Short Note - Economics - JAIBB

Prepared By: Md.
Abul Khairat (Tushar)

Fb Id: [email protected]
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Prepared By: Md. Abul Khairat (Tushar)
 Opportunity Cost
Opportunity cost refers to the value forgone in order to make one particular investment
instead of another.For example, let's assume you have $15,000 that you could either
invest in Company XYZ stock or put toward a graduate degree. You choose the stock.
The opportunity cost in this situation is the increased lifetime earnings that may have
resulted from getting the graduate degree -- that is, you choose to forgo the increase in
earnings when you use the money to buy stock instead.
Here's another example. Let's say you have $15,000 and your choice is to either buy
shares of Company XYZ or leave the money in a CD that earns only 5% per year. If the
Company XYZ stock returns 10%, you've benefited from your decision because the
alternative would have been less profitable. However, if Company XYZ returns 2% when
you could have had 5% from the CD, then your opportunity cost is (5% - 2% = 3%).
Opportunity cost is all about the most basic of economic concepts: trade-offs. It's a notion
inherent in almost every decision of daily life and of investing: if you make a choice, you
forgo the other options for now. And what's been given up can sometimes turn out to have
been the wiser choice, which is why opportunity cost is best measured in hindsight --
after all, it is impossible to know the end outcome of any investment. Opportunity costs
are a factor not only in consumer decisions, but in production decisions, capital
allocation, time management, and lifestyle choices.
 Gresham's law is an economic principle that states: "When a government

overvalues one type of money and undervalues another, the undervalued money will
leave the country or disappear from circulation into hoards, while the overvalued
money will flood into circulation."[1] It is commonly stated as: "Bad money drives out
good".
This law applies specifically when there are two forms of commodity money in
circulation which are required by legal-tender laws to be accepted as having similar face
values for economic transactions. The artificially overvalued money tends to drive an
artificially undervalued money out of circulation[2] and is a consequence of price control.
The law was named in 1858 by Henry Dunning Macleod, after Sir Thomas Gresham
(1519–1579), who was an English financier during the Tudor dynasty.Gresham’s
law, observation in economics that “bad money drives out good.” More exactly, if coins
containing metal of different value have the same value as legal tender, the coins
composed of the cheaper metal will be used for payment, while those made of more
expensive metal will be hoarded or exported and thus tend to disappear from circulation.
Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize
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this monetary principle, but his elucidation of it in 1558 prompted the economist H.D.
Macleod to suggest the term Gresham’s law in the 19th century.
 Inferior good:
In economics, an inferior good is a good that decreases in demand when consumer

income rises (or rises in demand when consumer income decreases),[1] unlike normal
goods, for which the opposite is observed.[2] Normal goods are those for which
consumers' demand increases when their income increases. [3] This would be the opposite
of a superior good, one that is often associated with wealth and the wealthy, whereas an
inferior good is often associated with lower socio-economic groups.
Inferiority, in this sense, is an observable fact relating to affordability rather than a

statement about the quality of the good. As a rule, these goods are affordable and
adequately fulfill their purpose, but as more costly substitutes that offer more pleasure (or
at least variety) become available, the use of the inferior goods diminishes.
Depending on consumer or market indifference curves, the amount of a good bought can
either increase, decrease, or stay the same when income increases.
Examples
There are many examples of inferior goods. Several economists have suggested that
shopping at large discount chains such as Walmart vastly represent a large percentage of
goods referred to as "inferior". Cheaper cars are examples of the inferior goods.
Consumers will generally prefer cheaper cars when their income is constricted. As a
consumer's income increases the demand of the cheap cars will decrease, while demand
of costly cars will increase, so cheap cars are inferior goods.
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Good Y is a normal good since the amount purchased increases from Y1 to Y2 as the
budget constraint shifts from BC1 to the higher income BC2. is an inferior good since the
amount bought decreases from X1 to X2 as income increases.
 Giffen goods
In economics, a giffen good is an inferior good with the unique characteristic that an
increase in price actually increases the quantity of the good that is demanded. This
provides the unusual result of an upward sloping demand curve.
This happens because of the interactions of the income and substitution effects.
Depending on whether the good is inferior or normal, the income effect can be positive or
negative as the price of a good increases. Imagine an inferior good being Top Ramen (an
inexpensive noodle dish, common among students). As your income rises, you actually
consume less Top Ramen, because you may begin to buy more spaghetti, or steak, or
something you enjoy more than Top Ramen. But if you lose your job, and your income
goes down, you will consume more Top Ramen, because it is inexpensive.
Next we have to consider the substitution effect. No matter type of good, the substitution
effect will be negative as the price of that good goes up. So if the price of Top Ramen
rises, the substitution effect will dictate that you will buy more spaghetti, or steak because
that good has become relatively cheaper.
The interesting thing about a giffen good, is that when the price of a giffen good rises, the
income effect is greater than the substitution effect. So if a good is inferior, the income
effect will be positive and larger than the negative value from the substitution effect.
Summary: if a good is inferior, a drop in income (represented by a price increase)

increases the quantity of the good that is demanded. The substitution effect is negative
for any good that experiences a price increase. A giffen good faces an upward sloping
demand curve because the income effect dominates the substitution effect, meaning that
quantity demanded increases as price rises.
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However, a good cannot have an upward sloping demand curve forever, because
eventually the consumer will run out of money. Remember that giffen goods have to be
inferior goods, which implies that the consumer purchasing them has little money to
begin with. At some point, the rising price of the giffen good takes over the consumer’s
entire budget, and a price increase will actually lower the amount of the good the
consumer is able to buy. This means that at high enough prices, we will see the
traditional downward sloping demand curve.
Let’s go through an example of a giffen good, using potatoes and steak as the choice set
of the consumer. Imagine the consumer has a budget of $30, and the cost of a potato
begins at $0.50 and the price of a steak is $10.00. Also consider that the consumer needs
to buy meals for 10 days.
With the original budget and prices, the consumer may choose to consume 2 steaks, at
$20, and 20 potatoes for $10 over this time frame to use up their entire budget. This is a
satisfactory amount because they will have on average 2 potatoes a day, and 2 steaks over
the period.
Now imagine a price increase of potatoes to $1 each. The consumer could still buy 2
steaks, but could now only buy 10 potatoes. This might leave them hungry, so it is
possible they will buy less steak, and more potatoes in order to get their calories. This
means that 20 potatoes will still be purchased, but now only 1 steak is purchased.
If the price of a potato increased again, say to $1.25, then the consumer would only be
able to get 16 potatoes for $20, which may not be enough calories to survive. They will
decrease their steak consumption by one, and use that money to buy more potatoes in
order to get the necessary energy. In this example, potato consumption would rise to 24
($30/$1.25) and steak consumption would drop to zero. This shows how consumption of
a good would rise with a price increase (thus an upward sloping demand curve).
At this point, the consumer’s entire budget is taken up by the giffen good, so any price
increase now will result in a decrease of the amount of good the consumer is able to buy.
Thus, we will have our typical downward sloping demand curve.
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 Consumer surplus:
Consumer surplus is the difference between the maximum price a consumer is willing to
pay and the actual price they do pay. If a consumer would be willing to pay more than the
current asking price, then they are getting more benefit from the purchased product than
they initially paid. An example of a good with generally high consumer surplus is
drinking water. People would pay very high prices for drinking water, as they need it to
survive. The difference in the price that they would pay, if they had to, and the amount
that they pay now is their consumer surplus. Note that the utility of the first few liters of
drinking water is very high (as it prevents death), so the first few liters would likely have
more consumer surplus than subsequent liters. The maximum amount a consumer would
be willing to pay for a given quantity of a good is the sum of the maximum price they
would pay for the first unit, the (lower) maximum price they would be willing to pay for
the second unit, etc. Typically these prices are decreasing; they are given by the
individual demand curve. For a given price the consumer buys the amount for which the
consumer surplus is highest, where consumer surplus is the sum, over all units, of the
excess of the maximum willingness to pay over the equilibrium (market) price. The
consumer's surplus is highest at the largest number of units for which, even for the last
unit, the maximum willingness to pay is not below the price The aggregate consumers'
surplus is the sum of the consumer's surplus for all individual consumers. This can be
represented graphically as shown in the above graph of the market demand and supply
curves.
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Consumers always like to feel like they are getting a good deal on the goods and services
they buy and consumer surplus is simply an economic measure of this satisfaction. For
example, assume a consumer goes out shopping for a CD player and he or she is willing
to spend $250. When this individual finds that the player is on sale for $150, economists
would say that this person has a consumer surplus of $100.more general demand and
supply functions, these areas are not triangles but can still be found using integral
calculus. Consumer surplus is thus the definite integral of the demand function with
respect to price, from the market price to the maximum reservation price (i.e. the price-
intercept of the demand function
 Currency Depreciation
A decrease in the level of a currency in a floating exchange rate system due to market
forces. Currency depreciation can occur due to any number of reasons – economic
fundamentals, interest rate differentials, political instability, risk aversion among
investors and so on. Countries with weak economic fundamentals such as chronic current
account deficits and high rates of inflation generally have depreciating currencies.
Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness
and may improve its trade deficit over time. But abrupt and sizeable currency
depreciation may scare foreign investors who fear the currency may fall further, and lead
to them pulling portfolio investments out of the country, putting further downward
pressure on the currency. Easy monetary policy and high inflation are two of the main
causes of currency depreciation. In a low interest-rate environment, hundreds of billions
of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of
currency depreciation.
In the 12 months ending January 2014, for example, the Canadian dollar depreciated by
10% against the U.S. dollar. This was because economists and analysts expected the Bank
of Canada to relax its monetary policy in 2014, at the same time the Federal Reserve was
preparing to scale back its bond purchases, which was seen as a precursor to tighter
monetary policy.
Inflation can also cause currency depreciation. This is because the higher input costs for
export products made in a high-inflation nation will make its exports uncompetitive in
global markets, which will widen the trade deficit and cause the currency to depreciate.
Sudden bouts of currency depreciation, especially in emerging markets, inevitably raise

the fear of “contagion,” whereby many of these currencies get afflicted by similar
investor concerns. There have been a number of such episodes, among the most notable
being the Asian crisis of 1997 that was triggered by the devaluation of the Thai baht. In
the summer of 2013, the currencies of nations such as India and Indonesia traded sharply
lower on concern that the Federal Reserve was poised to wind down its massive bond
purchases.
 Floating exchange rate :
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A floating exchange rate or fluctuating exchange rate is a type of exchange-rate regime in
which a currency's value is allowed to fluctuate in response to market mechanisms of the
foreign-exchange market. A currency that uses a floating exchange rate is known as a
floating currency. A floating currency is contrasted with a fixed currency.In a fixed
exchange rate system, the government (or the central bank acting on the government's
behalf) intervenes in the currency market so that the exchange rate stays close to an
exchange rate target. When Britain joined the European Exchange Rate Mechanism in
October 1990, we fixed sterling against other European currencies. The pound, for
example, was permitted to vary against the German Mark by only 6% either side of a
central target of DM2.95. Britain left the ERM in September 1992 when the pound came
under sustained selling pressure, and the authorities could no longer justify very high
interest rates to maintain the pound's value when the domestic economy was already
suffering from a deep recession.
Fluctuations in the exchange rate can provide an automatic adjustment for countries with
a large balance of payments deficit. If an economy has a large deficit, there is a net
outflow of currency from the country. This puts downward pressure on the exchange rate
and if a depreciation occurs, the relative price of exports in overseas markets falls
(making exports more competitive) whilst the relative price of imports in the home
markets goes up (making imports appear more expensive).
This should help reduce the overall deficit in the balance of trade provided that the price
elasticity of demand for exports and the price elasticity of demand for imports is
sufficiently high. A second key advantage of floating exchange rates is that it gives the
government / monetary authorities flexibility in determining interest rates. This is
because interest rates do not have to be set to keep the value of the exchange rate within
pre-determined bands. For example when the UK came out of the Exchange Rate
Mechanism in September 1992, this allowed a sharp cut in interest rates which helped to
drag the economy out of a prolonged recession.
 Quasi Rent:
The term quasi rent is not new to the economists. This is basically an analytical term
which is used for the income earned as a result of the opportunity cost after investment.
Usually it so happens that the individuals face the loss of cost investment and their
payment may be sunk. The amount earned after such a loss is called as the quasi rent. The
term of quasi rent is not too old and it was used for the first time by Alfred Marshall. He
was the first economist to earn quasi rents. Income one earns on a sunk cost. A quasi-rent
occurs when one makes an investment and pays for it, and then earns income from it
without needing to make further investment. In order to be considered quasi-rent, the
income must exceed the opportunity cost of the investment. Quasi-rent has also been
defined as the excess of total revenue earned in the short run over and above the total
variable costs.
Thus, Quasi-rent = Total Revenue — Total Variable Cost.
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In the long run, all costs are variable and in the long-run competitive equilibrium, total
receipts are equal to total costs (including normal profit), there are no excess earnings
over and above costs and hence no quasi-rent. However, these abnormal profits will not
last long. When the abnormal conditions are over, the number of machines will be
increased, then the incomes from machines are bound to decrease.
In short, quasi-rent is applied to the very large incomes which the owners of a factor of
production come to enjoy on account of the temporary scarcity of such a factor.
Economic value of quasi rent
Generally the quasi rent also sometimes referred to as the economic rent is defined as the
difference between the incomes obtained from a certain factor of production and the cost
of the factor which is used in bringing the production in particular use. There are many
applications of quasi rent. Either it is used in bringing the factor of quasi rent into
economic use or it can also be applied in using the factor for the purposes of opportunity
cost.
Investment of quasi rent
In general the quasi rent is defined as the difference between the income earned as a
result of the currently used factor and the minimum cost which is required to draw the
quasi factor for a particular use. The value of opportunity income is the most important
while practicing the quasi rent. Basically the opportunity cost of income is the current
income subtracted by the available income being used in next best factor. This factor is
used during the particular use in future. Nowadays there are many examples where the
capital investments are made out of the quasi rent cost investments. This usage is
recorded in almost all of the specialized or unspecialized capital equipment.
In case of the investment of sunk cost, the amount required to draw the result for an
economic usage is minimal. On the other hand the true quasi rent is the income which is
in excess and it is also required in order to make the remaining factor much productive.
Sometimes the quasi rent may also include the sunk cost investment.
 'Fixed Cost:
A cost that does not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by a company,
independent of any business activity. It is one of the two components of the total cost of a
good or service, along with variable cost. Fixed costs are costs that are independent of
output. These remain constant throughout the relevant range and are usually considered
sunk for the relevant range (not relevant to output decisions). Fixed costs often include
rent, buildings, machinery, etc. Fixed costs are costs that do not change when the
quantity of output changes. Unlike variable costs, which change with the amount of
output, fixed costs are not zero when production is zero.
An example of a fixed cost would be a company's lease on a building. If a company has

to pay $10,000 each month to cover the cost of the lease but does not manufacture
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anything during the month, the lease payment is still due in full.
In economics, a business can achieve economies of scale when it produces enough goods
to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets
means that each widget carries with it $1 in fixed costs. If the company produces 200,000
widgets, the fixed cost per unit drops to 50 cents
Some examples of fixed costs include rent, insurance premiums, or loan payments. Fixed
costs can create economies of scale, which are reductions in per-unit costs through an
increase in production volume. This idea is also referred to as diminishing marginal
cost. For example, let's assume it costs Company XYZ $1,000,000 to produce 1,000,000
widgets per year ($1 per widget). This $1,000,000 cost includes $500,000 of
administrative, insurance, and marketing expenses, which are generally fixed. If
Company XYZ decides to produce 2,000,000 widgets next year, its total production costs
may only rise to $1,500,000 ($0.75 per widget) because it can spread its fixed costs over
more units. Although Company XYZ's total costs increase from $1,000,000 to
$1,500,000, each widget becomes less expensive to produce and therefore more
profitable.Some fixed costs change in a stepwise manner as output changes and therefore
may not be totally fixed. Also note that many cost items have both fixed and variable
components. For example, management salaries typically do not vary with the number of
units produced. However, if production falls dramatically or reaches zero, layoffs may
occur. Economically, all costs are variable in the end.
 Variable Cost:
A corporate expense that varies with production output. Variable costs are those costs that
vary depending on a company's production volume; they rise as production increases and
fall as production decreases. Variable costs differ from fixed costs such as rent,
advertising, insurance and office supplies, which tend to remain the same regardless of
production output. Fixed costs and variable costs comprise total cost.
Variable costs can include direct material costs or direct labor costs necessary to complete
a certain project. For example, a company may have variable costs associated with the
packaging of one of its products. As the company moves more of this product, the costs
for packaging will increase. Conversely, when fewer of these products are sold the costs
for packaging will consequently decrease. Variable costs are corporate expenses that
vary in direct proportion to the quantity of output. Unlike fixed costs, which remain
constant regardless of output, variable costs are a direct function of production volume,
rising whenever production expands and falling whenever it contracts. Examples of
common variable costs include raw materials, packaging, and labor directly involved in a
company's manufacturing process.
The formula for calculating total variable cost is:
Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output
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The term variable cost is not to be confused with variable costing, which is an accounting
method related to reporting variable costs.
Let's assume XYZ Company has received an order for 5,000 widgets for a total sales
price of $5,000 and wants to determine the gross profit that will be generated by
completing the order. First, the variable costs per widget must be determined.
Let's assume the following:
Annual Widgets Produced: 100,000

Raw Materials Costs: $10,000
Direct Labor Costs: $50,000
From this information, we can conclude that each widget costs 10 cents ($10,000 /
100,000 widgets) in raw materials and 50 cents ($50,000 / 100,000 widgets) in direct
labor costs. Using the formula above, we can calculate that XYZ Company's total
variable cost on the order is:
5,000 x ($0.10 + $0.50) = $3,000
Therefore, the company can reasonably expect to earn a $2,000 gross profit ($5,000 -
$3,000) from the order.
While fixed costs, such as rent or other overhead, generally remain level, variable costs
will correlate with the number of products manufactured. Because average variable costs
differ widely among industries, comparisons are generally most meaningful among
companies operating within the same industry.
When analyzing a company's income statement, it should be remembered that rising costs
are not necessarily a troubling sign. Whenever sales rise, more units must first be
produced (excluding the impact of stronger pricing), which in turn means that variable
production costs must also increase. Thus, for revenues to climb, expenses must also rise
accordingly.
It is important, though, that revenues increase at a faster rate than expenses. If, for
example, a company reports volume growth of 8%, while cost of goods sold (COGS)
only rises 5% over the same span, then costs have likely declined on a per unit basis. If a
company can find ways to reduce the input costs associated with producing each item it
sells, then its profitability will improve. One way to monitor this aspect of a company's
business is to divide variable costs by total revenues to figure costs as a percentage of
sales.Variable costs frequently factor into profit projections and the calculation of break-
even points for a business or project. Some costs change in a piecewise manner as output
changes and therefore may not remain constant per unit of output. Also, note that many
cost items have both fixed and variable components. For example, management salaries
typically do not vary with the number of units produced. However, if production falls
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dramatically or reaches zero, then layoffs may occur. This is evidence that all costs are
variable in the long run.
A company with a large number of variable costs (compared to fixed costs) may exhibit
more consistent per-unit costs and hence more predictable per-unit profit margins than a
company with fewer variable costs. However, a company with fewer variable costs (and
hence a larger number of fixed costs) may magnify potential profits (and losses) because
revenue increases (or decreases) are applied to a more constant cost level. Part of being a
successful investor involves making an educated forecast about how a company will
respond under different operating conditions, and one of the key determinants is the
proportion of fixed costs to variable costs.
 Basel II
Basel 11is the second of the Basel Accords, (now extended and effectively superseded by
Basel III), which are recommendations on banking laws and regulations issued by the
Supervision. Basel II, initially published in June 2004, was intended to create an
international standard for banking regulators to control how much capital banks need to
put aside to guard against the types of financial and operational risks banks (and the
whole economy) face. One focus was to maintain sufficient consistency of regulations so
that this does not become a source of competitive inequality amongst internationally
active banks. Advocates of Basel II believed that such an international standard could
help protect the international financial system from the types of problems that might arise
should a major bank or a series of banks collapse. In theory, Basel II attempted to
accomplish this by setting up risk and capital management requirements designed to
ensure that a bank has adequate capital for the risk the bank exposes itself to through its
lending and investment practices. Generally speaking, these rules mean that the greater
risk to which the bank is exposed, the greater the amount of capital the bank needs to
hold to safeguard its solvency and overall economic stability.
Objective
The final version aims at:
1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which would allow market participants to assess
the capital adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on
data and formal techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the
scope for regulatory arbitrage.
While the final accord has at large addressed the regulatory arbitrage issue, there are still
areas where regulatory capital requirements will diverge from the economic capital.
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing
risk), (2) supervisory review and (3) market discipline.
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 Disguised Unemployment
Unemployment that does not affect aggregate output. Disguised unemployment exists
where part of the labor force is either left without work or is working in a redundant
manner where worker productivity is essentially zero. An economy demonstrates
disguised unemployment where productivity is low and where too many workers are
filling too few jobs.
Disguised unemployment exists frequently in developing countries whose large

populations create a surplus in the labor force. Where more people are working than is
necessary, the overall productivity of each individual drops. Disguised unemployment is
characterized by low productivity and frequently accompanies informal labor markets
and agricultural labor markets, which can absorb substantial quantities of labor.
This is when people do not have productive full-time employment, but are not counted in
the official unemployment statistics. This may include:
 People on sickness / disability benefits (but, would be able to do some jobs)

 People doing part-time work.
 People forced to take early retirement and redundancy
 Disguised unemployment could also include people doing jobs that are
completely unproductive, i.e. they get paid but they don’t have a job. In a
developing economy like China, many workers in agriculture may be adding little
if anything to overall unemployment, therefore this type of employment is classed
as disguised unemployment.
 The Production Function
The production function simply states the quantity of output (q) that a firm can produce
as a function of the quantity of inputs to production, or . There can be a number of
different inputs to production, i.e. "factors of production," but they are generally
designated as either capital or labor. (Technically, land is a third category of factors of
production, but it's not generally included in the production function except in the context
of a land-intensive business.) The particular functional form of the production function
(i.e. the specific definition of f) depends on the specific technology and production
processes that a firm uses.
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In the short run, the amount of capital that a factory uses is generally thought to be fixed.
(The reasoning is that firms must commit to a particular size of factory, office, etc. and
can't easily change these decisions without a long planning period.) Therefore, the
quantity of labor (L) is the only input in the short-run production function. In the long
run, on the other hand, a firm has the planning horizon necessary to change not only the
number of workers but the amount of capital as well, since it can move to a different size
factory, office, etc. Therefore, the long-run production function has two inputs that be
changed- capital (K) and labor (L). Both cases are shown in the diagram above.
Note that the quantity of labor can take on a number of different units- worker-hours,
worker-days, etc. The amount of capital is somewhat ambiguous in terms of units, since
not all capital is equivalent, and no one wants to count a hammer the same as a forklift,
for example. Therefore, the units that are appropriate for the quantity of capital will
depend on the specific business and production function.
The Production Function in the Short Run
Because there is only one input (labor) to the short-run production function, it's pretty
straightforward to depict the short-run production function graphically. As shown in the
above diagram, the short-run production function puts the quantity of labor (L) on the
horizontal axis (since it's the independent variable) and the quantity of output (q) on the
vertical axis (since it's the dependent variable).
The short-run production function has two notable features. First, the curve starts at the
origin, which represents the observation that the quantity of output pretty much has to be
zero if the firm hires zero workers. (With zero workers, there isn't even a guy to flip a
switch to turn on the machines!) Second, the production function gets flatter as the
amount of labor increases, resulting in a shape that is curved downward. Short-run
production functions typically exhibit a shape like this due to the phenomenon of
In general, the short-run production function slopes upwards, but it is possible for it to
slope downwards if adding a worker causes him to get in everyone else's way enough
such that output decreases as a result.
The Production Function in the Long Run
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Because it has two inputs, the long-run production function is a bit more challenging to
draw. One mathematical solution would be to construct a three-dimensional graph, but
that is actually more complicated than is necessary. Instead, economists visualize the
long-run production function on a 2-dimensional diagram by making the inputs to the
production function the axes of the graph, as shown above. Technically, it doesn't matter
which input goes on which axis, but it is typical to put capital (K) on the vertical axis and
labor (L) on the horizontal axis.
You can think of this graph as a topographical map of quantity, with each line on the
graph representing a particular quantity of output. (This may seem like a familiar concept
if you have already studied indifference curves!) In fact, each line on this graph is called
an "isoquant" curve, so even the term itself has its roots in "same" and "quantity."
Why is each output quantity represented by a line and not just by a point? In the long run,
there are often a number of different ways to get a particular quantity of output. If one
were making sweaters, for example, one could choose to either hire a bunch of knitting
grandmas or rent some mechanized knitting looms. Both approaches would make
sweaters perfectly fine, but the first approach entails a lot of labor and not much capital
(i.e. is labor intensive), while the second requires a lot of capital but not much labor (i.e.
is capital intensive). On the graph, the labor heavy processes are represented by the points
toward the bottom right of the curves, and the capital heavy processes are represented by
the points toward the upper left of the curves. In general, curves that are further away
from the origin correspond to larger quantities of output. (In the diagram above, this
implies that q3 is greater than q2, which is greater than q1.) This is simply because curves
that are further away from the origin are using more of both capital and labor in each
production configuration. It is typical (but not necessary) for the curves to be shaped like
the ones above, as this shape reflects the tradeoffs between capital and labor that are
present in many production processes.
 Gross national product (GNP):
Gross national product (GNP) is the market value of all the products and services
produced in one year by labour and property supplied by the citizens of a country. Unlike
Gross Domestic Product (GDP), which defines production based on the geographical
location of production, GNP allocates production based on location of ownership.
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GNP does not distinguish between qualitative improvements in the state of the technical
arts (e.g., increasing computer processing speeds), and quantitative increases in goods
(e.g., number of computers produced), and considers both to be forms of "economic
growth".GNP is a measure of a country's economic performance, or what its citizens produced
(i.e. goods and services) and whether they produced these items within its borders. An economic
statistic that includes GDP, plus any income earned by residents from overseas
investments, minus income earned within the domestic economy by overseas residents.
Gross. GNP is the total value of all final goods and services produced within a nation in a
particular year, plus income earned by its citizens (including income of those located
abroad), minus income of non-residents located in that country. Basically, GNP measures
the value of goods and services that the country's citizens produced regardless of their
location. GNP is one measure of the economic condition of a country, under the
assumption that a higher GNP leads to a higher quality of living, all other things being
equal
 Public good
An item whose consumption is not decided by the individual consumer but by the society
as a whole, and which is financed by taxation.
A public good (or service) may be consumed without reducing the amount available for
others, and cannot be withheld from those who do not pay for it. Public goods (and
services) include economic statistics and other information, law enforcement, national
defense, parks, and other things for the use and benefit of all. No market exists for such
goods, and they are provided to everyone by governments. See also good and private
good A product that one individual can consume without reducing its availability to
another individual and from which no one is excluded. Economists refer to public goods
as "non-rivalrous" and "non-excludable". National defense, sewer systems, public parks
and basic television and radio broadcasts could all be considered public goods. One
problem with public goods is the free-rider problem. This problem says that a rational
person will not contribute to the provision of a public good because he does not need to
contribute in order to benefit. Public goods are goods that can be consumed by everybody
in a society or nobody at all. They cannot or will not be produced for individual profit,
since it is difficult to get people to pay for its large beneficial externalities. It is helpful to
think about a public good as one with a large positive externality. A public good is
defined as an economic good which possesses two properties: non-rivalrous and non-
excludable. Some examples of public goods include clean air, national defense, the
judiciary, lighthouses, street lights, and the well know example of a fireworks show
A public good is often (though not always) under-provided in a free market because of its
characteristics of non-rivalry and non-excludability.
Public goods have two characteristics:

1. Non-rivalry: This means that when a good is consumed, it doesn’t reduce the
amount available for others.
16
– E.g. benefiting from a street light doesn’t reduce light for others, but eating an
apple would.
2. Non-excludability: This occurs when it is not possible to provide a good without
it being possible for others to enjoy. E.g erecting a dam to stop flooding, or
providing law and order.
A public good is a term used by economists to refer to a product (i.e., a good or service)
of which anyone can consume as much as desired without reducing the amount available
for others1.
It is the opposite of a private good, which is any product for which consumption by one
person reduces the amount available for others, at least until more is produced. Most
products are private goods, but some of the most important products are public goods.
Many products have characteristics of both a public good and a private good. Thus, the
term public good is usually used to describe products that are dominated by their public
good nature, and the term pure public good is used to describe products that do not
possess any of the characteristics of a private good.
There is no automatic connection between public goods and the public sector (i.e.,
government) or between private goods and the private sector (i.e., businesses and
consumers). However, it is very often the case that public goods are supplied by the
public sector, or with some sort of assistance from it, and in capitalist countries private
goods are generally supplied by the private sector.
Examples of public goods include mathematics, algorithms, melodies, cooking recipes,

radio and television broadcasts, languages (both human and programming), computer
software, stories, web sites, national defense, clean air, the light from lighthouses and
uncongested roads. Examples of private goods include airplanes, apples, books,
computers, fingernail polish, flashlights, gold, guns, houses, olive oil, pianos, sheep,
radios and shirts.
It can be seen that public goods tend to be intangible items, that is, things which are
difficult to grasp with the hands, and that many of them fall into the category of
information or knowledge. Private goods are invariably tangible items, that is, items that
can be touched, moved and/or seen by humans. Very often both types of goods work in
tandem or are symbiotic; for example, a piano, which is a a private good, can be used to
play a melody, which is a public good, the methods for creating both a piano and a
melody are public goods, and a specific performance of the melody on the piano is a
private good3 but a radio or television broadcast of that performance is a public good.
Another example is computer hardware and software. The hardware (i.e., the computer
itself and peripheral devices such as monitors, printers, modems and keyboards) are all
private goods, because use by one person reduces the amount available for others. But the
software (i.e., operating systems and application programs) used on it is a public good
17
because anyone can use as much as desired without reducing the amount available for
anyone else4.
Some products may begin to lose some of their characteristic of a public good as a result
of negative externalities that occur when consumption rises beyond a certain level. An
externality is a cost or benefit that results from an individual or group engaged in an
activity to other individuals or groups. Examples of negative externalities include
congestion (e.g., on roads or on shipping lanes near lighthouses) and pollution (e.g., air,
water or noise). An example of a positive externality is pollination of farmers' crops by
bees kept by a beekeeper.
 Index (economics):
In economics and finance, an index is a statistical measure of changes in a representative
group of individual data points. These data may be derived from any number of sources,
including company performance, prices, productivity, and employment. Economic
indices (index, plural) track economic health from different perspectives. Influential
global financial indices such as the Global Dow, and the NASDAQ Composite track the
performance of selected large and powerful companies in order to evaluate and predict
economic trends. The Dow Jones Industrial Average and the S&P 500 primarily track
U.S. markets, though some legacy international companies are included.[1] The Consumer
Price Index tracks the variation in prices for different consumer goods and services over
time in a constant geographical location, and is integral to calculations used to adjust
salaries, bond interest rates, and tax thresholds for inflation. The GDP Deflator Index, or
real GDP, measures the level of prices of all new, domestically produced, final goods and
services in an economy.[2] Market performance indices include the labour market
index/job index and proprietary stock market index investment instruments offered by
brokerage houses.
Some indices display market variations that cannot be captured in other ways. For
example, the Economist provides a Big Mac Index that expresses the adjusted cost of a
globally ubiquitous Big Mac as a percentage over or under the cost of a Big Mac in the
U.S. in USD (estimated: $3.57). The least relatively expensive Big Mac price occurs in
Hong Kong, at a 52% reduction from U.S. prices, or $1.71 U.S. Such indices can be used
to help forecast currency values. From this example, it would be assumed that Hong
Kong currency is undervalued, and provides a currency investment opportunity.
Economists frequently use index numbers when making comparisons over time. An index
starts in a given year, the base year, at an index number of 100. In subsequent years,
percentage increases push the index number above 100, and percentage decreases push
the figure below 100. An index number of 102 means a 2% rise from the base year, and
an index number of 98 means a 2% fall. n index number is an economic data figure
reflecting price or quantity compared with a standard or base value.[4][5] The base usually
equals 100 and the index number is usually expressed as 100 times the ratio to the base
value. For example, if a commodity costs twice as much in 1970 as it did in 1960, its
18
index number would be 200 relative to 1960. Index numbers are used especially to
compare business activity, the cost of living, and employment. They enable economists to
reduce unwieldy business data into easily understood terms.
In economics, index numbers generally are time series summarising movements in a

group of related variables. In some cases, however, index numbers may compare
geographic areas at a point in time. An example is a country's purchasing power parity.
The best-known index number is the consumer price index, which measures changes in
retail prices paid by consumers. In addition, a cost-of-living index (COLI) is a price index
number that measures relative cost of living over time.[6] In contrast to a COLI based on
the true but unknown utility function, a superlative index number is an index number that
can be calculated.[6] Thus, superlative index numbers are used to provide a fairly close
approximation to the underlying cost-of-living index number in a wide range of
circumstances.[There is a substantial body of economic analysis concerning the
construction of index numbers, desirable properties of index numbers and the relationship
between index numbers and economic theory.
 Vicious Circle of Poverty

The vicious circle of poverty on the supply side of capital operates in this manner poverty
in the under – developed countries means that the per capital income in such countries is
low. Since per capital income is low , their capacity to save is low . When people cannot
make even the two ends meet with their low income the question of saving does not arise.
That is why the rate of savings in the under- developed countries is extremely low. The
rate of savings being low. The rate of , investment in turn is bound to be low. Since the
rate of investment is low, the rate of capital formation is low and hence there is great
shortage of capital in the under-developed countries. Since the amount of capital per man
is of vital importance in determining productivity, the level of productivity per worker is
extremely low in the under-developed countries. The productivity per worker being low,
the real income per capita is low and there is poverty. This is how the vicious circle is
complete on the supply side. Owing to poverty or low per capita income saving is less
and when saving is less the rate of investment is low. The rate of investment being low, t
he amount of capital per worker is small and when capital per worker is small,
productivity per worker is small .Since productivity is low , the income per capita is low
which means that the country is poor. In this way , we see that the cause of a country’s
poverty is poverty itself and as Nurkse says “Under- developed countries are poor
because they are poor”
In economics, the cycle of poverty is the "set of factors or events by which poverty, once
started, is likely to continue unless there is outside intervention." The cycle of poverty has
been defined as a phenomenon where poor families become trapped in poverty for at least
three generations. These families have either limited or no resources.
There are many disadvantages that collectively work in a circular process making it
virtually impossible for individuals to break the cycle. This occurs when poor people do
not have the resources necessary to get out of poverty, such as financial capital,
education, or connections.
19
In other words, poverty-stricken individuals experience disadvantages as a result of their
poverty, which in turn increases their poverty. This would mean that the poor remain poor
throughout their lives.This cycle has also been referred to as a "pattern" of behaviours
and situations which cannot easily be changed. The poverty cycle is usually called
"development trap" when it is applied to countries.Dr. Ruby K. Payne distinguishes
between situational poverty, which can generally be traced to a specific incident within
the lifetimes of the person or family members in poverty, and generational poverty, which
is a cycle that passes from generation to generation, and goes on to argue that
generational poverty has its own distinct culture and belief patterns.
Economic growth can be seen as a virtuous circle. It might start with an exogenous factor
like technological innovation. As people get familiar with the new technology, there
could be learning curve effects and economies of scale. This could lead to reduced costs
and improved production efficiencies.
In a competitive market structure, this will probably result in lower average prices. As
prices decrease, consumption could increase and aggregate output also. Increased levels
of output lead to more learning and scale effects and a new cycle starts.
However, pollution, natural resource depletion and other externalities associated with
uncontrolled economic growth can turn the virtuous cycle into a vicious cycle below.
Many developing countries are caught up in vicious cycle of poverty. Low level of
income prevents savings, retards capital growth, hinders productivity growth, and keeps
income low. Successful development may require taking steps to break up the chain at
many points.Other points in poverty are also self- reinforcing. Poverty is accompanied by
low levels of education, literacy and skill; these in turn prevent the adaptation to new and
improved technologies and lead to rapid population growth. The vicious cycle of poverty
is depicted as below: Overcoming the barriers of poverty often requires a concentrated
effort on many fronts and a 'big-push' is required to break the 'vicious cycle' into
'virtuouscircle'.If the country has stepped to invest more, improve health and education,
develop labour skills, and curb population growth, she can break vicious cycle of poverty
and stimulate a virtuous circle of rapid economic growth.
20
Cost Push Inflation
Cost push inflation occurs when we experience rising prices due to higher costs of
production and higher costs of raw materials. Cost push inflation is determined by supply
side factors (cost-push inflation is different to demand-pull inflation which occurs due to
aggregate demand growing faster than aggregate supply)
Cost-push inflation can lead to lower economic growth and often causes a fall in living
standards, though it often proves to be temporary. Cost-push inflation is when a shortage
of supply of labor, raw materials or capital drives up prices. The demand remains the
same, but since there are fewer goods or services, the supplier can charge more per unit.
It is one of the three main causes of inflation, the other two being demand-pull
inflation and expansion of the money supply. Cost-push inflation can only occur if
demand for the end product or service is inelastic. That means there is a high demand for
the product even if the price goes up.
Diagram Showing Cost Push Inflation
Causes of Cost Push Inflation
1. Higher Price of Commodities. A rise in the price of oil would lead to higher petrol
prices and higher transport costs. All firms would see some rise in costs. As the
most important commodity, higher oil prices often lead to cost push inflation (e.g.
1970s, 2008, 2010-11)
21
2. Imported Inflation. A devaluation will increase the domestic price of imports.
Therefore, after a devaluation we often get an increase in inflation due to rising
cost of imports.
3. Higher Wages. Wages are one of the main costs facing firms. Rising wages will
push up prices as firms have to pay higher costs (higher wages may also cause
rising demand)
4. Higher Taxes. Higher VAT and Excise duties will increase the prices of goods.
This price increase will be a temporary increase.
5. Higher Food Prices. In western economies food is a smaller % of overall
spending, but in developing countries, it plays a bigger role. (food inflation)
Cost push inflation could be caused by a rise in oil prices or other raw materials.
Imported inflation could occur after a depreciation in the exchange rate which increases
the price of imported goods.
22
What are the types of Unemployment?
1) Structural unemployment: Basically Bangladesh's unemployment is structural in

nature. It is associated with the inadequacy of productive capacity to create enough jobs
for all those able and willing to work. In Bangladesh not only the productive capacity
much below the needed quantity, it is also found increasing at a slow rate. As against this,
addition to labour force is being made at a first rate on account of the rapidly growing
population. Thus, while new productive jobs are on the increase, the rate of increasing
being low the absolute number of unemployed persons is rising from year to year.
2) Disguised unemployment: Disguised unemployment implies that many workers are

engaged in productive work. For example, in Indian villages, where most of
unemployment exists in this form, people are found to be apparently engaged in
agricultural works. But such employment is mostly a work sharing device i.e., the
existing work is shared by the large number of workers. In such a situation, even if many
workers are withdrawn, the same work will continue to be done by fewer people.It
follows that all the workers arte not needed to maintain the existing level of production.
The contribution of such workers to production is nothing. It is found that the very large
numbers of workers on Indian farms actually hinder agricultural works and thereby
reduce production.
3) Cyclical unemployment: Cyclical unemployment in caused by the trade or business

cycles. It results from the profits and loss and fluctuations in the deficiency of effective
demand production is slowed down and there is a general state of depression which
causes unemployment periods of cyclical unemployment is longer and it generally affects
all industries to a greater or smaller extent. unemployment is when workers lose their
jobs during downturns in the business cycle. It generally happens when the economy
contracts, as measured by Gross Domestic Product (GDP). If the economy contracts for
two quarters or more, then it's in a recession.
Cyclical unemployment is usually the cause of high unemployment, when rates quickly
grow to 8% or even 10% of the labor force.
It's known as cyclical because, when the economy re-enters the expansion phase of the
business cycle, the unemployed will get rehired. Cyclical unemployment is temporary --
23
although it could last anywhere from 18 months (the typical time frame of a recession) to
ten years (during a depression).
Causes
Cyclical unemployment results from a large drop-off of demand. It usually starts with
less personal consumption. When consumer demand for goods and services drops,
business revenues decline, and eventually companies have to lay off workers to maintain
profit margins. Often there isn't enough production to keep the workers busy.
The last thing a business wants to do is layoff workers. It's a traumatic event, and a
company could lose valuable employees that it's invested a lot in. That's why, by the time
cyclical unemployment starts to climb, the economy is usually already in a recession.
Businesses wait until they're sure the downturn is severe before starting layoffs.
Examples
An example of cyclical unemployment is the loss of construction jobs during the 2008
financial crisis. As the housing crisis unfolded, home builders stopped constructing new
homes. As many as 2 million construction workers lost their jobs. Whenever home
building starts up again, they will be able to go back to work. (Source: CBS News, 2
Million Construction Jobs Lost, June 16, 2011)
Someone can start out being cyclically unemployed, and wind up being being a victim of
structural unemployment. During the recession, many factories switched to robots and
sophisticated computer equipment to run machinery. Workers now need to get updated
computer skills so they can manage the robots that now runs the machinery they used to
work on themselves. Unfortunately, fewer workers are needed. Those that don't go back
to school are structurally unemployed. That's because their skills no longer match the
needs of the workforce.
Cyclical Unemployment Rate
The cyclical unemployment rate is the difference between the natural unemployment rate
and the current rate. The natural rate includes structural, frictional, and surplus
unemployment. Subtract those from the unemployed and the labor force and, Voila!, you
have the cyclical unemployment rate. In real life, it's difficult to look at the data and
determine why each person is unemployed. Therefore, economists have come up with
two other methods to estimate how much of unemployment is cyclical.
The first, and most common, method is to take the unemployment rate during the peak
phase of the business cycle, subtract it from the unemployment rate during the trough
phase, and chalk the rest up to cyclical unemployment.
The second is to compare the unemployment rate for recent college graduates with the
unemployment rate overall. If their rate is similar to the overall rate, then most of the
24
nation's unemployment is cyclical. Why? Recent college graduates have new skills, and
are able to move to wherever the jobs are. Therefore, they have very little of the reasons
for structural unemployment. Using this method, researchers found that the most of the
unemployment in 2011 was cyclical. (Source: Bureau of Labor Statistics, Current
unemployment:cyclical or structural?, March 21, 2011)
Solution
Because cyclical unemployment can so quickly spiral out of control, usually the Federal
government must step in to stop it. The first, and easiest, response is with expansionary
monetary policy. The Federal Reserve will start lowering interest rates. This is like
putting money into the pockets of families and businesses. That's because it lowers all
interest rates, making loans and even credit card payments cheaper. Furthermore, just
knowing that the Fed is taking action may restore the confidence needed to boost
demand.
If that's not enough, then expansionary fiscal policy must be used. This takes longer,
because usually the President and Congress must vote on more spending. This raises the
budget deficit. It also re-ignites the bi-partisan debate as to whether tax cuts or spending
are more effective job creators. However, a U Mass/Amherst study shows that the most
cost effective unemployment solution is spending on public works projects to create
construction jobs. This makes sense, since these jobs are the most cyclical. The second is
extending unemployment benefits. Tax cuts, according to the research, is less effective in
creating the demand needed to stop cyclical unemployment. Article updated February
25, 2015.
4) Seasonal unemployment: Seasonal unemployment occurs at certain seasons of the year.

It is a widespread phenomenon of Indian villages basically associated with agriculture.
Since agricultural work depends upon Nature, therefore, in a certain period of the year
there is heavy work, while in the rest, the work is lean. For example, in the sowing and
harvesting period, the agriculturists may to engage themselves day and night.But the
period between the post harvest and pre sowing is almost workless, rendering many
without work. Thus, seasonal unemployment is largely visible after the end of agricultural
works.
5) Underemployment: Underemployment usually refers to that state in which the self

employed working people are not working according to their capacity. For example, a
diploma holder in engineering, if for wants of an appropriate job, start any business may
be said to be underemployed. Apparently, he may be deemed as working and earning in a
productive activity and in this sense contributing something to production.But in reality
he is not working to his capability, or to his full capacity. He is, therefore, not full
employed. This type of unemployment is mostly visible in urban areas.
6) Open Unemployment: Open unemployment is a condition in which people have no

work to do. They are able to work and are also willing to work but there is no work for
25
them. They are found partly in villages, but very largely in cities. Most of them come
form villages in search of jobs, many originate in cities themselves. Such employment
can be seen and counted in terms of the number of such persons.Hence it is called upon
unemployment. Open unemployment is to be distinguished from disguised
unemployment and underemployment in that while in the case of former unemployment
workers are totally idle, but in the latter two types of unemployment they appear to be
working and do not seem to be away their time.
7) Voluntary Unemployment: Voluntary unemployment occurs when a working persons

willingly withdraws himself from work. This type of unemployment may be caused due
to a number of reasons. For example, one may quarrel with the employer and resign or
one may have permanent source of unearned income, absentee workers, and strikers and
so on. In voluntary unemployment, a person is out of job of his own desire. She does not
work on the prevalent or prescribed wages. Either he wants higher wages or does not
want to work at all.
Involuntary unemployment: Involuntary unemployment occurs when at a particular time

the number of worker is more than the number of jobs. Obviously this state of affairs
arises because of the insufficiency or non availability of work. It is customary to
characterise involuntary unemployment, not voluntary as unemployment proper.
What are the ways to remove unemployment?
Ways and means to remove unemployment in Society of Bangladesh removal of

unemployment is the responsibility of the state. The Constitutional of Bangladesh has the
“Directive Principles” of the State and enjoined this duty on the State Government.In
Society we have already seen that there is a good deal of unemployment. This removal of
unemployment is necessary for the prosperity of the nation. For this, the following steps
have to be taken:
1) Improvement in the agricultural system: We have already seen that the agricultural
system in Bangladesh is backward and underdeveloped. This backwardness is responsible
for a lot of unemployment. If the unemployment has to removed, the system of
agriculture has to be modernized and improved, for this the following steps to be taken:
a) Holding should be consolidated and made economic.
b) Methods of agriculture should be improved and as far as possible farmers should be
freed from dependence on nature.
c) System of crops should be planned scientifically and improved. If more crops earned
they would provide more employment.
d) The farmers should be provided with good seed, good fertilizer, healthy animals,
modern implements and tools etc.
2) Adequate arrangement of facilities of irrigation: In villages the agriculture very much

depends on nature. If rains fail, the crops are destroyed. This brings about a good deal of
26
unemployment. Methods of irrigation should be made more modern. They should also be
adequate so that it may be possible for people to water their fields.
3) Increasing the area of cultivable land: To day in the villages there is a great pressure on
land. The area under cultivation is not sufficient to provide food to all the people of this
country. Barren land should be broken and made fertile. Other methods should also be
made for improving the area of cultivable land which is not normally fit for agriculture,
also be improved and made fit. This would remove unemployment in the villages.
4) Setting up and develop the cottage and village industries: In village, people have
seasonal employment in agriculture. Apart from it all the persons do not have avenues for
the employment. What is needed is to set up of industries so that those who do not have
land are employed in it. Apart from it, the agriculturalists during dull season should get
employment in these industries. Women and land less laborers shall also be able to get
employment if industries are set up.
5) Improving the means of transport and communication: In villages there is need to have
proper roads and places where offices and stores for seeds etc, may be set up. Public
construction should be undertaken in the villages to provide employment to the idle
hands. This would improve the employment position in the village. Apart from it, it
would also add to the prosperity of the villages.
6) Construction of public Transports, Roads etc: It is necessary to improve the means of

transport and communication. This would have two fold advantages. Firstly, the village
people shall be able to send their products to markets for sale and secondly, they shall
also be able to go to such other places where they can get employment. Apart from it, this
would also provide employment to many persons who shall engage themselves in the task
of transporting these people.
7) Organization of the agricultural market: There is need to organize markets for the
agricultural product. At present, there is dearth of such market. This situation creates
difficulties for the agriculturalists. On the one hand, they are not able to get proper price
and on the other hand they have to suffer from other handicaps. If markets are organized,
they would provide employment to certain hands and also help the agriculturalists to get
proper price for their labor.
In fact Bangladesh is such a vast country and unemployment is so large that “Herculean”
efforts shall have to be made to surmount this degree. Various economists and social
thinkers have suggested various ways for it. Many of these ways have also been
incorporated in the Five Year Plans. In spite of these Five Year Plans employment
position is far from satisfactory.
27
Inferior good
An inferior good means an increase in income will causes a fall in demand. An inferior
good has a negative income elasticity of demand. (YED)
For example, if average incomes rise 10%, and demand for holidays in Blackpool falls
2%. The YED of Blackpool holidays is -0.2 – an inferior good.
Inferior goods will have better quality alternatives. Therefore, when income rises, people
can afford to forego the cheap alternative and buy the higher quality good instead.
For example, a person on low income may buy cheap gruel. But, when his income rises,
he will afford better quality foods, such as fine breads and meat. Therefore, he stops
buying gruel.
Examples of inferior good
 ‘Supermarket own brand’ goods. E.g. Tesco value bread 32p a loaf. When income
rises you buy better quality, more expensive bread.
 Tinned meat / spam, corned beef. This is a cheap form of meat, when income rises
you buy fresh meat and less of the tinned variety.
 Instant coffee. When income rises you buy expensive bread instead.
 Bus travel. When income rises you can afford to buy a car and therefore no longer
need the car.
 Butlin family holidays in Skegness. In the post-war austerity years, these budget
holidays were very popular. But, rising incomes enabled people to travel abroad
and to be able to afford hotel rooms, rather than the more basic accommodation.
Importance of inferior goods
In a recession, with falling incomes, inferior goods can become in higher demand.
Supermarkets may push these cheaper, value ‘inferior’ goods because there will be higher
demand. Recessions, can be good for Pound Shops, which concentrate on value goods.
However, rising incomes can lead to falling demand for inferior goods and firms will
increase supply of the alternatives better quality goods.
28

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Prepared By: Md.

Abul Khairat (Tushar)

 Gresham's law is an economic principle that states: "When a government

In economics, an inferior good is a good that decreases in demand when consumer

Inferiority, in this sense, is an observable fact relating to affordability rather than a

Summary: if a good is inferior, a drop in income (represented by a price increase)

Sudden bouts of currency depreciation, especially in emerging markets, inevitably raise

 Floating exchange rate :

Thus, Quasi-rent = Total Revenue — Total Variable Cost.

Economic value of quasi rent

An example of a fixed cost would be a company's lease on a building. If a company has

The formula for calculating total variable cost is:

Let's assume the following:

Annual Widgets Produced: 100,000

5,000 x ($0.10 + $0.50) = $3,000

Disguised unemployment exists frequently in developing countries whose large

 People on sickness / disability benefits (but, would be able to do some jobs)

 The Production Function

The Production Function in the Short Run

The Production Function in the Long Run

 Gross national product (GNP):

Public goods have two characteristics:

Examples of public goods include mathematics, algorithms, melodies, cooking recipes,

In economics, index numbers generally are time series summarising movements in a

 Vicious Circle of Poverty

Cost Push Inflation

Diagram Showing Cost Push Inflation

Causes of Cost Push Inflation

What are the types of Unemployment?

1) Structural unemployment: Basically Bangladesh's unemployment is structural in

2) Disguised unemployment: Disguised unemployment implies that many workers are

3) Cyclical unemployment: Cyclical unemployment in caused by the trade or business

Cyclical Unemployment Rate

4) Seasonal unemployment: Seasonal unemployment occurs at certain seasons of the year.

5) Underemployment: Underemployment usually refers to that state in which the self

6) Open Unemployment: Open unemployment is a condition in which people have no

7) Voluntary Unemployment: Voluntary unemployment occurs when a working persons

Involuntary unemployment: Involuntary unemployment occurs when at a particular time

What are the ways to remove unemployment?

Ways and means to remove unemployment in Society of Bangladesh removal of

2) Adequate arrangement of facilities of irrigation: In villages the agriculture very much

6) Construction of public Transports, Roads etc: It is necessary to improve the means of

Examples of inferior good

Importance of inferior goods

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