1 - Economics - IBBI

Consumption
Consumption, in its broadest sense, means the use of economic

goods and personal services for satisfying human wants. It is also
defined as the destruction of utilities contained in the goods. The
destruction of utilities may be instantaneous as in the case of
perishable good or gradual as in the case of durable goods like
house, furniture etc.
Consumption theories deal with the satisfaction of human wants.
Anything that we desire is a want. The process of satisfaction of
these wants is called consumption.
1 Necessaries
 Necessaries for existence or life (food)
 Necessaries for efficiency (nutritious food, cycle, etc.)
Wants  Conventional necessaries (coffee, cigarette, etc.
2 Comforts
3 Luxuries
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Indifference Curve
An indifference curve is a curve which Combination Food Cloth

A 1 12
represents all those combinations of two B 2 6
C 3 4
goods which give same satisfaction to the D 4 3
consumer.
Since all the combinations on an indi-
fference curve give equal satisfaction to
the consumer, the consumer is indifferent
among them.
In other words, since all the combinations provide the same level of
satisfaction the consumer prefers them equally and does not mind
which combination he gets.

Properties of Indifference Curves
1. Indifference curves slope downward to the

right
2. Indifference curves are always convex
(curved) to the origin
3. Indifference curves can never intersect
each other
4. A higher indifference curve represents a higher level of
satisfaction than the lower indifference curve
5. Indifference curve will not touch either axes

Budget Line
A budget line shows all those combinations of

two goods which the consumer can buy
spending his given money income on the two
goods at their given prices.
All those combinations which are within the
reach of the consumer (assuming that he spends all his money
income) will lie on the budget line.

Consumer’s Equilibrium
A consumer is in equilibrium when he is

deriving maximum possible satisfaction from
the goods and therefore is in no position to
rearrange his purchases of goods.
Assume that;
 Has a fixed money income which he has to spend wholly on goods
X and Y;
 Prices of goods X and Y are given and are fixed;
 All goods are homogeneous and divisible;
 The consumer acts ‘rationally’ and maximizes his satisfaction

Consumer’s Surplus
Consumer’s surplus is excess of the price which

a consumer would be willing to pay rather than
go without a thing over that which he actually
does pay.
Thus consumer’s surplus = what a consumer is
ready to pay - what he actually pays

Law of Demand
The greater the amount to be sold, the smaller must be the price at
which it is offered in order that it may find purchasers or in other
words the amount demanded increases with a fall in price and
diminishes with a rise in price.
Demand schedule of an individual consumer
Commodity Price Quantity

Demaned
A 5 10
B 4 15
C 3 20
D 2 35
E 1 60
Market Demand Schedule
Price P Q R Market
Demand
5 10 8 12 30
4 15 12 18 45
3 20 17 23 60
2 35 25 40 100
1 60 35 45 140
Determinant of Demand
1. Price of the commodity

2. Price of related commodities
3. Income of the consumer
4. Tastes and preferences of consumers
5. Consumers’ Expectations
6. Other factors: Size of population, Composition of population,
the level of National Income and its Distribution, Consumer-
credit facility and interest rates, etc.
Assumption
1. Income of the people remaining unchanged;

2. Taste, preference and habits of consumers unchanged;
3. Prices of related goods i.e., substitute and complementary
goods remaining unchanged;
4. There is no expectation of future change in price of the
commodity; and
5. The commodity in question is not consumed for its prestige
value.
Exceptions to the Law of Demand
1. Conspicuous (obvious/eye-catching) Goods: Articles of

prestige value or snob appeal or articles of conspicuous
consumption are demanded only by the rich people.
2. Giffen Goods: Goods which are inferior, with no close
substitutes easily available and which occupy a substantial
place in consumer’s budget are called ‘Giffen goods’.
Examples of Giffen goods are coarse grains like bajra, low
quality rice and wheat etc.
All Giffen goods are inferior goods; but all inferior goods are
not Giffen goods.
Inferior goods ought to have a close substitute.
3. Conspicuous Necessities:
Example, in spite of the fact that the prices of television sets,
refrigerators, coolers, cooking gas etc. have been continuously
rising, their demand does not show any tendency to fall.
4. Future expectations about prices:
Example, when there is wide-spread drought; people expect
that prices of food grains would rise in future. They demand
greater quantities of food grains as their price rise.
5. Demand for necessaries
The law of demand does not apply much in the case of
necessaries of life. Irrespective of price changes, people have to
consume the minimum quantities of necessary commodities.
Example: Food, Power, Water, Gas, etc.
6. Speculative Goods:
Example: Market for stocks and shares
Elasticity of Demand
Elasticity of demand is defined as the responsiveness of the quantity

demanded of a good to changes in one of the variables on which
demand depends.
It is the percentage change in quantity demanded divided by the
percentage change in one of the variables on which demand depends.
1. The price of radio from Rs. 500 to Rs. 400, the quantity
demanded increases from 100 radios to 150 radios.
2. The price of wheat from Rs. 20 per kilogram to Rs. 18 per
kilogram, the quantity demanded increases from 500 kg to 520
kg.
3. The price of salt from Rs. 9 per kilogram to Rs. 7.50, the
quantity demanded increases from 1000 kilogram to 1005
kilograms
Cross Elasticity of Demand
Substitute Products
The cross demand curve slopes upwards (i.e.
positively) showing that more quantities of a
commodity, will be demanded whenever
there is a rise in the price of a substitute
commodity.
Complementary Goods
A change in the price of a good will have
an opposite reaction on the demand for
the other commodity which is closely
related or complementary.
Type of Market
Perfect Market
It is characterized by many sellers selling identical products to many
buyers.
Features: Large number of buyers and sellers, Homogenous goods,
Free entry and free exit, Profit maximization, No Government
regulation, Perfect mobility of factors, Perfect knowledge
Monopolistic Market
It differs in only one respect, namely, there are many sellers offering
differentiated products to many buyers.
Features: Large number of sellers and buyers, Product Differentiation:
Real Differentiation, Artificial Differentiation, Non-price competition,
Selling Cost, Free entry and free exit, Independent price policy
Monopoly Market
It is a situation where there is a single seller producing for many
buyers. Its product is necessarily extremely differentiated since
there are no competing sellers producing products which are close
substitutes.
Features: Single seller and large number of buyers, No close substitute,
Restriction on the entry of new firms, Price maker, Possibility of Price
Discrimination
Oligopoly Market
There are a few sellers selling competing products to many buyers.
Features: Few Sellers, Interdependence, Nature of Product, Barrier to
Entry
Factor of Production
Factor of Production
Land Labour Capital Entrepreneur Other

Land
The term ‘land’ is used in a special sense in Economics. It does not

mean soil or earth’s surface alone, but refers to all free gifts of
nature which would include besides land in common parlance,
natural resources, fertility of soil, water, air, light, heat natural
vegetation, etc.
 Land is a free gift of nature
 Supply of land is fixed
 Land is permanent and has indestructible powers
 Land is a passive factor
 Land is immobile
 Land has multiple uses
 Land is heterogeneous
Lobour (Use of physical exertion, skill and intellect)
The term ‘labour’, means any mental or physical exertion directed

to produce goods or services. All human efforts of body or of mind
undergone partly or wholly with a view to secure an income apart
from the pleasure derived directly from the work is termed as
labour.
 Human Effort
 Labour is perishable
 Labour is an active factor
 Labour is inseparable from the labourer
 Labour power differs from labourer to labourer
 All labour may not be productive
 Labour has poor bargaining power
 Labour is mobile
 There is no rapid adjustment of supply of labour to the demand
for it
 Choice between hours of labour and hours of leisure
Capital
 Capital has been rightly defined as ‘produced means of

production’ or ‘man-made instruments of production’.
 In other words, capital refers to all man made goods that are
used for further production of wealth.
 This definition distinguishes capital from both land and labour
because both land and labour are not produced factors.
 They are primary or original factors of production, but capital
is not a primary or original factor; it is a produced factor of
production.
 It has been produced by man by working with nature.
 Machine tools and instruments, factories, dams, canals,
transport equipment etc., are some of the examples of capital.
 All of them are produced by man to help in the production of
further goods.
Types of Capital
 Fixed capital is that which exists in a durable shape and

renders a series of services over a period of time. For example
tools, machines, etc.
 Circulating capital is another form of capital which performs its
function in production in a single use and is not available for
further use. For example, seeds, fuel, raw materials, etc.
 Real capital refers to physical goods such as building, plant,
machines, etc.
 Human capital refers to human skill and ability. This is called
human capital because a good deal of investment has gone into
creation of these abilities in humans.
 Tangible capital can be perceived by senses whereas intangible
capital is in the form of certain rights and benefits which
cannot be perceived by senses. For example, patents, goodwill,
patent rights, etc.
 Individual capital is personal property owned by an individual
or a group of individuals.
 Social Capital is what belongs to the society as a whole in the
form of roads, bridges, etc.
Entrepreneur
Functions of Entrepreneur
 Initiating business enterprise and resource co-ordination
 Risk bearing or uncertainty bearing
 Innovations
Objective of Entrepreneur
 Organic objectives
 Economic objectives
 Social objectives
 Human objectives
 National objectives
Theory of Rent
1. Ricardian Theory of Rent
Rent is that portion of the produce of the each which is paid to the
landlord for the use of the original and indestructible power of the
soil. Rent is the payment for the use of only land and is different
from contractual rent which includes the returns on capital
investment made by the landlord in the form of wells, irrigation
structures etc. besides the payment for the use of land. In
economics, rent is the ‘the reward paid for land’.
Example
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As we study the natural resources of Jawahar Figure 1
Island, we find the land to be of four grades.
For convenience, we call them A, B, C and D in the order of their
fertility. We shall settle down in Tarapur in ‘A’ part of the island
(See Figure).
This is the most fertile land and gives us the largest produce per
acre. Enough land is available of this quality to satisfy all our needs
at the moment. Therefore, it is u free good and will not command
any price, i.e., rent. But as the time passes, the mouths to be fed
increase in number. This may be due to more immigrants, who
have heard of our good luck, or due to an increase in population.
Rent in Extensive Cultivation
A time comes when all land of the best quality has been taken up.
But some demand still remains unsatisfied. We have then to resort
(option) to ‘B’ quality land. It is inferior to ‘A’ and yields only 30
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quintals of wheat per plot as compared with 35 quintals of ‘A’ with
the same expenditure of labour and capital. Naturally plots in
‘A’ now acquire a greater value as compared with ‘B’. A tenant will
be prepared to pay up to 5 quintals of wheat in order to get a plot
in the ‘A’ zone, or take ‘B’ quality land free of charge.
This difference, paid to the owner (if the cultivator is a tenant)
or kept to himself (if he is the owner), is economic rent. In the
first case (i.e., when the cultivator is a tenant) it is contractual
rent; and in the latter (i.e., when the cultivator is the owner) it is
known as implicit rent. ‘B’ plots do not pay any rent. To go a step
further, we see that after all land of ‘B’ quality has also been taken
up, we begin cultivating ‘C’ plots. Now even ‘B’ quality land comes
to have differential surplus over ‘C’. Rent of ‘A’ increases still
further.
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When the demand increases still more, we are pushed to the use of
the worst land, which is of ‘D’ quality yielding 25 quintals per plot.
‘D’ quality land is now no-rent land or marginal land whiles ‘A’, ‘B’,
‘C all earn rent. This growing demand shows itself in rising prices.
They raise high enough to cover the expenses of cultivation on the
lowest grade land, i.e., ‘D’ quality.
Let us suppose that one unit of productive effort is equal to Rs.
3,500. When only A’ quality land, where a plot produces 35
quintals is under the plough, the price of wheat will be Rs. 100 per
quintal. When owing to increased demand, the price of wheat rises
to Rs. 110 then and only then will ‘B’ quality land be cultivated
which produces 30 quintals of wheat. And when that happens ‘A’
land will have a surplus of 5 quintals X Rs. 110 = Rs. 550 per plot.
This becomes rent.
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The difference, in other words, between the return from a plot of
land above the margin and the marginal plot (i.e., the one just
paying its way) is called rent or economic rent.
Rent in Intensive Cultivation
The settlers in Jawahar Island realize that there is another way too
of increasing the produce. Why not apply more labour and capital
to superior lands, and resort to intensive cultivation? This is done
but it is seen that the law of diminishing returns sets in. Look at
Figure again. Now consider that A, B, C and D are the different
doses (amount) of labour and capital (instead of different grades
of land) applied to the same grade of land. The first dose yields 35
quintals.
The second unit of labour and capital used on ‘A’ plot will almost
definitely give us less than the first. We suppose it gives us only 30
quintals. So we have the choice of either taking new plots in ‘B’
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land, or cultivating ‘A’ lands more intensively. If we adopt the
latter course, the first unit of labour and capital will be yielding a
surplus over the second unit—which unit produces just enough to
cover the expenses. This surplus, again, is rent. As more and more
units of labour and capital are applied, the return per unit will go
on falling.
Rent Due to Differential Advantages:
With the passage of time, however, a new factor emerges. A
locality in the ‘A’ zone - marked Tarapur in Figure develops into a
market and Azadnagar in ‘B’ into a railway junction, and produce
has to be sent to those two flourishing localities for their final
disposal. Now the plots situated in the neighborhood of Tarapur
and Azadnagar come to have an advantage. They have either no
transport charges or much smaller charges than in the case of
lands in ‘C’ and D’ areas.
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Transport charges are a part of the cost of production, because
production is complete only when the commodity reaches the
hands of consumers. The better-situated plots, which have to bear
less transport charges, will enjoy a surplus over the distant ones.
This surplus will be another cause of rent. Hence, economic rent
is a surplus which arises on account of natural differential
advantages, whether of fertility or of situation, possessed by
the land in question over the marginal land.
No-rent or Marginal Land
The cases described above show that rent is
earned due to a certain paces being better
suited for cultivation or being better situated
in regard to markets. But better than what?
Of course better than some other plot of land.
This ‘some other’ plot is marginal land which Figure 2
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just covers its expenses and no more. This land is called ‘no-rent
land’. All rents are measured from it upwards.
In figure ‘D’ quality and land which produces 20 quintals per plot
is the marginal land. Here the return and cost are equal. It is just
worthwhile cultivating this land, since it just covers expenses of
cultivation and yields no surplus to the cultivator.
2. Modern Theory of Rent
According to the modern theory of rent, the rent of a factor, from
the point of view of any industry, is the difference between its
actual earnings and transfer earnings.
Rent = Present Earnings minus Transfer Earnings
Transfer earning refers to the amount of money, which a factor of
production could earn in its next best-paid use (opportunity cost).
Page 8 of 12
Suppose, a hectare of land under cotton cultivation yields an
income of Rs. 15,000. If the same area is put into its next best use,
namely, paddy cultivation, it earns an income of Rs.12,000, then it
is its transfer earning (opportunity cost). Then, the rent of that
hectare of land is Rs. 3,000 (Rs. 15,000 – Rs. 12,000).
This concept of rent is applicable not merely to land but also to all
factors of production i.e. labour, capital and entrepreneur’s
earnings too. They can all earn economic rent in the sense that the
modern economists use the term ‘rent’.
How Rent arises
Rent in the sense of surplus arises when the supply of land, or for
that matter that any other factor service, is less than perfectly
elastic.
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From the point of elasticity of supply, there are three
possibilities:
( 1 ) The supply may be perfectly elastic, which can be shown as
a horizontal straight line, as in Figure 3.
( 2 ) The supply of land may be absolutely inelastic. This is
shown in Figure 4 by a vertical straight line.
( 3 ) Here is the situation in between these two extremes, i.e., it
is elastic, but not perfectly elastic. This is shown in Figure 5.
Figure 3 Figure 4 Figure 5
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If the supply is absolutely inelastic (Fig. 4), the transfer earning is
zero, because land cannot be transferred to any use; the supply of
land is fixed, and it has only one use, whether it is used or not. In
this case, the entire income from land is surplus, and hence rent.
When the supply of land is perfectly elastic, there will be no
surplus and the actual earnings and transfer earnings will be
equal. For example, for an individual firm or farmer, the supply of
land is perfectly elastic.
Suppose the supply is elastic but not perfectly elastic, then a part
of income from land is rent (in the sense of surplus over transfer
earnings), and a part is not rent.
3. Quasi Rent
Quasi rent is the earning of capital equipments such as
machineries, buildings etc., which are inelastic in supply, in short
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run. According to Marshall, the quasi rent is only a temporary
surplus, which is enjoyed by the owner of the capital equipments
in the short run. This is due to the increase in its demand and it
will disappear in the long run, if supply of the capital equipment is
increased in response to the increased demand. The quasi rent is
also defined as the excess of total revenue earned in the short run
over and above the total variable costs. Thus,
Quasi Rent = Total Revenue Earned minus Total Variable
Costs
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Interest
Interest is the price paid for the use of loanable funds (capital) used in
the production process. It is the payment for the use of money for a
specified period of time and it is the reward of capital.
1. Pure Interest and Gross interest
Pure interest or gross interest is the payment made only for the
services of capital or for the services of money borrowed. Gross
interest includes the following items besides pure interest.
( a ) Payment for risk
The lender has to face the risk of loss of capital due to trade
risk and personal risk. Trade risk faced by the borrower
arises from the uncertainty of profit in the business and
therefore, he may not be able to repay the loan amount in
time. Personal risk is due to dishonesty of the borrower.
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( b ) Payment for inconvenience
After lending the money, the lender may urgently need the
money for some other purpose. Sometimes, the borrower
may return the money at the time when the lender may not
be able to reinvest it in any other purpose. These are some of
the inconveniences faced by the lender.
( c ) Payment for work and worry
The lender has to maintain proper accounts. He has to keep
the securities (documents, jewels, etc.) safely. Sometimes, the
lender sets legal proceedings against defaulters. All these
cause worries to the lenders. By way of compensating all
these, the lender charges some thing over and above the pure
interest and it is called gross interest.
Differences in interest rates
Page 2 of 9
In the money market, the interest on borrowed money varies due to
following reasons:
1. Interest rate is low, if the offered securities are easily
realizable (E.g. Gold). If securities are difficult to realize
quickly, the interest will be high (E.g. Land).
2. Interest for long-term loan will higher than that of short-term
loan. This is because of the fact that the lender loses his
command over his money for a long period of time in the case
of long-term loan. So he expects higher interest rate for such
loans.
3. Interest rates vary according to purpose for which loan is
obtained. Nationalized banks charge lower interest for
agricultural loans when compared to consumption loan.
Theory of Interest
( 1 ) Loanable Fund Theory of Interest,
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( 2 ) Keynes ‘Liquidity Preference Theory of Interest and
( 3 ) Modern Theory of Interest or Neo-Keynesian Theory of
Interest.
According to the modern theory, the four determinants,
namely, saving, investment, liquidity preference and the
supply of money are integrated along with income and
determine the rate of interest. In order to achieve this, the
modern theory has evolved two curves- the IS curve and LM
curve- the former shows the equilibrium in the real sector or
product market, while the latter indicates the equilibrium in
monetary sector or money market.
Page 4 of 9
IS curve indicates the various rates of
interest which equalize saving and
investment at the corresponding levels
of income. Higher the level of income,
greater is the volume of saving. Greater
the volume of saving, lower will be the
rate of interest. Thus, as the level of Figure 6
income rises, the rate of interest falls
down. Hence, the IS curve slopes downward from left to right
(Figure 6).
The LM curve shows the various rates of interest, which
equalize the demand for cash (liquidity preference) of the
people with the supply of cash at various levels of income. As
the level of income increases, the liquidity preference (or the
demand for cash) of the people increases and consequently
the interest rate also increases.
Page 5 of 9
Capital
Capital in a man-made material. Man produces capital equipments or
goods to help him in the production of other goods and services.
Capital is, therefore, defined as ‘the produced means of further
production’. The word capital is often interchangeably used for
concepts like money, wealth and land.
The definition of capital is made clearer in the following section:
A. Capital and Money
Money can be used to buy consumer goods (rice) as well as
capital goods (tractor). Money used to buy capital goods is also
called capital, while money used to buy consumer goods is not
capital.
B. Capital and Wealth
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Wealth included both consumer goods and capital goods. Hence,
all capital is wealth, but all wealth is not capital.
C. Capital and Land
Land is a free gift of nature but capital is man-made. Capital is
perishable, i.e., it can be destroyed. But land is indestructible and
permanent. Capital is mobile when compared with land. The
quantity of capital can be changed depending upon its price. But
the land area is fixed and limited in supply.
Characteristics of Capital
1. Capital is man-made (artificial);
2. It increases the productivity of resources;
3. Supply of capital is elastic. It can be produced in large quantity
when its requirement increases;
4. Capital is perishable as it can be destroyed;
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5. Capital is highly mobile
Types of Capital
A. Fixed capital and working capital
Fixed capital can be used many times in the production process.
The level of fixed capital does not vary with the level of
production in a very short period, (e.g.) farm buildings, tractors,
farm tools, etc.
Working capital or variable capital or circulating capital can be
used only once and they are not available for further use. The
level of working capital increases (decreases) with the increase
(decrease) in the level of production, (e.g.) raw cotton or lint
used to spin yarn, fertilizer used to produce paddy, etc.
B. Sunk capital and floating capital
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Sunk capital is meant only for a specific purpose, (e.g.) cane
crusher, paddy thrasher etc. They cannot be used for any other
purpose.
Floating capital can be employed for any use, (e.g.) money.
C. Social capital and private capital
Private capital is owned by individuals and the income or benefit
derived from these assets are available only to the individuals
who own them (e.g.) tractors, private factories etc.
Social capital is owned by the society as a whole and the benefits
derived from these assets are shared among the members of the
society, e.g. bridge, dam, government owned factories, etc.
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Micro Economics: Chapter - 1
Money
Definition:
Money is anything that is generally acceptable as a means of
exchange.
1 Medium of exchange;
2 With the help of money any exchange of goods and services can
take place;
3 Money is said to be the most liquid asset among all the assets of a
man;
4 It has general acceptability as a means of payment and liquid
characteristic. Keynes called this liquidity preference;
5 Generally money is created by the Central Bank or the
Government of a country;
Functions & Role of Money : Page 1 of 6

6 These are legal tender money as there is legal compulsion for

their acceptance;
7 They also called as Cash Money;
8 Another considerable flow of money is Credit Money - created by
the commercial banks by their loan transactions.
Function of Money
A. Static functions
1. Medium of Exchange
 In an exchange economy money has an intermediary
role.
 The invention of money has made the exchange system
smooth and convenient.
2. Measure of value

 Things are said to be cheap or expensive on the basis of

amount of money required for their possession.
 This makes exchange mutually profitable.
3. Standard of deferred payment

 It implies the role of money in borrowing and lending.
 Money taken as loan is usually repaid after a time gap.
 This delayed payment is done through money.
4. Store of value
 Purchasing power of money can be stored by keeping a
part for future use, called monetary savings.
 Current income can be used for current consumption as
well as future consumption by savings.

B. Dynamic Functions
 Money activated idle resources and puts them into
productive channels.
 It thus, helps in increasing output, employment and
income.
 It helps in converting savings into investment.
 Creation of new money governments of modern

economies can spend more than what they can.
Value & Forms of Money
A. Value of Money
 It means Exchange Value.
 It implies how much of goods and services can be

obtained in exchange of a unit of money.
 Value of money is inverse of price.
 When price level increases, the value of money decrease

and vice versa.
B. Forms of Money
 Cash Money
 Credit Money
Role of Money
 In Production: Money facilitates production by stimulating
savings and investment. It helps in capital formation and
mobilizing capital.
 In Distribution: It plays an important role in the field of
distribution of national income as wage, rent, interest, etc.

 In Consumption: Money enables a consumer to maximize his

satisfaction. People use the money to buy goods.
 In Exchange: Money possesses the purchasing power and
serves as a medium of exchange.
 Public Finance: Government receives revenue such as tax,
fines, etc. in the form of money.

Inflation
Inflation is a sustained increase in the general price level of
goods and services in an economy over a period of time. When the
general price level rises, each unit of money buys fewer goods and
services. Inflation reflects a reduction in the purchasing power per
unit of money.
Inflation occurs due to…
 An imbalance between demand and supply of money,
 Changes in production and distribution cost or
 Increase in taxes on products.
When economy experiences inflation, i.e. when the price level of
goods and services rises, the value of currency reduces. This means
now each unit of currency buys fewer goods and services.
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It has its worst impact on consumers. High prices of day-to-day

goods make it difficult for consumers to afford even the basic
commodities in life. This leaves them with no choice but to ask for
higher incomes. Hence the government tries to keep inflation under
control.
Contrary to its negative effects, a moderate level of inflation
characterizes a good economy. An inflation rate of 2 or 3% is
beneficial for an economy as it encourages people to buy more and
borrow more, because during times of lower inflation, the level of
interest rate also remains low. Hence the governments as well as the
central bank always strive to achieve a limited level of inflation.
There are several variations in inflation:
Deflation: When the general level of prices is falling. This is the
opposite of inflation.
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Hyperinflation: Unusually rapid inflation. In extreme cases, this can

lead to the breakdown of a nation's monetary system. One of the
most notable examples of hyperinflation occurred in Germany in
1923, when prices rose 2,500% in one month.
Stagflation: It is the combination of high unemployment and
economic stagnation with inflation. This happened in industrialized
countries during the 1970s, when a bad economy was combined
with OPEC raising oil prices. In recent years, most developed
countries have attempted to sustain an inflation rate of 2-3%.
In this type, there is fall in the output and employment levels. Due to
various pressures, the entrepreneurs have to raise price to maintain
their margin of profits. But as they only partially succeed in raising
the prices, they are faced with a situation of declining output and
Page 3 of 16
investment. Thus on one side there is a rise in the general price level
and on the other side there is a fall in the output and employment.
Recession: A period of general economic decline; typically defined
as a decline in GDP for two or more consecutive quarters. A
recession is typically accompanied by a drop in the stock market, an
increase in unemployment, and a decline in the housing market. A
recession is generally considered less severe than a depression, and
if a recession continues long enough it is often then classified as a
depression.
Depression: A depression is a severe economic catastrophe in
which real gross domestic product (GDP) falls by at least 10%. A
depression is much more severe than a recession and the effects of a
depression can last for years. It is known to cause calamities in
banking, trade and manufacturing, as well as falling prices, very
Page 4 of 16
tight credit, low investment, rising bankruptcies and high

unemployment.
Causes of inflation
A. On the Basis of cause
1. Currency inflation:
This type of inflation is caused by the printing of currency notes.
2. Credit inflation
Being profit-making institutions, commercial banks sanction
more loans and advances to the public than what the economy
needs. Such credit expansion leads to a rise in price level.
3. Deficit induced Inflation
Page 5 of 16
The budget of the government reflects a deficit when

expenditure exceeds revenue. To meet this gap, the government
may ask the central bank to print additional money. Since
pumping of additional money is required to meet the budget
deficit, any price rise may then be called the deficit-induced
inflation.
4. Cost Push Inflation
Cost-push inflation basically means that prices have been
"pushed up" or increased by increases in costs of any of the four
factors of production (labor, capital, land or entrepreneurship).
(Aggregate supply is the total volume of goods and services
produced by an economy at a given price level.)When there is a
decrease in the aggregate supply of goods and services due to an
increase in the cost of production, we have cost-push inflation.
Page 6 of 16
As a result, the increased costs are passed on to consumers,

causing a rise in the general price level (inflation).
5. Demand Pull inflation
The situation where the demand for goods and services rises
faster than the supply of goods and services. This excess demand
increases the prices of the goods and services hence creating
inflation. Can be simply said as ‘Too much money chasing too
few goods’. Some factors that cause this demand pull inflations
are excessive foreign investment, expansionary fiscal policy (e.g.
increase in government expenditure), expansionary monetary
policy ( e.g. Increase in money supply), easy access to credit,
deficit financing and others.
Demand Pull v/s Cost Push Inflation
Page 7 of 16
 If demand pull inflation is present in the economy, the

government must bear the cost of excessive spending and
monetary authorities are to be blamed for “cheap money policy”
 On the contrary, if cost push is the real cause for inflation then
the trade union are to blamed for excessive wage claim,
industries for acceding them and business firms for marking- up
profits aggressively.
B. On the Basis of Speed or Intensity
1. Creeping Inflation
It is a circumstance where the inflation of a nation increases
gradually, but continually, over time. This tends to be a typically
pattern for many nations. Although the increase is relatively
small in the short-term, as it continues over time the effect will
become greater and greater.
Page 8 of 16
2. Galloping Inflation
It is a very rapid inflation which is almost impossible to reduce.
3. Hyper Inflation
Hyperinflation is caused mainly by excessive deficit spending
(financed by printing more money) by a government, some
economists believe that social breakdown leads to hyperinflation
(not vice versa), and that its roots lie in political rather than
economic causes.
4. Suppressed Inflation
It is existing inflation disguised by government price controls or
other interference in the economy such as subsidies. Such
suppression, nevertheless, can only be temporary because no
Page 9 of 16
governmental measure can completely contain accelerating

inflation in the long run. It is also called Repressed Inflation.
Measures to control Inflation
1. Fiscal Policy: Reducing Fiscal Deficit
2. Monetary Policy: Tightening Credit
3. Supply Management through Imports
4. Incomes Policy: Freezing Wages
Fiscal Policy: Reducing Fiscal Deficit
Fiscal policy means how a Government raises its revenue and
spends it. If the total revenue raised by the Government through
taxation, fees, surpluses from public undertakings is less than the
expenditure it incurs on buying goods and services to meet its
requirements of defense, civil administration and various welfare
and developmental activities, there emerges a fiscal deficit in its
Page 10 of 16
budget. To check inflation the Government should try to reduce

fiscal deficit. It can reduce fiscal deficit by curtailing its wasteful and
inessential expenditure. In India, it is often argued that there is a
large scope for scaling down non-plan expenditure on defense,
police and General Administration and on subsidies being provided
on food, fertilizers and exports.
Monetary Policy: Tightening Credit
Monetary policy refers to the adoption of suitable policy regarding
interest rate and the availability of credit. Monetary policy is
another important measure for reducing aggregate demand to
control inflation. It affects the cost of credit through interest rate.
The higher the rate of interest means the greater the cost of
borrowing from the banks. Other tools of monetary policy like SLR,
CRR, Repo rate, Reverse Repo rate, open market operations are use
Page 11 of 16
to control inflation in the economy by draining the liquidity from

the market.
Supply Management through Imports:
To check the rise in prices of food-grains, edible oils, sugar etc., the
Government has often taken steps to increase imports of goods in
short supply to enlarge their available supplies. When inflation is of
the type of supply-side inflation, imports are increased. To increase
imports of goods in short supply the Government reduces customs
duties on them so that their imports become cheaper and help in
containing inflation.
Incomes Policy: Freezing Wages
Another anti-inflationary measure is the avoidance of wage
increases. When cost of living rises due to the initial rise in prices,
workers demand higher wages to compensate for the rise in cost of
Page 12 of 16
living. By freezing wages of the employee can helpful in controlling

inflation.
Impact or Effect of Inflation
 Inflation affects the pattern of production; a shift in production
pattern takes place from consumer goods to luxury goods.
 On Investment: Inflation discourages entrepreneurs in investing as
the risk involved in the future production would be very high with
less hope for returns. Uncertainty about the future purchasing
power of money discourages investment and savings.
 Inflation also results in black marketing. Sellers may stock up the
goods to be sold in the future, anticipating further price rise.
 The effect of inflation is felt on distribution of income and wealth
and on production.
Page 13 of 16
 People with fixed income group are the worst sufferers of

inflation. Those living off a fixed income, such as retirees, see a
decline in their purchasing power and, consequently, their
standard of living.
 The entire economy must absorb reprising costs (menu costs) as
price lists, labels, menus and more have to be updated.
 If the inflation rate is greater than that of other countries,
domestic products become less competitive.
 They add inefficiencies in the market, and make it difficult for
companies to budget or plan long-term.
 On Exchange rate and trade: There can also be negative impacts to
trade from an increased instability in currency exchange prices
caused by unpredictable inflation.
 On Taxes: Higher income tax rates on taxpayers. Government
incurs high fiscal deficit due to decreased value of tax collections.
Page 14 of 16
 On Export and balance of trade: Inflation rate in the economy is

higher than rates in other countries; this will increase imports and
reduce exports, leading to a deficit in the balance of trade.
Measurement of Inflation
Inflation is measured by calculating the percentage rate of change of
a price index, which is called the inflation rate.
Inflation is often measured either in terms of Wholesale Price Index
or in terms of Consumer Price Index.
 Wholesale Price Index (WPI): The Wholesale Price Index is an
indicator designed to measure the changes in the price levels of
commodities that flow into the wholesale trade intermediaries.
The index is a vital guide in economic analysis and policy
formulation. It is a basis for price adjustments in business
contracts and projects. It is also intended to serve as an
Page 15 of 16
additional source of information for comparisons on the

international front.
 Consumer Price Index (CPI): Consumer price index is specific to
particular group in the population. It shows the cost of living of
the group. It is based on the changes in the retail prices of goods
or services. Based on their incomes, consumer spends money on
these particular set of goods and services. There are different
consumer price indices. Each index tracks the changes in the
retail prices for different set of consumers.
Page 16 of 16
Saving
Definition
Excess of income over expenditure on consumption, or it is the
difference between disposable income and consumption.
S (saving) = Y (income) – C (consumption)
The unconsumed part of national income of all members of the
community represents, National Savings.
Total domestic savings = households’ savings + business sector’s
savings + government’s savings
This relation between saving and income is called the propensity to
save or the saving function.
Propensity to Save
A. Average Propensity to Save (APS)
Saving & Investment : Page 1 of 16
The APS is the ratio of saving to income. It is found by dividing

saving by income, or APS = S/Y.
For example, an income level of Rs. 180, the consumption
expenditure is Rs. 170 than the savings are Rs. 10.
B. Marginal Propensity to Save (MPS)
The MPS is the ratio of the change in saving to the change in
income. It can also be defined as the rate of change in APS as
income changes. It can be found by dividing a change in saving
by a change in income, i.e. S / Y.
For example, when income increases from Rs. 180 crores to Rs.
240 crores, savings increase from Rs. 10 crores to Rs. 20 crores
so that Y = Rs. 60 (240-180) crores and S = Rs. 10 (20 – 10)
crores and the MPS = 10/60 = 0.17. It means that 17 per cent of
income is saved.
Determinants
A. Income
1 Savings is functionally related to income S = f(Y);
2 The saving income ratio tends to rise with increase in
income;
3 The savings function is a stable function of income in the
short run;
4 Savings as such is not a stable function of income;
5 Marginal propensity to save (ds/dy) is always greater than
zero but less than unity;
6 People save part of additional income but not the entire
income;
7 Symbolically, 1 > MPS > 0 or 1 > ds/dy > 0.
B. Distribution of income

1 Inequality of income distribution helps the process of

savings;
2 ‘Demonstration effect’, that is man’s desire to imitate the
superior consumption standard of neighbors or relatives’;
3 This induces a man to buy expensive goods and so saving
decline.
C. Sound financial instruments and the rate of interest
1. A higher rate of interest motivates us to save more.
2. Existence of diverse type of financial instruments gives
people incentive to save more.
D. Subjective or psychological factors
1 A man’s attitude towards savings depends on his
farsightedness, his desire to bequeath a fortune, to enjoy a
better living in future or to possess some physical asset.

3. A man saves or insures as a precaution against future

uncertainty and insecurity.
In other way:
A. Will to Save: Family Affection, Precaution, Standard of Living,
Farsightedness, Calculating Mind, Enterprise, Economically
Independent, Social Status, Miserliness, etc.
B. Power to Save: Size of National Income, Natural Resources,
Trade, Industrial Development, Agricultural Development,
Efficiency of Labour, Distribution of Wealth and Income, etc.
C. Facilities to Save: Peace and Security, Banking Facilities,
Taxation Policy, Value of Money, Investment Opportunities,
Economic Policy of Government, etc.

Investment
Various goods and services are produced by an economic system.
These are divided into two broad categories, 1) consumer goods
and 2) capital goods.
Consumer goods are those which satisfy wants directly.
By contrast, goods that satisfy wants indirectly, for example, a textile
producing machine or a tractor are classified as producer goods.
Expenditure on producer goods is known as investment or
capital formation. This is also known as real investment which is
different from financial (paper) investment, e.g., when someone
‘invests’ in the purchase of shares, buying shares is to be treated as
saving and the term ‘investment’ is used to focus on the role of real
investment.
Definition
Investment has dual aspect. It implies the production of new capital
goods like plants and equipments. Secondly, a change in inventories
or stocks of capital of a firm between two periods.
Three element of Investment
The basic objective is to produce saleable goods to make profit.
I. To replace existing capital:
Capital goods wear out through use and have to be replaced. So,
a firm has to make provision for depreciation, i.e., reduction in
the value of capital goods due to their contribution to the
production process. At any fixed time, there will be some
investment which is needed to replace worn-out capital.
II. To expand capacity:

If the amount of total (gross) new investment taking place

happened to just equal the amount of depreciation, the size of
the stock of capital employed would remain constant. Any
excess of gross investment over depreciation represents net
investment in expanded capacity or net capital formation.
Net investment is needed to introduce new products and
groups of products or to produce existing products on a much
larger scale. In a period of rising demand for goods and services
existing capacity will be fully utilized and there will be need for
fresh investment
III. To increase efficiency
To survive in a competitive world, firms will be under constant
pressure to raise productivity of resources, especially labour
power. This can be achieved through process of innovation, i.e.,
introduction of new production processes.
This is often associated with the application of new technology.

In fact, the greater the pressure and scope for increased
efficiency, the larger the volume of investment firms are likely
to undertake if they are to survive and expand.
Type of Investment
1. Autonomous Investment: Investment which does not change
with the changes in income level like road, house, public
infrastructure, etc.
2. Induced Investment: Investment which changes with the
changes in the income level like fixed capital, inventories, etc.
3. Financial Investment: Investment made in buying financial
instruments such as new shares, bonds, securities, etc.
4. Real Investment: Investment made in new plant and
equipment, construction of public utilities like schools, roads
and railways, etc.
5. Planned (Ex-ante) Investment: Investment made with a plan

in several sectors of the economy with specific objectives
6. Unplanned Investment: Investment done without any
planning
7. Gross Investment: The total amount of money spent for
creation of new capital assets like Plant and Machinery, Factory
Building, etc. It is the total expenditure made on new capital
assets in a period.
8. Net Investment: Gross Investment less (minus) Capital
Consumption (Depreciation) during a period of time, usually a
year. It must be noted that a part of the investment is meant for
depreciation of the capital asset or for replacing a worn-out
capital asset. Hence it must be deducted to arrive at net
investment.

9. Public Investment: Made by the government of the country

like Welfare of people, defense of country, economic
development, etc.
10. Private Investment: Made by private individuals with the aim
of profits
Determinants
1. There are two determinants;
(a) the marginal efficiency of capital (MEC) and
(b) the rate of interest.
2. MEC implies the prospective yield from the capital asset
(PY) and the supply price of this asset. PY is calculated by
aggregating net income of every year of a machine throughout
its life time. To estimate net income, cost is deducted from
annual output of machine. Supply Price is the cost of the

machine. But not the cost of existing machine but that of a

brand new machine.
3. Symbolically C = Q/P. Where Q is the prospective yield from
capital asset and P is the supply of this asset.
4. In considering a particular investment project the investor must
have some idea of future returns, that is yields from the real
asset in its life span. To find the present value of all expected
future returns we have to discount all future returns.
5. Generally there exists a negative relation between interest rate
and investment expenditure. A fall in the rate of interest may
induce an increase in investment expenditure whereas a higher
rate, investment is likely to be less. At a higher interest rate, a
firm instead of using funds for capital equipments may invest in
financial assets. Thus the level of investment is a negative
function of the rate of return.

6. Risk, uncertainty and instability tend to discourage business to

undertake investment projects.
7. A firm may expand investment outlay for innovation viz.
introducing a new good or a new technique. Innovations either
by increasing sale or by reducing cost may help the innovating
firm a larger return on its investment. Investment decisions are
influenced by the cost of capital goods.
8. A firm normally calculates the initial cost of acquisition, and the
subsequent cost of maintenance and operation of capital goods.
Marginal Productivity of Capital (MPC)
 The additional physical product obtained due to the employment
of one extra unit of capital (do/dc) per unit of time.
 The MPC is net current product of the capital good minus the
cost of capital good.

 In contrast, MEC denotes the series of increments in output

anticipated over the life of the capital equipment.
Investment Multiplier
 The Keynesian multiplier shows how many times the total
income increases by a given amount of initial investment.
 If dI represents increase in investment, dY represents increase in
income and M the multiplier, then M = dY/dI.
 The multiplier is the number by which the initial investment is to
be multiplied to get the resulting change in income.
 With the help of the marginal propensity to consume the relation
between a given dose of investment and the resulting change in
income can be shown.
Acceleration Principle

 Change in output of consumption goods cause investment for

production of capital goods used in producing those
consumption goods.
 The ratio between the induced investment and the net change in
consumption outlay is known as acceleration coefficient.
 a = dI/dC, where dI is net change in investment and dC for net
change in consumption expenditure and for accelerator.
 The value of accelerator depends on capital output ratio, the
durability of capital goods.
 The acceleration effect will be high if capital equipments have
more durability and capital output ratio is high.
Factor effecting the Investment
 Technological Advancement and innovation
 Discovery of natural resources
 Government policies
 Foreign trade
 Political Environment
 Expectations
 Rate of population growth
 Territorial Expansion
 The price level
 The market structure
 Availability of finance
 Conditions in the labour market
 Aggregate Demand

Components of Economy
A. Sectors of Indian Economy : Based on Nature of Activity
1. Primary Sector
When the goods are produced by exploiting natural
resources, it comes under the activity of the primary sector. It
involves transforming natural resources into primary products.
Components of Economy : Page 1 of 13
It forms the base for all other products that we eventually make.
Most of the natural products we get are from agriculture, dairy,
fishing, forestry. Therefore, this sector is also called as
Agriculture and Related Sector.
Examples of the primary sector are Agriculture, Fishing, Mining,
Forestry, etc.
Generally, it is the larger sector in the developing countries. In
developed countries, activities of the primary sector have
become more technologically advanced, for example, the
mechanization of farming instead of hand picking and planting.
2. Secondary Sector
The secondary sector encompasses activities in which natural
products are changed into other forms, or finished goods by
manufacturing that are consequently used for consumption.
The product has to be made and therefore some process of

manufacturing is essential. The manufacturing could be done in a
factory, workshop or at home.
For example, using cotton fiber from the plant, to spin yarn and
weave cloth, or using sugarcane to make jaggery and refined
sugar. The manufacturing process is usually associated with the
different kinds of industries that come up, therefore, this is also
called as Industrial Sector.
Secondary Sector is usually divided into Light Industry and
Heavy Industry.
Light Industry: It involves products that require less capital
and is more consumer oriented.
Examples: Manufacturing of clothes, Shoes, furniture, etc.

Heavy Industry: It involves products that are either heavy in

weight or in their production process. They require huge
capital and advanced resources or facilities.
Examples: Heavy machinery, Chemical Plant, Production of
heavy equipments, like crane, etc.
3. Tertiary Sector
The activities in tertiary sector help in the development of the
primary and secondary sectors. These activities do not produce
any good but they are an aid or a support for the production
process.
For example, certain business activities involve borrowing
money from banks to help production and trade or goods that
are produced in the primary or secondary sector would need
transportation facility to be sold in wholesale or retail shops.
Examples of Tertiary Sector are Transport, Storage,

Communication, Banking, Insurance, Trade, Hospitality, Tourism,
Entertainment, Management Consultancy, etc.
Since the activities involved in Tertiary Sector generate services
rather than goods, it is also called as Service Sector.
B. Sectors of Indian Economy: Based on Condition of Work
Organized & Unorganized Sector
C. Sectors of Indian Economy: Based on Ownership of Assets
Public & Private Sector
Informal Sector in Urban Economy
It is an enterprises typically operating on a small scale with a low
level of organization, low and uncertain wages and no social
welfare and security.
The entrepreneurs are in this sector for their livelihood, not for
making more profit.
Informal Sector includes all activities which are not officially
recognized or registered as normal income sources. They are not
monitored by any form of government and thus no taxes are paid
on them unlike the formal sector.
The term is sometimes used to refer to that part of economy which
includes illegal activities, like earning income without paying tax
on it, the black market, the shadow economy, underground
economy etc. However, the informal sector also encompasses
many other legal activities, such as job that are performed in
exchange for something other than money.
The informal forms of organizations are major players in such
activities as manufacturing, construction, transport, trade, hotels
and restaurants, and business and personal services. The informal
sector plays a significant role in the economy in terms of

employment opportunities and poverty alleviation. This sector
generates income-earning opportunities for a large number of
people. In India, a large section of the total workforce is still in the
informal sector, which contributes a sizeable portion of the
country's net domestic product.
While analyzing the composition of the Indian Economy, it is of
two major sectors namely, organized and unorganized. The
organized sector contributes two third to the GDP. Whereas the
remaining 1/3 is by unorganized sector. The following statistics by
National Account Statistics reveals the contribution of
unorganised sector to the NDP.
Features of Informal sector
 Low level of organization; small in scale usually employing
fewer than ten workers and often from the immediate family;
 Heterogeneity in activities;
 Easier entry and exit than in the formal sector;
 Usually minimal capital investment; little or no division
between labour and capital;
 Mostly labour intensive work, requiring low-level skills; there
is usually no formal training as workers learn on the job;
 Labour relations based on casual employment and or social
relationships as opposed to formal contracts; employer and
employee relationship is often unwritten and informal with
little or no rights;
 Due to their isolation and invisibility, workers in the informal
sector are often largely unaware of their rights, cannot
organize them and have little negotiating power with their
employers and intermediaries.
Informal sector plays an important role in terms of it capacity

 To absorb labour
 Provide a sizable amount of goods and services at inexpensive
cost
 Sustains a large proportion of urban population
Parasitic Components in Urban Economy
Following economic activities come under parasitic economics
 Gambling
 Speculation (dealing in notional values)
 Forward trading in notional values, stocks, shares and
derivatives, hedge funds
 Unreasonable stocking (Hoarding)
 Prostitution and related work such as pimps
 Bootlegging, liquor bars
 Thieving (all stealing and cheating activities come in it)

 All other activities helping vices (unethical, immoral and

criminal activities)
 Money laundering
 Black marketing
 Derivatives
 Races (horse etc.)
Characteristic differences in the two economics: -
 Real economics grows according to the market forces; growth
of parasite is manageable artificially by operators.
 Real economics is natural and so not habit forming while
parasite is habit forming in the sense one afflicted by it stays in
it, pulling resources out of real economics causing whirlpool
effect. This defect of parasitic economics helps it grow
continuously.
 Real economics is based on simple basic laws of economics
using real values; while parasitic, involves mostly notional
values requiring complicated mathematical formulas, to

predict future values, making the jargon of economics vulgar.
Today what they teach economics in education is mostly
related with these superfluous laws making the subject unduly
awkward. Albeit, this useless mathematics has given subject of
economics an air of being some serious science, even though,
economics is actually an art and not science in true sense.
 Real economics is always a healthy activity while parasitic is
considered as a disease when it exceeds the safe limit. Safe
limit is very crucial and that is considered to be not more than
15% of the total economic activity of the state; however, this
percentage is a subject of debate.
Parasitic economics advantages: -
 Huge profits are possible, (P)
 At personal level, helps improve that person’s economic status
if worked well in exceptionally short time (P)
 Over all growth rate could be enhanced staggeringly by finance

manipulations. This aspect charms most people and they are
attracted to this, ultimately are stuck in it to the detriment of
themselves and the state. (P)
 Bull and bear positions can be predicted and manipulated
cleverly (P)
 Market activity is controllable (P)
Parasitic economics disadvantages:
 Does not create any new assets for the state
 Does suck in, large funds to destabilize the monetary status of
the real economy called, whirl pool effect
 Activity does not add to state economy
 Sucks away valuable finance required by the real economic
activity
 Creates effects such as inflation and recession

 This activity is habit forming and so can demoralize society if

spread to measure section of the people, like any other vice.

Macro Economics: Chapter - 6
Concepts Associated with National Income

Gross National Product  The market value of all final goods and services;
(GNP)  These are produced by domestically owned factors
of production in a country in that year.
 GNP = GDP + Net factor income from abroad
Net factor income from abroad = Factor income
earned by the domestic factors of production
employed in the rest of the world minus Factor
income earned by the factors of production of the
rest of the world employed in the domestic
economy.
Net National Product  NNP at market price = GNP minus depreciation of
(NNP) capital stock.
 The productive power of physical capital stock
diminishes gradually because of the wear and tear
that it undergoes in the process of production.
NNP at factor cost or  NNP at factor cost (National Income) = NNP at
National Income market price minus Indirect Business Tax minus
Non tax liabilities minus Business Transfer
Payments plus Subsidy from Government
Gross Domestic Product  The sum total of values of all goods and services
GNP, GDP & Capital Formation : Page 1 of 3
(GDP) produced within the geographical boundary of the

country;
 These are without adding the factor income
received from abroad.
 GDP = GNP - Net factor income from abroad
NFIA: Net Factor Income from

NFIA D Abroad,
ID - GDP: Gross Domestic Product
Sub GNP: Gross National Product
UP NNP: Net National Product
+ D: Depreciation,
NIH ID: Indirect Taxes,
NNP
NI + Sub: Subsidies,
GNP (at
GDP (NNP CT - NI: National Income
Market
at TrH UP: Undistributed Profits,
Price)
Factor NIH: Net Interest Payments by
PTP
Cost) Households,
+
PI NP CT: Corporate Taxes,
TrH: Transfers received by
PDI Households,
PI: Personal Income
PTP: Personal Tax Payments,

NP: Non-Tax Payments,
PDI: Personal Disposable Income
Distinction between Gross National Product and Gross Domestic Product:
Gross National Product (GNP) is different from Gross Domestic Product (GDP) in
following respects:
1. GNP refers to the total market value of all the final goods and services produced
in a country during a given year plus net factor income from abroad. But GDP
refers to the total market value of all the goods and services produced in the
given year within the domestic territory of the country.
2. GNP includes all income earned by the country in abroad (including foreign
investments). But GDP does not include the income earned by the country from
abroad.

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Consumer’s surplus is excess of the price which

Sanjay Patel : +91 96246 69492 : swamibeic@gmail.com

Demand schedule of an individual consumer

Commodity Price Quantity

1. Price of the commodity

1. Income of the people remaining unchanged;

1. Conspicuous (obvious/eye-catching) Goods: Articles of

Elasticity of demand is defined as the responsiveness of the quantity

Land Labour Capital Entrepreneur Other

The term ‘land’ is used in a special sense in Economics. It does not

The term ‘labour’, means any mental or physical exertion directed

 Capital has been rightly defined as ‘produced means of

 Fixed capital is that which exists in a durable shape and

Figure 3 Figure 4 Figure 5

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6 These are legal tender money as there is legal compulsion for

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 Things are said to be cheap or expensive on the basis of

3. Standard of deferred payment

 Money taken as loan is usually repaid after a time gap.

 This delayed payment is done through money.

Functions & Role of Money : Page 3 of 6

 Creation of new money governments of modern

 It implies how much of goods and services can be

 Value of money is inverse of price.

 When price level increases, the value of money decrease

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 In Consumption: Money enables a consumer to maximize his

Functions & Role of Money : Page 6 of 6

It has its worst impact on consumers. High prices of day-to-day

Hyperinflation: Unusually rapid inflation. In extreme cases, this can

tight credit, low investment, rising bankruptcies and high

The budget of the government reflects a deficit when

As a result, the increased costs are passed on to consumers,

 If demand pull inflation is present in the economy, the

governmental measure can completely contain accelerating

budget. To check inflation the Government should try to reduce

to control inflation in the economy by draining the liquidity from

living. By freezing wages of the employee can helpful in controlling

 People with fixed income group are the worst sufferers of

 On Export and balance of trade: Inflation rate in the economy is

additional source of information for comparisons on the

The APS is the ratio of saving to income. It is found by dividing

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1 Inequality of income distribution helps the process of

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3. A man saves or insures as a precaution against future

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If the amount of total (gross) new investment taking place

This is often associated with the application of new technology.

5. Planned (Ex-ante) Investment: Investment made with a plan