y) MAMMA LERORLIER Every subject has some basic terms, concepts and tools. The knowledge about these basic terms, concepts and tools are essential to study that subject. In economics there exist some economic terms, basic concepts and tools, which are the basis of the analysis of economics. The most important economic terms, basic concepts and tools are mentioned here at first, Along with it nature and scope of economics are also discussed in this chapter. # 1.1 Economic, Terms © 1.1.1. Utility : In economics, utility means power to remove human wants. For example, utility may obtain by using a clock, but the clock itself is not the utility, the power of the clock to give time is the utility of the clock. Utility is of five types : (a) Natural Utility : Utility which is obtained directly from the nature is called natural utility.'For example light of the sun, air etc. (b) Transforming Utility : Utility which is created as a result of given new shape of any commodity is called transforming utility, e.g. doll from the mud, chair and table from the wood of forest etc. (c) Place Utility ; Utility which is created as a result of sending any commodity from one place to another place is called place utility, e.g. utility of shawl is increased by bringing it from Kashmir to Kolkata, (d) Time Utility : Utility which is created.in a fixed period of time to meet up human wants is called time utility. For example, woollen garments in winter season, umbrella in rainy season etc, (©) Service Utility : The capacity of non-physical goods to meet up wants is called service utility, e.g. teaching of teacher, treatment of doctor etc. © 1.1.2, Wants : The desire to get any necessary or luxury or comfortable commodity is called wants in economics, In reality there is the need for some goods and services to survive in the world. The desire to get these goods and services is the wants, Wants can be divided into three groups : (a) Wants of Necessaries : Wants which are essential for existence of life are called wants of necessaries, e.g. food, cloth, shelter etc. (b) Wants of Comforts : The wants of goods which are not essential for existence of life but these goods increase the comforts of life are called wants of comforts, e.g. chair with mattress, (c) Wants of Luxuries : Wants of goods which are created to show the luxuries in the society are called wants of luxuries, e.g. costly car. @ 1.1.3. Goods and services : Anything which can satisfy human wants is called goods. In economies, there exist two types of goods. One is material goods and the other is non-material goods. The goods which has physical shape and visible is 2‘but the price Microeconomics I and Statistics he other hand, the goods i Je, food, pen, etc. On t c called material goods. For exam hs re is called non-material goods. The non- i i -visible is called nor q en 4 sae sehaee oe For example, the teaching of the teacher, business mat goodwill, etc? es Accol ‘ding oods can also be é ae a and the other is the capital goods. The goods which are directly used at z mption is called consumer goods. For example, rice, milk, etc. On pees ar ig hhich are not directly used for human consumption, but use the goods wl z He Se Sree is called capital goods. For example, raw materials, jineries, etc. S Bic : Se Consumption and Consumer : The utility within the commodity is destroyed by consumption. So the destruction of utility of the commodity is called consumption. 4 Utility of some commodity is destroyed by using one time only. For example, apple or orange is finished by eating one time only. Further there are some commodity which cannot be finished by using it only in one time. In these cases utilities are destroyed slowly. For example, garments cannot be finished by using one time only, it is finished by using many times. ib The person who consumes is called consumer. Wants of the consumer is unlimited but his income is limited. For this every consumer have to select which wants will meet up first and which wants will meet up after that. e 1.1.5. Wealth : The commodity which can meet up human wants, whose supply is less than demand and exchange with the help of money is called wealth. In economics, a commodity can be called wealth when following four characteristics are present. (1) Utility : The commodity will have a utility. (2) Scarcity : The supply of the commodity will be less than demand. (3) Transferability : The commodity will have transferability. Transferability means transferability of ownership. (4) Externalities : The commodity will have external existence i.e. visible. Thus house property, sharé of a company, copyright of book are the examples of wealth: But ait, educational certificate etc. are not the wealth. © 1.1.6. Value and Price : In economics, the word value is used in two senses. ‘One is the value-in-use and the other is the value-in-exchange. The satisfaction or utility which the user gets by using the ccmmodity is called value-in-use of’that commodity. The value-in-use is a personal concept. 4 ded into two groups. One is the By one unit of a commodity how much unit of the other commodity can be exchanged is called the value-in-exchange of the first commodity. If one kg of rice is exchanged for 2 kgs of wheat then the value-in-exchange of one kg of rice is 2 kgs of wheat. On the other side, the value-in-exchange of one kg of wheat is 1 kg of rice. In this way the value-in-exchange can be derived for any two commodities. In common sense this value-in-exchange is called value. When the value-in-exchange is expressed in terms of money then it is called price. In other words the exchange rate of a commodity with money is called the price of commodity. For example, 1 kg of Fice = Rs, 20. So the amount of money received by exchanging one unit of comm ity is the price of that commodity. peresty __ Therefore the value of any commodity is expressed i a in terms of ot! - of any commodity is expressed in terms het commodity of money.2 1.2 Basic Concepts e 1.2.1. Production and Factors of Production : There exists a controversy among the economist regarding the concept of production. According to the classical economist creation of physical goods is called production. By this concept, making of chair, table etc. are the examples of production. But according to the modern economist creation of utility is called production. By this definition the services of doctor, teacher etc. are productive because their services create utilities. ‘The things which are used for production is called factors of production. In economics, the factors of production are divided into four groups—Land, Labour, Capital and Organisation. 'e 1.2.2. Firm and Industry : The economic unit for the production of goods and services is called firm. The size of the firm may be large or small. If a farmer ploughs a small area of land then it may call a firm. Similarly, the factory. of Bata Shoe Company, Texmaco Cotton Mill are the examples of firm. The sum of all firms which produce same type of goods is called industry. For examples shoe industry, cotton industry etc. So in case of cotton industry each mill is a firm (e.g. Texmaco Cotton Mill) and the total of all the cotton mills is the cotton industry. 1.2.3, Equilibrium : An important basic concept of economics is equilibrium. A situation from where there is no tendency to change, is called equilibrium. Equilibrium is of two types. One is Partial equilibrium and other is the General equilibrium. In the analysis of Partial equilibrium, only a part of the economic system is discussed, keeping other things unchanged. For example, consumer’s equilibrium, firm’s equilibrium etc. On the other hand, in the analysis of general equilibrium every part of the economic system is discussed and the equilibrium in all the sectors are ~ “simultaneously determined. “Therefore, in partial equilibrium, information can be obtained only on special part of the economic system but in general equilibrium, oyerall picture of the economic system can be obtained. © 1.2.4, Circular Flow of Income : Economic activities of any country flow in a circular way. Actually income is created in one side and on the other side expenditure takes place as a result of economic activities. Here it is assumed that decisions regarding economic functions are taken by two groups. One is the households and the other is the firms. Here it is assumed that firms purchase different factors of production (land, labour etc,) from the households to produce goods and services. Households get money as income from the firms in exchange of those factors of production. This money is the income of the households but expenditure of the firms. In this way a flow of money takes place from the firms to the households due to purchase of factors of production. This money again flow from the households to the firms when. the households spend this income to purchase goods and services. This money is the expenditure of the households but income of the firms. In this way another flow of money takes place from the households to the firms due to purchase of goods and services. This means that the amount of money which is spent by the firms to purchase factors of production, that money again came back to the firms through the sale of produced goods and services. This is called circular flow of income expenditure or circular flow of income. Thus the flow of income from the firms to the households and from the households to the firm in a circular way is called the circular flow of income or the circular flow of income and expenditure.Microeconomics I and Statistics The concept of circular flow of income is now explained with the help of Fig, 1 Fig: 1.1. ._ In the upper part of Fig. 1.1 two flows A and B exist. Flow A represents the supply Of different factors of production (land, labour etc.) given by the households to the firms i.e. flow A represents purchase of different factors of production (land, labour te.) by the firms from the households for the production of goods and services, The amount of money received due to supply of these factors of Production by the households from the firms as factor income have been represented by the flow B. This means that flow B represents the flow of money from the firms to the households due to purchase of the factors of production. onan tie lower part of Fig. 1.1 flow C represents supply of produced goods and Services given by the firms to the household ie. flow C represents purchase of different goods and services by the households from the firms. The amount of money Teceived due to supply of these goods and services by the firms from the households as income have been represented by the flow D. This means that the flow D represents the flow of money from the households to the firms due to sale of Produced goods and services. So money expenditure made by the firms to purchase factors of production that money again return to the firms by selling produce goods and services. This is the circular flow of income and expenditure or the circular flow of income, © 1.2.5.Optimum Level: Optimum level is an important basic concept in economics. The economic units within their own limitation, operate to ‘Satisfy their Particular objective. The level at which the particular objective is fulfilled is called optimum level. For example, if the objective of the consumer is to max ise utility, then the level of consumption at which the consumer attain maximum utility is called ‘optimum level of consumption 4 A First part Application of Calculus : Short Notes-I : S icatie fn Bu ee, application of calculus 10Introduction a e 1.2.6. Economic System: System which takes necessary arrangement for collection and distribution of resources to satisfy the basic problems of human world is called economic system. Economic system is mainly divided into two groups. One is the Capitalistic Economic System and the other is the Socialistic Economic System. Economic system in which ‘private ownership of the factors of production exist and the functions of production and distribution are organised on the basis of private ownership is called Capitalistic Economic System. This type of economic system mainly organised by the price system. On the other hand, economic system in which private ownership of the factors of production is absent and the functions of production and distribution are organised on the basis of social ownership is called Socialistic Economic System. Economic system which emerges by the combination of capitalistic economic system and socialistic economic system is the Mixed Economic System or mixed economy. So, economic system in which private sector alongwith the government sector of planned economy co-exist is called Mixed Economic System. = 1.3 Concepts of Required Tools In economics there exist some mathematical tools which are the basis of the analysis of modern economics namely microeconomics. The most important tools are how mentioned in this section. © 1.3.1. Constant and Variable : The number whose values are fixed or non changeable is called constant. On the other hand, the number where values are not fixed or changeable is called variable. For example, the fixed quantity of land of a farmer is constant to the farmer and the fertilizer, labour etc. for cultivation are variable to the farmer. Variable can be’ divided into two parts. One is independent variable and the other is dependent variable. If the value of the second variable depends on the value of the first variable, the first variable is called independent variable and the second variable is called dependent variable. For example, an. individual consumer generally increases the demand as a result of decrease in the price of the commodity and decreases the demand as a result of increase in the price of the commodity. So for individual consumer price is independent variable and demand is dependent variable, because individual demand depends on price. ~ But in the market price generally increases as a result of increase in the demand and price generally decreases as a result of decrease in demand. Thus in the market demand is independent variable and price is dependent variable. Thus from this analysis it is seen that to an individual which is independent variable (price) acts as a dependent variable in the market. Thus a variable can be an independent variable in any special situation can also be a dependent variable in other situation. © 1.3.2. Function : In mathematics, the functional relation between the variables ig called function. For example, other thing remaining constant, demand increases as a result of decrease in price. The causality relation between price (p) and demand (q) can be mathematically written as q= fp) "This mathematical relation is called demand function. In this way other functions can also be derived.8 Microeconomics I and Statistics © 1.3.3. Sign: Sign is used to determine the nature of relation between ty, variables. The sign can be positive (+) or negative (-). For example, other thing remaining constant, demand for a commodity decreases as a result of increase in th price of that commodity. Here the opposite relation between price and demang \, expressed with negative (-) sign. If change in price and change in demand are denoted by the symbol A, (A = sina, change, this symbol is called delta) then Ap is the change in price and Aq is th, ‘change in demand. If price decreases, Ap is negative (Ap < 0) and demand increase. gq is positive (Aq > 0). So the ultimate sign of the ratio of these two variables j 7 ] ive | <0 (g Further, other thing remaining constant, supply of a commodity increases as ; “Tesuilt of increase in, the price of that commodity. Here the direct relation betwee, price and supply is expressed with positive (+) sign. If price increases, Ap is; positive (Ap > 0) and supply increases, AS is positi: AS (AS > 0). So the ultimate sign of the ratio of these two variables is positive (2 >| ~ © 1.3.4, Schedule : At a fixed time, the relation between the different value of « variable and the value of the other variable when arranged in a systematic way from above to below in the form of a table is called schedule. In economics there exist Many schedules, e.g. demand schedule. At a fixed time the different amount of demand at Gifferent price if expressed in a schedule then the schedule is called demand schedule. © 1.3.5. Graphs : The functional relation between the variables is called function, Here it is assumed that there are two variables x and y. Here the value of variable y depends on the value of variable x. So here y = f(x) is a function. ‘The function can be expressed in the form of graph. Generally there are two axes ‘One is horizontal axis (or x-axis) and the other is the vertical axis (y-axis). In the ‘graph paper x is measured along the horizontal axis and y is measured along the ‘vertical axis. Different value of y is obtained by putting different value of x in the “function. In reality one value of y is obtained for one value of x. These two values are expressed by a point in the graph paper. In this way different points are obtained in the graph paper for different combination of x and y. By joining these points a “Tocus is obtained. The locus is called line and this is the graphical representation of function. Thus the geometrical representation of the established relation among the " two variables is called’ line. Line is of two types. One is straight line and the other iy Saryee OF Vidette inabarsqah t In the function y = f(x), if x and y are related to a fixed and the rate of change in y always remain constant due to change mmatic representation of the relation among x and y become a 1 the rate of change in y will always remain constant due to the relation among x and y diagrammatically will stay on a straight is of the form y = mx + c where m and c are constant then the tation of the function will be a straight line.Straight line can be upward rising downward sloping or parallel to any axis. (a) If y increases as x increases or y decreases as x decreases then the straight line will be upward rising (Fig.1.2.). (b) If y decreases as x increases or y increases as x decreases then the straight line will be downward sloping (Fig. 13). ¥ Y Ee Y B BIA A B Al B 0 Xo xO OETA > Fig : 1.2. Fig: 1.3. Fig: 1.4. Fig : 1.5. (c) If y remain constant at a fixed level as x increases or decreases then the straight line will be parallel to horizontal axis (Fig. 1.4.). (d) If y increases or decreases even though x remain constant at a fixed level then the straight line will be parallel to vertical axis (Fig. ee): 1.3.5.2. Curve: In the function y = f(x), if x and y are related to a fixed quantitative relation and the rate of change in y does not always remain constant due to change in x then the diagrammatic representation of the relation among x and y become a curve, i.e, when the rate of change in y will not always remain constant due to change in x then the relation among x and y diagrammatically will stay on a curve. If the function is of the form y = x° then the diagrammatic representation of the function will be a curve. Curve can be upward rising or downward sloping. Apart from this curve can be convex or concave. ‘© 1.3.6. Concept of Slope or Gradient : Change in the amount of dependent variable due to one unit change in the amount of independent variable is called the slope of that line i.e. the rate of change in the value of dependent variable with the change in the value of independent variable is the slope. Here it is assumed that the value of the variable y depends on the value of the variable x i.e. x is independent variable and y is dependent variable. It is assumed that due to change in the value of x by Ax the value of y is changed by the amount Ay (A = small change, this symbol is called delta). So due to change in the value of x by the amount Ax, the value of y is changed by the amount Ay. Thus due to change in the value of x by one unit, the value of y is changed by the amount 2. So 4 is the change in the amount of y due to one unit change in the amount of “x. Thus 42 is the slope’ of the fixed line. In terms of caiculus here slope is 2.able x is plotted on the horizontal axis and the n the vertical axis. In the diagram AB is the upward and D are taken on the straight line AB. From the 3 is again drawn on perpendicular DN. changed by the amount MN or CE due to movement 1 he value of y is changed by the amount DE, So here f hee . of the straight line AB is eice _ADCE is an equiangular triangle, because le perpendicular of this triangle. Here it isIntroduction u Further if the straight line is parallel to horizontal axis then the value of y will remain const’1t even though the value of x changes, ie. the value of y will remain tonstant (Ay = 0) even though the value of x changes. So these r=0 (Zero). Thus if the straight line is parallel to horizontal axis then the slope of that line will be zero. But if the straight line is parallel to vertical axis then the value of y changes even though the value of x remain constant i.e, the value of x does not change (Ax = 0). So here 2¥=c (infinity). Thus if the straight line is parallel to the vertical axis then the slope of that line will be infinity. ¢ Relation between Slope and Steepness of Straight Line : There exist the relation between slope and steepness of straight line. The relations are : (a) When the straight lines are parallel then their slopes are equal. (b) When the straight lines are upward rising, then the slope of the line will be larger in case of steeper straight line. (©) When the straight lines are downward sloping, then the slope of the line will be smaller in case of steeper straight line but here the absolute value of the slope will be larger due to negative slope. ‘Thus it can be said that whether the straight line is upward rising or downward sloping, the absolute value of the slope of the straight line will be large for more steeper straight line and the absolute value of the slope of the straight line will be small for less steeper straight line. + 1.3.6.2, Slope of a Curve : Slope of a curve at different points will be different. Because in this type of line the change in x and y are not in equal rate. If two points are taken on any curye like straight line, and 2% are determined among these two points then that will be the average slope of that portion of the curve. Because here slopes are different from one point to another point. The matter is explained with the help of Fig. 1.7. Fig: 1.7. Maw x _ In Fig. 1.7, AB is a curve. Two points P-and.Q are taken on the curve AB. Here the value of x changes by the amount MN or by the amount PS and the value of y changes by the amount QS as a result of movement fror the point P to the point Q. %Microeconomics I and Statistics d Ay = QS. So here 41.= @ is the slope of the straight lng in = le ‘This cannot be accepted as slope of the curve AB. Because in reality it is not th, . This ; eas se of the point p and also not the slope of the point Q. This $5 is treated as th, average slope of the portion PQ of the curve AB. ints P and Q should be taken very near to each other to remove this wah Pt keep the points P and Q very near to each other, the point Q moves es . nstant. As a rasult the value of Ax wi int P by keeping the point P remain co! H be the Point ° moves to the fixed point P. In this way when Ax become very small (nearly zero) then it is said that Ax tends to zero (Ax-0). Ultimately one value of 42 be obtained which is called limit. This is called #. So the slope of the curve 12 Thus here Ax = PS a _ Ay_dy Batax ~ dx Geometrically it can be said that # is the slope of the tangent drawn at a particular point on a curve. ‘Thus it is seen that slope of a curve at any point is equal to the slope of the tangen drawn at that point. The tangent will be a straight line. The slope of that tangent will bbe the slope of the curve at the tangency point. For example in Fig. 1.7, the slope at the point P of the curve AB is equal to the slope of the tangent PR. So the slope at point P on curve AB = slope of tangent PR = tan @ (here 0 = ZPRM). ‘Thus it can be said that tan of the angle made by the tangent drawn at any point on the curve with the horizontal axis is the slope of the curve at that point. So the slope of the curve at different points will be different. Slope of different shaped curve : Slope of different shaped curve is now discussed. _(@ Upward Rising Curve: If the curve is upward rising then the tangent at different points on this curve will be upward rising. As a result slope will be positive. So the slope at every point on upward rising curve will be positive. (b) Downward Sloping Curve : If the curve is downward sloping then the tangent at different points on this curve will be downward sloping. As a result slope will be negative, So the slope at every point on downward sloping curve will be negative. (©) A Part is Upward Rising and a Part is Downward Sloping of a Curve : If be anit is upward rising and a part is downward sloping of any curve then the slope upward rising portion will be positive and the slope of the do: i portion will be negative. ated Further if the tangent at any point on the curve is parallel to hori i a slope at that point on that curve will be zero and if the a curve is parallel to vertical i means, ‘vertical axis then the slope at that point on that curve willIntroduction 13 In Fig. 1.8 the curve AB is upward rising. From the diagram it is seen that the slope at point P on curve AB is equal to the slope of the tangent PC. Further the slope at point Q to the right of point P on curve AB is equal to the slope of the tangent Pi , From the diagram it is seen that the slope of the tangent QD is greater than the slope of the tangent PC. So the slope at point Q increases compare to point P. For this the curve is convex (0 the horizontal axis. Fier LB. Fig : 1.9. In Fig. 1.9 the curve AB is downward sloping. So the slope at every point on this curve is negative. From the diagram it is seen that the slope at point P is less than the slope at point Q (due to negative value) i.e. the slope of the curve (absolute value) increases at point Q-compare to-point P. For this the curve AB is convex to the origin. On the other hand, if the curve is such that the slope of the curve decreases as ‘a movement on the curve from left to right then that curve is called concave to the origin or concave to the horizontal axis. It is shown in Fig. 1.10 and Fig. 1,11. In Fig, 1.10, the curve AB is upward rising. From the diagram it is seen that the slope at point P on curve AB is equal to the slope of the tangent PC. Further the slope at point Q to the right of point P on curve AB is equal to the slope of the tangent QD. From the diagram it is seen that the slope of the tangent QD is less than the slope of the tangent PC. So the slope at point Q decreases compare to point P. For this the curve is concave to the horizontal axis. Fig : 1.10. In Fig. 1.11, the curve AB is downward sloping. So the slope at every point on the curve is negative. From the diagram it is seen that the slope at point P is greater than the slope at point Q (due to negative value) ie. the slope of the curve (absolute