Professional Documents
Culture Documents
JAHFARALI K P
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INTERNATIONAL ASPECTS ]
It is a science (social science) that deals with unlimited human wants and
their satisfaction in relation to scarce resources'
Facts: Human wants are unlimited
Resources are limited (scarce)
What is scarcity?
It is a situation where there is not enough (resources) to satisfy everyone's
wants.
Or
Non- durable goods: those goods that can be used very short period or
only once.
building etc.
Geographically immobile: Cannot move from one place to
another.
All the tools, machines, equipments, vehicles, buildings etc are examples of
ca pita L
,.
Eg: Raw materials, Fuel etc.
Fixed capital: Some capital goods do not change according to the
production. They are fixed at any level of output. These capital goods are
called fixed capital.
Profitistherewardforentrepreneurfortakingrisk,
:
Innovation: Bringing new ideas to the business to make more profit or
make the production more efficient.
Investment
investment means the production of new capital goods in the economy or in
bu siness.
It is the expenditure made on the creation of new capital asset. Such as Machines,
Tools, factories, Roads, bridges etc.
Gross investment
The total value of investment made during a financial year'
Net investment
Net investment = Gross investment - Depreciation
Points to remember
Land Rent
Labour Wage
Capital Interest
entrepreneur profit
ECONOMIC SYSTEMS
How an economy solves its basic economic problem determines its economic
system [type of economy].
That means how an economy answers the basic questions of what, how and
forwhomtoproducedeterminesitseconomicsystem...
If these questions are solved by automatic price m€ctranism qr, by private
individuals freely (without any government control), then, it follows a market
economy.
Chart 1
Features ' ,
Price mechanism
In a market economy the prices are determined by the market forces of
demand and supply.
If the demand is more, price goes up and if demand is less, price comes
down.
If the supply is more, price comes down and if supply is less price goes up.
These changes take place automatically in a market economy. This
automatic adjustment is called price mechanism or market mechanism.
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Features
1. Co-existence of both public sector and private sector.
2. Government control overl.private se'ctor.
3. Freedom of choice and plan'ning.
4. Both welfare of the people'and,'profit motive
5. Firms are efficient becaus€,there is competition.
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Advantages , ",,
We need a public sector because private sector proVides goods and services
only if its production is profitable. They never consider the needs of the
society. But in public sector,
1. It provides merit goods like education and health.
2. It produces for the welfare of the people.
3. It protects the country from,the external attacks.
4. It considers social cost and social benefit.
5. It maintains law and order within the country.
6. It prevents the use of demerit goods like drugs and alcohols.
Merit goods: Those goods which government thinks that everybody ought
to have.
Examples: health facilities, education
Demerit goods: those goods that government thinks that nobody should
get it. Examples: drugs, alcohols
Social cost: The total cost of the production to the producer and to the
society as well.
Social cost = private cost + external cost
External cost is also called negative externalities.
Social benefit: The total benefit of the production to the producer and the
society as well.
Social benefit - private benefit + external benefit
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One useful distinction is between complete market failure when the market
simply does not exist to supply products at aii (i.e. we see "missinE
markets"), and partial market failure, when the market does actually
functlon but it produces the urrong quantity oi a good or service at the
wrong price.
Markets can fail for lots of reasons and the main causes of market failure are
summarized below:
In a market system (market economy) the prices are determined by market forces
of demand and supply. This is called price mechanism or market mechanism. How
this mechanism works. Before answering this question we should know apout.
Demand and supply.
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DEMAND
Demand for a good or service means the amount of that good or service that
people are willing to buy at a given period of time at particular price.
In other words demand for good (or service) is the amount of that good (or service)
bought (demanded) by the consumers at a given time and at a given price.
The relationship between demand and price,
There is an inverse relationship between price and quantity demanded, if other
things are remaining unchanged.
Demand schedule
It a table showing the relationship between price and quantity demanded of a
commodity.
In other words, a demand schedule is the tabular presentation of the inverse
relationship between demand and price.
Demand curve is the graphical presentation of the inverse relationship between
quantity demanded and price.
It is curve showing the relationship between price and quantity demanded'
An imaginary demand schedule and demand curve is shown below.
Price -
I 25 4
2 20
3 15
1
4 10
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7. Climate and seasons: some products are demanded more only in some
particular Seasons. For exampfe'umbrella and rain coat are demanded in
rainy season and ice cream is demanded more in a hot climate.
B. Expectation of a change in price.in future: if there is an expectation
about a fall in price in future demand falls and if there is a increase in price in
future the demand also rise.
Contraction of demand
Contraction of demand means a fall in quantity demanded due to a rise in
These changes can be shown in a single demand curve. These changes are
movements along demand curve.
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Decrease in demand means a fall in demand due to any one of the factor
that affect demand other than price. It is a backward shift in demand curve.
These changes can be shown in the following figure.
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The shift from D to D1 if increase in demand. Here Price is not changing,
but demand increases demand increases
The shift from d to D2 is decrease in demand. Here price has no change,
but demand decreases at each price.
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Determinants of supply
1. Price of the commodity: There is a direct relationship between price and
supply. (it is already explained above)
2. Cost of production: As cost of production increases, supply fall.
3. Legislation (govt. laws, tax etc): Government laws and policies will affect
supply. As tax increases supply falls and vice versa.'Subsidies to firms also
will increase the supply.
4. Expectations: Expectation of an increase in the price in future tends to
decrease the supply and a fear about a fall in price in future increases the
supply. More over expectation about the tax changes also will affect supply in
the same manner,
5. Price of other goods: Producers or suppliers always think to get more
profit. So when the price of other goods increases, the producer thinks to
stop his production or reduce the production and to shift his production to
the production of those goods whose prices are increased.
6. Weather and climate: A favorable or a good weather condition gives a
good harvest. So supply increases. A bad or unfavorable weather will spoil
the crops and a fall in supply.
For example a good summer may bring a good harvest and a natural
calamity such as heavy rain, drought, flood, storm etc spoils the agriculture
and supply falls.
7. Technical progressi An improvement in technology increases the supply.
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Increase in supply means a rise in supply due to the changes in any one of
the factor that affect supply except price. It is a forward shift in supply
curve,
Decrease in supply means a fall in supply due to the changes in any one of
the factor that affect supply except price. It is a backward shift in supply
curve.
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So, equilibrium means a situation where zero excess demand and zero
excess supply.
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f Equilibrium
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Qty der*a*d and supply
Equilibrium price is the price where demand and supply are equal. In the
diagram it is 3.
Equilibrium quantity is the quantity where demand and supply are equal.
In the diagram it is 3units.
Disequilibrium
A market is in disequilibrium when the demand and supply are not equal. In
this state there will be excess demand (shortage of supply) or excess supply
(deficient demand) and price rise and fall in price.
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Price elasticity
Income elasticity
Cross elasticity
Advertisement elasticity
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2. Elastic demand
If there is a large change in quantity demanded as a result of a small change
in price it is called elastic demand. A small change in price makes a large
change in demand. Here, PED>1
Eg: if price falls 5olo and as a result quantity demanded increases 20olo, then
elasticity will be:
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0ty ilerrianded
Eg: A producer sells his product at $10 and his sales are 1000 units.
So his total revenue is 10 x 1000 =$10000.
If he increases the price to $12 (20o/o), demand falls to 500 (40olo fall)
units.
Here elasticity is 4O/2O = 2. (Elastic)
Here his revenue is 12 x 600 = 72OO. (Revenue fall)
It is a bad decision; if he reduces the price demand would have
increased.
If he reduces the price to $B (2Oo/o) the demand increases to 1400
(4Oo/o) units.
Now elasticity is 4O/2O =2.
Then the revenue is B x 1400=11200.(revenue increases; It is a good
decision)
PRODUCTION
Production is the process of converting raw-materials (inputs) into finished
goods (output).
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Production means
Productivity
It refers the ability or efficiency of factors to produce goods and services.
Output
Productivity - Input
The main divisions of production (sectors of production)
1, Primary sector Iprimary production]
2. Secondary sector [industrial sector]
3. Tertiary sector [service sector]
They change raw materials into finished goods or semi finished goods.
It includes manufacturing, processing, building, construction etc.
It includes the rent given to land, wage given to the labour, interest given to
the capital, price paid to the raw materials, electricity charges, taxes, profit
given to the entrepreneur etc.
Factors of production can be two types; Variable factors and fixed factors
Variable factors
These are the factors whose supply can be changed quickly and easily.
These factors change according to the production in short run.
Shot run: This is the period of time over which at least one of the
factors of production is fixed in supply.
Long run: This is a period of time over which all factors of production
(both fixed and variable) can be changed easily.
Average cost falls as output increases in the first stage of production, but
after a limit AC starts to increase. So AC curve is a U shaped curve as shown
bellow.
Output
Marginal cost
It is the cost for an additional unit of output produced.
ATC
MC: AQ
Where, Q = number of outqut Produced
A = changes
Cost
Output
The income from the sales of goods and services is called revenue.
Total revenue
Total revenue = Total output sold x Price
Average revenue
It is the per unit revenue. It is always equal to the price, ie, price = AR
Total revenue
Average Revenue =
Number of output sold
Marginal revenue
It is the revenue from the sales of an additional unit.
Changes in total reuenue
Marginal Revenue :
- i"nnumber of output sold
Changes
ATR
MR- AQ
Breakeven point
Breakeven point is a point where total cost equals to total revenue. In'
breakeven point there is no profit no loss.
A firm makes profit where TR > TC (TC < TR) and it makes lose where
TR < TC (TC > TR).
MARKET STRUCTURES
Perfect completion and monopoly
Market refers to all the places in which buyers and seller are in contact with
each other for the purchase and sale of the commodity. Markets are
classified into:
Pefect competitionl
It refers to a market situation in which large number of buyers and sellers
sells homogeneous product at a single uniform price.
Features:
a) Large number of buyers and sellers.
b) Homogeneous product
c) free entryand exit of firms.
Under perfect competition, the firm is a price taker because it has to accept
the price determined by the demand and supply of goods in the market. It
cannot change price by individual action.
The seller may sell any amount of output at the given price as a result the
demand curve facing a firm is perfectly elastic. Moreover AR and MR are
equal and parallel to x-axis.
Profit maximization in short run:
The conditions are
a) MC = MR.
b) MC cuts MR from below.
c) P>AVC
In short run firm may get abnormal profit, losses or Normal profit depends
on the price. The firm never produces output below shut down point.
Output
LABOUR MARKET
CHOICE OF OCCUPATION
The factors that affect the choice of occupation of an individual can be
classifies as wage factors and non wage factors.
1. Chances of promotion: Some people look for a job having the chances
to be promoted.
2. Job security: People always search for a secure iob.
3. Nature of job; easy or risky: Usually normal people prefer easy job but
adventurous people like risky jobs.
4. Job satisfaction: If the work gives a happy environment then people
choose that job.
5. Working condition: people always prefer a pleasant working condition
and so such work as well.
6. Working hours: Usually people choose a job with less working hours.
7. Chances of entertai nment.
8. The distance from home to work site.
I. Internal growth
II. External growth
Types of integration
Integration can be in the following three types
1. Two firms producing same products join together- Horizontal
integration.
2. Two firms producing different stages of same product join together-
Vertical integration.
This can be two ways
i) Vertical integration backward.
One firm merges to another firm which is the source of
supply [raw materials or components of its products].
Diagramatically
For example:
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TYPES OF UNEMPLOYMENT
1. Frictional unemployment ( search unemployment)
It is the unemployment that occurs as a result of lack of information in
the labour market. It often takes time, when workers shift their jobs,
to find a new job and in the mean time they are unemployed.
2. Seasonal unemployment
It is the Unemployment that occurs as a result of seasonal changes.
4. Structural unemployment
It is unemployment that occurs as a result of structural changes in the
economy.
5. Technical unemployment
It is the unemployment that occurs as a result of technological
improvement, inventions and findings.
3. Technological advance:
If there is a technological advance, it may cause the replacement
of labour intensive technology by capital intensive technology. It
will leads to technical unemployment.
5. Over population:
Due to overpopulation countries are unable to give job to all
working population. It causes disguised unemployment.
If the inflation is cost push, government should control the price and the
producers can be given subsidies.
Real income: it means the purchasing power. How much goods and
services can be purchased by an income.
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Real lncom" =
-
As price increases real income falls.
Hyper inflation: it means a high rate of inflation, usually more than o/o.
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Based on the facilities available and standard of living the countries in the
world are classified in to developed, developing and less developed(under
developed) countries.
Compared to developed countries both developing and under developed
countries have almost same features.
Developed countries are called first world. And developing and less
developed countries are called third world.
Features of developed countries
1. High per capita GDP
2. High standard of living
3. High capital investment
4. High level of education
5. High life expectancY
6. Low birth rate and low death rate
7. Yery low infant moftalitY rare
8. Less population
9. High productivity of primary, secondary and tertiary sectors
10. More people work in teftiary sector.
11. High level of technologY
L2. Political and social stability
Features of developing/ less developed countries
1. Rapidly growing population(over population)
2. Less per capita GDP
3. Poor natural resources and poor climate
4. Over dependence on agriculture (primary sector)
5. Unequal trade (importing manufactured and exporting raw materials)
6. Extreme povefty
7. High birth rate
B. High death rate
9. Less life expectancY
10. High infant mortalitY rate
11. Lack of infrastructure
t2. Less medical facilities
13. Low level of standard of living
L4. Foreign debt problem
15. Lack of capital and technologY
16. Political and social instability
1. Surplus Budget:
Excess of estimated revenue of the year over the anticipated expenditure is
known as surplus budget.
2. Deficit Budget:
Deficit Budget is a situation where in estimated Government expenditure
exceeds the anticipated revenue.
3. Balanced Budget:
Balanced Budget is a situation where in estimated Government expenditure
equals the anticipated revenue.
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Aims of taxation
The aims of taxation or the reason for why government imposes taxes are varied.
They are mainly:
1. To raise an income for government (to raise public revenue).
2. To discourage consumption and thereby reduce import and achieve a BOP
surplus,
3. To reduce the gap between rich and poor (to maintain equality in the
economy)
4. fo reduce inflation.
5. To discourage the consumption of harmful goods Iike cigarettes, alcohol etc.
6, To reduce pollution, Special taxes on uses of petroleum products and some
other chemicals.
Leads to
lleads to Reduce aggregate demand T
. Increase in aggregate demand including demand.for
L
imPorted goods also
Leads to Leads to
. Increase in output and . A reduction in import and BOP
employment surPlus
Leads to Leads to
.
Increase the demand for . A decrease in the output and
ll lPUt LELI goods
imported I also
Y(JULTJ Al)U emPloYment
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demand
Leads to Leads to
. Increase in output and . a decrease in the price level
employment and reduce inflation
and reduce unemPloYment
Leads to Leads to
. An increase in price level . less output and less
emPloYment
Leads to Leads to
. inflation . unemPloYment
Leads to Leads to
. Increase in aggregate demand . Decrease the demand for
goods and services
Leads to Leads to
. Increase in output . Decrease in output
Leads to Leads to
. Economic growth . Lower economic growth
Leads to Leads to
r Increase in the price level . Decrease the price level
Leads to Leads to
. I nflation . Less inflation
Leads to Leads to
. Increase in aggregate demand o High tax on rich
' . Discourage investment
Leads to Leads to
. Increase in output and . Less output
employment
Leads to Leads to
. Reduce unemployment . More unemployment
Leads to Leads to
. Inequality (rich can be richer . More equal distribution
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and lLl lEl / tl(reduce
EuuLs inequality)
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POPULATION
Population - Definitions
There are a number of terms which are important to understand in studying
population.
The crude birth rate is the number of births per 1000 people in a year.
The crude death rate is the number of deaths per 1000 people in a year.
The natural increase is the number of extra people (birth rate minus the death
rate). This is usually given as a percentage.
The infant mortality rate is the annual number of deaths of infants (before age 1)
less than one year old per 1,000 live births'
A person's standard of living tells you how well off they are. We can measure their
standard of living by looking at
2. Death Rates
Developing countries have high death rates because, in many cases, there
are
Developed countries have Iow death rates because, in many cases, there
are
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. New Zealand, a developed country, has 23o/o of its population less than
15, and l2o/o over 65. This makes 65% between 15 and 64.
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Countries that have a high dependency ratio have more people who are not
of working age, and fewer who are working and paying taxes. The higher the
number, the more people that needs looking after.
The problems of an area that encourage people to leave are known as push
factors. Examples include
. Natural disasters
. Lack of employment
. Low pay, and poor standard of living
. Poor housing
. Lack of educational oppoftunities
. Shortage of medical facilities and services
. War and/or persecution
In a developed country more people live in cities and very less people live in
rural areas.
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This shape is typical of a developed country. It is narrow at the base, wider
in the middle, and stays quite wide until the very top, as there is a sizable
percentage of older people. Note that there are more old women than men.
Italy and Japan have population structures that are of'this shape'
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9. Inflation: Inflation will affect exporE and import demands and as a result
BOP also. It may lead to a deprecation of domestic currency.