E&S

Unit-1

DEFINITION OF ECONOMICS:Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals. Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways.

There are two main types of economics: macroeconomics and microeconomics. Microeconomics focuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders. Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.

A study of economics can describe all aspects of a country’s economy, such as how a country uses its resources, how much time laborers devote to work and leisure, the outcome of investing in industries or financial products, the effect of taxes on a population, and why businesses succeed or fail.

People who study economics are called economists. Economists seek to answer important questions about how people, industries, and countries can maximize their productivity, create wealth, and maintain financial stability. Because the study of economics encompasses many factors that interact in complex ways, economists have different theories as to how people and governments should behave within markets.

Adam Smith, known as the Father of Economics, established the first modern economic theory, called the Classical School, in 1776. Smith believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. He believed that governments should not restrict or interfere in markets because they could regulate themselves and, thereby, produce wealth at maximum efficiency. Classical theory forms the basis of capitalism and is still prominent today.

Scope of economics:Scope means the sphere of study. We have to consider what economics studies and what lies beyond it. The scope of economics will be brought out by discussing the following.

a) Subject – matter of economics.

b) Economics is a social science

c) Whether Economics is a science or an art?

d) If Economics is science, whether it is positive science or a normative science?

a) Subject – matter of economics: Economics studies man’s life and work, not the whele of it, but only one aspect of it. It does not study how a person is born, how he grows up and dies, how human body is made up and functions, all these are concerned with biological sciences, Similarly Economics is also not concerned with how a person thinks and the human organizations being these are a matter of psychology and political science. Economics only tells us how a man utilizes his limited resources for the satisfaction of his unlimited wants, a man has limited amount of money and time, but his wants are unlimited. He must so spend the money and time he has that he derives maximum satisfaction. This is the subject matter of Economics.

Economic Activity: It we look around, we see the farmer tilling his field, a worker is working in factory, a Doctor attending the patients, a teacher teaching his students and so on. They are all engaged in what is called “Economic Activity”. They earn money and purchase goods. Neither money nor goods is an end in itself. They are needed for the satisfaction of human wants and to promote human welfare.

To fulfill the wants a man is taking efforts. Efforts lead to satisfaction. Thus wants- Efforts-Satisfaction sums up the subject matter of economics.

b) Economics is a social Science: In primitive society, the connection between wants efforts and satisfaction is close and direct. But in a modern Society things are not so simple and straight. Here man produces what he does not consume and consumes what he does not produce. When he produces more, he has to sell the excess quantity. Similarly he has to buy a product which is not produced by him. Thus the process of buying and selling which is called as Exchange comes in between wants efforts and satisfaction.

Nowadays, most of the things we need are made in factories. To make them the worker gives his labour, the land lord his land, the capitalist his capital, while the businessman organizes the work of all these. They all get reward in money. The labourer earns wages, the landlord gets rent the capitalist earns interest, while the entrepreneur’s (Businessman) reward is profit. Economics studies how these income—wages, rent interest and profits-are determined. This process in called “Distribution: This also comes in between efforts and satisfaction.

Thus we can say that the subject-matter of Economics is

Consumption- the satisfaction of wants.

Production- i.e. producing things, making an effort to satisfy our wants

Exchange - its mechanism, money, credit, banking etc.

Distribution – sharing of all that is produced in the country. In addition, Economics also studies “Public Finance”

Macro Economics – When we study how income and employment is generated and how the level of country’s income and employment is determined, at aggregated level, it is a matter of macro-economics. Thus national income, output, employment, general price level economic growth etc. are the subject matter of macro Economics.

Micro-Economic – When economics is studied at individual level i.e. consumer’s behavior, producer’s behavior, and price theory etc it is a matter of micro-economics.

c) Economics, a Science or an Art? Broadly different subjects can be classified as science subjects and Arts subjects, Science subjects groups includes physics, Chemistry, Biology etc while Arts group includes History, civics, sociology Languages etc. Whether Economics is a science or an art? Let us first understand what is terms ‘science’ and ‘arts’ really means.

A science is a systematized body of knowledge. A branch of knowledge becomes systematized when relevant facts hove been collected and analyzed in a manner that we can trace the effects back to their and project cases forward to their effects. In other words laws have been discovered explaining facts, it becomes a science, In Economics also many laws and principles have been discovered and hence it is treated as a science. An art lays down formulae to guide people who want to achieve a certain aim. In this angle also Economics guides the people to achieve aims, e.g. aim like removal poverty, more production etc. Thus Economics is an art also. In short Economics is both science as well as art also.

d) Economics whether positive or normative science: A positive science explains ''why" and "wherefore" of things. I.e. causes and effects and normative science on the other hand rightness or wrongness of the things. In view of this, Economics is both a positive and. normative science. It not only tells us why certain things happen, it also says whether it is right or wrong the thing to happen. For example, in the world few people are very rich while the masses are very poor. Economics should and can explain not only the causes of this unequal distribution of wealth, but it should also say whether this is good or bad. It might well say that wealth ought to be fairly distributed. Further it should suggest the methods of doing it.

Central Problems of Economics:

Economic Laws:A law (or generalization) is the establishment of a general truth on the basis of particular observations or experiments which traces out a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena.

Chapter-5.pdf

Marshall defined economic laws in these words, “Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

It can be inferred from this definition that economic laws are (a) statements of economic tendencies, (b) social laws, (c) concerned with human behaviour, and (d) human behaviour can be measured in money. On the other hand, according to Robbins, “Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.” These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behaviour.

Their Nature:

Scientific or like Natural or Physical Laws. Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result is expected to follow from a particular cause in economics. The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will be reduced and the law will not work properly. As pointed out by Marshall, “The law of gravitation is therefore, a statement of tendencies.”

Similarly economic laws are statements of tendencies. For instance, the law of demand states that other things remaining the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws such as the Law of Diminishing Returns which deal with inanimate nature. Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

Non-Precise like the Laws of Natural Sciences:

Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as the scientific laws. For instance, the law of gravitation must operate whatever the conditions may be. Any object coming from above must fall to the ground. But demand will not increase with the fall in price if there is depression in the economy because consumers lack purchasing power. Therefore, according to Marshall, “There are no economic tendencies which act as steadily and can be measured as exactly as gravitation can, and consequently, there are no laws of economics which can be compared for precision with the law of gravitation.”

There is controlled experimentation in natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in his experiments in the laboratory. But in economics, controlled experiments are not possible because an economic situation is never repeated exactly at another time.

Moreover, the economist has to deal with man who acts in accordance with his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory.

As a result, predictions concerning human behavior are liable to error. For instance, a rise in price may not lead to contraction in demand rather it may expand it, if people fear shortage of goods in anticipation of war. Even if demand contracts as a result of the price rise, it is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case; they may not be reliable in the ever-changing environment of real economy; and they are in no sense, of course, inviolable.”

Non-predictable like the Law of Tide:

But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise. But this may not happen.

It may rise earlier or later than the predicted time due to some unforeseen circumstances. Marshall, therefore, compared the laws of economics with the laws of tides “rather than with simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.”

Behaviorist:

Most economic laws are behaviorist, such as the law of diminishing marginal utility, the law of equi-marginal utility, the law of demand, etc., which depend upon human behavior. But the behaviorist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform.

This is because all men are not rational beings. Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”

Indicative:

Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

Hypothetical:

Prof. Seligman characterized economic laws as “essentially hypothetical”, because they assume ‘other things being equal’ and draw conclusions from certain hypotheses. In this sense, all scientific laws are

also hypothetical as they too assume the ceteris paribus clause (i.e. other things being equal). For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water. If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed. Still there is difference in hypothetical element present in economic laws as against scientific laws. It is more pronounced in the former because economics deals with human behaviour and natural sciences with matter.

But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise and accurate. This is because economies possesses the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact. Despite this, economic laws are less certain like the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

Truisms or Axioms:

There are certain generalisations in economics which may be stated as truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally true and valid.

Historico-Relative:

On the other hand, economists of the Historical School regarded economic laws as abstractions which are historico-relative, that is economic laws have only a limited application to a given time, place and environment. They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historico-relative.

They are simply relative to the existence of certain conditions which are assumed to be given. If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid. But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”

Economic goods:An economic good is a desirable thing of which there is not enough to satisfy the desires of those who want it.

THREE CHARACTERISTICS OF AN ECONOMIC GOOD

1. Must give utility or satisfaction

– anything which is a nuisance or irritant does not give utility or satisfaction and so would not be considered an economic good.

2. Must be scarce in relation to demand

- otherwise people would not be willing to pay for it. If something is scarce, it can command a price. People would not be prepared to pay for something if there is plenty of it freely available.

3. Must be transferable

- if the good is not transferable, it would not be possible for one person to sell the good to another person.

A good must have ALL THREE characteristics to be considered an economic good.

Work in pairs to explain why the following goods ARE considered economic goods:

Beauty Treatments

Medicine

Grinds

Car

Work in pairs to explain why the following goods would NOT be considered economic goods:

Fresh Air in Ireland

Good Health

Intelligence

Swine Flu

Sand on a beach

Standard of LivingStandard of living can be thought of as a measure of the quality of life or level of material prosperity enjoyed by individuals, a specific demographic group, or a geographic region such as a country. In economics, the standard of living is usually used to determine the relative prosperity of the population of an entire country and is often compared to the standard of living that populations of other countries enjoy.

General FactorsStandard of living is a composite of different factors that are generally believed to enhance the quality of life of individuals in a population.

The following is a list of factors that are used to determine a country's standard of living:

Household income

General health of a population

Life expectancy of the members of a population

Availability and quality of housing

Level of crime

Access to health care

Access to education

Access to social services

Political freedom

Social freedom

Market ValueMarket value is based on supply and demand. It is used to refer to a company’s market capitalization value. It is calculated by multiplying the number of shares issued by the price of the company's share. A company's share price is determined by daily trading between buyers and sellers on the relevant stock exchange. Market prices are easy to determine for assets as the constituent values, such as stock and futures prices, are readily available. The value of real estate assets are not as simple to determine, so real estate appraisers are required to provide a valuation. The same is true for businesses whose shares are not traded on a public exchange. A valuation would have to be prepared using a different method.

Opportunity CostThe basic economic problem is the issue of scarcity. Because resources are scarce but wants are unlimited, people must make choices. This lesson showcases the most important concept in macroeconomics, which is the concept of opportunity cost. Very simply, everyone has the same amount of hours in a day, but we all make different decisions about what we do, what we choose to buy, and how we spend our time. What determines these choices? Opportunity cost does.

Every time you make a choice, there is a certain value you place on that choice. You might not know it or think about it, but every choice has a value to you. When you choose one thing over another, you're saying to yourself, I value this more than another choice I had.

The opportunity cost of a choice is what you gave up to get it. If you have two choices - either an apple or an orange - and you choose the apple, then your opportunity cost is the orange you could have chosen but didn't. You gave up the opportunity to take the orange in order to choose the apple. In this way, opportunity cost is the value of the opportunity lost.

Value: Benefits and Cost

Value has two parts to it. It has benefits as well as costs. If you choose an apple over an orange, maybe the apple costs less, but maybe you enjoy it more. So, looking at choice in terms of benefits and costs

helps you make better economic decisions. To make a good economic decision, we want to choose the option with the greatest benefit to us but the lowest cost.

Monetary Value

For example, if we graduate from college and suddenly find ourselves in the job market, there are choices to be made. Let's say that two jobs become available to us. We can either work for Company A or Company B. The job with Company A promises to pay us $20 an hour, while Company B offers to pay us only $10. Based on this information alone, of course most people would choose Company A.

Why? Because Company A is paying a higher salary. But when you look at this kind of a choice in only dollar terms, you're only seeing it from the perspective of the benefits. Let's take that same example, but now we discover that the job for Company A requires a fancy dress suit that will cost you $1,500. You realize that the job with the higher salary may not be worth it to you. Now you're starting to think economically. You're thinking economically when you look at the value of a choice through the eyes of its benefits and costs.

Whatever we choose, the opportunity cost is the value of the choice we could have had. The opportunity cost of working for Company A is the value of what we gave up to take the job. We gave up the value of working for Company B, so that is the opportunity cost of choosing to work for Company A. In this example, we focused more on the monetary costs. The challenge is, most people get stuck evaluating choices only in monetary terms, but there's more to the story.

Law of DiminishingThe law of diminishing marginal returns is a law of economics that states an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point.

For example, a factory employs workers to manufacture its product. As long as all other factors of production stay the same, at one point, each supplementary worker generates less output than the worker before him. Thus, each worker who follows provides smaller and smaller returns. If the factory continues to add new workers, it eventually becomes so cramped that additional workers hinder the efficiency of other employees, thereby decreasing the factory’s production.

BREAKING DOWN 'Law of Diminishing Marginal Returns'

The law of diminishing marginal returns goes by a number of different names, including law of diminishing returns, principle of diminishing marginal productivity and law of variable proportions. This law affirms that the addition of a larger amount of one factor of production, while all others remain constant, identified by the Latin term “ceteris paribus,” inevitably yields decreased per-unit incremental returns. The law does not imply the addition of the factor decreases total production, otherwise known as negative returns; however, this commonly happens.

Origins

The idea of diminishing returns has ties back to some of the world’s earliest economists including Jacques Turgot, Johann Heinrich von Thunen, Thomas Robert Malthus, David Ricardo and James Steuart.

The first recorded expression of diminishing returns came from Turgot sometime in the mid-1700s. Classical economists, such as Ricardo and Malthus, attribute successive diminishment of output to a decrease in quality of input. Ricardo contributed to the development of the law, referring to it as the "intensive margin of cultivation." He was the first to demonstrate how additional labor and capital to a fixed piece of land would successively generate smaller output increases. Malthus introduced the idea during the construction of his population theory. This theory argues that population grows geometrically while food production increases arithmetically, resulting in a population outgrowing its food supply. Malthus’ ideas about limited food production stem from diminishing returns.

Neoclassical economists take the position that each “unit” of labor is exactly the same, and diminishing returns are caused by a disruption of the entire production process as extra units of labor are added to a set amount of capital.

Production Theory

The law of diminishing returns is not only a fundamental principle of economics but also plays a starring role in production theory. Production theory is the study of the economic process of converting inputs into outputs.

Unit-2

Theory of ProductionProduction theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that are suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, construction, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

Production is a process, and as such it occurs through time and space. Because it is a flow concept, production is measured as a “rate of output per period of time”. There are three aspects to production processes:

the quantity of the good or service produced, the form of the good or service created, the temporal and spatial distribution of the good or service produced.

A production process can be defined as any activity that increases the similarity between the pattern of demand for goods and services, and the quantity, form, shape, size, length and distribution of these goods and services available to the market place.

Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (the output). It is the act of creating output, a good or service which has value and contributes to the utility of individuals.

Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of commodities and increasing incomes from growing and more efficient market production.

The most important forms of production are

market production public production household production

In order to understand the origin of the economic well-being we must understand these three production processes. All of them produce commodities which have value and contribute to well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving the competitiveness of products means often to the producer lower product prices and therefore losses in incomes which are to compensated with the growth of sales volume.

Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only one production form which creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role in creating well-being, i.e. the role of producing developing commodities and the role to creating income. Because of this double role market production is the “primus motor” of economic well-being and therefore here under review.

Factors of ProductionIt is an economic term that describes the inputs that are used in the production of goods or services in order to make an economic profit. The factors of production include land, labor, capital and

entrepreneurship. These production factors are also known as management, machines, materials and labor, and knowledge has recently been talked about as a potential new factor of production.

Breaking Down Factors of ProductionFactors of production include any resource needed for the creation of a good or service. At the core, land, labor, capital and entrepreneurship encompass all of the inputs needed to produce a good or service. Land represents all natural resources, such as timber and gold, used in the production of a good. Labor includes all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur. The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business. Capital is made up of all of the tools and machinery used to produce a good or service.

Scale of Production"Scale of production is set by the size of plant, the number of plants installed and the technique of production adopted by the producer".

Classifications/Types:

The scale of production is classified as under:

(i) Small Scale Production.

(ii) Large Scale Production.

(iii) Optimum Scale of Production.

(i) Small Scale Production: If a firm produces goods with small sized plants, the scale of production is said to be small scale production. Small scale of production is associated with low capital output and capital labor ratios. In small scale of production, the economies of scale do not occur to the firm.

(ii) Large Scale of Production: If a firm uses more capital and larger quantities of other factors, it is said to be operating on large scale production. Large scale production enjoys both internal and external economies of scale.

(iii) Optimum Scale of Production. The optimum scale of production refers to that size of production which is accompanied by maximum net economics of scale; it is a scale at which the cost of production per unit is the lowest.

Internal and External Economics Internal economies of scale simply benefit a single business as it grows (i.e. its average cost of

production starts to fall).

External economies of scale, however, benefit all the businesses in a particular industry (i.e. the average cost of production will fall for all the businesses in a particular industry).

Internal economies of scale fall into four main categories:

Technical. This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than using labor, since the machinery can be used 24 hours a day, with no breaks and with a constant level of output per hour.

Purchasing. Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials, and therefore secure their supplies at a far lower cost per unit than a smaller business.

Financial. Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business than to a smaller business, since the larger business represents less of a risk because it is more financially secure.

Managerial. Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. These managers can therefore devote all their time to specialising in one particular field (resulting in higher levels of efficiency and hopefully falling average costs). Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot specialize in a single area of the business.

External economies of scale

External economies of scale fall into three main categories:

Labour. A large pool of available labour in a particular area of the country which has been trained at a local college, or even at a rival business, will possess specialised skills which will be useful to the whole industry, rather than simply to just one business.

Joint ventures. Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of developing a new product or manufacturing process.

Support services. A wide range of commercial and support services often cluster together in a certain area near a number of rival businesses (e.g. waste disposal, cleaning, component suppliers, distribution, etc). Clearly this benefits all the businesses in the area, rather than just one of them.

However, it is also possible that as a business grows in size and produces more units of output, then it will actually experience rising average costs of production (i.e. on average, each unit of output costs more to produce).

Division of LabourThe division of labour is the separation of tasks in any economic system so that participants may specialize. Individuals, organizations, and nations are endowed with or acquire specialized capabilities and either form combinations or trade to take advantage of the capabilities of others in addition to their own. Specialized capabilities may include equipment or natural resources in addition to skills and training and complex combinations of such assets are often important, as when multiple items of specialized equipment and skilled operators are used to produce a single product. The division of labour is the motive for trade and the source of economic interdependence.

Because of the large amount of labour saved by giving workers specialized tasks in Industrial Revolution-era factories, some classical economists as well as some mechanical engineers such as Charles Babbage were proponents of division of labour. Also, having workers perform single or limited tasks eliminated the long training period required to train craftsmen, who were replaced with lesser paid but more productive unskilled workers. Historically, an increasing division of labour is associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialised processes. The concept and implementation of division of labour has been observed in ancientSumerian (Mesopotamian) culture, where assignment of jobs in some cities coincided with an increase in trade and economic interdependence. In addition to trade and economic interdependence, division of labour generally increases both producer and individual worker productivity.

In contrast to division of labour, division of work refers to the division of a large task, contract, or project into smaller tasks—each with a separate schedule within the overall project schedule. Division of labour, instead, refers to the allocation of tasks to individuals or organizations according to the skills and/or equipment those people or organizations possess. Often division of labour and division of work are both part of the economic activity within an industrial nation or organization.

Theory of DemandDemand theory is a theory relating to the relationship between consumer demand for goods and services and their prices. Demand theory forms the basis for the demand curve, which relates consumer desire to the amount of goods available. As more of a good or service is available, demand drops and therefore so does the equilibrium price.

BREAKING DOWN 'Demand Theory'

Demand theory is one of the core theories of microeconomics. It aims to answer basic questions about how badly people want things, and how demand is impacted by income levels and satisfaction (utility). Based on the perceived utility of goods and services by consumers, companies adjust the supply available and the prices charged.

Market Mechanism

Imperfection of competitionImperfect competition is the general term for competitive markets that do not match the criteria of perfect competition. They are competitive, but they are imperfect. Market structures with no competition--monopoly and monopsony--are excluded.

CompetitionCompetition comes in two basic varieties, both of which are found in imperfect competition--competition among the few and competition among the many.

Competition among The Few: This form of competition occurs with only a handful of participants. Each participant usually knows the other competitors quite well. Many markets operate with competition among the few. In such markets, one seller can gain a competitive advantage by offering a product that is just a little better than other sellers--not the best product, only a little better product. Such competition seldom leads to an efficient use of resources.

Competition among The Many: This form of competition occurs with hundreds, thousands, or even millions of participants. Each participant is lost among the masses. In this case, the only way for a seller to gain a competitive advantage is to produce the best possible product. Competition among the many brings out the best, that is, the most efficient use of resources.

Theory of income, employment and moneyIn the Keynesian thesis, employment is based on effective demand. Effective demand results in productivity or output. Productivity generates earnings or income. Earnings offer employment. Since Keynes believes all these four volumes namely, Effective demand (ED), Productivity or Output (Q), Earnings (Y) and Employment (N) parities each other, he considers employment as a function of earnings.

Effective demand is ascertained by two aspects, the aggregate supply function and the aggregate demand function. The aggregate supply function is based on physical or technical situations of manufacturing which does not vary in the short term. Since Keynes believes the aggregate supply function to be stable, he contemplates his entire concentration upon the aggregate demand function to fight gloominess and redundancy. Thus employment is based on aggregate demand which in turn is ascertained by consumption demand and investment demand.

Supply and Demand -The Market Mechanism.pdf

According to Keynes, employment can be hiked by enhancing consumption and or investment. Consumption is based on income C(Y) and when income hikes, consumption also hikes but not as much as earnings. In other words, as income enhances savings augments. Consumption can be enhanced by hiking the inclination to consume in order to enhance earnings and employment. But the inclination to consume is based on the attitude of the people, their choices, behaviour, requirements and the social structure which decide the distribution of earnings.

All these elements remain constant during the short run. Hence, the propensity to consume is stable. Employment thus depends on investment and it varies in the same direction as the volume of investment. Investment in turn, depends on the rate of interest and the marginal efficiency of capital MEC. Investment can be augmented by a drop in the rate of interest and or a rise in the MEC. The MEC is based on the supply price of capital assets and their prospective yield.

It can be augmented when the supply price of capital assets is stable in the short run; it is difficult to lower it. The next determinant of MEC is the potential yield of capital assets which is based on the prospect of yields on the part of businessmen. It is again a psychological aspect which cannot be depended upon to enhance the MEC to hike investment. Therefore, there is little scope for augmenting investment by raising the MEC.

The other determinant of investment is the cost of interest. Investment and employment can be augmented by reducing the cost of rate. The rate of interest is determined by the demand for money and supply of money. On the demand side is the liquidity preference (LP) agenda. The greater the liquidity preference the greater is the rate of interest that will have to be paid to cash holders to persuade then to part with their liquid assets and alternatively.

Public hold money (M) in cash for three motives: transactions, precautionary and speculative. The transactions and precautionary motives (M) are income elastic. Thus the amount held under these two motives (M1) is a function (L1) of the level of earnings (Y), i.e. M1 = L1 (Y). But the money held for speculative motive (M2) is a function of the cost of interest (r), i.e. M2 = L2 (r). The higher the rate of interest, the lower the demand for money and alternatively. Public hold money (M) in cash for three motives: transactions, precautionary and speculative. The transactions and precautionary motives (M) are income elastic. Therefore the interest held under these two motives (M1) is a function (L1) of the level of income (Y), i.e. M1 = L1 (Y). But the money held for speculative motive M2 is a function of the rate of interest (r), i.e. M2 = L2 (r).

The greater the rate of interest the lower the demand for money and alternatively. Since LP is based on the attitude to liquidity on the part of speculators with regard to future interest rate of interest. The other determinant of interest rate is the supply of money which is believed to be fixed by the monetary authority during the short term.

The association between interest rate, MEC and investment is represented in the diagram below, where in Panels (1) and (2) the total demand for money is evaluated along the horizontal axis from M onward. The transactions and defensive demand is presented by the L1 curve at OY1 income level, the

transactions demand is presented by OM1 and at OY2 level of earnings it is OM2. In panel (2) the L2 curve depicts the speculative demand for money as a function of the rate of interest.

When the drop in the rate of interest to R1, the speculative demand for money hikes to MM1. Panel (3) depicts investment as a function of the rate of interest and the MEC. Given the MEC when the rate of interest is R2, the level of investment is OI1. But when the rate of interest drops to R1, investment hikes to OI2.

In Keynesian study the symmetry level of employment and earnings is ascertained at the point of equality between saving and investment. Saving is a function of earnings, i.e. S = f (Y). It is defined as the excess of earnings over consumption, S = Y – C and the earnings is equal to consumption plus investment.

Therefore,

Y = C + I

Or,

Y – C = I

Hence,

Y – C = S

Therefore,

I = S

So the equilibrium level of earnings is established where saving parities investment. This is shown in Panel (4), where the horizontal axis from O toward the right depicts investment and saving and OY axis depicts earnings. S is the saving incline. The line I1E1 is the investment curve which touches the S curve at E1. Therefore, OY1 is the symmetry beyond E as in an S and I representation. This is the level of under employment symmetry, as per Keynes.

If OY2 is presumed to be the full employment level of earnings then the equality between saving and investment will take place at E2 where I2 E2 investment equals Y2 E2 saving aggregate supply (C + S) and aggregate demand (C + I). Since redundancy results from the insufficiency of aggregate demand, employment and earnings can be augmented by enhancing aggregate demand.

Presuming the tendency to consume to be constant during the short term aggregate demand can be augmented by enhancing investment. Once investment augments employment and earnings enhances. Enhanced earnings tend to a hike in the demand for consumption goods which tends to hike in a cumulative manner through the multiplier process till they reach the symmetry level.

According to Keynes the symmetry level of employment will be one of under employment symmetry for the reason that when earnings enhances consumption also enhances but by less than the augment in earnings. This mannerism of the consumption function widens the gap amidst income and consumption which ordinarily cannot fill up due to the lack of required investment. The full employment earnings level can only be established if the volume of investment is enhanced to fill the earnings – consumption gap corresponding to full employment.

Indicators of economic developmentTo assess the economic development of a country, geographers use economic indicators including:

Gross Domestic Product (GDP) is the total value of goods and services produced by a country in a year.

Gross National Product (GNP) measures the total economic output of a country, including earnings from foreign investments.

GNP per capita is a country's GNP divided by its population. (Per capita means per person.)

Economic growth measures the annual increase in GDP, GNP, GDP per capita, or GNP per capita.

Inequality of wealth is the gap in income between a country's richest and poorest people. It can be measured in many ways, (eg the proportion of a country's wealth owned by the richest 10 per cent of the population, compared with the proportion owned by the remaining 90 per cent).

Inflation measures how much the prices of goods, services and wages increase each year. High inflation (above a few percent) can be a bad thing, and suggests a government lacks control over the economy.

Unemployment is the number of people who cannot find work.

Economic structure shows the division of a country's economy between primary, secondary and tertiary industries.

Demographics study population growth and structure. It compares birth rates to death rates, life expectancy and urban and rural ratios.

ProblemsSince 1991, the Indian economy has pursued free market liberalization, greater openness in trade and increase investment in infrastructure. This helped the Indian economy to achieve a rapid rate of economic growth and economic development. However, the economy still faces various problems and challenges.

1. Inflation

Fuelled by rising wages, property prices and food prices inflation in India is an increasing problem. Inflation is currently between 8-10%. This inflation has been a problem despite periods of economic slowdown. For example in late 2013, Indian inflation reached 11%, despite growth falling to 4.8%. This suggests that inflation is not just due to excess demand, but is also related to cost push inflationary factors. For example, supply constraints in agriculture have caused rising food prices. This causes inflation and is also a major factor reducing living standards of the poor who are sensitive to food prices. The Central Bank of India have made reducing inflation a top priority and have been willing to raise interest rates, but cost push inflation is more difficult to solve and it may cause a fall in growth as they try to reduce inflation.

2. Poor educational standards

Although India has benefited from a high % of English speakers. (important for call centre industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas and amongst women. Over 50% of Indian women are illiterate. This limits economic development and a more skilled workforce.

3. Poor Infrastructure

Many Indians lack basic amenities lack access to running water. Indian public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it reaches the market; this is one example of the supply constraints and inefficiency’s facing the Indian economy.

4. Balance of Payments deterioration.

Although India has built up large amounts of foreign currency reserves the high rates of economic growth have been at the cost of a persistent current account deficit. In late 2012, the current account reached a peak of 6% of GDP. Since then there has been an improvement in the current account. But,

the Indian economy has seen imports growth faster than exports. This means India needs to attract capital flows to finance the deficit. Also, the large deficit caused the depreciation in the Rupee between 2012 and 2014. Whilst the deficit remains, there is always the fear of a further devaluation in the Rupee. There is a need to rebalance the economy and improve competitiveness of exports.

5. High levels of private debt

Buoyed by a property boom the amount of lending in India has grown by 30% in the past year. However there are concerns about the risk of such loans. If they are dependent on rising property prices it could be problematic. Furthermore if inflation increases further it may force the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted facing rising interest payments and potentially reducing consumer spending in the future

6. Inequality has risen rather than decreased.

It is hoped that economic growth would help drag the Indian poor above the poverty line. However so far economic growth has been highly uneven benefiting the skilled and wealthy disproportionately. Many of India’s rural poor are yet to receive any tangible benefit from the India’s economic growth. More than 78 million homes do not have electricity. 33% (268million) of the population live on less than $1 per day. Furthermore with the spread of television in Indian villages the poor are increasingly aware of the disparity between rich and poor.

7. Large Budget Deficit

India has one of the largest budget deficits in the developing world. Excluding subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little scope for increasing investment in public services like health and education.

8. Rigid labour Laws

As an example Firms employing more than 100 people cannot fire workers without government permission. The effect of this is to discourage firms from expanding to over 100 people. It also discourages foreign investment. Trades Unions have an important political power base and governments often shy away from tackling potentially politically sensitive labour laws.

9. Inefficient agriculture

Agriculture produces 17.4% of economic output but, over 51% of the work force are employed in agriculture. This is the most inefficient sector of the economy and reform has proved slow.

10. Slowdown in growth

2013/14 has seen a slowdown in the rate of economic growth to 4-5%. Real GDP per capita growth is even lower. This is a cause for concern as India needs a high growth rate to see rising living standards, lower unemployment and encouraging investment. India has fallen behind China, which is a comparable developing economy

Characteristics of underdeveloped countriesThere are various definitions which have been offered by the different writers but these are not satisfactory. Any how we describe here the basic features of developing economy which are commonly found in the developing countries.These are following:

1. Poverty :-In the less developed countries the standard of living is very poor. Basic needs like food, clothing, housing, education and medical facilities are not available. People are leading miserable life.

2. Dependence on Agriculture :-Most of the less developed countries like India and Pakistan depend upon agriculture sector. The majority of population is engaged in agriculture. But unfortunately agriculture is hopelessly in a backward stage in the developing countries, the average land holding and per acre yield is low.

3. Shortage of Natural Resources :-There is a shortage of natural resources like land, forests, rivers, and minerals in the poor countries, on the other hand, these are not utilized properly to achieve prosperity. So national product remains very low in these countries.

4. Population Pressure :-In the under developed countries the size of population is greater than the size of natural resources. The rate of population growth is very high while the rate of economic development is very low. So high birth rate is the main obstacle in the way of economic development.

5. Lack of Capital :-It is the main cause of poverty in the under developed countries. These countries can not establish the industries and can not utilize their resources due to the non availability of capital.

6. Unemployment :-In the less developed countries rate of unemployment is very high. Disguised unemployment is also found in these countries. It is an obstacle in the way of economic development and in India and Pakistan it is increasing with urbanization and spread of education.

7. Lack of Technology :-In the developing countries like India and Pakistan there is a use of low level technology in various sectors. So the cost of production is very high and rate of production is very low.

8. Unequal Distribution of Wealth :-It is an important feature of under developed economy. In these countries society is divided into two classes rich and poor. The rich class enjoys all the facilities of life while poor class suffers poverty and

hunger.

9. Political Instability :-In the under developed countries political condition is also not favorable. For example in Pakistan the rate of development remained low due to political crises. Uncertain conditions creates many problems for the investors.

10. Deficit Balance of Payment :-The less developed countries are producing and exporting the primary commodities while these are importing the finished and capital goods. In the international market the prices of raw material are very low while the prices of capital goods are high. So balance of payment remains unfavorable , due to this reason.

11. Limited Home Market :-In the less developed countries like Pakistan, the purchasing power of the people is low. Producer is unable to increase the supply of various goods due to low demand. So limited market is also an obstacle in the way of economic development.

12. Burden of Debt :-It is an important characteristic of the under developed countries. All these countries receive foreign aid of their development program. For example Pakistan spends a huge amount of foreign exchange for the repayment of debt interest every year. It is an obstacle in the way of economic development.

13. International Forces :-The rate of economic growth in the third world has also been adversely affected by the advanced countries economic policies. The advanced countries are not ready to transfer technology in these countries.

14. Inflation :-The rate of inflation is high in all the less developing countries which affects the economic performance. In these countries level of prices is rising which is creating the problems for producer and consumer.

15. Imperfection of Market :-In the under developed countries prices of commodities vary from shop to shop and place to place. Labour and capital are less mobile in search of higher returns. So imperfection of market is an obstacle in the way of development.

16. Poor Performance of Industrial Sector :-In the under developed countries there is hold of few families on the industrial sector. The small scale industry has also been ignored. There is also a shortage of entrepreneur.

17. Low Per Capita Income:-

In the under developed countries the size of national income is low but the size of population is very high. So per capita income remains low which is the main obstacle in the way of economic development.

18. Vicious Circle of Poverty :-A poor country is trapped in its own poverty. In the less developed countries production, per capita income, saving and investment is low. So low investment leads to low production.

19. Frequent Changes in Fiscal Policy :-The frequent changes are made many times in the same year in these countries which affect the rate of investment adversely.

20. Unproductive Expenditure :-In the under developed countries a huge capital is used for unproductive purpose which increases the rate of inflation and affects the rate of economic development, adversely.

Balanced Growth and Industrialization

IndustrializationIndustrialization is the process by which an economy is transformed from primarily agricultural to one based on the manufacturing of goods. Individual manual labor is often replaced by mechanized mass production, and craftsmen are replaced by assembly lines. Characteristics of industrialization include economic growth, more efficient division of labor, and the use of technological innovation to solve problems as opposed to dependency on conditions outside human control.

BREAKING DOWN 'Industrialization'Industrialization is most commonly associated with the European Industrial Revolution of the late 18th and early 19th centuries. The onset of the second World War also led to a great deal of industrialization, which resulted in the growth and development of large urban centers and suburbs. Industrialization is an outgrowth of capitalism, and its effects on society are still undetermined to some extent; however, it has resulted in a lower birthrate and a higher average income.

Industrial RevolutionThe Industrial Revolution traces its roots to the late 19th century in Britain. Prior to the proliferation of industrial manufacturing facilities, fabrication and processing were generally carried out by hand in people's homes. The steam engine was a key invention, as it allowed for many different types of machinery. Growth of the metals and textiles industries allowed for the mass production of basic

balancedgrowth.pdf

personal and commercial goods. As manufacturing activities grew, transportation, finance and communications industries expanded to support the new productive capacities.

Population ProblemsOver-population has been major problem in India. The efforts to remove the curse of population problem have only been partially effective. In consequence the rate of population increase has gone down, but the balance between the optimum population growth and a healthy nation is far to be achieved.

Ignorance, illiteracy, unhygienic living and lack of proper recreation have remained the caused of population problem in India.

Both men and women should realize the dangers of over-population. If we make a random survey we shall find that still there are women as well as men who are not able to grasp why they should have less children. The television instructs through advertisements and tableaus about the merit of a small, manageable family. But still there are families that suffer from die-hard superstition. They consider adoption as an unholy activity. Again the backward tradition of professional ancestry is also firmly rooted in a large cross-section of our Indian society. A blacksmith, a carpenter, a mason or a tailor promptly trains his children to pick up the trade of their father. Naturally, they have a psychological make-up that the more sons they have the more they can employ. Thus a laborer produces more as that mean more income.

People, themselves must realize the merits of a small family. They should be encouraged to adopt preventive checks – checks that control the birth rate.

Another factor that encourages the growth-rate is religion. Some communities consider any mandate or statutory method of prohibition to be sacrilegious. India being a secular state, she cannot exercise any check or restraint on religious grounds.

Another great factor that contributes to the population growth is the cursed voting system. It is based on number. On the other hand the voting pattern, especially in northern India, is based on caste. Naturally, the caste that outstrips the other castes in sheer number of votes enjoys a comparatively higher leverage in the domain of powers.

Early marriages not only leads to high-population and thwart the progress of our young population, they entail an enormous amount of trouble to young mothers. These young girls, in most cases, are not healthy enough to bear the burden of childbearing.

The importance of a higher standard of living should be inculcated in the mind of the mass of the people. The desire for better living conditions automatically works as a deterrent to heavy increases in population. It restricts the population explosion and thus tends to keep high the efficiency of our existing population.

Education at the grass root, more equitable distribution of the natural wealth, restrictions on religious fanatics that would damage the country’s economy by unnecessary births, and lastly, weight age to voting not by number but by some other method – these alone can bring about a kind of effective control over the population problem.

Technological Change and Innovation long-term economic plans