12th Micro Economics and Macro Economics NCERT (NEW) Notes
12th Micro Economics and Macro Economics NCERT (NEW) Notes
12th Micro Economics and Macro Economics NCERT (NEW) Notes
1. Micro Economics 5 - 74
4
MICRO ECONOMICS
5
Resource Team :
1) M. Chandran, HSST, GHSS Periya
2) P. Sasi, HST, GHSS Kundumkuzhi
3) T.V. Raghunathan, HSST, GHSS Kuttamath
4) P. Mohanan, HSST, GHSS Thayannur
6
Chapter 1
INTRODUCTION
1.1. A Simple Economy
Think about the Society in which you live. You will find people engaged in a variety
of economic activities. You will find farmers, teachers, doctors etc. All these economic
units are engaged in the production of goods and services. In general, every individual in
society is engaged in the production of some goods and services and she wants a
combination at many goods and services not all of which are produced by her.
A basic economic problem is the problem of choice. The problem arise due to the
mismatch between wants and resources. Human wants are unlimited. But resources are
limited. Resorces are having altermative uses. This leads to the problem of choice. A
country can produce only a combination of goods and services. This leads us to the
central problems of an economy.
7
D]tbmKnpsImp sXmgn Xo{h kmtXnI hnZy D]tbmKnWtam
FpXmWv {]iv\w. GXv kmtXnI hnZy D]tbmKnpp shXv Cu kXv
hyhbnse sXmgn inbpsSbpw aqe[\nsbpw e`yXsb B{ibnncncpp.)
c) For whom to produce? Bv thn Dev]mZnnWw?
This is a problem related to distribution. This problem deals with the distinction of
national product among the individuals in the economy. Distribution involves the division
of the national product among the four factors of production namely land, labour, capital
and organisation. This is called functional distribution.
(Bv thn Dev]mZnnWw FXv sImv AamIpXv. Dev]ns
{]h\ ]camb hnXcWsbmWv. Dev]mZ\LSIfmb `qan, A[zm\w, aqe[\w,
kwLS\w Fnhv Dev]w hoXnp sImSppXns\bmWv {]h\]camb
hnXcWw Fpw ]dbpXv.
8
In this example there are six possibilities. Possiblity A represents, 0 Butter and 15,000
guns. Possibility F represents, 5 million quintals butter and O gun. Last column shows
marginal opportunity cost. It is defind as the next best alternative forgone. That is in
order to produce 1 unit of Butetr what is the amount of gun scarified. For the possiblity
B, it is one and for C it is two etc. That means opportunity cost in increasing. The above
table is diagramatically represented below.
y
18
A production possibility curve Gun
15 A
(PPC) is defind as to locus of all B
combinations of two goods that can be 12 C
produced with given amount of
9 D
resources that are fully and efficiently
utilised. The shape of the PPC is 6
convcave. Increasing Marginal E
9
c) The mixed Economy (an{i kZv hyh)
In reality, all economic are mixed economies. In a mixed economy there exist both
public property and private property. Some importatnt decisions are taken by the
government and some are taken by individuals. So with the help of planning commission
and price mechanism basic economic problems are solved.
Evaluation Questions
1. Classify the following in a given table under the given titles.
10
Micro Economics Macro Economics
National Savings Rate, Wage Rate of a KSRTC worker, Average cost, Inflation.
1. 1.
2. 2.
4. State any two features of resources that give rise to the economic problem.
5. Classify the following in to positive economics and normative economics
a) Globalisatioon affected badly in indian agriculture.
b) India introduced planning in 1951
c) Mean, Median and Mode are the measures of central tendencies.
y
6. a) Identify the curve
A
b) Why does it get such a shape? good y l
0
good x x
7. Prepare a seminar paper on 'Central Problems of an economy'
11
Chapter 2
good2 rcept
Vertical inte
M
P2
P
1 X
1 + t
P ep
2 X rc
e
2 =
M l Int
. nt a
r izo
Ho
0 M x
good1
P1
M M
spends his entire income on good 2, he can buy P units of good 2. Thus P is called the
2 1
M
horizontal intercept and P is called the vertical intercept.
2
13
_Pv sse
D]t`mmhns hcpam\w ]qambpw sNehgnsSp Fm D]t`mK
_nepIfpsSbpw tbmPnnv hcbvp tcJbmWv _Pv sse. _Pv sse\ns
M M
kahmIyw P1X1 + P2X2 = M. P1 s\ slmdntkm Csk]v v Fpw P2 hns\
shn Csk]vv Fpw ]dbpp.
14
Change in Income
Suppose the consumer's income changes from M to M'. Then the new equation at
the budget line is P1x1+P2x2 = M'. When the income of the consumer increses, the consumer
is able to buy more of two goods and the budget line shifts parallel outward. Similarly,
when the income decreases, the consumer is unable to buy as much goods as previously
and the budgetline shifts inward.
y Increase in Income y
Decrease in Income
M'
P2 M
M P2
P
X
P1
1
P2 M'
x1
P 1 +
+P
1 X P2 P
X
P1
+
x2 2
1 2
x1
P =
=
+P
X M
M
good2
2 good2
'
x2 2
2
M
=
.
M
'
0
good1 M M' x 0 M' M
good1 x
P1 P1 P1 P1
Change in Price
Now suppose the price of good1 changes from P1 to P'1 but the income and price of
good2 remain unchanged. The new budget line is P'1x1 + P2x2 = M. If the price of good
one increases, the slope of the budget line increases and the budget line becomes steeper
if the price of good one decreases the slope of budget line decreases and the budget line
becomes flatter as shown in the diagrams.
y
y
Price increase Price decrease
A
A
P P'
1x
x +
good2
1 1
1 + P P
good2
P 1 x 2 x
x 1 + 2 =
P' 1
2
2 = P M
x1
M 2 x
+
2 =
P2
M
x2
.
=
0
M
0 B good1 B B' x
good1 B' x
15
(km[\w 1 s hne Ipdbptm _Pv sse hetmv amdpIbpw km[\w
1s hne IqSptm _Pv sse CStmv amdpIbpw sNpp)
Monotonic Preferences
A consumer's preferences are monotonic if and only if between any two bundles,
the consumer prefers a bundle which has more of atleast one of the goods and no less of
the other goods as compared to the other bundle. That is if the consumers preferences are
monotonic, if more is preferred to less. Consider two bundles (2, 3) and (2, 4). Here the
consumer prefers the bundle (2, 4) to (2, 3) because it contains one unit more of good2.
So here the preferences is monotonic.
GIZniob apKW\
cv _nepIfn GXv _nenemtWm Hcp km[\nssbnepw Hcp
bqWnsnepw IqSpX DXpw. at km[\ns Afhv IpdbmsX CcnpIbpw
sNpXpw D]t`mmhv AXv sXcsSppIbpw sNptm D]t`mmhns
apKW\ GIZniobambncnpw.
Indifference Curve
An indifferance curve shows different bundles which give the consumer the same
level of satisfaction. Since the level of satisfaction from all bundles are the same, the
consumer will be indifferent among them. y
18
Consider the example,
x2 15
Good2 Good1 MRS x1x2 ( x )
1
12
15 1 -
Good2
9
10 2 5
6 3 4 6
3 4 3
3
1 5 2
IC
0 1 2 3 4 5
x
Good1
16
In this example amonng the bundles (15, 1), (10, 2), (6, 3), (3, 4), (1, 5) the consumer
is indifferent. By joining all these points we get the indifference curve which is convex to
the origin. The reason for the convex shape is diminishing rate of substitution. The amount
of good2 that the consumer would be willing to give up for an additional unit of good1
would decline. This is called diminishing Marginal rate of substitution. This is shown in
the third column. (MRS x1x2)
\nkwKXm h{Iw
Hcp D]t`mmhn\v Xpey kwXr]vXn \Ip cv km[\fpsS hnhn[
kwtbmK tNv hcp h{Is \nkwKXm h{Iw Fv ]dbpp. \nkwKX,
h{In\v , tImshIv kv BIrXnbnbmWv . CXn\p Imcw A]Nb koam
{]Xn]\ \ncmWv. Hcp bqWnv Hmas km[\w e`nm thn thsv
shbvp cmas km[\ns AfhmWv {]Xnm]\ \ncv. Cu \ncv 5,4,
3,2 Fns\ Ipdbpp. CXns\ A]Nb knam {]Xnm]\ \ncv Fv ]dbpp.
Demand
Demand is the desire for a good backed up by willingness to pay and ability to
purchase. Mere desire doesnot constitute demand. A desire becomes demand if it is backed
by willingness to pay and ability to purchase.
tNmZ\w : Hcp km[\n\pthn hne sImSpm\p Ignhpw kXbpw Hp
tNp B{KlamWv tNmZ\.
Individual Demand
It is the quantity of a commodity that an individual consumer is willing to buy in a
given period of time at a given price.
Law of Demand
The law of demand explains the inverse relationshio between price of a commodity
and its quantity demanded. According to this law, other things remaining the same as
price of a commodity increases, quantity demaded decreases and vice versa.
tNmZ\ \nbaw
Hcp km[\ns hnebpw tNmZ\w sNsSp Afhpw Xnep hn]coX
_amWv tNmZ\ \nbaw hnhcnpXv. ap Imcy ncambn \nptm
Hcp km[\ns hne IqSptm tNmZ\w IpdbpIbpw hne Ipdbptm tNmZ\w
IqSpIbpw sNpp.
Demad Schedule
It is a table showing various quantities of a good demaded at various prices. A
household demand schedule shows various prices of a good and its quantities demanded
at those prices. A demand schedule is given below.
18
Prices of Apple Quantity Demanded
1 20
2 15
3 10
4 6
5 2
y
Demand Curve D
tNmZ\ h{Iw
tNmZ\ ]nIbpsS tcJm Nn{XamWv tNmZ\ h{Iw. tNmZ\ h{Iw \nnm
hnhn[ hneI y Anepw tNmZ\w sNs AfhpI x Anepw
tcJsSppp.
19
hne Ipdbptm tNmZ\ IqSpsXpsImv?
tNmZ\ \nba {]Imcw Hcp km[\ns hne Ipdbptm tNmZ\w sNsSp
Afhv IqSpIbpw hne IqSptm tNmZ\w IpdbpIbpw sNpp. As\sbn
Fp sImmWv D]t`mmhv Hcp km[\ns hne Ipdbptm AXns IqSpX
bqWnpI hmpXv. CXn\v cv ImcW Dv
Demand Function
The relation between the consumer's optimal choice of the quantity of a good and
its price is called the demand function. This can be written as q=d(P), where q = quantity
demanded, P = price of the good.
Determinants of Demand
Demand for a good depends on many factors. These factors are called determinants
of demand. They are the follows.
1. Price of the commodity
2. Price of related commodities
3. Income of the Consumer
4. Tastes and Preferences
5. Money Supply
6. Interest Rate
Linear Demnd
Linear Demad function is a demand function along a straight line. This can be
written as
20
a
Q = a - bp ; 0p
b
a y
=0;p>
b
Here 'a' is the Horizontal intercepts, 5
'-b' is the slope. At price o, the demand is 'a'
4
and at price equal to 'a/b', the demand is '0'. rcept
Price
Vertical inte
t p
3
terce
Eg: Consider a linear demand function
Q=10-3p. When p=0, q=10-3 0=10, So 10 Q=
n
2 10
ntal I
is the horizontal intercept. When q=0, 0=10- -3 p
zo
10 1
3p, 3p=10, p= =3.33, So 3.33 is the vertical
Hori
3
intercept. We can draw a linear demand curve
2 4 6 8 10 x
with this values. 0
Quantity demanded
21
Shifts in the Demand Curve
The amount of a good that the consumer chooses depends on many factors. Changes
in quantity demanded cost by changes in the price is referred to as movemental along the
demand curve. Variations in quantity demanded caused by changes in factors other than
its price is referred to as shifts in demand.
y
Movement along the demand curve
D
When price of a commodity falls,
co
Price
nt
the consumer, the consumre purchases
ra
p2 b
ct
io
more and when price of a commodity
n
rises, demand decreases. Then increase p a e
xp
an
in quantity demanded due to decline in s
p1 c ion
its price is called expansion of demand.
In the diagram movement from point D
0 q2 q q1 x
'a' to 'c' is expansion of demand.
Quantity demanded
Movement from 'a' to 'b' is called
contraction.
Hcp km[\ns hne Ipdbptm D]t`mmhv IqSpX km[\w hmpp.
As\ tNmZ\ h{In Xmtgmv \opp. CXns\ tNmZ\ns hnImkw Fv
]dbpp. AXpt]mse Hcp km[\ns hne IqSptm D]t`mmhv Ipdv hmpp.
Atm tNmZ\ h{Ins apI `mKtv \opXns\ tNmZ\ns ktmNw
Fv ]dbpp.
Shift in Demand
Changes in other factors y
influencing demand other than price D1
leads to the change in demand curve. D
D2
This is known as shift in demand. Due
to increase in income demand for a
commodity may increase eventhough
N
price remains the same. It is called P
increase in demand. Here the consumer
moves from demand curve DD to D1D1.
D1
Due to a fall in income, the consumer D
may reduce the demand. This is called D2
22
tNmZ\ h{Ins amw
hne Hgnp av LSI amdptm tNmZ\w amdpXns\bmWv. tNmZ\
h{Ins amw Fv ]dbpXv. D]t`mmhns hcpam\w IqSptm \nehn
hne amdmsX Xs D]t`mmhv IqSpX tNmZ\w sNpw, CXns\ tNmZ\ h[\hv
(Increase in Demand)Fv ]dbpp. (DD to D1D1). hcpam\w Ipdbptm D]t`mmhv
tNmZ\wsNp Afhv Ipdbptm AXns\ tNmZ\ Ipdhv (Decrease in Demand)
Fv ]dbpp. (DD to D2D2)
Market Demand
The market demand for a good at a particular price is the total deman d for all
consumers taken together. The market demand schedule for a good can be derived from
the individual demand schedule as shown below.
Itmf tNmZ\w
Hcp Itmfns\ apgph
D]t`mmfpsSbpw tNmZ\w IqnbXmWv D
D2
Itmf tNmZ\w. DZmlcWambn Hcp D1
Itmfn aqv D]t`mm
0
Dsn aqv t]cpw hnhn[ hneIv Quantity x
hmnp km[\ns Afhv Iqnbm
Itmf tNmZ\w e`npw. AXpt]mse
Itmfnse Fm hynfpsSbpw
tNmZ\ h{Isf kamcambn Iqnbm
Itmf tNmZ\ h{Iw e`npw.
23
Adding up two Linear demand Curves
Consider a market where there are two consumers. The demand curves of the two
consumers are given by d1(P)=10-P, d2(P)=15-P
The market demand can be derived by adding two equations.
ie., d1(P)=10-P+d2(P) = 15-P,
10-P+
15-P
25-2P
Elasticity of Demand
Demand for some goods are very responsive to price changes while demands for
certain other goods are not so responsive to price changes. Price elasticity of demand is a
measure of the reponsiveness of the demand for a good to changes in its price.
q = change in quantity
p = Change in Price
p = Original Price
q = Original Quantity
Price elasticity of demand is a negative number since the demand for a good is
negatively related to the price. However for simplicity, we will always refer to the absolute
value of the elasticity.
tNmZ\ns hne CemkvXnIX
hnebnse ams XpSv tNmZ\n Fv amw DmIppshv \nbnp
]ZamWv CemnIX. Hcp km[\ns hnebnse amw aqew B km[\ns
tNmZ\ns AfhnepmIp ams kqNnnpXmWv CemkvXnIX.
tNmZ\nep iXam\amw
tNmZ\ns hne CemkvXnIX =
hnebnep iXam\amw
q = tNmZ\nep amw
p = hnebnep amw
p = BZys hne
q = BZy Afhv
24
Degrees of Price Elasticity
There are certian goods for which the demand is not affected much by price changes
and there are some other goods which are very responsive to price changes. Since the
responsiveness of quantity demanded varies from commodity to commodity and from
market to market it is important to study the degrees of price elasticity. There are five
degrees of price elasticity. y
Price
infinite increase in quantity demanded and a
slight increase in price leads to zero demand.
Thus price elasticity in infinite (ep= ) 0 x
y Quantity
D
b) Perfectly inelastic demand
This is a situation where changes in
Price
p q
Thus ep = b = b
q p
bp
or ep = a bp ( q = a bp )
0 a
= b =0 1
q 2b
2) When quantity is zero
p p 0
ep = b = b =
q 0 0 a a x
a a 2
3) At the mid point, P = (half price = 2 )
2b b
a
Then demand is
2
a a
b
2b 2
ep= a = a = -1
2 2
Thus, ep = 1
26
4) In between mid point and the point touching y axis elasticity will be greater than
one (ep>1)
5) In between mid point and the point touching x axis elasticity will be less than one
(ep<1)
Expenditure Method
Whether the expenditure on the good goes up or down as a result of an increase in
its price depends on how responsive the demand for the goods is to the price charge. As
a result at a change in price, if total expenditure increases elasticity is greater than one. If
total expenditure decreases elasticity is leass than one. If total expenditure remains constant,
elasticity is equal to one.
27
4. Income of the people: Generally, Very rich people have inelastic demand for goods
while poor people have elastic demand.
5. Number of uses: Certain goods can be put to many uses. Such goods have elastic
demand because as the price decreases they will be put to more uses.
EVALUATION QUESTIONS
1) Below is given a demand curve for a branded umbrella.
a) If the demand for umbrella increases
y D
during rainy season, what term we
use in economics to denote this
change? Draw the curve.
Price
(b) If the quantity demanded for
umbrella decreases, when its
price increases, what term we
use in economics to denote D
this change? Draw the Curve? 0 Quantity demanded x
2) Balu's demand for orange was 2kg at price of Rs.50/Kg. He purchases 2 Kg more
when price falls to Rs.30/Kg. On the basis of this
a) Define price elasticity of demand
b) Find eleasticity of demand
c) Comment on the nature of elasticity
3) A consumer wants to consume two goods. The price of the two goods are Rs.4 and
Rs.5 respectively. The consumer's income is Rs.20.
1) Write down the eqation of the budget line.
2) How much of good I can the consumer consume. If she spends her entire
income on that good?
3) How much of good2 can she consume if she spends her entire income on that
good?
4) What is the slope of the budget line?
4) One of the properties of Indifferance curve is downward sloping. Write any other
two properties
28
5) Suppose a consumer wants to consume two goods. The two goods are eqally priced
at Rs.10 and the consumer's income is Rs.40.
a) Write down all the bundles that are available to the consumer.
b) Among the bundles that are available to the consumers, indentify those which
cost her exactly Rs.40.
7) Suppose there are 20 consumers in a market. They have indetical demand function.
d(p)=10-3p. Find the market demand functions.
9) Imagine that you are the Finance Minister of Kerala. You want to raise more revenue.
How will you use elasticity in your tax proposals.
10) The price of Jowar declained from Rs.5 to Rs. 4 per kg.Consequently, the quantity
demanded declined from Rs. 6 kg to 2 kg. What conclusions can you derive from
this?
***
29
Chapter 3
A producer or a firm acquires different inputs like labour, mechines, land, raw
meterials etc. combining these inputs, it produces output. This is called the process of
prodution. Production can defind as the transformation of inputs in to outputs.
Production Function
Production Functions tells us what maximum quantity of output can be produced
by using different combinations of inputs. A production function is defined for a given
technology. It is the technological knowledge that determines the maximum levels of
output than can be produced using different combinations of inputs.
If there are two inputs, factor 1 and factor 2. We can write the production Function
as q = f (x1, x2). That means by using x1 amount of factor 1 and x2 amount of factor 2. We
can at most produce q amount of the commodity.
D]mZ\ [w
D]hpw (output) \nthifpw (inputs) Xnep _s Dev]mZ\ [w
Fv ]dbpXv. Dev]mZ\ [w kmtXnI hnZybpambn _sSpnbmWv ]dbmdv.
ImcWw kmtXnI hnZy amdptm Dev]mZ\hpw amdpw. Atm Hcp \nnX
kmtXnI hnZy D]tbmKnv ]camh[n Dev ] w Dev ] mZnnm\v Ignbp
\nthifpsS hnhn[ kwtbmKs Dev]mZ\ [w Fv ]dbpw. _oPKWnX
cq]n q = f(x1, x2) x1 bqWnv Hmas LSIhpw x2 bqWnv cmas LSIhpw
D]tbmKnv ]camh[n Dev]mZnnm Ignbp Dev]amWv q.
Change in output q
MP1 = =
Change in Input x1
Marginal product can also be found out from total product. Here MP=TP(n) - TP
(n-1), TP(n) is the total product of the last unit TP(n-1)th is the total product of the (n-1)th
unit. Marginal product are additions to the total product. Total product is the sum of
marginal products. TP, AP and MP are shown in the Table below.
Factor 1 TP MP AP
0 0 - -
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5
7 57 0 8.1
31
Total product Curve y
The total product curve is a
TP
positively slopped shown below. We TP
measure units of factor 1 along the
horizontal axis and output along the
vertical axis. Total product curve is a
positively slopped curve.
0 output
x
Average product and Marginal product Curves
The MP and AP curves look like y
an inverse of 'U' shape. For the first unit
of input, both MP and AP are the same. MP/
AP
As we increase the amount of input,
MP rises. AP also rises but less than
AP
the MP. As long as AP incresase MP is
greater than AP. When AP falls, MP has
to be less than AP, MP curve cuts AP 0 Units x
curve from above at its maximum. MP
The Law of Diminishing Marginal Product and the Law of Variable Proportions
The law of Diminishing marginal product is a short run production function.
According to this law. If we keep increasing the employment of an input, with other
inputs fixed. eventually a point will be reached after which the resulting addition of
output (i.e. MP) will start falling. The Law of variable proportion also explains this. It
says that the marginal product of a factor input initially rises with its employment level.
But after reaching a certain level of employment, it starts falling.
According to this theory, as we increase the variable factor, the TP, AP and MP
passes through three distinct stages.
32
Third stage : Negative Returns
Stage third begins with MP turning negative. When MP is zero. TP is maximum.
When MP turns negative, TP declines.
The reason behind this law is the following. As we increases one variable input, the
factor proportions change. Earlier stage, the proportion becomes more and more suitable
for the production. But after a certain level of employment, the production process becomes
too crowded with the variable input and the factor proportions becomes less and less
suitable for the production.
33
tIm_v Ukv Dev]mZ\ [w
kn. Fw. tIm_pw t]m Fv. Upw tNv AtacnIbnse hyhkmb
m]\fn \Snb ]T\ns ASnm\n Dmnb Dev]mZ\ [amWnXv.
q=x1 x2 FXmWv CXns _oPKWnX cq]w. ChnsS q FXv D]w. x1 FXv
Hmas LSIns Afhv, x2 FXv cmas LSIns Afhv, , Fnh
t]mkohv kwJyI. Cu Dev]mZ\ [w nc {]Xyb \nbas (Constant Returns
to Scale CRS) ImWnpp. AXmbXv \nthi "Sn' aSv h[nnm Dev]hpw
"Sn' aSv h[npw.
Costs
In order to produce output, the firm needs to employ inputs. Costs refer to the
expenses incurred in production.
Cost Function
With the inputs prices given, the firm will choose that combination of inputs which
is least expensive. For every level of output, the firm choose the least cost input
combination. This output - cost relationship is the cost function.
34
Various Concepts of Costs
35
Shape of AFC Curve y
AFC is the ratio of TFC to output.
TFC is a constant. Therefore as output
increases, AFC decreases. AFC curve cost
is a rectangular hyperbola as shown in
the diagram. AFC
0
output x
Shape of AVC Curve y
Both SMC and AVC Curves starts
from the same point. Then as output AVC
cost
increases, SMC falls. AVC also falls,
but falls less than SMC. But after a
point AVC starts rising. The AVC curve
is therefore 'U' shaped.
0 output x
0 output q x
Long run Costs
In the long run, all inputs are variable. The producer can change all fixed factor in
the long run. The total cost and the total variable cost coincide in the long run. Thus in the
lond run there are only two costs, average and Marginal costs. We call it as long run
average costs (LRAC) and long run marginal cost (LRMC).
36
Long run Marginal Cost (LRMC)
LRMC is the change in total cost per unit of change in output. When we increase
production from q1-1 to q2 units. The marginal cost of producing q1 th unit will be measured
as LRMC=(TC at q units) - (TC at q1-1 units)
or TC(n)-TC(n-1)]
y
LRMC
cost
LRAC
0 q x
output
EVALUATION QUESTIONS y
AC
1. Correct the figure if there are MC
0
output x
37
2. A firm SMC schedule is shown in the following table. The total fixed cost of the
firm is Rs. 100. Find the TVC, TC, AVC and SAC schedule.
Q SMC
0 -
1 500
2 300
3 200
4 300
5 500
6 800
0 output x
4. Classify the following in to appropriate heads, wages of temporary workers, cost
of raw materials, salary of permanent staffs, cost of transportations, Cost of plant,
cost of acquiring land.
6. Why the short run and long run marginal cost curves are 'U' shaped?
7. Let the production function of a firm be q=3LK. Find the maximum possible
output that the firm can produces with 100 units of L and 100 units of K.
38
Chapter 4
In the last chapter we dealt with different concepts of production and cost. In this
chapter we shall study the profit maxmisation problem of firm operating under perfect
competition.
Concepts
Market, Profit Maximization, Perfect Competition, Price taker, Total Revenue,
Average Revenue, Marginal Revenue, Price Line, Supply Curve, Shut down point, Normal
Profit, Break - event point, Determination of firms supply curve, Market Supply Curve,
Price Elasticity of Supply.
Market
Market refers to an arrangement that facilitate close contact between the buyers and
sellers for the transaction of goods and services.
Explain breifly the concept of the cost function.
GsXnepw Ncns hmen\mbpw hnev ] \bv mbpw hmphcpw
hnphcpw ]ckv]cw kn hcp GXp en\p Itmfsap
]dbpw.
FORMS OF MARKET
39
3) Seller is price taker (price taking firms)
4) Uniform price
5) Perfect knowledge about the market.
6) Freedom of Entry and Exit.
7) Free mobility of goods and factors of production.
8) Absence of Transport Cost.
Revenue
Revenue is the money earned by firm through the sale of its output.
(D]mZnn Dw \npXneqsS m]\w t\Sp ]WamWv hnphchv)
3 30 20
4 40
10
5 50
0 1 2 3 4 5 x
Observations Output sold
1. When output sold is zero, TR is also zero. Therefore TR curve starts from the
origin.
2. TR curve is a straight line (In perfect competition all units sold at the same price.)
3. The slope of TR curve of a firm in perfect competition gives us the price of
commodity.
40
Price Line
Price line shows the relationship between output sold and the market price.
y
(Price line is the demand curve
of firm in perfect competition)
Market
price
P
P=AR=MR=Demand
0 Output sold x
(demand)
Average Revenue (AR)
AR is calculated by dividing total revenue by quantity of out put sold
TR Pq
AR = q = = q
= P(hne)
41
The conditions for profit Maximisation (equilibrium) for a firm in perfect competition.
(kqW InS ac Itmfn em`w ]camh[n (kpenXmh) Fnm\p kmlNcy)
The profit maximisation conditions for the output level qo are
1. At qo P=MC (hne = koam Nnehv)
2. At qo MC is non-decreasing.
(D]mZ\w qov apIfn hnptm koam Nnehv hnpp)
3. A In the short run
At qo P AVC ({lkz ImeLn hne icmicn hnt`ZI sNehn\v Xpeytam
IqSpXtem BbncnWw)
B In the long run
At qo P LRAC (ZoL Imebfhn hne icmicn sNehn\v Xpeytam IqSpXtem
BbncnWw)
1. Condition - 1 P = MC ie., MR = MC
A profit maximising firm will not produce an output level where P>MC and P<MC.
It maximise profit by increasing production up to the point when P=MC or MR=MC
MC
y
P=MC
P=AR=MR
Price,
Cost and
Revenue
0 q output q0 x
2. Condition - 2
For output beyond qo, MC is non decreasing. The MC Curve cannot slop downwards
after the profit maximising out level. In the above figure at the output level q the market
price P=MC; however the MC curve is downward sloping (MC falls). The firm maximise
profit by increasing production up to qo . An increase in production above this qo adds less
to revenue and more to cast (MR<MC)
42
3. Condition - 3
A) In the short run, At qo P AVC
A profit maximising firm will not produce an output where market price 'p' less than
AVC.
y
SAC
SMC
AVC
B
Price, E
LOSS
Cost
and P A P = AR = MR
Revenue
0 q output x
43
y LRMC
LRAC
B
Price, E
LOSS
Cost and
Revenue P A P = AR = MR
0 q output x
In the diagram,
TR = p q = 0P 0q
TR = The area of rectangle 0PAq
TC = LRAC q
= 0E 0q
TC = The area of rectangle 0EBq
The area of rectangle 0PAq (TR) is less than the area of rectangle 0EBq (TC).
There fore at 'q' level of output the firm making loss equal to the area of pEBA.
SMC
y
SAC
Price A
P P = AR = MR
Cost Profit
E
Revenue B AVC
0 qo x
output
44
TR = 0PAqo
TC = 0EBqo
Here firm earns a profit equal to the area of rectangle EPAB.
Profit = TR - TC
= 0PAqo - 0EBqo
= EPAB
Supply
Supply referes to the quantity of a commodity that a produces is willing to produce
and sell in the market at given price during a given period of time.
(D]mZI Itmf hnebvI\pkcnv Dev]mZnnv hnm XdmIp Hcp
Dev]ns AfhpIfmWv {]Zm\w Fp ]dbpXv)
Supply Curve
The supply curve shows relationshiop between different levels of out put and different
values of Market Price.
y SMC
ur
c
ly
pp
Price AVC
su
un
and
tr
or
Cost
Sh
0 output (supply) x
45
Long run supply of Curve of firm
A firms long run supply curve is rising part of LRMC curve form and above the
minimum of LRAC curve.The price less than minimum of LRAC brings zero level of
output and supply ({]Zm\w h{Iw LRAC h{Ins an\naw _nphn\p tijap LRMC
h{Ins Dbp t]mIp `mKamWv)
ve
y LRMC
ur
yc
pl
LRAC
up
Price
ns
and
ru
ng
Cost
Lo
0 output x
y
SMC SAC
AVC
Price
and
Cost P=AR=MR
P
Short run shut down point
P=AVC
SMC=AVC
0 q output x
In the short run a firms shut down point is minimum point of AVC at which P=AVC
and SMC curve cuts AVC curve (SMC=AVC).
(lrkz Imebfhnse jvUu t]mbn v AVC h{Ins an\naw _phmWv.
ChnsS P=AVC bpw SMC=AVC Dw Bbncnpw.)
46
In the Long run a firms shut down point is minimum point of LRAC at which
P=LRAC and LRMC Curve cuts LRAC Curve (LRMC = LRAC)
(ZoL Imebfhn Hcp Dev]mZI bqWnns jvUu t]mbn v LRACbpsS
an\naw t]mbn v BWv. ChnsS P=LRACDw LRMC=LRACDw Bbncnpw.
y
LRMC
LRAC
Price
and
Cost E P=AR=MR
P
Long run Short down point
P=LRAC and LRMC = LRAC
0 q output x
y
LRMC
LRAC
Price
and
Cost E
P
Break - Even Point
LRAC = LRMC
0 output x
The minimum point of LRAC (Point E) at which supply curve cuts the LRAC curve
is the break - even point of the firm.
47
(Hcp m]\n\v AXns hnhnX sNehpw Ahkcm[nnX sNehpw
Dsmm am{Xw e`np em`s km[mcW em`w (Normal Profit) Fp
]dbpp.
Hcp m]\n\v km[mcW em`w am{Xw e`npp Fv ImWnp {]Zm\
h{Inse _nphmWv Break Even Point.
1. Input Price
a) When input price increases supply falls and supply curve shift the left.
y
S1
S
P
Price S1
S
0 q1 q Supply x
b) When input price falls Supply increases and supply curve shifts to the right.
y
S
S1
P
Price S
S1
0 q q1 x
Supply
48
2. Technological Progress
Technological progress increases supply and supply curve shift the right.
y
S
S1
P
Price S
S1
0 q q1 x
Output
0 q1 q
Supply x
49
Price Elasticity of supply
Price elasticity of supply is technical term used to indicate the rate at which supply
of a commodity changes due to change in price.
Price
P
0 x
2. Perfectly inelastic supply supply
Price
0 q supply x
3. Elastic supply
Change in price causes more then proportionate change in supply. Elasticity of
supply is greater than one. y
S
P1
P
Price S
0 q q1 supply x
4 Inelastic Supply
Change in price causes less than proportionate change in supply - Elasticity of
supply is less than one.
y S
P1
P
Price
S
0 q q1 supply x
50
5 Unitary elastic supply
Change in price causes, proportionate (equal) change in supply. Elasticity and supply
is one.
y
S
P1
P
Price
S
0 q q1 supply x
q p
= p = original price
p q
q = original quantity supplied
q = change in quantity supplied
p = change in price
2. Geometric method
y Extended supply curve intersect
S
the x-axis at the negative range
Price showing elastic supply.
Elastic supply curve
PEs > 1
S 0 Supply x
0 Supply x
51
y S Extended supply curve passes
through the origin shows
Price unitary elastic supply
Unitary elastic supply
PEs=1
0 Supply x
52
Evaluation Questions
1. Define market, List out features of a perfectly competitive market.
price / cost
0 q0 x
q1 output
4. Any factor that affect a firm's MC curve is a determinant of its supply curve
a) Identify the determinants of supply curve of a firm.
b) Show graphically the changes in the supply curve of a firm, due to changes
in its determinants.
5 Indicate the changes in supply of rice in the following situations. Represent them
diagramatically.
a) Price of chemical fertiliser increases
b) Govt. rises subsidies on rice cultivation.
c) Wage rate increases
d) Introduction of HYV seeds
6. Suppose there are three identical firms in a market, the supply function of a single
firm is given below.
qsf = 10 + 2p
a) Prepare the firms supply schedules and the market supply schedule for prices
(Rs.) 1, 2, 3, 4, 5, 6
b) Draw the market supply curve.
53
7. A firm earns a revenue of Rs.100, when the market price of a good is Rs.10. When
the market price increases to Rs.15, the firm's revenue increases to Rs.300. Find the
price elasticity of supply.
9. The price of a commodity is Rs. 10 per unit and the quantity supplied is Rs.500. If
the price falls by 10 per cent and quantity supplied falls to 400 units. Calculate its
price elasticity of supply.
10. Discuss the geometrical method ofi measuring the elasticity of a point on a straight
line supply curve.
11. "The long run shudown point of a perfectly competitive firm is minimum point of
the LRAC"
a) Give the condition of shutdown point of a firm under perfect competition in
the short run.
b) Represent the shutdown point in a diagram.
12. Prove that, for a firm in perfect competition has P=AR=MR (kqW InSac
Itmfn P=AR=MR Fv sXfnbnpI)
Output Sold 0 1 2 3 4 5 6
54
Chapter 5
MARKET EQUILIBRIUM
Equilibrium price
The price at which market equilibrium is reached is known as equilibrium price.
At equilibrium price (p) market demand (qD) and market supply (qS) are equal.
At equilibrium P, qD = qS
The quantity demanded and supplied at the equilibrium price is called equilibrium
quantity
55
Numerical example
Market demand qD = 200-p and market supply qS = 120+p
At equilibrium qD = qS
200-p = 120+p
200-120 = p+p
80 = 2p
80
p= = 40
2
Equilibrium price = 40
Substituting Rs. 40 in demand function we get qD = 200-40 = 160
Similarly Rs.40 in supply function we get qS = 120+40=160
Effect of shift (change) in demand and supply on market equilibrium with fixed number
of firms
(m-]-\--fpsS Fw nc-ambn \ns tNmZ-\-nepw {]Zm-\-nepw Dm-
Ip am- Itmf kp-en-Xm-h--bn-ep-m-Ip am-)
y D1
D S
1. Effect of Shift (change) in demand
P1 E1
(supply constant)
P
a. Increase in demand E
Price
56
b. Decrease in demand
SS curve shift left wards
y D both equilibrium price and quantity falls.
D1 S
P E
P1
E1
Price
S
D
D1
0 q1 q x
Demand and supply
P1 E
Price
S
D
S1
0 q q1 x
Demand and supply
b. Decrease in supply
SS surve shift leftwards
y S1 equilibrium price - increases
D
S equilibrium quantity - falls.
E1
P1
P E
S1
Price
S
D
0 q1 q x
Demand and supply
57
3. Effect of simultaneous shift (change) in demand and supply
a. Both demand and supply increases at the same rate. (DD and SS curve shift
rightwards)
y Equilibrium price remain unchanged.
D1
Equilibrium quantity increases
D S
S1
Price
P E E1
S
S1 D
D1
0 q1 q x
Demand and supply
b. Both demand and supply decreases at the same rate (both DD and SS curve
shift left wards.)
y D Equilibrium price remain unchanged
D1
S1 Equilibrium quantity falls.
S
P E1
E
Price
S1
D
S
D1
0 q1 q x
Demand and supply
c. Demand increases and supply decreases at the same rate (DD curve shift right
wards and SS curve shift left wards, proportionately)
y
D1 S1
D
S Equilibrium price increases but
E1
P1 quantity remain unchanged.
P
E
Price
S1
S
D1
D
0 q x
Demand and supply
58
d. Demand decreases and supply increases at the same rate (DD curve shift leftwards
and Ss cruve shift right wards preportionately
y Equilibrium price falls, but
D S quantity remain unchanged
D1
E S1
P
Price
P1
S E1
D
S1
D1
0 q x
Demand and supply
Market Equilibrium with free entryand exist (market equilibrium with varying
number of firms) (I-tmf kp-en-Xm-h kzmX-{-amb {]th-i\ \njv{I-aW
Ah--bn)
In an industry the situation of free and entry and exit of firms ensure that in
equilibrium, all firms earn only normal profit. In other wards market price p = minimum
AC
The possibility for super normal profit (P>min AC) will attract new firms. As a
result of this, finally the super normal profit wiped out. Similarly, if the firms earns less
than normal profit (loss), (P<min AC), some firms will exit the industry which will lead
to normal profit again. Thus with free entry and exit each firm will always earn normal
profit. (P=min AC)
(]q {]th-i\ \nK-a\ kzmX-{y-ap Itm-f-n m]-\- km[m-
cW em`w am{Xw t\Sp-p. IqSmsX Itmf hne Ftmgpw icm-icn sNe-hns an\n-a-
n-em-bn-cn-pw.)
y D
Price
E
PO = Min AC
0 qO x
Demand and supply
Equilibrium price determination with free entry and exit. At Po = min AC each
firms supplies same quantity of output say qsf (quantity supplied by a single firm)
59
qo
Equlibrium number of firms in the market no = qsf
60
A. Price floor (Support price) Xmphne
To protect the interest of producers (mainly farmers) govt. announce minimum price
for their products. This floor price is generally higher than the market price.
y
D S
excess supply
Price
P1
P E
S
D
0 q x
demand and supply
When govt. fix floor price an excess supply of product is created in the market. The
possible outcome in this situation are
1. procurement activities by the govt.
2. If govt. does not purchase the excess supply price will falls back to the
previous level.
y D
S
Price
P E
P1
excess demand
S
D
0 q x
demand and supply
When govt fix control price an excess demand for product is created in the market.
The possible out comes in this situation are.
1. Rationing
2. Black marketing
61
Evaluation Questions
1. Match columns B and C with A
A B C
Govt.Intervention Labour Market Qs = Q d
Market Equilibrium P = Min. of AC Price Ceiling
Free Entry & Exist Income Normal Profit
Supply of Labour Demand & Supply Analysis S1 = D1
Wage Rate determination Price Floor Leisure
2. 'The direction of change in equilibrium price and quantity is same whenever there
is a shift in demand curve, supply remaining constant'.
a. Identify the two shifts of demand curve.
b. Draw relevant diagrams and prove the above statement
4. Suppose the demand and supply curve shifts simultaneously, there will be four
possibilities. Illustrate and explain the impact on equilibrium price and quanitity in
all four situations.
5. Suppose the market demand and supply function in a competitive industry is given
as follows.
Qd = 700 - 50 p; Qs = 400+25p
a) Derive the market demand and supply schedules at prices Rs.1, 2, 3, 4, 5, 6, 7, 8
b) Find the equilibrium price using the function.
c) Represent the equilibrium in a graph.
6. Using supply and demand curves, show the changes in equilibrium price of flowers
bought and sold during onam season in Kerala.
62
7. Graphically explain the effect of rise in the price of iron rod, cement and sand on
the equilibrium price of newly constructed house.
8. Suppose the equilibrium price of sugarcan ein the market is Rs.15/- per kg.
a) What will happen when the Govt.fix a price of Rs.20/- per Kg for sugar cane
with a view to protect the sugarcane cultivators?
b) By what name this policy is known?
c) Draw diagram to illustrate this.
9. In the union budget 2009-10, import duty on crude rubber was reduced from 20%
to 15% per kg. Other things remaining constant, how will it affect the equilibrium
price and quantity of rubber in the country? Represent it in a diagram and explain.
10. The demand and supply function of milk are given as follows.
Qd = 30 - p Qs = 25 + p
Find the equilibrium price and quantity
11. Give the equation for equilibrium number of firms with free entry and exit. Suppose
the market for chickens with identical farms have the following demand and supply
functions.
qd = 400 2 p for 0 p 400
= 0 for p > 400
qsf = 40 + P for P 40
= 0 for 0 p < 40
a) Find the equilibrium price and quantity
b) Find the equilibrium number of farms.
12. Define the market equilibrium. What will happen if the price prevailing in the
market is
a) above the equilibrium price
b) below the equilibrium price.
***
63
Chapter 6
Monopoly
Monopoly is a market situation in which a single seller controlls the entire supply
of a commodity, which has no close substitute.
Features
1. Single Seller
2. There will be no close substitute for the product produced by the monopolist.
3. Entry is denied to new firms in the market
4. The monopolist has complete control over the supply
5. The seller is 'Price Maker'
6. Firm and Industry are same
7. Price discrimination
y
D
Price
P0
D
O q q0 demand x
64
Total revenue, Average revenue and Marginal revenue of a monopoly firm
To a monopoly firm the motive behind production is to earn maximum profit. So he
always tries to maximise revenue.
1. Total Revenue
TR=Quantity of output sold price
TR=p q
Let the demand funtion is
q = 20 - 2p
This equation can be written in terms of price as
2p = 20 - q
p = 10 - 0.5q
Since TR = p q
=(10-0.5q)q
TR = 10q - 0.5q2
This is quadratic equation in which the squared term has a negative co-effcient. The
graphical representation of this equation gives us an Inverted Vertical Parabola.
Thus TR curve take the shape of an inverted vertical parabola
2. Average Revenue
TR
Average Revenue =
quantitysold
Since TR = p q
pq
AR =
q
AR = P
The monopolist can fix the price by regulating the supply of his product. The
demad curve of monopolist shows the prices that are available for different quantities of
output. The AR values are same as the values of price 'p'. Therefore AR curve will be
demand curve of a monopoly firm.
3. Marginal Revenue
MR is addition to TR by the sale of an additional unit output.
TR
MR = q
MRn = TRn - TRn-1
65
y
P TR
TR
Price
AR
MR
0 Output sold x
MR
Conclusion
1 The shape of TR curve depends on the shape of AR curve = Demand curve
2 If AR = DD curve is a negatively slopping straight line, the TR curve take the shape
of inverted vertical parabola.
TR
TR
M
Price
0 N output
x
66
The AR at quantity 'N' is the slope of the line 0M.
MN
The slope of line 0M =
ON
Since value MN shows Total revenue and 0N is the quantity of output,
MN
AR =
ON
Marginal revenue at any level of output can be measured from the slope of the
tangent at the relevant point on the TR Curve.
L2 c L3
P
b
TR
L1
and
MR d
a L4
Price
TR
0 x
output
MR
67
Marginal revenue and price Elasticity of demand
a) As long as MR is positive, the elasticity of demand is more than one (Elastic demand)
b) When MR becomes negative, the elasticity of demand is less than one (Inelastic
demand)
y
a
TR TR
AR
and R
Price
MR
AR=DD
0 output q x
MR
The diagram shows that monopolist maximise TR by selling 'q' amount of output.
This is also the level where MR=0.
68
The TR of a monopoly firm = AR q
= 0p 0q
This is equal to the area of shaded rectangle 0PRq.
Since TC is zero. Profit = TR
= Area of 0PRq
TR1 A
L
TR
TC1
B
Revenue
and
cost
0 q2 q1 q0 q3 x
output
profit
Profit = TR - TC
when quantity is q1
Profit = TR1 - TC1
It equal to length of line AB
At q0 levels of output the vertical distance between TR and TC is aL and it is
maximum. Therefore producing q0 level of output the monopolist maximise his profit.
2) MC and MR approach
In terms of MC and MR, equilibrium of a monopoly firm is defind as the point
where MC=MR and MC is rising.
69
y
MC
MC
and
MR
MC = MR
0 q0 x
output
MR
As long as MR curve lies above MC curve the firm would increase its profit. This
process comes to an end when the firm reaches an output level where MC = MR. In the
figure at q0 level of output. MC=MR and there fore q0 is the equilibrium level of output
which maximize profit.
Monoplistic Competition
Monopolistic competition is a market situation in which large number of sellers
selling differentiated products. This kind of market structure is commonly visible.
Features:
1. Large no of buyers and sellers
2. Differentiated products (sshhn[y hIrX Dev])
3. Firms have freedom of entry and exit.
4. The demand curve slopes downward from left to right.
5. High selling cost.
70
A. Short run - equilibrium of a firm under Monopolistic competition
A firm under Monopolistic Competition attains equilibrium in the short run under
the following conditions.
1) MC=MR. The firm increase its output as long as MR>MC.
2) MC should not be decreasing in equilibrium MC curve should be rising.
Some firms get super normal profit and other firms will incurring loss in the short
run. In the figure equilibrium price is '0p' and equilibrium quantity is '0q'
y
Profit=TR - TC
= p q - AC q
p
M = 0p 0q - 0L 0q
Price, SAC
Profit SMC = 0pMq - 0LNq
cost
and L
N AR profit = LpMN
revenue
E
MR
0 q output x
B. Long run equilibrium of a firm under monolistic competion
The condition for equilibrium are.
1. MC=MR. The long run Marginal cost should be equal of Marginal revenue.
2. p=AR=LRAC
In monopolistic competition firms have freedom of entry and exit. In the short run,
if the industry is running with super normal profit, new firms will enter that industry and
thus super normal profit will disappear. If any firm suffers loss in the short run, that firm
will stop production and leave the market. So in the long run all firms achieve only
normal profit. In the diagram equilibrium price is '0p' and quantity is '0q'
LRMC
y At the output 'q'
LRAC
MC=MR and P=AR=LAC
R
Price, P Profit = TR-TC
cost
and = p q - LAC q
revenue E AR = 0p 0q - 0PRq
= 0PRq - 0PRq
MR
= Zero
0
q x
output
71
As TR is equal to TC super normal profit is zero.
(Equilibrium quantity in monoplistic competition market will be less than that of a perfect
competitive market and more than that of a monopoly market. Similarly equilibrium
price of monopolistic competion market will be more than the price of a perfect competition
market and less than that of a monopoly.)
Oligopoly
Oligopoly is a market situation which few firms selling either homogeneous product
or differentiated products. Therefore Oligopoly is also known as 'Competition among
few'
'Duopoly' is a special case of oligopoly market in which there are exactly two sellers.
Features
1. Few sellers.
2. Products are either homogeneous of differentiated.
3. Interdependence in decision making: In an oligoploy market the price and output
decisions are interrelated. This interdependence of firm some times leads of 'Collusive
Oligopoly'
4. Price Leadership : In some oligopoly markets, the powerful or experienced firm
may fix the price of product of the industry. Then other firms consider it as a guidline
to fix the price. Here the powerful firm is 'price leader' and others are price followers.
5. Price Rigidity : In an oligopoly market once price of commodity is determined. It
tends to remain stable for long period of time. No firm ready change the prevailing
price because of fear of counter actions by rival firms.
6. Indeterminateness of demand curve.
72
1
That is, Individual firm supply =
n+1
n
Market Supply =
n+1
n = number of firms
73
We get,
p = 50 - 0.25q
400
= 50 - 0.25
3
100
= 50
3
=50 - 33.3
Equilibrium market price p = 16.67
The Equilibrium quantity supplied (market supply) is
= 200 - 4p
= 200 - 4 16.67
q = 133.32
Evaluation Questions
1) The market demand curve facing two duopolis is given by, q=500-5p
a) Find the equilibrium market price
b) Find the quantity supplied by each firm in equilibrium
***
74
MACRO ECONOMICS
75
Resource Team :
1) M. Chandran, HSST, GHSS Periya
2) P. Sasi, HST, GHSS Kundumkuzhi
3) T.V. Raghunathan, HSST, GHSS Kuttamath
4) P. Mohanan, HSST, GHSS Thayannur
76
Chapter 1
INTRODUCTION
77
Why Macro Economics
Adam Smith, the father of modern Economics argued that micro analysis can an-
swer all the economic problems. But economists gradually discoverd that they had to
look further. The following are the reasons why we should study problems in Macro
perspective.
1) ssat{Im hniIe\w ]dbpXpt]mse FmImcyfnepw Itmf
\ne\npItbm Asn \ne\nm km[yXtbm C.
2) Nne k`fn Itmf \ne\nppsnepw AXphgn
kwXpe\mh t\SWsan.
3) ssat{Im hniIe\w hynKX ey am{XamWv ]nXpScpXv. ]s Hcp
cmPys kw_nv Nnetm kmaqly ey ]nXpStcn htmw.
Macro Economics decision makers are the State, Statutory bodies like RBI, SEBI
and similar institutions. They follow objectives like the welfare of the country and its
people as a whole.
II Wage rate, Price of Pencil, inflation, allocation of resources aggregate demand price
theory.
79
VII Classify the given variables in to Micro Economics and Macro Economics.
General price level, Aggregate consumption, Rent for a house in a city, Demand for
fish in a local market.
IX Some variables are given below Classify them on two branches of economics.
1) Utility
2) Price Level
3) Inflation
4) Demand for pen
5) Aggregate Consumption
6) Taxes
7) GDP
8) Rent
80
Chapter 2
Adam Smith, the father of modern Economics in his famous Book. An Inquiry in to
the Nature and Causes of Wealth of Nations says that a country becomes rich or poor not
merely depends on the natural Resources available in the country but how the Natural
Resources are utilised for production of wealth.
Hcp cmPyns kX Xocpam\npXv AhnsS e`yamb {]IrXn hn`hfpsS
Afh adnv Acw hn`hfpsS D]tbmKneqsS AhnsS D]mZnnsSp
kns AfhmWv.
In every country certain goods and services are produced by the people by combin-
ing their energies with natural and man made resources. This results in a flow of produc-
tion.
Hcp kXv hyhbn a\pjy e`yamb {]IrXn hn`hfpambpw a\pjy
\nnX hn`hfpambpw {]Xn{]hnpXns `mKambn At\Iw km[\
tkh\ D]mZnnpp. CXv D]mZ\ns Hgpn\v ImcWamIpp. Cu
D]mZ\{]h\amWv Hcp cmPyv hcpam\ D]mZ\n\v ImcWamIpXv.
Production always generates income. Production of goods taking place in an country can
be categorised as follows.
PRODUCTION
81
Final goods are of two types. Endup their use by single use are called consumer
goods. Hcp D]tbmKw sImv Xs AXns AnXzw CmXmIphbmWv
D]t`mIvXr hkvXp. CXv Xocpam\npXv Hcp hkvXphns D]tbmKamWv.
Capital goods are used in the production process. They help for further production.
They are durable in Nature. Examples Machines, tools, implements, buildings etc
D]mZ\w hnnm klmbnpIbpw AtX kabw kzbw ]cnWman\p
hnt[bamImXncnpIbpw sNp hkvXpfmWv aqe[\ hkvXpI. cmPyns
D]mZ\ {]{Inbbn \smbn {]hnpXv aqe[\ hkvXpfmWv.
Continuous and prolonged use of capital goods cause wear and tear to these goods.
They are to be repaired or replaced in due course of time. This expenditure is called
depreciation or capital consumption expenditure.
These various sector are not functioning independently. They are interdependent
and interlinked. The functions of one sector has many exchanges with other sectors.
82
Hence we can say that an economy is like a web where the various sectors are interlinked
by their varified functions. The pictorial illustration of this inter relation and interdepen-
dence of the various sectors are called circular flow of Income.
Hcp kZv hyhbnse \mev taJeI ]ckv ] cw _nXamWv . Hcp
taJebvpw Cv kzX{ambn \nmt\m {]hnmt\m km[ya. Ch Xnep
_ tcJsSpnbm AXv kv hyhsb Hcp Nnen hev Xpeyambn
ampw. taJeI Xnep _fpw ]ckv ] cm{ibfpw Nn{X cqt]W
{]ZinnpXmWv. hcpam\ns Nm{InI {]hmlw FdnbsSpXv.
Here we examine the simple economic model of circular flow of income involving
only two sectors ie., firms and households. The following flow chart exhibits the circular
flow of income.
Spending
Factor payment
Factor services
There are four major exchanges between firms and households. Every flow from
one sector has a counter flow from other sector.
Firms s {][m\ [w D]mZ\amWv. D]mZ\ LSIsf Bhiyamb
A\p]mXn ka\zbnnv D]mZ\w \SpIbmWv firms sNpXv.
Household s {][m\ [ D]mZ\n\mhiyamb D]mZ\ LSIsf
{]Zm\w sNpI. D]mZnnsSp km[\ tkh\ hmn D]tbmKnpI
FnhbmWv.
The first flow is flow of factor services from Household to Firms. Factor services
are Land, Labour, Capital, Organisation. They hired by firms to produce goods and services.
These factors must be rewarded with Rent, Wages, Interest and profit respectively. This
is the beggining of the second flow. It is also the counterflow of the first flow. That is
factor payments. These are the income of the Households. They use this income for the
purchase of goods and services. This give rise to the third flow. Flow of goods and
services from firms to Households. In return the households make the spending
83
(consumption expenditure) which is the fourth flow.
{][m\ambpw \mev hn\nabfmWv Cu cv taJeI Xn \SpXv.
1) D]mZ\ LSIfpsS Hgpv Household \nv Firms tev
2) D]mZ\ LSIp {]Xn^ens Hgpv Firms \nv House-
hold tev
3) km[\ tkh\fpsS Hgpv Firms \nv Household tev
4) D]t`mKsNehns Hgpv Household \nv Firms tev
Cu HgppIsf cmbn XcwXncnncnpp. Money flows and Real flows.
84
The Product or Value Added Method
In this method national income is viewed as production total. Here we look at National
Income as a flow of production of goods and services over a year.
In this method National Income is calculated by adding together the value added of
each and every firm in the economy.
Value added is the value generated and added by a firm in the process of production.
For example if a farmer produces 100 rupees worth of wheat. Further we assume that the
farmer do not need any input other than human labour. In other words no intermediate
goods used by the farmer. Hence the whole 100 rupees value is the contribution of the
farmer.Next a Baker purchases this 100 rupees wheat from the farmer and produces
250rupees worth of bread. Here the net contribution made by the Baker is value of
production of the firm. - value of intermediate goods used by the firm. ie., 250-100=150.
The value Added by the Baker is 150. Value added of farmer and baker can be calculated
as follows.
Farmer Baker
Total Production (Value of output) 100 250
Intermediate goods used 0 100
Value added 100 150
Hence the total production took place in the economy is 100+150=250
Gross Value Added = Value of output - Intermediate Consumption
Net Value Added = Gross value added - Depreciation
Net Value Added = Net value Added - Net Indirect Tax.
When we calculate the value of output by adding together the value added of each
firm in the economy we can avoid the problem of double counting.
Double counting is the problem of counting the value of a good more than once
while calculating value of production. In this method we add the Gross value added of
every firm. Symbolically
GDP = GVA1+ GVA2+ GVA3+ .......... GVAN
N
N N
GDP = NVA
Ai+ Di
i =1 i =1
NDP = NVA
Ai
i =1
85
Value of output of a firm can also be calculated in another way. Here we take the
output as sold and unsold output.
Hcp firm Hcp hjn \npw ASp hjtv amp hnsSm
Ana hkvXp. A\nnX hkvXpI, Akwkv I rX hkvXpI
apXembhbpsS BsI Afhns\ Inventories FdnbsSpp.
Hcp firm s Inventories hjm hjw cp Xcw amfpmImdpv.
Invertories s h\hv Accumulation Fpw Inventories DmIp Ipdhv
Deccumulation Fpw AdnbsSpp. Inventories DmIp amw Ip]nSnm
Xmsg ]dbp coXn kzoIcnmhpXmWv.
Change in Inventories = Product of a firm during a year - sale
(Change in stock Fpw AdnbsSpw) of the firm during the year.
= Closing stock - Opening Stock
(Inventories !Hcp stock variable BWv)
Cu coXnbn Hcp firm s Hcp hjs sales 1000 cq] bptSXmWv. B hjw
firm s Inventories ! 500 cq]bpsS h\hpmbn. B hjw B firm s
samw D]mZ\aqeyw
Value of output = Value of sales + Value of Change in Inventories.
= 1000+500
= 1500
86
on machines, plants and Machinery, tools, implements, infrastructure etc, are
examples for this type of expenditure. This is denoted by (Ii)
3. Government Expenditure : In modern economies govt plays an important role. Govt.
makes a lot of expenditure as a part of their developmental and regulating activities.
This is called Government Expenditure. Which is denoted by (Gi)
4. Net Exports : This is the foreign demand in an economy. This is the difference
between export and import of an economy during a year.
Hence GDP=sum total of all the final expenditure received by the firms in the
economy.
GDP=C+I+G+X-M
X-M P GVA
i =1
Ai
+ +
G In
+ +
I R
+ +
C W
Expenditure Income Product
Method Method Method
The difference between import and export is known as Trade deficit (M-X)
The difference between Govt. expenditure and Tax revenue is called Budget
deficit. (G-T)
87
BASIC NATIONAL INCOME CONCEPTS
GNP = GDP + Net factor Income from abroad
GDP = GNP - Net factor Income from abraod
NDP = GDP - Depreciation
NNP = GNP - Depreciation
NNPFC= NNPMP - Net Indirect Tax
NNPFC is the true National Income (NI) of an economy
apIfn ]dncnp hnhn[ National Income Concepts I Ism
\Inb Concepts Dw ImtW Concepts Dw Xnep Ac hyXymkhpw t\mpI.
GXp Concept I Xnep hyXymkw NFI, Depreciation, Net Indirect Tax Fnhbn
GsXnepambncnpw. Xmsg ImWnncnp Chart CXn\v \nsf klmbnpw.
-- Depreciation
G - Gross
N - Net
G N
+Depreciation
+NFI
+NIT
88
DZmlcWw
GNPMP = NNPFC + ........................ + .........
ChnsS \apv Xncnp cv conceptI GNPMPbpw NNPFCbpamWv. Chbnb
GsXms Acfn hyXymkapv? G N, MP FC, cv hyXymkfmWv.
ChnsS N \nv G bntepw FC bn \npw MP bntepw t]mIWw. AXpsImv
bYm{Iaw (apIfnse {Km^v {]Imcw) Depreciation NIT Fnh NNPFCtbmSp Iqnbm
GNPMP bnsemw.
Personal Income (PI) = NI - Undistributed profit - Net Interest payment -
Corporate Tax + Transfer earnings of the Households.
Personal Disposable Income (PDI) = PI - Personal Tax Payments - Non-tax
payments.
GDP Deflator
tZiob hcpam\w cSnm\n IWmmw. Hv AXXp hjs
km[\tkh\fpsS hne \nehmcw (Current Price) IWnseSppsImv D]mZ\
aqeyw IqnsbSpv tZiob hcpam\w ImWmw. CXns\ National Income at Current
Price FmWv ]dbpI.
cv ap]p GsXnepw hjs (Base Year) hneIsf ASnm\amn (Base
Year Price) Cu hjs D]mZ\ aqeyw IWmn tZiob hcpam\w Ismw.
CXns\ National Incoem at Constant Price FdnbsSpp.
Hcp cmPyns, bYm kmnI hf a\nemm National Income at
Constant Price BWv IWmpI. ChnsS bYmn Xhjtv ASnm\
hjn \npapmb hneamw \mw HgnhmnbmWv tZiob hcpam\w ImWpXv.
Cns\ hneamw aqew D]mZ\ aqeynepmb amw HgnhmnsbSpp
{]{InbbmWv GDP Deflator FXpsImv DtinpXv. AXv Xmsg ]dbp coXnbn
ImWmw.
Nominal GDP GDP at Current Price
GDP Deflator = 100 = 100
Real GDP GDP at Constant Price
Hcp cmPyns GDP Current hnebn IWmnbtm 3200 cq]bpw Con-
stant Price IWmnbtm 1600 cq]bpamsWv Ip GDP Deflator ImWpI.
89
GDP & WELFARE
GDP Hcp cmPyns tas kqNnnp aXnbmb Hcp kqNIamtWm?
A FXmWv Dcw. GDP bpw tahpw Xn _apv . ]s
tans AfhptIm F coXnbn GDP v Nne ]cnanXnIfpv. Ah Xmsg
]dbphbmWv.
1 GDP hcpam\ hnXcWnepmbncp AkaXzw IWnseSppn. GDP
hnm am{Xw taw hnn. AXv kaXz]qambn kaqln
hnXcWw sNsSpI IqSnthWw.
2 Non - Marketed Exchanges (ItmtfXc hn\nab {KmaoW kXv
hyhIfn Hcp ]mSv \Sppv) Ch GDP bpsS ]cn[nbn hcphb.
]s tas kzm[o\nInphbmWv.
3 Externalities : htXmXn D]mZ\w \SpXns `mKambn DmIp
{]Xytam ]tcmtam Bb KpW tZmjfmWv Externalities FdnbsSpp.
Ch GDP bpsS ]cn[nbn hcpn. DZm:- Hcp ^mdn {]hnptm AXns
Npp]mSpaphv DmIp BtcmKy {]iv\, aen\oIcW {]iv\
Fnh GDP IWmptm ]cnKWnsSpn. ]s tas
tZmjIcambn _m[npp. AXpt]mse Hcp h ^mdn H]p {]tZiv
hcptm AXns `mKambn sdbn KXmKX kuIcyw e`yampXv
KpWIcamb Hcp ^eamWv. CXpw GDP bn ]cnKWnsSp hnjba.
QUESTIONS
1) The data collected for small economy is presented in the following table
No. Item Amount
1 Govt. expenditure 150
2 Rent 250
3 Wages and Salaries 655
4 Pvt. Fiscal Consumption Expenditure 755
5 Investment Expenditure 190
6 Interest 40
7 Exports 230
8 Imports 250
9 Profit 130
10 Depreciation 10
a) Calculate GDP by income and expenditure method.
b) Do you get identical result? Why?
c) What is the amount of Trade deficiet
90
(kqN\ : Income Method-GDP =Rent+Wages+Interest+Profit+Depreciation
Expenditure method : GDP=Pvt -fiscal consumption exp + Givt.expenditure + In-
vestment Expenditure + Net export +Depreciation
Trade Deficit = M-X (Import - Export))
l l
91
5) Xmsg Xncnp ]nIbn \nv A F I\nbpsS hnX aqeyw (Value
Added) IWmpI.
92
9) The names of various commodities are given below. Classify them in to final good
and intermediate good.
Bread, Wood, Rubber, Tyre, Table, Wheat
10) Give one word for the following statements
a) National Income Population =
b) A pictorial illustrations of the interdependence between major sectors of the
economy.
c) Personal Income - Personal Tax Payments
d) GNP - Depreciation
11) Calculate National Income (NI) by expenditure method from the following data
(Hints: GDP MP GNPMP NNPMP NNPFC )
1) Consumption of fixed capitol : 40 crores
2) Private Consumption expenditire : 4800 crores
3) Investment Expenditure : 3500 crores
4) Export : 860 crores
5) Import : 900 crores
6) Govt. Expenditure : 200 crores
7) Net factor Income from : -40 crores
8) Net Indirect tax : 20 crores
(GDPMP=C+I+G+X-M)
93
Chapter 3
What is money?
According is Robertson, "Money can be defined as anything which is commonly
accepted in exchange for goods and services and discharging other kinds of obligations."
According to W.A.Walker, "Money is what money does."
Rate of
Liquidity Trap
interest
rmin
O x
Speculative demand
96
THE SUPPLY OF MONEY
Money supply is a stock variable Money supply consists of currency notes and
coins issued by monetary authority. It also includes demand and time deposits created by
commercial banks.
Currency notes and coins are used as money because they have general acceptabil-
ity and the legal backing of the govt. As they circulate because of the order of the govt.
they are called fiat money. They are also called legal tender money because of the legal
backing of the monetary authority.
RBI's measures of money supply.
M1 = CU+DD CU - Currency DD - Demand Deposit
M2 = M1+savings deposits with post office savings banks
M3 = M1+Net time deposits of commercial banks
M4 = M3 + Total deposits with post office savings organisations
M1
M2
} are called narrow money
M3
M4
} are called broad money
M3 - is called aggregate monetary resources. It is most commonly used measure of
money supply.
To ensure that the commercial banks keep enough reserves the RBI uses the follow-
ing tools:
1. Cash reserve ratio
2. Statutory Liquidity Ratio
3. Bank rate
97
Functions of commercial banks
1) Accepting deposits.: CB's accept deposits from the public. There are three types
of deposits.
1. Demand or current deposits - no interest paid
2. Savings deposits - Low interest paid
3. Fixed or Time deposit - High interest paid.
2) hmbv] \I (Giving loans & advances) s]mXp-P-\-v Bh-iy-amb
hnhn[ Xcw hmbv]-I \Ip-p.
3) Creation of credit (hmbv] krjvSn-)
4) \nt]w \S- (Making investment)
ap [-
^v amw
^v tiJ-cn-
AS-h-Ip-I \S-
hn]{X Imcy- \S-m-
tem kwhn-[m\w \I
hnhn[ Xcw hnI-k\ {]h-\-v [\-k-lmbw \I.
tI{-_mv
Fm cmPy-pw AXn-t-Xmb tI{-_m-p-v. Cybnse tI{-_mv dnkhv
_mv Hm^v Cy F-dn-b-s-Sp-p. Hcp cmPy-ns [\-Imcy hyh--bpsS Xe--
p m]-\-amWv tI{-_m-v. Cw-n AXv _mv Hm^v Cwv, Ata-cn--bn
s^U-d dnkhv knw Fn-s\ Adn-b-s-Sp-p.
tI{-_m-ns [-
1. Note issue (t\mn-d-) Cy-bnse Idkn t\mp-Ifpw Hcp cq] tImbn Hgn-
p \mW-b-fpw Cd-m-\p ]q A[n-Imcw tI{-_m-n-\m-Wv.
2. Khsans _mv (Government's Bank) tI{-_mv Khsans D]-tZ-jvSmhv,
_mv, GP v Fo \ne-I-fn {]hn-p--Xn-\m Khsans _mmbn
Adn-b-s-Sp-p.
3. _mp-If - psS _mv (Bankers Bank) : cmPy-nse ap _mp-Is
- fmw Cu _mns
\nb-{-W-n-em-Wv. Ch-bpsS Icp-X [\w kqn-p-Xv tI{-_mmWv.
Ah-iy-L---fn km-nI klmbw \In klm-bn-p-Xpw tI{-_m-m-
Wv. AXp-sImv tI{-_m-ns\ _mp-I-fpsS Ah-km-\s AmWn (Lender
of last resort) F-dn-b-s-Sp-p.
98
4. hmbv]-bp-tSbpw ]W {]Zm-\-n-tbpw \nb-{-I Controller of credit and money
supply)
Hcp cmPy-ns km-nI ncX Ddp hcp-pI FXv tI{-_m-ns Npa-
X-e-bm-Wv. AXp-sImv Xs cmPyv ]W-s-cpw, ]W-Np-cpw Fo {]Xn-`m-
k- Dm-ImsX t\mt-Xv tI{-_m-ns D-c-hm-Zn-Xz-am-Wv. tI{-_mv
AXns ]W-\-b - n-eqsS (Monetary policy) CXv km[y-am-Ip-p. hmbv]b
- psS Afhv
AXp-hgn ]W-ns Afhv \nb-{n-p-sImv tI{-_mv Cu eyw t\Sp-p.
5. hntZ-i-\mWy tiJc kqn-p-Im-c (Custodian of foreign exchange reserves)
6. Publisher of reports (dn-tmv {]km[-I)
7. CS-]m-Sp-I Xop tZiob tI{w.
99
Sterilisation by RBI : Hcp cmPyv km-nI {]iv\- Dm-Ip-Xv cmPy-n \-I-
p ]W-n-stbm hmbv]-I-bp-tStbm Af-hn-ep-m-Ip h-\thm Ipdthm
sImp am{X-a-. Cs Xpd kZvhyh--bn Fm cmPy-Mvlepw CXc cmPy-
-fp-ambpw km-nI hn\n-a-b- \S-n-tm-p. Cs\ hntZi km-nI hn\n-
a-b-ns `mK-am-bp-m-Ip ]W-ns Hgppw kZvhyh--bpsS nc-Xsb
_m[nmw. Cs\ hcp-tm B.-_n.sF hntZ-ip \npw hcp ]W-ns
Af-hn\v Xpey-amb ]W-A-fhv kZvhyh--bn \npw ]nh-en-m-\p \S-]Sn
kzoI-cn-p-p. Ans\ AXns ^ew Cm-Xm-m {ian-p-p. Cu \S-]SnmWv
Sterilisation by RBI F-dn-b-s-Sp-Xv.
Questions
1. Match the A with B column.
A B
M1, M 2 Aggregate Monetary resources
M3, M 4 Narrow Money
Macro Economics Price Theory
M3 Borad Money
Micro Economics General Theory
100
4. Xmsg sImSp-n-cn-p [-sf cmbn Xcw Xncnv Xe-sv \Ip-I. \nt-
]- kzoI-cn-p-I, hmbv]bpw AUzmkpw \Ip-I, _np-I UnkvIzv
sNp-I, hmbv]-bpsS krjvSn, doUn-kvIu-nwKv _n, ]Ww A-Sn-n-d
- p-I, hntZi
\mWy-ns kqn-p-Im-c.
6. Prepare a seminar report on the topic credit control policy of Reserve Bank of
India. It contains heading, introduction, main points, conclusion and order of
presentation.
7. RBI is the independent authority for conducting monetary policy. The most important
Role is as the controller of moeny supply. Explain 3 measures of monetary policy
(credit control measures)
101
13. 1) Central Govt. wants advice on a. GXv m]-\-n-\mWv Cu ]d
a financial crisis {]h-\- ([-) {]mhn
2) Central Govt: wants an authority I-am-m km[n-p-Xv?
as the custodian of foreign b. ta]-d Hmtcm {]iv\-fpw hni
exchange reserves Ie\w sNbvXv B m]\w Ah
3) The country need an institution Fs\ ssIImcyw sNpp Fv
to regulate the money hy-am-p-I.
supply and credit system.
15. The RBI has been publishing four alternative measures of money supply in India
since 1977. On the basis of this can you complete the following table.
Terms Components
M1 .............................
M2 ............................
M3 ............................
M4 ............................
102
Chapter 4
103
C 140 80 60
MPC = ( )=( )= = 0.6
Y 300 200 100
It indicates that 60% of increase in income is spent on consumption.
Average Propensity to Consume (APC)
It is the ratio between total comsumption (C) and total income (Y)
C
ie APC =
Y
For eg, if consumption is Rs.60 crore and income is Rs.100 crore, then
60
APC = = 0.6
100
This means that 60% of income is spent on consumption.
Average Propensity to Save (APS)
It is defined as the ratio of total savings to total income of the economy.
S
i.e. APS =
Y
For example if savings Rs.40 crore and income is Rs.100 crore.
40
Then APS = = 0.4
100
i.e. 40% of income is saved.
Investment Function (I)
Investment are additions made to the existing sotck of capital. or it is the expenditure
on creation of new capital assets and changes in the inventory of producers. For simplicity
we assume that firms plan to invest the same amount every year. We can write the
investment demand as
I= I
Therefore, In an economy without a government, the exante aggregate demand for
final goods is the sum total of exante consumption expenditure and exante investment
expenditure.
y
ie AD = C + I + bY AS
The equilibrium level of E AD = C + I + bY
income and employment can Aggregate
Demand C + bY
be determined with the help of &
aggregate demand curve and Aggregate
aggregate supply curve. In Supply
104
willing to supply whatever amount consumers will demand at that price therefore, the
aggregate supply curve takes the form of a 450 upward slopping straight line.
DETERMINATION OF
INCOME & EMPLOYMENT
BapJw
1930 Ifn-ep-mb km-nI amyw mn- km-nI imkv{X A]-{K-Y-
\-n-t\ I\ {]l-c-ambncpp. sXmgn-en-m-bva-bpw, \mW-b-s-cp-hpw kZvhyh-
-bn cq-am-bn-op.
mn- km-nI imkv{X-ns hm--fn-sem-c-fmb sP.-_n.-sk-bpsS
Itmf \nb-a-ns km[pX tNmZyw sN-s-p. Cu {]Xn-kn L-n, k-Zvhy-
h--bnse sXmgn \ne-hmcw \n-bn-p LS-I--sf-p-dnv Xr]vXn-I-c-amb hni-
Zo-I-cWw \In-bXv tPm sabv\mUv sIbnkv F km-nI hnZ-Kv-\m-bn-cp-
p. Xs {]kn--amb ]pkvX-I - n-eqsS kZv hyh--bnse hcp-am\ \nbw sXmgn-
en-m-bva-bpsS ImcWw Fn-hs - b-p-dnv hy-amb hnh-cWw Atlw \In. "sXmgn,
]en-i, ]Ww cv taJ-e-I-fp Hcp AS k-Zvhy-h-b - n kam-lr-Z-tNm-Z-\
- n\v
{][m-\-ambpw cv LS-I--fm-Wp--Xv.
F) D]-t`m-K-tNm-Z-\w. _n) \nt-]-tNm-Z\w
hcp-am\ knm--ns ASn-m\w a\:imkv{X-]-c-amb D]-t`m-K-\n-baw BIp-
p. hcp-am-\-ns am-ns am-n-\-\p-k-cnv D]-t`m-K-sN-e-hnepw amw kw`-hn-p-
p.
hcp-am-\hpw D]-t`m-Khpw Xn-ep ]c-a-amb _s Ipdn-p--XmWv D]-
t`mK GIZw (Consumption function)
C = f(Y)
ChnsS C FXv D]-t`m-Khpw Y FXv hcp-am-\-hp-am-Wv. hcp-am\w hn-p-
tm Bfp-I Ah-cpsS D]-t`m-Khpw hn-n-p-p. Fm hcp-am-\-nse h-
\-hn-t\-m Ipd-hm-bn-cn-pw D]-t`m-K-nse h-\-hv. Ch Adn-b-s-Sp-Xv D]-t`m-K
{]-h-WX AYhm D]-t`m-K-n-\p Dp-JX (Propensity to consume) FmWv. D]-
t`mK GI-Zs kqNn-n-p ka-hmIyw Xmsg ]d-bp hn[-n \apv hni-Zo-I-cn-
mw.
C = C + by
105
ChnsS C FXv D]-t`mK tNmZ\w C FXv hcp-am\w Cm Ah--bn
Bfp-Iv thn-h-cp Hcp \nnX \ne-hm-c-n-ep D]-Po-h\
- -n-ep D]-t`mKw.
b FXv koam-c D]-t`mK {]h-WX
Y Fm hcp-am\w
D]-t`m-K-n-ep h-\hpw hcp-am-\-n-ep h-\hpw Xn-ep A\p-]m-
X-amWv koam D]-t`m-K- {]-h-W-X.
C
MPC =
Y
DZm-l-c-W-n\v hcp-am-\-n 500 cq]-bpsS h-\hv Dm-Ip-tm D]-t`m-K-
n 400 cq]-bpsS h-\hv Dm-Ip-p-sh-n
C 400
MPC = = = 0.8 BIpp
Y 500
D]-t`m-Khpw hcp-am-\hpw Xn-ep _-s-bmWv icm-icn D]-t`mK {]h-WX
C
Fv ]d-bp--Xv. APC =
Y
DZm-l-c-W-n\v 1000 cq] hcp-am-\hpw 600 cq] D]-t`m-Khpw BsW-n icm-icn
D]-t`mK {]h-WX F-Xv.
600
APC = = 0.6 BIp-p.
1000
Investment Demand (\nt] tNmZ\w)
`uXnI aqe-[\ BkvXn-I krjvSn-p--Xn\v thn-bp sNe-hp-I-sf-bmWv
\nt-]-tNm-Z\w FXv sImv A-am-p--Xv. aqe-[-\-ns koam--Im-cy--a-
Xbpw ]en-i-\n-c-p-amWv \nt] tNmZ-\s \n-bn-p--Xv.
Aggregate Supply (kam-lrX {]Zm\ GI-Zw)
Hcp k-Zvhy-h--bnse hyXykvX sXmgn \ne-hm-c--fnse BsI-bp \nK-
a--fpsS (output) hn]-\-bn \nv kwcw-`-Iv AYhm D]m-Z-Icv#v e`n-m-
hp XpI-Isf ImWn-p ]nIbmWv kam-lrX {]Zm\ GI-Zw.
asmcp coXn-bn ]d-m s]mXp-P-\-v e`n-p hcp-am\w D]-t`m-K-
n\pw km-Zy-n-\p-ambn hn\n-tbm-Kn-p-p. Bb-Xn-\m
AS = C + S Fp ]d-bmw.
AS = kam-lrX {]Zm\ GIZw
y
C = D]-t`mKw
S = kmZyw
AS
kp-enX hcp-am\ \nbw
E
sIbv\o-jy Zznta-Jem amXrI AD = C + I
Aggregate
k-Zvhy-h--bnse hcp-am-\-ns Demand
k-en-Xm-h \n-bn-p-Xv kam- & C= C + bY
lrZ tNmZ-\hpw kam-lrZ {]Zm-\-hp-am- Aggregate
Supply
Wv. Ch cpw Xpey-am-hp _nphn
kp-en-Xm-h {]m]n-p-p. Xmsg
sImSp-n-cn-p Nn{X-n \npw
0 Level of Income x Employment x
CXv hy-am-hp-p.
106
Chapter 5
The Govt. in a mixed economy has to perform a lot of functions. It has to raise
revenue and to incure expenditure for this. The revenue - expenditure statement of the
Govt. is termed as budget.
Meaning of Budget
"Budget is the statement of estimates of govt. receipts and expenditure during a
financial year which runs from April 1st to March 31". In India the budget is to be presented
before the Parliament as per article 112 of the constitution.
2. Distribution Function
The Govt. aims to reduce inequalities in the distribution of income and wealth. The
Govt. uses the budget to impose new taxes and to modify the existing rates and also to
make transfer payments. This will redistribute the income and wealth of the people.
3. Stabilisation Function
The Govt. uses the budget to achieve economic stability. When there occurs changes
in aggregate demand and aggregate supply there will be economic instabilities like
recession, depression etc, The Govt. uses the budget to revise its revenue, taxation and
expenditure policies to avoid situations of economic instabilities and to achieve economic
stability.
107
Parts of Budget
The budget has two important parts and various components. This is clear from the
chart given below.
I. GOVERNMENT BUDGET
Non-Plan Capital
Tax Revenue
Non-Tax Revenue
Interest receipts on loans, dividends profits, fees, fines, penalties, escheats, grants
etc are items of non tax revenue.
km _Ppw k-Zvhy-h-bpw
Khsans hc-hp--sN-eh - p-IW
-
- ns\bmWv _Pv F-dn-bs
- -Sp--Xv. _P-ns\
\apv Cs\ \nh-Nn-mw. "G{]n Hp apX amv 31 hsc-bp Hcp [\-Im-cy-
hj-n-ep Kh: hc-hp--sN-e-hp-I-W-p-Isf ImWn-p tcJsb _Pv Fp ]d-
108
bp-p". Cy `c-W-L-S-\-bpsS 112-mw hIpp ]me-san\p apmsI _P--h-X-cn-n-
-W-sav A\p-im-kn-p-p.
_Pv ey-
1. hn`h \onshbvpI
P\- s]mXp-hmbn D]-tbm-Kn-p km[-\--sfbpw tkh-\-t- fbpw s]mXp-
N-c-p-I FmWv ]d-bp--Xv. Ch km-cmWv {]Z\w sNtXv. Ccw
km[-\- {]Zm\w sNm-\m-hi - y-amb hn`-h- _P-n IqSnbmWv Khsa v
\on-sh-p--Xv. Cs\ s]mXp-N-c-p-Ipth-n-bp hn`-h- \on-sh-
-emWv _P-ns Hm-as eyw.
2. hcpam\w ]p\hnXcWw sNpI
Khsa v ey-an-Sp-Xv Ak-a-Xzw Ipd-p-sIm-p-h-cm-\mWv. CXp t\Sn-sb-Sp-
p-Xv _P-n IqSn ]pXnb \nIp-Xn-I Npa-nbpw ]g-b-h-bpsS \ncv ]cn-
jvI-cnpw ssIam AS-hp-I-fn-eq-sS-bp-am-Wv. Ccw \S-]-Sn-I-fn IqSn hcp-am\w
]p\hn-X-c-W-n\v hnt[-b-am-m-hp--Xm-Wv. Bb-Xn-\m _P-ns cm-as
eyw hcp-am-\-hn-X-c-W-hp-ambn _-s--Xm-Wv.
3. kmnIncX ssIhcnpI
Hcp k-Zvhy-h ]e-X-c-n-ep An-c-X-Ipw hnt[-b-am-Im-hp--Xm-Wv.
A\p-tbm-Py-amb \nIpXn sNehp \b--fn IqSn km-nI ncX ssIh-cn-
m km {ian-p-p. _Pv km-nI ncX ssIh-cn-m-\p D]m-[n-
bmbn Khsa v D]-tbm-Kn-p-p.
_Pv : hnhn[ `mKfpw LSIfpw
Khsa v _Pv
sNdpkmZy, Hmlcn
IS, hmbv]XncnShv,
\nIpXnbnXc hcpam\w
hngn
109
dh-\yq-h-chv
CXn cp-hn-`mKw hc-hp-Is]Sp-p.
\nIpXn hcp-am\w
CXn {]Xy--\n-Ip-Xn-Ifpw ]tcm \nIp-Xn-Ifpw Ds-Sp-p. hcp-am-\-\n-Ip-Xn,
tIm-td-j \nIpXn (em-`-\n-Ip-Xn), kzv \nIp-Xn, Kn^vv \nIpXn Ftv \nIpXn
Ch {]Xy \nIp-Xn-p-Zm-l-c-W- kzv \nIp-Xn, Kn^vv \nIpXn Ftv \nIpXn
Ch ISemkv \nIp-Xn-I F-dn-b-s-Sp-p.
Iwkv Xocph, FIvsskkv Xocp-h, hnev]\ \nIpXnI, tkh\ \nIp-Xn-I
Ch ]tcm \nIp-Xn-I.
\nIp-Xn-bn-Xc hcp-am\w
hmbv]-I-fn \np ]en-i-I, em`-hn-ln-Xw, em`w, ^okv, ]ng-I, FjvNovkv,
{Kmp-I apX-em-bh \nIp-Xn-bn-Xc hcp-am-\-n-\p-Zm-l-c-W-.
Revenue Expenditure
Recurring expenditure like salaries, pensions, interest payments subidies etc.
Capital receipts
Those receipts which creates liability or reduce capital assets. eg: Market Borrow-
ings, disinvestment etc
Capital expenditures
Those expenditures which creates physical or financial asset. eg. Expenditure on
buildings, plant and machinaries, loans to state govts etc.
Plan expenditure:
It shows the provisions for projects, programmes and schemes included in the cen-
tral plans.
Non - Plan expenditure
Itmes not included in the central plan like salaries, pensions are termed as non plan
expenditure.
110
aqe-[\ hcp-am-\- : Khsan\v _m[yX krjvSn-p-tXm aqe-[\ BkvXn-I-
fpsS CSn-hn\v CS-bmn InptXm Bb hc-hp-If
- m-Wn-h. s]mXp-I-tm-f-n \np
ISw hm, Hmlcn hn-gn- Ch DZm-l-c-W-.
aqe-[-\-sN-e-hp-I : `uXn-Ihpw [\-]-c-hp-amb BkvXn-I-fpsS krjvSn-n-S-bm-p
sNe-hp-I-fmWv Ch. tI{ Khsans sIn-S-\nmW sNe-hp-I, ^mIvSd- n-Ipw
b{-pw thn-bp sNe-hp-I, kwm-\-p {Kmp-I Ch aqe-[\
sNe-hp-I-fn s]Sp--h-bm-Wv.
]Xn Bkq-{X-W-sN-e-hp-I
tI{-Kh - sans ]-Xn-I-fn Ds hnhn[ t{]mP-IvSp-I, tI{m-hn-jvIrX
]cn-]m-Sn-I, kvIqfp-I Ch-bvp sNe-hp-I-fm-Wn-Xv.
AD = C + I + G
When Govt. cornes, AD will decrease or increase. This is because of the govt
puchases, imposition of taxes and transfer payments. In a 3 sector model closed economy,
equilibrium condition is output (AS) equals AD. ie
AS = Y = AD
i.e. AS = AD
Changes in Taxes: It will affect AD and level of income and output in a 3 sector mode
economy. A cut in taxes increase income of the people and thereby AD. It leads to
increase in income. An increase in tax will decrease income of people and thereby AD. It
112
leads to decrease in income. Both the increase and decrease in income level are in mul-
tiples. This is called tax multiplier. It is defined as the ratio of change in income (Y) to
change in tax (T)
Y C
Tax multiplier = = (Negative multiplier)
T 1 C
Khsa v CS-s]-Sp-tm AD IqSm\pw Ipd-bm\pw CS-bm-Imw. ImcWw Khsa v
hcp-tm km tNmZ-\w, \nIp-Xn-Np-a-, ssIam AS-hp-I Ch Dm-Ip--Xm-
Wv. {Xnam-XrI AS km-Zvhy-h--bn kp-en-Xm-h FXv
AS = Y = AD BWv. AXmbXv AS = AD.
s]mXp-sN-ehv KpWnXw
s]mXp-sN-e-hn-ep h-\hv tNmZ-\-n h-\-hp-m-p-Ibpw X^-e-ambn
tZinb hcp-am\w KpWn-X-{]-{In-b-hgn aS-p-I-fmbn hn-p-Ibpw sNpw. s]mXp sNe-
hn hyXn-bm\w Dm-Ip-tm F{X aS-p-I-fm-bmtWm tZiob hcp-am\w amdp-Xv
CXns\ s]mXp-sN-ehv KpWnXw Fp ]d-bp-p. KWnX coXn-bn,
Y 1
s]mXp-sN-ehv KpWnXw = =
G 1 C
\nIpXn KpWnXw :
\nIp-Xn-bnep-m-Ip am- sam tNmZ-\-tbpw XZzmc kp-en-X-h-cp-am-\-
tbpw _m[n-p-p-v. \nIp-Xn-I Ipd-m tNmZ\w IqSp-Ibpw CXv Dev]m-Z\
h-\-hn-\n-S-bm-p-Ibpw X^-e-ambn tZiob hcp-am\w hn-p--Xn-\n-S-bm-Ip-Ibpw
sNpw. adnpw kw`hnmw. \nIp-Xn-bn-ep-m-Ip am-ns ^e-ambn tZiob hcp-
am-\-n-ep-m-Ip am-ns Af-hns\ (a-Sv) \nIpXn KpWnXw Fp ]d-bp-p.
\nIp-Xn-bn-ep amhpw hcp-am\nep amhpw ]n]-co-X-Zni-bn-em-b-Xn-\m \nIpXn
KpWnXw Hcp s\K-ohv KpWn-X-am-Wv.
Y C
\nIpXn KpWnXw = =
T 1 C
Y Y I C
Balanced Budget Multiplier = + = +
G T 1 C 1 C
1 C
i.e. BBM = =1
1 C
It implies that the fixed increase in Govt. Expenditure and proportionate increase in
taxes will increase the income in the economy by the same amount.
eg. A Rs.50 crores increase in expenditure (G) and Rs. 50 cr increase in taxes (T)
113
will increase the national income by the same Rs.50 crores only.
Transfer Payment Multiplier
It is change in income (Y) due to change in transfer payments (TR) symbolically
Y C
Transfer payment mulitiplier = =
TR 1 C
Recardian Equivalence
The theory that consumers are forward booking and anticipating that a Govt.
borrowing today will mean a tax increase in the future to repay the public debt. Therefore
people will adjust consumption accordingly. This will have the same effect on the economy
as a tax increase today. This phenomenon is called Ricardian Equivalence.
114
dnmUnb XpeyX
{]kn km-nI imkv{X--\mb dnmtUmbpsS A`n-{]m-b-n D]-t`m-
m--sfbpw {]Xo-m-k---cm-Wv. AXp-sImv Cv s]mXp-sN-ehv IqSn-bm AXv
Xncn-S-
- p-X
- n-\mbn `mhn-bn \nIpXn h-\h
- p-mIm-sav apIq-n-Im-Wp-Ibpw AXn-
\-\p-k-cnv h-am\ D]-t`mKw {Iao-I-cn-p-Ibpw sNp-p. Bb-Xn-\m CXv Cv
\nIpXn hn-n--Xn\v Xpey-amb Hcp ^ew Dm-pw. Cu knm-s dnmUn-
b XpeyX Fp ]d-bp-p.
Automatic Stabilisers
The fiscal policy instruments which work automatically to stabilise the economic
are called automatic stabilisers. Proportional taxation, public expenditure, transfers are
automatic stabilisers.
Hcp k-Zvhy-h--bn km-nI ncX ssIh-cn-p--Xn-\mbn kzb-tah
{]hn-p [\-\b D]-I-c-W-sf Hmtm-am-nIv _n-sse-k Fp ]d-bp-p.
B\p-]m-XnI \nIpXn s]mXp-sN-ehv, ssIam AS-hp-I Ch DZm-l-c-W-.
115
Chapter - 6
OPEN ECONOMY
Most Economics are open economics in the modern world (reality). Interactions
with other economies of the world are in three broad ways.
l Product market linkage
l Financial market linkage
l Factor market linkage
116
Foreign exchange refers to the stock of foreign currencies & securities bonds etc
issued by foriegn corporate and government.
(Exchange rate between India & America)
Eg: The number of units foreign currency required to purchase one unit of domestic
currency
1 Dollar = 61 Rupees
y
D S
Rate of
foreign
exchange
R2
Exchange
Supply
R
R1
Excess
S demand D
0 M1 M M2 x
Quantity of foreign exchange
117
NOMINAL & REAL EXCHANGE RATE
118
hym]mc injvS-t-m hfsc hnim-e-amb kw-bmWv AShv injvSw FXv
Hcp \nnX Ime-L--n Hcp cmPyw injvS-tem-I-hp-amb km-nI CS-]m-Sp-I-fp-
tSbpw {Ia-_--amb tcJ-bmWv AShv injvSw F-Xv.
CXn\v {][m-\-ambpw cv Au-p-I-fm-Wp-X
- v. Id v Au-v, aqe-[\ Au-
v. km[-\--fpsS Ib-p-aXn Cd-p-aXn XpS-nb Fm hn[-nepap h-am\
Ime ssIam-- Id v Au-nepw cmPy-ns _m[y-XI - -tftbm BkvXn-I-tftbm
_m[n-p Xc-n injvS-tem-I-hp-am-bp ssIam---fmWv aqe-[\ Au-n
tcJ-s-Sp-p--Xv.
hn\n-ab \ncv
Hcp cmPy-ns Idkn asmcp cmPy-ns Idkn-bp-ambn hn\n-abw sNp-
tm Ahbvv e`y-am-Ip hne-bmWv hn\n-ab \nc-v.
hn\n-ab \ncv cv hyXykvX coXn-bn \n-Nn-mw.
Hcp bqWnv hntZi Idknsb B`y-c IdknbpsS aqey-hp-am-bp A\p-]m-Z-
ambn Ah-X-cn-n-p-p.
DZm-l-c-W-ambn Hcp Ata-cn- tUmf e`n-p-hm 62 cq] \I-W-sa-n Ata-
cn-bpw Cybpw Xn-ep hn\n-ab \ncv 62 cq] = 1 tUmf Fv ]d-bmw.
Hcp bqWnv B`y-c Idknsb hntZi Idkn-bpsS bqWn-p-I-fp-ambn A\p-]m-
X-n Ah-X-cn-n-p-Xv asmcp coXn
DZm: Rs. 1 = 2 cents
\ma-am{X hn\n-ab \ncpw bYm hn\n-ab \ncpw (Nominal & Real Exchange
Rate) B`y-c Idknbpw hntZi Idknbpw Xn-ep ]W-cq-]-n-ep hn\n-ab
\nc-m-Wn-Xv.
bYm hn\n-ab \ncv FXv hntZi km[-\--fpsS Bt]-nI hne B`y-
c km[-\--fpsS hne-bp-ambn Xmc-X-ay-s-Sp-p--Xm-Wv.
119
hn\n-ab \ncv \nbw
coXn-I hn\n-ab \ncv \n-b-n\v aqv coXn-I kzoI-cn-m-dp-v.
1) Ab-hp hn\n-ab \nc-p-I
2) nc hn\n-ab \nc-p-I
3) amt\PvUv hn\n-ab \nc-p-I
Ab-hp hn\n-ab \ncv k{-Zm-b-n Itmf tNmZ-\, {]Zm\ in-I-fpsS
{]h-\-^-e-am-bmWv hn\n-ab \ncv \n-bn-p--Xv.
Cu k{-Zm-b-n hn\n-ab \ncv \n-bn-p--Xn\v tI{-_mv CS-s-Sp-n-
. hntZi hn\n-ab - -ns tNmZ-\h
- {- Ihpw {][m-\-h-{Ihpw JWvUn-p _np-hn kp-
enX hn\n-ab \ncv \n-bn--s-Sp-p. Xmsg sImSp-n-cn-p tcJm-Nn-{X-n
'DD'hntZi \mW-b-ns tNmZ-\-h-{Ihpw 'SS' {]Zm-\-h-{I-hp-amWv. 'E'F _np-hn
hntZ-ih
- n-\n-ab Itmfw kp-e-Xm-h - b- n-se-p-p. ChnsS kp-enX hn\n-ab \ncv
e*Dw kp-enX Afhv q Dw BWv.
D
S
e*
hn\n-ab
\ncv
S D
O q
hntZi hn\n-a-b-ns Afhv
nc hn\n-ab \ncv
Cu k{- Z m- b - a -\ p-k -c nv hn\n-a b \ncv Hcp cmPy- nse tI{-_ mtm
Khsatm \n-bn-p-p.
nc hn\n-ab \ncv s]KvUv hn\n-ab \ncv Fpw Adn-b-s-Sp-p. nc-hn-\n-
ab \ncv \ne-\np--Xn\v tI{-_mv hntZ-i-\m-Wbw hntZ-i-hn-\n-ab Itm-f-n
\npw hmp-Itbm hnp-Itbm sNp-p.
***
120