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The Story of Village Palampur Class 9 Notes Chapter 1
As per the previous 3 years’ examinations, special emphasis has been laid upon the following topics
from this chapter.
• Organisation of Production
• Change in the Traditional Activities
• Fanning in Palampur
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Village Palampur
• Palampur is a small village. About 450 families live here. It is 3 km away from Raiganj —
a big village.
• Shahpur is the nearest town to the village.
Main Production Activities
• Farming is the main production activity in the village Palampur.

• Most of the people are dependent on farming for their livelihood.
• Non-farming activities such as dairy, small-scale manufacturing (e.g., activities of
weavers and potters, etc.), transport, etc., are carried out on a limited scale.
Factors of Production (or Requirements for Production of Goods and Services)
• Land, labour and capital are the basic requirements for the production of goods and
services which are popularly known as factors of production.
• Land includes all free gifts of nature, e.g., soil, water, forests, minerals, etc.
• Labour means human effort which of course includes physical as well as mental labour.
• Physical capital is the third requirement for production.
• Physical capital includes fixed capital (e.g. tools, machines, building, etc.) and raw
materials such as seeds for the farmer, yarn for the weaver.
Important Changes in Farm Activities
Land area under cultivation is virtually fixed. However, some wastelands in India had been converted
into cultivable land after 1960.
Over the years, there have been important changes in the way of farming, which have allowed the
farmers to produce more crops from the same amount of land. These changes include:
• Multiple cropping farming

• Use of modern farming methods.
Due to these changes (in the late 1960s) productivity of land has increased substantially which is
known as Green Revolution. Farmers of Punjab, Haryana and Western Uttar Pradesh were the first to
try out the modern farming methods in India.
Labour: After land, labour is the basic factor of production. Small farmers provide their own labour,
whereas medium and large farmers make use of hired labour to work on their fields.
Capital: After land and labour, capital is another basic factor of production. All categories of farmers
(e.g., small, medium and large) require capital. Small farmers borrow from big farmers or the village
moneylenders or the traders who supply them various inputs for cultivation.
Modern farming requires a great deal of capital.
Sale of Surplus Farm Products
Farmers produce crops on their lands by using the three factors of production, viz. land, labour and
capital. They retain a part of produce for self-consumption and sell the surplus in the nearby market.
That part of farm produce which is sold in the market is called marketable surplus. Small farmers
have little surplus output. It is the medium and big farmers only who have substantial surplus produce
for selling in the market.
Non-farming activities
Out of every 100 workers in the rural areas in India, only 24 are engaged in non-farming activities.
There is a variety of non-farming activities in the villages. Dairy, small scale manufacturing, transport,
etc., fall under this category.
People as Resource Class 9 Notes Chapter 2
According to the previous 3 years examinations, the following concepts are most important from this
chapter and should be focussed upon.
• Various Aspects of Human Resource Development

• The Role of Education
• Unemployment and Forms of Unemployment in India.
Human beings perform many activities which can be grouped into economic and non-economic.
Economic Activities: Economic activities refer to those activities of human which are undertaken for
a monetary gain or to satisfy his/her wants. The activities of workers, farmers, shopkeepers,
manufacturers, doctors, lawyers, taxi drivers, etc. fall under this category.
Non-Economic Activities: Non-economic activities are ones that are not undertaken for any
monetary gain. These are also called unpaid activities, e.g., Puja-paath, housekeeping, helping the
poor or disabled, etc.
Classification of Economic Activities:
Various economic activities can be classified into three main sectors, that is, primary sector,
secondary sector and tertiary sector. The primary sector includes activities like agriculture, forestry,
animal husbandry, fishing, poultry, farming and mining. In this sector, goods are produced by
exploiting nature. In the secondary sector, manufacturing (small and large) and construction activities
are included. The tertiary sector (also called service sector) provides various types of services like
transport, education, banking, insurance, health, tourism, etc.
Market Activities and Non-Market Activities: Economic activities, i.e., production of goods and
services can be classified into market activities and non-market activities. Market activities
are’performed for remuneration. Non-market activities are the activities carried out for self
consumption.
Activities of Women: Women generally look after domestic affairs like cooking of food, washing of
clothes, cleaning of utensils, housekeeping and looking after children.
Human Capital: Human capital is the stock of skill and productive knowledge embodied in human
beings. Population (human beings) become human capital when it is provided with better education,
training and health care facilities.
People as a Resource: People as a resource is a way of referring to a country’s workforce in terms

of their existing skills and abilities.
Human Capital Formation: When the existing human resource is further developed by spending on
making the workforce more educated and healthy, it is called Human Capital Formation.
Quality of Population: The quality of population depends upon the literacy rate, life expectancy and
skills formation acquired by the people of the country.
Role of Education: Education is the most important component of Human Resource Development.
In view of its contribution towards the growth of the society, government expenditure on education as
a percentage of GDP rose from 0.64% in 1951-52 to 3.98% in 2002-03. However, our national goal is
6% of GDP
Health: Health is another very important component of Human Resource Development. The
efficiency of workers largely depends on their health.
There has been a considerable improvement in the country’s health standard. For instance, the life
expectancy at the time of birth in India rose from 37.2 years in 1951 to 63.9 years in 2001. Similarly,
the infant mortality rate has come down from 147 to 70 during the same time period.
Unemployment: Unemployment is said to exist when people who are willing to work at the prevailing
wage rates cannot find jobs. When we talk of unemployed people, we refer to those in the age group
of 15-59 years. Children below 15 years of age and the old people above 60 are not considered while
counting the number of unemployed.
Nature of Unemployment in India:
Seasonal unemployment occurs when people fail to get work during some months of the year (that
is, during off-season). Farm labourers usually face this kind of problem, i Disguised unemployment is
another kind of unemployment found in rural areas. Such kind of problem arises due to excessive
pressure of population on agriculture. Disguised unemployment refers to a situation wherein the
number of workers in a job is more than actually required to do the job. The extra number of workers
are disguisedly unemployed.
Consequences of Unemployment:
• Unemployment leads to wastage of manpower resource.

• Unemployment tends to increase the economic overload that is the dependence of the
unemployed on the working population.
• Unemployment may lead to an increase in social unrest and tension.
Poverty as a Challenge Class 9 Notes Chapter 3
Poverty is the most difficult challenge faced by independent India. Poverty is a condition in which a
person lacks the financial resources and essentials things to enjoy minimum standards of life. Poor
people can be landless labourers in villages, jhuggi and slum dwellers in cities and towns, daily wage
workers at construction sites, child , workers in dhabas or even beggars. India has the largest single
concentration of the poor in the world, where every fourth person is poor.
Two Typical Cases Of Poverty

The following two cases show the many dimensions of poverty, including lack of proper food, shelter,
healthcare, education as well as clean water and sanitation. They also show lack of a regular means
of livelihood.
(i) Urban Case

Ram Saran is a daily wage labourer in a flour mill near Ranchi in Jharkhand. He earns around Rs.
1500 per month when employed. He supports his family of 6 persons, besides sending some money
to his elderly parents. His wife and son also work, but none of his 4 children can attend school. The
family lives in a one-room rented house on the outer areas of the city; The children are
undernourished, have very few clothes or footwear and no access to healthcare.
(ii) Rural Case
Lakha Singh is a landless labourer in a small village near Meerut in Uttar Pradesh. By doing odd jobs
for farmers, he earns Rs. 50 per day. Sometimes, he gets some foodgrain or other items instead of
cash. He is not literate and his family of 8 people lives in a kuchha hut near the edge of the village.
They have no access to healthcare, cannot afford new clothes or even soap or oil.
Poverty Analysis by Social Scientists

Social scientists, analyze poverty from many aspects besides levels of income and consumption.
These aspects are
• Poor level of literacy

• Malnutrition leading to poor resistance to disease
• Lack of access to healthcare
• Lack of job opportunities
• Lack of access to sanitation and safe drinking water and so on.
Indicators for Poverty

The most commonly used indicators for poverty analysis are social exclusion and vulnerability.
Social Exclusion
A social exclusion means living in a poor surrounding with poor people, excluded from enjoying Social
equality of better off people in the better surrounding. Social exclusion can be a cause as well as a
result of poverty which leads to exclusion of individuals or groups from facilities, benefits and
opportunities that others enjoy.
In India, the caste system is based on social exclusion. People belonging to certain caste were
prevented from enjoying equal facilities, benefits and opportunities. This caused more poverty than
the lower income.
Vulnerability
Vulnerability to poverty is a measure, which describes the greater probability of certain communities
e.g. members of a backward caste or individuals e.g. widow, physically handicapped person of
becoming or remaining poor in the coming time.
Vulnerability is determined by various options available to different communities in terms of assets,
education, job, health, etc and analyse their ability to face various risks like natural disasters. The
group which face greater risk at the time of natural calamity are called vulnerable groups.
Poverty Line
Poverty line is an imaginary line used by any country to determine its poverty. It is considered
appropriate by a country according to its existing social norms. It varies from time to time, place to
place and country to country.
The most common method of determining poverty is income or consumption levels i.e. people will be
considered poor if their income or consumption level falls below a given ‘minimum level’ (poverty line)
necessary to fulfil the basic needs.
Poverty Line Estimation in India

In India, a subsistence level or minimum level of food requirement (as determined by its calorific
value), clothing, footwear, fuel, lighting,-educational and medical requirements, etc are determined for
estimating the poverty line. Since ih rural and urban areas, the nature of work and the prices of goods
are different, the calorific requirement and expenditure per capita are also different.
Poverty line defined by the government as follows
The money value required for buying these calorie requirements (given in the last column) in terms of
foodgrains and other items is revised periodically based on rise in prices of these goods. In urban
areas, the prices of essential items is higher when compared to the rural areas and so, the poverty
line is higher despite having low calorific requirement per day.
Organisations Involved in Estimating Poverty Line

Surveys for determining poverty line are carried out by the National Sample Survey Organisation
(NSSO). It is an organisation under the Ministry of Statistics and Programme Implementation of the
Government of India. It conducts surveys at the interval of 5 years. It is the largest organisation in
India conducting regular socio-economic surveys. It was established in 1950.
For determining the poverty line in various countries and for their comparison, international
organisations like the World Bank use a uniform standard method. As per this method, the poverty
line is level of minimum availability of the equivalent of $1 per person per day.
Poverty Trends In India

There is a decline in poverty ratios in India from about 45% in 1994 to 21.9% in 2012. If the trend of
declining poverty ratios in India continues at this rate, then the poverty line may reduce 20% in the
next few years.
Group Vulnerable to Poverty
Poverty among social groups and economic categories varies widely in India. Social vulnerable
groups are the households of the Scheduled Castes (SCs) and Scheduled Tribes (STs).
Economically vulnerable groups comprise rural landless labour households and urban casual labour
households.
However, during the last few years, all these groups except the Scheduled Tribes group, have
witnessed a decline in poverty.
In the year 2011-12, the proportions (as determined by NSSO) were as given below
Source Reports of Employment and Unemployment among Social Groups in India NSSO. Ministry of
Statistics and Programme Implementation, Government of India.
There is a great difference within poor families. It is observed that female infants, women and elderly
members are not given equal access to resources available to the family. So, they are also called
poorest of the poor.
Story of Sivaraman
The family of Sivaraman, a rural landless labourer has been cited as an example of such a family.
There are 8 members in the family and both he and the wife work. His children do not attend school
due to poverty. Only his son gets milk sometimes and they find difficulty in managing even two meals
in a day.
The story portays the sufferings of Sivaraman who works as an agricultural labourer, that too for just
5-6 months in a year. The sufferings and inequality within the family for women and children »are
even more. Girls are not sent to school and not even given milk to drink, while the youngest child,
who is a son gets milk to drink sometimes and his parents also plan for his education.
Inter-State Disparities
The proportion of poor people is not the same in every state. Recent estimates show while the all
India HCR was 21.9% in 2011-12, states like Madhya Pradesh, Assam, Uttar Pradesh, Bihar and
Orissa had all India poverty level.
Bihar and Odisha continue to be the two poorest states with poverty ratios of 33.7% and 37.6%
respectively. Alongwith rural poverty, urban poverty is also high in Odisha, Madhya Pradesh, Bihar
and Uttar Pradesh.
In states like Kerala, Jammu and Kashmir, Andhra Pradesh, Tamil Nadu, Gujarat, West Bengal, there
is a significant decline in poverty. The states successful in reducing poverty have adopted different
methods for doing so.
Some examples are
• Punjab and Haryana had high agricultural growth rates due to the effects of the Green
Revolution.
• Kerala has developed its human resources by investing more in education.
• West Bengal has reduced poverty by implementing land reforms.
• Public distribution of foodgrains at subsidised prices in Andhra Pradesh and Tamil Nadu
has helped in poverty reduction.
• Jammu and Kashmir have generated wide-ranging economic activities all across the
state and converted potential in various sectors into employment opportunities.
Global Poverty Scenario
Although extreme economic poverty has reduced in the world from 43% in 1990 to 22% in 2008 (as
per the World Bank), still there are vast regional differences. These are stated below
The proportion of people living under poverty in different countries is defined by the international
poverty line (means population below $1 a day).
In South-East Asia and China, there is a decline in poverty due to rapid economic growth and
massive investment in human resource development.
In Latin America and the Caribbean, the poverty ratio has not changed significantly since 1981.
In Sub-Saharan Africa, poverty has increased since 1981 due to successive droughts and other
reasons. However, it declined from 51% in 1981 to 47% in 2008.
Economic Growth It is a term which defines an increase in real output of a country.
The Millennium Development Goals of the United Nations (formulated in the year 2000) call for
reducing the proportion of people living on less than $1 a day to half the 1990 level by 2015.
Causes of Poverty
Poverty continues in India for a variety of reasons.
These are
• Historically, there was a low level of economic development under the British colonial
administration prior to 1947. They discouraged traditional handicrafts and also industrial
development, reducing job opportunities and income growth.
• The low level of economic development persisted for many years after independence
and due to population increase, per capita income growth was low, increasing poverty.
• The Green Revolution improved opportunities in agriculture, only in certain areas of the
country.
• The growth in the population increased the number of job seekers, who had to be content
with low paying jobs in urban areas, leading to poverty spreading to towns and cities.
• Sociocultural (i.e. traditions) and economic factors lead to extra expenditure, which
ultimately increases poverty.
• There is an unequal distribution of land and other resources, that is why there are large
income inequalities also.
• Land reforms have not been properly implemented and lack of adequate land resources
is also a reason for many people to be poor.
• Small farmers borrow money for seeds, fertilisers and pesticides, etc and later on fail to
pay landing in debt trap. This high level of indebtedness is both the cause and effect of
poverty.
Anti-Poverty Measures
Removal of poverty has been one of the major objectives of Indian developmental strategy.
The current anti-poverty strategy of the government is based on the following two objectives
(i) Promotion of Economic Growth

The government has promoted economic growth during the last few years. Economic growth was low
till the 1980s but has increased significantly since then, causing significant poverty reduction. The
high economic growth helps in a significant reduction of poverty. There is strong linkage between
economic growth and poverty reduction. Economic growth widens opportunities and provides the
resources needed to invest in human development.
High economic growth encourages people to send their children (including the girl child) to school
with hope of better economic returns from investing in education.
The poof may not take direct advantage of economic growth. Due to lack of growth in the agricultural
sector, the large number of people remain poor in rural areas.
(ii) Targeted Anti-Poverty Programmes

The government introduced targeted anti-poverty programmes starting from 1990. The results of
these programmes have been mixed due to lack of proper implementation and improper targeting.
Also, some schemes overlap others. Thus, the benefits of these schemes are not fully reaching the
deserving poor.
So, now the government is emphasising more on proper monitoring of all these programmes.
Millennium Development Goals These are eight international development goals that were officially
established following the Millennium Summit of the United Nations in 2000, following the adoption of
the United Nations Millennium Declaration. One of these was to reduce by 50% the proportion of
people living on less than US $1 a day by the year 2015.
The Challenges to Poverty Reduction
Poverty reduction is still a major challenge in India, due to the wide differences between regions as
well as rural and urban areas. Further, poverty should include not only the matter of the adequate
amount of food but other factors like education, healthcare, shelter, job security, gender, equality,
dignity and so on.
These give us the concept of human poverty. Poverty reduction is expected to be lower in the next
10-15 years.
In addition to anti-poverty measures, the government should focus on the following to reduce poverty.
• Higher economic growth.

• Universal free elementary education.
• The decrease in population growth.
• Empowerment of women and weaker sections.
Summary
The most difficult challenge faced by independent India is poverty.
India has the largest single concentration of the poor in the world, where every fourth person is poor.
Social scientists analysis poverty from many aspect besides level of income and consumption.
These aspects include poor level of literacy, lack of job opportunities etc.
Social exclusion aneb* vulnerability are the most commonly used indicators for poverty analysis.
The poverty line is an imaginary line used by any country to determine is poverty. It varies time to
time, place to place and country to country.
The most common method of determining poverty is income or consumption levels.
The calorific requirement and expenditure per capita are different for urban and rural areas.
Surveys for determining poverty lines are carried out by the National Sample Survey Organisation
(NSSO).
The organisation is under the Ministry of statistics and programme implementation of the Government
of India.
Poverty among social groups and economic categories varies widely in India.
Female infants, women and elderly member are not given equal access to resources available to the
family.
Bihar and Odisha continue to be the two poorest states with poverty ratios of 33.7% and 37.6%
respectively.
In states like Kerala, Andhra Pradesh, Gujarat, there is significant decline in poverty.
The proportion of people living under poverty in different countries is defined by the international
poverty line i.e. population below $ 1 a day.
There is decline in poverty in South-East Asia and China due to rapid economic growth and massive
investment in human resource development.
The Millenium Development Goals of the United Nations formulated in 2000, call for reducing the
proportion of people living on less than $ 1 a day to half the 1990 level by 2015.
There are many causes for the prevalence of poverty in India like unemployment, low economic
development and income inequalities.
Removal of poverty has been one of the major objectives of Indian developmental strategy.
There is a strong linkage between economic growth and poverty reduction.
The Government of India introduced targeted anti-poverty programmes starting from 1990.
Poverty reduction is still a major challenge in India, due to the wide differences between regions as
well as rural and urban areas.
Food Security in India Class 9 Notes Chapter 4
Food security refers to availability, accessibility and affordability of food to all people at all times. Food
security depends, on the Public Distribution System (PDS) and government vigilance and time to time
action, when this security is threatened.
Meaning Of Food Security

Food security means availability of adequate supply of basic foodstuffs at all times.
The 1995 World Food Summit declared, “Food security at the individual, household, regional, national
and global levels exists when all people, at all times, have physical and economic access to sufficient,
safe and nutritious food to meet their dietary needs and food preferences for an active and healthy
life”. The declaration further recognises that “poverty eradication is essential to improve access to
food”.
Food security has the following dimensions
• Availability of Food It means food production within the country, food imports and the
previous years stock stored in government granaries.
• Accessibility of Food It means food is within reach of every person.
• Affordability of Food It implies that an individual has enough money to buy sufficient, safe
and nutritious food to meet one’s dietary needs.
The above dimensions conclude that food security is ensured in a country only if * Enough food is
available for all the persons.
• All persons have the capacity to buy food of acceptable quality.

• There is no barrier on access to food.
Necessity Of Food Security

Food security is needed in a country to ensure food at all times. It is needed to ensure that no person
in a country dies of hunger.
Effect of Natural Calamity on Food Security
Most of the time, the poorest section of society might be food insecure. But persons above the
poverty line might also be food insecure when the country faces a national disaster/calamity like
earthquake, drought, flood, tsunami, widespread failure of crops causing famine, etc.-
The total production of foodgrains decreases due to a natural calamity. It creates a shortage of food
in the affected areas. The price of the food products goes up due to this shortage. At high prices,
some people cannot afford to buy food. If such calamity happens in a very wide area or is stretched
over a longer time period, it may cause a situation of starvation. Massive starvation might take a turn
of famine. Thus, natural calamity affects food security adversely.
Famine and Starvation
A famine is characterised by widespread deaths due to starvation and epidemics caused by forced
use of impure water or decaying food and loss of body resistance due to weakening from starvation.
The most devastating famine in India was the famine of Bengal in 1943. Thirty lakh people died in it.
The price of rice, the staple diet of the people in the region, increased sharply.
People Affected by Famine

No famine has occurred in India since independence. But today also, there are places like Kalahandi
and Kashipur in Odisha where famine-like condition still prevails. Starvation deaths are also reported
in Baran district of Rajasthan, Palamau in Jharkhand and man^ other remote areas.
Food Insecure People

Food and nutrition insecurity has affected the large section in India. But the most affected people in
the rural areas are landless agricultural labourers, traditional artisans and petty self-employed
workers. In urban areas the most affected are beggars and homeles people, casual labourers people
employed in ill-paid occupations and construction migrant and other seasonal workers.
Further, many pregnant and nursing mothers and also children under the age of 5 years are food
insecure people. The second National Health and Family Survey (NHFS) conducted during 1998-99.
estimated that approximately 11 crore women and children in India are food insecure.
Food Insecure Regions
Economically backward states with high level of poverty, tribal and remote areas, regions more prone
to natural disasters (like Eastern and South-eastern parts of Uttar Pradesh, Bihar, Odisha, Jharkhand,
West Bengal, Chhattisgarh, Maharashtra and parts of Madhya Pradesh) consist the largest number of
food insecure people.
Hunger
Food insecurity also has an important aspect of hunger. To create food security, current hunger
should be removed and the risk of future hunger should be reduced. Hunger has two dimensions i.e.
chronic and seasonal.
National Health and Family Survey (NHFS) 1998-95 A large-scale, multi-round survey conducted in a
representative sample of households throughout India. Three rounds of the survey have been
conducted since the first survey in 1992-93 and this was the second. The survey provided .essential
data on health and family welfare needed by the Ministry of Health and Family Welfare and other
agencies for policy and programme purposes as well as information on important emerging health
and family welfare issues.
There are two types of hunger. These are as follows
(i) Chronic Hunger

It is a consequence of a diet regularly deficient in quantity and quality this is caused due to lack of
income to buy food for survival. Chronic hunger has reduced in rural areas from 2.3% of households
in 1983 to 0.7% in 1999 – 2000. In urban areas, it has reduced from 0.8% to 0.3% during the same
period.
(ii) Seasonal Hunger

It is related to seasonal cycles of food growing and harvesting. It affects landless* agricultural
labourers in rural areas the most. In urban areas, casual construction workers suffer from this during
the time when they do not get work. The proportion of households experiencing seasonal hunger in
rural areas has reduced significantly from 16.2% in 1983 to 2.6% in 1999-2000. In urban areas, it has
reduced from 5.6% to only 0.6% during the reference period.
Note Malnutrition is a condition that results from eating a diet in which certain nutrients are lacking or
in wrong proportions.
Measures for Self-Sufficiency in Foodgrains.
India is aiming at self-sufficiency in foodgrains since independence. India has adopted all measures
to achieve self-sufficiency in foodgrains. The’ Green Revolution during the late 1960s and early 1970s
helped significantly to achieve this, although the success varied from region to region.
During this period, High Yielding Varieties (HYVs) of wheat and rice were introduced in many states.
The highest rate of growth was achieved in Punjab and Uttar Pradesh, where foodgrain production
jumped from 7.23 million tonnes in 1964-65 to reach an all-time high of 78.9 million tonnes in 2012-
13.
Production of foodgrains in Uttarakhand, Jharkhand, Assam, Tamil Nadu has dropped. West Bengal
and Uttar Pradesh, on the other hand, recorded significant increases in rice yield in 2012-13. Indira
Gandhi, the then Prime Minister of India, officially recorded the impressive progress of the Green
Revolution in agriculture by releasing a special stamp entitled ‘Wheat Revolution’ in Julyl968.
Food Corporation of India (FCI) This was set-up under the Food Corporation’s Act 1964, in order to
support operations for safeguarding the farmers, distribution of foodgrains throughout the country Tor
PDS and maintaining satisfactory level of operational and buffer stocks.
Minimum Support Price (MSP) This is the price at which the government (through the Food
Corporation of India) purchases crops from the farmers. Presently, there are 27 crops being
purchased with such prices including varieties of cereals, pulses, oilseeds, fibre crops and others.
Food Security In India

The Green Revolution was started in early 70s. Since then, our country has avoided famine even
during adverse weather conditions. India has become self-sufficient in foodgrains during the last 30
years due to the variety of crops grown. Foodgrains availability even in adverse conditions has been
ensured by the government through a food security system consisting of maintaining a buffer stock of
foodgrains, alongwith a Public Distribution System (PDS) for foodgrains and other essential items.
Buffer Stock
It is the stock of foodgrains (wheat and rice) procured by the government. Government purchases
wheat and rice from farmers through the Food Corporation of India (FCI) states having surplus
production. The farmers are paid a Minimum Support Price (MSP) for their crops. The MSP is
announced at the beginning of the sowing season to give an incentive to the farmers to grow more.
These purchased foodgrains are stored in granaries as a buffer stock. This stock is maintained to
distribute foodgrains through the PDS in the areas of the country where production is less. It is
provided, to the poorer sections of society at subsidised prices, i.e. lower than the market price which
is known as the issue price. The buffer stock also helps to resolve the problem of food shortage due
to a calamity or in adverse weather conditions.
Programmes For Food Security In India

In mid-1970s, National Sample Survey Organisation (NSSO) reported the high incidence of poverty
level. Due to this, three important food intervention programmes were introduced.
They are
• Public Distribution System (PDS) for foodgrains

• Integrated Child Development Services (ICDS)
• Food-For Work (FfW) programme.
Public Distribution System (PDS) Through government regulated ration shops, the food procured by
the FCI is distributed among the poorer sections of the society. This is called the Public Distribution
System (PDS). Ration shops are now present in most localities, villages, towns and cities. There are
about 5.5 lakh ration shops all over the country. Ration shops are also known as fair price shops.
They keep stock of foodgrains, sugar, kerosene oil for cooking. These items are sold to people at a
price lower than the market price. Any family with a ration card can buy .a stipulated amount of these
items (e.g. 35 kg of grains, 5 litres of kerosene, 5 kg of sugar, etc) every month from the nearby ration
shop. The ration cards are of three kinds, colour-coded for easy recognition
• Antyodaya card for the poorest of the poor.
• BPL card for families below the poverty line.
• APL card for all others.
Rationing
It is a term given to government controlled distribution of resources and scarce goods or services. It
restricts how much people are allowed to buy or consume at a particular time within a particular
period. Rationing in India was introduced in 1940s against the backdrop of the Bengal famine. Later,
it was revived in the wake of an acute food shortage during 1960s prior to the Green Revolution.
Current Status of Public Distribution System
In the beginning, the PDS coverage was universal with no discrimination between the poor and non-
poor. In 1992, a Revamped Public Distribution System (RPDS) was started in 1,700 blocks of the
country to provide the benefits of PDS in remote and backward areas. In 1997, a Targeted Public
Distribution System (TPDS) was introduced to target the ‘poor in all areas’, with a lower issue price
for foodgrains for them compared to the price paid by non-poor people. Further in year 2000, two
special schemes Antyodaya Anna Yojana (AAY) and Annapura Scheme (APS) were launched.
(i) Antyodaya Anna Yojana (AAY) for the ‘poorest of poor’. AAY was launched in December 2000.
Under the scheme, 1 crore of the poorest among the BPL families covered under the Targeted Public
Distribution System (TPDS) were identified.
Poor families were identified by the respective state rural development departments through a Below
Poverty, Line (BPL) survey. 25 kg of foodgrains were made available to each eligible family at a
highly subsidised+ rate of Rs. 2 per kg for wheat and ? 3 per kg for rice. This quantity was increased
from 25 kg to 35 kg from April 2002.
(ii) Annapurna Scheme (APS) for the ‘indigent senior citizen’. It provides 10 kg of foodgrains free of
cost per month to senior citizens who are not receiving any pension or have any other source of
income or having a family to support them, i.e. they are destitute.
Following are some remarkable achievements of PDS
• PDS has helped government to stabilise foodgrain prices, so that it is available to

consumers at affordable rates.
• It has helped in avoiding widespread hunger and famine by supplying food from surplus
regions to deficit ones.
• It also helped in increasing foodgrain production, besides providing income security to
farmers in some areas.
Criticisms of PDS
The implementation of the PDS still needs to be improved, because of the following reasons
• Buffer stocks are much higher than the rules.

• In some FCI godowns, grains are getting damaged or eaten by rats and still instances of
hunger are prevalent.
• High level of buffer stock of 65.3 million tonnes of wheat and rice in 2014 was much more
than the minimum level of buffer norms. The excess stock of foodgrains bought from
farmers at high , prices leads to high carrying costs for the government, besides leading
to deterioration and wastage.
• The pressure exerted by leading foodgrain producing states to increase the buying cost
has increased MSP. The rising’ MSP has increased the maintenance cost of procured
foodgrains, storage cost and transportation cost.
• The buying of foodgrains is concentrated in a few prosperous states like Punjab,
Haryana Western Uttar Pradesh, Andhra Pradesh and to a lesser extent in West Bengal.
• The high MSPs have made farmers to cultivate wheat and rice more resulting in
depletion of the water table, as they require more water to grow. This has also led to soil
degradation, endangering future sustainability of agricultural development in the regions
where these are grown.
Malpractices in PDS
PDS has also become ineffective in many regions of the country because dealers running the ration
shops are indulged in malpractices
The malpractices indulged into by the dealers include
• Diverting the grains to open market to get a better margin.

• Selling poor quality grains at ration shops.
• Irregular opening of the shops and so on.
The malpractices have resulted in consumers of Bihar, Uttar Pradesh, Madhya Pradesh and Odisha
buying much less foodgrains than the national average from the ration shops. In the Southern states,
where the shops are run by cooperatives, the consumers purchase much more than the national
average.
Since the introduction of Targeted Distribution System (TPDS), with three levels of prices for three
different income level families, the Above Poverty Line (APL) families do not have much incentive to
buy foodgrains from the ration shops. The prices for these families are not significantly lower than
market prices.
Subsidy
It is a payment that a government makes to a producer to supplement the market price of a
commodity. Subsidy helps in keeping consumer prices low while maintaining a higher income for
domestic producers.
Integrated Child Development Services (ICDS)
In 1975, it was introduced on an experimental basis. Its aim is to provide children upto 6 years of age
supplementary nutrition, immunisation, health, check-up, referral services, pre-school non-formal
education as well as nutrition and health education for their mothers.
Food-For-Work (FFW) Programme

The main objective of the Food for Work Programme is generation of supplementary wage
employment. It is open to all rural people who are in need of unskilled work wage employment.
National Food For Work Programme

National Food for Work Programme was launched on 14th November, 2004 in 150 most backward
districts of the country with the objective of intensifying the generation of supplementary wage
employment. The programme is open to all rural poor who are in need of wage employment and
desire to do manual unskilled work. It is implemented as a 100% centrally sponsored scheme and the
foodgrains are provided to the states free of cost. The Collector is the nodal officer at the district level
and has the overall responsibility of planning, implementation, coordination, monitoring and
supervision. The programme from 2005 has since been subsumed in NREGA.
Poverty Alleviation Programmes (PAPs)

Over the last few years, several other Poverty Alleviation Programmes (PAPs), were launched mostly
in rural areas. Some of – them have also been restructured.
Some of these programmes have explicit food components. Others are employment programmes,
which improve food security by increasing the income of the poor. For example, Rural Wage
Employment Programme, Employment Guarantee Scheme, Sampurna Grameen Rozgar Yojana and
Mid-day-Meal.
Role Of Cooperatives In Food Security
The role played by cooperatives in food security of India is important especially in the Southern and
Western parts of the country. The cooperative societies set-up shops to sell low priced goods to poor
people. For example, out of all fair price shops running in Tamil Nadu, around 94% are being run by
the cooperatives.
The examples shown below are success stories of cooperatives in order to contribute in food security
of India
In Delhi, Mother Dairy is making progress in the provision of milk and vegetables to the consumers at
a controlled rate decided by the Government of Delhi.
Amul is another success story of cooperatives in milk and milk products from Gujarat. It has brought
about the White Revolution in the country.
In Maharashtra, Academy of Development Science (ADS) has facilitated a network of NGOs for
setting up grain banks in different regions. ADS organises training and capacity building programmes
on food security for NGOs. The ADS Grain Bank programme is acknowledged as a successful and
innovative food security intervention.
Summary
The availability, accessibility and affordability of food to all people at all times is called food security.
When there is problems in food production or distribution, poor household has to suffer the most.
The food, security in India depends on the Public Distribution System (PDS) and vigilant and timely
action of the government.
Food is an essential item for the survival of human being.
Food security of a nation is ensured if all of its citizens have enough nutritious food available
(availability), all person having the capacity to buy food (affortat>iJit^) and there is no barrier on
access to food (accessibility).
The poorest strata of society are mostly food insecure and the better off might face food insecurity
during national disaster and calamity.
During natural calamity there is decrease in foodgrain production, which causes shortage of
foodgrain. The increased price ultimately leads to starvation and famine.
Epidemics during famine is caused by forced use of contaminated water or decaying food and loss of
body resistance due to weakening from starvation.
Landless people, traditional artisans, petty self employed workers and destitutes Including beggars
are worst affected groups from food and nutrition insecurity.
Workers of ill-paid occupations and casual labourer are the most food insecure people in urban
areas.
Agriculture is seasonal and low paying activity.
Besides the inability to buy food, the social composition (like SCs, STc, OBCs etc) also has role in
food insecurity.
Economically backward states, with high incidence of poverty, tribal and rural areas, regions prone to
natural disaster has largest number of food insecure people.
For example, Bihar, Jharkhand, Eastern UP, West Bengal, Madhya Pradesh, Maharashtra etc.
Poverty and hunger are two dimensions of food insecurity.
Hunger can be chronic or seasonal.
The chronic hunger is the consequence of a diet regularly deficient in quantity and quality due to lack
of income.
The seasonal hunger is the consequence of seasonal nature of food production and harvesting which
affects landless agricultural labourers the most.
Through Green Revolution, India attained self sufficiency in foodgrain production.
The food security system of government consist of component of buffer stock and public distribution
system.
Buffer stock is the stock of foodgrains (wheat and Rice) procured by government (through FCI) from
surplus producing state for distribution (through PDS) to deficit states and the poorest section of
society.
The pre-announced price, paid by government to farmers is called Minimum Support Price (MSP).
The price at which foodgrains is distributed to poorer section of people is called issue price. It is lower
than market price.
The system of distribution of food procured by the FCI among the poorer section of society is called
the Public Distribution System (PDS).
Ration shops (also known as fair price shops), keep stocks of foodgrains, sugar, kerosene etc to be
sold to people at a price lower than market price.
In addition to PDS, the other poverty alleviation programme comprising component of food security
are : Integrated Child Development Service (ICDS); Food For Work (FFW), mid day meals,
Antyodaya Anna Yojana (AAY) etc.
Various cooperatives, NGOs are also working intensively along with government to ensure food
security of India.
Mother Dairy, Amul, Grain banks are regarded as successful and innovation food security
intervention.
Development Class 10 Notes Chapter 1
Different notions of development:

Different people have different notions of development because life situations of persons are different
and therefore their aspirations and desires and goals.
Importance of averages:
Since countries have different populations comparing total income does not tell us what an average
person is likely to earn, hence we compare the average income which is the total income of the
country divided by its total population. It is also called per capita income.
Criterion used by the World Bank as per World Development Report 2006, in classifying the
countries. World Bank says that countries with the per capita income of Rs 4,53,000 per annum and
above in 2004 are called rich countries and those with the per capita income of Rs 37,000 or less are
called low-income countries. India comes in the category of low income countries because its per
capita income in 2004 was just Rs 28000 per annum. Rich countries excluding the countries of
Middle-East and certain other small countries are generally called developed countries.
Key terms:
• Development. Growth of economy along with the improvement in the quality of life of the
people like health, education etc.
• Per capita income. Is the average income obtained as the ratio between National Income
and Population of a country.
• National income. Is the money value of final goods and services produced by a country
during an accounting year.
Human development Index:
It is a composite Index prepared by United Nations Development Programme (UNDP) through its
Annual Human Development Report published every year. Major parameters such as longevity of life,
levels of literacy and Per capita income are used to measure the development of countries. World
countries are ranked accordingly in to Very High Developed countries, High Developed countries,
Medium Developed countries and Low Developed countries.
• Infant Mortality Rate. The number of children that die before the age of one year as a
proportion of 1,000 live birth in that particular year.
• Literacy Rate. It measures the proportion of literate population in the 7 and above age
group.
• Net Attendance Ratio. It is the total number of children of age group 6-10 attending
school as a percentage of total number of children in the same age group.
• Body Mass Index. (BMI) one way to find out if adults are undernourished is to calculate
Body Mass Index. Divide the weight of a person (in kg) by the square of the height (in
metres). If this figure is less than 18.5 then the person would be considered
undernourished. If this BMI is more than 25, then a person is overweight.
Sustainable Development:
It means development without hampering the Environment. It is the process of development that
satisfies the present needs without compromising the needs of the future generation.
Sectors of Indian Economy Class 10 Chapter 2
Primary sector:
When we produce goods by exploiting natural resources, it is an activity of the primary sector.
Secondary sector:
Covers activities in which natural products are changed into other forms through ways of
manufacturing, it is also called as industrial sector.
Tertiary sector:
These are the activities that help in the development of the primary & secondary sector. These
activities by themselves do not produce good but they are an aid and support to the production
process. Example: Transportation-Goods that are produced in the primary sector need to be
transported by trucks or trains and than sold in the wholesale and retail shops; Storage—at times it is
necessary to store these products in godowns, which is also a service made available.
Communication -talking to others on telephone); Banking-borrowing money from the banks. Since
these activities are generate services rather than goods it is also called Service sector.
Gross Domestic Product (GDP):
The value of final goods and services produced in each sector during a particular year provides the
total production of the sector for that year. And sum of production in three sectors give Gross
Domestic Product—GDP of the country. It is the value of all final goods and services produced within
the country during a particular year.
Underemployment:
This is the situation of where people are apparently working but all of them are made to work less
than their potential. This kind of underemployment is hidden in contrast to someone who does not
have a job. Hence, it is also called disguised unemployment.
Mahatma Gandhi National Rural Employment Guarantee Act 2005, (MNREGA 2005):
Under NREGA 2005, all those who are able to, and are in need of, work have been guaranteed 100
days of employment in a year by the government. If the government fails in its duty to provide
employment, it will give unemployment allowances to the people.
Organised sector:
It covers those enterprises or places of work where the terms of employment are regular and
therefore, people have assured work.
Unorganized sector:
It is characterized by small and scattered units which are largely outside the control of the
government. There are rules and regulations but these are not followed.
Public sector:
In this sector government owns most of the assets and provides all the services.
Growing importance of Tertiary sector:
• In any country several services such as hospitals , educational institutions, post and
telegraph services, police stations, courts, village administrative offices, municipal
corporations, defense, transport, banks, insurance companies etc. are required.
• The development of the agriculture and industrial leads to the development of services
such as transport, trade, storage and the like. Greater the development of primary and
secondary sectors more will be demand of such services.
• As the income level rise, certain sections of people start demanding many more services
like
eating out, tourism, shopping , private hospitals, professional training etc. This is found
especially in the big cities.
• Over the past decade or so certain new services such as those based on the information
and communication technology have become important & essential.
Money and Credit Class 10 Notes Chapter 3
Money:
Money acts as an intermediate in the exchange process & it is called medium of exchange. In many
of our day to day transactions, goods are being bought & sold with the use of money.
The reason as to why transactions are made in money is that, a person holding money can easily
exchange it for any commodity or service that he or she wants.
Double coincidence of wants:
When in the exchange, both parties agree to sell and buy each others commodities it is called double
coincidence of wants. In the barter system double coincidence of wants is an essential feature.
Demand Deposits in Bank:
Deposits in the bank account that can be withdrawn on demand. People need only some currency for
their day to day needs. For instance workers who receive their salaries at the end of each month,
have some extra cash. They deposit it with the banks by opening a bank account in their name. Bank
accept the deposits and also pay an interest rate on the deposits.
Cheque:
Paper instructing the bank to pay a specific amount from a person’s account to the person in whose
name the cheque is drawn.
Reserve Bank of India:
It is the central bank of India which controls the monetary policy of the country. Reserve Bank of India
supervises the activities of formal sector and keep the track of their activities but there is no one
supervise the functioning of informal sector. Periodically banks have to submit information to the RBI
on how much they are lending and to whom, at what interest rate, etc.
Credit:
The activity of borrowing and lending money between two parties.
Collateral:
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with
banks) and uses this as a guarantee to a lender until the loan is repaid. Property such as land titles,
deposits with banks, livestock are some common examples of collateral used for borrowing.
Terms of Credit:
Interest rate, collateral and documentation requirement, and the mode of repayment together
comprise what is called the terms of credit. The terms of credit vary substantially from one credit
arrangement to another. They may vary depending on the nature of the lender and the borrower.
Formal sector:
Includes banks & cooperatives; RBI supervises the functioning of formal sources of loans. To see that
the bank maintains a minimum cash balance and monitors that these banks give loans not just to
profit-making business and traders but also to small cultivators , small scale industries , to small
borrowers etc. periodically banks have to submit information to RBI of their activities.
Informal sector:
Includes money lenders, traders, employers, relatives & friends etc. There is no one to supervise their
credit activities. They can charge whatever rate of interest. There is no one to stop them from using
unfair means to get their money back.
Self Help Groups (SHG):
A typical SHG has 15-20 members usually belonging to a neighborhood, who meet and save
regularly. Saving per month varies from 25-100 rupees or more depending upon the ability of the
people. Members take small loans from group itself to meet their needs.
Globalisation and the Indian Economy Class 10
Notes Chapter 4
Globalisation refers to the integration of the domestic economy with the economies of the world.
An MNC is a company that owns and controls production in more than one nation.
Foreign Investment is investment made by MNCs.
Advantages of Foreign Trade—
1. ‘Foreign Trade’ has facilitated the travel of goods from one market to another.
2. It provides a choice of goods to the buyers.
3. Producers of different countries have to compete in different markets.
4. Prices of similar goods in two markets in two different countries become almost equal.
SEZs or Special Economic Zones
are industrial zones being set up by the Central and State Governments in different parts of the
country. SEZs are to have world class facilities such as electricity, water, roads, transport, storage,
recreational and educational facilities. Companies who set up production units in SEZs are exempted
from taxes for an initial period of five years. SEZs thus help to attract foreign companies to invest in
India.
Reasons to put barriers to foreign trade:
1. The Indian government after independence had put barriers to foreign trade and
investment. This was done to protect the producers within the country from foreign
competition. Industries were just coming up in the 1950s and 1960s and competition from
imports at that stage would not have allowed these industries to develop and grow.
Imports of only essential items such as machinery, fertilizers, petroleum etc. was
allowed.
2. To protect the Indian economy from foreign infiltration in industries affecting the
economic growth of the country as planned. India wanted to move faster to catch up with
the main industries in the world market and therefore had to keep an extra watch on its
progress in international trade and give incentives to the more rapidly growing industries
through fiscal tariff and other means.
Around 1991, some changes were made in policy by the Indian government as it was decided that
the time had come for the Indian producers to compete with foreign producers. This would not only
help the Indian producers to improve their performance but also improve their quality.
Liberalization
means the removal of barriers and restrictions set by the government on foreign trade. Governments
use trade barriers to increase or decrease (regulate) foreign trade to protect the domestic industries
from foreign competition. Example, Tax on imports. Around 1991, government India adopted the
policy of liberalization.
World Trade Organization (WTO) was started at the initiative of the developed countries. Its main
objective is to liberalize international trade.
Privatization means transfer of ownership of property from public sector to private sector.
Business Process Outsourcing (BPO)
is the contracting of non primary business activities and functions to a third party service provider.
Economic Reforms or New Economic Policy is policy adopted by the Government of India since
July 1991. Its key features are Liberalization, Privatisation and Globalisation (LPG).
MNCs set up production in various countries based on the following factors:
• MNCs set up offices and factories for production in regions where they can get cheap
labour and other resources; e.g., in countries like China, Bangladesh and India.
• At times, MNCs set up production jointly with some of the local companies of countries
around the world. The benefit of such joint production to the local company is two-fold.
First, the MNCs can provide money for additional investments for faster production.
Secondly, the MNCs bring with them the latest technology for enhancing and improving
production.
• Some MNCs are so big that their wealth exceeds the entire budgets of some developing
countries. This is the reason why they buy up local companies to expand production.
Example, Cargill Foods, An American MNC has bought over small Indian company such
as Parakh Foods.
• MNCs control production by placing orders for production with small producers in
developing nations; e.g., garments, footwear, sports items etc. The products are supplied
to these MNCs which then sell these under their own brand name to customers.
Factors which have helped in globalization:
• Technology. Rapid improvement in technology has contributed greatly towards
globalization.
• Development in information and communication technology has also helped a great deal.
Telecommunication facilities — telegraph, telephone (including mobile phones), fax are
now used to contact one another quickly around the world. Teleconferences help in
saving frequent long trips across the globe.
• Information technology has also played an important role in spreading out production of
services across countries. Orders are placed through internet, designing is done on
computers, even payment for designing and printing can be arranged through internet.
Consumer Rights Class 10 Notes Chapter 5
Consumer is a person who buys and uses a good or service from the market after making a
payment.
Some common ways by which consumers may be exploited by manufacturers and traders:
• Underweight and under-measurement: Goods sold in the market are sometimes not
measured or weighed correctly.
• High prices: Very often the traders charge a price higher than the prescribed retail price.
• Sub-standard quality: The goods sold are sometimes of sub-standard quality, e.g.
selling medicines beyond their date of expiry, selling deficient or defective home
appliances.
• Duplicate articles: In the name of genuine parts or goods, fake or duplicate items are
sold.
• Adulteration and impurity: In costly edible items like oil, ghee and spices, adulteration
is common in order to earn more profit. This causes heavy loss to the consumers.
• Lack of safety devices: Fake or inferior electronic goods, electrical devices or other
appliances, produced locally lack the required in-built safety measures. This may cause
accidents.
• Artificial scarcity: Some unscrupulous businessmen create artificial scarcity by
hoarding. They sell their goods for a higher price by creating panic among consumers.
• False and incomplete information is provided by sellers which can easily mislead
consumers.
• Unsatisfactory after-sale service: The suppliers do not provide the satisfactory after-
sale service despite the necessary payments on items such as electronics, automobiles,
etc.
Consumer International:
An international umbrella organization to over 240 member organizations from over 220 countries.
COPRA: This Act (COPRA) 1986 tries to ensure:
• information, safety, redressal, representation and consumer education.

• Under COPRA, a’ three tier quasi-judicial machinery at the district, state and national
level helps in solving consumer disputes.
• Consumer Movement with its different organisations helps in exerting pressure on
business firms as well as the government to correct their conduct which may be against
the interests of the consumers at large.
Right to Information Act, 2005:
This act gives rights to the citizen to have information about the government departments, their
policies practices and procedures.
ISI Mark:
A certification mark for industrial products in India developed by the Bureau of Indian Standards.
AGMARK:
A certification mark employed on agricultural products in India by the directorate of Marketing and
Inspection.
Hallmark:
An official mark struck on items made of precious metals like gold silver platinum etc.
Duties of consumers while shopping are

A consumer must check for a certification of quality such as ISI mark, Agmark or Hallmark;
Consumers must ensure that they receive a valid bill or cash memo and warranty on purchase of
items especially electronic goods such as TV, laptop, mobile phones etc.; The consumer should not
allow a salesman to force him/her to buy a particular brand; and a consumer should inform concerned
authorities if a shopkeeper is selling defective goods.
Consumer Forum:
The consumer movement in India has led to the formation of various organizations locally known as
consumer forums or consumer protection councils. They guide consumers on how to file cases in the
consumer court. They represent consumers in the consumer courts. These voluntary organizations
receive financial support from the government for creating awareness among the consumers.
Indian Economy on the Eve of Independence
Class 11 Notes Chapter 1
Agricultural Sector on the Eve of Independence
India’s agricultural sector (on the eve of independence) exhibited three principal characteristics, these
characteristics pointed to backwardness of India’s agriculture as well as its stagnation
• Low level of productivity

• High degree of vulnerability
• A wedge between owners of the soil and tillers of the soil.
Factors causing backwardness and stagnation of Indian agriculture during the British rule
• Land revenue settlement under the British Raj

• Forced commercialisation of agriculture
Industrial Sector
“Systematic de-industrialisation” is the term that describes the status of industrial sector during the
British rule. It implied two things
• Decay of world famous traditional handicraft industry owing to discriminatory policies of

the British Government.
• Bleak growth of modern industry now to lack of investment opportunities.
Two-fold motive behind the systematic .(industrialisation during the British Rule in India.
• To exploit India’s wealth of raw material and primary products. It was required to fulfill the
emerging needs of industrial inputs in the wake of industrial revolution in Britain.
• To exploit India as a potential market for the industrial products of Britain.
Foreign Trade India had occupied a place of eminence in the area of Foreign trade, since ancient
times. But the British rule in India ended this eminence.
Drain of India’s Wealth

Huge administrative expenses were incurred by the British Government to manage their colonial i ale
in India. Also huge expenses were incurred by the British Government to fight wars in pursuit of their
policy of imperialism.
Demographic Condition
Demographic conditions during the British rule exhibited all features of a stagnant and backward
economy. Both birth rate and death rate were very high nearly 48 and 40 per thousand respectively.
Occupational Structure
Greater dependence on agriculture as suggested by occupational structure on the eve of
independence implied lesser availability of land per head for the farming population. Accordingly
agriculture was taken largely as a means of subsistence and less as an occupation for profit.
Infrastructure
Infrastructure refer to the elements of economic change as well as elements of social change which
serve as a foundation for growth and development of a country. Development of infrastructure is a
precondition to the economic and social development of a country.
Economy of a country includes all production, distribution or economic activities that relates with
people an determines the standard of living. On the eve of independence Indian economy was in a
very bad shape due to the presence of British colonial rule.
The Britishers generally framed policies that favoured England. The only purpose of Britishers was to
unjustly enrich themselves at the cost of India’s economic development. Thus, in 1947, when British
transferred power back to India, we inherited a crippled economy.
India’s National and Per Capital Income

Under Colonial Rule There were no efforts from the part of the colonial government to measure the
national and per capital income of India. Some individual attempts were made to measure such
incomes but produced conflicting and inconsistent results. The contribution of VKRV Rao and
Dadabhai Naoroji are considered very significant in this context.
Low Economic Growth Under Colonial Rule

India had an independent economy before the arrival of British rule. But the Britishers, dominated it
for over a period of 200 years. Britishers framed policies that protected and promoted the economic
interests of their own country. They transformed India into supplier of raw materials and consumer of
finished goods from the factories of Britain. Such policies affected Indian economy very adversely.
In this context, we will discuss the conditions of certain sectors that were badly affected by the
presence of colonial rule, i.e. on the eve of independence.
State of Agriculture Sector

Agriculture was the main source of livelihood for most of the people of India, and about 85% of the
country’s population lived mostly in villages and derived livelihood directly or indirectly from
agriculture.
Inspite of such a large segment of the population being dependent of agriculture, either directly or
indirectly, this sector was facing stagnation and constant deterioration, as is brought forward through
the following points.
• Low Level of Productivity Productivity, i.e. output per hectare of land was very low. This
led to a low level of output, inspite of a large area under cultivation.
• High degree of Vulnerability Agriculture was vulnerable to climatic factors and mostly
affected by erratic rainfall. Poor rainfall generally led to a low level of output and also to
crop failures. No effort was made by British Government to provide permanent source of
irrigation facilities for the farmers.
The reasons for stagnation of agricultural sector were

(i) Land Revenue System
The Britishers introduced the zamindari system. The zamindars were recognised as permanent
owners of the soil. Zamindars were to pay a fixed sum to the government as land revenue and they
were absolutely free to extract as much from the tillers of the soil as they could.
Their main interest was in rent collection regardless of the economic conditions of cultivators and this
caused misery and social tension among the latter.
Apart from this there are two more systems namely, the Ryotwari and the Mahalwari were prevalent.
(ii) Lacking of Resources

Because the tillers had to pay huge amount of rent, referred to as ‘Lagaan’, they were not left with
any surplus to be able to provide for resources needed in agriculture in the form of fertilisers or
providing for irrigation facilities. This further lowered the agricultural productivity.
(iii) Commercialisation of Agriculture

Commercialisation of agriculture refers to shift from cultivation for self-consumption to cultivation for
sale in the market. It also refers to cultivation of cash-crops like cotton, indigo, etc.
Due to commercialisation of agriculture, there was some evidences of a relatively higher yield of cash
crops in certain areas of the country. But this could not help in improving the conditions of Indian
farmers.
Instead of producing food crops, farmers were producing cash crops, which were ultimately to be
used by British industries.
State of Industrial Sector
In the pre-british period, India was particularly well-known for its handicraft industries, in the fields of
cotton and silk textiles, metal and precious stone works, etc. These products enjoyed a worldwide
market based on the reputation of the fine quality of material used and the high standards of
craftsmanship.
But the Britishers followed a policy of systematic de-industrialisation by creating circumstances

conducive to the decay of handicraft industry and not taking any steps to promote modern industry
and reduced India to a mere exporter of raw material and importer of finished goods.
The following points bring farword the state of the industrial sector at the eve of independence
1. Decay of Handicraft Industry
The traditional handicraft industry in India enjoyed worldwide reputation, but the British misrule in
India led to the decline of Indian handicraft industry. The Britishers adopted the following policies to
systematically destroy the handicraft industry.
• Discriminatory Tariff Policy of the State The Britishers followed a discriminatory tariff
policy by allowing tariff free exports of raw material from India (to provide for the
requirements of their industries in Britain) and tariff free import of British Industrial
products (to promote British goods in India), but placed a heavy duty on the export of
handicraft products. So, Indian handicraft products started loosing their domestic as well
as foreign markets.
• Competition from Machine-made Products Machine-made products from Britain were
cheap and better in quality than the handicraft products. This competition forced many a
handicrafts to shut down their business.
• Introduction of Railways in India The Britishers introduced Railways in India, to expand
the market of its low priced industrial products. Consequently, the demand of high-priced
handicraft products started to fall, thus leading to the downfall of handicraft industry.
2. Slow Growth of Modem Industry

Under second half of 19th. century, modern industry showed slow growth. This development was
confined to the setting up of cotton and jute textile mills.
Subsequently, the iron and steel industries began coming up in the beginning of the 20th century.
In this context, the Tata Iron and Steel Company (TISCO) was incorporated in August, 1907 in India.
It established its first plant in Jamshedpur [Bihar, at present Jharkhand].
But, these industries were the result of private endeavour. The state participation in the process of
modem industrialisation was very limited, as is evident from the following points
• Limited Growth of Public Sector Enterprises The public sector enterprises such as
railways, power, post and telegraph were confined to areas which would enlarge the size
of market for British products in India.
• Lopsided Industrial Structure The industrial growth was lopsided, in the sense that
consumer goods industry was not adequately supported by the capital goods industry.
• Lack of Basic and Heavy Industries No priority was given for the development of basic
and heavy industries. Tata Iron and Steel Mills was the only basic industry in India.
Textile Industry in Bengal

Muslin is a type of cotton textile which had its origin in Bengal,particularly, places in and around
Dhaka (now the capital city of Bangladesh). Daccai Muslin had gained worldwide fame as an
exquisite type of cotton textile.
The finest variety of muslin was called malmal. Foreign travellers also used to refer to it as malmal
shahi or malmal khas meaning that it was worn by or fit for, the royalty.
State of Foreign Trade
India has been an important trading nation since ancient times.

But when the restrictive policies of commodity production, trade and tariff were imposed by the
colonial government, it adversely affected the structure, composition and volume of India’s foreign
trade.
Following were the reasons behind the poor growth of foreign trade
1. Exporter of Primary Products and Importer of Finished Goods
Under the colonial rule, India became an exporter of primary products such as raw silk, cotton, wool,
sugar, indigo, jute, etc and an importer of finished consumer goods like cotton, silk and woollen
clothes and capital goods like light machinery produced in the factories of Britain.
2. Britain’s Monopoly Control

Britain maintained a monopoly control over India’s exports and imports. Due to this, more than half of
India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries
like; China, Ceylon (Sri Lanka) and Persia (Iran). The opening of Suez Canal in 1869 further
intensified British control over India’s foreign trade.
3. Drain of India’s Wealth
An important characteristic of foreign trade throughout the colonial period was the generation of a
large export surplus. But this surplus came at a huge cost to the country’s econo Several essential
commodities like food grains, kerosene, were scarcely available in the domestic market.
Also, this surplus was not used in any developmental activity of India. Rather, it was used to maintain
the administrative set-up of the Britishers or bear the expenses of war taught by Britain.
All of this, led to the drain of Indian wealth.
State of Occupational Structure

During the colonial period, the occupational structure of India exhibited its backwardness. The
agricultural sector accounted for the largest share of the work force which remained at a high of 70-
75% of the work force and the manufacturing and services sectors accounted for only 10 and 15-20%
respectively.
There existed a growing regional disparity with few states such as Orissa, Rajasthan and Punjab
witnessing an increase in agricultural workforce while the states which were the parts of Madras
presidency. Bombay and Bengal witnessed a decline in the percentage of work force dependent on
agriculture.
State of Infrastructure
Infrastructure comprises of such industries which help in the growth of other industries. Under the
colonial period, basic infrastructure such as railways, port per transport, posts and telegraphs
developed.
However, the real motive behind this development was not to provide basic amenities to the people
but to sub serve various colonial interests.
The state of infrastructure under the colonial rule can be understood with the help of following points
1. Roads
Roads constructed before independence were not fit for modern transport. It was very difficult to
reach rural areas during rainy season.
The roads were built only to serve the purpose of mobilising the army within India and transporting
raw materials from the countryside to the nearest railway station or the port for exporting it.
2. Railways
British rulers introduced railways in India in 1850 and it began its operation in 1853. It is considered
as one of the important contribution of Britishers.
The railways affected the structure of the Indian economy in the following two ways
• It enabled people to undertake long distance travel and thereby break geographical and
cultural barriers.
• It fostered commercialisation of Indian agriculture which adversely affected the self-
sufficiency of the village economies in India.
So, the social .benefits provided by the Railways was outweighed by the country’s huge economic
loss.
3. Water and Air Transport

The colonial rulers took measures for the development of water transport. The inland waterways, at
times, also proved uneconomical as in the case of the coast canal on the Orissa coast. The main
purpose behind their development was to serve Britain’s colonial interest.
The colonial government also showed way to the air transport in 1932 by establishing Tata Airlines.
Thus, in this way it inaugurated the aviation sector in India.
4. Communication
Modern postal system started in India in 1837. The first telegraphy line was opened in 1857. The
introduction of the expensive system of electric telegraph in India served the purpose of maintaining
law and order.
Demographic Condition
Various details about the population of British India were first collected through a census in 1881.
Before 1921, India was in the first stage of demographic transition. The second stage began after
1921. However neither the total population of India nor the rate of population growth at this stage was
very high. Though suffering from certain limitations, it revealed the Unevenness in India’s population
growth. The population grew at a rate of 1.2% up to the year 1951.
On the eve of independence the demographic condition was as follows
• The overall literacy level was less than 16%.

• The female literacy level was at a negligible low rate of about 7%.
• Public health facilities were either unavailable to large chunks of population or when
available, were highly inadequate. Infant mortality rate was 218 per thousand in contrast
to present infant mortality rate of 63 per thousand.
• Life expectancy was very low 44 years in contrast to the present 66 years.
• Both birth rate and death rate were very high at 48 and 40 per thousand of persons
respectively.
Indian Economy 1950 – 1990 Class 11 Notes
Chapter 2
Economic Planning
It is a process under which a central authority defines a set of targets to be achieved within a
specified period of time.
Capitalism It is an economic system in which major economic decisions like
• What goods and services are to be produced.

• How goods and services are to be distributed are left to the free play of the market forces
or the forces of supply and demand.
Socialism
It is an economic system in which major economic decisions are taken by the government, keeping in
view the collective interest of the society as a whole.
Mixed Economy
It is an economic system in which major economic decisions are taken by the Central Government
authority as well as are left to the free play of the market forces.
Goals of Five Year Plans

A plan should have some clearly specified goals. The goals of five year plans are
• Growth Economic growth implies a consistent increase in GDP or a consistent increase

in the level of output or a consistent increase in the flow of goods and services in the
economy over a long period of time.
• Modernisation To increase the production of goods and services to producers with the
adoption of new technology.
• Self-reliance It means avoiding imports of those goods which could be produced in India
itself. This policy was considered a necessity in order to reduce our dependence on
Foreign countries, especially for food.
• Equity It implies equitable distribution of income so that the ^benefits of growth are
shared by all sections of the society.
Agriculture
It refers to all those activities which are related to the cultivation of land for the production of crops;
food crops and non-food crops.
(i) Importance of Agriculture in the Indian Economy
• Contribution to GDP
• Supply of wage goods
• Employment
• Industrial raw material
• Contribution to international trade
• Contribution to domestic trade
• Wealth of the nation
(ii) Problems of Indian Agriculture
• Lack of permanent means of irrigation

• Deficiency of finance
• Conventional outlook
• Small and scattered holding
• Lack of organised marketing system
Reforms in Indian Agriculture

(i) Technical Reforms
• Use of HYV seeds

• Use of chemical fertilisers
• Scientific farm management practices
• Mechanised means of cultivation
(ii) Land Reforms
• Abolition of intermediaries
• Regulation of rent
• Consolidation of holding
• Ceiling on land holding
• Co-operative farming
(iii) General Reforms
• Expansion of irrigation facilities

• Provision of credit
• Regulated market
• Price support policy
Marketable Surplus
It refers to surplus of farmer’s output over and above his own farm consumption.
Thus, Marketable surplus of wheat = Output of wheat – On farm consumption of wheat
Green Revolution
It started in India in year 1967-68. In the year, 1967-68 itself, foodgrain production increased by
nearly 25%. So, much increase in foodgrain production in a country which earlier used to import
foodgrains.
Industry
Industry provides employment in agriculture; it promotes modernisation and overall prosperity.
Importance of industry are as follows
• Structural transformation
• Source of employment
• Source of mechanised means of farming
• Imparts dynamism to growth process
• Growth of civilisation
• Infrastructural growth
Industrial Policy Resolution 1956 (IPR-1956)
• Three-fold classification of industries

• Industrial licensing
• Industrial soaps
Private Sector
It was assigned only a secondary role in the process of industrialisation. Industries in the private
sector could be established only through a license from the government.
Small Scale Industries (SSI)

These were accorded a high priority with a view to promoting the goals of ‘employment and equity’.
Import Substitution
Inward looking trade strategy is called import substitution.
On 15 th August, 1947, India attained its freedom. After independence, Nehru and many other
leaders decided the type of economic system that will prove beneficial for India. In order to achieve
the objectives of ‘growth with equity’, mixed economy was introduced as the economic system of
India.
Topic 1 Economic System and Planning

Economic System
Economic system is defined as an arrangement by which the central problems of an economy are
solved.
The three basic central problems of an economic system are
• Choice of Production What goods and services should be produced in the country?
• Choice of Technology How should the goods and services be produced? Should
producers use more human labour or more capital for producing things,
• Distribution of Goods and Services How should goods and services be distributed among
people?
On the basis of government intervention, economic system can be classified as
Socialist Economy
It is an economic system in which all economic decisions are taken by the government. In this
system, the government decides what goods are to be produced in accordance with the needs of
society, how goods are to be produced and how they should be distributed.
Socialist economy promotes equitable distribution of income. However, it also suffers from the
drawbacks of a bureaucratic set up in the form of red-tapism and corruption.
In Cuba and China, most of the economic activities are governed by the socialistic principles.
Capitalist Economy
Capitalist economies depend upon the market forces of demand and supply. In this type of economy,
only those consumer goods will be produced that have good demand in the market and yield profit to
the producers.
For example, cars will be produced if they are in demand and also if they can earn profits for the
producer.
In this economy, the goods and services produced are distributed among people not on the basis of
what people need but on the basis of purchasing power.
• Capitalist economy generally manifests unequal distribution of income, but it also

generates fastest growth in output and national income
• Capitalist economy is also called laissez faire or free market economy, it exists in North
America, Japan, Australia, Western Europe, etc.
Mixed Economy
It is an economic system in which public sector and private sector exist side by side.
In this economy, the market will provide whatever goods and services it can produce well and the
government will provide essential goods and services which the market fails to provide.
Merits of Mixed Economy
• Mixed economy gives proper scope to private individuals to co-exist and contribute
towards economic development.
• In this, planned economic development ensures stability . and balanced development.
• In this, competition between the private sector and public sector industries is there. It
leads to enhanced productivity.
Demerits of Mixed Economy
• Mixed economy cannot effectively control the private sector industries which are outside
the government purview.
• It is characterised by red-tapism and high degree of corruption.
• In it, there is concentration of economic power in the hands of private sector, politicians
and bureaucrats.
Economic Planning
Economic planning is a process in which a central authority of a country defines a set of goals to be
achieved within a specified period, sets out a plan to achieve those goals, keeping in view the
country’s resources.
Planning commission defines economic planning as, ‘Economic planning means utilisation of
country’s resources in different development activities in accordance with national priorities’. Now, let
us understand what a ‘plan’ is?
• A plan spells out how the resources of nation should be efficiendy utilised.
• It should have some general goals which are achieved through specific objectives within
a specified period of time.
To formulate plans, Planning Commission was set up in 1950 under the chairmanship of Jawaharlal
Nehru, the first Prime Minister of independent India.
Its aim was to promote rapid rise in standard of living of the people, increase production and offer
employment opportunities in India. To facilitate economic planning Five Year Plans were forniulated.
The first Five Year Plan was introduced in April 1951.
All the Five Year Plans are formulated keeping the below objectives in mind
Growth
It refers to increase in the country’s capacity to produce the output of goods and services within the
country. It implies either a larger stock of productive capital or a large size of supporting services like
transport and banking.
Increase is GDP is a good indicator of economic growth. Gross Domestic Product (GDP) is the
market value of all final goods and services produced in the different sectors of an economy, viz the
primary sector, the secondary sector and the tertiary sector during an year within the domestic teritory
of a country.
Modernisation
Adoption of new technology is called modernisation. It is done with an aim to increase the production
of goods and services. For example, a farmer can increase the output on the farm by using new seed
varieties instead of using old ones.
Modernisation refers to not only change in production methods, but also change in the social outlook
of a society by granting equal status to women and making use of their talent in the productive
process.
Self-Reliance
A nation can promote economic growth and modernisation by using its own resources or by using
resources imported from other nations. The first seven Five Year Plans gave importance to self-
reliance by avoiding imports. This policy was considered a necessity in order to reduce our
dependence on foreign countries especially for food.
Equity
It refers to reduction in disparity of income or wealth, by uplifting weaker sections of the society. It
also refers to distribution of economic power equally or in such way that every Indian should be able
to meet his or her basic needs such as food, a decent house, education, healthcare, etc.
Mahalanobis
The Architect of Indian Planning
Prasanta Chandra Mahalanobis was born in 1893 in Calcutta. He was educated at the Presidency
College in Calcutta and at Cambridge University in England. His contributions to the subject of
statistics brought him international fame. In 1946, he was made a Fellow (member) of Britain’s Royal
Society, one of the most prestigious organisations of scientists.
Mahalanobis established the Indian Statistical Institute (ISi) in Calcutta and started a journal,
Sankhya. Mahalanobis had contributed a lot in the formulation of our Five Year Plans. The Second
Plan, became the landmark of his contribution.
During the Second Plan period, Mahalanobis invited many distinguished economists from India and
abroad to advise him on India’s economic development. Some of these economists became Nobel
Prize winners later, which shows that he could identify individuals with talent.
Many economists today reject the approach to planning formulated by Mahalanobis but he will always
be remembered for playing a vital role in putting India on the road to economic progress and
statisticians continue to profit from his contribution to statistical theory.
Liberalisation, Privatisation and Globalisation –
An Appraisal Class 11 Notes Chapter 3
Economic Reforms
These were based on the assumption that market forces would steer the economy into the path of
growth and development. Economic reforms started in 1991 in India.
Need for Economic Reforms
• Mounting fiscal deficit

• Adverse balance of payment
• Gulf crisis
• Fall in foreign exchange reserves
• Rise in prices
Liberalisation
Liberalisation of the economy means its freedom from direct or physical controls imposed by the
government.
Economic Reforms Under Liberalisation

(i) Industrial Sector Reforms
• Abolition of industrial licensing.

• De-reservation of production areas.
• Expansion of production capacity.
• Freedom to import goods.
(ii) Financial Sector Reforms
Liberalisation implied a substantial shift in the role of the RBI from a regulator to a facilitator of the
financial sector.
(iii) Fiscal Reforms Fiscal reforms relate to revenue and expenditure of the government. Tax reforms
are the principal component of fiscal reforms. Broadly taxes are classified
• Direct Taxes and

• Indirect Taxes
(iv) External Sector Reforms It include Foreign exchange reforms and Foreign trade policy reforms.
Privatisation
Privatisation is the general process of involving the private sector in the ownership or operation of a
state owned enterprise.
Disinvestment
It refers to a situation when goverment sell off a part of its share capital of PSUs to the private
investors.
Globalisation
It may be defined as a process associated with increasing openness, growing economic
interdependence and deepening economic integration in the world economy.
Policy Strategies Promoting Globalisation of the Indian Economy
• Increase in equity limit of foreign investment

• Partial convertibility
• Long term trade policy
• Reduction in tariffs
• Withdrawal of quantitative restriction
World Trade Organisation (WTO)
The WTO was founded in 1995 as the successor organisation to the general agreement on Trade
and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation.
Positive Impact of the LPG (Liberalisation, Privatisation and Globalisation) Policies
• A vibrant economy
• A stimulant to industrial production
• A cheek on fiscal deficit
• A cheek on inflation
• Consumer’s sovereignty
• Flow of private foreign investment
Negative Impact of LPG (Liberalisation, Privatisation and Globalisation) Policies
• Neglection of agriculture
• Urban concentration of growth process
• Economic colonialism
• Spread of consumerism
• Lopsided growth process
• Cultural erosion
During the tenure of Narasimha Rao Government (1991), India met with an economic crisis relating to
its external debt. The government was unable to make repayments on its borrowings from abroad;
foreign exchange reserves were not sufficient to repay the debts. The prices of essential goods were
rising and the imports were growing at a very high rate.
As a result, the government initiated a new set of policy measures to reform the conditions of an
economy and several economic reform programme were also introduced in this respect to promote
privatisation, liberalisation and globalisation.
Economic Crisis of 1991 and Indian Economy Reforms
Crisis in India is figured out because of the inefficient management of Indian Economy in 1980s.
The revenues generated by the government were not adequate to meet the growing expenses. So,
the government resorted to borrowing to pay for its debts and was caught is a debt-trap.
Deficit it refers to the excess of government expenditure over its revenue.
Causes of Economic Crisis
Different causes of economic crisis are given as under
• The continued spending on development programmes of the government did not

generate additional revenue.
• The government was not able to generate sufficient funds from internal sources such as
taxation.
• Expenditure on areas like social sector and defence do not provide immediate returns, so
there was a need to utilise the rest of its revenue in a highly effective manner, which the
government failed to do.
• The income from public sector undertakings was also not very high to meet the growing
expenditures.
• Foreign exchange borrowed from other countries and international financial institutions
was spent on meeting consumption needs and to make repayments on other loans.
• No effort was made to reduce such increased spending and sufficient attention was not
given to boost exports to pay for die growing needs.
Due to above stated reasons, in the late 1980s, government expenditure began to exceed its revenue
by such large margins that meeting the expenditure through borrowings became unsustainable.
Need for Economic Reforms

The economic policy followed by the government upto 1990 failed in many aspects and landed the
country in an unprecedented economic crisis. The situation was so alarming that India’s reserves of
foreign exchange were basely enough to pay for two weeks of imports. New loans were not available
and NRIs were withdrawing large amounts. There was an erosion of confidence of international
investors in the Indian economy.
The following points highlight the need for economic reforms in the country
• Increasing fiscal deficit

• Adverse Balance of Payments
• Gulf crisis
• Rise in prices
• Poor performance of Public Sector Units (PSUs).
• High rate of deficit financing.
• Collapse of soviet block.
Emergence of New Economic Policy (NEP)

Finally, India approached International Bank for Reconstitution and Development, popularly known as
World Bank and International Monetary Fund (IMF) and received $ 7 million as loan to manage the
crisis. International agencies expected India to liberalise and open up economy by removhfg
restrictions on private sector and remove trade restrictions between India and other countries.
India agreed to conditions of World Bank and IMF and had announced New Economic Polity (NEP)
which consist of wide range of economic reforms.
The measures adopted in the New Economic Policy can be broadly classified into two groups i.e.,
• Stablisation Measures They are short-term measures which were intended to correct
some weakness that have developed in the Balance of Payments and to bring Inflation
under control.
• Structural Reforms They are longterm measures, aimed at improving the efficiency of the
economy and increasing its international competiveness by removing the rigidities in
various segments of the Indian economy.
The various structural reforms are categorised as
• Liberalisation
• Privatisation
• Globalisation
Balance of Payment It is a system of recording country’s economic transactions with the rest of the
world over a period of one year. Inflation It is a situation in which general price level of goods and
services increases in an economy over a period of time.
Liberalist off, Privatisation and Globalisation

By introducing concept of liberalisation, privatisation and globalisation, government have revived the
condition of Indian Economy.
Liberalisation
Libralisation was introduced with an aim to put an end to those restrictions which became major
hindrances in growth and development of various sectors. It is generally defined as the lossening of
government regulations in a country to allow for private sector companies to operate business
transactions with fewer ristrictions. In relation to developing countries, this term refers to opening of
economic border for multinationals and foreign investment.
Objectives of Liberalisation
The main objectives of liberalisation policy are
• To increase competition among domestic industries.

• To increase foreign capital formation and technology.
• To decrease the debt burden of the country.
• To encourage export and import of goods and services.
• To expand the size of the market.
Economic Reforms Under Liberalisation

Reforms under liberalisation were introduced in many areas. Let us discuss these now
Industrial Sector Reforms
The following steps were taken to deregulate the industrial sector
(i) Abolition of Industrial Licensing Government abolished the licensing requirement of all industries,
except for the five industries, which are
• Liquor
• Cigarettes
• Defence equipment
• Industrial explosives
• Dangerous chemicals, chugs and pharmaceuticals.
(ii) Contraction of Public Sector The number of industries reserved for the public sector was reduced
from 17 to 8.. Presendy, only three industries are ’ reserved for public sector. They are
• Railways
• Atomic energy
• Defence
(iii) De-reservation of Production Areas The production areas which were earlier reserved for SSI
were de-reserved.
(iv) Expansion of Production Capacity The producer’s were allowed to expand their production
capacity according to market demand. The need for licensing was abolished.
(v) Freedom to Import Capital Goods The business and production units were given freedom to
import capital goods to upgrade their technology.
Financial Sector Reforms

Financial sector includes financial institutions such as commercial banks, investment banks, stock
exchange operations and foreign exchange market.
The following reforms were initiated in this sector
• Reducing Various Ratio Statutory Liquidity Ratio (SLR) was lowered from 38.5% to 25%.
Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
• Competition from New Private Sector Banks The banking sector was opened for the
private sector. This led to an increase in competition and expansion of services for
consumers.
• Change in the Role of RBI RBI’s role underwent a change from a ‘regulator’ to a
‘facilitator’.
• De-regulation of Interest Rates Except for savings accounts, banks were able to decide
their own interest rates
Tax Reforms/Fiscal Reforms

Tax reforms are concerned with the reforms in government’s taxation and public expenditure policies
which are collectively known as its fiscal policy.
Moderate and Simplified Tax Structure Prior to 1991, the tax rates in the country were quite high,
which led to tax evasion. The fiscal reforms simplified the tax structure and lowered the rates of
taxation. This reduced tax-evasion and increased government’s revenues.
Foreign Exchange Reforms/External Sector Reforms

External sector reforms include reforms relating to foreign exchange and foreign trade. The following
reforms were initiated in this sector
(i) Devaluation of Rupee Devaluation implies a fall in the value of rupee against some foreign
currency. In 1991, the rupee was devalued to increase our country’s exports and to discourage
imports.
(ii) Other Measures
• Import quotas were abolished.

• Policy of import licensing was almost scrapped.
• Import duty was reduced.
• Export duty was completely withdrawn.
World Trade Organisation (WTO)
The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade
and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation
to administer all multinational trade agreements by providing equal opportunities to all countries in
international market for trading purpose. However this had certain problems hence.
WTO was expected to establish a rule based trading regime in which nations cannot place arbitrary
restrictions on trade. Its purpose was mainly to expand production and trade in order to have optimum
utilisation of world resources.
The WTO agreements cover {rade in goods as well as services to facilitate international trade through
removal of tariff as well as non-tariff barriers and provide better market access to all countries. Being
an important member of WTO. India has been in front to frame rule and regulations and safeguards
interest of developing world.
India has kept commitments towards liberalisation of trade in WTO by removing quantitative
restrictions on imports and reducing tariff rates.
Functions of WTO
• It facilitates the implementation, administration and operation of the objectives of

multilateral trade agreements.
• It administers the ‘trade review mechanism’.
• It administers the ‘understanding rules and procedures , governing the settlement
disputes’.
• It is a watchdog of international trade, it examines the trade regimes of individual
members.
• Trade disputes that cannot be solved through bilateral talks are forwarded to the WTO
dispute settlement ‘court’.
• It is a management consultant for world trade. Its economist keep a close watch on the
activities of the global economy and provide studies on the main issues of the day.
Privatisation
It refers to giving greater role to private sector thereby reducing the role of public sector. In other
words, it means shedding of the ownership or management of a government owned enterprise.
It may also mean de-reservation of industries previously reserved for public sector.
Government companies (public companies) are converted into private companies in two ways
• By withdrawal of the government from ownership and management of the public sector
companies.
• By the method of disinvestment.
Forms of Privatisation
Different forms of privatisation are
• Denationalisation When 100% govermffdht ownership of productive assets is transferred

to the private sector, it is called denationalisation. It is also known as strategic sale.
• Partial Privatisation When less than 100% or more than 50% ownership is transferred, it
is a case of partial privatisation with private sector owning majority of shares. In this
situation, the private sector can claim to possess substantial autonomy in its functioning.
It is also known as partial sale.
• Deficit Privatikation/Token Privatisation When the government disinvests its shares to the
extent of 5 to 10% to meet the deficit in the budget, this is termed as deficit privatisation
or token privatisation.
Objectives of Privatisation
The most common and important objectives of privatisation are
• Improving the financial condition of the government.

• Raising funds through disinvestment.
• Reducing the workload of public sector.
• Increasing the efficiency of the government undertakings.
• Providing better goods and services to consumers.
• Bringing healthy competition within an economy.
• Making way for Foreign Direct Investment (FDI).
Navratnas and Public Enterprise Policies
In order to improve efficiency, infuse professionalism and enable them to compete more effectively in
the liberalised global environment, the government identifies PSUs and declare them as maharatnas,
navratnas and mininavratnas. They were given greater managerial and operational autonomy, in
taking various decisions to run the company efficiently and thus increase their profits. Greater
operational, financial and managerial autonomy has also been granted to profit-making enterprises
referred to as mininavratnas.
In 2011, about 90 public enterprises were designated with different status.
A few examples of public enterprises with their status are as follows
• Maharatnas
o Indian Oil Corporation Limited
o Steel Authority of India Limited
• Navratnas
o Bharat Heavy Electricals Limited
o Mahanagar Telephone Nigam Limited
• Mininavratnas
o Bharat Sanchar Nigam Limited
o Airport Authority of India
Globalisation
It means integration of the economy of the'”country with the world economy. Globalisation
encourages foreign trade and private and institutional foreign investment.
Globalisation is a complex phenomenon and an outcome of the set of various policies that are aimed
at transforming the world towards greater interdependence and integration. Globalisation attempts to
establish links in such a way that the happenings in India can be in need by events happening miles
away. It is turning the into one whole or creating a borderless world.
Outsourcing
An Outcome of Globalisation
This is one of the important outcome of the globalisauon process. In outsourcing, a company hires
regular service from external sources, mosdy from other countries, which were previously provided
internally or from within the country like legal advice, computer service, advertisement, etc. In other
words outsourcing means getting a work done on contract from Someone outside.
As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of
fast modes of communication particularly the growth of Information Technology (IT).
Many of the services such as voice-based business processes (popularly known as BPO or call
centres), record keeping, accountancy, banking services, music recording, film editing, book
transcription, clinical advice or even teaching are being outsourced by companies in developed
countries to India.
Most multinational corporations and even small companies, are outsourcing their services to India
where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low
wage rates and availability of skilled manpower in India have made it a destination for global
outsourcing in the post reform period.
Economic Growth During Reforms

Growth of an economy is measured by the Gross Domestic Product (GDP). The growth of GDP
increased from 5.6% during 1980-91 to 8.2% during 2007-2012.
Main highlights of economic growth during reforms are given below
• During the reform period, the growth of agriculture has declined. While the industrial
sector reported fluctuation, the growth of service sector has gone up. This indicates that
the growth is mainly driven by the growth in the service sector.
• The opening up of the economy has led to rapid increase in foreign direct investment and
foreign exchange reserves.
The foreign investment, whiclyincludes Foreign – Direct Investment (FDI) and Foreign
Institutional Investment(FII), has increased from about US $ 100 million in 1990-91 to
US $ 400 billion in 2010-11.
• There has been an increase in the foreign exchange Reserves from about US $ 6 billion
in 1990-91 to US $ 300 billion in 2011-12. In 2011, India is the seventh largest foreign
exchange reserve holder in the world.
• India is seen as a successful exporter of auto parts, engineering goods, IT software and
textiles in the reform period. Rising prices have also been kept under control.
Failures of Economic Reforms

I- Neglect of Agriculture
There has been deterioration in agricultural growth rate. This deterioration is the root cause of the
problem of rural distress that reached crisis in some parts of the country. Economic reforms have not
been able to benefit the agricultural sector because
• Public investment in agriculture sector especially in infrastructure which includes

irrigation, power, roads, market linkages and research and extension has been reduced
in the reform period.
• The removal of fertiliser subsidy has led to increase in the cost of production which has
severely affected the small and marginal formers.
• Various policy changes like reduction in import duties on agricultural products, removal of
minimum support price and lifting of quantitative restrictions have increased the threat of*
international competition to the Indian formers.
• Export-oriented policy strategies in agriculture has been a shift from production for the
domestic market towards production for the export market focusing on cash crops in lieu
of production of food grains.
II- Uneven Growth in Industrial Sector

Industrial sector registered uneven growth during this period.
This is because of decreasing demand of industrial products due to various reasons
• Cheaper imports have decreased the demand for domestic industrial goods.
• Globalisation created conditions for the free movement of goods and services from
foreign countries that adversely affected the local industries and employment
opportunities in developing countries.
• There was inadequate investment in infrastructural facilities such as power supply.
• A developing country like India still does not have the access to developed countries
markets because of high non-tariff barriers.
Sirdlla Tragedy
Privatisation of power supply in Andhra Pradesh resulted in substantial increase in power-rates,
causing many powerlooms to shut down in a small town, Sirdlla.
50 workers committed suicide because of loss in means of livelihood.
II- Other Failures
In addition to the above mentioned failures, the other drawbacks of LPG policy were:
• It led to urban concentration of growth process.

• It encouraged economic colonialism.
• It resulted in the spread of consumerism.
• It led to cultural erosion.
Poverty Class 11 Notes Chapter 4
Poverty
It is inability to fulfill the minimum requirements of life.
• Relative Poverty It refers to poverty in relation to different classes, regions or countries.

• Absolute Poverty In India, concept of poverty line is used as a measure of absolute
poverty.
Poverty Line
It is that line which expresses per capita average monthly expenditure by which people can satisfy
their minimum needs.
Relative poverty and absolute poverty are the two variants of poverty.
Poverty line is fixed in India
• in the estimation of consumption cut off.

• in private consumption expenditure.
• frequencies are recorded against each class-interval. Each frequency counts the number
of heads belonging to a particular consumption class.
Categorising Poverty
• Category 1 Chronic poor Those who are always poor and those who are usually poor
e.g., Landless workers.
• Category 2 Transient Poor Those who are moving in and out of poverty and occasionally
poor.
• Category 3 Never Poor These are categorised as non-poor people.
Rural Poor
These include landless agricultural work marginal holders and tenants-at-will.
Urban Poor
These include migrants from the rural areas in search of employment, casual factory workers and self
employed serving largely as street vendors.
Urban poor are largely the spillover of the rural poor who are forded to migrate in search of jobs.
Causes of Poverty
• Low level of national product

• Low rate of growth
• Heavy pressure of population
• Inflationary pressures
• Chronic unemployment and under employment
• Capital deficiency
• Outdated social institutions
• Lack of infrastructure
Measures to Remove Poverty
• Combating poverty by accelerating the place of economic growth.

• Combating inequality of income through fiscal and legislative measures.
• Combating poverty through population control.
• Other measures enhancing quality of life of the poor.
Poverty Alleviation Programmes
Some of the principle measures adopted by the government to remove poverty are given below
• Samaranjayanti Gram Swarozgar Yojana (SGSY)

• Sampoorna Gramin Rozgar Yojana (SGRY)
• Pradanmantri Gramoday Yojana (PGY)
• Jai Prakash Rozgar Guarantee Yojana (JPRGY)
• The Swaran Jayanti Shahri Rozgar Yojana (SJSRY)
• Prime Minister’s Rozgar Yojana
• Development of Small and Cottage Industries (viii) Minimum Needs Programme
• Twenty Point Programme
• Mahatma Gandhi National Rural Employment Guarantee
Rural Development Class 11 Notes Chapter 5
Rural Development
Rural development means an action- plan for the social and economic upliftment of the rural areas.
The key issues of action plan for rural development are
• Development of infrastructure
• Human capital formation
• Development of productive resources
• Poverty alleviation
• Land reforms
Rural Credit
Rural credit means credit for the farming families. Credit is the life line of farming activity credit needs
of the typical Indian farmer may broadly be classified as under
• Short Term Credit It needs relates basically to the purchase of inputs like seeds fertilisers
etc short term borrowings generally stretches over a period of 6 to 12 months.
• Medium Term Credit Medium term loans are required for purchasing machinery
constructing fences and digging wells. Such loans are generally stretch over a period of
12 months to 5 years.
• Long Term Credit Long term credit is meant for the purchase of additional land. The
period of such loan ranges between 5 to 20 years.
Sources of Rural Credit
• Non-institutional sources
• Institutional sources
o Co-operative credit societies
o State Bank of India
o Regional Rural Bank
o National Bank for Agriculture and Rural Development (NABARD)
Agriculture Marketing
It includes all those activities or processes which help a former getting maximum price for his produce
among others, these processes include grading packaging and storage.
Measures Initiated by the Government to Improve Market System
• Regulated markets
• Co-operative agricultural marketing societies
• Provision of warehousing facilities
• Subsidised transport
• Dissemination of information
• MSP policy
Diversification Diversification is an emerging challenge in the context of rural development. It has two
aspects.
• Diversification of Crop Production It implies production of diverse variety of crops rather

than one specialised crop. It means a shift form single-cropping system to multi-cropping
system.
• Diversification of Production Activity/Employment It implies a shift from crop farming to
other areas of production activity employment.
Non-Farm Areas of Production Activity/Employment for the Rural Population
• Animal Husbandry It is the most important area of employment in India different from
crop farming. It is also called live stock farming, poultry, cattle etc.
• Fisheries The fishing community in India depends almost equally on inland sources and
marine sources of fishing. Inland sources include rivers, lakes, ponds and streams etc.
• Horticulture Horticultural crops include fruits, vegetables and flowers besides several
other. Over time, there has been a substantial increase in area under horticulture.
• Cottage and Household Industry This industry has been dominated by such activities as
spinning, weaving, dyeing and bleaching.
Organic Farming and Substainable Development

Organic farming is a system of farming that relies upon the use of organic inputs for cultivation.
Organic inputs basically include animal manures and composts.
Benefits of organic farming are as follows
• Discards the use of non-renewable resources

• Environment friendly
• Sustains soil fertility
• Healthier and tastier food
• In expensive technology for the small and marginal farmers
Golden Revolution
The rapid growth in the production of diverse horticultural crops such as fruits, vegetables, tuper
crops and plantation crops is known as Golden Revolution.
Agriculture is the major source of livelihood in the rural sector. Mahatma Gandhi once said that “real
progress of India did not mean only the industrial growth but also the development of villages
because two-third of India’s population depends on agriculture”. One-third of rural Indians still live in
poverty. This is the reason, why there is need to develop rural India.
Rural Development and Rural credit

Rural development is a comprehensive term which essentially focuses on action for the development
of areas that are lagging behind in the overall development of the village economy. It is a process
whereby the standard of living of rural people, especially poor people, rises continuously.
The basic objectives of rural development are
• Increasing the productivity of the agricultural sector, so that the income of the formers
increase.
• Generating alternative means of livelihood in the rural areas, so that dependency on
agriculture sector is reduced.
• Promoting education and health facilities in the rural areas, so that human development
is also achieved.
Key Areas in Rural Development

Some of the areas which are challenging and need fresh initiatives for development in rural India are
as follows
• Development of the productive resources of each locality.
• Development of human resources including literacy (more specifically female literacy)
education and skill development.
• Development of human resources like health, addressing both sanitation and public
health.
• Honest implementation of land reforms.
• Infrastructure development like electricity, irrigation, credit, marketing, transport facilities
including construction of village roads and feeder roads to nearby highways, facilities for
agriculture research and extension and information dissemination.
• Special measures for alleviation of poverty and bringing about significant improvement in
the living conditions of the weaker sections of the populations emphasising access to
productive employment opportunities.
The share of agriculture sector’s contribution to GDP was on a decline, the population dependent on
this sector did not show any significant change. Further, after the initiation of reforms, the growth rate
of agriculture sector decelerated to 2.3% per annum during the 1990s, which was lower than the
earlier years.
Rural Credit
Credit is the life line of the farming activity. Rural credit means providing credit for the forming
community. Farmers need credit because
• Most formers in India are small and marginal land holders who practice subsistence
farming. They have no surplus for further production.
• The gestation period between sowing and harvesting is quite high. So, farmers have to
borrow to fulfill their various needs during this period.
Borrowings of afarmer can befor thefollowingpurpose
• Productive Borrowings These borrowings include loans to buy seeds, fertilisers and
agricultural equipments and imptements.
• Un-productive Borrowings These borrowings include loans for social purposes such as
marriage and festive occassions.
Types of Rural Credit

Credit needs of farmers may be classified as
• Long-term Credit These loans are required to acquire permanent assets like tractors,
land, costly equipments, tube-wells, etc. These loans are for a period of 5 to 20 years.
• Medium-term Credit These loans are required for purchasing machinery, constructing
fences and digging wells. Such loans are generally stretch over a period of 12 months to
5 years.
• Short-term Credit These loans are required for buying seeds, tools, manure and
fertilisers, etc. This credit is given to the needy borrowers by cooperatives, moneylenders
and banks. These loans are for a period of 6 to 12 months.
Sources of Rural Credit

Credit in the rural sector is available from two sources
1. Non-institutional Sources of Rural Credit The major non-institutional sources of rural credit are
moneylenders, friends, relatives, landlords, shopkeepers and commission agents. Moneylenders
provided about 93.6% of total financial requirement rural areas in 1951-52 and presently it is 30%.
The short-term credit needs of the formers are met from commission agents, friends and relatives
which supply roughly 50% of total rural borrowings, Non-institutional sources of credit are not
encouraged by government because of the following reasons
• They charge high rate of interest.

• They acquire land on failure to pay interest and loan.
• They manipulate accounts.
The Poor Women’s Bank Kudumbashree is women-oriented community based poverty i reduction
programme being implemented in Kerala. In 1995, a thrift and credit society was started as a small
savings for poor women with an objective to encourage savings. The thrift and credit society
mobilised Rs. 1 crore as thrift savings. These societies have been acclaimed as largest informal
banks in Asia in terms of participation and savings mobilised.
2. Institutional Sources of Rural Credit In regard to rural credit, major change occurred after 1969,
when India adopted social banking and multi agency approach to adequately meet the needs of rural
credit. Different institutions were formed to provide the rural credit.
The major institutional sources of rural credit are as follows
(i) National Bank for Agriculture and Rural Development (NABARD) It was set up in 1982 as an apex
body to coordinate the activities of all institutions involved in the rural financing system. It has an
authorised share capital of Rs. 500 crore. The RBI has contributed half of the share capital while the
other half has been contributed by Government of India.
The main functions of NABARD are
• To grant long-term loans to the State Government for subscribing to the share capital of
cooperative societies.
• To take the responsibility of inspecting cooperative banks, Regional Rural Banks (RRBs)
and primary cooperative societies.
• To promote research in agriculture and rural development.
• To serve as a refinancing agency for the institutions providing finance to rural and
agricultural development.
• To help tenant farmers and small farmers to consolidate their land holdings.
The national agricultural credit fundjias been transferred from RBI to NABARD to form a part of its
national rural credit fund.
(ii) Self Help Groups (SHGs) Formal credit system has proven inadequate. It has also not been fully
integrated into the overall rural, social and community development.
Due to the demand of some kind of collateral, vast proportion of poor rural households were
automatically out of the credit networks. Self Help Groups emerged to fill this gap, created by formal
credit system.
Self Help Groups (SHGs) promote thrift in small proportions by a minimum contribution from each
member. By March end 2003, more than Rs. 7 lakh SHGs had reportedly been credit linked. Such
credit provisions are generally referred to as micro-credit programmes. SHGs have helped in the
empowerment of women. However, borrowings from SHGs are mainly confined to consumption
purposes.
(iii) Regional Rural Banks (RRBs) As a supplement to commercial banks, the regional rural banks
have also been opened. These have been set up under the Regional Rural Banks Act-of 1976. Their
banking services are meant for small and marginal formers and artisans, etc. They cater exclusively
to the needs of weaker section. Nearly 90% of the loan of RRBs were provided to the weaker section.
Kisan Credit Card Scheme

Kisan Credit Card scheme (KCCs) was introduced by the government in 1998-99. It facilitates access
to credit from commercial banks and regional rural banks. Under the scheme, the eligible farmers are
provided with a kisan card and pass book from the relevent bank. The farmers can make withdrawls
and repayments of cash within the credit limit as – specified in the Kisan Credit Card (KCC).
(iv) Commercial Banks They were inducted into the field of agricultural credit under the Banking
Reforms Act, 1972. The share of commercial banks in the supply of agricultural credit has
considerably improved. It was 46.9% during the year 2006-07.
Commercial banks disburse agricultural credit for the purchase of inputs, cattle, tractors, dairy
farming, installation of tube-wells, etc.
(v) Cooperative Credit Societies The cooperative credit societies are actively engaged in addressing
credit needs of the farmers, besides offering a host of related services. Notably these societies
provide guidance in diverse agricultural operations with a view to raise crop productivity. Currendy,
cooperatives account for 16-17% of rural credit flow. The main fimcdon of cooperative credit society is
to provide timely and increased flow of credit to the farmers.
Latest Status of Agricultural Credit

The following points reveal the latest status of agricultural credit
• The credit flow in this sector in 2011-12 is placed at Rs. 475000 crore.
• The agricultural debt waiver and debt relief scheme was announced in the union budget
2008-09.
• Farmers have been receiving crop loans upto a principal amount of Rs.3 lakh at an
effective rate of 4% per annum.
• To provide adequate and timely credit support to the formers, the Kisan Credit Card
(KCC) scheme was
introduced in February, 1999. About 10.78 crore KCCs had been issued upto October
2011.
• Government is implementing a revival package for short-term rural cooperative credit
structure involving financial outlay of Rs. 13596 crore.
Rural Banking : A Critical Appraisal

After the nationalisation of commercial banks in 1969, the rapid expansion of the banking system in
rural areas has been witnessed. Rural banking has raised the level of rural farm and non-farm output,
income and employment especially after the green revolution.
Advantages of Rural Banking
• Raising farm and non-farm output by providing services and credit facilities to farmers.
• Generating credit for self employment schemes in rural areas.
• Achieving food security which is clear from the abundant buffer stocks of grains.
Limitations of Rural Banking
• Small and marginal formers receive only a very small portion of the institutional credit.
• Rural banking is suffering from the problems of large amount of over dues and default
rate.
• The sources of institutional finance are inadequate to meet the requirements of
agricultural credit.
• There exist regional inequalities in the distribution of institutional credit.
It is suggestible that more and more regional rural banks should be set up to need the credit need of
the rural and backward areas of India.
Agricultural Marketing, Diversification of Agricultural Activities and Organic Fanning
Agricultural Marketing Agricultural marketing is the process that involves functions of assembling,
storage, processing, packaging, transportation, grading and distribution of agricultural commodities
throughout the country.
In other words, agricultural marketing covers the services involved in moving an agricultural product
from the farm to the consumer.
Need of Agriculture Marketing
Need of agriculture marketing originates due to the problems faced by farmers.
Different types of problems faced by the farmers are
• Farmers while selling their produce to traders suffered from faulty weighing and
manipulation of accounts.
• Due to lack of knowledge about the prices prevailing in the markets, farmers are often
forced to sell their produce at low prices.
• Farmers did not have proper storage facilities to keep back their produce for selling later
at better price.
Approximately 10% of goods produced in farms is wasted due to lack of storage.
Distress Sale Lack of agricultural marketing infrastructure often forces the farmers to sell their
produce at low prices for fear of spoilage or to pay off an imminent debt. This is termed as distress
sale. Farmers tend to suffer highly on account of these sales, because they not only get a low price
for their produce, but are also cheated by use of false weights and are charged a high commission.
Measures by Government to Improve Agriculture Marketing
Four measures which were initiated to improve the agriculture marketing aspect are discussed below
1. Regulation of Markets The first measure to improve agriculture marketing aspect is regulation of
markets to create orderly and transparent marketing conditions. Regulated markets have been
established where sale and purchase of the produce is monitored by the Market Committee
consisting of representatives of government, farmers and the traders.
Market committee ensure that the formers get appropriate price of their produce. By and large, this
policy benefited farmers as well as consumers. However there is still need to develop about 27000
rural periodic markets as regulated market places to realize the full potential of rural markets.
2. Improvement in Physical Infrastructure It is the second measure to improve the agriculture

marketing aspect. The current infrastructure facilities like; roads, railways, warehouses, godowns,
cold storages and processing units etc are inadequate to meet the growing demand. Through this
measure government ensures the improvement in physical infrastructure.
3. Cooperative Marketing It is the third measure taken by government in realising the fair prices for
farmers products. As members of these societies, formers find themselves better bargainers in the
market and get better prices of their produce through collective sale. The success of milk
cooperatives in Gujarat and some other parts of the country are the brilliant examples of cooperative
marketing.
Different problems faced by cooperative during the recent past are
• Inadequate coverage of former members.

• Lack of appropriate link between marketing and processing cooperatives.
• Inefficient financial management.
Supporting Policies
It is the fourth measure taken by government to improve agriculture marketing system. Different
supportive policies applied in this regard are
• Minimum Support Price (MSP) It is an important step to improve agriculture market

system. MSP is an assurance to the farmers that a minimum price will be fixed by the
government to formers’ produce, no purchasing can be done below this price, however
farmers can sell their produce in open market above MSP. This policy assured a
minimum income to the farmers.
• Maintenance of Buffer Stocks of Wheat and Rice Purchases from the farmers are kept by
Food Corporation of India as buffer stocks.
• Distribution of Foodgrains and Sugars Through Stocks purchased by government at MSP
are used primarily for Public Distribution System (PDS). Distribution of foodgrains and
other necessary items like kerosene oil at subsidised price to the poor takes place
through fair price shops.
• Emerging Alternative Marketing Channels In India, alternative marketing channels are
emerging. Through these channels, farmers directly sell their products to the consumers.
This system increases farmers’ share in the prices paid by the consumers.
Important examples of such channels are
• Apni mandi (Punjab, Haryana and Rajasthan).

• Hadaspar mandi (Pune); Rythu Bazars (Vegetables and fruit market in Andhra Pradesh).
• Uzhavar sandies (Farmers’ Markets in Tamil Nadu).
• Several national and international fast food chains and hotels are also entering into
contracts with the farmers to supply them farm products (fresh vegetables and fruits) of
the desired quality.
Diversification into Productive Activities
Diversification means a major proportion of the increasing labour force in the agricultural sector needs
to find alternate employment opportunities in other non-farm sectors. Diversification is an emerging
challenge in the context of rural development. It has two aspects
• Diversification of crop production

• Diversification of productive activity
Diversification of Crops
This implies a shift from single cropping system to multi-cropping system. In India, where subsistence
farming is still dominant, it may also mean a shift from subsistence farming to commercial farming.
Significance of Diversification of Crops Diversification of crops is improtant because it will
• Minimise the risk occuring. due to failure of monsoon.
• Minimise the market risk arising due to price fluctuations.
Need of Diversification into Productive Activities

Agriculture sector is a seasonal based activity, most of agriculture employment activities are
concentrated in Kharif season. But during Rabi season, in the areas where irrigation facilities are
inadequate, it becomes difficult to find gainful employment.
So, there is a need to focus on allied activities, non farm employment and other emerging alternatives
of livelihood. Also agriculture sector is already overcrowded, a major proportion of the increasing
labour force needs to find alternate employment opportunities in other non-farm sectors.
Some non-farm activities are discussed below
1. Animal Husbandry
In India, the forming community uses the mixed crop-live stock forming system. Cattle, goats, fowl are
the widely domesticated species. Livestock production provides increased stability in income, food
security, transport, fuel and nutrition for the family without disrupting other food producing activities.
Today, livestock sector alone provides alternate livelihood options to over 70 million small and
marginal farmers including landless labourers.
Poultry accounts for the largest share with 55% followed by others. India has about 304 million cattle,
including 105 million buffaloes.
A significant number of women also find employment in the livestock sector.

Milk production in the country has increased by more thlkn five times between 1960-2009. This can
be attributed mainly to the successful implementation of ‘operation flood’.
Meat, eggs, wool and other by-products are also emerging as important productive sectors for
diversification.
In numbers, our livestock population is quite impressive but its productivity is quite low as compared
to other countries. It requires improved technology and promotion of good breeds of animals to
enhance productivity. Improved veterinary care and credit facilities to small and marginal formers and
landless labourers would enhance sustainable livelihood options through livestock production.
Operation Flood
It is a system whereby all the farmers can pool their milk produced according to different grading
(based on quality) and the same Is processed and marketed to urban centres through cooperatives.
In this system farmers are assured of fair price and Income from the supply of the milk to urban
markets. Gujarat state is held as a success story in the efficient implementation of milk cooperatives
which has been emulated by many states.
Fisheries
The socio-economic status of fishermen is comparatively lower because of
• rampant underemployment
• low per capital earnings
• absence of mobility of labour to other sectors
• high rate of illiteracy
• indebtedness
Horticulture
Due to varying climate and soil conditions, India has adopted growing of diverse horticultural crops
such as fruits, vegetables, tuber crops, flowers, medicinal and aromatic plants, spices and plantation
crops. These crops play an important role in providing food, nutrition and employment.
The period between 1991-2003 is called ‘golden revolution’ because during this period, the planned
investment in horticulture became highly productive and the sector emerged as a sustainable
livelihood option.
India has emerged as a world leader in producing a variety of fruits, like mangoes, bananas,
coconuts, cashew, nuts and a number of species and is the second largest producer of fruits and
vegetables.
Economic conditions of many formers engaged in horticulture has improved and has become a
means of improving livelihood for many unprivileged classes.
Flower harvesting, nursery maintance, hybrid seed production and tissue culture, propagation of fruits
and flowers and food processing are highly profitable employment opportunities for rural women. It
has been estimated that this sector provides employment to around 19% of the total labour force.
Other Alternate Livelihood Options

The Information Technology (IT) has revolutionised many sectors in the Indian economy.
It plays a very significant role in achieving sustainable development and food security in the following
ways
• It can act as a tool for releasing the creative potential and knowledge embedded in our
people.
• Issues like weather forecast, crop treatment, fertilisers, pestisides storage conditions, etc
can be well administered, if expert opinion is made available to the farmers.
• The quality and quantity of crops can be increased manifold, if the farmers are made
aware of the latest equipments, technologies and resources.
• It has ushered in a knowledge economy.
• It has potential of employment generation in rural areas.
Every Village A Knowledge Centre

MS Swaminathan Research Foundation, an institution located in Chennai, Tamil Nadu, with support
from Sir Ratan Tata Trust, Mumbai, has established the Jamshedji Tata National Virtual Academy for
Rural Prosperity. The academy envisaged to identify a million grass root knowledge workers who will
b% enlisted as fellows of the academy.
The programme provides an info-kiosk (PC with internet and video conferencing facility, scanner,
photocopier, etc) at a low cost and trains kiosk owner; the owner then provides different services and
tries to earn a reasonable income. The Government of India has decided to join the alliance by
providing financial support of Rs. 100 crore.
Sustainable Development and Organic Farming

Conventional agriculture uses chemical fertilisers and toxic pesticides, etc which enter the food
supply, penetrate the water resources, harm the livestock, deplete the soil and devastate natural eco-
system. Due to these problems, an eco-friendly technology is required.
Organic farming is such technology which restores, maintains and enhances the ecological balance.
There is an increasing demand for organically grown food to enhance food safety throughout the
world.
Benefits of Organic Farming
• Organic forming substitutes costlier agriculture inputs like HYV seeds, chemical fertlisers,
pesticides, etc with locally produced organic inputs that are cheaper and thereby
generate good returns on investment.
• Organic forming also generates income through exports.
• Organically grown food has more nutritional value than chemical forming, thus providing
us with healthy foods. Produce pesticide free and produced in an environmendy
sustainable way.
• Due to more labour requirement in organic farming, it is an attractive proposition for
India.
Limitations of Organic Farming
• Yields from organic forming are less than modern agricultural forming in the initial years.
Therefore, small and marginal formers may find it difficult to adapt to large scale
production.
• Organic produce have shorter shelf life than sprayed produce.
• Choice in production of off-season crops in quite limited in organic forming.
Human Capital Formation in India Class 11 Notes
Chapter 6
Human Capital It refers to the stock of ‘skill and expertise’ of a
nation at a point of time. It is the sum total of skill and
expertise.
• Human Capital Formation It is the process of adding to the stock of human capital over time.
• Physical Capital It refers to the stock of produced means of production. It consists of machines,
production plants etc.
• Financial Capital It refers to the stocks/shares of the companies or these are simple financial
claims against assets of the companies.
Sources of Human Capital Formation
• Expenditure on Education
• Expenditure on Health
• On-the-Job Training
• Study Programmes for Adults
• Migration
• Expenditure on Information
Human Capital Formation and Economic Growth
• Higher Productivity of Physical Capital Human capital formation increases productivity of physical
capital specialised engineers and skilled workers can certainly handle machines better than the
other.
• Innovative Skills It facilitates the use and growth of innovative skills. Innovation is the life line of
growth.
• Higher Rate of Participation and Equality By enhancing productive capacities of the labour force,
human capital formation induces greater employment.
Thus, there is a cause and effect relationship between human capital formation and economic growth.
Problems Facing by Human Capital Formation in India
• Rising population
• Brain drain
• Desicient man power planning
• Law academic standards
Human Capital and Human Development

Human capital and human development are related concepts, but certainly not identical. Human
capital is a means to an end. Human development is an end itself.
Education as an Essential Element of Human Resource Development

It implies the process of teaching training and learning especially in schools or colleges, to improve
knowledge and develop skills.
Growth of Education Sector in India

Following observations highlight the growth of education sector in India
• Expansion of general education

• Primary education
• Secondary education
• Higher education
• Vocationalisation of secondary education
• Technical, medical and agricultural education
• Rural education
• Adult and female education
• Total literacy campaign
Education Still a Challenging Proposition

Education system of the country which along with the following facts makes education still challenging
proposition in India.
Large Number of Illiterates
• Inadequate vocationalisation
• Gender bias
• Low rural access level
• Privatisation
• Low government expenditure on education
Right to Education (RTE)
In the year 2012, the Government of India has brought about an Act, called RTE. It promises
education to all. It makes education a matter of right to all children in the age group of 6-14 years.
The concept of human capital formation, source of human capital and its growth is revealed in the
chapter. It also deals with the relationship among human capital, economic growth and human
development.
Concepts and Sources of Human Capital Formation

Just as a country can turn physical resources like land into physical capital like factories, similarly it
can also turn human resources like students into engineers and doctors. There by increasing their
productivity and efficiency. So, human capital formation aims at converting human resources into
human assets.
Human Capital and Physical Capital
• Human Capital It refers to the stock of skill, ability, expertise, education and knowledge in a
nation at a point of time.
• Physical Capital All inputs which are required for further production such as machine, tools and
implements, factory buildings, etc are called physical capital.
Human Capital Formation
It is the process of acquiring and increasing the number of people who* have the skills, education and
experience which are critical for the economic and political development of a country.
In other words, human capital formation is the process of adding to the stock of human capital over
time.
G.M. Meier defines human capital formation as, “human capital formation is the process of acquiring
and increasing the number of persons who have the skiff education and experience which are
essential for the economic and political development of a country”.
Sources of Human Capital Formation

Investment in education is considered as one of the most important sources of human capital
formation. There are several other sources as well. Investment in health, on-the-job training,
migration and information are the other sources of human capital formation.
These sources are discussed below
1. Expenditure on Education
The education expenditure is an important source of human capital formation as it is the most
effective way on enhancing and enlarging a productive workforce in the country.
Nations and individuals invest in education with the objective
• increasing their future income.

• generating technical skills and creating manpower, well suited for improving labour productivity
and thus, sustaining rapid economic development.
• tending to bring down birth rate which in turn, brings decline in population growth rate. It makes
more resources available per person.
• education also results in social benefits since, it also spreads to others.
2. Expenditure on Health
Health is another important source of human capital formation. A sick labourer without access to
medical facilities is compelled to abstain from work and there in a loss of productivity. The various
forms of health expenditure are preventive medicine, curative medicine, social medicine, provision of
clean drinking water, etc.
3. On-the-job Training
Expenditure regarding on-the-job training is a source of human capital formation as the return of such
expenditure in the form of enhanced labour productivity is more than the cost of it.
Firms spend huge amounts on giving on-the-job training to their workers. It may be in different forms
like a worker may be trained in the firm itself or under the supervision of a skilled worker or can be
sent for off campus training.
The firms then insist that workers should work for atleast some time in die company so that they can
recover the benefits of the enhanced productivity owing to the training.
4. Migration
People sometimes migrate from one place to the other in search of better jobs that fetch them higher
salaries than what they may get in their native places. It includes migration of people from rural areas
to urban areas in India. Unemployment is the reason for the rural urban migration in India and
technically qualified people migrate from one country to another in order to get high salaries.
5. Expenditure on Information
People spent to acquire information relating to the labour market and other markets like education,
health, etc.
For example, people seek information regarding salaries and other facilities available in different
labour markets, so that they can choose the right job. Expenditure incurred for acquiring information
regarding labour markets and other markets like education and health have also becomes an
important source of human capital formation.
Economic Growth and State of Human Capita! Formation in Intiter

Human Capital and Economic Growth
India recognised the importance of human capital in economic growth long ago. The Seventh Five
Year Plan says, ‘Human resources development has necessarily to be assigned a key role in any
development strategy, particularly in a country with a large population’.
The following points show clearly the interdependence among the two
• Higher Productivity of Physical Capital Human capital increases productivity of physical capital as
specialised and skilled workers can handle machines or techniques better than the unskilled
works. This increased productivity and hence production in leads to economic growth.
• Innovative Skills Human capital facilitates innovation of new methods of production and this
increase the rate of economic growth in the form of increase in GDP.
• Higher Rate of Participation and Equality Human capital formation leads to a higher employment
rate. With increase in employment, the productivity rises. Also, increase in employment
opportunities also increases the level of income and this helps in reducing inequalities of wealth.
Both, increase in employment rate and decrease in income inequalities are pointers of economic
development.
• Brings Positive Outlook The process of human capital formation bring in a positive outlook to the
society which is different from orthodox and traditional ways of thinking, and hence increases the
rate of participation in the workforce causes increase in level of production.
India as a Knowledge Economy
The Indian software industry has been showing an Impressive record over the past decade.
Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform
itself into a knowledge-based economy by using Information Technology (IT).
There have been some instances of villagers using e-mail which are cited as examples of such
transformation. Likewise, e-governance is being projected as the way of the future.
The value of IT depends greatly on the existing level of economic development.
Human Capital and Human Development

Human development is the broader term than human capital.
Human capital considers education and health as a means to increase labour productivity. Human
development is based on the idea that education and health are integral to human well-being
because when people have the ability to read and write and the ability to lead a long and healthy life,
they will be able to make other choices they value.
In human capital view, any investment in education and health is unproductive, if it-does not enhance
output of goods and services. In the human development perspective, human beings are ends in
themselves. Therefore, basic education and basic health are important in themselves, irrespective of
their contribution to labour productivity. Deutsche Bank and World Bank Report on Indian Economy.
• According to two independent reports one from Deutsche and other from World Bank have
identified that India would grow faster due to Its strength in human capital formation.
• According to Deutsche Bank (a German Bank)’s report on Global Growth Centres, it has been
identified tha India will emerge as one among four major growth Centres in the world by 2020.
This report also says that between 2005 to 2020, we expect a 40% rise in the average years of
education in India, to just above 7 years.
• World’s Bank report India and the Knowledge Economy-Leveraging Strengths and Opportunities
states that India should make a transition to the knowledge economy and if it uses its knowledge
as much as Ireland does, then the per capita income of India will increase from a little over US
$1000 in 2002 to US $3000 in 2020.
• It further states that the Indian economy has all the key ingredients for making this transition such
as a critical mass of skilled workers, a well functioning democracy and a diversified science and
technology infrastructure. Thus two reports point out the fact that further human capital formation
in India will move its economy to a higher growth.
Problems of Human Capital Formation in India
The main problems of human capital formation in India are
• Rising Population Rapidly rising population adversely affects the quality of human capital in under
developed and developing countries like India. It reduces per head availability of existing facilities
like sanitation, employment, drainage, water system, housing, hospitals, education, food supply,
nutrition, roads, electricity, etc.
• Brain Drain Migration of highly skilled labour termed as ‘brain drain. This slow down the process
of human capital formation in the domestic economy.
• Inefficient of Manpower Planning There is inefficient manpower planning in less developed
countries where no efforts have been made either to raise the standard of education at different
stages pr to maintain the demand and supply of technical labour force. It is a sad reflection on the
wastage of human power and human skill.
• Long-term Process The process of human development is a long-term policy because skill
formation takes time. The process which produces skilled manpower is thus, slow. This also
lowers our competitiveness in the international market of human capital.
• High Poverty Levels A large proportion of the population lives below poverty line and do not have
access to basic health and educational facilities. A large section of society cannot afford to get
higher education or expensive medical treatment for major disease.
Human Developent Index
The Human Developent Index (HDI) is a composite statistic of life expectance education, and income
indices rank countries into four tiers of human development.
It was created by economist Mahbub Ul Haq, followed by economist Amartya Sen in 1990, and
published by the United Nations Development Programme. India has 136th position in the World
Human Development Index.
Education Sector in India
Education implies the process of teaching, training and learning especially in schools or colleges, to
improve knowledge and develop skills.
Following points explain the important or objective of education
• It produces good citizens.

• It develops science and technology.
• It facilities use of natural and human resources of all regions of the country.
• It expands mental horizon of the people.
Growth in Government Expenditure on Education

Government expenditure on education can be expressed in two ways
• As a percentage of‘total government expenditure.

• As a percentage of Gross Domestic Product (GDP).
The percentage of ‘education expenditure of total government expenditure’ indicates the importance
of education in the scheme of expenses before the government. Expenditure on education out of our
GDP shows how much we are committed towards the development of education in our country.
During 1952-2010, education expenditure as percentage of total government expenditure increased

from. 7.92% to 11.1% and as percentage of GDP increased from 0.64% to 3.25%. During this period
expenditure on education was not constant. There was irregular rise and fell.
Expenditure on Elementary Education in India
Elementary education takes a major share of total education expenditure and the share of the
higher/tertiary education is the least. But expenditure per student on tertiary education is higher than
that of elementary.
As we expand school education, we need more teachers who are trained in the higher educational
institutions, therefore, expenditure on all levels of education should be increased. The per capita
education expenditure is as high as Rs. 2005 in Himachal Pradesh to as low as Rs. 515 in Bihar.
This leads to differences in educational opportunities across states.
Free and Compulsory Education

The Education Commission (1964-66) had recommended that atleast 6% of GDP to be spent on
education so as to make a noticeable rate of growth in education.
In December 2002, the Government of India, through the 86th Amendment of the Constitution of
India, made free and compulsory education a fundamental right of all children in the age group of 6-
14 years. Government of India in year 1998 appointed. The Tapas Majumdar Committee, which
estimated an expenditure of around 1.37 lakh crore over 10 years (1998-99 to 2006-07) to bring all
Indian children in the age group of 6-14 years, under the purview of school education. Desired level of
expenditure an education is 6% of GDP but the current level is little over 4% which is not inadequate.
It is necessary to reach the level of 6% which is considered as must for coming years.
Recently, Government of India has started levying a 2% ‘education cess’ on all Union taxes. The
revenues from education cess has been earmarked for spending on elementary education.
Educational Achievements in India Generally, educational achievements in a country are indicated in
terms of
• Adult literacy level

• Primary education completion rate
• Youth literacy rate These statistics for the years 1990 to 2010 are given in the following table
Future Prospects
India government considers education a key sector where considerable growth and.development is
required. Thus, it has set some future prospects for framing its policies.
These prospects are discussed below
Education for All : Still a Distant Dream
Although the education level in India has risen for both adults as well as for youth. Still the number of
illiterates in India are as much as the population was at the time of Independence.
In 1950, when the Constitution of India was passed by the constituent assembly, it was noted in the
directive principles of the constitution that the government should provide free and compulsory
education for all children up to the age of 14 years within 10 years from the commencement of the
constitution.
The following factors makes education still a distant dream
• Large number of illiterates

• Inadequate vocationalisation
• Gender bias
• Low rural access level
• Privatisation
• Low government expenditure on education
Gender Equity : Better than Before

The differences in literacy rates between males and females are narrowing, signifying a positive
development in gender equity; still the need to promote education for women in India is imminent for
various reasons, such as
• Improving economic independence.

• Social status of women.
• Healthcare of women and children.
Therefore, we cannot show the satisfaction about the upward movement in literacy rates as we have
miles to go in achieving cent percent adult literacy.
In India, Mizoram, Kerala, Goa and Delhi are the states having high literacy rate, while Bihar, Uttar
Pradesh, Rajasthan and Arunachal Pradesh are the educationally backward states. The educational
backwardness is due to social and economic poverty of the people.
Higher Education : A Few Takers
The Indian education pyramid is steep, indicating lesser and lesser number of people reaching the
higher education level.
As per NSSG (National Sample Survey Organisation) data, in the year 2007-08, the rate of
unemployment for youth with education up to secondary level and above was 18.1% whereas, the
rate of unemployment for youth with education up to primary level was only 11.6%.
Therefore, the government should increase allocation for higher education and also improve the
standard of higher education institutes, so that students are imparted employable skills in such
institutions
Employment-Growth, Informalisation and Related
Issues Class 11 Notes Chapter 7
Worker A worker is an individual who is in some employment
to earn a living. He is engaged in some production activity.
• Production Activity It refers to the process of producing goods and services. Employed are those
who are engaged in some production activity or the other.
• Self-employed and Hired Worker Self-employed workers are those who are engaged in their own
business or own profession.
Hired workers are those who work for others they renders their services to other, as a reward, get
wages/salaries or may be they are paid in kind.
• Casual and Regular Worker Casual workers are the daily wagers. They are not hired by their
employers on regular basis.
Regular workers are permanent pay-roll of their employers. A regular worker is usually a skilled
worker.
• Labour Supply It refers to supply of labour corresponding to different wage rates. Supply of
labour is measured in terms of man-days of work and always studied with reference to wage rate.
• Labour Force It refers to the number of persons actually working or willing to work. It is not
related to wage rate.
• Work Force It refers to the number of persons actually working and does not account for those
who are willing to work.
• Employment in Firms, Factories and Offices In the course of economic development of a country,
labour force from agriculture and other related activities to industry and services. In this process
workers migrate from rural to urban areas.
• Informalisation of Workforce It refers to a situation where percentage of work force in the formal
sector tends to decline and that in the informal sector tends to rise.
Market economy and informalisation of workers, perhaps are strongly correlated to each other.
Unemployment
According to Prof Pigou, “A man is unemployed only when he is both without a job a or not employed
and also desires to be employed”.
• Rural Unemployment In Indian villages nearly 58.7% of labourers are engaged in primary sector.
Most of the rural labourers engaged in non-farm sector work in cottage industries.
• Urban Unemployment In urban areas, unemployed people are often registered with employment
exchanges. Therefore, urban unemployment is more like open unemployment.
Unemployment in urban sector is placed in two board categories
o Industrial Unemployment
o Educated Unemployment
Common Types of Unemployment in Rural and urban Areas

In India, following types of unemployment are found both in urban and rural areas
• Open unemployment
• Structural unemployment
• Under employment
• Frictional unemployment
• Cyclical unemployment
Suggestions to Solve the Problem of Unemployment in India
• Increase in production
• Increase in productivity
• High rate capital formation
• Help to self employed persons
• Technique of production
• Co-operative industries
Government Policy and Programmes

Government seeks to solve the problem of unemployment through its poverty eradication
programmes generating employment opportunities for poorer sections of the society. Rural
employment Guarantee scheme is a significant recent attempt of the government, offering
guaranteed employment to those in the rural areas who are below poverty line.
Some of the basic issues related to unemployment in India are emphasised in this chapter. It also
addresses the growth rate of Indian economy and various employment generation, schemes. It also
specifies the need of transformation of workers from in formal sector to formal sector.
Employment and Informalisation of Indian workforce
Work plays an important role in our lives as an individual or a group of members can earn their living
after doing work. Being employed gives us a sense of self-worth and enables us to relate ourselves
meaningfully with others. In this way, every working person can actively contribute towards national
income.
Thus, there is need to know who is a worker and what is an employment.
A person is classed as a worker if
• he has contract or agreement to do work.

• he gets reward or other benefits from doing a work.
• he works for himself or is self-employed.
So, it can be concluded that all those who are engaged in production activities, in whatever capacity
high or low, are workers.”
Types of Workers
Broadly, workers can be categorised into self-employed and hired workers. They are discussed below
• Self-Employed The workers who own and operate an enterprise to earn their livelihood are
known as self-employed.
For example, a farmer working on his own farm. This category accounts for more than 50% of the
workforce.
• Hired Workers Those people who are hired by others and are paid wages or salaries as a reward
for their services are called hired workers.
Hired workers can be of two types
• Casual Workers Those people, who are not hired by their employers on a regular/permanent
basis and do not get social security benefits are said to be casual workers.
For example, construction workers.
• Regular Salaried Workers When a worker is engaged by someone or by an enterprise and paid
his or her wages on a regular basis, they are known as regular salaried employees or regular
workers.
For example, teachers, chartered accountants, etc.
Self-Employed and Hired Workers in India

1. According to Region (Rural and Urban)
• 41% of workers are self-employed and 59% of workers are hired in urban areas.
• 54% of workers are self-employed and 46% of workers are hired in rural areas.
The above chart shows that the self-employed and casual wage labourers are found more in rural
areas than in urban areas. It is -because in urban areas, people are skilled and work for jobs in
offices and factories. But in rural areas, people work on their own farms.
2. According to Gender
• 50% of male workers are self-employed and 50% of male workers are hired.
• 53% of female workers are self-employed and 47% of female workers are hired.
Distribution of Employment by Gender The above chart shows that self-employment and hired
employment are equally important for male workers. But female workers give preference to self-
employment than to hired employment. It is because women, both in rural and urban areas are less
mobile and thus, prefer to engage themselves in self employment.
So, it can be concluded that self-employment is a very important source of livelihood for people in
India. Size of Workforce in India. India has a workforce of nearly 40 crore of people.
The data on the size of workforce In India are as follows
• About 70% of the workforce comprises of male workers, only 30% are female workers,
• Nearly, 70% of workforce is found in rural areas i and only 30% is in urban areas.
• Percentage of female workforce In rural areas is nearly 26% while it is only 14% in urban areas.
Employment
It is a relationship between two parties i.e. employer and the employee who are binded in a contract
of doing something valuable or it is an act of employing or state of being employed.
The nature of employment in India is multifaceted. Some get employment throughout the year or
some others get employed for only a few months in a year. Many workers do not get fair wages for
their work but still while estimating the numbers of workers, all those who are engaged in productive
activities are included as employed.
Terms associated with workers and employment are accumulated below
• Productive Activities Those activities which contribute to the gross national product are called
productive activities.
• Workforce Persons who are engaged in productive activities are termed as workers and they
constitute the workforce.
Workforce is the total number of persons actually working.
• Workforce Participation Rate (Ratio) It is measured as the ratio between workforce and total
population of a country.
• Labour Supply It refers to the amount of labour that the workers are willing to work,
corresponding to a particular wage rate.
• Labour Force It refers to he number of workers actually working or who are able to work. It is not
related to wage rate.
• Rate of Unemployment
Participation of People in Employment

It refers to participation of people induction activity. It is measured as a ratio of or force to total
population of the country.
The data on rate of participation of people in employment are as follows
• Rate of participation for the urban areas is about 35%.

• Rate of participation for the rural areas is about 41%.
• In urban areas, rate of participation is about 54.3% for men and 13.8% for women.
• In rural areas, rate of participation is about 54.7% for men and 26.1 % for women.
• Overall rate of participation in the country is about 39.2%.
Worker-Population Ratio in India, 2009-2010 Worker-Population Ratio
The above data reveals the following
• Overall rate of participation in the country is not very high, implying not many people are engaged
in production activity.
• Participation rate in rural areas is higher than in urban areas.
• Participation rate for women is higher in rural areas compared with urban areas.
Employment in Firms, Factories and Offices

In the course of economic development of a country, labour flows from agriculture and other related
activities to industry and services. In this process, workers migrate from rural to urban areas.
Generally, we divide all productive activities into different industrial divisions, they are as follows
• Primary Sector It includes agriculture, forestry and logging, Ashing, mining and quarrying.
• Secondary Sector It includes manufacturing, construction, electricity, gas and water supply.
• Tertiary Sector It includes trade, transport, storage and services.
Growth and Changing Structure of Employment
During the period 1960-2000, Gross Domestic Product (GDP) of India grew positively and was higher
than the employment growth. However, there was always fluctuation in the growth of GDP. During
this period, employment grew at a stable rate of about 2%.
In 1972-73, about 74% of workforce was engaged in primary sector and in 2009-10, this proportion
has declined to 53%. Secondary and service sectors are showing promising future for the Indian
workforce.The distribution of workforce in different status indicates that over the last four decades
(1972-2010), people have moved from self employment and regular salaried employment to casual
wage work. Yet self-employment continues to be the major employment provider.
The movement of labour from regular workers to casual wage workers is known as The Process of
casualization.
The chart given above points that in the late 1990s, employment growth started declining and
reached the level of growth that India had in the early stages of planning. During these years, there is
a widening gap between the growth of GDP and employment. This means that in the Indian economy,
without generating employment, we have been able to produce more goods and services. This
phenomenon is referred as Jobless Growth.
Distribution of workforce by industrial sectors shows substantial shift from farm work to non-farm
work.
Informalisation of Indian Workforce

Development planning in India is always focused to provide decent livelihood to its people. It was
thought that the industrialisation strategy would bring surplus workers from agriculture to industry with
better standard of living as in developed countries. Over the years, the quality of employment has
been deteriorating. A small section of Indian workforce is getting regular income. The government
through its labour laws, enable them to protect rights in various ways. This section of workforce forms
trade unions, bargains with employers for better wages and other social security measures.
Workforce can be classified into two categories
Formal Sectors All the public sector establishments and those private sector establishments which
employ 10 hired workers or more are called formal sector establishments and those who work in such
establishments are formal sector workers.
Informal Sectors All other enterprises and workers working in those enterprises form the informal
sector. Informal sector includes millions of farmers, agricultural labourers, owners of small enterprises
and people working in those enterprises as also the self employed who do not have any hired
workers.
Those who are working in the formal sector enjoy social security benefits. They earn more than those
in the informal sector. Workers and enterprises in the informal sector do not get regular income; they
do not have any protection or regulation from the government. Workers are dismissed without any
compensation.
As the economy will grow, more and more workers would become formal sector workers. Owing to
the efforts of the International Labour Organisation (ILO), the Indian government has initiated the
modernisation of informal sector.
Informalisation in Ahmedabad Ahmedabad is a prosperous city with its wealth based on the produce
of more than 60 textile mills with a labour force of 150000 workers employed in them. These workers
had, over the course of the century, acquired a certain degree of income security.
They had secure jobs with a living wage, they were covered by social security schemes protecting
their health and old age. They had a strong trade union which not only represented them in disputes
but also ran activities for the welfare of workers and their families. In the early 1980s, textile mills all
over the country began to close down. In some places, such as Mumbai, the mills closed rapidly.
In Ahmedabad, the process of closure was long drawn out and spread over 10 years. Over this
period, approximately over 80000 permanent workers and over 50000 non-permanent workers lost
their jobs and were driven to the informal sector.
The city experienced an economic recession and public disturbances, especially communal riots. A
whole class of workers was thrown back from the middle class into the infor mal sector, into poverty.
There was widespread alcoholism.
Unemployment
In every section of society there will be a large number of unemployed persons. It is a situation, in
which all those who, owing to lack of work are not working but either seek work through employment
exchanges, intermediaries, friends or relatives or by making applications to prospective employers or
express their willingness or availability for work under the prevailing condition of work and
remunerations.
There are a variety of ways by which an unemployed person is identified. As per the view 4)f some
economists, unemployed person is one who is not able to get employment of even one hour in half a
day.
One can get the data of unemployed persons through below stated sources
• Reports of Census of India

• NSSO’s (National Sample Survey Organisations) reports of employment and unemployment
situation
• Directorate General of Employment and Training Data of Registration with Employment
Exchanges.
Types of Unemployment in India
1. Rural Unemployment
Around 70% of India’s population lives in village. Agriculture is the single largest source of their
livelihood. Agriculture suffers from a number of problems like dependence upon rainfall, financial
constraints, obsolete techniques, etc.
Rural unemployment can be of following three types
• Open Unemployment It refers to that situation wherein the worker is willing to work and has the
necessary ability to work yet he does not get work and remains unemployed for full time. ”
• Seasonal Unemployment It refers to a situation where a number of a persons are not able to find
a job in a particular season. It occurs in case of agriculture, ice-cream factories, woollens
factories, etc.
• Disguised Unemployment It exists when marginal physical productivity of labour is zero or
sometimes it becomes negative. Important features of disguised unemployment are as under
o Marginal physical productivity of labour is zero.
o There is disguised unemployment among wage earners.
o Disguised unemployment is invisible.
o It is different from industrial unemployment.
2. Urban Unemployment
In urban areas, unemployed people are often registered with employment exchanges. Between 1961
and 2008, the number of unemployed registered in employment exchanges has increased more than
eight-fold.
Urban unemployment is of three types
• Industrial Unemployment It includes those illiterate persons who are willing to work in industries,
mining, transport, trade and construction activities, etc.
Problem of unemployment in industrial sector has become acute because of increasing migration
of rural people to urban industrial areas in search of employment.
• Educated Unemployment In India the problem of unemployment among the educated people is
also quite grave. It is a problem spread across all parts of the country, because the massive
expansion of the education facilities have contributed to the growth of educated persons who are
on the look out for white collar jobs.
• Technological Unemployment Technological upgradation is taking place in all spheres of activity.
People who have not updated their skills in the latest technology become technologically
unemployed.
Causes of Unemployment in India
1. Slow Economic Growth In Indian economy, the rate of economic growth is very slow. This slow
growth rate fails to provide enough employment opportunities to the rising population. Supply of
labour is much more than the available employment opportunities.
2. Rapid Growth of Population Constant increase in population has been a grave problem of India. It
is one of the main causes of unemployment. The number of unemployed has actually increased
instead of decreasing during the plan period.
3. Faulty Employment Planning The Five Year Plans in India have not been designed for employment
generation. A frontal attack to solve the problem of unemployment is missing. It was thought that
economic growth will take care of unemployment problem.
4. Excessive Use of Foreign Technology Lack of scientific and technical cosearch at home, due to its
high cost has resulted in excessive use of foreign technology which has led to technical
unemployment in our country.
5 Lack of Financial Resources The expansion and diversification programme of agriculture and small
scale industries have suffered because of lack of financial resources. This has been accompained by
increasing government control of economic activities.
6. Increase in Labour Force The population explosion stage of Indian economy has added young
people to the labour force who are seeking employment.
Government and Employment Generation

In 2005, the government had passed an act in parliament known as the National Rural Employment
Guarantee Act, 2005. It promises 100 days of guaranteed wage employment to all rural households
who volunteer to do unskilled manual work. This scheme is one of the important measure adopted by
government to generate employment for those who are in need of jobs in rural areas.
Since independence, the Union and State Government have played an important role in generating
employment or creating opportunities for employment generation. Their efforts can be broadly
categorised into two i.e., direct and indirect.
• Direct Employment, In this government employs people in various departments for administrative
purposes. It also runs industries, hotels and transport companies and hence provides
employment directly to workers.
• Indirect Employment It can be understood as when output of goods and services from
government enterprises increases, then private enterprises which receive now materials from
government enterprises will also raise their output and hence increase the number of
employment opportunities in the economy. This is the indirect generation of employment
opportunities by the government initiatives in the economy.
Employment Generation Programmes

Many programmes that governments implement with the aim of alleviating poverty through
employment generation are called employment generation programmes.
These programmes aim at providing not only employment but also services in areas such as primary
health, primary education, rural drinking water, nutrition, assistance for people to buy income and
employment generating assets, development of community assets by generating wage employment,
construction of houses and sanitation, assistance for constructing houses, laying of rural roads,
development of waste lands/degraded lands.
Infrastructure Class 11 Notes Chapter
Concept of Infrastructure
Infrastructure refers to such core elements of economic and social change which serves as a support
system to production activity in the economy.
Economic Infrastructure
It refers to all such elements of economic change which serve as a support system to the process of
economic growth.
Social Infrastructure
It refers to the core elements of social change which serve as a support system for the process of
social development of a country.
Infrastructure and Development
Following observations show how exactly infrastructure contributes to the process of growth and
development.
• Infrastructure impacts productivity

• Infrastructure induces investment
• Infrastructure generates linkages in production
• Infrastructure enhances size of the market
• Enhance ability to work
• Induces Foreign Direct Invesment (FDI)
The State of Infrastructure in India

(i) Energy Energy is the most important component of economic infrastructure. Industrial production is
not possible if energy is not available.
Energy is broadly classified as commercial and non-commercial energy.
• Components of Commercial Energy Coal, petroleum products natural gas, electricity.

• Components of Non-Commercial Energy Fire wood, animal waste, agricultural waste.
(ii) Conventional Sources
• Coal
• Natural gas
(iii) Non-Conventional Sources
• Solar energy
• Wind energy
• Biomass energy including energy in the form of gobar gas
• Geo thermal energy
• Energy through tides and waves as well as temperatue gradient over sea
(iv) Power/Electricity The most visible form of energy, which is often identified with progress in
moderation civilization is power, commonly called electricity.
(v) Some Challenges in the Power Sector
• Inadequate generation of electricity

• Less capacity utilisation
• Losses of electricity boards
(vi) Health Health is a state of complete physical, mental and social well-being. It does not simply
mean absence of disease; rather it means a sound physical and mental state of the individual.
Development of Health Services After Independence

There has been a large scale improvement in health facilities. Following are the highlights
• Decline in death rate

• Reduction in infant mortality
• Rise in expectancy of life
• Control over deadly diseases
• Reduction in child mortality rate
Women’s Health
Women in India suffer from a serious neglect not only in the area of education, but in the area of
health care as well. More than 50% of women in India in the age group of 15-49 years suffer from
nutritional deficiency.
Health as an Emerging Challenge
Points given below highlight the deficiencies of our social infrastructure in terms of health facilities.
• Unequal distribution of healthcare services

• Communicable diseases
• Poor management
• Privatisation
• Poor upkeep and maintenance
• Poor sanitation level
Infrastructure facilitates support system in an economy. It contributes to economic development of a

country both by rising the productivity of factors of production and by improving the quality of life of its
people.
This chapter focuses on analysing the economic and social components of infrastructure. The
significance of infrastructure in the context of growth and development of an economy is also
discussed in it.
Concept, Types and Importance of Infrastructure

Infrastructure is basic physical and organisational structure needed for the operation of a society or
enterprise. It provides supporting services in the main areas of industrial and agricultural production,
domestic and foreign trade and commerce. Infrastructural installations do not direcdy produce goods
but help in promoting production activities in an economy. e.g. transport, communication, banking,
power, etc.
These services include roads, railways, ports, airports, dams, power stations, oil and gas pipelines,
telecommunication facilities, etc. They also include country’s educational system including schools
and colleges, health system including hospitals, sanitary system including clean drinking water
facilities and the monetary system including banks, insurance and other financial institutions.
Types of Infrastructure
Infrastructure is broadly categorised as social and economic infrastructure. They are discussed below
Social Infrastructure It refers to the core elements of social change which serve as a foundation for
the process of social development of a country. It contributes to economic processes indirectly and
from outside the system of production and distribution, e.g. educational institutions, hospitals, sanitary
conditions and housing facilities, etc.
Economic infrastructure It refers to all such elements of economic change which serve as a
foundation for the process of economic growth. These helps in the process of production directly. e.g.
transportation, communication, energy/power, etc.
Difference between Social and Economic Infrastructure
Relevance of Infrastructure
Infrastructure is the support system which provides support to the efficient working of a modem
industrial economy. Modem agriculture also largely depends on it
• for speedy and large scale transportation of seeds, pesticides, fertilisers, etc.
We use modern roadways, railways and shipping i facilities. In recent times, agriculture also depends
on insurance and banking system.
Inadequate infrastructure can have multiple adverse effects on health. Improvements in water supply
and – sanitation have a large impact by reducing morbidity (state of being unhealthy or diseased)
from major
• waterborne diseases and reducing the severity of disease, when it occurs. Air pollution and
safety hazards connected to transportation also effect morbidity particularly in densely populated
areas.
Importance of Infrastructure in Development
Folloiving points highlights how exactly infrastructure contributes to the process of growth and
development
• Impact on Productivity Infrastructure plays an major role in the raising productivity, with improved
roadways, warehouses etc farmers can easily sell their products in different markets. Also
irrigation facilities has reduced dependence on monsoon for water needs, which not only
increases productivity but also production level.
• Induces Investment Infrastructure induces investment. Low investment points to low level of
production and backwardness of an economy. A well developed infrastructure attracts foreign
investors. Which gives investment avenues and profitable ventures.
• Generates Linkages in Production Better means of transport and communication, robust system
of banking and finance generates better inter-industrial linkages. It is a situation when expansion
of one industry facilitates the expansion of the other.
• Enhances Size of the Market Infrastructure enhances the size of the market as large scale of
production can capture more market.
• Enhances Ability to Work Social infrastructure increases the quality of life of workers, thereby
increasing their efficiency. Health care centres, educational institutions and other such facilities
inherit skills which increases ability and efficiency to work.
• Facilities Outsourcing India is emerging to be a global destination for all kinds of outsourcing. For
example, call centres, study centres, medical
• transcription and such other services, owing largely – to its sound system of social and economic
infrastructure.
The State of Infrastructure in India
Traditionally, the government has been solely responsible for developing the country’s infrastructure.
But it was found that the government’s investment in infrastructure was inadequate. Today, the
private sector by itself and also in joint partnership with the public sector has started playing a very
important role in infrastructure development. India invests only 5% of its GDP on infrastructure, which
is for below than that of China and Indonesia.
Infrastructure State in Rural Area
Majority of India’s population still lives in rural area.

Infrastructure state in rural India can be understood from the following points
• Despite of so much technological progress, women of rural India are still using bio fuels to meet
their daily energy requirement.
• Women go long distances to fetch water and other basic needs.
• The Census 2001 shows that in rural India, only 56% households have an electricity connection
and 43% still use kerosene.
• About 90% of the rural households use bio fuels for cooking.
• Tap water availability is limited to only 24% rural households.
• About 76% of the population drinks water from open resources such as wells, ponds, etc.
• Access to improved sanitation in rural areas was only 20%.
Future Prospects in India

Some economists have projected that India will become the third biggest economy in the world, a few
decades from now. For that to happen, India will have to boost its infrastructure investment.
In an economy as the income rises, requirement of infrastructure will change. For low income
countries, basic infrastructure services like irrigation, transport and power are more important. On the
contrary the developed economies require more service related to infrastructure. That is why, share
of power and telecommunication infrastructure is greater in high income countries.
Thus, development of infrastructure and economic development go hand in hand. Obviously, if proper
attention is not paid to infrastructure development, economic development will be severely affected.
In this chapter, we will focus only two kinds of infrastructure, those associated with energy and health.
Other types of infrastructure are not included in our syllabus.
Energy
Energy is a critical aspect of development process of a nation. It is essential for industries, agriculture
and related areas like production and transportation of fertilisers, pesticides and farm equipment. It is
also required in house for cooking, household lighting and heating etc.
Sources of Energy
1. Conventional Sources of Energy
There are two types of conventional sources of energy
• Commercial Sources Coal, petroleum and electricity are commercial sources of energy as they
bought and sold in the market. They account for over 40% of total energy sources consumed in
India. Commercial sources of energy are generally exhaustible in nature.
• Non-commercial Sources Fire wood, agricultural waste and dried dung non-commercial sources
of energy. They are found in nature free of cost. Non-commercial sources are generally
renewable in nature.
More then 60% of Indian households depend on the traditional sources of energy. In meeting their
regular cooking and heating needs.
2. Non-conventional Sources of Energy

Solar energy, wind energy and tidal power are non-conventional sources. India has almost unlimited
potential for producing all three types of energy if some appropriate cost effective technologies (that
are already available) are used.
Note India is fifth largest producer of wind energy.
Difference between Conventional and Non-conventional Sources of Energy

Conventional Sources of Energy
These are the traditional sources of energy which are generally bought and sold in the market.
In India, conventional sources are being used in total disregard to the environment, i.e. These
sources creates pollution.
Primary and Final Sources of Energy
Primary Sources They are those sources which are the gift of nature to the Earth. They do not require
any transformation before their use. They are directly used as the inputs of production. e.g., coal,
lignite, petroleum, gas, etc.
Final Sources They sources are used as a final product.

This involves transformation process, transforming inputs into final outputs like transformation of coal
energy into electricity.
Consumption Pattern of Commercial Energy in India
At present, commercial energy consumption makes up about 74% of the total energy consumed in
India. This includes coal with the largest share of 54%, followed by oil at 33%, natural gas at 9% and
hydro energy at 3%. Non-commercial energy sources account for over 26% ofthe total energy
consumption.
The critical feature of India’s energy sector and its linkages to the economy, is the import dependence
on crude and petroleum products, which is likely to grow rapidly to more than 100% of the need in the
near future.
Sectoral Pattern of Energy Consumption in India

Earlier till 1953-54, transport sector was the largest consumer of commercial energy but it declined
thereafter and industrial sector has been increasing. The share of oil and gas is highest among all
commercial energy consumption.
Power/Electricity
The most visible form of energy, which is often identified with progress in modern civilisation, is
power, commonly called electricity. It is a critical component of infrastructure that determines the
economic development of a country. The growth rate of demand for power is generally higher than
the GDP growth rate. Studies point that in order to have 8% per annum, power supply needs to grow
around 1. annually.
In 2010-11, thermal sources accounted for almost 65% generation capacity in India. Hydel and wind
power accounted for 32.5% while nuclear power accounted only 2.5%. India’s energy policy
encourages two energy sources; hydel and wind, as they do not rely on fossil fuel and hence, avoid
carbon emissions and are renewable in nature. It has resulted in faster growth of electricity produced
from there two sources.
Atomic energy is an important source of electric power. At present, nuclear energy accounts for only
2.5% of total energy consumption, against a global average of 13% which is too low. Hence, some
scholars suggest to generate more electricity through atomic sources.
Use of Solar Energy in Thane

There is a use of solar energy on large scale in Thane city. The use of solar energy, which was
considered a somewhat far fetched concept, has bought in real benefits and results in cost and
energy saving, In this city, solar energy is being applied to heat water, power traffic signals and
advertising hoardings, The experiment is lead by Thane Municipal Corporation. It has made
compulsory for all new buildings in the city to install solar water heating system.
Some Challenges in the Power Sector

Energy, in a developing country like India, is a basic put required to sustain economic growth and to
provide basic amenities of life to the entire population of a country.
Energy generated at various power stations is not totally used by the consumers, some of it is
consumed by the power station itself and some of it is wasted in transmission.
Some of the challenges that India’s power sector faces today are
• India’s installed capacity to generate electricity is , not sufficient to feed an annual economic
growth of 9%. At present, India is able to and only 20,000 MW a year. Even the installed capacity
is under utilised.
• State Electricity Boards (SEBs) which distribute electricity, incur losses which exceed ? 500
billion due to transmission and loss in distribution, wrong pricing of electricity and other
inefficiences.
• Private sector power generators are yet to play their role in a major way, same is the case with
foreign investors.
• There is general public unrest due to high power tariffs and prolonged power cuts in different
parts of the country.
• Thermal power plants which are the mainstay of India’s power sector, are facing shortage of raw
material and coal supplies.
Continued economic development and raising population is driving the demand for more energy than
what India is currendy producing. Instead of investing in already installed power sector, government
has shifted interest into the private sector particularly for the distribution of electricity at much higher
prices.
Power Distribution : The Case of Delhi

Since, independence power management in the capital has changed hands four times. The Delhi
State Electricity Board (DSEB) was set up in 1951. This was succeeded by the Delhi Electric Supply
Undertaking (DESU) in 1958. The Delhi Vidyut Board (DVB) came into existence as SEB in February
1997.
Now the distirbutioq of electricity vests with two leading private sector companies—Reliance Energy
Limited (BSES Rajdhani Power Limited and BSES Yamuna Power Limited) and Tata—Power Limited
(TPDDL). They supply electricity to approximately 28 lakh customers in Delhi.
The tariff structure and other regulatory issues are monitored by the Delhi Electricity Regulatory
Commission (DERC). Though it was expected that there will be greater improvement in power
distribution and the consumers will benefit in a major way, experience shows unsatisfactory results.
Health
A person’s ability to work depends largely on his health. Good health enhances the quality of life.
Health is not only absence of disease but also the ability to realise one’s potential. It is a yardstick of
one’s well being.
Health is an important component of social infrastructure. It is the holistic process related to the
overall growth and development of the nation. Scholars assess people’s health by taking into account
indicators like infant mortality and maternal mortality rate, life expectancy and nutrition levels,
alongwith incidence of communicable and non-communicable diseases.
Development of health infrastructure ensures a country about healthy manpower for production of
goods and services.
Health infrastructure includes hospitals, doctors, nurses and other para-medical professionals, beds,
equipment required in hospitals and a well developed pharmaceutical industry. Only the presence of
infrastructure is not enough to have healthy people but it should be accessable to all the people
easily.
State of Health Infrastructure in India

The government has the constitutional obligation to guide and regulate all health related issues such
as medical education, adulteration of food, drugs and poisons, medical profession, vital statistics,
mental, deficiency and lunacy. Central Council of Health and Family Welfare collects information and
renders financial and technical assistance to State Governments, union territories and other bodies
for implementation of important health programmes in the country.
State of health infrastructure in India can be understood from the following points
• At the village level, a variety of hospitals known as Primary Health Centres (PHCs) have been
set.
• There are large number of hospitals run by voluntary agencies and the private sector, equipped
with professionals and para medicaf professionals trained in medical, pharmacy and nursing
colleges.
• Since independence, there has been a significant expansion in the physical provision of health
services. Public Health Infrastructure in India, 1951-2000
Private Sector Health Infrastructure

In recent time, private health infrastructure has grown largely. Private sector health, infrastructure is
explained below
About 70% of the hospitals running in India belong to private sector. Nearly 60% of dispensaries are
run by the same private sector.
Private sector has also been contributing significantly in medical education and training, medical
technologies and diagnostics, manufacture and sale of pharmaceuticals, hospital construction and
medical services.
Health System in India
India’s health infrastructure and healthcare is made up of a three tier system

1. Primary Healthcare
Primary healthcare system in India includes
• Education concerning prevailing health problems and methods of identifying, preventing and
controlling them.
• Promotion of food supply and proper nutrition and adequate supply of water and basic sanitation.
• Maternal and child health care.
• Immunisation against major infectious diseases and injuries.
• Promotion of health and provision of essential drugs.
Auxiliary Nursing Midwife (ANM) is the first person who provides primary healthcare. Primary Health
Centres (PHCs), Community Health Centres (CHCs) and sub centres.
2. Secondary Healthcare
When condition of a patient is not managed by PHCs, they are referred to secondary or tertiary
hospitals. Health care institutes having better facilities for surgery, X-ray, ECG (Electro Cardio Graph)
are called secondary healthcare institutes. They function both as primary health care provider and
also provide better health care facilities. They are mostly located in district and headquarters in big
towns.
3. Tertiary Healthcare
In tertiary sector, there are the hospitals which have advanced level equipment and medicines and
undertake all the complicated health problems, which could not be managed by primary and
secondary hospitals.
This sector also includes many premier institutes which not only impart quality medical education and
conduct research but also provide specialised health care.
For example, All India Institute of Medical Sciences (AIIMSs), Post Graduate Institute (PGI),
Chandigarh, Jawaharlal Institute of Postgraduate Medical Education and Research (JIPMER),
Pondicherry, National Institute of Mental Health and Neuro Sciences (NIMHNSs), Banglore and All
India Institute of Hygiene and Public Health, Kolkata.
Indian Systems of Medicine ASM

It includes six systems, Ayurveda, Yoga, Unani, Siddha, Naturopathy and Homeopathy (AYUSNH). At
present there are 3529 ISM hospitals 24943 dispensaries and as 6.5 lakhs registered practitioners in
India.
Medical Tourism – A Great Opportunity
Now-a-days foreigners visit India for surgeries,liver transplants, dental and even cosmetic care etc,
the reason is, our health gervices combine latest medical technologies with qualified professionals
and is cheaper for foreigners as compared to costs of similar health careaervices in their own
countries. In 2004-05, as many as 150000 foreigners visited India for medical treatment, this figure is
likely to increase by 15% each year. Health infrastructure can be upgraded to attract more foreigners
to India.
ISM has huge potential and can solve a large part of our health care problems because they are
effective, safe, and inexpensive.
Indicators of Health an Health Infrastructure :critical Appraisal
(i) Health status of the country can be assessed through indicators such as infant mortality and
maternal mortality rates, life expectancy and nutrition levels, alongwith the incidence of
communicable diseases.
iholars argue that there is greater scope for the role of government in the health sector.
Source World Health Statistics 2011. www.worldbank.org

From the given table, following facts can be concluded
• India’s expenditure on health sector is only 4.2% of total GDP. This is very low as compared to
other countries, both developing and developed.
• India has about 17% of the world’s population but it bears a frightening 20% of the global burden
of diseases.
• Global Burden of Diseases (GBD) is an indicator used by experts to gauge the number of people
dying prematurely due to a particular disease as well as the number of years spent by them in
state of‘disability’ Owing to the disease.
• Every year around five lakh children die due to water borne diseases. The danger of AIDS is also
looming large.
• Malnutrition and inadequate supply of vaccines lead to the death of 2.2 million children every
year.
• At present, less than 20% c the population utilises public health facilities.
• Only 38% of PHC’s, have quired number of doctors and only 30% of PHC’s have sutTK stock of
medicines.
Urban-rural and Poor-rich Divide

Differences in medical healthcare between urban – rural and poor-rich can be understood from the
points given below
• Only one-fifth of total hospitals are located in rural areas. Rural India has about half the number
of dispensaries. People in rural areas do not have sufficient medical infrasctructure. This lead to
difference in the health status of people. Out of 7 lakhs beds, roughly 11% are available in rural
areas.
• There are only 0.36% hospital for every one lakh people in rural areas while urban areas have
3.6% hospitals for the same number of people.
• The PHCs located in rural areas do not offer even X-ray or blood testing facilities which, for a city
dweller, constitutes basic healthcare. Even though 315 recognised medical colleges produce
30,000 medical graduates every year. Still there is shortage of doctors in rural areas. One-fifth of
these doctors migrate from one coutry to -another for better job opportunities.
• The poorest 20% of Indians living in both urban and rural areas spend 12% of their income on
healthcare while the rich spend only 2%.
• Percentage of people who have no access to proper care has risen from 15 in 1986 to 24 in
2003.
Women’s Health
Women constitute about half the total population in India. They suffer many disadvantages as
compared to men in the areas of education, participation in economic activities and health care. The
child sex ratio has been detonated from 927 in 2001 to 914 in 2011.
There is growing incidence of female foeticide in the country. Close to 300000 girls under the age of
15 are not only married but have already borne children, at least once.
More than 50% of married women between the age group of 15 and 49 years suffer from anaemia
caused by iron deficiency. It has contributed to 19% of maternal deaths. Abortions are major cause of
maternal morbidity and mortality in India.
Health : A Vital Public Good and a Basic Human Right All citizens can get better health facilities if
public health services are decentralised. Success against diseases depends on education and
efficient health infrastructure. So it is necessary to create awareness on health and provide efficient
system. The role of telecom and IT in this regard is very important. The ultimate goal should be to
help people move towards a better quality of life.
Environment Sustainable Development Class 11
Notes Chapter 9
Concept of Environment
Environment may be defined as all those conditions and their effects which influence human life. It is
the sum total of surrounding and the totality of the resources.
According to the Environment Act 1986, “Environment includes, water, air and land and the inter
relationship which exists among and between water air land and human beings and other creatures,
plants, micro-organisms and property”.
Functions of Environment
• It assimilates waste.
• It sustains life by providing genetic and bio diversity.
• It also provides aesthetic services like scenery etc.
Significance of Environment
• Environment offers resources for production.

• Environment sustains life.
• Environment Enhance quality of life.
Two Basic Problems Related to Environment
• Problem of pollution.
• Problem of excessive exploitation of natural resources.
Pollution It refers to those activities of production and consumption which challenge purity of air and
water and serenity of the environment.
Pollution unfolds itself in three ways
• Air Pollution Pollution of air impliespollution of an essential elements of life.

• Water Pollution Water is an equally important element of life and its pollution is equally serious.
Polluted water is the principal cause of diseases like diarrhoea and hepatities.
• Noise Pollution Excessive noise causes irritation and unnecessarily fatigues the body and the
mind.
Causes of Environmental Degradation
• Population explosion
• Widespread poverty
• Increasing urbanisation
• Increasing use of insecticides, pesticides and chemical fertilisers
• Rapid industrialisation
• Multiplicity of transport vehicles
• Disregard to the civic norms
How to Save Environment?
Following measures need to be taken to protect environment
• Social awareness
• Population control
• Enforcement of Environment Conservation Act
• Afforestation campaign
• Control over industrial and agricultural pollution
• Water management
• Management of solid waste
• Improvement in housing
Sustainable Development
It is that process of economic development which aims at raising the quality of life of both and future
generation.
Features of Sustainable Development
• Sustained rise in real per capita income and economic welfare

• Rational use of natural resources
• No reduction in the ability of future generations to meet their own needs
• No increase in pollution
Strategies for Sustainable Development
• Input-efficient technology.
• Use of environment-friendly sources of energy.
• Integrated Rural Development.
• Shift to organic farming.
• Manage the westes.
• Stringent laws on the disposal of chimical effluents.
• Awarness to conserve natural assets for inter-generational equity.
• Public means of transport.
Factors Contributing to Deforestation
• Growing industrial demand for wood and other forest products.

• Growing demand for wood owing to explosive rise in population.
• River valley projects.
The economic development we have achieved so far is on the cost of environmental degradation.
The era of globlisation promises higher economic growth, but on the same side it had adverse
consequences that had impacted environment.
In order to understand the sustainable path of development, the significance and contribution of
environment to economic development should be understood. With this in mind, we would be able to
achieve sustainable development in India.
Environment is defined as the total planetary inheritance and the totality of all resources. It includes
all the biotic (e.g. birds, animals, plants, forests, etc) and abiotic (e.g., water, Sun, land, mountains,
etc) factors that influence each other.
According to the Environment Act-1986, ‘Environment includes, water, air and land and the inter
relationship which exists among and between water, air, land and human beings and other creatures,
plants, micro organisms and property’.
Functions of Environment
Environment performs four vital junctions, which are as follows
• Supply Resources Resources include both renewable and non-renewable sources of energy.
Resources which can be used without any fear of getting depleted are renewable sources of
energy, e.g. trees, fishes, etc. Non-renewable sources are those which are getting depleted or
exhausted. e.g. fossil fuel, etc.
• Assimilates Waste Production and consumption activity generates wastes. It is generally in form
of garbage which is absorbed by the environment.
• Sustains Life Sun, soil, air, water are the essential ingredients of environment for the human life.
Absence of these will lead to an end of life on the Earth.
• Aesthetic Services Environment provides aesthetic services like scenery, which includes rivers,
ocean, mountains and deserts. Enjoying these surroundings adds to the quality of life.
Environmental Crisis
The environment is performing its functions without any interruption as long as the demand of these
functions is within its carrying capacity. This means that if the rate of extraction of resources will be
above the rate of their regeneration, the environment will fail to perform its functions.
Resources are becoming extinct and wastes are generated beyond the absorptive capacity of the
environment. All this has lead to the environmental crisis, it refers to ecological crisis that occurs
when the environment of a species or a population changes and destabalises its survival.
Consequence of Environmental Crisis
The points given below describe the consequences of environmental crisis
• Development has polluted and dried up rivers and other aquifers, which was deteriorated the
quality of water.
• Intensive and extensive excavation of both renewable and non-renewable resources has
exhausted some of the vital resources, compelling to spend a huge amount of money on
technology and research to explore new resources.
• Decline in air and water quality have resulted in increased number of respiratory and water borne
diseases i.e., expenditure of health care is also rising according to a data 70% of water of . India
is polluted which cannot be used for drinking purpose.
Global Environmental Issues
The environmental issues which affect the whole world are called global environmental issues such
as global warming and ozone depletion. These issues also contribute to increased financial
commitments for the government.
These issues are discussed below
1. Global Warming
The gradual increase in the average temperature of Earth’s lower atmosphere is called global
warming.
Causes/Effects
It occurs due to greenhouse gases (carbon dioxide, methane and other gases which have the
capacity to absorb heat) through burning of fossil fuels (coal and petroleum) and deforestation
(increases the carbon dioxide level in atmosphere). Much of the recent observed and projected global
warming is human induced.
The atmospheric concentrations of carbon dioxide and methane have increased by 31% and 149%
respectively above pre-industrial level since 1750.
Different effects of global warming are described below
• During the past century, the atmospheric temperature has risen by 1.10° F (0.60° C).
• Melting of polar ice resulting in increase in sea level (during the past century, sea level has risen
by several inches) and the risk of coastal flooding has increased.
• Disruption of drinking water supplies dependent of snow melts.
• Extinction of species.
• More frequent tropical storms.
• Increased incidence of tropical diseases.
Action Taken
A United Nations Conference on Climate Change, held in Tokyo, Japan, in 1997, resulted in an
international agreement to fight global warming which called for reductions in emissions of
greenhouse gases by industrialised nations.
2. Ozone Depletion
It refers to the phenomenon of reductions in the amount of ozone layer in the stratosphere.
Causes/Effects
It is caused by high levels of chlorine and bromine compounds in the stratosphere. Origin of these
compounds are Chloro flurocarbons (CFCs), used as cooling substances in air conditioners and
refrigerators or as aerosol propellants and bromofluro-carbons.(halons) used in fire extinguishers.
Different effects of ozone depletion are described below
• More ultraviolet radiation comes to Earth causing damage to living organisms, skin cancer in
humans, low production of phytopjankton affecting acquatic organisms.
• Influences the growth of terrestrial plants.
Action Taken
Between 1979 to 1990, a reduction of 5% in ozone layer was detected. Since ozone layer prevents
most harmful ultraviolet radiation from passing through the Earth’s atmosphere, so reduction in ozone
layer generated worldwide concern, leading to adoption of the montreal protocol banning the use of
Chloroflurocarbon JCFC) compounds as well as other ozone depleting chemicals such as carbon
tetrachloride, tricholoroethane (also known as methyl chloroform) and bromine compounds known as
halons.
State of India’s Environment
India has rich quality of natural resources in plenty of amount.
It is clear from the following points
• India has rich quality of soil, hundreds of rivers and tributaries, lush green forests, plenty of
mineral deposits beneath the land surface, vast stretch of the Indian Ocean, ranges of
mountains, etc.
• The black soil of the Deccan Plateau is particularly suitable for cultivation of cotton. It has lead to
concentration of textile industries in this region.
• The Indo Gangetic plains spread from Arabian Sea to the Bay of Bengal are one of the most-
fertile, intensively cultivated and densely populated regions in the world.
• India’s forests though unevenly distributed, provide green cover for majority of its population and
natural cover for its wildlife.
• Large deposits of iron-ore, coal and natural gas are found in the country. India alone accounts for
nearly 20% of the world’s total iron-ore reserves.
• Bauxite, copper, chromate, diamonds, gold, lead, lignite, manganese, zinc, uranium, etc are also
available in different parts of the country.
Threat to India’s Environment
Threat to India’s environment is poverty, pollution, rapidly growing industrial sector. Air pollution,
water contamination, soil erosion, deforestation and wildlife extinction are some of the most pressing
environmental concerns of India. The developmental activities in India have resulted in pressure on
its finite natural resources, besides creating impacts on human health and well-being.
Out of them the priority issues are
• Land degradation and solid waste management
• Biodiversity loss
• Air pollution with special reference to vehicular pollution in urban cities
• Management of fresh water Some of these issues are discussed below
Land Degradation in India

Land in India suffers from varying degrees and types of degradation stemming mainly from unstable
use and inappropriate management practices.
The factors responsible for land degradation in India are
• Loss of vegetation occuring due to deforestation.

• Unsustainable fuel wood and fodder extraction.
• Shifting cultivation.
• Reduction into forest lands.
• Forest fifes and overgrazing.
• Non-adoption of adequate soil conservation measures.
• Improper crop rotation.
• Indiscriminate use of agro chemicals such as fertilisers and pesticides.
• Improper planning and management of irrigation system.
• Extraction of ground water in excess of the regain capacity.
• Open access resource.
• Poverty of the agriculture-dependent people.
Biodiversity Loss
India is the owner of 2.5% of world’s geographical area. India holds 17% of human and 20% of
livestock population on its land. In order to hold livestock and human in country, country needs 0.47
hectare of land to meet the basic needs but it has only 0.08 hectare of land which causes felling of
forests and soil erosion. 5.3 billion tonnes of soil is eroded every year. As a result quantity of nutrients
lost due to erosion each year ranges from 5.8 to 8.4 million tonnes.
Chipko or Appiko : What’s in a Name?
Chipko Movement aimed at protecting forests in the Himalayas. In Karnataka, a similar movement
took a different name, ‘Chpiko’, which means to hug.
On 8th September 1983, when the felling of trees was.started in Salkani forest in Sirsi district, 160
men, women and children hug|ed the trees and forced the woodcutters to leave. They kept vigil in the
forest over the next six weeks. Only after the forest officials assured the volunteers of the trees will be
cut scientifically and in accordance with the working plan of the district, did they leave the trees,
When commercial felling by contractors damaged a large number of natural forests, the idea of
hugging the trees gave the people hope and confidence that they can protect the forests. On that
particular incident, with the felling discontinued, the people saved 12000 trees. Within months, this
movement spread to many adjoining districts.
Air Pollution
In India, air pollution is widespread in urban areas where vehicles are the major contributors and in a
few other areas which have a high concentration of industries and thermal power plants.
Pollution from vehicles and industries are the major sources of air pollution.
• Vehicle Pollution Vehicle emissions are of particular concern since these are ground level
sources and thus, have the maximum impact on the general pollution. The number of vehicles
has increased from 3 lakh in 1957 to 67 crores in 2003.
In 2003, personal transport vehicles (two wheeled and cars only) contributed about 80% of the
total number of registered vehicles thus, contributing significantly to air pollution load.
• Industrial Pollution India is one of the ten most industrialised nations of the world. This status has
brought with it unwanted and unanticipated consequences like unplanned urbanisation, pollution
and the risk of accidents.
The CPCB (Central Pollution Control Board) has identified seventeen categories of industries
(large and medium scale) as significantly polluting.
Management of Fresh Water

Water is an equally important element of life and its pollution is equally serious. Water becomes
polluted when chemicals and other waste materials are dumped into it. Polluted water is the principal
cause of diseases like diarrhoea and hepatitis. Thus, the management of fresh water is essential to
sustain life.
Pollution Control Boards
To address two major environmental concerns in India; water, air and land pollution, the government
set up the Central Pollution Control Board (CPCB) in 1974. This was followed by states establishing
their own state level boards to address all the environmental concerns.
Different functions of pollution control boards are
• To investigate, collect and disseminate information relating to water, air and land pollution.
• To lay down standards for sewage/trade effluent and emissions.
• To provide technical assistance to governments in promoting cleanliness of streams and wells by
prevention, control and abatement of water pollution.
• To improve the quality of air and to prevent, control or abate air pollution in the country.
• To carryout and sponsor investigation and research relating to problems of water and air pollution
and for their prevention, control and abatement.
• To organise mass awareness programme for pollution control.
• To prepare manual, codes and guidelines relating to treatment and disposal of sewage and trade
effluents.
• To assess the air quality through regulation of industries.
• State boards through their district officials, periodically inspect every industry under their
jurisdiction to assess the adequacy of treatment measures provided to treat the effluent and
gaseous emissions.
• State pollution boards also provide background air quality data needed for industrial siting and
town planning.
In nutshell, it can be said that pollution control boards collect, collate and disseminate technical
and statistical data relating to water pollution. They monitor the quality of water in 125 rivers
(including the tribunaries), wells, lakes, ponds, tanks, drains and canals.
How to Save Environment?

The various measures adopted by Ministry of Environment and the central and state pollution control
boards may not yield reward unless, we make ourself concious.
Following are required measures which should be taken to save the environment
• Social Awareness There should be awareness among the people regarding the threats of the
increasing pollution and how can each of us contribute to the check this menace.
• Population Control Biggest issue which should be controlled is increasing population to protect
the environment.
• Enforcement of Environment Conservation Act The Environment act was passed in year 1986. It
was passed to check the detoriated quality of the environment.
• Afforestation Campaign Extensive afforestation campaign should be launched to protect
environment.
• Water Management There should be means which can harvest the rain water in order to use it in
the areas where there is scarcity of water, so that clean drinking water can be provided to the
rural people.
• Management of Solid Waste Management of solid waste is very essential. It should be treated
chemically. Rural garbage should be converted into compost.
Meaning, Features, Needs and Strategies for Sustainable Development
According to the United Nations Conference on Environment and Development (UNCED),
sustainable development can be defined as “development strategy that meets the need of present
generation without compromising the ability of future generation to meet their own needs.”
Edward Barbier, a renowned personality had also given the definition of sustainable development
Sustainable development is one which is directly concerned with increasing the material standards of
living of the poor at grass root level.
In specific term, sustainable development aims at decreasing the absolute poverty of the poor by
providing lasting and securing livelihoods that minimise resource depletion, environmental
degradation, cultural disruption and social instability.
The Brudtland Commission emphasises on protecting the future generation. A moral obligation to
hand over the planet Earth in good order to the future generation, i. e., the present generation should
bequeath a better environment to the future generation.
The present generation can promote development that enhances the natural and built environment in
the way, that are compatible with
• conservation of natural as us.

• preservation of the regenerative capacity of the worlds natural ecological system.
• avoiding the imposition of added costs or risks on future generation.
Features of Sustainable Development
• Sustained rise in real per capital income and economic welfare.

• Rational use of natural resources.
• No reduction in the ability of future generations to meet their own needs.
• Check on pollution.
A Way to Sustainable Development

According to Herman Dalay, a leading environmental economist, the main needs of sustainable
development are
• Limiting the human population to a level within the carrying capacity of the environment.
• Technological progress should be input efficient and not input consuming.
• Renewable resources should be extracted on a sustainable basis, i.e., rate of extraction should
not exceed rate of regeneration.
• For non-renewable resources, rate of depletion should not exceed the rate of creation of
renewable substitutes.
• Inefficiencies arising from pollution should be corrected.
Strategies for Sustainable Development
1. Use of Non-conventional Sources of Energy India heavily depends on thermal and hydro power
plants to meet its power needs. Both of these have adverse environmental impacts. Thermal power
plants emit large quantities of carbon dioxide, which is a greenhouse gas. If it is not used properly, it
may cause land and water pollution.
2. LPG, Gobar Gas in Rural Areas Rural households in India generally use wood, dungcake (upla) or
other biomass as fuel. This practice has several adverse implications like deforestation, reduction in
green cover and air pollution.
To rectify the situation, subsidised LPG is being provided. Besides it, gobar gas plants are being
encouraged through easy loans and subsidy. LPG is the clean fuel. It does not create any household
pollution and also wastage is minimised. For gobar gas plants, cattle dung is fed in the plant to
function which produces gas and slurry is used as organic soil fertiliser.
3. CNG in Urban Areas In Delhi, the use of Compressed Natural Gas (CNG) as fuel in public
transport system has significantly lowered air pollution and the air has become cleaner in the last few
years.
4. Wind Power In areas, where speed of wind is usually high, wind mills can provide electricity without
any adverse impact on the environment. The turbines moves with wind and electricity gets generated.
Its initial cost’ remain high but it can be recovered easily.
5. Solar Power Through Photovoltaic Cells In India, solar energy is used in different forms for
agriculture products, daily use products and even to warm ourselves in winters. Through photovoltaic
cells, solar energy can be converted into electricity. This technology is extremely useful for remote
areas and for places where supply of power lines is either not possible or proves very costly. This
technique is also totally free from pollution.
6. Bio Composting In order to increase production, we have started using chemical fertilisers which
are adversely affecting the waterbodies, ground water system, etc. But again farmers in large
numbers have started using organic fertilisers for production.
In some parts, cattles are maintained only because their waste prouction is very useful in form of
fertiliser. Earthworm can convert organic matter into compost faster than the normal composting
process.
7. Mini-Hydel Plants Mountainous regions have streams every where. Most of such streams are
perennial. Mini-hydel plants use the energy of such streams to move small turbines which generate
electricity. Such power plants are more or less environment friendly.
8. Traditional Knowledge and Practices Traditionally, Indian people have been close to their
environment. If we look back at our agriculture system, healthcare system, housing, transport, etc we
find that all practices have been environment friendly. But in recent years, we have been moving
away from these practices. This has caused large scale damage to our environment.
During older times, we used Ayurveda, Unani, Tibetan and Folk systems for the treatments but now
we are ignoring the traditional system and we are moving towards the western system. Not only these
products were environment friendly but they are free from side effects too.
9. Biopest Control With the advent of Green Revolution, the country entered into the use of chemical
pesticides to produce more which laid the adverse impacts on soil, water bodies, milk, meat and
fishes. To meet this challenge, better methods of pest control should be brought. One step is
pesticides based on plants like neem. Even many animals also help in controlling pests like snakes,
peacocks, etc.
Comparative Development Experience of India
with its Neighbors Class 11 Notes Chapter 10
Introduction
With the unfolding of the globalisation process, developing countries are keen to understand the
developmental processes pursued by their neighbours as they face competition from developed
nations as also amongst themselves.
Foreign Direct
Investment It is much larger compared to India and Pakistan, and a much stronger driver of growth.
SEZs (Special Economic Zones) policy of China is of central significance inducing FDI. SEZs are
offering robust infrastructural facilities for FDI.
Demographic Profile
Both for India and China, large size of population is a hindrance in the process of growth, as it
requires a huge amount of ‘maintenance investment’.
Human Development Some important parameters of human development are as these
• Life expectancy-higher the better.

• Adult literacy rate-higher the better.
• Infant mortality rate-lower the better.
• Maternal mortality rate-lower the better.
• Percentage of population having access to improved water sources-higher the better.
• Percentage of undernourished population-lower the better.
With a view to accelerating the pace of growth, different countries are forming regional and global
economic grouping based on common agreements of bilateral relations. e.g., SAARC, EU, ASEAN,
G-8, G-20.
Common Success Story of India and Pakistan
• A substantial rise in GDP per capita.

• Self-sufficiency in food production.
• Dualistic nature of the economy is gradually declining.
• Considerable reduction in the incidence of poverty.
Common Failures of India and Pakistan
• Relatively slow pace of GDP growth, compared with China.

• Poor perfomance in HDI ranking.
• Dismal Fiscal management.
• Political survival of a dominating issue rather than good governance.
Sex Ratio Sex ratio is found to be low in all three countries pointing to social backwardness, where
people hold high preference for a son in the family.
This chapter will not be examined. Open Text Based Assessment (OTBA) will be based on this
chapter.
Nations are also eager to know and understand about the developmental process pursued by their
neighbouring nations. It allows them to comprehend their strengths and weaknesses. In the process
of globalisation, it is essential for every nation to compete with developed countries.
In this chapter, we are comparing the developmental strategies pursued by India with its neighbouring
economies-Pakistan and China. This will help in understanding where do we stand today in
comparison to others.
Development Strategies of India, China and Pakistan

India, China, Pakistan have many similarities in their development strategies which are as follows
• India, Pakistan and China have started towards their developmental path at the same time. India
and Pakistan became independent nations in 1947. While Peoples Republic of China was
established in 1949.
• All the three countries had started planning their development strategies in similar ways. India
announced its Five Year Plan in 1951-56, while ’ Pakistan announced its first Five Year Plan in
1956, which is called Medium Term plan. China announced its First Five Year Plan in 1953.
• India and Pakistan adopted similar strategies such as creating a large public sector and raising
public expenditure on social development.
• Till the 1980s, all the three countries had similar growth rates and per capita incomes.
• Economic reforms took place in all the three countries. Reforms started in India in 1991, in China
in 1978 and in Pakistan in 1988.
Development Strategies of India
Some of the prominent strategies of India are discussed below

1. Sound Trade System India was a country which had the history of closed trade. Because of this
historical background; there is a critical challenge for India in order to make a new policy which can
support the new open trade system. This new reform in economies of India has been introduced and
accelerates the economic growth of India.
2. Reduction in Poverty India has adopted several poverty alleviation programmes to reduce poverty
in India. -This would help in increasing per capita income, rise in nutrition level of poors and there is a
subsequent fall in percentage of absolute poor in some states.
3. Rural Development Under this strategy, India adopted various measures for the development of
areas that are lagging behind in the overall development of village economy.
4. Employment Generation Several economic reforms were initiated to generate employment in the
country and their aim is to provide gainful self-employment and skilled wage employment
opportunities.
Development Strategies of China
After the establishment of People’s Republic of China under one party rule, all the critical sectors of
the economy, enterprises and lands owned and operated by individuals were brought under
government control.
Certain development strategies of China are discussed below
• Great Leap Forward (GLF) This campaign initiated in 1958 aimed at industrialising the country on
a massive scale. People were encouraged to set up industries in their backyards. In rural areas,
communes were started. Under the commune system, people collectively cultivated lands.
• Great Proletarian Cultural Revolution (1966-76) In 1965, Mao Tse Tung started a cultural
revolution on a large scale. In this revolution, students and professionals were sent to work and
learn from the country side. Unlike GLF, the cultural revolution did not have an explicit economic
rationale.
• 1978 Reforms Since 1978, China began to introduce many reforms in phases. The reforms were
initiated in agriculture, foreign trade and investment sector. In agriculture, lands were divided into
small plots which were allocated to individual households. They were allowed to keep all income
from the land after paying taxes.
In later phase, reforms were initiated in industrial sector. All enterprises which were owned and
operated by local collectives in particular, were allowed to produce goods.
At this stage, enterprises owned by government (known as State Board Enterprises – SOEs), in India
we call them public sector enterprises were made to face competition. In reform, prices were fixed in
two ways, i.e., farmers and industrial units were required to buy and sell fixed quantities of inputs and
outputs on the basis of prices fixed by the government and the rest were purchased and sold at
market prices.
Over the years, as production increased, the proportion of goods or inputs transacted in the market
also increased. The goal of Chinese economic reforms was to generate sufficient surplus to finance
the modernisation of the mainland Chinese economy. In order to attract foreign investors, Special
Economic Zones (SEZs) were set up.
Development Strategies of Pakistan

The development strategies of Pakistan are summarised below
• Mixed Economy Pakistan follows a mixed economy system where both public and private sectors
co-existed.
• Import Substitution Pakistan adopted a regulatory policy framework in the late 1950s and 1960s
for import industrialisation. The -policy combined tariff protection for manufacturing of consumer
goods together with direct import controls on competing imports.
• Green Revolution This was introduced to increase the productivity and self sufficiency in food.
This increased the output of foodgrains. This had changed the agrarian structure dramatically. In
1970’s nationalisation of capital goods took place. Pakistan shifted its policy orientation in 1970’s
and 1980’s when private sector got encouragement.
During this period, Pakistan received financial support from Western. This helped the country in
stimulating economic growth. Government also offered incentives to private sector. This had a
created climate for new investments. And in 1988 certain reforms were also initiated in the country.
Success and Failure of Strategies

The development strategies brought structural reforms in China, India and Pakistan. Follow the
description of their success and failure one by one.
Success of Structural Reforms in China
The success of structural reforms in China are
• There was existence of infrastructure in the areas of education and health and land reforms.
• There was decentralised planning and existence of small enterprise.
• Through the commune system, there was more equitable distribution of foodgrains.
• There was extension of basic health services in rural areas.
Failures of Structural Reforms in China

The failures of structural reforms in China are
• There was slow pace of growth and lack of modernisation in the Chinese economy under the
Maoist rule.
• Maoist vision of economic development based on decentralisation, self sufficiency and shunning
of foreign technology had failed.
• Despite of extensive land reforms, collectivisation, the great leap forward and other initiatives, the
per capita gain output in 1978 was the same as it was in the mid-1950s.
China has an Edge Over India

The Chinese reform process began more comprehensively during the 80s, when India was in the
mid-stream of slow growth process.
Rural poverty in China declined by 85% during the period 1978 to 1989. In India, it declined only by
50% during this period, Global exposure of the economy has been far more wider in China than in
India. China’s export-driven manufacturing has recorded on exponential growth, while India continues
to be only a marginal player in the international markets.
Common Success of Structural Reforms in India and Pakistan
The common success of structural reforms in India and Pakistan are
• Both India and Pakistan have succeeded in more than doubling their per capita incomes inspite
of high growth rate of population.
• The incidence of poverty has also been reduced significantly. However, the level of poverty is
lower in Pakistan.
• Both the countries have achieved self-sufficiency in the production of food.
• Both the countries have succeeded in developing their service and industry sectors at a fast rate.
• The use of modern technology is improving in both the countries.
Common Failures of Structural Reforms in India and Pakistan

The common failures of structural reforms in India and Pakistan are
• Growth rate of GDP and its sectoral constituents have fallen in 1990’s.
• Poverty and unemployment are still areas of major concerns in both the countries.
Areas Where Pakistan has an Edge Over India

Starting from almost the same level as India, Pakistan has achieved better results with regards to
• Migration of workforce from agriculture to industry,

• Migration of people from rural to urban areas.
• Access to improved water sources.
• Reduction in below poverty line population.
Areas where India has an Edge Over Pakistan

There is little doubt that, in the area of skilled manpower and research and development institutions.
India is better placed than Pakistan. Indian scientists excel in the areas of defence technology, space
research, electronics and avionics, genetics, telecommunications, etc. The number of Ph.Ds
produced by India in science and engineering every year (about 5000) is higher than the entire stock
of Ph.Ds in Pakistan. Issues of health facilities in general and infant mortality in particular are better
addressed in India.
Comparative Study
With Respect to Demographic Indicators, GDP and HDI .
I. Demographic Indicators
We shall compare some demographic indicators of India, China and Pakistan
• The population of Pakistan is very small and accounts for roughly about one-tenth of China or
India. Though China is the largest nation and geographically occupies the largest area among the
three nations, its density is the lowest.
• One child norm was introduced in China in late 1970’s to check the problem of population growth.
This measure led to decline in the sex ratio. Although sex ratio is biased against females in all
three countries, in recent times, all three countries are trying to adopt various measures to
improve the situation.
After few decades there will be more elderly people in proportion to young people due to one
child norm.
• The fertility rate is low in China and very high in Pakistan.
• Urbanisation is high in both Pakistan and China.
II. Gross Domestic Product and Sectors
According to the latest data available, we find
(i) China has the second largest GDP (PPP) of US$ 10.1 trillion whereas, India’s GDP (PPP) is US $
4.2 trillion and Pakistan’s GDP (PPP) is 0.47 trillion US$; roughly about 10% of India’s GDP.
(ii) In 1980’s, Pakistan was ahead of India, China was having double digit growth and India was at the
bottom.
Source Key indicators for Asia and Pacific 2011, Asian Development Bank, Phillipines
(iii) In 2000-10 there is a marginal decline in India and Chinas growth rates whereas Pakistan met
with drastic decline in 4.7%. The reform processes introduced in 1988 in Pakistan and political
instability are reasons behind this trend.
(iv) China and Pakistan have more proportion of urban people than India.
(v) In China, due to topographic and climatic conditions, the area suitable for cultivation is relatively
small-only about 10% of its total land area. The total cultivable area in China accounts for 40% of the
cultivable area in India.
(vi) Until the 1980s, more than 80% of the people in China were dependent on farming as their sole
source of livelihood.
(vii) The government encouraged people to leave their fields and pursue other activities such as
handicrafts, commerce and transport.
(viii) In 2008, with 40% of its workforce engaged in agriculture, its contribution to GDP in China is
10%.
(ix) In both India and Pakistan, the contribution of agriculture to GDP was at 19 and 21% respectively.
But the proportion of workforce that works in this sector is more in India. In Pakistan, about 45% of
people work in agriculture whereas in India it is 56%.
(x) The sectoral share of output and employment also shows that in all the three economies, the
industry and service sectors have less proportion to workforce but contribute more in terms of output.
(xi) In China, manufacturing contributes the highest to GDP at 47% whereas in India and Pakistan, it
is the service sector which contributes the highest. In both these countries, service sector accounts
for more than 50% of GDP. In the normal course of development, countries first shift their
employment and output from agriculture to manufacturing and then to services. This is what, is
happening in China.
The proportion of workforce engaged in manufacturing in India and Pakistan were low at 49 and 20%
respectively.
(xii) The contribution of industries to GDP is also just equal to or marginally higher than the output
from agriculture.
In India and Pakistan, the shift is taking place directly to the service sector.
(xiii) Thus, in both India and Pakistan, the service sector is emerging as a major player of
development. It contributes more to GDP and, at the same time, emerges as a prospective employer.
(xiv) In the 1980s India, China and Pakistan employed 17, 12 and 27% of its workforce in the service
sector respectively. In 2008-10 it has reached the level of 25, 33 and 35% respectively.
III. Human Development Indicator

India, China and Pakistan have performed in some of the selected indicators of human development.
Some Selected Indicators of Human Development, 2009-10
Source Human Development Report 2011 and World Development Indicators (www.worldbank.org)
From the data we would be able to conclude
• China is moving ahead of both India and Pakistan in terms of indicators of human development.
• Pakistan is ahead of India in reducing proportion of people below the poverty line and also its
performance in education, sanitation and access to water is better than that of India.
• In China, for one lakh births, only 38 women die whereas, in India 230 women die and in
Pakistan 260 women die.
• India is in the worst scenario as compared to the other two countries with respect to access to
improved sanitation and clean water.
Human Development Index (HPI)
HDI includes quantitative aspects of per capital, GDP and the quality aspects of performance in.
health and education. It is an average of life expectancy index, education index and GDP index.
PART 2
Statistics for Economics Class 11 Notes Chapter 1
Introduction
• Economics by Alfred Marshall, “The study of man in the ordinary business of life”.
• Consumer “A consumer is one who consumes goods and services for the satisfaction of his
wants”.
• Consumption “Consumption is the process of using up utility value of goods and services for the
direct satisfaction of our wants”.
• Producer “A producer is one who produces/or sells goods and services for the generation of
income”.
• Production “Production is the process of converting raw material into useful thing”.
• Saving It is the part of income which is not consumed. It is an art of abstinence from
consumption.
• Investment It is expenditure by the producers on the purchase of such assets which help to
generate income.
• Economic Activity It is an activity which is related to the use of scarce means. Means are always
scarce in relation to our wants.
• Economic Problem It is the problem of choice arising on account of the facts that resources are
scarce and these have alternative uses.
Components of Economics There are three components of economics
• Consumption
• Production
• Distribution
Statistics – A Plural Sense Statistics refers to information in terms of numbers or numerical data, such
as population statistics, employment statistics etc.
Accqrding to Bowley, “Statistics are numerical statements of facts in any department of enquiry
placed in relation to each other.”
Features of Statistics in the Plural Sense
• Aggregate of facts
• Numerically expressed
• Affected by multiplicity of causes
• Reasonable accuracy
• Placed in relation to each other
• Predetermined purpose
• Estimated
Statistics – A Singular Sense It refers to techniques or methods relating to collection, classification,

presentation analysis and interpretation of quantitative data.
According to Seligman, “Statistics is the science which deals with the methods of collecting,
classifying, presenting, comparing and interpreting numerical data collected to throw some light on
any sphere of enquiry”.
Importance of Statistics in Economics:
• Quantitative expression of economic problem

• Inter-sectoral and inter-temporal comparisons
• Working out cause and effect relationship
• Construction of economic theories or economic models
• Economic forecasting
• Formulation of policies
Limitations of Statistics:
• Study of numerical facts only

• Study of aggregates only
• Results are true only on an average
• Without reference, results may prove to be wrong
• Can be used only by the experts
• Prone to misuse
Collection of Data
Sources of Data There are two sources of data
• Primary Source of Data It implies collection of data from its source of origin.
• Secondary Source of Data It implies collection of data from some agency or institution which
already happens to have collected the data through statistical survey.
Types of Data There are two types of data
• Primary Data Data collected by the investigator for his own purpose for the first time, from
beginning to end are called primary data.
• Secondary Data These data have already been collected by somebody else, these are available
in the form of published or unpublished report.
Principal Differences between Primary and Secondary Data
• Primary data are original and secondary data are already in existence and therefore, are not
original.
• Primary data do not need any adjustment, secondary data need to be adjustment to suit the
objective of study in hand.
• Primary data are expensive and secondary data are less expensive.
Statistical Methods of Data Collection
(i) Direct Personal Investigation

It is the method by which data are personally collected by the investigator from the information. Merits
and demerits of this method are follows.
(a) Merits
• Originality
• Reliability
• Uniformity
• Accuracy
• Related information
• Elastic
(b) Demerits
• Difficult to cover wide areas
• Costly
• Personal bias
• Limited coverage
(ii) Indirect Oral Investigation

It is the method by which information is obtained not from the persons regarding whom the
information is needed. It is collected orally from other persons who are expected to possess the
necessary information. Merits and demerits of this method are given below
(a) Merits
• Wide coverage
• Expert opinion
• Simple
• Less expensive
• Free from bias
(b) Demerits
• Less accurate
• Doubtful conclusions
• Biased
(iii) Information from Local Sources or Correspondents

Under this method, the investigator appoints local persons or correspondents at different places.
Merits and demerits of this method are given below
(a) Merits
• Economical
• Wide coverage
• Continuity
• Suitable for special purpose
(b) Demerits
• Loss of originality
• Lack of uniformity
• Personal bias
• Less accurate
• Delay in collection
(iv) Information Through Questionnaries and Schedules

There are two ways of collecting information on the basis of questionnaire
(a) Mailing Method Under this method questionnaires are mailed to the informants. The method is
most suited when
• The area of the study is very wide.

• The informants are educated.
(b) Enumerator’s Methods Under this Method enumerator himself fills the schedules after seeking
information from the informants. This method is mostly used when
• field of investigation is large.
• the investigation need specialised and skilled investigation.
• the investigators are well versed in the local language and cultural norms of the informants.
(c) Collection of Secondary Data There are two main sources of secondary data
• Published sources
• Unpublished sources
(d) Published Sources Some of the published source of secondary data are
• Government publication
• Semi-government publication
• Reports of committees and commissions
• Publications of trade associations
• Publication of research institutions
• Journals and papers
• Publication of research scholars
• International publication
(e) Unpublished Sources These data are collected by the government organisations and others,
generally for their self use or office record.
• In order to assess the reliability, suitability and adequacy of the data, the following points must be
kept in mind
• Ability of the collecting organisation
• Objective and scope
• Method of collection
• Time and condition of organisation
• Definition of the unit
• Accuracy
(v) Census ‘Method

Census method is that method in which data are collected covering every item of the universe or
population relating to the problem under investigation. Merits and demerits of this method are given
follows
(a) Merits
• Reliable and accurate

• Less biased
• Extensive information
• Study of diverse characteristic
• Study of complex investigation
• Indirect investigation
(b) Demerits
• Costly
• Large manpower
• Not suitable for large investigation
(vi) Sample Method
It is that method in which data is collected about the sample on a group of items taken from the
populations for examination and conclusions are drawn on their basis. Merits and demerits of this
method are given below
(a) Merits
• Economical
• Time saving
• Identification of error
• Large investigation
• Administrative convenience
• More scientific
(b) Demerits
• Partial
• Wrong conclusions
• Difficulty in selecting representative sample
• Difficulty in framing a sample
• Specialised knowledge
Methods of Sampling
(i) Random Sampling Random sampling is that method of sampling in which each and every item of
the universe has equal chance of being selected in the sample.
Random sampling may be done in any of the following ways
• Lottery method
• Tables of random number
(ii) Purposive or Deliberate Sampling It is that method in which the investigator himself makes the
choice of the samples items which in his opinion are the best representative of the universe.
(iii) Stratified or Mixed Sampling According to this method of sampling population is divided into
different strata having different characteristics and some of the items are selected from each strata,
so the entire population gets represented.
(iv) Systematic Sampling According to this methods, units of the population are numerically,
geographically and alphabetically arranged. Every nth item of the numbered is selected as a sample
item.
(v) Quota Sampling In this method, the population is divided into different groups or classes according
to different characteristics of the population.
(vi) Convenience Sampling In this method, sampling is done by the investigator in such a manner that
suits his convenience.
Reliability of Sampling Data

It depends mainly on the following factors
• Size of the sample

• Method of sampling
• Bias of correspondents and enumerators
• Training of enumerators
Important agencies at the national level which collect process and tabulate the statistical data. NSSO
(National Sample Survey Organisation), RGI (Registrar General of India), DGCIS (Directorate
General of Commercial Intelligence and Statistics) and Labour Bureaus.
Organisation of Data
Organisation of Data
Organisation of data refers to the arrangement of figures in such a form that comparison of the mass
of similar data may be facilitated and further analysis may be possible.
Classification
Classification is the process of arranging things in groups or classes according to their resemblances
and affinities and gives expression to the unity of attributes that may exist amongst a diversity of
individuals.
Objectives of Classification
• Simplification and Briefness

• Utility
• Distinctiveness
• Comparability
• Scientific arrangement
• Attractive and effective
Characteristic of a Good Classification
• Comprehensiveness
• Clarity
• Homogeneity
• Suitability
• Stability
• Elastic
Basis of Classification
• Geographical Classification This classification of data is based on the geographical or locational

differences of the data.
• Chronological Classification When data are classified on the basis of time, it is known as
chronological classification.
• Qualitative Classification This classification is according to qualities or attributes of the data.
This classification may be of two types
o Simple classification
o Manifold classification
• Quantitative or Numerical Classification Data are classified in to classes or groups on the basis of
their numerical values. Quantitative classification is also called classification by variables.
• Concept of Variable A characteristic or a phenomenon which is capable of being measured and
changes its value overtime is called a variable.
The variable may be either discrete or continuous
o Discrete Variable These are those variables that increase in jumps or in compete
numbers.
o Continuous Variable Variable that assume a range of values or increase not in
jumps but continuously or in fractions are called continuous variables.
• Raw Data A mass of data in its crude form is called raw data.
Types of Statistical Series Statistical series are of two types
• Individual Series These are those series in which the items are listed singly. These series may be
presented in two ways
o According to serial numbers
o Ascending or descending order of data
• Frequency Series Frequency series may be of two types
o Discrete Series or Frequency Array It is that series in which data are presented in
way that exact measurement of items are clearly shown. In this series there are no
class intervals and a particular item in the series.
o Frequency Distribution It is that series in which items cannot be exactly measured.
The items assume a range of values and are placed within the limits is called class
interval.
Frequency distribution is also known as continuous series or series with class-intervals, or series of
grouped data.
Types of Frequency Distribution
• Exclusive Series It is that series in which every class-interval excludes items corresponding to its
upper limit.
• Inclusive Series An inclusive series is that series which includes all items upto its upper limit.
• Open End Series An open end series is that series in
which lower limit of the first class-interval and the upper limit of last class- interval is missing like
as below – 5, 20 and above
• Cumulative Frequency Series It is that series in which the frequencies are continuously added
corresponding to each class-interval in the series.
There are two ways of converting this series into cumulative frequency series
o Cumulative frequencies may be expressed on the basis of upper class limits of the
class-intervals.
o Cumulative frequencies may b expressed on the basis of lower class limits of the
class-intervals.
• Mid Values Frequency Series Mid value frequency series are those series in which we have only
mid values of the class intervals and the corresponding frequencies.
• Univariate Distribution The frequency distribution of a single variable is called a univariate
distribution.
• Bivariate Distribution A bivariate distribution is the frequency distribution of two variables.
Presentation of Data
Textual Presentation
In textual presentation, data are a part of the text of study or a part of the description of the subject
matter of study.
Tabular Presentation of Data

“Tabulation involves the orderly and systematic presentation of numerical data in a form designed to
elucidate the problem under consideration”
Components of a Table
Following are the principal components of a table
• Table number
• Title
• Head note
• Stubs
• Caption
• Body or field
• Footnotes
• Source
Classification of Data and Tabular Presentation

(i) Qualitative Classification of Data and Tabular Presentation Qualitative classification occurs when
data are classified on the basis of qualitative attributes or qualitative.
(ii) Characteristics of a Phenomenon
• Quantitative Classification of Data These occurs when data are classified on the basis ot
quantitative characteristics of a phenomenon.
• Temporal Classified of Data In this, data are classified according to time, and time becomes the
classifying variable.
(iii) Spatial Classification In spatial classification place, location becomes the classifying variable. It
may be a village, a town, a district, etc.
(iv) Merits of Tabular Presentation
• Simple and brief presentation

• Facilitates comparison
• Easy analysis
• High lights characteristics of data
• Economical
Diagrammatic Presentation of Data
These translates quite effectively the highly abstract ideas contained in numbers into more concrete
and easily comprehensible form. Diagrammatic presentation is classified as given below
(i) Bar Diagrams
Bar diagrams are these diagrams in which data are presented in the form of bars or rectangles.
Types of Bar Diagram are as follows
• Simple Bar Diagrams Simple bar diagrams are those diagrams which are based on a single set
of numerical data.
• Multiple Bar Diagrams These are those diagram which show two or more sets of data
simultaneously.
• Sub Divided Bar Diagram Sub-divided bar diagram are those diagrams which simultaneously
present total values as well as part values of a set of data.
• Percentage Bar Diagram Percentage bar diagrams are those diagrams which show
simultaneously, different parts of the values of a set of data in terms of percentages.
ii) Pie or Circular Diagrams
Pie diagram is a circle divided into various segments showing the per cent values of a series. This
diagram does not show absolute values.
iii) Frequency Diagram Data in the form of grouped frequency distributions are
generally represented by frequency diagram like histogram, frequency polygon,
frequency curve and ogive.
• Histogram A histogram is a two dimensional diagram. It is a set of rectangles with passes as the
intervals between class boundaries and with areas proportional to the class frequency
Histogram frequency distribution are of two types
o Histogram of equal class intervals
o Histogram of unequal class intervals
• Polygon Polygon is another form of diagrammatic presentation of data. It is formed by joining mid
points of the tops of all rectangles in a histogram. However, a polygon can be drawn even without
constructing a histogram.
• Frequency Curve A frequency curve is a curve which is plotted by joining the mid points of all
tops of histogram by free hand smoothed curves and not by straight lines.
• Ogive or Cumulative Curve Ogive or cumulative curve is the curve which is constructed by
plotting cumulative frequency data on the group paper, in the form of a smooth curve.
A cumulative frequency curve or ogive may be constructed in two ways
o Less than Method In this method, beginning from upper limit of the 1st values we go
on adding the frequencies corresponding to every next upper limit of the series.
o More than Method In this method, we take cumulative total of the frequencies
beginning with lower limit of the 1st class interval.
(iv) Arithmetic Line Graph An arithmetic line graph is also called time series graph. In it time is plotted
along x-axis and the value of the variable along y-axis. A line graph by joining these plotted points,
these obtained is called time series graph.
Rules for Constructing a Graph
• Choice of scale
• Proportion of axis
• Method of plotting the points
• Lines of different types
• Table of data
• Use of false line
• To draw a line or curve
o One Variable Graph One variable graph are those graphs in which values of only
one variable are shown with respect to some time period.
o Two or More than Two Variable Graphs These – are the graphs in which values of
two variables are simultaneously shown with respect to some period of time.
Merits of Diagrammatic and Graphic Presentation
• Simple and understandable information

• Lasting impact
• No need of training or specialised knowledge
• Attractive and effective means of presentation
• A quick comparative glance
• Information and entertaining
• Location of averages
• Study of correlation
Limitations of Diagrammatic and Graphic Presentation
• Limited use
• Misuse
• Only preliminary conclusions
Measures of Central Tendency
Central Tendency
A central tendency refers to a central value or a representative value of a statistical series.
According to Clark, “An average is a figure that represents the whole group”.
Types of Statistical Averages

Averages are broadly classified into two categories
• Mathematical Averages
• Positional Averages
Arithmetic Mean
Arithmetic Mean is the number which is obtained by adding the values of all the items of a series and
dividing the total by the number of items.
Arithmetic Mean is generally written as X. It may be expressed in the form of following formula
X¯¯¯¯=x1+x2+x3+……xNN or ΣX¯¯¯¯¯N
Types of Arithmetic Mean
• Simple Arithmetic Mean
• Weighted Arithmetic Mean
Methods of Calculating Simple Arithmetic Mean

(i) Individual Series In the case of individual series, Arithmetic Mean may be calculated by two
methods
• Direct Method According to this method, we find the Arithmetic mean from the following formula
X¯¯¯¯=ΣXN or X¯¯¯¯= Total value of the item Number of items
• Short-cut Method By short cut method, we find the Arithmetic Mean from the following formula
X¯¯¯¯=A+ΣdN
Here, X¯¯¯¯ = Arithmetic Mean, A = Assumed average of Ed = Net sum of the deviations of the
different values from the assumed average; and N = Number of items in the series,
(ii) Discrete Series There are three methods of calculating mean of the discrete series
• Direct Method Direct method of estimating mean of the discrete frequency series uses the
formula
X¯¯¯¯=ΣfXΣf
• Short-cut Method Short cut method of estimating mean of the discrete frequency series uses the
following formula
X¯¯¯¯=A+ΣfdΣf
• Step-deviation Method This method is a variant of short-cut method. It is adopted when
deviations from the assumed mean have some common factor
X¯¯¯¯=A+ΣfdΣf×c
(iii) Frequency Distribution
There are three methods of calculating mean in frequency distribution
(a) Direct Method Direct method of estimating mean of the discrete frequency series uses the formula
X¯¯¯¯=ΣfmΣf
m = mid-value, mid-value = L1+L22
L1 = lower limit of the class
L2 = upper limit of the class
(b) Short-cut Method Short cut method of estimating mean of the frequency distribution uses the
formula
X¯¯¯¯=A+ΣfdΣf
(c) Step Deviation Method According to this method, we find the Arithmetic Mean by the following
formula
X¯¯¯¯=A+Σfd′Σf×c
(d) Weighted Arithmetic Mean It is the mean of weighted items of the series. Different items are
accorded different weights depending on their relative importance. The weighted sum of the items is
divided by the sum of the weights.
Calculation of Weighted Mean
According to this way, we find weighted mean from the following information
X¯¯¯¯W=ΣWXΣW
(i) Merits
• Simplicity
• Certainty
• Based on all items
• Algebraic treatment
• Stability
• Basis of comparison
• Accuracy test
(ii) Demerits
• Effect of extreme value

• Mean value may not figure in the series at all
• Laughable conclusions
• Unsuitability
• Misleading conclusions
Median
“The Median is that value of the variable which divides the group into two equal parts, one part
comprising all values greater than the Median value and the other part comprising all the values
smaller than the Median value”.
(i) Calculation of Median
(a) Individual Series Calculation of Median in individual series involves the following formula
M = Size of (N+12)th item
When N of the series is an even number, Median is estimated using the following formula
(b) Discrete Series Calculation of Median in case of discrete series or frequency array involves the
following formula
M = Size of (N+12)th item
(c) Frequency Distribution Series
The following formula is applied to determine the Median Value
Quartiles
If a statistical series is divided in to four equal parts, the end value of each part is called a Quartile.
(i) Calculation of Quartiles Quartile values (Q1 and Q3) are estimated differently for different sets of
series,
(a) Individual and Discrete Series
(b) Frequency Distribution Series In frequency distribution series, the class interval of Q1 and Q3 are
first identified as under
Percentiles
Percentiles divide the series into 100 equal parts, and is generally expressed as P.
Percentiles are estimated for different types of series as under
(i) Individual and Discrete Series
(ii) Frequency Distribution Series
Mode
The value of the variable which occurs most frequently in a distribution is called the mode.
According to Croxton and Cowden, “ The mode may be regarded as the most typical of a series of
value”.
(i) Calculation of Mode
• Individual Series There are two ways of calculating Mode in individual series
o By inspection
o By converting individual series into discrete series
• Discrete Series There are two methods for calculation of mode indiscrete frequency series
o Inspection Method
o Grouping Method
• Frequency Distribution Series The exact value of Mode can be calculated with the following
formula
Z=L1+f1−f02f1−f0−f2xi
Relative Position of Arithmetic Mean, Median and Mode Suppose we express,
Arithmetic Mean = Me
Median = Mi
Mode = Mo
The relative magnitude of the three are Me > Mi > Mo or Me < Mi < Mo The Median is always between
the Arithmetic Mean and the Mode.
Measures of Dispersion
Dispersion
“It is the measure of the variation of the item”. According to Spiegel, ‘The degree to which numerical
data tend to spread about an average value is called the variation or dispersion of the data”.
Different methods of measuring dispersion are
• Range
• Quartile deviation
• Mean deviation
• Standard deviation
Range Range is the difference between the highest value and the lowest value in a series.
R = H – L or L – S
H or L = Highest or Largest value of series
L or S = Lowest or Smallest value of series
Coefficient of range = H−LH+L or L−SL+S

Calculation of Range and Coefficient of Range
(i) Individual Series and Discrete Series
Range = H – L or L – S
Coefficient of Range = H−LH+L or L−SL+S
(ii) Frequency Distribution Series
• Mid values of the class interval are found, difference between the highest and lowest values
would be the range.
• According to this method, we find the difference between lower limit of the first class interval and
upper limit of the last class interval in the series would be the range.
(iii) Inter Quartile Range

Difference between third quartile ( Q3) and first quartile of a series, is called Inter quartile range.
IQR = Q3 – Q1
Quartile Deviation
Quartile deviation is half of inter quartile range.
QD = Q3−Q12
It is also called semi-inter quartile range.
(i) Coefficient of Quartile Deviation (Coefficient of QD)
Coefficient of QD = Q3−Q1Q3+Q1
(ii) Calculation of Quartile Deviation
(a) Individual Series and Discrete Series First find out Q1 and Q3 from the following equations
(b) Frequency Distribution
Mean Deviation
“Mean deviation is the arithmetic average of deviation of all the values taken from a statistical
average of series. In taking deviation of values, algebraic signs + and – are not taken into
consideration, that is negative deviations are also treated as positive deviations”.
(i) Formulas for Mean Deviation
(a) If deviations are taken from median, the following formula is used
(b) If deviation are taken from arithmetic mean of the series
(ii) Coefficient of Mean Deviation
• Coefficient of mean deviation from Mean = MDX¯¯¯X¯¯¯¯¯

• Coefficient of MD from Median = MDMM
• Coefficient of MD from Mode = MDZZ
(iii) Calculation of Mean Deviation or Coefficient of Mean Deviation

(a) Individual Series
Estimating MD through Median, MD = Σ|dM|N
Estimating MD through Mean, MD = Σ|dX¯¯¯¯¯|N
Estimating Coefficient of MD through Median Coefficient of MD = MDMM
Estimating Coefficient of MD through Mean Coefficient of MD = MDX¯¯¯X¯¯¯¯¯
(b) Discrete Series
Estimating MD through median, MDM = Σf|dm|N
Estimating MD through mean, MDX¯¯¯¯¯ = Σf|dX¯¯¯¯¯|N
Estimating Coefficient of MD through Median Coefficient of MD = MDMN
Estimating Coefficient of MD through Median Coefficient of MD = MDX¯¯¯X¯¯¯¯¯
(c) Frequency Distribution Series
Mean deviation from Median, MDM = Σf|dM|Σf
Coefficient of MD = MDMM
Mean deviation from Mean, MDX¯¯¯¯¯ = Σf|dX¯¯¯¯¯|Σf
Coefficient of MD = MDX¯¯¯X¯¯¯¯¯
Standard Deviation
Standard deviation is the square root of the arithmetic mean of the squares of deviations of the items
from their mean values.
Coefficient of Standard Deviation

This is a relative measure of the dispersion of series.
Coefficient of standard deviation (Coefficient of σ) = σX¯¯¯¯¯
(i) Calculation of Standard Deviation
(a) Direct Method
Here, σ = Standard Deviation;

ΣX2 = Sum total of the squares of deviation,
X¯¯¯¯ = Mean Value,
X−X¯¯¯¯ = Deviation from mean value;
N = number of items
(b) Short-cut Method
(c) Step Deviation Method
(ii) Calculation of Coefficient of Variation

(a) Individual series = σX × 100
(b) Discrete series = σX × 100
(c) Frequency distribution series = σX × 100
Lorenz Curve
It is a curve that shows deviation of actual distribution from the showing equal distribution.
(i) Construction of the Lorenz Curve
• Calculate class mid-points

• Calculate cumulative frequencies as in column 6
• Express the grand total of column 3 and 6 as 100 and convert the cumulative totals in these
columns in to percentage.
• Now, on the graph paper, take the cumulative percentage of the variable on Y-axis and
cumulative percentages of X-axis.
• Draw a line joining co-ordinate (0, 0) with (100,100) this is called the line of equal distribution.
• Plot the cumulative percentages of the variable with cumulative percentages of frequency.
Index Numbers
Index Number
An index number is a statistical device for measuring changes in the magnitude of a group of related
variables. It represents the general trend of diverging ratios from which it is calculated.
According to Croxton and Cowden, “Index numbers are devices for measuring difference in the
magnitude of a group of related variables.”
Methods of Constructing Index Numbers
Construction of Simple Index Numbers

There are two methods of constructing simple index numbers.
(i) Simple Aggregative Method In this method, we use the following formula
P01=ΣP1ΣP0×100
Here, P01 = Price index of current year
ΣP1 = Sum of prices of the commodities in the current year
ΣP0 = Sum of prices of the commodities in the base year
(ii) Simple Average of Price Relatives Method
According to this method, we first find out price relatives from each commodity and then take simple
average of all the prices relatives.
Price relatives, P01 = Current year price (P1) Base year price (P0)×100
We can find out price index number of the current year by using the following formula
P01=∑[P1P0×100]N
Construction of Weighted Index Numbers
(i) Weighted Average of Price Relative Method
According to this method, weighted sum of the price relatives is divided by the sum total of the weight.
In this method, goods are given weight according to their quantity, thus
P01=ΣRWΣW
Here, P01 = Index number for the current year in relation to the base year
W = weight
R = price relative
(ii) Weighted Aggregative Method Under this method, different goods are accorded weight according
to the quantity bought therefore, suggested different techniques of weighting some of well known
methods are as under
Fisher’s Method is considered as ‘Ideal’ because
• It is based on variable weights.

• It takes into consideration the price and quantities of both the base year and current year.
• It is based on Geometric Mean (GM) which is regarded as the best mean for calculating index
number.
• Fisher’s index number satisfies both the Time Reversal Test and Factor Reversal Test.
Consumer Price Index or Cost of Living Index Number

The consumer price index is the index number which measures the averages change in prices paid
by the specific class of consumers for goods and services consumed by them in the current year in
comparison with base year.
Construction of Consumer Price Index
• Selection of the consumer class

• Information about the family budget
• Choice of base year
• Information about prices
• Weightage – There are two ways of according weights
o Quantity weight
o Expenditure weight
The following formula is used to find consumer’s price index

Consumer Price Index (CPI) = ΣWRΣW
Wholesale Price Index (WPI)
The Wholesale Price Index (WPI) measures the relative changes in the prices of commodities traded
in the wholesale markets. In India, the wholesale price index numbers are constructed on weekly
basis.
Industrial Production Index

The index number of industrial production measures changes in the level of industrial production
comprising many industries. It includes the production of the public and the private sector. It is a
weighted average of quantity relatives. The formula for the index is
P01=Σq1×WΣW×100
Construction of Index Number of Industrial Production
• Classification of industries
• Statistics or data related to industrial production
• Weightage
Agricultural Production Index

Index number of agricultural production is weighted average of quantity relatives.
Sensex
Sensex is the index showing changes in the Indian stock market. It is a short form of a Bombay Stock
Exchange sensitive index. It is constructed with 1978-79 as the reference year or the base year. It
consists of 30 stocks of leading companies in the country.
Purpose of Constructing Index Number
• Purpose of constructing index number of prices is to know the relative change or percentage in
the price level over time. A rising general price level over time is a pointer towards inflation, while
a falling general price level over time is a pointer towards deflation.
• Purpose of constructing index number of quantity is to know relative change or percentage
change in the quantum or volume of output of different goods and services. A rising index of
quantity suggests a rising level of economic activity and vice-versa.
Introduction to Macroeconomics and its Concepts Chapter 1 Class 12
Introduction And Structure Of MacroEconomics:
1. Macroeconomics is the part of economic theory that studies the economy as a whole, such as
national income, aggregate employment, general price level, aggregate consumption, aggregate
investment, etc. Its main instruments are aggregate demand and aggregate supply. It is also called
the ‘Income Theory’ or ‘Employment Theory’.
2. Structure of macro economy: As we know, Macroeconomics is concerned with economic
problems at the level of an economy as a whole. Structure of Macroeconomics implies study of
different sectors of the economy.
An economy may be divided into different sectors depending on the nature of study.
(a) Producer sector engaged in the production of goods and services.
(b) Household sector engaged in the consumption of goods and services.
Note: Households are taken as the owners of factors of production.
(c) The government sector engaged in activities like taxation and subsidies
(d) Rest of the world sector engaged in exports and imports.
(e) Financial sector (or financial system) engaged in the activity of borrowing and lending.
3. Circular flow of income.
It refers to flow of money, income or the flow of goods and services across different sectors of the
economy in a circular form.
There are two types of Circular flow:
(a) Real/Product/Physical Flow
(b) Money/Monetary/Nominal Flow
(a) Real flow
(i) Real flow of income implies the flow of factor services from the household sector to the producing
sector and corresponding flow of goods and services from the producing sector to the household
sector.
(ii) Let us consider a simple economy consisting only of 2 sectors:
• Producer Sector.
• Household Sector.
(iii) These two sectors are dependent on each other in the following ways:
• Producers supply goods and services to the households.
• Household (as the owners of factors of production) supplies factors of production (or factor services)
to the producers.
This interdependence can be explained with the help of the diagram given here.
(b) Money Flow
(i) Money flow refers to the flow of factor income, as rent, interest, profit and wages from the
producing sector to the household sector as monetary rewards for their factor services as shown in
the flowchart.
(ii) The households spend their incomes on the goods and services produced by the producing
sector. Accordingly, money flows back to the producing sector as household expenditure as shown in
the flowchart.
Circular Flow Of Income In Two Sector Model:
The following assumptions with regard to a simple economy with only two sector of
economics activity are:
(i) There are only two sectors in the economy; that is, household and firms.
(ii) Household supply factor services to firms.
(iii) Firms hire factor services from Households.
(iv) Households spend their entire income on consumption.

(v) Firms sell all that is produced to the households.
(vi) There is no government or foreign trade.
Such an economy described above has two types of markets.
(i) Market for goods and services, that is product market.
(ii) Market for factors of production, factor market.
As a result we can derive the following, in the case of our simple economy:
(i) Total production of goods and services by firms = Total consumption of goods and services by
Household Sector.
(ii) Factor Payments by Firms = Factor Incomes of Household Sector.
(iii) Consumption expenditure of Household sector = Income of Firm.
(iv) Hence, Real flows of production and consumption of Firms and households = Money flows of
income and expenditure of Firms and Households.
Phases Of Circular Flow:
There are three types of phases of Circular flow.

(i) Production Phase:
• It deals with the production of goods and services by the producer sector.
• If we study it in term of the quantity of goods and services produced, it is a Real Flow. But, it is a
Money flow, if we study it in terms of the market value of the goods produced.(ii) Distribution Phase: It
means the flow of income in the form of rent, interest, profit and wages, paid by producer sector to the
household sector. It is a Money Flow.
(iii) Disposition Phase:
• Disposition means expenditure made. This phase deals with expenditure on the purchase of goods and services
by households and other sectors.
• This is a Money Flow from other sectors to the producer sector. These phases are illustrated in the figure given
here.
Some Basic Concepts Of MacroEconomics
1. Factor Income
(a) Income earned by factor of production by rendering their productive services in the production
process is known as Factor Income.
(b) It is a bilateral [Two-Sided] Concept.
(c) It is included in National Income as it contribute something in the flow of goods and services.
Examples: Rent, interest, wages and profit.
2. Transfer Income
(a) Income received without rendering any productive services is known as transfer income.
(b) It is a unilateral [one-sided] concept.
(c) It is not included in National Income as it does not contribute anything in the flow of goods and
services.
Examples: Old Age Pension, Scholarship, Unemployment allowance.
There are two types of transfers:
(i) Current transfers (ii) Capital transfers
(i) Current Transfers
• Transfers made from the income of the payer and added to the income of the recipient (who
receive) for consumption expenditure are called current transfers.
• It is recurring or regular in nature.
For example, scholarships, gifts, old age pension, etc.
(ii) Capital Transfers
• Capital transfers are defined as transfers in cash and in kind for the purpose of investment to
recipients, made out of the wealth or saving of the donor.
• It is non recurring or irregular in nature.
For example, investment grant, capital gains tax, war damages, etc.
3. Stock
(a) Any economic variable which is calculated at a particular point of time is known as stock.
(b) It is static in nature, i.e., it do not change.
(c) There is no time dimension in stock variables.
For example, Distance, Amount of Money, Money Supply, Water in Tank, etc.
4. Flow
(a) Any economic variable which is calculated during a period of time is known as flow.
(b) It is dynamic in nature, i.e., it can be changed.
(c) There is time dimension in flow variables.
For example, Speed, Spending of Money, Water in River, Exports, Imports, etc.
5. Economic territory or Domestic Territory:
(a) According to the United Nations, economic territory is the geographical territory administered by a
government within which persons, goods and capital circulate freely.
(b) The above definition is based on the criterion “freedom of circulation of persons, goods and
capital”. Clearly, those parts of the political frontiers (or boundaries) of a country where the
government of that country does not enjoy the above “freedom” are not to be included in economic
territory of that country.
(i) One example is embassies. Government of India does not enjoy the above freedom in the foreign embassies
located within India. So, these are not treated as a part of economic territory of India. They are treated as part of
the economic territories of their respective countries. For example the U.S. embassy in India is a part of
economic territory of the U.S.A. Similarly, the Indian embassy in Washington is a part of economic territory of
India.
(ii) International organizations like UNO, WHO, etc. located within the geographical boundaries of a country.
(iii) In layman terms, the domestic territory of a nation is understood to be the territory lying within the political
frontiers (or boundaries) of a country. But in national income accounting, the term domestic territory is used in
a wider sense. Based on ‘freedom’ criterion, the scope of economic territory is defined to cover:
• Ships and aircrafts owned and operated by normal residents between two or more countries. For example,
Indian Ships moving between china and India
i regularly are part of domestic territory of India. Similarly, planes operated by Air India between Russia and
Japan are part of the domestic territory of India. Similarly, planes operated by Malaysian Airlines between India
and Japan are a part of the domestic territory of Malaysia.
• Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the
international waters where they have exclusive
rights of operation. For example, Fishing boats operated by Indian fishermen in international waters of Indian
Ocean will be considered a part of domestic territory of India.
• Embassies, consulates and military establishments of a country located abroad. For example, Indian Embassy
in Russia is a part of the domestic territory of India. ‘Consulate’ is an office or building used by consul (an
officer commissioned by the government to reside in a foreign country to promote the interest of the countiy to
which he belongs).
6. Citizenship/Nationalship
(a) Citizenship is basically a legal concept based on the place of birth of the person or some legal provisions
allowing a person to become a citizen.
(b) It means, Indian citizenship can arise in two ways:
(i) When a person is born in India, he acquires automatic citizenship of India.
(ii) A person born outside India applies for citizenship and Indian Law allows him to become Indian Citizen.
7. Normal Resident/Resident
(a) A Normal residenf, whether a person or an institution, is one whose centre of economic interest lies in the
economic territory of the country in which he lives.
(b) The centre of economic interest implies in two things:
(i) The resident lives or is located within the economic territory for more than one year and
(ii) The resident carries out the basic economic activities of earnings, spending and accumulation from that
location
(c) There is a difference between the terms normal resident (resident) and citizen (or national).
(i) A person becomes a national of a countiy because he was born in the country or on the basis of some other
legal criterion.
(ii) A person is treated resident of a country on the basis of economic criterion.
(iii) It is not necessary that a resident must also be the national of that country. Even foreigners can be the
residents if they pass the above stated economic criterion.
For example, a large number of Indian nationals have settled in U.S.A., England,
Australia, etc. as residents (and not as nationals) of these countries. For India, they
are Non-resident Indians (NRI) but continue to remain Indian nationals.
Following are not included under the category of Normal residents:
(i) Foreign visitors in the country for such purposes as recreation, holidays, medical treatment, study tours,
conferences, sports events, business etc. (they are supposed to stay in the host country for less than one year. In
case they continue to stay for one year or more in the host country, they will be treated as normal residents of
the host countiy).
(ii) Crew members of foreign vessels, commercial travelers and seasonal workers in , the country (Foreign
workers who work part of the year in the country in response to the varying seasonal demand for labour and
return to their households and border workers who regularly cross the frontier each day or somewhat less
regularly, (i.e. each week) to work in the neighbouring country are the normal residents of their own countries.
Example: Nepal.
(iii) Officials, diplomats and members of the armed forces of a foreign country.
(iv) International bodies like World Bank, World Health Organisation or International Monetary Fund are not
considered residents of the country in which these organisations operate but are treated as residents of
international territory. However, the staffs of these bodies are treated as normal residents of the country in
which the international body operates. For example, international body like World Health Organisation located
in India is not normal resident of India but Americans working in its office for more than a year will be treated
as normal residents of India.
(v) Foreigners who are the employees of non-resident enterprises and who have come to the country for
purposes of installing machinery or equipment purchased from their employers. (They are supposed to stay for
less than one year. In case they continue to stay for one year or more, they will be treated as normal residents of
the host country).
8. Final Goods
(a) These are the goods that are used for:
(i) Personal Consumption (like bread purchased by consumer household), or (if) Investment Or Capital
Formation (like building, machinery purchased by a firm)
(b) In other words, final goods are those, which require no further processing and are available in an economy
for consumption purpose or investment. These give direct satisfaction to a consumer.
(c) According to production boundary, if a good crosses the imaginary line around the production unit and
reaches to final consumer or investment made by a producer within the imaginary line of production unit is
known as the final good.
9. Intermediate Goods
(a) These are the goods that are used for:
(i) Further processing (like sugar used for making sweets); or
(ii) Resale in the same year (If car purchased by car dealer for resale).
(b) In other words, intermediate goods are the ones, which require further processing and are not available in an
economy for the purpose of consumption. These goods give indirect satisfaction to a consumer.
(c) According to the production boundary, if a good does not cross the imaginary line around the production
unit and reaches to other firm within the production boundary, is known as intermediate good.
10. Point to Remember for Final Goods and Intermediate Goods
(a) Basis of Classification: If a good is used for:
(i) Personal consumption; or (ii) Investment
Then it is a final good, whereas, if a good is used for:
(i) Further processing; or
(ii) Resale in the same year, then it is known as intermediate good.
Thus, the basis of classification between these two goods is not the commodity itself, but the use made of it.
For example, bread used by a consumer household is a final goods, but the same used by a bakery for making a
sandwich is a intermediate goods.
(b) Production Boundary
(i) Production boundary plays a vital role to differentiate between intermediate and final goods. The production
boundary is the imaginary line around the production unit.
(ii) According to the production boundary, if a good crosses the imaginary line around the production unit and
reaches to final consumer or investment made by a producer within the imaginary line of production unit, it is
known as final good.
As against it, if a good does not cross the imaginary line around the production unit and reaches to other firm
within the production boundary, it is known as intermediate good.
In the given diagram, there are 3 production units. The thick border drawn around these three units is the
Production Boundary.
Within this limit, wheat and flour are intermediate goods.
Bread is final good as it lies outside the purview of production boundary.
11. Important Points about
Intermediate Goods: As far as intermediate consumption of general government is concerned, it’s purchased
goods ranges from ordinary writing paper, pencils and pens to sophisticated fighter aircrafts. The goods and
services purchased include both durable goods and non-durable goods and services. The intermediate
consumption of the general government includes the following items:
(a) Value of all Non-durable Goods and Services such as petrol, electricity, lubricants, stationery, soaps, towels
etc. including repair and maintenance of capital stock: Non-durable goods and services are those which have an
expected life time of use of less than one year. Repair and maintenance of capital stock mean expenditure
incurred for maintaining fixed assets and keep them in good working order. This includes the expenditure on
new parts of the fixed assets. The life of the new parts may be around one year or slightly more and the value
should be relatively small. For example, replacement of the tyres of a truck is an intermediate consumption, but
not the replacement of its engine.
(b) Expenditure on Military Equipment missiles, rockets, bombs, warships, submarines, military aircrafts, tanks,
missile carriers and rocket-launchers etc. whose function is to release weapons. Military vehicles and light
weapons.
(c) Value of goods received from foreign governments in form of gifts or as transfers. Examples of these
transfers in kind are food, clothing, medicines, vegetable oils, butter, toys sent by the government of one
country to the other in times of natural calamities or as a token of goodwill and friendship between two
countries.
However, the goods received for distribution to consumer households without renovation or alternation should
not be included in intermediate consumption as these goods go into the final consumption of consumer
households.
(d) As we know, intermediate goods are purchased by one production unit from another production unit within
the production boundary.
However, it’s not necessary that all purchases by one production unit from other production units are
intermediate purchases. For example, purchases of building, machinery, etc. are not intermediate purchases (if
they are not meant for resale in the same year). Rather, these purchases are meant for investment and are termed
as final product.
(e) Research and development
• Commodities consumed. In research and exploratory activities (like oil exploration in different parts of India
by the Oil and Natural Gas Commission) or improving the technology of a particular production process.
• Commodities used in basic scientific research.
• Advertisements, market research and public relationship meant for improving the goodwill of the business
enterprises.
• Business expenses of the employees on tours and entertainment.
12. Final goods can be classified into two
: Consumption Goods and Capital Goods.

(a) Consumption Goods:
(i) Meaning: Consumption goods are those which satisfy the wants of the consumers directly. For example,
cars, television sets, bread, furniture, air-conditioners, etc.
(u) Categories of Consumption Goods:
• Durable goods: These goods have an expected life time of several years and of relatively high value. They are
motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers,
communication equipments etc.
• Semi-durable goods: These goods have an expected life time of use of one year or slightly more. They are not
of relatively great value. Examples are clothing, furniture, electrical appliances like fans, electric irons, hot
plates and crockery.
• Non-durable goods: Goods which can not be used again and again, i.e., they lose their identity in a single act
of consumption are known as non-durable goods. These are foodgrains, milk and milk products, edible oils,
beverages, vegetables, tobacco and other food articles.
• Services: Services are non-material goods which satisfy the human wants directly. They cannot be seen or
touched, i.e., they are intangible in nature. These are medical care, transport and communications, education,
domestic services rendered by hired servants, etc.
(b) Capital Goods:
(i) Capital goods are defined as all goods produced for use in future productive processes.
For example, all the durable goods like cars, trucks, refrigerators, buildings, aircrafts,
air-fields and submarines used to produce goods and are ready for sale in the market
are a part of capital goods.
(ii) Stocks of raw materials, semi-finished and finished goods lying with the producers at the end of an
accounting year are also a part of capital goods.
(iii) Some more examples of capital goods are machinery, equipment, roads and bridges.
(iv) These goods require repair or replacement over time as their value depreciate over a period of time.
13. Differentiate between final goods and intermediate goods on the basis of end used classification of
goods and services with example.
Words that Matter
1. Circular flow of income: It refers to flow of money income or the flow of goods and services
across different sectors of the economy in a circular form.
2. Money flow (nominal flow): Money flow refers to the flow of factor income, as rent, interest, profit
and wages from the producing sector to the household sector as monetary rewards for their factor
services.
3. Real flow or physical flow: Real flow of income implies the flow of factor services from the
household sector to the producing sector and corresponding flow of goods and services from the
producing sector to the household sector.
4. Factor income: Income earned by factor of production by rendering their productive services in
the production process is known as Factor Income.
5. Transfer income: Income received without rendering any productive services is known as
Transfer Income.
6. Current transfers: Transfers made from the current income of the payer and added to the current
income of the recipient (who receive) for consumption expenditure are called current transfers.
7. Capital transfers: Capital transfers are defined as transfers in cash and in kind for the purpose of
investment to recipient made out of the wealth or saving of a donor.
8. Final goods: These are those which are used for:
(a) Personal consumption (like bread purchased by consumer household), or
(b) Investment or capital formation (like building, machinery purchased by a firm)
9. Intermediate goods: These are those, which are used for:
(a) Further processing (like sugar used for making sweets), or
(b) Resale in the same year (If car purchased by a car dealer for resale).
10. Consumption goods: Consumption goods are those goods which satisfy the wants of
consumers directly.
11. Capital goods: Capital goods are defined as all goods produced for use in future
productive processes.
National Income and Related Aggregates Chapter 2 Class 12
Introduction:
This is a numerical based chapter to calculate national income by different methods (Income,
expenditure and value added method, their steps and precautions). Numerically to determine private
income, personal income, personal disposable income, National disposable income (net and gross)
and their differences.
Gross And Net:
1. Gross means the value of product including depreciation. Net means the value of product
excluding depreciation.
2. The difference between these two terms is depreciation.
3. Where depreciation is the expected decrease in the value of fixed capital assets due to its general
use.
4. It is the result of production process.
Gross = Net + Depreciation Net = Gross – Depreciation
Note: Other names of depreciation are:
(a) Consumption of fixed capital (b) Capital consumption allowance
(c) Current replacement cost.
National Income And Domestic Income:
1. National Income refers to net money value of all the final goods and services produced by the
normal residents of a country during an accounting year.
2. Domestic Income refers to a total factor incomes earned by the factor of production within the
domestic territory of a country during an accounting year.
3. The difference between these two incomes is Net Factor Income from abroad (NFIA), which is included in National
Income (NY) and excluded from Domestic Income (DY).
4. Where NFIA is the difference between income earned by normal residents from rest of the world and similar
payments made to Non residents within the domestic territory. NFIA = Income earned by Residents from rest of the
world (ROW) – Payments to
Non-Residents within Domestic territory.
NY = DY + NFIA DY = NY – NFIA
Note:
Case I: Income paid to abroad is given, then to make NFIA inverse the sign. For this put income from abroad 0.
Example, Income paid to abroad =100
NFIA = Income from Abroad – Income paid to abroad
= 0 – 100 = -100 and vice versa.
Case II: Income from abroad is given, then NFIA = Income from abroad. For this put income paid to abroad 0.
Example, Income from abroad =100
NFIA = Income from Abroad- Income paid to abroad = 100 – 0 = 100 and vice versa Case III: If income from abroad and
income paid to abroad both are given, then NFIA is the difference between them,
Example, Income from abroad =100 Income paid to abroad =120
NFIA = Income from Abroad- Income paid to abroad = 100 – 120 = (-) 20 and vice versa Case IV: Net factor income to
abroad be given, then to make NFIA inverse the sign.
Net factor income paid to abroad (NFPA) = income to abroad – income from abroad.
Example,
(i) Net Factor Income to abroad (NFPA = 100). In this NFPA is positive, which means that income to abroad is greater
than income from abroad, which makes,
NFIA = (-)100
(ii) Net Factor Income to abroad [NFPA = (-)100]. In this NFPA is negative, which
means that income to abroad is less than income from abroad, which makes,
NFIA = (+) 100
Factor Cost And Market Price:
1. Factor Cost (FC): It refers to amount paid to factors of production for their contribution in the
production process.
2. Market Price (MP): It refers to the price at which product is actually sold in the market. The
difference between these two is Net Indirect Taxes (NIT) which is included in MP and excluded from
FC. Where NIT is the difference between indirect taxes and subsidies.
NIT = IT – Subsidies
Where, Indirect Taxes are the taxes which are levied by the government on production and sale of
commodity. Sales tax, excise duty, custom duty, etc. are some of the indirect taxes, and subsidies are
the cash grants given by the government to the enterprises to encourage production of certain
commodities, to promote exports or to sell goods at prices lower than the free market Price. In India,
LPG cylinder is sold at subsidized rates.
MP = FC + NIT (Indirect Taxes – Subsidies)
FC = MP – NIT (Indirect Taxes – Subsidies)
Note:
Case I: Subsidy is given, then to make NIT inverse the sign. For this put Indirect tax = 0.
Example, Subsidy = 100
NIT = Indirect Tax – subsidies = 0-100 = (-) 100 and vice versa
Case II: IT is given, then NIT = IT (For this put subsidy 0)
Example, IT = 100
NIT = Indirect Tax – subsidies = 100-0 = 100 and vice versa
Case III: If IT and subsidy both are given, then NIT is the difference.
Example, IT = 100
Subsidy = 80
NIT = Indirect Tax – subsidies = 100-80 = 20
Case IV: If sales tax and excise duty are given, then by adding both, we get indirect taxes.
Example, Sales tax = Rs. 1000
Excise duty = Rs.1000 Subsidy = Rs.500
NIT = Indirect Tax(sales tax + excise duty)-subsidies = (1000 + 1000) – 500 = 1500
Case V: If Net subsidy is given, then to convert it into Net Indirect tax, we have to inverse the sign,
Net Subsidy = Subsidy – Indirect Tax
Example,
(a) Net Subsidy = 100. In this, Net subsidy is positive, which means that indirect tax is less than
subsidy which makes,
NIT = (-) 100
(b) Net Subsidy = (-) 100. In this Net subsidy is negative which means that Indirect tax is greater than
subsidy which makes,
NIT = 100
Case VI: If Net subsidy and Indirect tax both are given, then we have to ignore Indirect Tax and
inverse the sign of Net subsidy.
Example, Net Subsidy = 100
Indirect Tax = 20 Net Indirect Tax = (-) 100 Numeribals Illustration on Basic Concept
Aggregate Of National Income
1. Gross Domestic Product at Market Price (GDPMP ): GDPMP is defined as the gross market value
of the final goods and services produced within the domestic territory of a country during an
accounting year by all production units.
(a) ‘Gross’ in GDPMP signifies that depreciation is included, i.e., no provision has been made for
depreciation.
(b) ‘Domestic’ in GDPMP signifies that it includes all the final goods and services produced by all the production units
located within the economic territory (irrespective of the fact whether produced by residents or non-residents).
(c) ‘Market Price’ in GDPMP signifies that indirect taxes are included and subsidies are excluded, i.e., it shows that Net
Indirect Taxes (NIT) have been included.
(d) ‘Product’ in GDPMP signifies that only final goods and services have to be included and intermediate goods should not
be included to avoid the double counting.
2. Gross Domestic Product at Factor Cost ( GDPFC): GDPFC is defined as the gross factor value of the final goods and
services produced within the domestic territory of a country during an accounting year by all production units excluding
Net Indirect Tax.
GDPFC = GDPMP – Net Indirect Taxes
3. Net Domestic Product at Market Price (NDPMP ).
NDPMP is defined as the net market value of all the final goods and services produced within the domestic territory of a
country by its normal residents and non-residents during an accounting year.
NDPMP =GDPMP – Depreciation
4. Net Domestic Product at Factor Cost (NDPFC ).
NDPFC refers to a total factor income earned by the factor of production within the domestic territory of a country during
an accounting year.
NDPFC = GDPMP – Depreciation – Net Indirect Taxes NDPFC is also known as Domestic Income or Domestic factor income.
5. Gross National Product at Market Price (GNPMP).
GNPMP refers to market value of all the final goods and services produced by the normal residents of a country during an
accounting year.
GNPMP = GDPMP + Net factor income from abroad It must be noted that GNPMP can be less than GDPMP when NFIA is
negative. However, GNPMP will be more than GDPMP when NFIA is positive.
6. Gross National Product at Factor Cost (GDPFC ) or Gross National Income GNPFC refers to gross factor value of all the
final goods and services produced by the normal residents of a country during an accounting year.
GDPFC = GNPMP – Net Indirect Taxes
7. Net National Product at Market Price (NNPMP ).
NNPMP refers to net market value of all the final goods and services produced by the normal residents of a country
during an accounting year.
NNPMP = GNPMP – Depreciation
8. Net National Product at Factor Cost (NNPFC ).
NNPFC refers to net money value of all the final goods and services produced by the normal residents of a country during
an accounting year.
NNPFC = GNPMP – Depreciation – Net Indirect Taxes It must be noted that NNPFC is also known as National Income.
Real, Nominal Aggregates, Activities Excluded From GDP And Does GDP Measures Social
Welfare:
1. National Income at Constant Price:

(a) If national income is calculated on the basis of base year price index, then it is known as National
income at constant price.
(b) It is also called Real National Income as it fluctuates due to the fluctuation in the flow of goods and
services and price remains constant.
2. National Income at Current Price:
(a) If National Income is calculated on the basis of current year price index, then it is known as
national income at current price.
(b) It is also called Monetary National Income as it fluctuates due to the fluctuation in the flow of
goods and services along with the price of the commodity.
3. GNP at current MP: When final goods and services included in GNP are valued at current MP,
i.e., prices prevailing in the year for which GNP is being measured, it is called GNP at current MP or
Nominal GNP.
4. GNP at constant MP: When final goods and services included in GNP are valued at constant
prices, i.e. prices of the base year, it is called GNP at constant MP or Real GNP.
5. GNP Deflator: GNP Deflator measures the average level of the prices of all the final goods and services that are
produced within the domestic territory of an economy including NFIA. GNP deflator is measured as the ratio of nominal
GNP to real GNP, multiplied by 100.
6. Green GNP: Green GNP refers to GNP adjusted for loss of value due to,
(a) Environmental degradation; and
(b) Depletion of natural resources on account of overall production activity in the
economy.
7. Activities excluded from GDPMP: The activities are as follows:
(a) Purely financial transactions: It may be of three types:
(i) Buying and selling of securities
(ii) Government Transfer payments
(iii) Private Transfer Payments
(i) Buying and selling of securities:
• In financial markets potential savers and investors buy and sell financial assets such as shares and bonds.
• While someone buys a share, there is only a transfer of ownership right. It is a claim to ownership of assets.
• Trading in financial instruments does not imply production of final goods and services. As such these are not included
in the GNP.
(ii) Government Transfer Payments:
• Transfer Payments are payments for which no goods and services are provided in exchange.
• • Pension payments employees social security measures, etc. are examples for
Government Transfer Payment as there is no production of final goods and services in response to transfer Payment,
transfer payments are not included in GNP.
(iii) Private Transfer Payments:
• Items such as pocket money given by parents to their children, elders gifting money to the young ones are private
transfer payments.
This is merely a transfer of money from one individual to another. Hence, this is not included in GNP.
(b) Transfer of used goods:
(i) GNP refers to the value of the final goods and services produced in a given year.
(ii) Hence, goods produced in the previous time period cannot be included in the GNP. For example, Mr A sells his old
bike to Mr B for rs. 30,000 on 25th April 2011 which was purchased by Mr A on 1st March 2010 for Rs. 45,000. This
transaction should not be included as it has already been included in the 2010 GNP and if we again include it, then it will
create the problem of double counting.
(c) Non-market goods and services:
(i) Many final goods and services are not acquired through regular market transaction. Vegetables can be grown in the
backyard instead of buying them from the super market or an electrical fault can be repaired by the house owner
himself instead of hiring an electrician.
(ii) These are examples of Non-marketed goods and services that have been consumed with using organized markets as
GNP includes only those transactions that occur through market activities.
(d) Illegal Activities: Activities like gambling, black-marketing etc., should be excluded because all unlawful activities are
beyond the scope of NY and also because there is statistical problem of their estimation.
(e) Leisure Time Activities: Activities like painting, growing of flowers in kitchen garden, etc. is not included as their aim
is not to earn money but to pass away free time in one’s hobby or entertainment, again there is statistical problem of
measuring their satisfaction derived in painting or any other leisure activities.
8. Limitations of using GDP as an index of welfare of a country: There are many
reasons behind this. These are:
(a) Many goods and services contributing economic welfare are not included in GDP or Non-Monetary exchanges:
(i) There are many goods and services which are left out of estimation of national income on account of practical
estimation difficulties e.g., services of housewives and other members, own account production, etc.
(ii) These are left on account of non-availability of data and problem in valuation.
(iii) It is generally agreed that these items contribute to economic welfare.
(iv) So, if we depend only on GDP, we would be underestimating economic welfare.
(b) Externality:
(i) When the activities of somebody result in benefits or harms to others with no payment received for the benefit and
na payment made for the harm done, such benefits and harms are called externalities.
(ii) Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to
others are called negative externalities, and thus decrease welfare.
(iii) GDP does not take into account these externalities.
For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not
contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities
flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare
understates welfare. It means that welfare is much more than it is indicated by GDP.
(iv) Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at
the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms
people. The factories are not required to pay anything for harming people. Producing goods increases welfare but
creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare. In this case,
welfare is much less than indicated by GDP.
(c) Change in the distribution of income (GDP) may affect welfare:
(i) All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is
unequal distribution of income.
(ii) At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per
capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of
some it may even fall.
(iii) It means that the inequality in the distribution of income may increase or decrease.
(iv) If it increase it implies that rich become more rich and the poor become more poor.
(v) Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one
rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than
the increase in welfare of the rich.
(vi) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro
sense).
(d) All products may not contribute equally to economic welfare:
(i) GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc.
(ii) Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products
like police services, military services etc. may comparatively contribute less and may not directly affect the standard of
living of the people.
(iii) Therefore, how much is the economic welfare would depend more on the types of goods and services produced, and
not simply how much is produced.
(iv) It means that if GDP rises, the increase in welfare may not be in the same proportion.
(e) Contribution of some products may be negative:
(i) GDP includes all final products whether it is milk or liquor.
(ii) Milk may provide both immediate and ultimate satisfaction to consumers. On the other hand, liquor may provide
some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare.
(iii) GDP include only the monetary values of the products and not their contribution to welfare.
(iv) Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and
services consumed.
Methods Of National Income And How To Determine National Income By Income Method And
Its Numericals, Steps And Precaution:
There are three methods of calculating national income.

These are:
(a) Income Method
(b) Expenditure Method
(c) Value Added Method/Product Method/Output Method
National Income determination under income method:
(a) “Production creates income”. If we want to calculate National Income by Income method, then we
have to add different factor incomes from the economy.
(b) The addition of all these factor incomes gives us the calculation near by the
National Income, i.e., Net Domestic Product at FC (NDPfc).
(c) Components of Income Method
1. Compensation Of Employees (COE)/Emoluments of employees: The amount
earned by employees from their employers, whether in cash or in kind or through any
other social security scheme is known as compensation of employees.
This is broadly divided into the following three components:
(a) Wages and Salaries payable in Cash:
(i) Wages and salaries receivable by the employees in respect of their work.
(ii) Special allowances for working overtime.
(iiij Cost of travel to and from work, and car parking.
(iv) Bonuses
(v) Commissions, gratuities, tips, cost of living (i.e., dearness allowance paid in our country)
honorarium, vacation, sick leave allowance etc.
(vi) Pensions at the time of retirement (Deferred Wage): Pensions at the time of retirement are related
to factor services rendered by recipient prior to their retirement. It is also known as deferred wage.
Any expenses incurred by the employees and thereafter reimbursed by the business enterprise
should be excluded from Compensation Of Employees (COE) as such expenses are part of
intermediate consumption of business enterprise.
(b) Wages and Salaries in Kind: Remuneration in kind consists of goods and services that are not
necessary for work and can be used by employees at their own discretion, for the satisfaction of their
needs or wants or those of other members of their households. It includes:
(i) Meals and drinks including those consumed when travelling for business.
(ii) Accommodation.
(iii) The services of vehicles or other durables provided for the personal use of the employees.
(iv) Goods and services produced as outputs from the employer’s own process of production such as
free travel for the employees of railways or airlines, or free coal for miners.
(v) Sports, recreation or holiday facilities for employees and their families.
(vi) Creches for children of employees.
(vii) Value of the interest foregone by employers when they provide loans to employees at reduced, or
even zero rates of interest for the purposes of buying houses, furniture or other goods and services.
It should be kept in mind that it does not include any facilities which are necessary for work and in
which employees do not have any discretion.
For example, uniforms or other forms of special clothing to be used for work only. Examples are
uniforms for police, uniforms of drivers, uniforms for nurses in the hospital. It’s so because such
payments are intermediate consumption of business enterprises.
(c) Employers’ Contribution to Social Security Schemes: Employers’ make payments to social
security schemes like life insurance, causality insurance, pension schemes etc. For example, there is
a Contributory provident Fund Scheme for employees of educational institutions and public sector
undertakings. The contribution made by the employers for such schemes is a part of compensation of
employees.
The thing which has to be remembered is that, employers’ contribution towards social security
scheme should be included whereas employees’ contribution towards Social Security Scheme should
not be included as COE is that what the employer pays to employee and if anything borne by
employee himself should not be included under COE.
2. Operating Surplus: The CSO (Central Statistical Organization) has defined operating surplus as
“value of gross output less the sum of intermediate consumption, compensation of employees, mixed
income, depreciation and NIT.”
Operating Surplus = GVOMP – Intermediate consumption – COE – Mixed Income – Depreciation –
NIT
In other words, it is the sum of income from property and income from entrepreneurship. Operating
surplus have the following two components:
(a) Income from property: It is the income which has been arisen from rent, interest and royalty.
It is divided into three components:
(i) Rent: The income arising from ownership of land and building is known as rent. It also includes
imputed rent. If a person living in his own house, then it is assumed in an economy that he is paying
rent to himself. This concept is known as imputed rent.
(ii) Royalty: Royalties are the payments made for the use of mineral deposits such as coal, oil, etc. or
for the use of patents, copyrights, trademarks, etc.
(iii) Interest: It is the amount earned for lending funds to the production units. It also includes imputed
interest of funds provided by entrepreneur. But interest income includes interest on loan taken for
productive services only.
The following categories of interest should not be included :
• Interest on national debt or interest paid by government on nation debt should not be included as it
is assumed that such interest is paid on loan taken for consumption purpose.
• Interest paid by one firm to another firm as it is already included in the profit of the firm which pays it.
(b) Income from entrepreneurship: It is a return of entrepreneur after paying all the other factors of
production. It is of the following three types:
(i) Distributed Profit (Dividend): It is that part of total profit which is given to shareholders.
The thing to be noted here is that profit earned by one firm to another should not be included under
this head because it is already included in the profit of the firm which pays it.
(ii) Undistributed Profit (Saving of private corporate sector or Retained £arnings):
It is that part of total profit which is not given to shareholders and kept as a reserve for future
uncertainties.
(iii) Corporation Tax (Profit Tax): It is that part of total profit which is given by a firm to the government
as Tax.
The concept of operating surplus is applicable to all producing enterprises, whether they belong to the
private sector or to the government. The government enterprises also are expected to earn
reasonable rate of profit on the funds invested.
But, operating surplus does not arise in the general government sector as they produce goods and
services for the social welfare of the country and not for profit motive i.e., why rent, interest and profit
are zero in general government sector.
3. Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and
unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income. They
do not maintain proper accounts. They do not generally hire factor services from the market rather
use their own resources like land, labour, funds, etc. As the result of, it becomes difficult to classify
their income distinctly among rent, wages, interest and profit.
NDPFC Compensation of employees (COE) + Operating surplus (OS) + Mixed Income (MY)
Method For Calculating National Income By Income Method:
If we want to calculate National Income by Income method, we have to add different factor incomes
from the economy.
The addition of all these factor incomes gives us the calculation near by the National Income, i.e. Net
Domestic Product at FC (NDPFC).
Important Note:
1. Profit earned by one firm to another should not be included because it is a part of intermediate
consumption.
2. If Profit after tax is given and corporate tax is given, then by adding them we get profit. Profit after
tax = 1000
Corporate tax =100 Profit =1100
3. If Profit before tax and corporate tax are given, then ignore corporate tax.
Profit before tax = 1000
Corporate tax =100 Profit = 1000
Steps for calculating national income by income method:
Step 1: To identify enterprises which employ primary factors (Land, Labour, Capital, enterprise).
Step 2: To classify various types of factor income like:
(a) Compensation of employees: The amount earned by employees from their employer, whether in
cash or in kind or through any other social security scheme is known as compensation of employees.
(b) Operating Surplus: It is the sum of income from property and income from entrepreneurship.
(c) Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and
unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income.
Step 3: To estimate amount of factor payments made by each producing unit.
Step 4: To add all factor incomes / payments within domestic territory to get domestic income, i.e.,
NDPFC .
NDPFC = Compensation of employees + Operating Surplus + Mixed Income Step 5: Addition of NFIA
to NDPFC to get NY, i.e., NNPFC .
Precautions of income method.

(a) Avoid transfers: National income includes only factor payments, i.e., payment for the services
rendered to the production units by the owners of factors. Any payment for which no service is
rendered is called a transfer, not a production activity. Gifts, donations etc. are main examples. Since
transfers are not a production activity it must not be included in national income.
(b) Avoid capital gain: Capital gain refers to the income from the sale of second hand goods and
financial assets. Income from the sale of old cars, old house, bonds, debentures, etc. are some
examples. These transactions are not production transactions. So, any income arising to the owners
of such things is not a factor income.
(c) Include income from self-consumed output: When a house owner lives in his house, he does
not pay any rent. But infact he pays rent to himself. Since, rent is a payment for services rendered,
even though rendered to the owner itself, it must be counted as a factor payment.
(d) Include free services provided by the owners of the production units: Owners work in their own
unit but do not charge salary. Owners provide finance but do not charge any interest. Owners do
production in their own buildings but do not charge rent. Although they do not charge, yet the services
have been performed. The imputed value of these must be included in national income.
How To Determine National Income By Expenditure Method And Its Numericals, Steps And
Precautions:
National income determination by Expenditure method:

(a) “Production creates income, income creates expenditure”. If we want to calculate National Income
by this method, we have to add different final expenditures from an economy.
(b) The addition of all those final expenditure gives us the calculation near by the National Income,
i.e. GDPMP .
Components of Expenditure Method
1. Government Final Consumption Expenditure (GFCE): The expenditure made by a general

government on current expenditure on goods and services like public health, defence, law and order,
education, etc. These goods and services generate no income because it is produce by a general
government without any profit motive.
These goods and services are valued at their cost to the government as they are not sold to the
citizen and have been produced for the social welfare of the citizens. So, GFCE = Intermediate
consumption of government + Compensation of employees (wages and salaries in cash and in kind)
by government + Direct purchases made abroad by government (purchases made by embassies and
consulates located in foreign countries) + Consumption of fixed capital (depreciation) – Sale of goods
and services by government.
2. Private Final Consumption Expenditure (PFCE): Private final consumption expenditure is
defined as consumption expenditure by consumer households (household final consumption
expenditure) and private NPISH (Non-profit Institution serving households) on all types of consumer
goods.
PFCE = Household final consumption expenditure + Private non-profit Institution serving households
final consumption expenditure.
The value of following items is measured for getting private final Consumption Expenditure.
(a) Purchases of currently produced goods and services in the domestic market by consumer
households and NPISH.
(b) Direct purchases made abroad by resident households are added but direct purchases in
domestic market by non-resident households and extra territorial bodies are deducted.
PFCE = Purchases of currently produced goods and services in the domestic Market by consumer
households and NPISH households + direct purchases made abroad by resident households – direct
purchases in domestic market by non¬resident households.
Note: If in the examination problem household final consumption expenditure is not given, it can be
calculated as under
Household Final Consumption Expenditure = Personal disposable income – Personal (Household)
Saving
3. Gross Domestic Capital Formation or Gross Investment or Investment Expenditure:
It refers to additions to the physical stock of capital during a period of time. It includes building
machinery, Housing construction, construction of factories, etc. It has been classified into the
following categories.
(a) Gross Domestic Fixed Capital Formation (GDFCF): It is the expenditure incurred on purchase of
fixed assets. It is of three types:
(i) Gross Business Fixed Investment: It is the amount that the business units spend on purchase of
newly produced capital goods like plant and equipments. Gross business fixed investment is the
gross amount spent on newly produced fixed capital goods. When depreciation is deducted from it,
we obtain Net Business fixed Investment.
Gross Business Fixed Investment = Net Business fixed Investment + Depreciation
(ii) Gross Residential Construction Investment: This is the amount spent on construction of flats and
residential houses. The investment is said to be gross when depreciation is not deducted and Net
when depreciation is deducted.
(iii) Gross Public Investment: This includes capital formation by government in the form of building of
roads, bridges, schools, hospitals, etc. This investment is called Gross when depreciation is not
deducted and Net when depreciation is subtracted.
(b) Change In Stock (Closing Stock – Opening Stock) Or Inventory Investment: It is the net change in
inventories of final goods, finished goods, semi-finished goods and raw material. These are included
as they represent currently produced goods, which are not included in the current sale of final output.
It is a difference between closing stock and the opening stock of the year.
(c) Net Acquisition Of Valuables: These are those high value durable goods like gold, silver,
amtiques, etc. which are taken at market price.
GDCF = Gross domestic fixed capital formation (GDFCF) + Change in Stock (Closing Stock –
Opening Stock) + Net acquisition of valuables
Or
GDCF = Gross Business Fixed Investment + Gross Residential Construction +
Gross Public Investment + Inventory Investment + Net Acquisition of Valuables
4. Net Export (Export – Import): It shows the difference between Domestic spending
on foreign goods (i.e., imports) and foreign spending on domestic goods (i.e., exports).
Thus, the difference between exports and imports of a country is called Net Exports.
Net Exports = Export – Import
GDPMP = Government final consumption expenditure + Private final consumption expenditure +
Gross domestic capital formation + Net export
Numerical Problems on Expenditure Method
Money – Chapter 3 Class 12
Introduction:
This chapter is a detailed version of barter system and its difficulties, how money has overcome its
drawbacks, money supply and its measures.
Barter System And Its Difficulties, Money And Functions Of Money:
1. Barter system of exchange is a system in which goods are exchanged for goods.
2. For example, wheat may be exchanged for cloth; house for horses, etc., or a teacher may be paid
wheat or rice as a payment for his/her services.
3. Such exchange exists in the C-C Economy (commodity to commodity exchange economy).
Note: In C-C Economy C stands for commodity. C-C economy is the one in which commodities are
exchanged for commodities. C-C exchange refers to barter system of exchange. Hence, C-C
Economy is an economy dominated by barter system of exchange.
4. Difficulties of barter system are:-Barter system as a system of exchange is faced with the following difficulties:
(a) Lack of double coincidence of wants:
(i) Barter is possible only if goods produced by two persons are needed by each other. It is double coincidence of wants.
(ii) Double coincidence of wants means that goods in possession of two different persons must be useful and needed by
each other. It is the main basis of barter system of exchange. But it is rare.
(iii) It is difficult to find such a person every time. In barter system, exchange becomes quite limited.
(b) Lack of divisibility:
(i) In commodity exchange, difficulty of dividing the commodity arises.
(ii) For example, if a car is to be exchanged for a scooter, then car can not be divided. Similarly, animals can not be
divided into smaller units.
(c) Difficulty in storing wealth:
(i) It is very difficult to store wealth for future use.
(ii) Most of the goods like wheat, rice, cattle etc. are likely to deteriorate with the passage of time or involve heavy cost
of storage.
(iii) Further, the transfer of goods from one place to another place involves huge transport cost.
(iv) Transfer of immovable commodities (such as house, farm, land, etc.) becomes almost impossible.
(d) Absence of common measure of value:
(i) Different commodities are of different values. The value of a good or service means the amount of other goods and
services it can be exchanged for in the market. There is no common measure of value under barter system.
(ii) In this situation, it is difficult to decide in what proportions are the two goods to be exchanged.
(e) Lack of standard of deferred payment: In a barter economy future payments would have to be stated in terms of
specific goods or services. This leads to following problems:
(i) There could be disagreement regarding the quality of the goods or services to be repaid.
(ii) There would be disagreement regarding which specific commodities would be used for repayment.
5. Money: Money is something which is generally acceptable as a medium of exchange
and can be converted into other assets without losing its time and value.
6. Functions of money: Functions of money can be summed up as follow:
“Money is a matter of the following four functions:
A medium, a measure, a standard, a store”
We can conclude these four functions under the following two functions:
(a) Primary function
(b) Secondary function
(a)Primary function or Main function: Primary function includes the most important functions of money, which it must
perform in an economic system irrespective of time and place. The following two functions are included under this
category.
(i) Medium of exchange
• Money when used as a medium of exchange helps to eliminate the basic limitation of barter trade, that is, the lack of
double coincidence of wants.
• Individuals can exchange their goods and services for money and then can use this money to buy other goods and
services according to their needs and convenience.
• Thus, the process of exchange shall have two parts: a sale and a purchase.
• The ease at which money is converted into other goods and services is called “liquidity of money”.
(ii) Measure of value /unit of account
• Another important function of money is that it serves as a common measure of value or a unit of account.
• Under barter economy there was no common measure of value in which the values of different goods could be
measured and compared with each other. Money has also solved this difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.”
Money measures the value of economic goods.
• Money works as a common denominator into which the values of all goods and services are expressed.
• When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various
commodities, it is easy to calculate exchange ratios between them.
(b) Secondary Functions
(i) Standard of deferred payments
• Credit has become the life and blood of a modern capitalist economy.
• In millions of transactions, instant payments are not made.
• The debtors make a promise that they will make payments on some future date. In those situations money acts as a
standard of deferred payments.
• It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
(ii) Store of vaiue
• Wealth can be conveniently stored in the form of money. Money can be stored without loss in value.
• Savings are secured and can be used whenever there is a need.
• In this way, money acts as a bridge between the present and the future.
• Money means goods and services. Thus, money serves as a store of value.
• It is also known as asset function of money.
7. Characteristics or features of money:
(a) Durability: Money must be durable and not likely to deteriorate rapidly with
frequent handling. Currency notes and coins are being used repeatedly and shall
continue to do so for many years.
(b) Medium of exchange: Money is the thing that acts as a medium of exchange for the sale and purchase of goods and
services.
(c) Weight: Money must be light in weight. Paper money is better than metal coins because it is light in weight.
(d) Measure of value: It not only serves as medium of exchange but also acts as a measure of value. The value of all the
goods and services is expressed in terms of money.
8. Money has overcome the drawbacks of barter system: Barter system makes
the exchange process very difficult and highly inefficient. Money has overcome the
drawbacks of barter system in the following manners:
(a) Medium of exchange
(i) Under barter system, there is lack of double coincidence of wants.
(ii) With money as a medium exchange individuals can exchange their goods and services for money and then use this
money to buy other goods and services according to their needs and conveniences.
(iii) A buyer can buy goods through money and a seller can sell goods for money.
(b) Measure of value
(i) Under barter system, there was no common measure of value. Money has also solved this difficulty.
(ii) As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be
compared.” Money measures the value of economic goods.
(iii) Money works as a common denominator into which the values of all goods and services are expressed.
(iv) When we express the values of a commodity in terms of money, it is called price and by knowing prices of the
various commodities, it is easy to calculate exchange ratios between them.
(c) Store of value
(i) Under barter system it is very difficult to store wealth for future use.
(ii) Most of the goods are perishable and their storage requires huge space and transportation cost.
(iii) Wealth can be conveniently stored in the form of money.
(iv) Money can be stored without loss in value.
(v) Money can easily be stored for future use.
(d) Standard of deferred payments
(i) Under barter system, transactions on deferred payments are not possible.
(ii) With money, the debtors make a promise that they will make payments on some future dates. In these situations
money acts as a standard of deferred payments.
(iii) It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
9. Legal definition of money:
(a) Legally, money is anything proclaimed by law as a medium of exchange.
(b) Paper notes and coins (together called currency) is money as a matter of law.
(c) Nobody can refuse its acceptance as medium of exchange.
(d) In other words, it is legal tender. It means people have to accept it legally for different payments. Currency is also
called FIAT money because it commands ‘FIAT’ (order/authority) of the government.
10. Functional definition of money: Functional definition of money refers to money as anything that performs four basic
functions,
(a) It serves as a medium of exchange.
(b) It serves as a standard unit of value.
(c) It serves as a means for future / contractual payments or standard of deferred payments.
(d) It serves as a store of value.
According to this, definition of money includes both notes and coins as well as chequeable deposits with the banks.
11. Narrow definition of money: Functional definition of money is a narrow definition of money. It includes only notes,
coins and demand deposits as money. In other words, in its narrow definition, money includes only those things that
function as money in terms of:
(a) Medium of exchange.
(b) Measure of value.
(c) Standard of future/Deferred payments.
(d) Store of value.
12. Broad definition of money:
(a) A broad definition of money also includes time deposits/term deposits with the banks or post offices as a component
of money.
(b) These deposits can be converted into demand deposits on a short notice, and are “Near money assets”. Money
assets and near money assets together make up a definition of money.
Money Supply And Measures Of Money Supply
1. Money supply: The volume of money held by the public at a point of time, in an economy, is
referred to as the money supply. Money supply is a stock concept.
2. Measures of money supply: On the recommendation of the second working group on
money supply, the RBI presented four measures of money supply in its 1977 issues of RBI
Bulletin, namely M1, M2, M3 and M4.
Measures of M1 include:
(a) Currency notes and coins with the public (excluding cash in hand of all commercial banks)
[C]
(b) Demand deposits of all commercial and co-operative banks excluding inter-bank deposits.
(DD),
Where demand deposits are those deposits which can be withdrawn by the depositor at any
time by means of cheque. No interest is paid on such deposits.
(c) Other deposits with RBI [O.D]
M1 = C + DD + OD
Where, Other deposits are the deposits held by the RBI of all economic units except the
government and banks. OD includes demand deposits of semi¬government public financial
institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International
Monetary Fund, the World Bank, etc.
Measures of M2:
(i) M1 [C + DD + OD]
(if) Post office saving deposits
Measures of M3:
(i) M1
(ii) Time deposits of all commercial and co-operative banks.
Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the
stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
Measures of M4:
(i) M3
(ii) Total deposits with the post office saving organization (excluding national savings
certificates).
3. High-powered money: High-powered money is money produced by the RBI and the
government. It
2. consists of two things: (a) currency held by the public and (b) Cash reserves with the banks.
Words that Matter
1. Barter system: Barter system of exchange is a system in which goods are exchanged for goods.
2. Double coincidence of wants: It means that goods in possession of two different persons must
be useful and needed by each other.
3. Money: Money is something which is generally acceptable as a medium of exchange and can be
converted into other assets without loosing its time and value.
4. Legal definition of money: Legally, money is anything proclaimed by law as a medium of
exchange. Paper notes and coins (together called currency) is money as a matter of law.
5. FIAT Money: It is defined as a money which is under the ‘FIAT’ (order/authority) of the government
to act as a money.
6. Functional definition of money: Functional definition of money refers to money as anything that
performs four basic functions. (Medium of exchange, standard unit of value, standard of deferred
payments, store of value)
7. Narrow definition of money: Functional definition of money is a narrow definition of money. It
includes only notes, coins and demand deposits as money.
8. Broad definition of money: A broad definition of money also includes time deposits/ term
deposits with the banks or post offices as a component of money.
9. Money Supply: The stock of money held by the public at a point of time, in an economy, is
referred to as the money supply. Money supply is a stock concept.
10. High-powered money: It is money produced by the RBI and the government. It consists of two
things: (i) currency held by the public and (ii) Cash reserves with the banks.
11. Demand deposits: These are the deposits that can be withdrawn by the depositor at any time by
means of cheque. No interest is paid on such deposits.
12. Time deposits: These are the deposits that cannot be withdrawn before the expiry of the
stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
13. Other deposit measures of M1: Other deposits are the deposits held by the RBI of all economic
units except the government and banks. OD includes demand deposits of semi-government public
financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International
Monetary Fund, the World Bank, etc.
Banking – Chapter 4 Class 12
Introduction:
This is a textual description of commercial bank, credit creation by commercial bank, central bank and
its functions.
Commercial Bank And Credit Creation By Commercial Bank
1. Commercial bank
is a financial institution which performs the functions of accepting deposits from the public and
making loans and investments, with the motive of earning profit.
2. Process of money creation/deposit creation/credit creation by the commercial banking system.
(a) Let us assume that the entire commercial banking system is one unit. Let us call this one unit
simply “banks’. Let us also assume that all receipts and payments in the economy are routed
through the banks. One who makes payment does it by writing cheque. The one who receives
payment deposits the same in his deposit account.
(b) Suppose initially people deposit Rs.1000. The banks use this money for giving loans. But the
banks cannot use the whole of deposit for this purpose. It is legally compulsory for the banks to
keep a certain minimum fraction of these deposits as cash. The fraction is called the Legal
Reserve Ratio (LRR). The LRR is fixed by the Central Bank. It has two components. A part of the
LRR is to be kept with the Central bank and this part ratio is called the Cash Reserve Ratio. The
other part is kept by the banks with themselves and is called the Statutory Liquidity Ratio.
(c) Let us now explain the process, suppose the initial deposits in banks is Rs.1000 and the LRR
is 10 percent. Further, suppose that banks keep only the minimum required, i.e., Rs.100 as cash
reserve, banks are now free to lend the remainder Rs.900. Suppose they lend Rs.900. What
banks do to open deposit accounts in the names of the borrowers who are free to withdraw the
amount whenever they like.
• Suppose they withdraw the whole of amount for making payments.
(d) Now, since all the transactions are routed through the banks, the money spent by the
borrowers comes back into the banks into the deposit accounts of those who have received this
payment. This increases demand deposit in banks by ?900. It is 90 per cent of the initial deposit.
These deposits of Rs.900 have resulted on account
of loans given by the banks. In this sense the banks are responsible for money creation. With this
round, increased in total deposits are now Rs.1900 (=1000 + 900).
(e) When banks receive new deposit of ?900, they keep 10 per cent of it as cash reserves and
use the remaining Rs. 810 for giving loans. The borrowers use these loans for making payments.
The money comes back into the accounts of those who have received the payments. Bank
deposits again rise, but by a smaller amount of Rs.810. It is 90 per cent of the last deposit
creation. The total deposits now increase to Rs.2710 (=1000 + 900 + 810). The process does not
end here.
(f) The deposit creation continues in the above manner. The deposits go on increasing round after
round but Deposit Creation By Commercial Banks each time only 90 per cent of the last round
deposits. At the same time cash reserves go on increasing, each time 90 per cent of the last cash
reserve. The deposit creation comes to end when the total cash reserves become equal to the
initial deposit. The total deposit creation comes to Rs.10000, ten times the initial deposit as shown
in the table.
It can also be explained with the help of the following formula:
3. Banks required to keep only a fraction of deposits as cash reserves Banks are required to keep
only a fraction of deposits as cash reserves because of the following two reasons:
(a) First, the banking experience has revealed that not all depositors approach the banks for
withdrawal of money at the same time and also that normally they withdraw a fraction of deposits.
(b) Secondly, there is a constant flow of new deposits into the banks. Therefore to meet the daily
demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of deposits as a
cash reserve.
4. When the primary cash deposit in the banking system leads to multiple expansion in the total
deposits, it is known as money multiplier or credit multiplier.
Central Bank And Their Functions
1. The central bank is the apex institution of a country’s monetary system. The design and the
control of the country’s monetary policy is its main responsibility. India’s central bank is the Reserve
Bank of India.
2. Functions of Central Bank.
(a) Currency Authority:
(i) The central bank has the sole monopoly to issue currency notes. Commercial banks cannot issue
currency notes. Currency notes issued by the central bank are the legal tender money.
(ii) Legal tender money is one, which every individual is bound to accept by law in exchange for
goods and services and in the discharge of debts.
(iii) Central bank has an issue department, which is solely responsible for the issue of notes.
(iv) However, the monopoly of central bank to issue the currency notes may be partial in certain countries.
(v) For example, in India, one rupee notes and all types of coins are issued by the government and all other
notes are issued by the Reserve Bank of India.
(b) Banker, Agent and Advisor to the Government: Central bank everywhere in the world acts as banker,
fiscal agent and adviser to their respective government.
(i) As Banker: As a banker to the government, the central bank performs same functions as performed by the
commercial banks to their customers.
• It receives deposits from the government and collects cheques and drafts deposited in the government account.
• It provides cash to the government as resumed for payment of salaries and wages to their staff and other cash
disbursements.
• It makes payments on behalf of the government.
• It also advances short term loans to the government.
• It supplies foreign exchange to the government for repaying external debt or making other payments.
(ii) As Fiscal Agent: As a fiscal agent, it performs the following functions :
• It manages the public debt.
• It collects taxes and other payments on behalf of the government.
• It represents the government in the international financial institutions (such as World Bank, International
Monetary Fund, etc.) and conferences.
(iii) As Adviser
• The central bank also acts as the financial adviser to the government.
• It gives advice to the government on all financial and economic matters such as deficit financing, devaluation
of currency, trade policy, foreign exchange policy, etc.
3. Banker’s Bank and Supervisor:
(a) Banker’s Bank: Central bank acts as the banker to the banks in three ways: (i) custodian of the cash
reserves of the commercial banks; (ii) as the lender of the last resort; and (iii) as clearing agent.
(i) As a custodian of the cash reserves of the commercial banks, the central bank maintains the cash reserves of
the commercial banks. Every commercial bank has to keep a certain percent of its cash reserves with the central
bank by law.
(ii) As Lender of the Last Resort.
• As banker to the banks, the central bank acts as the lender of the last resort.
• In other words, in case the commercial banks fail to meet their financial requirements from other sources, they
can, as a last resort, approach to the central bank for loans and advances.
• The central bank assists such banks through discounting of approved securities and bills of exchange.
(ii) As Clearing Agent
• Since it is the custodian of the cash reserves of the commercial banks, the central bank can act as the
clearinghouse for these banks.
• Since all banks have their accounts with the central bank, the central bank can easily settle the claims of
various banks against each other simply by book entries of transfers from and to their accounts.
• This method of settling accounts is called Clearing House Function of the central bank.
(b) Supervisor
(i) The Central Bank supervises, regulate and control the commercial banks.
(ii) The regulation of banks may be related to their licensing, branch expansion, liquidity of assets,
management, amalgamation (merging of banks) and liquidation (the winding of banks).
(iii) The control is exercised by periodic inspection of banks and the returns filed by them.
4. Controller of Money Supply and Credit: Principal instruments of Monetary Policy or credit control of the
Central Bank of a country are broadly classified as:
(a) Quantitative Instruments or General Tools; and
(b) Qualitative Instruments or Selective Tools.
(a) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of monetary policy
that affect overall supply of money/credit in the economy. These instruments do not direct or restrict the flow of
credit to some specific sectors of the economy. They are as under:
(i) Bank Rate (Discount Rate)
• Bank rate is the rate of interest at which central bank lends to commercial banks without any collateral
(security for purpose of loan). The thing, which has to be remembered, is that central bank lends to commercial
banks and not to general public.
• In a situation of excess demand leading to inflation,
-> Central bank raises bank rate that discourages commercial banks in borrowing from central bank as it will
increase the cost of borrowing of commercial bank.
-> It forces the commercial banks to increase their lending rates, which discourages borrowers from taking
loans, which discourages investment.
-> Again high rate of interest induces households to increase their savings by restricting expenditure on
consumption.
-> Thus, expenditure on investment and consumption is reduced, which will control the excess demand.
• In a situation of deficient demand leading to deflation,
-> Central bank decreases bank rate that encourages commercial banks in borrowing from central bank as it will
decrease the cost of borrowing of commercial bank.
-> Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages borrowers
from taking loans, which encourages investment.
-> Again low rate of interest induces households to decrease their savings by increasing expenditure on
consumption.
-> Thus, expenditure on investment and consumption increase, which will control the deficient demand.
(ii) Repo Rate
• Repo rate is the rate at which commercial bank borrow money from the central
bank for short period by selling their financial securities to the central bank.
• These securities are pledged as a security for the loans.
• It is called Repurchase rate as this involves commercial bank selling securities
to RBI to borrow the money with an agreement to repurchase them at a later
date and at a predetermined price.
• So, keeping securities and borrowing is repo rate.
• In a situation of excess demand leading to inflation,
-> Central bank raises repo rate that discourages commercial banks in borrowing from central bank as it will
increase the cost of borrowing of commercial bank.
-> It forces the commercial banks to increase their lending rates, which discourages borrowers from taking
loans, which discourages investment.
-> Again high rate of interest induces households to increase their savings by restricting expenditure on
consumption.
-> Thus, expenditure on investment and consumption is reduced, which will control the excess demand.
• In a situation of deficient demand leading to deflation,
-> Central bank decreases Repo rate that encourages commercial banks in borrowing from central bank as it
will decrease the cost of borrowing of commercial bank.
-> Decrease in Repo rate makes commercial bank to decrease their lending rates, which encourages borrowers
from taking loans, which encourages investment.
-> Again low rate of interest induces households to decrease their savings by increasing expenditure on
consumption.
-> Thus, expenditure on investment and consumption increase, which will control the deficient demand.
(iii) Reverse Repo Rate
• It is the rate at which the Central Bank (RBI) borrows money from commercial bank.
• In a situation of excess demand leading to inflation, Reverse repo rate is increased, it encourages the
commercial bank to park their funds with the central bank to earn higher return on idle cash. It decreases the
lending capability of commercial banks, which controls excess demand.
• In a situation of deficient demand leading to deflation, Reverse repo rate is decreased, it discourages the
commercial bank to park their funds with the central bank. It increases the lending capability of commercial
banks, which controls deficient demand.
(iv) Open Market Operations (OMO)
• It consists of buying and selling of government securities and bonds in the open market by Central Bank.
• In a situation of excess demand leading to inflation, central bank sells government securities and bonds to
commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases,
which will control excess demand.
• In a situation of deficient demand leading to deflation, central bank purchases
government securities and bonds from commercial bank. With the purchase of these securities, the power of
commercial bank of giving loans increases, which will control deficient demand.
(v) Varying Reserve Requirements
• Banks are obliged to maintain reserves with the central bank, which is known as legal reserve ratio. It has two
components. One is the Cash Reserve Ratio or CRR and the other is the SLR or Statutory Liquidity Ratio.
• Cash Reserve Ratio:
-> It refers to the minimum percentage of a bank’s total deposits, which it is required to keep with the central
bank. Commercial banks have to keep with the central bank a certain percentage of their deposits in the form of
cash reserves as a matter of law.
-> For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs. 100 crore, it will
have to keep Rs. 10 crore with the Central Bank.
-> In a situation of excess demand leading to inflation, Cash Reserve Ratio (CRR) is raised to 20 per cent, the
bank will have to keep Rs.20 crore with the Central Bank, which will reduce the cash resources of commercial
bank and reducing credit availability in the economy, which will control excess demand.
-> In a situation of deficient demand leading to deflation, cash reserve ratio (CRR) falls to 5 per cent, the bank
will have to keep Rs. 5 crore with the central bank, which will increase the cash resources of commercial bank
and increasing credit availability in the economy, which will control deficient demand.
(vi) The Statutory Liquidity Ratio (SLR)
• It refers to minimum percentage of net total demand and time liabilities, which commercial banks are required
to maintain with themselves.
• In a situation of excess demand leading to inflation, the central bank increases statutory liquidity ratio (SLR),
which will reduce the cash resources of commercial bank and reducing credit availability in the economy.
• In a situation of deficient demand leading to deflation, the central bank decreases statutory liquidity ratio
(SLR), which will increase the cash resources of commercial bank and increases credit availability in the
economy.
• It may consist of:
-> Excess reserves
-> Unencumbered (are not acting as security for loans from the Central Bank) government and other approved
securities (securities whose repayment is guaranteed by the government); and
-> Current account balances with other banks.
(b) Qualitative Instruments or Selective Tools of Monetary Policy: These
instruments are used to regulate the direction of credit. They are as under:
(i) Imposing margin requirement on secured loans
• Business and traders get credit from commercial bank against the security of their goods. Bank never gives
credit equal to the full value of the security. It always pays less value than the security.
• So, the difference between the value of security and value of loan is called
marginal requirement.
• In a situation of excess demand leading to inflation, central bank raises marginal requirements. This
discourages borrowing because it makes people gets less credit against their securities.
• In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This
encourages borrowing because it makes people get more credit against their securities.
(ii) Moral Suasion
• Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central banks to
commercial banks to cooperate with general monetary policy of the central bank.
• In a situation of excess demand leading to inflation, it appeals for credit contraction.
• In a situation of deficient demand leading to deflation, it appeals for credit expansion.
(iii) Selective Credit Controls (SCCs)
• In this method the central bank can give directions to the commercial banks not to give credit for certain
purposes or to give more credit for particular purposes or to the priority sectors.
• In a situation of excess demand leading to inflation, the central bank introduces rationing of credit in order to
prevent excessive flow of credit, particularly for speculative activities. It helps to wipe off the excess demand.
• In a situation of deficient demand leading to deflation, the central bank withdraws rationing of credit and make
efforts to encourage credit.
Words that Matter
1. Commercial Bank: Commercial bank is a financial institution which performs the functions of
accepting deposits from the public and making loans and investments, with the motive of earning
profit.
2. Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be kept by the
commercial banks with themselves (Statutory Liquidity Ratio) and with the central bank (Cash reserve
Ratio).
3. Money Multiplier or Credit Multiplier: When the primary cash deposit in the banking system
leads to multiple expansion in the total deposits, it is known as money multiplier or credit multiplier.
4. Central Bank: The central bank is the apex institution of a country’s monetary system. The design
and the control of the country’s monetary policy is its main responsibility.
5. Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy.
6. Qualitative Instruments or Selective Tools of Monetary Policy: The instruments which are
used to regulate the direction of credit is known as Qualitative Instruments.
7. Bank rate: It is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan).
8. Repo rate: It is the rate at which commercial bank borrow money from the central bank for short
period by selling their financial securities to the central bank.
9. Reverse Repo rate: It is the rate at which the central bank (RBI) borrows money from commercial
bank.
10. Open Market Operation: It consists of buying and selling of government securities and bonds in
the open market by central bank.
11. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is
required to keep with the central bank.
12. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time
liabilities, which commercial banks are required to maintain with themselves.
13. Marginal requirement: Business and traders get credit from commercial bank against the
security of their goods. Bank never gives credit equal to the full value of the security. It always pays
less value than the security. So, the difference between the value of security and value of loan is
called marginal requirement.
14. Moral suasion: It implies persuasion, request, informal suggestion, advice and appeal by the
central banks to commercial banks to cooperate with general monetary policy of the central bank.
15. Selective Credit Controls (SCCs): In this method the central bank can give directions to the
commercial banks not to give credit for certain purposes or to give more credit for particular purposes
or to the priority sectors.
Aggregate Demand and Its Related Concepts Chapter 5 Class 12
Introduction
This chapter gives an insight into the constructive key role of J.M. Keynes (John Maynard Keynes)
during the period of 1929-1933 towards the rectification of great depression in America, emphasizing
mainly on aggregate demand, aggregate supply, propensity to consume and save and its types;
including related Numericals.
Aggregate Demand, Aggregate Supply And Three Components
1. Aggregate Demand:
(a) Aggregate demand refers to the total demand for final goods and services in an economy during
an accounting year.
(b) Aggregate demand is aggregate expenditure on ex-ante (planned) consumption and ex-ante
(planned) investment that all sectors of the economy are willing to incur at each income level.
Note: In terms of Keynes, aggregate demand refers to the total amount of money, which the buyers
are ready to spend on purchase of goods and services, produced in an economy during a given
period. It should be kept in mind that Keynes measured aggregate demand not in terms of physical
goods and services but as a part of total income that society is ready to spend.
(c) Components of aggregate demand: The components of aggregate demand are:
(i) Private (or Household) consumption demand
• The total expenditure incurred by all the households of the country on their personal consumption is known as private
consumption expenditure.
• Consumption demand depends mainly on disposable income and propensity to consume.
(ii) Private investment demand
• Private investment demand refers to the demand for capital goods by private investors.
• It is addition to the existing stock of real capital assets such as machines, tools, factory – building etc.
• Investments demand depends upon marginal efficiency of capital (Marginal efficiency of investment) and interest rate.
• Investment is of two types, Autonomous Investment and Induced investment, but in Keynes theory investment is
assumed to be Autonomous.
• The basic difference between Induced Investment and Autonomous Investment
(iii) Government demand for goods and services Its curve is upward sloping rises up to Right.
• In a modern economy, the government is an important buyer of goods and services.
It is income inelastic, i.e., it is not affected by change in income level. The volume of autonomous investment is the same
at all levels of income.
Its curve is a straight line parallel to horizontal axis.
• The government demand may be on account of public needs for roads, schools, hospitals, power, irrigation etc, for the
maintenance of law and order and for defence.
(iv) Demand for net export (X – M)
• Net export represents foreign demand for goods and services produced by an economy.
• When exports exceed imports, net exports is positive and when imports exceed, net exports is negative.
• Exports and imports of a country are influenced by a number of factors such as foreign trade policy, exchange- rate,
prices and quality of goods etc.
Thus, aggregate demand consists of these four types of demand.
However, for the sake of simplicity Keynes included only two types of demand,
-> Consumption demand (C)
-> Investment demand (I)
Aggregate demand can be explained with the help of AD schedule and AD curve.
2. Aggregate Supply:
(a) The concept of aggregate supply (ΔS) is related with the total supply of goods and services by all the producers in an
economy. Four factor of production like land,
labour, capital and enterprise are required for the production of goods and services. Producers pay rent to land, wages
and salaries to labour, interest to capital and Profits to the entrepreneur for their services in production. This payment is
factor- cost from producer’s point of view and factor-income from factor-owner angle.
(b) Thus, aggregate supply is the total amount of money value of goods and services, (which is paid to the factor of
production against their factor services) that all the producers are willing to supply in an economy. In other words, it is
the total cost of production of goods and services produced in a country or it is the value of net national product at
factor cost (NNPFC). Thus, the main components of aggregate supply are:
(c) Keynes assumed his economy to be a closed capitalist economy and whenever any economy is closed capitalist, then
Net Factor Income from Abroad (NFIA) is 0. National Income (NNPFC) = Domestic Income (NDPFC) + Net Factor Income
from Abroad (NFIA)
National Income (NNPFC) = Domestic Income (NDPFC) + 0
In short,
Aggregate Supply = NNPFC = NDPFC = Factor Income = Rent + Interest + Wages + Profit
(d) As we know income is either consumed or saved, hence for the sake of simplicity Keynes has regarded only two main
constituents of aggregate supply:
Consumption Function(Propensity To Consume)And its types,Saving Function (Propensity To

Save) And Its Types
1. Consumption function expresses functional relationship between aggregate consumption and

national income.
Thus, consumption (C) is a function of income (Y). C = F (Y)
Where, C = Consumption; F = Function; Y = Disposable income Consumption at a point of time can
be measured with the equation:
2. According to Keynes, as income increases consumption expenditure also increases but increase
in consumption is smaller than the increase in income. In other words, consumption lags behind
income. This is called Keynes’ Psychological law of Consumption. According to Keynes, propensity to
consume of the people remains stable in the short period.
3. Break-even point refers to that point in the level of income at which consumption is just equal to
income. In other words, whole of income is spent on consumption and there is no saving. Below this
level of income, consumption is greater than income but above this level, income is greater than
consumption.
In the given imaginary household schedule of consumption and saving, at annual
income level of Rs.60,000, consumption is Rs.60,000 and in consequence there is no
saving. This is break-even point.
It is evident from the table and diagram that:
(i) As the income increases, consumption also increases, but the increase in consumption remains
less than the increase in income.
(ii) Income can be zero but consumption can never be zero in the economy.
(iii) When C > Y, saving are negative.
(iv) When C = Y, savings are zero. This is known as break-even point. This is shown by point E in the
diagram. Thus break-even point indicates a point where consumption becomes equal to income or
consumption curve cuts the income curve.
4. There are two types of propensity to consume:
(a) Average propensity to consume (APC)
(i) The ratio of aggregate consumption expenditure to aggregate income is known , as average
propensity to consume. It indicates the percentage (or ratio) of income which is being spent on
consumption. It is worked out by dividing total consumption expenditure (C) by total income (Y).
A Consumption (C)
(ii) It can be explained with the help of following schedule and diagram:
(iii) Important Points for APC:

• When APC is more than 1: When APC is more than 1, consumption is more than national income,
i.e. before the break-even point.
• APC = 1: When APC is equal to 1, consumption is equal to national income, which is known as to
be break-even point.
• When APC is less than 1: When consumption is less than national income, i.e. beyond the break-
even point.
(b) Marginal Propensity to consume (MPC):
(i) The ratio of change in consumption (C) to change in income (Y) is known as marginal propensity to
consume. It indicates the proportion of additional income that is being spent on consumption.
(ii) It can be explained with the help of following schedule and diagram:
(iii) Important points for MPC:

• Value of MPC varies between 0 and 1: As we know that increase in income is either spent on
consumption or saved for future use.
• MPC falls with the successive increase in income: It happens because as an economy becomes
richer, it has the tendency to consume smaller percentage of each increment to its income.
5. (a) Propensity to save (or saving function) shows the functional relationship between aggregate
savings and income.
It is evident from the saving-function schedule and diagram that as income increases saving also
increases. Saving can be both negative and positive. Prior to break-even point saving is negative, at
break-even point saving is zero and after the break-even point saving is positive.
(c) Important points for Saving function:
(i) Starting Point of Saving Curve:
• Saving curve (SS) starts from point _c on the Y-axis, indicating that there is negative saving (equal
to amount of autonomous consumption) when national income is zero. Note: The saving curve will
have a negative intercept on Y-axis of the same magnitude as the consumption curve has positive
intercept on the Y-axis. It happens because if consumption is positive at zero level of income, then
there would be dis-savings of the same magnitude.
• Break-even point (S = 0).
Saving curve crosses the X-axis at point R which is known as break-even point as at this point saving
is zero (or consumption is equal to income).
• Positive Saving: After the break-even point saving is positive.
6. Types of propensity to save
(a) Average propensity to save (APS):
(i) The ratio of aggregate saving to aggregate income is known as average propensity to save (APS).
By dividing aggregate saving by aggregate income, we get APS. Symbolically,
(ii) Important Points for APS:

• APS can never be 1 or more than one.
As saving can never be equal to or more than national income.
• APS can be 0: APS is 0 when income is equal to consumption i.e., saving = 0. This point is known
as break-even point.
• APS can be negative or less than 1.
At income levels which are lower than the break-even point APS can be negative as there will be dis-
savings in the economy.
• APS rises with increase in income.
• APS rises with the increase in income because the proportion of income saved keeps on increasing.
(b) Marginal Propensity to Save:
(i) The ratio of change in saving (ΔS) to change in income (ΔY) is called MPS. It is proportion of
income saved out of additional (incremental) income. Symbolically,
Words that Matter
1. Aggregate demand: It is aggregate expenditure on ex-ante (planned) consumption and ex-ante

(planned)investment that all sectors of the economy are willing to incur at each income level.
2. Induced Investment: It refers to the investment which is made with the motive of earning profit.
3. Autonomous Investment: It refers to the investment, which is made irrespective of level of
income.
4. Aggregate Supply: Aggregate supply is the total amount of money value of goods and services,
(which is paid to the factor of production against their factor services) that all the producers are willing
to supply in an economy.
5. Consumption Function: Consumption function(Propensity to consume) expresses functional
relationship between aggregate consumption and national income. Thus, consumption (C) is a
function of income (Y).
C = F (Y) and C = C + b Y
6. Autonomous Consumption: It refers to minimum level of consumption i.e. (c), which is needed
for survival, i.e., consumption at zero level of national income.
7. Keynes’ Psychological law of Consumption: According to Keynes, as income increases
consumption expenditure also increases but increase in consumption is smaller than the increase in
income. In other words, consumption lags behind income.
8. Break even Point: Break-even point refers to that point in the level of income at which
consumption is just equal to income. In other words, whole of income is spent on consumption and
there is no saving.
9. Average Propensity to Consume: The ratio of aggregate consumption expenditure to aggregate
income is known as average propensity to consume.
APC=C/Y
10. Marginal Propensity to consume: The ratio of change in consumption (C) to change in income
(Y) is known as marginal propensity to consume. It indicates the proportion of additional income that
is being spent on consumption.
MPC=ΔC/ΔY
11. Saving Function: Saving function (Propensity to save) shows the functional relationship between
aggregate savings and income.
S = f (Y) and S = — C + (1 — b) Y
12. Average Propensity to Save: The ratio of aggregate saving to aggregate income is known as
average propensity to save (APS).
APS=S/Y
13. Marginal Propensity to Save: The ratio of change in saving (ΔS) to change in income (ΔY) is
called MPS. It is proportion of income saved out of additional (incremental) income. Symbolically,
MPC= ΔS/ΔY
National Income Determination and Multiplier Chapter 6 Class 12
Introduction
This chapter is a numerical determination of national income under Aggregate demand— Aggregate
supply and Saving—Investment approach. Concept of Multiplier, based numerical on it and its
working is also highlighted.
National Income Determination Under Aggregate Demand And Supply Approach And Saving,
Investment Approach, Effective Demand
1. Determination of equilibrium level of national income

Or
Keynesian theory of income and employment
(a) It refers to that point which has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition:
Condition to get equilibrium level of NY
• AD = AS
• Investment = Saving
How is Investment = Saving?
Here,
AD = AS
C+I=C+S
I=C+S–C
I=S
(b) If due to some disturbance, we divert from that position, then the economic forces will work in
such a manner so as to drive us back to the original position,
i. e., aggregate demand is equal to aggregate supply.
(c) Any movement from that point would be unstable. In short, it is a position of rest.
(d) It can be explained with the help of following schedule and diagram:
(e) Figure B is derived from figure A. In figure A at point P, income is equal to consumption, which is
known as to be breakeven point. Corresponding to point P, we derive point P 1; in figure B, where
saving is equal to zero. In figure A, the equilibrium level of national income is attained at point E,
where aggregate supply = aggregate demand. Corresponding to point E, we derive the point E 1,
where saving = investment.
2. Determination of equilibrium level of national income through Aggregate demand-Aggregate
Supply Approach
(a) It refers to the point that has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition
where Aggregate Demand = Aggregate Supply.
(b) If due to some disturbance, we divert from that position, the economic forces will work in such a
manner so as to drive us back to the original position, i.e., aggregate demand is equal to aggregate
supply.
(c) In the above mentioned figure, at point P, income = consumption, which is known as to be a
break-even point. The equilibrium level of national income is attained at point E, where aggregate
demand = aggregate supply.
(d) If due to some disturbance we divert from our position, like when AD > AS [at Y 2], then, production
will have to be increased to meet the excess demand. Consequently, national income will increase.
As we know positive relationship exists between national income and consumption, so consumption
will increase, which will thereby increase the aggregate demand till we reach the equilibrium.
(e) As against it, when AD < AS [at Y1], then there would be stockpiling and producers will produce
less. National income will fall and as a result consumption will start falling, which will thereby fall the
aggregate demand till we reach the equilibrium.
3. (a) Ex-ante saving and ex-ante investment:
(i) In an economy what we plan (or intend or desire) to save during a particular period is called ex-
ante saving.
(ii) Against it, what we plan (or intend or desire) to invest during a particular period is called ex-ante
investment.
(b) Ex-post saving and ex-post investment.
(i) In an economy what we actually save or what is left after deducting consumption expenditure from
income is called ex-post (or realized) saving.
(ii) As against it what we actually invest or what we actually add to the physical assets of an economy
is called ex-post (or realized) investment.
4. Determination of equilibrium level of national income through Saving-Investment
Approach
(a) It refers to the point that has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition
where Aggregate Demand (AD)= Aggregate Supply (AS). AD = AS
Consumption (C) + Investment (I) = Consumption (C) + Saving (S)
I=S
(b) If due to some disturbance, we divert from that position, the economic forces will work in such a
manner so as to drive us back to the original position, i.e., Saving is equal to Investment.
(c) In the above figure, the equilibrium level of national income is attained at point E, where saving =
investment which is derived from a point where AD = AS.
(d) If due to some disturbance we divert from our position like when investment > saving [at Y2], then
production will have to be increased to meet the excess demand. Consequently, national income will
increase leading to rise in saving until saving becomes equal to investment. It is here that equilibrium
level of income is established because what the savers intend to save becomes equal to what the
investors intend to invest.
(e) As against it, when saving > investment [at Y1], then there would be stockpiling and producers will
produce less. .National income will fall and as a result saving will start falling until it becomes equal to
investment. It is here the equilibrium level of income is derived.
5. Effective Demand: The level at which the economy is in equilibrium, i.e., where
aggregate demand = aggregate supply, is called effective demand. It can also be
explained with the help of the following table:
Paradox Of Thrift, It’s Reasons With Numirical Example
1. The term thrift means savings and the paradox of thrift shows how an attempt by the economy as
a whole to save more out of its current income will ultimately results in lower savings for the economy.
2. If all the people in the economy make an effort to save more, then the total savings of the
community will not increase, on the contrary they will decrease. This is called the
paradox of thrift.
3. Reasons for “Paradox of thrift” to operate
(a) As we know that one person’s expenditure is another person’s income.
(b) If individual ‘A’ decides to save more by reducing his consumption expenditure, the income of
individual ‘B’ will be less and individual ‘B’ in turn will spend less.
(c) Thus, if all individuals in the economy decide to save more, the income received by each
individual will be less and overall income will fall and also lower will be the total savings.
4. Diagram Representation: The concept of paradox of thrift with the help of diagrams and mathematical
illustration is as under:
When Investment is Autonomous When Investment is Induced
(a) Paradox of thrift fails in keyne’s theory (when Investment is autonomous):
In figure A, society, households plan to save more at each income level. So, saving curve shifts up and left from
S to . Equilibrium national income falls from Y to Yr The thing which has to be remembered is that savings is
equal to autonomous investment, that is, remains unchanged.
(b) Paradox of thrift is possible when investment is induced: In figure B, we have induced investment function
which makes the investment curve upward positively sloping. With the increase in savings, not only the
equilibrium income falls, but also savings decline.
5. Numerical Illustration: Suppose the original savings function is given as,
S = -50 + 0.5Y and investment (I) = 25 + 0.25Y.
Equilibrium level of income will be attained at the level where
Saving = Investment ! -50 + 0.5Y = 25 + 0.25Y
0. 25Y = 75 Y = 300
Therefore, savings at Y=300 will be S = -50 + 0.5 (300) = 100
Suppose, eveiy individual in the economy decides to save 25 more at each level of income. The new savings
function will be
S2 = -50 + 25 + 0.5Y – -25 + 0.5Y.
The new equilibrium income will be attained at the level where
s2 = i
-25 + 0.5Y = 25 + 0.25Y 0.25Y = 50 Y = 200
Therefore, savings at Y = 200 will be S = -25 + 0.5 (200) = -25 + 100 = 75
Thus, when everybody in the economy decides to save more, the equilibrium level of income falls and the total
savings also fall. This is called the paradox of thrift.
Elements In Understanding Investment (Marginal Efficiency Of Investment And Market Rate Of
Interest), Investment Demand Function
1. Elements In Understanding Investment: A private investor’s demand for investment

depends on two things:
(a) The rate of return on investment or M.E.I: The expected rate of return from’an additional unit of
investment is called marginal efficiency of investment (M.E.I). It is defined as the expected rate of
return of an additional unit of capital goods. M.E.I is very important factor in determining the
investment demand. M.E.I. is determined by two factors.
(i) Supply Price: The cost of replacing the machine under consideration with a brand new machine is
known its supply price. For example, if a machine of Rs.1 lakh is replaced in place of old machine,
then Rs. 1 lakh is the supply price.
(ii) Prospective Yields: It refers to expected net returns(of all costs) from the capital asset over its
lifetime. For example, if the given machine is expected to yield revenue of Rs. 10,000 and running
expenditure is Rs.2000, the prospective yield will be, 10000 – 2000 = 8000.
(iii) Formula of Marginal efficiency of investment: In the given examples, marginal efficiency of investment
will be,
(b) The Market Rate of Interest: It refers to cost of funds borrowed for financing the investment. There exists
inverse relationship between rate of interest and investment demand. Higher interest implies lower level of
investment demand.
(c) Decision whether to invest or not
(i) The investor goes on making additional investments until M.E.I becomes equal to the rate of interest. If
M.E.I is greater than the rate of interest, the investors has to increase the investment and if the rate is higher
than the M.E.I, no investment is to be made.
(ii) For example, if an entrepreneur has to pay 15% market rate of interest on the loan taken by him and he
expected rate of profit i.e., M.E.I. is 30%, then he will surely go for the investment and will continue making
investment till M.E.I. = Rate of Interest (ROI).
2. Investment demand function: Investment demand function is the relationship between rate of interest and
investment demand. There exists inverse relationship between rate of interest and investment demand. Higher
interest implies lower level of investment demand.
Concepts Of Investment Multiplier
1. Investment Multiplier
Meaning: The ratio of change in national income (ΔY) due to a change in investment (ΔI) is known as
multiplier (K).
Words that Matter
1. Ex-ante saving: In an economy what we plan (or intend or desire) to save during a particular
period is called ex-ante saving.
2. Ex-ante Investment: In an economy, what we plan (or intend or desire) to invest during a
particular period is called ex-ante investment.
3. Expost Saving: In an economy what we actually save or what is left after deducting
consumption expenditure from income is called ex-post (or realized) saving.
4. Expost Investment: In an economy, what we actually invest or what we actually add to the
physical assets of an economy is called ex-post (or realized) investment.
5. Effective Demand: The level at which the economy is in equilibrium, i.e., where aggregate
demand = aggregate supply, is called effective demand.
6. Paradox of Thrift: The term thrift means savings and the paradox of thrift shows how an
attempt by the economy as a whole to save more out of its current income will ultimately
results in lower savings for the economy.
7. Marginal efficiency of Investment: The expected rate of return from an additional unit of
investment is called marginal efficiency of investment (M.E.I). In other words, it is the expected
rate of return of an additional unit of capital goods.
8. Supply Price: The cost of replacing the machine under consideration with a brand
new machine is known its supply price. .
9. Prospective Yields: It refers to expected net returns (of all costs) from the capital asset
over its lifetime.
10. Market Rate of Interest: It refers to cost of funds borrowed for financing the investment.
There exists inverse relationship between rate of interest and investment demand. Higher
interest implies lower level of investment demand.
11. Multiplier: The ratio of change in national income (ΔY) due to change in investment (ΔI) is
known as multiplier (K)
Excess Demand and Deficient Demand – Chapter 7 Class 12
Introduction
An illustration of meaning, diagram, reasons, impacts and measures to control excess demand
(inflationary gap) and deficient demand (deflationary gap); basic definitions of full employment, over
full employment, involuntary unemployment, voluntary unemployment is also dealt with in this
chapter.
Excess Demand And Its Related Concepts
1. Excess Demand and Inflationary Gap:

(a) When in an economy, aggregate demand exceeds “aggregate supply at full employment level”,
the demand is said to be an excess demand.
(b) Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at
the level of full employment’. It is called inflationary because it leads to inflation (continuous rise in
prices).
(c) A simple example will further -clarify it. Let us suppose that an imaginary economy by employing
all its available resources can produce 10,000 quintals of rice. If aggregate demand of rice is say
12,000 quintals, this demand will be called an excess demand, because aggregate supply at level of
full employment of resources is only 10,000 quintals and the result of the gap of 2000 quintals will be
called as inflationary gap. In the above diagram Inflationary gap is AB because at Full employment
Y*, Aggregate demand (BY*) is greater than Aggregate Supply(AY*).
2. Reasons or causes for excess demand: The main reasons for excess demand are
apparently the increase in the following components of aggregate demand:

(a) Increase in household consumption demand due to rise in propensity to consume.
(b) Increase in private investment demand because of rise in credit facilities.
(c) Increase in public (government) expenditure.
(d) Increase in export demand.
(e) Increase in money supply or increase in disposable income.
3. Impacts or effects of excess demand on price, output, employment:
(a) Effect on General Price Level: Excess demand gives a rise to general price level because it arises when aggregate
demand is more than aggregate supply at a full employment level. There is inflation in economy showing inflationary
gap.
(b) Effect on Output: Excess demand has no effect on the level of output. Economy is at full employment level and there
is no idle capacity in the economy. Hence output can’t increase.
(c) Effect on Employment: There will be no change in thq. level of employment also.
The economy is already operating at full employment equilibrium, and hence, there is no unemployment.
4. Measures to control the excess demand: We can control the excess demand with the help of the following policy:
(a) Monetary Policy (b) Fiscal Policy
Let us discuss it in detail:
(a) Monetary Policy: Monetary policy is the policy of the central bank of a countiy to control money supply and
availability of credit in the economy. The central bank can take the following steps:
(i) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of monetary policy that
affect overall supply of money/credit in the economy. These instruments do not direct or restrict the flow of credit to
some specific sectors of the economy. They are as under
• Bank Rate or Discount Rate (Increase in Bank Rate)

-> Bank rate is the rate of interest at which central bank lends to commercial banks without any collateral (security for
purpose of loan). The thing, which has to be remembered, is that central bank lends to commercial banks and not to
general public.
-> In a situation of excess demand leading to inflation
-> Central bank raises bank rate that discourages commercial banks in borrowing from central bank as it will increase the
cost of borrowing of commercial bank.
❖ It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loans, which
discourages investment.
❖ Again high rate of interest induces households to increase their savings by restricting expenditure on consumption.
❖ Thus, expenditure on investment and consumption is reduced, which will control the excess demand.
• Repo Rate (Increase in Repo Rate):
-> Repo rate is the rate at which commercial banks borrow money from the central bank for short period by selling their
financial securities to the central bank.
-> These securities are pledged as a security for the loans.
-> It is called Repurchase rate as this involves commercial bank selling securities to RBI to borrow the money with an
agreement to repurchase them at a later date and at a predetermined price.
-> So, keeping securities and borrowing is repo rate.
-> In a situation of excess demand leading to inflation
❖ Central bank raises repo rate that discourages commercial banks in borrowing from central bank as it will increase the
cost of borrowing of commercial bank.
❖ It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loans, which
discourages investment.
❖ Again high rate of interest induces households to increase their savings by restricting expenditure on consumption.
❖ Thus, expenditure on investment and consumption is reduced, which will control the excess demand.
• Reverse Repo Rate (Increase in Reverse Repo Rate):
-> It is the rate at which the central bank (RBI) borrows money from commercial bank.
-> In a situation of excess demand leading to inflation, Reverse repo rate is increased, it encourages the commercial
bank to park their funds with the central bank to earn higher return on idle cash. It decreases the lending capability of
commercial banks, which controls excess demand.
• Open Market Operations (OMO) (Sale of securities):
-> It consists of buying and selling of government securities and bonds in the open market by central bank.
-> In a situation of excess demand leading to inflation, central bank sells government securities and bonds to commercial
bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will control
excess demand.
• Increase in Varying Reserve Requirements or Legal Reserve Ratio:
-> Banks are obliged to maintain reserves with the central bank, which is known as legal reserve ratio. It has two
components. One is the Cash Reserve Ratio or CRR and the other is the SLR or Statutory Liquidity Ratio.
-> Cash Reserve Ratio (Increase in CRR):
❖ It refers to the minimum percentage of a bank’s total deposits, which
it is required to keep with the central bank. Commercial banks have to keep with the central bank a certain percentage
of their deposits in the form of cash reserves as a matter of law.
❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs.100 crore, it will have to
keep Rs.10 crore with the central bank.
❖ In a situation of excess demand leading to inflation, cash reserve ratio (CRR) is raised to 20 per cent, the bank will
have to keep Rs.20 crore with the central bank, which will reduce the cash resources of commercial bank and reducing
credit availability in the economy, which will control excess demand.
-> Statutory Liquidity Ratio (Increase SLR):
❖ It refers to minimum percentage of net total demand and time liabilities, which commercial banks are required to
maintain with themselves.
❖ In a situation of excess demand leading to inflation, the central bank increases statutory liquidity ratio (SLR), which
will reduce the cash resources of commercial bank and reducing credit availability in the economy.
(ii) Qualitative Instruments or Selective Tools of Monetary Policy: These instruments are used to regulate the direction
of credit. They are as under:
(i) Imposing margin requirement on secured loans (Increase):
• Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal
to the full value of the security. It always pays less value than the security.
• So, the difference between the value of security and value of loan is called marginal requirement.
• In a situation of excess demand leading to inflation, central bank raises marginal requirements. This discourages
borrowing because it makes people get less credit against their securities.
(ii) Moral Suasion:
• Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central banks to commercial
banks to cooperate with general monetary policy of the central bank.
• In a situation of excess demand leading to inflation, it appeals for credit contraction.
(iii) Selective Credit Control (SCC) [Introduce Credit Rationing]:
• In this method the central bank can give directions to the commercial banks not to give credit for certain purposes or
to give more credit for particular purposes or to the priority sectors.
• In a situation of excess demand leading to inflation, the central bank introduces rationing of credit in order to prevent
excessive flow of credit, particularly for speculative activities. It helps to wipe off the excess demand.
(b) Fiscal Policy: The expenditure and revenue policy taken by the general government to accomplish the desired goals is
known as fiscal policy. A general government can take the following steps:
(a) Revenue Policy (Increase Taxes):
(i) Revenue policy is expressed in terms of taxes.
(ii) During inflation the government impose higher amount of taxes causing the decrease in purchasing power of the
people.
(iii) It is so because to control excess demand we have to reduce the amount of liquidity from the economy.
(b) Expenditure Policy (Reduces Expenditure):
(i) Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.
(ii) During inflation, government should curtail (reduce) its expenditure on public works like roads, buildings, irrigation
works thereby reducing the money income of the people and their demand for goods and services.
(c) Increase in Public Borrowing/Public Debt:
(i) This measure means that government should raise loans from public and hence borrowing decreases the purchasing
power of people by leaving them with lesser amount of money.
(ii) So, government should resort to more public borrowing during excessive demand.
(iii) Government should make long term debts more attractive so that public may use their excess liquidity amount of
money in purchasing these bonds, which will reduce the liquidity amount of money in the economy and thereby
inflation could be controlled
Deficient Demand And Its Related Concepts
1. Deficient Demand or Deflationary Gap:

(a) When in an economy, aggregate demand falls short of aggregate supply at full employment level,
the demand is said to be a deficient demand.
(b) Deflationary gap is the gap showing Demand

deficient of current aggregate demand over ‘aggregate supply at the level of full employment’. It is
called deflationary because it leads to deflation (continuous fall in prices).
(c) Let us suppose that an imaginary economy by employing all its available resources can produce
10,000 quintals of rice. If aggregate demand of rice is, say 8,000 quin tals, this demand will be called
a deficient demand and the gap of 2000 quintals will be called as deflationary gap. Clearly here
equilibrium between AD and AS is at a point less than level of full employment. Keynes called it an
under employment equilibrium.
2. Reasons or causes for deficient demand: The main reasons for deficient demand are
apparently the decrease in four components of aggregate demand:
(a) Decrease in household consumption demand due to fall in propensity to consume.
(b) Decrease in private investment demand because of fall in credit facilities.
(c) Decrease in public (government) expenditure.
(d) Decrease in export demand.
(e) Decrease in money supply or decrease in disposable income.
3. Impacts or effects of deficient demand:
(a) Effect on General Price Level: Deficient demand causes the general price level to fall because it
arises when aggregate demand is less than aggregate supply at full employment level. There is
deflation in an economy showing deflationary gap.
(b) Effect on Employment: Due to deficient demand, investment level is reduced, which causes
involuntary unemployment in the economy due to fall in the planned output.
(c) Effect on Output: Low level of investment and employment implies low level of output.
4. Measures to Control the deficient demand: We can control the deficient demand with the
help of the following policies:
(a) Monetary policy (b) Fiscal policy
Let us discuss it in detail:
(a) Monetary Policy: Monetary policy is the policy of the central bank of a country of controlling money
supply and availability of credit in the economy. The central bank takes the following steps:
(i) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy. These instruments do not
direct or restrict the flow of credit to some specific sectors of the economy. They are as under:
• Bank Rate or Discount Rate (Decrease in Bank Rate):
-> Bank rate is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan). The thing, which has to be remembered, is that central bank
lends to commercial banks and not to general public.
-> In a situation of deficient demand leading to deflation,
❖ Central bank decreases bank rate that encourages commercial banks in borrowing from central
bank as it will decrease the cost of borrowing of commercial bank.
❖ Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages
borrowers from taking loans, which encourages investment.
❖ Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
❖ Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
• Repo Rate (Decrease Repo Rate):
-> Repo rate is the rate at which commercial banks borrow money from the central bank for short
-> These securities are pledged as a security for the loans.
-> It is called Repurchase rate as this involves commercial bank selling securities to RBI to borrow the
money with an agreement to repurchase them at a later date and at a predetermined price.
-> So, keeping securities and borrowing is repo rate.
In a situation of deficient demand leading to deflation,
❖ Central bank decreases Repo rate that encourages commercial banks in borrowing from central
bank as it will decrease the cost of borrowing of commercial bank.
❖ Decrease in Repo rate makes commercial banks to decrease their lending rates, which
encourages borrowers from taking loans, which encourages investment.
❖ Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
❖ Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
• Reverse Repo Rate (Decrease Reverse Repo Rate):
-> It is the rate at which the central bank (RBI) borrows money from commercial bank.
-> In a situation of deficient demand leading to deflation, Reverse repo rate is decreased, it
discourages the commercial bank to park their funds with the central bank. It increases the lending
capability of commercial banks, which controls deficient demand.
• Open Market Operation (Purchase of Securities):
-> It consists of buying and selling of government securities and bonds in the open market by central
bank.
-> In a situation of deficient demand leading to deflation, central bank purchases government
securities and bonds from commercial bank. With the purchase of these securities, the power of
commercial bank of giving loans increases, which will control deficient demand.
• Decrease in Varying Reserve Requirements:
-> Banks are obliged to maintain reserves with the central bank, which is known as legal reserve
ratio. It has two components. One is the Cash Reserve Ratio or CRR and the other is the SLR or
Statutory Liquidity Ratio.
-> Cash Reserve Ratio (Decrease):
❖ It refers to the minimum percentage of a bank’s total deposits, which is required to keep with the
central bank. Commercial banks have to keep with the central bank a certain percentage of their
deposits in the form of cash reserves as a matter of law.
❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs. 100
crore, it will have to keep Rs.10 crore with the central bank.
❖ In a situation of deficient demand leading to deflation, cash reserve ratio (CRR) falls to 5 per cent,
the bank will have to keep Rs. 5 crore with the central bank, which will increase the cash resources of
commercial bank and increasing credit availability in the economy, which will control deficient
demand.
-> The Statutory Liquidity Ratio (SLR) (Increase):
❖ It refers to minimum percentage of net total demand and time liabilities, which commercial banks
are required to maintain with themselves.
❖ In a situation of deficient demand leading to deflation, the central bank decreases statutory liquidity
ratio (SLR), which will increase the cash resources of commercial bank and increases credit
availability in the economy.
(ii) Qualitative Instruments or Selective Tools of Monetary Policy: These
instruments are used to regulate the direction of credit. They are as under:
• Imposing margin requirement on secured loans( Decrease):
-> Business and traders get credit from commercial bank against the security of their goods. Bank
never gives credit equal to the full value of the security. It always pays less value than the security.
-> So, the difference between the value of security and value of loan is called marginal requirement.
-> In a situation of deficient demand leading to deflation, central bank decreases marginal
requirements. This encourages borrowing because it makes people get more credit against their
securities.
• Moral Suasion:
-> Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central
banks to commercial banks to cooperate with general monetary policy of the central bank.
> In a situation of deficient demand leading to deflation, it appeals for credit expansion.
• Selective Credit Controls (SCCs):
-> In this method the central bank can give directions to the commercial banks not to give credit for
certain purposes or to give more credit for particular purposes or to the priority sectors.
-> In a situation of deficient demand leading to deflation, the central bank withdraws rationing of credit
and make efforts to encourage credit.
2. Fiscal Policy: The expenditure and revenue policy taken by the general government to accomplish
the desired goals is known as fiscal policy. A general government has to take the following steps:
(a) Revenue Policy (Decrease in Taxes):
(i) Revenue policy is expressed in terms of taxes.
(ii) During deflation the government will impose lower amount of taxes so that purchasing power of
the people be increased.
(iii) It is so because to control deficient demand we have to increase the amount of liquidity in the
economy.
(b) Expenditure Policy (Increase in Expenditure):
(i) Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.
(ii) During deflation government should increase its expenditure on public works like roads, buildings,
irrigation works thereby increasing the money income of the people and their demand for goods and
services.
(c) Decrease in Public Borrowing / Public Debt:
(i) At the time of deficient demand public borrowing should be reduced.
(ii) People will have more money and more purchasing power.
(iii) In brief, during period of deficient demand government should adopt the pricing of deficit budget.
(iv) Old taken debts from public should be finished and paid back to increase money in the market.
Full Employment, Voluntary Unemployment And Involuntary Unemployment
1. Full employment:
(i) Full employment equilibrium refers to the situation where aggregate demand is equal to aggregate
supply, and all those who are able to work and willing to work (at the existing wage rate) are getting
work.
(ii) Full employment doesn’t means that there is no unemployment in an economy. Unemployment
also exists at full employment level because of voluntary unemployment.
2. Voluntary unemployment:
(i) Voluntary unemployment refers to the situation when a person is unemployed because he is not
willing to work at the existing wage rate, even when work is available.
(ii) Suppose, if the market wage rate for MBA in the industries is Rs.8,000 a month, but
some of the qualified MBA’s refuse to accept job at Rs.8,000 a month, they will be considered as
voluntarily unemployed.
3. Involuntary unemployment:
(i) Involuntary unemployment refers to a situation in which all able and willing persons to work at
existing wage-rate do not find work.
Words that Matter
1. Excess Demand: When in an economy, aggregate demand exceeds “aggregate supply at full
employment level”, the demand is said to be an excess demand.
2. Inflationary gap: It is the gap showing excess of current aggregate demand over ‘aggregate
supply at the level of full employment’. It is called inflationary because it leads to inflation (continuous
rise in prices).
3. Deficient demand: When in an economy, aggregate demand falls short of aggregate supply at full
employment level, the demand is said to be a deficient demand.
4. Deflationary gap: It is the gap showing deficient of current aggregate demand over ‘aggregate
supply at the level of full employment’. It is called deflationary because it leads to deflation
(continuous fall in prices).
5. Monetary policy: It is the policy of the central bank of a country to control money supply and
availability of credit in the economy.
6. Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy.
7. Qualitative Instruments or Selective Tools of Monetary Policy: These instruments are used to
regulate the direction of credit.
8. Bank rate: It is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan).
9. Repo rate: It is the rate at which commercial bank borrow money from the central bank for short
10. Reverse repo rate: It is the rate at which the central bank (RBI) borrows moneyfrom commercial
bank.
11. Open Market Operation: It consists of buying and selling of government securities and bonds in
the open market by central bank.
12. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is
required to keep with the central bank.
13. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time
liabilities, which commercial banks are required to maintain with themselves.
14. Marginal requirement: Business and traders get credit from commercial bank against the
security of their goods. Bank never gives credit equal to the full value of the security. It always pays
less value than the security. So, the difference between the value of security and value of loan is
called marginal requirement.
15. Moral suasion: It implies persuasion, request, informal suggestion, advice and appeal by the
central banks to commercial banks to cooperate with general monetary policy of the central bank
16. Selective credit control: In this method the central bank can give directions to the commercial
banks not to give credit for certain purposes or to give more credit for particular purposes or to the
priority sectors.
17. Fiscal policy: The expenditure and revenue policy taken by the general government to
accomplish the desired goals is known as fiscal policy.
18. Full employment equilibrium: It refers to the situation where aggregate demand is equal to
aggregate supply, and all those who are able to work and willing to work (at the existing wage rate)
are getting work.
19. Voluntary unemployment: It refers to the situation when a person is unemployed because he is
not willing to work at the existing wage rate, even when work is available.
20. Involuntary unemployment: It refers to a situation in which all able and willing persons to work
at existing wage-rate do not find work.
Government Budget and the Economy Chapter 8 Class 12
Introduction
This is a descriptive chapter on government budget of Indian economy, wherein its objectives,
importance, types, components, budget deficits and its types (Revenue, Fiscal, Primary Deficit) and
their implications are studied.
Chapter at a Glance
Government Budget And Its Related Concepts
1. A government budget is an annual financial statement showing item wise estimates of

expected revenue and anticipated expenditure during a fiscal year.
2. Budget has two parts:
(a) Receipts; and (b) Expenditure.
3. Objectives of budget:
(a) Activities to secure a reallocation of resources:
(i) Private enterprises always desire to allocate resources to those areas of production where profits
are high.
(ii) However, it is possible that such areas of production (like production of alcohol) may not promote
social welfare.
(iii) Through its budgetary policy the government of a country directs the allocation of resources in a
manner such that there is a balance between the goals of profit maximisation and social welfare.
(iv) Production of goods which are injurious to health (like cigarettes and whisky) is discouraged
through heavy taxation.
(v) On the other hand, production of “socially useful goods” (like electricity, ‘Khadi’) is encouraged
through subsidies.
(vi) So, finally government has to reallocate resources in accordance to social and economic
considerations in case the free market fails to do or does so inefficiently.
(b) Redistributive activities:
(i) Budget of a government shows its comprehensive exercise on the taxation and subsidies.
(ii) A government uses fiscal instruments of taxation and subsidies with a view of improving the
distribution of income and wealth in the economy.
(iii) A government reduces the inequality in the distribution of income and wealth by imposing taxes
on the rich and giving subsidies to the poor, or spending more on welfare of the poor.
(iv) It reduces income of the rich and raises the living standard of the poor, thus, leads to equitable
distribution of income.
(v) Expenditure on special anti poverty and employment schemes will be increased to bring more
people above poverty line.
(vi) Public distribution system should be inferred so that only the poor could get foodgrains and other
essential items at subsidised prices.
(vii) So finally, Equitable distribution of income and wealth is a sign of social justice which is the
principal objective of any welfare state in India.
(c) Stabilising activities:
(i) Free play of market forces (or the forces of supply and demand) are bound to generate trade
cycles, also called business cycles.
(ii) These refer to the phases of recession, depression, recovery and boom in the economy. (Hi) The
government of a country is always committed to save the economy from
business cycles. Budget is used as an important policy instrument to combat(solve) the situations of
deflation and inflation.
(iv) By doing it the government tries to achieve the state of economic stability.
(v) Economic stability leads to more investment and increases the rate of growth and development.
(d) Management of public enterprises:
(i) A government undertakes commercial activities that are of the nature of natural monopolies; and
which are established and managed for social welfare of the public.
(ii) A natural monopoly is a situation where there are economies of scale over a large range of output.
(iii) Industries which are potential natural monopolies are railways etc.
4. Importance of a budget:
(a) Today every country aims at its economic growth to improve living standard of its people. Besides,
there are many other problems such as poverty, unemployment, inequalities in incomes and wealth
etc. Government strives hard to solve these problems through budgetary measures.
(b) The budget shows the fiscal policy. Itemwise estimates of expenditure discloses how much and on
what items, the government is going to spend. Similarly, itemwise details of government receipts
indicate the sources from where the government intends to get money to finance the expenditure.
In this way budget is the most important instrument in hands of governments to achieve their
objectives and there lies the importance of the government budget. Note: Fiscal year is the year in
which country’s budgets are prepared. Its duration is from 1st April to 31st March.
5. Types of budget: It may be of two types:
(a) Balanced Budget (b) Unbalanced Budget
Let us discuss them in detail:
(a) Balanced Budget: If the government revenue is just equal to the government expenditure made by
the general government, then it is known as balanced budget.
(b) Unbalanced Budget: If the government expenditure is either more or less than a government
receipts, the budget is known as Unbalanced budget.
It may be of two types:
(i) Surplus budget (ii) Deficit budget
Let us discuss them in detail:
(i) Surplus Budget: If the revenue received by the general government is more in comparison to
expenditure, it is known as surplus budget.
In other words, surplus budget implies a situation where government income is in excess of
government expenditure.
(ii) Deficit Budget: If the expenditure made by the general government is more than the revenue
received, then it is known as deficit budget.
In other words, in deficit budget, government expenditure is in excess of government income.
Components Of Government Budget, Budget Receipts Its Types
1. Components of a government budget: Government budget, comprises of two parts—

(a) Revenue Budget and (b) Capital Budget.
(a) Revenue Budget: Revenue Budget contains both types of the revenue receipts of the
government, i.e., Tax revenue and Non tax revenue ; and the Revenue expenditure.
(i) Revenue Receipts: These are the receipts that neither create any liability nor reduction in assets of
the government. It includes tax revenues like income tax, corporation tax and non-tax revenue like
fines and penalties, special assessment, escheat etc.
(ii) Revenue Expenditure: An expenditure that neither creates any assets nor cause reduction of liability is called
revenue expenditure.
(b) Capital Budget: Capital budget contains capital receipts and capital expenditure of the government.
(i) Capital Receipts: Government receipts that either creates liabilities (of payment of loan) or reduce assets (on
disinvestment) are called capital receipts. Capital receipts include items, which are non-repetitive and non-
routine in nature.
(ii) Capital Expenditure: This expenditure of the government either creates physical or financial assets or
reduction of its liability. Acquisition of assets like land, machinery, equipment, its loans and advances to state
governments etc. are its examples.
2. Budget receipts (government receipt): Budget receipt refers to the estimated receipts of the government from
various sources during a fiscal year. It shows the sources from where the government intends to get money to
finance the expenditure. Budget receipts are of two types:
(a) Revenue receipts
(i) Meaning:
• Government receipts, which
-> Neither create any liabilities for the government; and
-> Nor cause any reduction in assets of the government, are called revenue receipts.
In revenue receipts both the conditions should be satisfied.

• Revenue receipts include items which are Repetitive and routine in nature.
(ii) Revenue receipts are further classified into:
• Tax Revenue:
-> Tax revenue refers to receipts from all kinds of taxes such as income tax, corporate tax, excise duty etc.
-> A tax is a legally compulsory payment imposed by the government on income and profit of persons and
companies without reference to any benefit. Taxes are of two types: Direct taxes and Indirect taxes.
• Non-Tax Revenue:
-> Non-tax revenue refers to government revenue from all sources other than taxes.
-> These are incomes, which the government gets by way of sale of goods and services rendered by different
government departments.
-> Components of Non-Tax Revenue:
♦ Commercial Revenue (Profit and interest):
♦ It is the revenue received by the government by selling the goods and services produced by the government
agencies.
♦ For example, profit of public sector undertakings like Railways, BHEL, LIC etc.
♦ Government gives loan to State Government, union territories, private enterprises and to general public and
earns interest receipts from these loans.
♦ It also includes interest and dividends on investments made by the government.
♦ Administrative Revenue: The revenue that arises on account of the administrative function of the government.
This includes:
♦ Fee: Fee refers to a payment made to the government for the services that it renders to the citizens. Such
services are generally in public interest and fees are paid by those, who receive such services. For example,
passport fees, court fees, school fees in government schools.
♦ License Fee: License fee is a payment to grant a permission by a government authority. For example,
registration fee for an automobile.
♦ Fines and penalties for an infringement of a law, i.e., they are imposed on law breakers.
♦ Special Assessment: Sometimes government undertakes developmental activities by which value of nearby
property appreciates, which leads to increase in wealth. So, it is the payment made by owners of those
properties whose value has appreciated. For example, if value of a property near a metro station has increased,
then a part of developmental expenditure made by government is recovered from owners of such property. This
is the value of special assessment.
♦ Forfeitures are in the form of penalties imposed by courts that a person needs to pay in the court of law for
failing to comply with court orders.
♦ Escheat refers to the claim of the government on the property of a person who dies without having any legal
heir or without leaving a will.
♦ External grants: Government receives financial help in the form of grants, gifts from foreign governments
and international organisations (IMF, World Bank). Such grants and gifts are received during national crisis
such as earthquakes, flood, war etc.
(b) Capital receipts:
(i) Meaning:
• Government receipts, that either creates liabilities (of payment of loan) or reduce assets (on disinvestment) are
called capital receipts.
In capital receipts any one of the conditions must be satisfied.
• Capital receipts include items which are non-repetitive and non-routine in nature,
(ii) Components:
• Borrowing (Domestic and External): Borrowings are made to meet the financial requirement of the country. A
government may borrow money:
-> Domestically: General Public (By issuing government bonds in the open market). Reserve Bank of India.
-> Externally: Rest of the world (foreign government and international institutions)
• Recovery of Loans and Advances: Loans offered to others are assets of the government. It includes recovery
of loans granted by the central government to state and union territory governments. It is a capital receipt
because it reduces financial assets of the government. For example, The Government of India may give Rs.
1000 crore as a loan to The Government of Delhi. Here the value of asset is Rs. 1000 crore. When The
Government of Delhi repaid Rs. 100 crore, the value of The Government of India assets reduces to Rs. 900
crore. Since, recovery of loan reduces the value of assets, it is termed as a capital receipts.
• Disinvestment: A government raises funds from disinvestment also. Disinvestment means selling whole or a
part of the shares (i.e., equity) of selected public sector enterprises held by government. As a result, government
assets are reduced.
Types Of Taxes:
1. Direct Taxes: When (a) liability to pay a tax (Impact of Tax), and (b) the burden of that tax
(Incidence of tax), falls on the same person, it is termed as direct tax. A direct tax is paid directly by
the same person on whom it has been levied. It means a tax in which impact and incidence of tax
falls on the same persons, then it is termed as direct tax. In other words, burden of a direct tax is
borne by the person on whom it is imposed which means the burden cannot be shifted to others.
Alternatively, the person from whom the tax is collected is also the person who bears the ultimate
burden of the tax. Income tax and corporate (profit) tax are most appropriate examples of direct tax.
2. Indirect Tax: When (a) liability to pay a tax (Impact of tax) is on one person; and
(b) the burden of that tax (Incidence of tax), falls on the other person, it is termed as indirect tax. It
means a tax in which impact and incidence of tax lie on two different persons, then it is termed as
indirect tax. In other words, indirect taxes are the taxes of whose burden can be shifted to others. In
case of an indirect tax, person first pays the tax but he is able to transfer the burden of the tax to
others. For instance, sales tax is an indirect tax because indirect tax is collected by government from
the seller of the commodity who in turn realizes the tax amount from the buyer by including it in the
price of the commodity. Other examples of indirect taxes are excise duty, custom duty, entertainment
tax, service tax etc.
3. Progressive Tax: A tax the rate of which increases with the increase in income and decreases
with the fall in income is called a progressive tax. The higher is the income of a taxpayer, the higher is
proportionate tax he pays. For example, in India income tax is considered a progressive tax because
its rate goes on increasing with the increase in annual income. For example, presently (2012-2013)
there is no tax up to annual income of Rs. 2,00,000 but the.rate of income tax increases with the
increase in incomes. It is 10% on incomes between Rs. 2,00,000 and Rs. 5,00,000; 20% on incomes
between Rs. 5,00,000 and Rs.10,00,000 and 30% on incomes above Rs. 10,00,000.
4. Proportional Taxation: A tax is called proportional when the rate of taxation remains constant as
the income of the taxpayer increases.
Example: If tax rate is 10% and the annual income of a person is Rs. 2,00,000, then he will have to
pay Rs. 20,000 per year as tax. If income rises to Rs. 3,00,000 per annum, then the tax liability will
rise to Rs. 30,000 per year. In this case, burden of tax is more on the poor section as compared to
rich section.
5. Regressive Tax: In a regressive tax system, the rate of tax falls as the tax base increases.
In this case, we find that (a) the amount of tax to be paid increases, and (b) the rate at which tax is to
be paid falls.
Budget Expenditure & Its Related Concepts
1. Meaning: Budget expenditure refers to the estimated expenditure of the government on its
“development and non-development programmes or “plan and non-plan programmes during the fiscal
year.
2. Types:
(a) Plan and non-plan expenditure
(b) Revenue and capital expenditure
(c) Developmental and non-developmental Expenditure
(a) Plan and non-plan expenditure:
(i) Plan Expenditure: Plan expenditure refers to that expenditure which is incurred by the government
to fulfill its planned development programmes. This includes both consumption and investment
expenditure by the government or Planning Commission of a country. Expenditure on agriculture,
industry, public utilities, health and education etc. are examples of plan expenditure.
(ii) Non-Plan Expenditure: This refers to all such government expenditures which are beyond the
scope of its planned development programmes. For instance, no government can escape from its
basic function of protecting the lives and properties of the people. For this government has to spend
on police, judiciary, military etc. In short, expenditure other than expenditure related to current Five-
year plan is treated as non-plan expenditure.
(b) Revenue and capital expenditure:
(i) Revenue Expenditure: An expenditure that (a) Neither creates any assets (b) nor causes any
reduction of liability.
In revenue expenditure both the conditions should be satisfied.
Examples of revenue expenditure are: salaries of government employees, interest : payment on loans
taken by the government, pensions etc.
(ii) Capital Expenditure: An expenditure that either create assets for the government [equity or
shares) of the domestic, or multinational corporations purchased by the government), or cause
reduction in liabilities of the government, [repayment of loans reduces liability of the government).
In capital expenditure any one of the above conditions must be satisfied.
Thus, it refers to expenditure that leads to creation of assets and reduction in liabilities. Such
expenditure is incurred on long period development.
Conclusion: A basic difference between capital expenditure and revenue expenditure is that the
capital expenditure is incurred on creation or acquisition of assets, whereas, the revenue expenditure
is incurred on rendering services.
For example: Expenditure on construction of a hospital building is capital expenditure, but
expenditure on medicines, salaries of doctors etc. for rendering services by the hospital is revenue
expenditure.
(c) Developmental and non-developmental Expenditure:
(i) Developmental Expenditure: Developmental expenditure is the expenditure on activities which are
directly related to economic and social development of the country. This includes expenditure on
education, health, agriculture, transport, roads, rural development etc. This also includes loans given
by the government to enterprises like Sahara for the purpose of development.
(ii) Non-developmental Expenditure: Non-developmental expenditure of the
government is the expenditure on the essential general services of the government. This includes
expenditure on defence, payment of old age pension, collection of taxes, interest on loans, subsidies
etc.
Deficits And Implications Of These Deficits
1. Budget deficit:
(a) Meaning:
(i) Budgetary deficit refers to the excess of total budgeted expenditure (both revenue expenditure and
capital expenditure) over total budgetary receipts (both revenue receipt and capital receipt).
(ii) In other words, when sum of revenue receipts and capital receipts fall short of the sum of revenue
expenditure and capital expenditure, budgetary deficit is said to occur. Symbolically,
Budgetary Deficit = Total Expenditure – Total Receipts
(b) Types:
(i) Revenue deficit, (ii) Fiscal deficit and (iii) Primary deficit
2. Revenue deficit:
(a) Meaning:
(i) Revenue deficit refers to the excess of revenue expenditure of the government over its revenue
receipts. Symbolically,
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts
(ii) The government of India budget for the year 2012-2013, total expenditure is Rs. 12,42,263 crore
against total revenue receipts of Rs. 8,78,804 crore. As a result there is revenue deficit of Rs.
3,63,459 (12,42,263-8,78,804) crore, which is 3.6% of GDP.
(b) Implications of revenue deficit:
(i) Revenue deficit indicates dis-savings on government account because the government has to
make up uncovered gap.
(ii) Revenue deficit implies that the government has to cover this uncovered gap by drawing upon
capital receipts either through borrowing or through sale of its assets.
(iii) Since government is using capital receipts to generally meet consumption expenditure of the
government, it leads to an inflationary situation in the economy.
(c) Measures to reduce revenue deficit are:
(i) Government should reduce its unproductive or unnecessary expenditure.
(ii) Government should increase its receipts from various sources of tax and non-tax revenue.
3. Fiscal deficit:
(a) Meaning:
(i) Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital
receipts) excluding borrowing. In the form of an equation:
(ii) Fiscal deficit is a measure of total borrowings required by the government.
(iii) Fiscal deficit indicates capacity of a country to borrow in relation to what it produces. In other
words, it shows the extent of government dependence on borrowing to meet its budget expenditure.
(iv) Another point to be noted here is that as the government borrowing increases, its liability in future
to repay loan with interest also increases leading to a higher revenue deficit. Therefore, fiscal deficit
should be as low as possible.
(v) Fiscal deficit for the year 2012-2013 is 4,89,890 crore which is 4.9% of GDP.
(b) Implications of fiscal deficit:
(i) Causes Inflation: An important component of government borrowing includes borrowing from the
Reserve Bank of India. This invariably implies deficit financing or meeting deficit requirements of the
government by way of printing more currency. This is a dangerous practice, though very convenient
for the government. It increases circulation of money and causes inflation.
(ii) Increase in Foreign Dependence: Government also borrows from rest of the world. It increases our
dependence on other countries. Foreign borrowing is often associated with economic and political
interference by the lender countries. It increases our economic slavery.
(iii) Financial Burden for Future Generation: Borrowing implies accumulation of financial burdens for
the future generations. It is for future generations to repay loans as well as the mounting interest
thereon.
(iv) Deficits Multiply Borrowings: Payment of interest increases revenue expenditure of the
government, causing an increase in its revenue deficit. Thus, a vicious circle is set wherein the
government takes more loans to repay earlier loans, which is called Debt Trap.
4. Primary deficit:
(a) Meaning:
(i) Primary deficit is defined as fiscal deficit minus interest payments.
Primary Deficit = Fiscal Deficit – Interest Payments
(ii) The government of India budget for the year 2012-2013, fiscal deficit is 4,89,890 crore and Interest
Payment is 3,11,996 crore. As a result, primary deficit is 1,77,894 crore, which is 1.8% of GDP.
(b) Implications of primary deficit: While fiscal deficit shows borrowing requirement of the government
for financing the expenditure inclusive of interest payments, primary deficit reflects the borrowing
requirements of the government for meeting expenditures other than interest payments on earlier
loans.
Words that Matter
1. Government Budget: A government budget is an annual financial statement showing itemwise

estimates of expected revenue and anticipated expenditure during a fiscal year.
2. Balanced Budget: If the government revenue is just equal to the government expenditure made
by the general government, then it is known as balanced budget.
3. Unbalanced budget: If the government expenditure is either more or less than a government
receipts, the budget is known as Unbalanced budget.
4. Surplus Budget: If the revenue received by the general government is more in comparison to
expenditure, it is known as surplus budget.
5. Deficit Budget: If the expenditure made by the general government is more than the revenue
received, then it is known as deficit budget.
6. Budget receipt: It refers to the estimated receipts of the government from various sources during
a fiscal year.
7. Budget expenditure: It refers to the estimated expenditure of the government on its “development
and non-development programmes or “plan and non-plan programmes during the fiscal year.
8. Revenue Budget: Revenue Budget contains both types of the revenue receipts of the
government, i.e., Tax revenue and Non tax revenue ; and the Revenue expenditure.
9. Revenue Receipts: Government receipts, which
(a) Neither create any liabilities for the government; and
(b) Nor cause any reduction in assets of the government, are called revenue receipts.
10. Tax Revenue: Tax revenue refers to receipts from all kinds of taxes such as income tax,
corporate tax, excise duty etc.
11. Tax: A tax is a legally compulsory payment imposed by the government on income and
profit of persons and companies without reference to any benefit.
12. Non-tax revenue: It refers to government revenue from all sources other than taxes called non-
tax revenue.
13. Revenue Expenditure: An expenditure that (a) Neither creates any assets (b) nor causes any
reduction of liability.
14. Capital Budget: Capital budget contains capital receipts and capital expenditure of the
government.
15. Capital Receipts: Government receipts that either creates liabilities (of payment of loan) or
reduce assets (on disinvestment) are called capital receipts.
16. Capital Expenditure: Government expenditure of the government which either creates physical
or financial assets or reduction of its liability.
17. Direct Tax: When (a) liability to pay a tax (Impact of Tax), and (b) the burden of that tax
(Incidence of tax), falls on the same person, it is termed as direct tax.
18. Indirect Tax: When (a) liability to pay a tax (Impact of tax) is on one person; and (b) the burden of
that tax (Incidence of tax), falls on the other person, it is termed as indirect tax.
19. Progressive Tax: A tax the rate of which increases with the increase in income and decreases
with the fall in income is called a progressive tax.
20. Proportional Taxation: A tax is called proportional when the rate of taxation remains constant as
the income of the taxpayer increases.
21. Regressive Tax: In a regressive tax system, the rate of tax falls as the tax base increases.
22. Plan expenditure: It refers to that expenditure which is incurred by the government to fulfill its
planned development programmes.
23. Non-Plan Expenditure: This refers to all such government expenditures which are beyond the
scope of its planned development programmes.
24. Developmental Expenditure: Developmental expenditure is the expenditure on activities which
are directly related to economic and social development of the country.
25. Non-developmental expenditure: Non-developmental expenditure of the government is the
expenditure on the essential general services of the government.
26. Budgetary deficit: It refers to the excess of total budgeted expenditure (both revenue
expenditure and capital expenditure) over total budgetary receipts (both revenue receipt and capital
receipt).
27. Revenue Deficit: Revenue deficit refers to the excess of revenue expenditure of the government
over its revenue receipts.
28. Fiscal deficit: It is defined as excess of total expenditure over total receipts (revenue and capital
receipts) excluding borrowing. Fiscal deficit indicates capacity of a country to borrow in relation to
what it produces. In other words, it shows the extent of government dependence on borrowing to
meet its budget expenditure.
29. Debt Trap: A vicious circle set wherein the government takes more loans to repay earlier loans,
which is called Debt Trap.
30. Primary deficit: It is defined as fiscal deficit minus interest payments.
Foreign Exchange Rate Chapter 9 Class 12
Introduction
This chapter defines the meaning of foreign exchange and related terms, how foreign exchange rate
is determined, study of foreign exchange rate regimes (fixed and flexible exchange rate) and their
differences; thereafter hybrid systems of exchange rate and operation of foreign exchange market.
Foreign Exchange And Its Related Concepts
1. Foreign exchange refers to all the currencies of the rest of the world other than the domestic
currency of the country. For example, in India, US dollar is the foreign exchange.
2. The rate at which one currency is exchanged for another is called Foreign Exchange Rate.
In other words, the foreign exchange rate is the price of one currency stated in terms of another currency. For example,
if one U.S dollar exchanges for 60 Indian rupees, then the rate of exchange is 1$ = Rs. 60 or 1 Rs = 1/60 or 0.0166 U.S.
dollar.
3. Foreign exchange market is the market where the national currencies are converted, exchanged or traded for one
another.
4. Functions of a foreign exchange market
(a) Transfer Function: Transfer function refers to transferring of purchasing power
among countries.
(b) Credit Function: It implies provision of credit in terms of foreign exchange for the export and import of goods and
services across different countries of the world.
(c) Hedging Function: Hedging function pertains to protecting against foreign exchange risks. Where Hedging is an
activity which is designed to minimize the risk of loss.
5. Sources of demand of foreign exchange:
The demand (or outflow) of foreign exchange comes from the people who need it to make payments in foreign
currencies. It is demanded by the domestic residents for the following reasons:
(a) Imports of Goods and Services: When India imports goods and services, foreign exchange is demanded to make the
payment for imports of goods and services.
(b) Tourism: Foreign exchange is demanded to meet expenditure incurred in foreign tours.
(c) Unilateral Transfers Sent Abroad: Foreign exchange is required for making unilateral transfers like sending gifts to
other countries.
(d) Purchase of Assets in Foreign Countries: It is demanded to make payment for purchase of assets, like land, shares,
bonds, etc. in foreign countries.
(e) Repayment of loans to Foreigners: As and when we have to pay interest and repay the loans to foreign lenders, we
require foreign exchange.
(d) Speculation: Demand for foreign exchange arises when people want to make gains from appreciation of currency.
6. Reasons for ‘Rise in Demand’ for Foreign Currency:
The demand for foreign currency rises in the following situations:

(a) When price of a foreign currency falls, imports from that foreign country become cheaper. So, imports increase and
hence, the demand for foreign currency rises. For example, if price of 1 US dollar falls from Rs. 60 to Rs. 55, then imports
from the USA will increase as American goods will become relatively cheaper. It will raise the demand for US dollar.
(b) When a foreign currency becomes cheaper in terms of the domestic currency, it promotes tourism to that country.
As a result, demand for foreign currency rises.
(c) When price of a foreign currency falls, its demand rises as more people want to make gains from speculative
activities.
7. Demand curve of foreign exchange is downward sloping:
(a) Demand curve of foreign exchange slopes downwards due to inverse relationship between demand for foreign
exchange and foreign exchange rate.
(b) In figure, demand for foreign exchange (US dollar) and rate of foreign exchange are shown on the horizontal axis and
vertical axis respectively.
(c) The demand curve [US$] is downward sloping. It means that less foreign exchange is demanded as the exchange rate
increase
(d) This is due to the fact that rise in the price of foreign exchange increases the rupee cost of foreign goods, which make
them more expensive. As a result, imports decline. Thus, the demand for foreign exchange also decreases.
8. Sources of supply of foreign exchange: The supply (inflow) of foreign exchange comes from the people who receive it
due to the following reasons.
(a) Exports of Goods and Services: Supply of foreign exchange comes through exports of goods and services.
(b) Tourism: The amount, which foreigners spend in the home country, increases the supply of foreign exchange.
(c) Remittances (unilateral transfers) from Abroad: Supply of foreign exchange increases in the form of gifts and other
remittances from abroad.
(d) Loan from Rest of the world: It refers to borrowing from abroad. A loan from U.S. means flow of U.S. $ from U.S. to
India, which will increase supply of Foreign exchange.
(e) Foreign Investment: The amount, which foreigners invest in our home country, increases the supply of foreign
exchange.
(f) Speculation: Supply of foreign exchange comes from those who want to speculate on the value of foreign exchange.
9. Reasons of‘rise in supply’ of foreign currency: The supply of foreign currency rises in the following situations:
(a) When price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign country to
increase their imports from the domestic country. As a result, supply of foreign currency rises. For example, if price of 1
US dollar rises from Rs. 60 to Rs. 65, then exports to USA will increase as Indian goods will become relatively cheaper. It
will raise the supply of US dollars.
(b) When price of a foreign currency rises, foreign direct investment (FDI). from rest of the world increases, which will
increase the supply for foreign exchange.
(c) When price of a foreign currency rises, supply of foreign currency also rises as people want to make gains from
speculative activities.
10. Supply curve of foreign exchange is upward sloping:
(a) Supply curve of foreign exchange slopes upwards due to positive relationship between supply for foreign exchange
and foreign exchange rate, which means that supply of foreign exchange increases as the exchange rate increases.
(b) This makes home country’s goods become cheaper to foreigners since rupee is depreciating in value. The demand for
our exports should therefore increase as the exchange rate increases.
(c) The increased demand for our exports will translate into greater supply of foreign exchange.
Thus, the supply of foreign exchange increases as the exchange rate increases.
How Foreign Exchange Is Determine, Disequilibrium Conditions Under Exchange Rate
1. Determination of foreign exchange rate:

(a) Exchange rate in a free exchange market is determined at a point, where demand for foreign
exchange is equal to the supply of foreign exchange.
(b) Let us assume that there are two countries – India and U.S.A – and the exchange rate of their
currencies i.e., rupee and dollar is to be determined. Presently, there is floating or flexible exchange
regime in both India and U.S.A. Therefore, the value of currency of each country in terms of the other
currency depends upon the demand for and supply of their currencies.
(c) In the above diagram, the price on the vertical axis is stated in terms of domestic currency (that is,
how many rupees for one US dollar). The horizontal axis measures the quantity demanded or
supplied.
(d) In the above diagram, the demand curve [D$] is downward sloping. This means that less foreign
exchange is demanded as the exchange rate increases. This is due to the fact that the rise in price of
foreign exchange increases the rupee cost of foreign goods, which make them more expensive. As a
result, imports decline. Thus, the demand for foreign exchange also decreases.
(e) The supply curve [S$] is upward sloping which means that supply of foreign exchange increases
as the exchange rate increases.
This makes home country’s goods become cheaper to foreigners since rupee is depreciating in value.
The demand for our exports should therefore increase as the exchange rate increases.
The increased demand for our exports translates into greater supply of foreign exchange. Thus, the
supply of foreign exchange increases as the exchange rate increases.
2. Disequilibrium conditions under equilibriun exchange rate:
(a)Change in demand:
(i) Increase in demand for dollar: An increase in the demand for US dollar in India will cause the
demand curve to shift to D1$ and the exchange rate rises to P1$. Note that increase in the exchange
rate means that more rupees are required to buy one US dollar. When this occurs, Indian rupee is
said to be depreciating.
(b) Change in Supply

(i) Increase in supply for dollar: An increase in the supply of US dollar causes the supply curve to shift
to S1$ and exchange rate falls to P1$. In this case, rupee cost of US dollar is decreasing and the
Indian rupee is said to be appreciating.
(ii) Decrease in demand for dollar: A decrease in the demand for US dollar in India will cause the
demand curve to shift to D1$ and the exchange rate falls to P1$. Note that decrease in the exchange
rate means that less rupees are required to buy one US dollar. When this occurs, Indian rupee is said
to be appreciating.
(ii) Decrease in supply of dollar: A decrease in the supply of US dollar causes the supply curve to shift
to S1$ and exchange rate rises to P1$. In this case, rupee cost of US dollar is increasing and the
Indian rupee is said to be depreciating.
Exchange Rate Regimes (Fixed, Flexible And Managed Floating Exchange Rate And Their
Merits And Demerits)
Types of exchange rate regimes:

1. Fixed exchange rate system (Pegged exchange rate system):
(a) Meaning:
(i) The system of exchange rate in which exchange rate is officially declared and fixed by the
government is called fixed exchange rate system.
(ii) When domestic currency is tied to the value of foreign currency, it is known as
pegging.
(iii) To maintain stability in fixed exchange rate system, government buy foreign currency when
exchange rate appreciates and sell foreign currency when exchange rate depreciate. This process is
called Pegging operation, i.e., all efforts made by the central bank to keep the rate of exchange
stable.
Note:
(i) Fixed exchange rate is not determined by the forces of demand and supply in the market. Such a
rate of exchange has been associated with Gold Standard System during 1880-1914.
(ii) According to this system, value of every currency is determined in terms of gold. Accordingly, ratio
between gold value of the two countries was fixed as exchange rate between those currencies.
(iii) For example, Value of one dollar = 100 gms of gold.
Value of a rupee = 5 gms of gold
Then, 1 dollar = 100/5 = Rs. 20
(b) Merits of fixed exchange rate system:
(i) Stability: It ensures stability, in the international money market/exchange market. Day to day
fluctuations are avoided. It helps formulation of long term economic policies, particularly relating to
exports and imports.
(ii) Encourages international trade: Fixed exchange rate system implies low risk and low uncertainty
of future payments. It encourages international trade.
(iii) Co-ordination of macro policies: Fixed exchange rate helps co-ordination of macro policies across
different countries of the world. Long term economic policies can be drawn in the area of international
trade and bilateral trade agreements.
(c) Demerits of fixed exchange rate system:
(i) Huge international reserves: Fixed exchange rate system is often supported with huge international
reserves of gold. This is because different currencies are directly or indirectly convertible into gold.
(ii) Restricted movement of capital: Fixed exchange rate restricts the movement
of capital across different parts of the world. Accordingly, international growth process suffers. .v
(iii) Discourages venture capital: Venture capital in the international money market refers to
investments in the purchase of foreign exchange in the international money market with a view to
earn profits. Fixed exchange rate system discourages such investments. Fixed exchange rate
discourages venture capital in the international money market.
(d) Devaluation of currency: Devaluation refers to decrease in the value of domestic
currency in terms of foreign currency by the government. It is a part of fixed
exchange rate.
(e) Revaluation of currency: Revaluation refers to increase in the value of domestic
currency by the central government. It is a part of fixed exchange rate.
2. Flexible exchange rate (floating exchange rate system):
(a) Meaning:
(i) The system of exchange rate in which value of a currency is allowed to float freely as determined
by demand for and supply of foreign exchange is called flexible exchange rate system.
(ii) Under this system, the central banks, without intervention, allow the exchange rate to adjust to
equate the supply and demand for foreign currency.
(iii) The foreign exchange market is busy at all times by changes in the exchange rates.
(b) Merits of flexible exchange rate system:
(i) No need for international reserves: Flexible exchange rate system is not to be supported with
international reserves.
(ii) International capital movements: Flexible exchange rate system enhances movement of capital
across different countries of the world. This is due to the fact that member countries are no longer
required to keep huge international reserves.
(iii) Venture capital: Flexible exchange rate promotes venture capital in foreign exchange market.
Trading in international currencies itself becomes an important economic activity.
(c) Demerits of flexible exchange rate system:
(i) Instability: It causes instability in the international money market. Exchange rate tends to fluctuate
like price of goods in the commodity market.
(ii) International trade: Instability in foreign exchange market causes instability in the area of
international trade. It becomes difficult to draw long period policies of exports and imports.
(iii) Macro policies: While fixed exchange rate helps coordination of macro policies, flexible exchange
rate makes it a difficult proposition. Day to day fluctuations in exchange rate makes bilateral trade
agreements a difficult exercise.
(d) Currency depreciation:
(i) Currency depreciation refers to decrease in the value of domestic currency in terms of foreign
currency. It makes the domestic currency less valuable and more of it is required to buy a foreign
currency. It is a part of flexible exchange rate.
(ii) For example, rupee is said to be depreciating if price of $1 rises from ? 60 to Rs. 65.
(iii) Effect of depreciation of domestic currency on exports: Depreciation of domestic currency means
a fall in the price of domestic currency (say, rupee) in terms of a foreign currency (say, $). It means,
with the same amount of dollars, more goods can be purchased from India, i.e., exports to USA will
increase as they will become relatively cheaper.
(e) Currency appreciation:
(i) Currency appreciation refers to increase in the value of domestic currency in terms of foreign
currency. The domestic currency becomes more valuable and less of it is required to buy a-foreign
(ii) For example, Indian rupee appreciates when price of $1 falls from Rs. 60 to Rs. 55.
(iii) Effect of appreciation of domestic currency on imports: Appreciation of domestic currency means
a rise in the price of domestic currency (say, rupee) in terms of a foreign currency (say, $). Now, one
rupee can be exchanged for more $, i.e., with the same amount of money, more goods can be
purchased from the USA. It leads to increase in imports from the USA as American goods will
become relatively cheaper.
3. Managed floating rate system:
(a) Managed floating exchange rate is a mixture of a flexible exchange rate (the float part) and a fixed
exchange rate (the Managed part).
(b) In other words, it refers to a system in which foreign exchange is determined by free market forces
(demand and supply forces), which can be influenced by the intervention of the central bank in foreign
exchange market.
(c) Under this system, also called Dirty floating, central banks intervene to buy or sell foreign
currencies in an attempt to stabilize exchange rate movements in case of extreme appreciation or
depreciation.
Kinds Of Foreign Exchange Rate (Spot And Forward Market)
1. Spot market for foreign exchange:

(a) If the operation is of daily nature, it is called spot market or current market.
(b) The exchange rate that prevails in the spots market for foreign exchange is called spot rate.
(c) In other words, spot rate of exchange refers to the rate at which foreign currency is available on
the spot.
2. Forward market for foreign exchange:
(a) A market for foreign exchange for future delivery is known as forward market.
(b) Exchange rate that prevails in a forward contract for purchase or sale of foreign exchange is
called forward rate.
(c) Thus, forward rate is the rate at which a future contract for foreign currency is bought and sold.
Other Types Of Exchange Rate System
1. Wider band System:

(a) It is a system that allows wider adjustment in the fixed exchange rate system.
(b) It allows adjustment upto 10% around the “parity” between any two currencies in the
internationahmoney market.
(c) For example, if one US dollar is fixed as equal to fifty Indian rupees, 10% revision (upward or
downward) is to be allowed in this exchange rate of 1: 50. Exchange rate may be revised as,
1: 60 + 10% = 1: 66 or as 1: 60 – 10% = 1 : 54
2. Crawling peg system:
(a) It allows “small” but regular adjustments in the exchange rate for different currencies.
(b) Not more than (+) 1% adjustment is allowed at a time. Indeed, it is a small adjustment.
(c) But it can crawl, i.e., it can be repeated at regular intervals.
Some Important Terms
1. Nominal exchange rate (NER): The number of units of domestic currency required to purchase a
unit of foreign currency is called nominal exchange rate. Thus, $1 = Rs. 60. It may move to $1 = Rs.
65, and so on.
2. Nominal effective exchange rate (NEER):
(a) The concept is useful for an aggregative analysis. A nation has to deal with a number of countries,
and hence a number of currencies.
(b) For example, during a period Indian rupee may be losing value against the American dollar, but it
may be gaining value against Euro.
(c) Therefore, we would be interested in knowing what is happening in aggregate to our rupee i.e., is
it gaining or losing.
(d) For this purpose, we prepare a basket of all the currencies which we are interested in, and find out
the average of the changes in these currencies in a given period. This gives us the nominal effective
exchange rate (NEER).
(e) So, finally NEER is the measure of average relative strength of a given currency with respect to
other currencies without eliminating the effect of change in price.
3. Real exchange rate (RER): RER is the exchange rate which is calculated after eliminating the
effects of price change. Therefore, RER is based on constant prices.
4. Real effective exchange rate (REER): REER is the measure of average relative strength of a
given currency with respect to other currencies after eliminating the effects of price change.
5. Parity value: In the context of exchange rate in foreign exchange market, parity value refers to the
value of one currency in terms of the other for a given basket of goods and services. If a U.S. dollar
buys 50 times the goods and services in India, compared to a rupee, the parity value of a US dollar
should be 50 : 1. Accordingly, the exchange rate between rupee and a US dollar ought to be Rs. 50 :
1$. Any change in the parity value would imply a corresponding change in exchange rate.
Words that Matter
1. Foreign exchange: It refers to all the currencies of the rest of the world other than the domestic
currency of the country. For example, in India, US dollar is the foreign exchange.
2. Foreign Exchange Rate: The rate at which one currency is exchanged for another is called
Foreign Exchange Rate.
3. Foreign exchange market: It is the market where the national currencies are converted,
exchanged or traded for one another.
4. Hedging function: Hedging function pertains to protecting against foreign exchange risks, where
Hedging is an activity which is designed to minimize the risk of loss.
5. Fixed exchange rate system: The system of exchange rate in which exchange rate is officially
declared and fixed by the government is called fixed exchange rate system.
6. Pegging: When domestic currency is tied to the value of foreign currency, it is known as pegging.
7. Pegging operations: It refers to all efforts made by the central government to keep the rate of
exchange stable.
8. Venture capital: Venture capital in the international money market refers to investments in the
purchase of foreign exchange in the international money market with a view to earn profits.
9. Devaluation: It refers to decrease in the value of domestic currency in terms of foreign currency by
the government. It is a part of fixed exchange rate.
10. Revaluation: It refers to increase in the value of domestic currency by the central government. It
is a part of fixed exchange rate.
11. Flexible Exchange Rate: The system of exchange rate in which value of a currency is allowed to
float freely as determined by demand for and supply of foreign exchange is called flexible exchange
rate system.
12. Currency depreciation: It refers to decrease in the value of domestic currency in terms of foreign
currency. It makes the domestic currency less valuable and more of it is required to buy a foreign
13. Currency appreciation: It refers to increase in the value of domestic currency in terms of foreign
currency. The domestic currency becomes more valuable and less of it is required to buy a foreign
14. Managed floating exchange rate: It is a mixture of a flexible exchange rate (the float part) and a
fixed exchange rate) the Managed part).
15.Spot Rate: If the operation is of daily nature, it is called spot market or current market.
16. Forward Rate: A market for foreign exchange for future delivery is known as forward market.
17. Nominal Exchange Rate (NER): The number of units of domestic currency required to purchase
a unit of foreign currency is called nominal exchange rate.
18. Nominal Effective Exchange Rate (NEER): It is the measure of average relative strength of a
given currency with respect to other currencies without eliminating the effect of change in price.
19. Real Exchange Rate (RER): It is the exchange rate which is calculated after eliminating the
effects of price change. Therefore, RER is based on constant prices.
20. Real Effective Exchange Rate (REER): It is the measure of average relative strength of a given
currency with respect to other currencies after eliminating the effects of price changes.
21. Parity value: It refers to the value of one currency in terms of the other for a given basket of
goods and services.
Balance of Payment Chapter 10 Class 12
Introduction
This chapter gives a detailed account of balance of payment of an economy, it structure and
categorisation into current and capital account. Thereafter explaining balance of trade and its
differences with the balance of payment, autonomous items, accommodating items and their
differences, disequilibrium in balance of payment.
Balance Of Payment, Its Structure And Components
1. The balance of payments of a country is a systematic record of all economic transactions

between its residents and residents of the foreign countries during a given period of time.
Note: Economic transactions are the transactions which cause transfer of value. In the context of
foreign transactions value is transferred by the residents of one country to the residents of other
country. Example: when exports of goods or services are made by country A to country B, value (=
export receipts) is transferred by country B to country A. Between the countries, value is transferred
in terms of foreign exchange (i.e. payments are received and made in terms of foreign exchange).
2. Structure of balance payment accounting
(a) Transactions are recorded in the balance of payments accounts in double-entry book keeping.
(b) Each international transaction undertaken by country will results in a credit entry and debit entry of
equal size.
(c) As international transactions are recorded in double entry accounting, the BOP accounting must
always balance i.e., total amount of debits must be equal to total amount of credits.
(d) The balancing item Errors and omissions must be added to “balance” the BOP accounts.
(e) By convension, debit items and credit items are entered with a minus sign and plus sign
respectively.
(f) Transactions in BOP are classified into the following five major categories:
(i) Goods and services account (ii) Unilateral transfer account
(iii) Long-term capital account (iv) Short-term private capital account
(v) Short-term official capital account
For each of these given categories, specific types of transactions are shown as debits or credits. This
is shown in below table:
The above five categories are also divided into the following two major categories of accounts in the
BOP account statement:
3. Current Account (Category-I, Category-II):
(a) Meaning: Current account records imports and exports of goods and services and unilateral
transfers.
(b) Components of Current Account: The main components of Current Account are:
(i) Export and Import of Goods (Merchandise Transactions or Visible Trade):
A major part of transactions in foreign trade is in the form of export and import of goods (visible
items). Payment for import of goods is written on the negative side (debit items) and receipt from
exports is shown on the positive side (credit items). Balance of these visible exports and imports is
known as balance of trade (or trade balance).
(ii) Export and Import of Services (Invisible Trade): It includes a large variety of non-factor services
(known as invisible items) sold and purchased by the residents of a country, to and from the rest of
the world. Payments are either received or made to the other countries for use of these services.
Services are generally of three kinds: (a) Shipping, (b) Banking, and (c) Insurance. Payments for
these services are recorded on the negative side and receipts on the positive side.
(iii) Unilateral or Unrequisted Transfers to and from abroad (One sided Trans¬actions): Unilateral
transfers include gifts, donations, personal remittances and other ‘oneway’ transactions. These refer
to those receipts and payments, which take place without any service in return. Receipt of unilateral
transfers from rest of the world is shown on the credit side and unilateral transfers to rest of the world
on the debit side.
(iv) Income receipts and payments to and from abroad: It includes investment income in the form of
interest, rent and profits.
4. Capital Account (Category-Ill, Category-IV, Category-V):
(a) Meaning: Capital account is that account which records all such transactions between residents
of a country and rest of the world which cause a change in the asset or liability status of the residents
of a country or its government.
(b) Components of Capital Account: The main components of capital account are:
(i) Loans: Borrowing and lending of funds are divided into two transactions:
• Private Transactions
-> These are transactions that are affecting assets or liabilities by individuals, businesses, etc. and
other non-government entities. The bulk of foreign investment is private.
-> For example, all transactions relating to borrowings from abroad by private sector and similarly
repayment of loans by foreigners are recorded on the positive (credit) side.
-> All transactions of lending to abroad by private sector and similarly repayment of loans to abroad
by private sector is recorded as negative or debit item.
• Official Transactions
-> Transactions affecting assets and liabilities by the government and its agencies.
-> For example, all transactions relating to borrowings from abroad by government sector and
similarly repayment of loans by foreign government are recorded on the positive (credit) side.
-> All transactions of lending to abroad by government sector and similarly repayment of loans to
abroad by government sector is recorded as negative or debit item.
Private and official transactions borrowing are of two components:
(i) Commercial borrowings, referring to borrowing by a country (including government and private
sector) from international money market. This involves market rate of interest without considerations
of any concession, (ii) Borrowings as External Assistance, referring to borrowing by a country with
considerations of assistance. It involves lower rate of interest compared to that prevailing in open
market.
(ii) Foreign Investment (Investments to and from abroad): It includes:
• Investments by rest of the world in shares of Indian companies, real estate in India, etc. Such
investments from abroad are recorded on the positive (credit) side as they bring in foreign exchange.
• Investments by Indian residents in shares of foreign companies, real estate abroad, etc. Such
investments to abroad are recorded on the negative (debit) side as they lead to outflow of foreign
exchange.
‘Investments to and from abroad’ includes two types of investments:
-> Foreign Direct Investment (FDI)
It refers to purchase of an asset in rest of the world, such that it gives direct control to the purchaser
over the asset.
For example, (i) acquisition of a firm in the domestic country by a foreign country’s firm (ii) transfer of
funds from the parent company abroad to the subsidiary company in the domestic country.
-> Portfolio Investment
Portfolio Investment refers to the purchase of financial asset by the foreigners that does not give the
purchaser control over the asset. A foreign Institutional Investment (FII) is also a part of portfolio
investment.
For instance, purchase of shares of a foreign company, purchase of foreign government’s bonds, etc.
are treated as portfolio investments.
(iii) Change in Foreign Exchange Reserves
• The foreign exchange reserves are the financial assets of the government held in
• central bank. A change in reserves serves as the financing item in India’s BOP.
• So, any withdrawal from the reserves is recorded on the positive (credit) side and any addition to
these reserves is recorded on the negative (debit) side.
• It must be noted that ‘change in reserves’ is recorded in the BOP account and not ‘reserves’.
Balance Of Payments And Its Types
1. Balance: It means difference between the sum of credits and sum of debits. The BOP account
records three balances:
(a) Balance of trade
(b) Balance on current account
(c) Balance on capital account
2. Balance of trade: The term “balance of trade” denotes the difference between the exports and
imports of goods in a country. Balance of trade refers to the visible items only. It is the difference
between the value of merchandise (goods) exports and imports.
Balance of Trade = Export of visible goods – Import of visible goods.
3. Balance on current account: It is the difference between sum of credits and sum of debits on current
account.
Balance on Current Account = Sum of credits on current account – Sum of debits on current account
4. Balance on capital account: It is the difference between sum of credits and sum of debits on capital account.
Balance on capital account = Sum of credits on capital account – Sum of debits
on capital account
Autonomous And Accommodating Items, Deficit In Balance Of Payment And Disequilibrium In
Balance Of Payment
1. Autonomous items
(a) Autonomous items refer to those international economic transactions in the
current account and capital account which take place due to some economic motive such as profit
maximisation.
(b) These transactions are independent of the state of BOP account.

(c) These items are also known as ‘above the line items’.
(d) For example, if a foreign company is making investments in India with the aim of earning profit, then such a
transaction is independent of the country’s BOP situation.
2. Accommodating items
(a) Accommodating items refer to the transactions that are undertaken to cover deficit or surplus in autonomous
transactions, i.e., such transactions are determined by net consequences of autonomous transactions.
(h) These items are also known as ‘below the line items’.
(c) For example, if there is a current account deficit in BOP, then this deficit is settled by capital inflow from
abroad. The sources used to meet a deficit in BOP, are: (i) Foreign exchange reserves; (ii) Borrowings from
IMF or foreign monetary authorities.
3. Deficit in BOP
(a) The balance of payments of a country is a systematic record of all economic transactions between the
residents of foreign countries during a given period of time.
(b) The transaction in the balance of payment account can be categorized as autonomous transactions and
accommodating transactions.
(c) Autonomous transactions are transactions done for some economic consideration such as profit.
(d) When the total inflows on account of autonomous transactions are less than total outflows on account of
such transactions, there is a deficit in the balance of payments account.
(e) Suppose, the autonomous inflow of foreign exchange during the year is $500, while the total outflow is
$600. It means that there is a deficit of $100.
4. Disequilibrium in Balance of Payments: There are a number of factors that cause disequilibrium in the
balance of payments showing either a surplus or deficit. These causes are:
(a) Economic Factors
(i) Large scale development expenditure that may cause large imports.
(ii) Cyclical fluctuations in general business activity such as recession or depression.
(iii) High domestic prices may result in imports.
(b) Political Factors: Political factors instability may cause large capital outflows and hamper the inflows of
foreign capital.
(c) Social Factors: Changes in tastes, preference and fashions of the people bring disequilibrium in BOP by
inflowing imports and exports.
Words that Matter
1. Balance of payment: The balance of payments of a country is a systematic record of all economic
transactions between its residents and residents of the foreign countries during a given period of time.
2. Current account: It records imports and exports of goods and services and unilateral transfers.
3. Capital account: Capital account is that account which records all such transactions between residents of a
country and rest of the world which cause a change in the asset or liability status of the residents of a country or
its government.
4. Foreign Direct Investment: It refers to purchase of an asset in rest of the world, such that it gives direct
control to the purchaser over the asset.
5. Portfolio Investment: It refers to the purchase of financial asset by the foreigners that does not give the
purchaser control over the asset.
6. Balance: It means difference between the sum of credits and sum of debits.
7. Balance of trade: The term “balance of trade” denotes the difference between the exports and imports of
goods in a country. Balance of trade refers to the visible items only.
8. Balance on Current Account: It is the difference between sum of credits and sum of debits on current
account.
Balance on Current Account = Sum of credits on current account – Sum of debits on current account
9. Balance on Capital Account: It is the difference between sum of credits and sum of debits on capital
account.
Balance on capital account = Sum of credits on capital account – Sum of debits
on capital account
10. Autonomous items: It refer to those international economic transactions in the current account and capital
account which take place due to some economic motive such as profit maximisation.
11. Accommodating items: It refer to the transactions that are undertaken to cover deficit or surplus in
autonomous transactions, i.e., such transactions are determined by net consequences of autonomous
transactions.
Introduction to Economics – Class 12 Micro
Economics
Introduction
This chapter primarily deals with the Economy, Central problem of an economy and explains the
production possibility Frontier along with their shapes, pertaining to the subject. It highlights
introduction to economics and its branches, namely Microeconomics and Macroeconomics.
A Simple Economy
1. Society consists of people and people in the society need many goods and services in their
everyday life including food, clothing, shelter, transport facilities like, roads, railways and
various other services like that of teachers and doctors.
2. In fact, the list of goods and services that any individual need is so large that no individual in
society, to begin with, has all the things he needs.
3. For example, the teacher in the school has the skills required to impart education to the students and he can earn
some money by teaching students in the school and use the money for obtaining the goods and services that he wants.
4. Economy is a system which provides people with the means to work and earn a living.
5. Economics is about studying economic problems arising due to limited means (having alternative uses) in relation to
unlimited wants.
6.
1. Economic problem is a problem of choice involving satisfaction of unlimited wants out of limited
resources having alternative uses.
2. Take an example of a piece of land. It can be used for constructing a house, a factory, a school, a park
etc. It can also be used for growing wheat, rice, vegetables etc. The economic problem here is that for
which purpose this piece of land should be used.
3. Similar problems may arise in making a choice in the use of other resources like labour, capital and
enterprise.
7. Economic problem arises because of scarcity of resources in relation to demand for them.
1. Wants are unlimited:
o This is a basic fact of human life.
Human wants are unlimited.
o They are not only unlimited but also grow and multiply veiy fast.
2. Resources are limited:
o The resources to produce goods and services to satisfy human wants are available in limited
quantities. Land, labour, capital and enterprise are the basic scarce resources.
o These resources are available in limited quantities in every economy, big or small, developed or
underdeveloped, rich or poor. Some economies may have more of one or two resources but not all
the resources.
o For example, Indian economy has relatively more labour but less capital and land. The U.S.
economy has relatively more land but less labour. No economy in the world is rich in all the
resources.
3. Resources have alternative uses:
o Generally a resource has many alternative uses.
o A worker can be employed in a factory, in a school, in a government office, self employed and so
on.
o Like this, nearly all resources have alternative uses. But the problem is that which resource should
be put to which use.
8. “Scarcity” in economics is the short supply of resources in relation to the demand. Resources of
the economy are scarce with the result that the economy can’t produce all that the society needs.
1. Greater Scarcity Higher Prices

Examples: Petrol, Diamonds
2. Lesser Scarcity Lesser Prices
Example: Water
3. No Scarcity No Price
Example: Air we breathe
9. Economising of resources means that resources are to be used in such a manner that the
maximum output is realised per unit of input. It also means optimum utilization of resources.
Central Problems Of An Economy
1. The problem of making a choice among alternative uses of resources is known as basic or central
problem of an economy.
2. There are many central problems of an economy, but according to syllabus we have to do one, that
is;
Problem of Allocation of Resources: Every economy has limited resources which can alternatively be used to produce
different goods and services. Hence, it has to allocate its available resources in the production of different goods and
services in such a manner that it ideally meets the needs of the society. While allocating resources optimally, the
decisions the following three central problems of an economy are required to be taken:
1. What to produce?
2. How to produce?
3. For whom to produce?
(a) What to produce?
1. What to produce refers to a problem in which decision regarding which goods and services should be
produced is to be taken.
2. Since its resources are limited, every economy has to decide what commodities are to be produced and
in what quantities.
3. In view of limited resources when we produce more of a commodity, it means we will be able to produce
less of another. Because more production of one commodity would force us to withdraw resources from
the production of the other commodity.
4. So, the economy has to choose between capital goods (like machines, tools, etc.), civil goods (like cloth,
watch, radio etc.), consumer goods (like wheat, cloth, shoes, sugar, etc.), military goods (like guns,
bombs, tanks, etc.) necessities of life (such as food, clothing, housing, etc.) and luxury goods (such as
car, colour TV, etc).
5. The guiding principle for an economy here is to allocate resources in such a way that gives maximum
aggregate utility to the society.
(b) How to produce?
1. How to produce refers to a problem in which decision regarding which technique of production should be
used is taken.
2. Goods and services can be produced in two ways: by using labour intensive techniques, and by using
capital-intensive techniques.
3. Under labour intensive techniques, more of labour and less of capital per unit of output is used in
producing goods and services, while in capital-intensive techniques more of capital and less of labour
per unit of output is used.
4. Thus, the economy has to decide whether the chosen goods and services should be produced with the
help of automatic machines or handicrafts. Every method of production has its own advantages and
disadvantages.
5. For example, on one side use of more capital; i.e., automatic machines, increases the quantity and
improves the quality of production but it results in unemployment as it requires lesser number of
labourers. On the other side, handicrafts generate more employment but produce smaller amount of
production.
6. The guiding principle for an economy in such a case is to decide about the techniques of production on
the basis of cost of production. Those techniques of production should be used which lead to the least
possible cost per unit of commodity or service.
(c) For whom to produce?
1. For whom to produce refers to a problem in which decision regarding which category of people are
going to consume a good, i.e., economically poor or rich.
2. As we know, goods and services are produced for those who can purchase them or have the capacity to
buy them.
3. Capacity to buy depends upon how income is distributed among the factors of production. The higher the
income, the higher will be the capacity to buy and vice Versa. So, this is a problem of distribution.
4. We know that the whole output is distributed among factors of production which have contributed to it.
5. Since production is the combined efforts of all the four factors of production, viz, land, labour, capital and
enterprise, it is distributed among them in the form of money income (i.e. rent, wages, interest and
profits). Who should get how much is, thus, the problem.
6. The guiding principle is that the economy must see here that important and urgent wants of its citizens
are being satisfied to the maximum possible extent or not.
Production Possibility Frontier
1. Production possibility frontier is a curve which depicts all possible combinations of two goods
which can be produced with given resources and technology in an economy.
2. Production possibility frontier is also known as production possibility curve or transformation
curve.
3. The concept of PP curve is based on the following assumptions:
1. First, the amount of resources in the economy is fixed.

2. Second, the technology is given and unchanged.
3. Third, the resources are efficient and fully employed.
4. Fourth, all the resources are not equally efficient in production of all goods.
4. Production Possibility Frontier Schedule and Curve
(a) It helps us to understand and solve the problem of what to produce and in what quantity.
Let us for the sake of simplicity assume that with given resources and technology, an economy can
produce only two goods, namely Rice and Tanks as shown in the production possibility schedule.
(b) By plotting the data, we get the following PP Curve:
In the given diagram, Tank is measured on vertical axis whereas Rice is measured on horizontal axis.
If the economy decides to use all its resources in the production of Tanks, OA quantity of Tanks will
be produced but Rice cannot be produced. On the other hand, if resources are devoted exclusively to
the production of Rice, OF amount of Rice will be produced but no Tanks can be manufactured.
These two are extreme possibilities. In between, there are many other possibilities. Another
alternative is that the economy devotes a part of its resources to the production of Tanks and a part to
the production of Rice. In that case there can be different possibilities of production as is indicated by
the points B, C, D and E. By joining points A, B, C, D, E and F of a curve, we get Production
Possibility Curve.
(c) Full Employment and Underemployment Under PP Curve
(i) Full Employment of Resources: It is represented along the PP-curve. The economy has to
decide that which combination of good X and good Y should be produced. It means that the economy
has to decide that how should resources be allocated in the production of good X and good Y. The
desired allocation of the two goods must lie somewhere on the PP curve. For example, point A on the
PP represents one such allocation.
(ii) Under Utilization of Resources: If resources are not fully and efficiently employed, may there be
a problem of under utilization of resources. Under utilization of resources arises because of
unemployment and inefficiency.
• The Problem of Unemployment: If the actual combination of two produced goods lies below the PP
curve, it means that the resources are not fully employed. If the resources are fully employed, the
combination must lie somewhere on the PP curve. For example, the combination ‘U’ below the PP curve
represents unemployment, i.e., the resources are not fully utilized.
• The Problem of Inefficiency: Assuming that the resources are fully efficient, and if the actual
combinations, say I, produced still lies below the PP curve, it means that resources are inefficiently
employed. So, any combination that lies below the PP curve also indicates the problem of inefficient
utilization of resources.
(d) Rightward and Leftward Shift of PP Curve
(i) Rightward Shift (When both Intercept Changes)
• When Resources Increase: Production possibility curve shows the combination of two pieces of goods
which can be produced-by utilizing the resources efficiently. But, every economy tries to increase its
resources so that more and more goods can be produced. PP curve is based on the assumption that the
amount of resources in the economy is fixed. When resources are fixed, one or more goods can be
produced only by sacrificing some quantity of the other good. We cannot produce more of both the
goods. However, when resources increase, we can produce more pieces of both the goods.
For example, Discovery of oil reserves in the GULF countries has caused a substantial shift to rightward
in the PPC of these countries.
• When Technology Changes: Generally, the change in technology is for the better. Better technology
means that more quantities of both goods can be produced. In this situation also PP frontier shifts
upwards.
(ii) Rightward Shift (When One intercept Changes):
In the given figure the improvement in technology, takes place only in one good, good X. There is no
improvement in the technology’ of producing the good Y. Thus, more quantity of good X can be
produced. Production possibility curve PP’ expands to PP’ showing economic growth. Similarly for
good Y.
(iii) Leftward Shift:
• When Resources Decrease: Resources with the society may decrease due to unusual happenings like
earthquakes, war, natural calamities like floods etc. In such situations the production capacity of the
country decreases, and the PP frontier shifts downwards.
(e) The concept of opportunity cost has occupied a very important place in economics. Modern
economists have used the concept of opportunity cost in allocation of resources besides other fields.
Simply, opportunity cost means opportunity lost.
What is given up for getting something is called the opportunity cost of that thing. For instance,
theoretically if a consumer has to forego 2 cups of tea for getting one glass of orange juice,
opportunity cost of one glass of orange juice will be 2 cups of tea. Thus opportunity cost of any
commodity is the amount of other goods which has been given up in order to produce that
commodity. Alternatively opportunity cost of a given activity is the value of the next best activity.
(f) Marginal opportunity cost is an addition to a cost in terms of a number of units of a commodity
sacrificed to produce one additional unit of another commodity.
(g) Marginal rate of transformation is the ratio of number of units of a good sacrificed to produce
one additional unit of another commodity.
(h) PPC is concave to the point of origin because of increasing marginal opportunity cost (MOC). This
behavior of the MOC is based on the assumption that all resources are not equally efficient in
production of all goods. Rise in opportunity cost occurs when factors (resources) which are
specialized or more adopted for production
of a particular good (say, guns), is transferred to the production of another good (say, rice) for which
they are less productive or less specialized. Thus, transfer of resources from more productive to less
productive uses indirectly means fall in their productivity, with the result more of such resources are
needed to produce an additional unit of the other commodity. Thus marginal opportunity cost goes on
increasing making the PP curve concave in shape.
5. Properties or Characteristics of Production Possibilty Curve
1. PPC is downward sloping: The downward slope of PPC means that if the country wants to produce more
of one good, it has to produce less quantity of the other goods.
2. PPC is concave to the point of origin: Concave shape of PPC implies that slope of PPC increases. Slope
of PPC is defined as the quantity of good Y given up in exchange for additional unit of good X.
6. Other shapes of PPC
(a) MOC Decreasing: PPC would be Convex to the point of origin, as shown below.
Microeconomics And Macroeconomics
Microeconomics
1. Microeconomics studies the behaviour of individual economic units of an economy, like households,
firms, individual consumers and producers etc.
2. Its main instruments are demand and supply.
3. It is also called ‘Price Theory’.
Macroeconomics
1. Macroeconomics is that part of economic theory which studies the economy as a whole, such as national
income, aggregate employment, general price level, aggregate consumption, aggregate investment, etc.
2. Its main instruments are aggregate demand and aggregate supply.
3. It is also called the ‘Income Theory’ or ‘Employment Theory’.
Words that Matter
1. Economy: Economy is a system which provides people with the means to work and earn a living.
2. Economics: Economics is about studying economic problems arising due to limited means (having
alternative uses) in relation to unlimited wants.
3. Economic problem: Economic problem is a problem of choice involving satisfaction of unlimited
wants out of limited resources having alternative uses.
4. Scarcity: Scarcity in economics is short supply in relation to the demand. Resources of the
economy are scarce with the result that the economy can’t produce all that the society needs.
5. Economising of resources: It means that resources are to be used in such a manner that the
maximum output is realised per unit of input. It also means optimum utilization of resources.
6. Central problem of an economy: The problem of making a choice among alternative uses of
resources is known as basic or central problem of an economy.
7. What to produce: What to produce refers to a problem in which decision regarding which goods
and services should be produced is to be taken.
8. How to produce: How to produce refers to a problem in which decision regarding which technique
of production should be used.
9. For whom to produce: It refers to a problem in which decision regarding which category of people
are going to consume a good, i.e., economically poor or rich.
10. Production: It is the process of transforming inputs (Raw material) into output (finished goods).
So, production means creation of goods and services.
11. Consumption: It is a process of using up of goods and services to satisfy human wants.
12. Production possibility curve: It is a curve which depicts all possible combinations of two goods
which can be produced with given resources and technology in an economy.
13. Production possibilities: It refer to different combinations of goods and services which an
economy can produce from a given amount of resources and a given stock of technology.
14. Opportunity cost: Opportunity Cost of any commodity is the amount of other good which has
been given up in order to produce that commodity. Alternatively opportunity cost of a given activity is
the value of the next best activity.
15. Marginal opportunity: It is an addition to a cost in terms of a number of units of a commodity
sacrificed to produce one additional unit of another commodity.
16. Marginal rate of transformation: It is the ratio of number of units of a good sacrificed to produce
one additional unit of another commodity.
17. Microeconomics: The term ‘micro’has been derived from Greek word ‘MIKROS’means ‘small’.
Microeconomics, therefore, studies the behaviour of individual economic units of an economy, like
households, firms, individual consumers and producers etc.
18. Macroeconomics: It is that part of economic theory which studies the economy as a whole, such
as national income, aggregate employment, general price level, aggregate consumption, aggregate
investment, etc.
Consumer Equilibrium –Class 12 Micro Economics
Introduction
This chapter consists of a detailed account of concepts of Utility, Law of Diminishing Marginal Utility,
Budget line, Budget Constraint, Monotonic Preferences, Indifference Curve, Consumer Equilibrium in
Cardinal (single and several Commodities) and Ordinal (indifference curve) Approaches.
Utility
1. Utility is the power or capacity of a commodity to satisfy human wants. Alternatively, utility of a
commodity means the amount of satisfaction that a person gets from consumption of a good or
service.
2. There are two types of Utility:
1. Cardinal Utility Approach (Marginal Utility Analysis or Marshall Utility Analysis):

o It states that the satisfaction the consumer derives by consuming goods and services can be
measured with a number.
o Cardinal utility is measured in terms of utils (the units on a scale of utility or satisfaction).
o According to cardinal utility the goods and services that are able to derive a higher level of
satisfaction to a consumer will be assigned higher utils and goods that result in a lower level of
satisfaction will be assigned lower utils.
o Cardinal utility is a quantitative method that is used to measure consumption satisfaction.
2. Ordinal utility Approach (Indifference Curve Analysis or J.R. Hicks analysis):
o It states that the satisfaction the consumer derives from the consumption of goods and services
cannot be measured in numbers.
o Rather, ordinal utility uses a ranking system in which a rank is provided to the satisfaction that is
derived from consumption.
o According to ordinal utility, the goods and services that offer a customer a higher level of
satisfaction will be assigned higher ranks and the goods and services that offer a lower level of
satisfaction will be assigned lower ranks.
o Ordinal utility is a qualitative method that is used to measure consumption satisfaction.
Cardinal Utility
3. Total utility is the total psychological satisfaction a consumer obtains from consuming a given
amount of a particular good. Alternatively, total utility is the sum of marginal utilities obtained from
consumption of successive units of a commodity. It is measured in utils.
TU = MUj + MU2 + MU3 + MUN

= IMU
For example,
4. Marginal utility is the additional utility derived from consumption of an additional unit of a
commodity.
5.
1. Law of diminishing marginal utility states that marginal utility derived from the consumption of a
commodity declines as more units of that commodity are consumed.
2. It’s can be seen from the above schedule that total utility increases at a diminishing rate, when marginal
utility falls.
3. Law of diminishing marginal utility will operate only when consumption is a continuous process. For
example, if one sandwich is consumed in the morning and another in the afternoon, the second
sandwich may provide equal or higher satisfaction as compared to the first one.
4. Law of diminishing marginal utility will not be applied with regard to education/ knowledge because every
effort to get education/ knowledge increases the utility.
6. Relationship between marginal utility and total utility:
1. When MU decreases, TU increases at a diminishing rate. (As shown in graph till consumption level OQ).
2. When MU is zero, TU is constant and maximum at P.
3. When MU is negative, TU starts diminishing.
Consumer Equilibrium Under Marginal Utility Analysis (Cardinal Approach)
1. Consumer’s Equilibrium refers to a situation where a consumer gets maximum satisfaction out of
his given money income and given market price.
2. Consumer’s equilibrium through utility analysis can be ascertained with reference to:
1. A single commodity
2. Two or several commodities
(a) Single Commodity Consumer Equilibrium:
(i) When purchasing a unit of a commodity, a consumer compares its price with the expected utility
from it. Utility obtained is the benefit, and the price payable is the cost. The consumer compares
benefit and the cost. He will buy the unit of a commodity only if the benefit is greater than or at least
equal to the cost.
(ii) Equilibrium Conditions for Single Commodity Consumer Equilibrium
• Necessary Condition
Where, MU of one rupee refers to the utility obtained from the purchase of commodities with one
rupee.
In particular, the condition (a) says that the marginal utility of a product in terms of money should be
equal to its price.
Sometimes, this is loosely stated as Marginal utility is equal to price, i.e.

MU = Price.
-> If MU > Price
-> As a rational consumer, he keeps on going to purchase an additional unit of a commodity as long as MU = Price.
-> MU > Price implies when benefit is greater than cost and whenever benefit is greater than cost a consumer keeps on
consuming additional unit of a commodity till MU = Price.
-> It is so because according to the law of diminishing marginal utility, MU falls as more is purchased. As MU falls, it is
bound to become equal to the price at some point of purchase.
-> If MU< Price
-> As a rational consumer he would have to reduce the consumption of a commodity as long as MU=Price.
-> MU < Price implies when benefit is less than cost and whenever benefit is less than cost, consumer keeps on
decreasing the additional unit of a commodity till MU = Price.
-> It is so because according to the law of diminishing marginal utility, MU rises as less units are consumed. As MU rises,
it is bound to become equal to the price at some point of purchase.
• Sufficient Condition: Total gain falls as more is purchased after equilibrium. It means that consumer continues to
purchase so long as total gain is increasing or at least constant.
-> It can be explained with the help of the following schedule and diagram:
Suppose, the price of commodity X in the market is Rs.3 per unit. It means he has to pay Rs.3 per unit. Suppose, the
utility obtained from the first unit is 5 utils (= Rs.5). The consumer will buy this unit because the utility of this unit is
greater than the price. Whether the consumer consumes second unit or not depends on the utility obtained from the
second unit. Suppose, it is 4 utils (= Rs.4). He will buy the second unit also. Again, suppose the utility of the third unit is 3
utils (= Rs.3). The price paid is also Rs.3. Since the utility equals to price he will buy the third unit also. Consumer will not
buy the fourth unit because utility of this unit is 2 utils (= Rs.2) which is less than the price. It is not worth buying the
fourth unit. The consumer will restrict his purchase to only 3 units.
The difference between utility and price of a unit of a commodity represents the gain to the consumer
from that unit. For example, utility of first unit of X is Rs.5 and price paid is Rs.3, The gain is Rs.2 (= 5
– 3). Similarly, gain from the second unit is Rs.1 and from the third unit is zero. The total gain from the
three units is Rs.3 (= 2 + 1 + 0). Marginal Gain from the 4th unit is negative, i.e. -1 (= 2 – 3). Total
gain from 4 units is Rs.2 (= 2 + 1 + 0 – 1). The consumer maximises gain when he buys only 3 units.
The conclusion is that in a single commodity case a consumer makes purchases only upto the point
where MU = Price.
In the above diagram, consumption (demand) is recorded on the horizontal axis and marginal utility
(price) is recorded on the vertical axis.
The MU curve is downward sloping from left to right. It is because it is assumed that there is inverse
relation between consumption and marginal utility. MU is measured in terms of rupee and it is
assumed marginal utility in terms of one rupee (MUR). According to the theory, the consumer
compares MU (the benefit) with the price (the cost) and makes purchase upto the MU = Price level. If
we assume that market price is₹3 per unit, the consumer will buy exactly 3 units. The consumer
maximizes gains at 3 units. The equilibrium purchase is at E.
In a single commodity case a consumer is in equilibrium when marginal utility equals to the price.
-> If Marginal utility of Rupee is not equal to one, then the consumer equilibrium with the help of
schedule is:
Suppose that the price of apple is 8 and marginal utility of a rupee is 3 utils.
It is clear from the above schedule that initially MU in terms of money is greater than the price of
apple. For example, from consumption of the first apple, the consumer gets utility equal to 30 utils or
utility worth Rs.10 (= 30 + 3) whereas he sacrifices utility of ?8 in the form of price. Thus, he gets
benefit of Rs.2 (= 10 – 8) from the first apple. So, he will buy it.
Making such comparisons for successive units till the consumption level of the 3rd unit at which MU in
terms of money (i.e., 8) becomes equal to its price (i.e., 78). Thus, at the level of 3 apples, the
consumer reaches the state of equilibrium because the above mentioned condition of equilibrium MU
= P_ is met here.
-> Derivation of Demand curve through the MU = Price for single commodity consumer
equilibrium: As we know a consumer purchases a good up to the point where marginal utility of the
good becomes equal to the price of that good.
MU = Price
Now, suppose that the price of the good falls and therefore, it becomes lower than the MU. It means
that MU is now greater than price.
MU > Price
Since MU is greater than the price, it means benefit is greater than the cost. It will induce the
consumer to buy more units of the goods. In fact, the consumer must buy to reach equilibrium again.
It shows that when price of goods falls, its demand rises and the consumer will continue to buy more
units until MU falls enough to be equal to the price again. It can be explained with the help of the
diagrams given on next page.
It can be seen from the given diagrams that Figure B is derived from Figure A. In figure A, initially,
consumer equilibrium is attained at point E, where MU (10) = Price (10). Corresponding to point E, we
derive point E1 in figure B.
Due to fall in price (suppose from 10 to 8), MU > Price at the given quantity. So, we can say that
benefit is greater than cost and the consumer increases the quantity till MU = Price condition is
attained at F. Corresponding to point F, we derive the point F1( in figure B. So, by joining point E1 and
F1 together, we derive the demand curve.
-> Given above is the utility schedule of a consumer for commodity X. The price of the commodity is
Rs. 6 per unit. How many units should the consumer purchase to maximize satisfaction? (Assume
that utility is expressed in utils and 1 util = Rs. 1).
We know that the equilibrium condition for a consumer, in case of a single commodity, is
condition is satisfied, if the consumer purchases 4 units. (At this level, MUx = 6 utils, MUR = 1 and Px =
Rs. 6), i.e. 6/1 = 6.
The consumer will purchase 4 units as MU is equal to price at the 4th unit. The consumer will not
purchase less than 4 units as MU will be greater than the price and there will be scope for increasing
the total satisfaction by purchasing more units. If the consumer buys more than 4 units, MU becomes
less than the price is paid. Therefore, benefit is less than cost. So, the consumer decreases the
quantity to increase the satisfaction.
(b) Two Commodities Consumer Equilibrium (Law of Equi-Marginal Utility or Law of
Substitution or Gossen’s Second Law or Law of Maximum Satisfaction)
(i) According to the two commodities consumer equilibrium or law of Equi-marginal utility, a consumer
gets maximum satisfaction, when ratios of MU of two commodities and their respective prices are
equal.
(ii) Conditions of Consumer’s Equilibrium In case of Two Commodities:
Necessary Condition:
Marginal utility of last rupee spent on each commodity is same.
Suppose there are two commodities, X and Y respectively.
So, for commodity X, the condition is,
Sufficient Condition:
Expenditure on commodity X+Expenditure on commodity Y=Money Income.
In other words, marginal utility falls as more and more units of a commodity are consumed. This
condition must be satisfied to attain the necessary condition,
Similarly, for commodity Y, the condition is,
Putting equation (2) in (1), we get MUx, MUy
X is more than marginal utility from the last rupee spent on commodity Y. So, to attain the equilibrium
consumer must increase the quantity of X, which decrease the MUx and decrease the quantity of Y
which will increase the MUy. Increase in quantity of X and decrease in quantity of Y continue till
commodity X is less than marginal futility from the last rupee spent on commodity Y. So, to attain the
equilibrium the consumer must decrease the quantity of X, which will increase the MU x and increase
the quantity of Y, which will decrease the MU . Decrease in quantity of X and increase in quantity of Y
continues till MUx=MUy .
the consumer will spend all his income on one commodity, which is highly unrealistic.
-> This can also be explained with the help of the following numerical example and diagram:
Let us now discuss the law of equi-marginal utility with the help of a numerical example. Suppose,
total money income of the consumer is Rs.6 which he wishes to spend on two commodities: ‘x’ and ‘y’
Both these commodities are priced at Rs.1 per unit. So, the consumer can buy the maximum 6 units
of ‘x’ or 6 units of ‘y’. In Table given below, has shown the marginal utility which the consumer derives
from the various units of ‘x’ and ‘y’.
In the diagram, MU from commodity ‘x’ is taken on OY axis and MU of commodity ‘y’ on O 1Y1 axis.
MUx and MUy are the marginal Utility curves for commodities ‘x’ and ‘y’ respectively.
From the above table and figure, it is obvious that the consumer will spend the first rupee (shown in
brackets) on commodity ‘x’, which will provide him utility of 26 utils.
The second rupee and the third rupee will again be spent on commodity ‘X, which gives him the utility
of 24 utils and 22 utils respectively. The fourth rupee will be spent on commodity Y, which gives him
the utility of 21 utils. To reach the equilibrium, consumer should purchase that combination of both the
goods, in which MU of ‘x’ and ‘y’ are equal, i.e. MUx = MUy (as prices of both the goods are same). It
happens at point ‘E’, when MU of 5th rupee spent on ‘y’ and MU of 6th rupee spent on ‘x’ or MU of
5th rupee spent on ‘x’ and MU of 6th rupee spent on ‘y’ are the same, i.e. 20 utils of 133 utils will be
obtained by spending his income of Rs. 6. It reflects the state of consumer’s equilibrium. If the
consumer spends his income in any other order, total satisfaction will be less than 133 utils.
-> Derivation of demand curve for two commodities consumer equilibrium:
The law states that a consumer is in equilibrium when the ratio of MU to price in case of each good
consumed is the same. In two goods, X and Y, a consumer is in equilibrium when,
Given that the consumer is in equilibrium and price of X falls. Due to this change equilibrium equality
converts into the following inequality.
It means, marginal utility from the last rupee spent on commodity X is more than marginal utility from
the last rupee spent on commodity Y. So, to attain the equilibrium the consumer must increase the
quantity of X, which decrease the MU . and decrease the quantity of Y, which will increase the MU .
Increase in quantity of X and decrease in quantity of Y continue till
It can be seen from the above diagrams that Figure B is derived from Figure A. In figure A, initially,
the consumer equilibrium is attained at point E, where
=(Assuming, Px = 10). Corresponding to point E, we derive point E:

in figure B. Due to fall in price (suppose from 10 to 8),
quantity Qx. It means, marginal utility from the last rupee spent on commodity X is more than marginal
utility from the last rupee spend on commodity Y. So, to attain the equilibrium the consumer must
increase the quantity of X, which decreases the MUx and decreases the quantity of Y, which will
increase the MUy .
Increase in quantity of X and decrease in quantity of Y continue till
and the new consumer equilibrium will be attained at point F. Corresponding to point F, we derive the
point F ; in figure B. So, by joining point E1 and F1; we derive the demand curve.
> Suppose a consumer has Rs. 36 to spend on purchase of two commodities X and Y, whose prices
are Rs. 6 per unit and Rs. 3 per unit respectively. The marginal utilities of the two commodities to the
consumer are given in table (a) and the marginal utilities of the last rupee on both commodities are
given in table (b).
Thus, given money income (Rs. 36) and given prices of the commodities X and Y (Rs. 6 per unit and
Rs. 3 per unit), we determine how the consumer allocates/distributes the total income on the
purchase of both the goods.
Marginal utilities of the last rupee spent on each commodity are equal [MUx/Px= MUy/Py ]
when the following combinations of X and Y are purchased.
The consumer will however maximize his utility when he spends Rs. 36, on purchase of 3 units of X
and 6 units of Y.
(3 x Rs. 6 per unit of X) + (6 x Rs. 3 per unit of Y) = Rs. 36. Thus, only when MUx/Px= MUy/Py = MUm =
7 utils, that the consumer will be in equilibrium and maximize his utility. The law of Equi-marginal
utility is also called the Law of Maximum Satisfaction as the consumer maximizes his satisfaction,
given the constraint of money income and prices of commodities.
The Consumer Budget
Let us consider a consumer who has only a fixed amount of money (income) to spend on two goods
the prices of which are given in the market. The consumer cannot buy any and every combination of
the two goods that she may want to consume. The consumption bundles that are available to the
consumer depend on the prices of the two goods and the income of the consumer. Given her fixed
income and the prices of the two goods, the consumer can afford to buy only those bundles which
cost her less than or equal to her income.
Budget Line
(a) Budget line is a graphical representation which shows all the possible combinations of the two
goods that a consumer can buy with the given income and prices of commodities. It is also called
consumption possibility line.
(b) Suppose, a consumer has Rs. 600 as his money income and decides to spend this entire income
on the purchase of two commodities X1 and X2 where per unit price of X1 be Rs. 5 and that of X2 Rs.4
per unit and these prices remain unchanged during the period in which the consumer buys these
commodities.
(c) If the consumer decides to spend his entire money income of Rs. 600 on the purchase of
commodity Xx, he can buy 120 units of X, and on purchase of X 2 i. e., 150 units of X2 (shown in given
figure as point R and P).
Points P and R are two extreme possibilities of the combination of that the can purchase with his
given money income and prices of commodities. By joining points P and R, we can know all the
possible combinations of two commodities X1
and X2, which can be purchased with Rs.600. We, therefore get the budget line RP. It is also called
Price income line. Thus, the budget line is the set of bundles that costs exactly M.
(d) The equation of budget line is:

P1 X1+ P2 X2 = M …(1)
Where, P1 and P2 are the prices of two commodities:
X1 and X2 are the quantities of two commodities P1 X1 is the expenditure on commodity X1
P2 X2 is the expenditure of on commodity X2
(e) Budget constraint shows the combination of two commodities whose expenditure can be less than
or equal to money income. So, there is possibility of saving.
P1 X1 + P2 X2 < M
(f) Budget set is the collection of all bundles of pieces of goods that a consumer can buy with his
income at the prevailing market prices.
(g) Market rate of Exchange is the rate at which market requires to sacrifice one commodity to gain
an additional unit of another commodity is called market rate of exchange.
Change in Quantity of Good Sacrificed (P1 X1 ) Change in Quantity of Good Gained (P2 X2)
Price of Good Gained [P1 ] Price of Good Sacrificed [P2 ]
This can be explained with the help of the following example and consumption possibility schedule.
Let consumer’s Money Income is 10 and Price of commodity 1 is 2 and price of commodity 2 is 1. i.e.,
M = 10, P, = 2 and P2 = 1.
Preferences Of The Consumer (Ordinal Utility Analysis)
1. Ordinal Utility states that the satisfaction the consumer derived from the consumption of goods
and services cannot be measured in numbers.
2. Rather, ordinal utility uses a ranking system in which a rank is provided to the satisfaction that is
derived from consumption.
3.
1. Consumer’s preferences are assumed to be such that between any two bundles (x1,x2) and (y1,y2), if
(x1,x2) has more of at least one of the good and no less of the other good as compared to (y1,y2), the
consumer prefers (x1,x2) to (y1,y2). Preferences of this kind are called monotonic preferences.
Thus, a consumer’s preferences are monotonic if and only if between any two bundles the consumer
prefers the bundle which has more of at least one of the pieces of good and no less of the other piece of
good as compared to the other bundle.
2. For example,
1. (x1[5], xy2[4]) bundle is monotonic preferred bundle to (y1[4], y2[4]) bundle because we have more
quantity of one good i.e., 5(x1) > 4(y1) and no less quantity of other goods i.e., 4(x2) = 4(y2).
2. Similarly, (x1[5], x2[5]) bundle is monotonic preferred bundle to (y1[4], y2[4]) bundle because we
have more pieces/quantities of both the goods i.e., 5(x1) > 4(y1) and 5(x2) > 4(y2).
3. But the (x1[5], x2[3]) bundle is not monotonic preferred bundle to (y1[4], yy2[4]) bundle because we
have more pieces of one good i.e., 5(x1) > 4(y1) and less of other good i.e., 3(x2) < 4(y2) and
condition states that we have atleast more of one good and no less of other good, but in this case
3(x2) < 4(y2). So, it is not monotonic preferred bundle.
Words that Matter
1. Utility: Utility is the power or capacity of a commodity to satisfy human wants.

2. Cardinal Utility: Cardinal utility states that the satisfaction the consumer derives by consuming
goods and services can be measured with number.
3. Ordinal utility: Ordinal Utility uses a ranking system in which a rank is provided to the satisfaction
that is derived from consumption.
4. Total utility: Total Utility is the total psychological satisfaction a consumer obtains from consuming
a given amount of a particular good.
5. Marginal Utility: Marginal utility is the additional utility derived from consumption of an additional
unit of a commodity.
6. Law of diminishing marginal utility: It states that marginal utility derived from the consumption of
a commodity declines as more units of that commodity are consumed.
7. Consumer’s Equilibrium: It refers to a situation where a consumer gets maximum satisfaction out
of his given money income and given market price.
8. MU of one rupee: It refers to the utility obtained from purchase of commodities with one rupee.
9. Budget Line: Budget line is a graphical representation which shows all the possible combinations
of the two goods that a consumer can buy with the given income and prices of commodities.
10. Budget constraint: It shows the combination of two commodities whose expenditure can be less
than or equal to money income.
11. Budget set: It is the collection of all bundles of pieces of goods that a consumer can buy with his
income at the prevailing market prices.
12. Market rate of Exchange: The rate at which market requires to sacrifice one commodity to gain
an additional unit of another commodity is called market rate of exchange.
13. Monotonic Preferences: Consumer’s preferences are assumed to be such that between any two
bundles (x1, x2) and (y1 , y2), if (x1, x2) has more of at least one of the good and no less of the other
good as compared to (y1 , y2), the consumer prefers (x1,x2) to (y1 , y2). Preferences of this kind are
called monotonic preferences.
14. Marginal rate of substitution: It is the rate at which a consumer is willing to sacrifice one
commodity for an extra unit of another commodity without affecting his total satisfaction.
15. Indifference curve: It refers to the graphical representation of various combinations of the goods
that provide the same level of satisfaction to the consumer.
Demand –Class 12 Micro Economics
Introduction
This chapter takes into account the demand and the factors affecting it, both at the personal and
market level. It highlights the law of demand, movement along the demand curve and the related
changes. Explanation for the downward slope in the law of demand and exceptions to it are dealt
with.
1. Demand is a quantity of a commodity which a consumer wishes to purchase at a given level of

price and during a specified period of time.
In other words, demand for a commodity refers to the desire to buy a commodity backed with
sufficient purchasing power and the willingness to spend.
2. Desire is just a wish for a commodity and a person can desire a commodity even if he does not
have the capacity to buy it from the market whereas demand is desire backed by purchasing power
that is to say whatever an individual is willing to buy from the market in a given period of time at a
given price. A poor person can desire to own a car but that will not become a demand because he
does not have the purchasing power to buy a car from the market.
3. Factors affecting personal (individual) demand:
(a) Price of the commodity: Inverse

relationship exists between price of the commodity and demand of that commodity.
It means with the rise in price of the commodity the demand of that commodity falls and vice-versa.
(b) Price of related goods: It may be of two types:
1. Substitute goods
2. Complementary goods
Let us discuss it in detail,
(i) Substitute Goods: Substitute goods are those goods which can be used in place of another
goods and give the same satisfaction to a consumer.
There would always exist a direct relationship between the price of substitute goods and demand for
given commodity.
It means with an increase in price of substitute goods, the demand for given commodity also rises
and vice-versa. For example, Pepsi and Coke.
(ii) Complementary Goods: Complementary goods are those which are useless in the absence of
another goods and which are demanded jointly.
There would always exist an inverse relationship between price of complementary goods and
demand for given commodity.
It means, with a rise in price of complementary goods, the demand for given commodity falls and
vice-versa. For example pen and refill.
1. (c) Income of a Consumer: There are three types of goods:
For Normal Commodity: For normal commodity, with a rise in income, the demand of the commodity also
rises and vice-versa. Shortly, direct relationship exists between income of a consumer and demand of
normal commodity.
2. For Inferior Goods: For inferior goods, with a rise in income, the demand of the commodity falls and vice-
versa.
Shortly, inverse relationship exists between income of a consumer and demand of inferior goods.
3. For Necessity Goods: For necessity goods, whether income increases or decreases, quantity demanded
remains constant.
(d) Taste and Preferences of the Consumer: Tastes, preferences and habits of a consumer also
influence its demand for a commodity.
For example, if Black and White TV set goes out of fashion, its demand will fall. Similarly, a student
may demand more of books and pens than utensils of his preferences and taste.
Miscellaneous: Some of the other factors affecting the demand of a consumer are: Change in
weather, change in number of family members, expected change in future price, etc.
4. Market demand refers to the quantity of a commodity that all the consumers are willing and able to
buy, at a particular price during a given period of time.
5. Factors affecting Market demand:
1. Price of the commodity
2. Price of related commodity
3. Income of a consumer
4. Taste and preference of a consumer
5. Miscellaneous
6. Population Size: Demand increases with the increase in population and decreases with the decrease in
population. This is because with the increase (or decrease) in population size, the number of buyers of
the product tends to increase (or decrease). Composition of population also affects demand. If
composition of population changes, namely, female population increases, demand for goods meant for
women will go up.
7. Distribution of Income: Market demand is also influenced by change in distribution of income in the
society. If income is not equally distributed, there will be less demand. If income is equally distributed,
there will be more demand.
6. Demand function shows the relationship between quantity demanded for a particular commodity
and the factors that are influencing it.
7. Individual demand function refers to the functional relationship between individual demand and the
factors affecting the individual demand.
8. Market demand function refers to the functional relationship between market demand and the
factors affecting the market demand.
9. Demand Schedule is a table showing different quantities being demanded of a given commodity
at various levels of price. It shows the inverse relationship between price of the commodity and its
quantity demanded. It is of two types:
1. Individual Demand Schedule

2. Market Demand Schedule
10. Individual demand schedule refers to a table that shows various quantities of a commodity that
a consumer is willing to purchase at different prices during a given period of time.
11. Market demand schedule is a tabular statement showing various quantities of a commodity that
all the consumers are willing to buy at various levels of price. It is the sum of all individual demand
schedules at each and every price.
Market demand schedule can be expressed as,
Movement Along The Demand Curve Or Change In Quantity Demandend
1. It is based on Law of Demand which states that quantity demanded of the commodity changes
due to the changes in price of the commodity.
2. The change in quantity demanded due to the change in price of the commodity is known as
movement along the demand curve. It may be of two types; namely,
(a) Expansion in Demand (Increase in quantity demanded)
(b) Contraction in Demand (Decrease in quantity demanded)

3. Expansion in Demand (Increase in quantity demanded or downward movement along the demand curve):
(a) It is based on Law of demand which states that quantity demanded of the commodity rises due to the fall in price of
the commodity.
(b) The rise in quantity demanded due to the fall in price of the commodity, is known as expansion in demand.
(c) It is shown in the figure given below
• In the given diagram price is measured on vertical axis whereas quantity demanded is measured on horizontal axis. A
consumer is demanding OQ quantity at OP price.
• But, due to fall in price of the commodity from OP to OP1 the quantity demanded rises from OQ to OQ1 which is known
as expansion in demand.
4. Contraction in Demand (Decrease in quantity demanded or upward movement

along the demand curve):
(a) It is based on Law of Demand which states that quantity demanded for the commodity falls due to the rise in price of
the commodity.
(b) The fall in quantity demanded due to the rise in price of the commodity is known as contraction in demand.
(c) This is shown in the figure given below:
• In the given diagram, price is measured on vertical axis whereas quantity demanded is measured on horizontal axis. A
consumer is demanding OQ quantity at OP price.
• But, due to rise in price of the commodity from OP to OP1, the quantity demanded falls from OQ to OQ1 which is
known as Contraction in Demand.
Shift In Demand Curve Or Change In Demand
1. It is based on factor other than price. If demand changes due to the change in factors other than
price, it is known as shift in demand curve.
2. It may be of two types,
(a) Increase in Demand (b) Decrease in Demand
(a) Increase in Demand:
(j) An increase in demand means that consumers now demand more at a given price of a commodity.
(ii) It’s conditions are:
• Price of substitute goods rises.
• Price of complementary goods falls.
• Income of a consumer rises in case of normal goods.
• Income of a consumer falls in case of inferior goods.
• When preferences are favourable.
(iii) In the given diagram, price is measured on vertical axis whereas quantity demanded is measured
on horizontal axis. A consumer is demanding OQ quantity at an OP price.
(iv) But, due to the change in factors other than price then demand curve shifts rightward from DD to
D1D1.
(v) With the rightward shift in demand curve from DD to D1D1 the quantity demanded rises from OQ to
OQ1 which is known as increase in Demand.
(b) Decrease in Demand:
(i) A decrease in demand means that consumers now demand less at a given price of a commodity.
(ii) Its conditions are:
• Price of substitute goods falls.
• Price of complementary goods rises.
• Income of a consumer falls in case of normal goods.
• Income of a consumer rises in case of inferior goods.
• When a preference becomes unfavourable.
(iii) In the given diagram price is measured on vertical axis whereas quantity demanded is measured
on horizontal axis. A consumer is demanding OQ quantity at an OP price.
(iv) But, due to the change in factor other than price, the demand curve shifts leftward to DD to D 1D1
(v) With the leftward shift in demand curve from DD to D1D1, the quantity demanded falls from OQ to
OQ1 which is known as decrease in demand.
Causes Of Law Of Demand And Exceptions To Law Of Demand
1. There is a inverse relationship between price of the commodity and quantity demanded
for that commodity which causes demand curve to slope downward from left to right.
2. It is because of the following reasons:

(a) Income effect:
(i) Quantity demanded of a commodity changes due to change in purchasing power (real income),
caused by change in price of a commodity is called Income Effect.
(ii) Any change in the price of a commodity affects the purchasing power or real income of a
consumers although his money income remains the same.
(iii) When price of a commodity rises more has to be spent on purchase of the same quantity of that
commodity. Thus, rise in price of commodity leads to fall in real income, which will thereby reduce
quantity demanded is known as Income effect.
It refers to substitution of one commodity in place of another commodity when it becomes relatively
cheaper.
(ii) A rise in price of the commodity let coke, also means that price of its substitute, let pepsi, has
fallen in relation to that of coke, even though the price of pepsi remains unchanged. So, people will
buy more of pepsi and less of coke when price of coke rises.
(iii) In other words, consumers will substitute pepsi for coke. This is called Substitution effect.
(c) Law of Diminishing Marginal Utility:
(i) This law states that when a consumer consumes more and more units of a commodity, every
additional unit of a commodity gives lesser and lesser satisfaction and marginal utility decreases.
(ii The consumer consumes a commodity till marginal utility (benefit) he gets equals to the price (cost)
they pay, i.e., where benefit = cost.
(iii) For example, a thirsty man gets the maximum satisfaction (utility) from the first glass of water.
Lesser utility from the 2nd glass of water, still lesser from the 3rd glass of water and so on. Clearly, if
a consumer wants to buy more units of the commodity, he would like to do so at a lower price. Since,
the utility derived from additional unit is lower.
(d) Additional consumer:
(i) When price of a commodity falls, two effects are quite possible:
* New consumers, that is, consumers that were not able to afford a commodity previously, starts
demanding it at a lower price.
• Old consumers of the commodity starts demanding more of the same commodity by spending the
same amount of money.
(ii) As the result of old and new buyers push up the demand for a commodity when price falls.
3. Exceptions to the Law of Demand are:
(a) Inferior Good or Giffen Goods:
(i) Giffen goods are a special category of inferior goods in which demand for a commodity falls with a
fall in its price.
(ii) In case of certain inferior goods when their prices fall, their demand may not rise because extra
purchasing power (caused by fall in prices) is diverted on purchase of superior goods.
(b) Goods expected to become scarce or costly in future:
(i) These goods are purchased by the household in increased quantities even when their prices are
rising upwards.
(ii) This is due to the fear of further rise in prices.
(c) Goods of Ostentation:
(i) Status symbol goods are purchased not because of their intrinsic value but because of status or
prestige value.
(ii) The same jewellery when sold at a lower price sells poorly but offered at two times the price, sells
quite well.
4. Necessities:
(a) The law of demand is not seen operating in case of necessities of life such as food grain, salt,
matchstick, milk for children, etc.
(b) A minimum quantity of these goods has to be bought whether the prices are high or low. In such
cases, law of demand fails to operate.
5. Ignorance: Being ignorant of prevailing prices, a consumer may buy more of a
commodity when its price has gone up.
6. Emergency: In times of emergency like flood, famine or war, the households do not
behave in a normal way and consequently law of demand may not operate.
Words that Matter
1. Demand: Demand is a quantity of a commodity which a consumer wishes to purchase at a given

level of price and during a specified period of time.
2. Substitute goods: Substitute goods are those goods which can be used in place of another goods
and give the same satisfaction to a consumer.
3. Complementary Goods: Complementary goods are those which are useless in the absence of
other good and which are demanded jointly.
4. Normal goods: For normal commodity, with a rise in income, the demand of the commodity also
rises and vice-versa.
5. Inferior Goods: For inferior goods, with a rise in income, the demand of the commodity falls and
vice-versa.
6. Market demand: Market demand refers to the quantity of a commodity that all the consumers are
willing and able to buy, at a particular price during a given period of time.
7. Demand function: It shows the relationship between quantity demanded for a particular
commodity and the factors that are influencing it.
8. Cross Price effect: When demand for one commodity is affected by the change in the price of
another commodity it is known as Cross Price Effect.
9. Law of Demand: It states that price of the commodity and quantity demanded are inversely related
to each other when other factors remain constant (ceteris Paribus).
10. Movement along the demand curve: The change in quantity demanded due to the change in
price of the commodity is known as movement along the demand curve.
11. Expansion in demand: The rise in quantity demanded due to the fall in price of the commodity,
is known as expansion in demand.
12. Contraction in demand: The fall in quantity demanded due to the rise in price of the commodity
is known as contraction in demand.
13. Shift in demand: If demand changes due to the change in factors other than price, it is known as
shift in demand curve.
14. Increase in demand: An increase in demand means that consumers now demand more at a
given price of a commodity.
15. Decrease in demand: A decrease in demand means that consumers now demand less at a
given price of a commodity.
16. Income Effect: Quantity demanded of a commodity changes due to change in purchasing power
(real income), caused by change in price of a commodity is called Income Effect.
17. Substitution Effect: It refers to substitution of one commodity in place of another commodity
when it becomes relatively cheaper.
18. Law of Diminishing Marginal Utility: This law states that when a consumer consumes more and
more units of a commodity, every additional unit of a commodity gives lesser and lesser satisfaction
and marginal utility decreases.
19. Giffen goods: Giffen goods are a special category of inferior goods in which demand for a
commodity falls with a fall in its price. In case of certain inferior goods when their prices fall, their
demand may not rise because extra purchasing power (caused by fall in prices) is diverted on
purchase of superior goods.
Elasticity of Demand –Class 12 Micro Economics
Introduction
This is a numerical based chapter on elasticity of demand, price elasticity of demand and its
measurements, also discussing the factors affecting it.
1. Elasticity of Demand: The degree of responsiveness of demand to the changes in

determinants of demand (Price of the commodity, Income of a Consumer, Price of
related commodity) is known as elasticity of Demand.
It may be of three types:
(a) Price elasticity of Demand.

(b) Income elasticity of Demand,
(c) Cross elasticity of Demand.
3. (a) The degree of responsiveness of quantity demanded to changes in price of commodity is
known as price elasticity of Demand.
(b) It is quantitative statement, i.e., it tells us the magnitude of the change in quantity demanded as a
result of change in price.
4. The degree of responsiveness of demand to change in income of consumer is known as income
elasticity of demand.
5. The degree of responsiveness of demand to change in the price of related goods (substitute
goods, complementary goods) is known as cross elasticity of demand.
Note: Income and cross elasticity of demand is outside the scope of 12 class syllabus. So, this
chapter deal with price elasticity of demand.
6. Percentage Method/Flux Method for calculating price elasticity of demand:
According to this method, price elasticity of demand is measured by dividing the percentage change
in quantity demand by the percentage change in price.
Note: Mathematically speaking, price elasticity of demand (ep) is negative, since the change in
quantity demanded is in opposite direction to the change in price. When price falls, quantity
demanded rises and vice-versa. But for the sake of convenience in understanding the magnitude of
response of quantity demanded to the change in price, we ignore the negative sign and take into
account only the numerical value of the elasticity. Thus, if 5% change in price leads to 15% change in
quantity demanded of good X and 30% change in that of Y, the above formula of elasticity will give
the value of price elasticity of good X equal to 3 and of good Y equal to 6. It indicates that the quantity
demanded of good Y changes much more than that of good X in response to a given change in price.
But if we write minus signs before the numerical values of elasticities of two goods, that is, if we write
the elasticities as – 3 and – 6 respectively as strict mathematics would require us to do, then since –
6 is smaller than – 3, we would be misled in concluding that price elasticity of demand of Y is less
than that of X.
But as we have noted above, response of demand for Y to the change in price is greater than that of
X, it is better to ignore minus signs and draw conclusions from
the numerical values of elasticities. Hence by convention minus sign before the value of price
elasticity of demand is generally ignored in economics.
7. There are five degrees of price elasticity of demand.
(a) Unitary elastic demand: If percentage change in the quantity demanded is equal to percentage
change in price of the commodity, then ED = 1 and the result is known as unitary elastic demand.
Negative sign indicates the inverse relationship between price and the quantity demanded.
PED = 1 [Unitary elastic demand]
(b) More than unitary elastic demand or elastic demand: If percentage change in quantity
demanded is more than the percentage change in price of the commodity then, ED > 1 and result is
known as more than unit elastic demand.
(c) Less than unitary elastic demand or inelastic demand: If percentage change in quantity
demanded is less than the percentage change in price of the commodity, then ED < 1 and the result
is known as less than unit elastic demand.
(d) Perfectly elastic demand: If quantity demand changes and price remains constant, then ED =
α and the result is known as perfectly elastic demand.
(e) Perfectly Inelastic demand: If price is changed ,and quantity demanded constant,then ED=0 and
the result is known as Perfectly Inelastic demand.
8. Total outlay method or Total Revenue Method or Expenditure method for calculating price
elasticity of demand
(a) Total expenditure method indicates the direction in which total expenditure on a product changes
as a result of change in price of the commodity.
(b) According to this method, there are three broad possibilities as shown below:
Case I: Inelastic Demand:
(i) When the total expenditure (Total revenue) varies directly with price, price elasticity of demand is
less than one (i.e., demand is inelastic).
(ii) In other words, with the fall in price, total expenditure (Total revenue) decreases or with a rise in
price, total expenditure (Total revenue) increases.
Case II: Elastic Demand:

(i) When the total expenditure (Total revenue) varies inversely with price, price elasticity of demand is
greater than one, (i.e. demand is elastic).
(ii) In other words, with the fall in price, total expenditure (Total revenue) increases, or with a rise in
price, total expenditure (Total revenue) decreases.
Case III: Unitary Price Elasticity:
(i) When the total expenditure (Total revenue) remains the same, whatever may be the change in the
price level, price elasticity of demand is said to be unity.
9. Geometrical Method or Point Method for Calculating Price Elasticity of Demand:

(a) According to point method, elasticity of demand at any point is measured by dividing the lower
segment of demand curve with the upper segment of the demand curve at that point. It can be
calculated by dividing the lower segment by upper segment.
Factors Determining Price Elasticity Of Demand For A Good
They are as follows:
1. Nature of commodity: Elasticity of demand of a commodity is influenced by its nature.
(a) The demand for necessities of life (commodities satisfying minimum basic needs) is less elastic.
They are required for human survival and they have to be purchased
whatever may be the price. Therefore, demand for necessities of life does not fluctuate much with
price changes.
(b) Whereas, demand for luxury goods is more elastic than the demand for necessities. When the price of luxuries falls,
consumers buy more of them and when the prices rises, demand contracts substantially.
Please remember the term “luxury” is a relative term, as a luxury for a low-income
earning worker may be a necessity for rich employer.
2. Availability of substitutes/Substitute goods:
(a) If close substitutes for the commodity are available, the demand for the commodity will be elastic. The reason is that
even a small rise in its prices will induce the buyers to go for its substitutes. For example, Pepsi and Coke are considered
fairly close substitutes. If the price of coke increases, Pepsi becomes relatively cheaper. Consumer will buy more of Pepsi
and less of relatively expensive Coke.
(b) However, the demand for a commodity (such as salt) having no close substitutes is inelastic.
3. Income Level:
(a) Higher income level groups have less elasticity of demand for any commodity as compared to the people with low
incomes. It happens because rich people are not influenced much by changes in the price of goods.
(b) But, poor people are highly affected by increase or decrease in the price of goods. As the result of, demand for lower
income group is highly elastic.
4. Level of price/Own price of a good:
(a) Higher own price of a good or Costly goods like car, gold etc. have highly elastic demand as their demand is very
sensitive to changes in their prices.
(b) However, demand for inexpensive goods like thread, needle etc. is inelastic as change in prices of such goods do not
change their demand by a considerable amount.
5. Postponement of Consumption:
(a) Commodities like ice cream, soft drinks, etc. whose demand is not urgent, have highly elastic demand as their
consumption can be postponed in case of an increase in their prices.
(b) However, commodities with urgent demand like life saving drugs, have inelastic demand because of their immediate
requirement.
6. Number of Uses:
(a) If the commodity under consideration has many alternative uses, its demand will be highly elastic. For example,
electricity.
(b) As against it, if commodity under consideration has only limited uses, its demand will be highly Inelastic.
7. Share in Total Expenditure:
(a) If a smaller proportion of consumer’s income is spent on a particular commodity, its elasticity is highly inelastic
because lesser proportion of consumer income is spent on consumption of these commodities. Demand for goods like
salt, needle, etc. tends to be inelastic as consumers spend a small proportion of their income on such goods. When
prices of such goods change, consumers continue to purchase almost the same quantity of these goods.
(b) As against it, if a larger proportion of consumer income is spent on the commodity, elasticity of demand is highly
elastic.
8. Time Period: Price elasticity of demand for a commodity also affected by time period.
(a) Demand is inelastic in the short period as consumers find it difficult to change
their habits during short period.
(b) As against it, demand is highly elastic during long period as their is availability of close substitutes in long period.
9. Habits
(a) The demand for those goods that are habitually consumed is inelastic. The reason is that such commodities become a
necessity for the consumer, and even if prices change, consumers continue to purchase and consume the commodity.
Examples of habit-forming commodities include alcoholic beverages, tobacco (in its various forms) consumption and
even tea and coffee.
(b) As against it, if a person is not habitual, demand is elastic.
Words that Matter
1. Elasticity of Demand: The degree of responsiveness of demand to the changes in determinants

of demand (Price of the commodity, Income of a Consumer, Price of related commodity) is known as
elasticity of Demand.
2. Price elasticity of Demand: The degree of responsiveness of quantity demanded to changes in
price of commodity is known as price elasticity of Demand.
3. Percentage Method/Flux Method: According to this method, price elasticity of demand is measured by dividing the
percentage change in quantity demand by the percentage change in price.
4. Unitary elastic demand: If percentage change in the quantity demanded is equal to percentage change in price of the
commodity, then ED = 1 and the result is known as unitary elastic demand.
5. More than unitary elastic demand or elastic demand: If percentage change in quantity demanded is more than the
percentage change in price of the commodity then, ED > 1 and result is known as more than unit elastic demand.
6. Less than unitary elastic demand or inelastic demand: If percentage change in quantity demanded is less than the
percentage change in price of the commodity, then ED < 1 and the result is known as less than unit elastic demand.
7. Perfectly Elastic Demand: If quantity demand changes and price remains constant, then ED = α and the result is
known as perfectly elastic demand.
8. Perfectly Inelastic Demand: If price changes, and quantity demand remains constant, then ED = 0 and the result is
known as perfectly Inelastic Demand.
9. Total expenditure method: It indicates the direction in which total expenditure on a product changes as a result of
change in price of the commodity.
10. Geometric method or point method: According to point method, elasticity of demand at any point is measured by
dividing the lower segment of demand curve with the upper segment of the demand curve at that point. It can be
calculated by dividing the lower segment by upper segment.
Production –Class 12 Micro Economics
Introduction
This chapter gives a clear account of terms like Production function, short period, long period, fixed
factors, variable factors, concepts like total product, average product, marginal product and their
interrelationships. Law of variable proportion and its phases are studied with reasoning.
Production Function (Short Period And Long Period)
1. The relationship between physical input and physical output of a firm is generally referred to as
production function.
The general form of production function is, q = f ( x1, x2)
where, q = output, x1 = 1 input like labour, x2= another input like machinery
2. Variable factors refer to those factors, which can be changed in the short run. They vary directly with the output. For
example, Labour, raw material, etc.
3. Fixed factors refer to those factors which cannot be changed in the short run. They do not vary directly with the
output. For example, Capital, land, plant and machinery, etc.
4. A short period refers to the period of time in which a firm cannot change some of its factors like plant, machineiy,
building, etc. due to insufficiency of time but can change any variable factor like labour, raw material, etc. Thus, in short
run, there will be some factors of production that are fixed at predetermined levels, e.g., a farmer may have fixed
amount of land.
5. A long period is a time period during which a firm can change all its factors of production including machines,
building, organization, etc. In other words, it is a period of time during which supplies can adjust itself to change in
demand.
Note: Mind, here the terms long period and short period are functional and do not refer to a calendar month or a year.
This distinction depends merely upon how quickly factor inputs can be change by producers in an industry.
6. Short run production function can be defined, when application of one factor is varied while all the other factors are
kept fixed (constant). The law that operates here, is known as “law of returns to a factor”.
In this factor ratio that is, land-labour ratio changes. For example, on 5 acres of land, 10 labour can be employed. So,
initially factor ratio will be 5 : 1, when we employ another labour, the factor ratio changes to 5 : 2. So, factor ratio
changes during short period.
7. Long run production function can be defined as, when application of all the factors is varied (changed) in the same
factor proportion, the law that operates in such a situation is known as law of returns to scale’.
Total Product, Average Product And Marginal Product
1. Total product or total return to an input: It refers to total volume of goods and services produced
by a firm with the given input during a specified period of time.
In a short period of time if a firm wants to increase its total product then it can do so by increasing the
variable factors of production only because fixed factors of production remain fixed and do-not
fluctuate with the fluctuation in production. However, in the long period, increase in all the factors of
production can increase level of output.
Note: But mind it, in short period, total product can be increased upto a particular point only because
after that point TP starts decreasing.
(i) To calculate Total Product, we have to add Marginal Product.
(ii) To calculate Total Product, we have to use this farmula:

Total product=APL x Units of variable factor
2.Average product or Average return to an input: It is per unit total product of variable factors. It is
calculated by dividing the total Product by the units of variable factor.
3. Marginal Product or Marginal Return to an Input: It is an addition to the total product when an
additional unit of a variable factor is employed.
4. Total Product, Average Product and Marginal Product with the help of schedule and
diagram are as follows:
Explanation of a Curves
1. TP increases continuously from points O to A. It increases at an increasing rate (convex shape)

from O to P and at a diminishing rate (concave shape) from P to A. TP is maximum at A and remains
so upto point B. After point B, Total product falls.
2. MP curve initially rises, reaches its maximum and ultimately declines taking the shape of inverted
U.
3. Similarly, AP curve first rises, reaches its maximum and then declines taking the shape of an
inverted U.
4. Return to a variable factor states that change in the physical output of a good when only the quantity of one input is
increased, while that of other input is kept constant.
Law Of Variable Proportions
1. The law of variable proportion states that as we increase the quantity of only one input, keeping
other inputs fixed, the total product increases at an increasing rate (convex shape) in the beginning,
then increases at diminishing rate (concave shape) and after a level of output ultimately falls.
2. Assumptions of Law of Variable Proportions

(a) Only one input is variable, the other is held constant or fixed.
(b) It is possible to change the proportion in which the factor units are combined.
(c) It assumes a short run.
(d) The state of technology is given and remains unchanged.
(e) Price of factors of production do not change.
3. It can be explained with the help of schedule and diagram:
4. Explanation of Each Phase
Phase I: Phase of increasing return or Increasing Return to factor
(a) It is called the stage of increasing returns.
(b) The total product increases at an increasing rate (convex shape) up to point P. The marginal
physical product of labour (MP) is increasing and reaches its highest point Pp vertically downwards to
point P.
(c) Point P is called the point of inflexion. At point P, the curvature of the TPP curve changes. It stops
increasing at an increasing rate and starts to increase at a diminishing rate.
In the first stage, firm is moving towards achievement of ideal combination of factors in which TP is
increasing at an increasing rate at every level of output. So, instead of stopping its production, the
firm will rather continue employing additional units of a variable factor.
Phase II: Stage of Diminishing Returns or Diminishing Return to factor
(a) The total product (TP) continues to increase, but at a diminishing rate (concave shape) and
eventually becomes the highest.
(b) MP is diminishing but is positive.
(c) The stage comes to an end, when Marginal Product (MP) = 0 and Total Product (TP) is maximum
and constant.
The firm would like to operate in the second phase because TP is maximum and there is proper
utilization of fixed factor.
Phase III: Phase of Negative returns or Negative Return to factor
(a) In this stage the total product declines in absolute terms.
(b) The marginal product becomes negative.
The firm cannot operate in the third stage where MP is negative and TP starts declining as we are
moving beyond the optimum degree of specialisation.
5. There are 3 important reasons or causes for the operation of increasing returns—
(a) Proper utilization of the fixed factor
(i) In the initial stage of production the units of variable input i.e., labour) is so less that fixed inputs
cannot be effectively utilized.
(ii) Proper utilization of the fixed factor can be attained when more and more units of variable factor
(labour units) are applied to the fixed factor (land), the fixed factor will be used intensively and output
will increase rapidly.
(b) Indivisibility of fixed factor
(i) Indivisibility of fixed factor means that due to technological requirements a minimum amount of
fixed factor must be employed, whatever the level of output,
i.e., fixed factor cannot be divided into smaller units.
(ii) Thus, as more units of variable factors are employed with an indivisible fixed factor, output
increases due to fuller and more effective utilization of the fixed factor.
(c) Specialization and division of labour
(i) Initially there was only one labour working on all the 5 acres of land ploughing, watering, etc.
(ii) As the number of labour units increases, each worker specialized in a particular activity leads to
specialization of the variable units and this resulted in increased output.
6. Reasons for diminishing returns:
(a) The non-optima! combination of variable factor with the fixed factor
(i) When a given quantity of a fixed factor is combined with more and more units of variable factor, the
additional units of variable factor will have smaller and smaller quantity of fixed factor to work with
them.
(ii) As many workers share the same fixed factor, the share of each would obviously fall. Therefore,
the cooperation of the fixed factor is not available to the same extent. Thus, an increase in the
variable factor would add less and less to total output.
(b) Imperfect Substitutes
(i) Diminishing return to factor occurs because variable factor and fixed factor are imperfect
substitutes to each other.
(ii) Technically speaking, there is a limit to which variable factor can be applied to fixed factor and that
limit depends upon the efficiency of fixed factor. So, variable factor and fixed factor are imperfect
substitutes to each other.
7. Reasons for Negative returns:
(a) Scarcity of Fixed Factor
(i) During a short period, there is a limitation that we cannot change the fixed factor.
(ii) So, variable factor can be change upto a certain limit and that limit depends upon the efficiency of
fixed factor. If we cross that limit, the total product starts falling.
(b) Efficiency of Variable Factor Fall
(i) In this stage the amount of variable factor becomes excessive relative to the fixed factor. This
happens when too many LABOUR are engaged in cultivating on a given piece of land.
(ii) Instead of helping each other in production they cause overcrowding and chaos and thus hamper
each other’s work. In such a case, the contribution of additional labour to production is bound to be
negative.
(iii) Thus, the marginal returns become negative and the total returns start diminishing.
(c) Efficiency of Fixed Factor Fall
(i) Too much of a variable factors may also lead to the inefficiency of the fixed factor as well.
(ii) In case of machine, which is a fixed factor, too much of labour may cause lot of wear and tear of
machinery, frequent breakdowns and excessive cost of maintenance. This is bound to affect total
production adversely.
(iii) In such a situation it is advisable to reduce the units of the variable factor than to increase it with a
view for getting maximum production.
Law Of Diminishing Marginal Returns
1. The Law of diminishing marginal return states that when we applied more and more units of
variable factor to a given quantity of fixed factor, total product increases at a diminishing rate and
marginal product falls.
2. Law of diminishing marginal returns is a classical theory and classical economists treated it as a
separate Law. But according to modern economists, this law indicates just one aspect (aspect of
diminishing returns) of law of variable proportion.
3.
In the above schedule and diagram when more units of variable factor are employed with a given
quantity of fixed factor TP increases at a diminishing rate or MP goes on falling. That is why shape of
MP curve is a downward sloping.
Words that flatter
1. Production function: The relationship between physical input and physical output of a firm is
generally referred to as production function.
The general form of production function is,
q = f ( x1 ,x2)
where, q = output, x1 = 1 input like labour, x2 = another input like machinery
2. Variable factors: It refer to those factors, which can be changed in the short run. They vary
directly with the output. For example, Labour, raw material, etc.
3. Fixed factors: It refer to those factors which cannot be changed in the short run. They do not vary directly with the
output. For example, Capital, land, plant and machinery, etc.
4. Short period: It refers to the period of time in which a firm cannot change some of its factors like plant, machinery,
building, etc. due to insufficiency of time but can change any variable factor like labour, raw material, etc.
5. Long period: It refers to a time period during which a firm can change all its factors of production including machines,
building, organization, etc.
6. Total product: It refers to total volume of goods and services produced by a firm with the given input during a
specified period of time.
7. Average product: It is per unit product of variable factors. It is calculated by dividing the total Product by the units of
variable factor.
Average Product=Total Product/Unit of Variable Factor
8. Marginal Product: It is an addition to the total product when an additional unit of a variable factor is employed.
MP=Change in output /Change in input =Δq/ΔL
9. Return to a factor: It states that change in the total output of a good when only the quantity of one input is increased,
while that of other input is kept constant.
10. Law of variable proportion: It states that as we increase the quantity of only one input, keeping other inputs fixed,
the total product increases at an increasing rate in the beginning, then increases at diminishing rate and after a level of
output ultimately falls.
11. Law of diminishing marginal return: It states that when we applied more and more units of variable factor to a given
quantity of fixed factor, total product increases at a diminishing rate and marginal product falls.
Cost –Class 12 Micro Economics
Introduction
This chapter gives a detailed version of cost and its types, related numericals and the
relationship between them.
Cost In Economics
1. Cost of producing a good, in Economics is the sum total of all the,

(a) Direct expenditure (actual money expenditure of a firm on purchasing goods or hiring factor
services, called explicit cost) and
(b) Indirect expenditures (imputed value of the owners estimated value of inputs provided, called ‘implicit cost’) and
(c) Certain minimum profit (refers to that amount of profit which a producer must get in the long run to continue to
produce the given goods, called ‘normal profit’.)
So, the sum total of explicit cost, implicit cost and normal profit is called economic cost.
2. Explicit Cost:
(a) It refers to the actual money expenditure of a firm on purchasing goods or hiring factor services and non-factor
inputs (like raw material, electricity, fuel etc.)
(b) In other words, “explicit cost are those cash payments which the firm makes to outsiders for their goods and
services.”
(c) For example—explicit cost of biscuit factory consists of flour, milk, sugar etc. purchased from outside and rent,
electricity, wages, interest etc paid to factor of production.
3. Implicit Cost:
(a) Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself.
(b) In other words, Implicit costs are cost of self-supplied factors of production, which are generally not recorded in
firm’s account book.
(c) Implicit costs of a biscuit factory are imputed rent of owner’s own factory building,imputed wages for owner’s
working as a manager himself, imputed interest on his money capital used in the factory, depreciation.
Short Run Cost
1. Cost function shows functional relationship between output and cost of production. It
gives the least cost combination of inputs corresponding to different levels of output.
Cost function is given as:
C = f(X), ceteris paribus, where, C = Cost and X = Output
2. Short Run cost are those in which some factors of production are fixed and others are variable. So, it is divided into
two parts:
(a) Fixed costs (b) Variable costs
Total Fixed Cost (Supplement/Indirect/Overhead Cost)
1. Fixed costs are those costs of production which do not change with a change in output.
2. These are the costs incurred on fixed factors, like rent of land and building, interest, etc. These are unavoidable
contractual costs.
3. Fixed costs are also called overhead costs or general costs because these are common for all the units produced.
These costs are also called supplementary costs or indirect costs.
4. The shape of Total fixed Cost is horizontal (Parallel to X-Axis). They have to be incurred when the output is large or
small or even zero.
Total Variable Cost (Prime/Direct Cost)

1. The cost incurred on variable factors of production is known as TVC.
TVC = TC – TFC
2. TVC is very much related with the production and fluctuates with the fluctuation in production. In case of zero level of
production, TVC would also be zero.
3. For example, Wages of casual labour, payment for raw material, etc.
4. The shape of Total Variable Cost is Inverse S-shape because of Law of variable Proportion. There are two phases on
which shape of total variable cost depends.
(a) In the first phase, TVC increase at a to lower cost of production. This is because of proper utilization of fixed factor by
employing more units of variable factor, specialization and division of labour. diminishing rate, [concave shape] i.e.,
every additional unit of output produced leads
(b) In the second phase, TVC increase at an increasing rate, [convex shape]
i. e., every additional unit of output produced leads to higher cost of production. This is because of non-optimal
combination of variable factor with the fixed factor.
Total Cost
1. During production, the expenditure incurred on various factors of production is known as total cost.
2. The thing, is has to remember, is that enterprise is one of the factors of production and the return of enterprise is
normal profit. So, normal profit is also included in total cost.
3. In other words, it is a sum of total fixed cost and total variable cost.
TC = TFC + TVC
4. The shape of Total Cost is Inverse S- shaped because of law of variable Proportion.
(a) TC is divided into two parts TFC and TVC such that
TC = TFC + TVC.
(b) TFC curve is a horizontal line parallel to the x-axis.
(c) TVC is inverse S-shaped starting from the origin due to law of variable proportion.
(d) TC is aggregate of TFC and TVC. TC curve is inverse S-shaped starting from the level of fixed cost. The reason behind it
shape is the law of variable proportion.
Average Fixed Cost (AFC)
1. The per unit cost incurred on fixed factors of production is known as average fixed cost.
2. AFC falls as output increases because AFC
3.The shape of AFC curve is a rectangular hyperbola as area under AFC curve (i.e. total fixed cost) remains same at
different levels of output.
Average Variable Cost (AVC)
1. The per unit cost incurred on variable factors of production is known as AVC.
2. Average Variable Cost is U-shaped because of Law of Variable Proportion.

(a) As we know the shape of AVC depends upon the shape of TVC. Initially, TVC increases at diminishing rate (because
Total Product Increases at increasing Rate), that makes the AVC to fall.
(b) Thereafter, TVC increases at increasing rate(because Total Product Increases at diminishing Rate), that makes the
average variable cost to rise.
(c) So, from inverse S-shape, TVC curve, we derive the U shape AVC curve. It can also be explained with the help of the
following schedule and diagram.
Average Total Cost/Average Cost (ATC)
1. The per unit cost incurred on various factors of production is known as average cost. In other words, it is the sum total
of average variable cost and average fixed cost.
2. Average Cost is U-Shaped because of Law of variable proportion:

(a) The shape of average cost (AC) depends upon total cost (TC).
(b) Initially, total cost (TC) increases at a diminishing rate (Total Product increases at Increasing rate), which makes its
average, i.e., average cost (AC) to fall, then reaches its minimum point.
(c) Thereafter, total cost (TC) increases at increasing rate (Total Product increases at diminishing rate), which makes the
average cost (AC) to rise. This type of production behaviour shows operation of law of variable proportion.
3. Average Cost is also U-shaped because of Average Variable Cost and Average Fixed Cost:
(a) In the beginning, we find that as output increases both AVC and AFC fall, therefore AC curve falls sharply.
(b) When AVC has started rising and AFC is falling, AC may continue to fall if the fall in AFC is more than the rise in the
AVC curve.
(c) But with further increase in output, AC would
start increasing because the rise in AVC offsets the fall in AFC.
(d) Therefore, the shape of the AC curve would be U-shaped—first falling and then rising.
Marginal Cost
1. The cost incurred on additional unit of output is known as Marginal cost.
(a) As we know the shape of MC depends on the shape of TVC or TC. Let us suppose TVC.
(b) Initially, TVC increases at a diminishing rate (Total Product increases at Increasing rate), which
makes the gap of TVC, i.e. MC to fall.
(c) Thereafter, TVC increases at an increasing rate (Total Product increases at diminishing rate)
which makes the marginal cost to rise.
(d) So, from inverse S-shape TVC curve, we derive U shape MC curve. It can be explained with the-
help of following schedule and diagram.
Relationship Between the cost and curve
Relationship between AC and MC

1. The relationship between marginal cost anci average cost can be shown with the help of
schedule.
The table given below shows the marginal costs, total costs and average costs at different levels of
output.
(a) When MC is less than AC, AC falls (because MC pulls AC down). It can be seen from the first
three units of the table.
(b) When MC = AC, AC is constant and at its minimum.
It can be seen from the fourth unit of the table.
(c) When MC is more than AC, AC rises (because MC pulls up AC). It can be seen from the fifth unit
of the table.
2. The relationship between marginal cost and ave]rage cost with the help of Diagram:
(a) As long as MC is below AC, AC curve falls till intersection at point E.

(b) When MC curve comes to fall, it falls more rapidly than AC curve and reaches its minimum point B
earlier than the AC curve reaches its minimum point E.
Therefore, MC curve is rising from B to E whereas AC curve is still falling from A to E.
(c) When MC curve is rising, it cuts the AC curve at its minimum point E and after that point MC is
above than AC.
Relationship between TC and MC
1. When Marginal Cost falls, Total Cost increases at a diminishing rate.
2. When Marginal Cost is minimum (at point P), Total Cost is at its inflexion point (at point P1).
3.When Marginal Cost rises, Total Cost increases at an increasing rate.
Relationship between Average Cost, Average Variable Cost and Marginal Cost –
1. As long as MC curve is below than AVC and AC Curve, AVC and AC curve fall till their intersection
at a point E and E1
2. When MC curve comes to fall, it falls much rapidly than AVC and AC curves and reaches its
minimum point A earlier than AVC and AC Curve reaches their minimum point E and E 1
Therefore, MC Curve is rising from A to E whereas AVC is still falling from B to E and similarly, MC is
rising A to E1 and AC still falls from C to E1
3. When MC curve is rising it cuts the AVC and AC curves at their minimum point E and E 1
Thereafter, AVC and AC curve rise because MC is above than AVC and AC curves.
Relationship between Average Variable Cost and Marginal Cost
1.Both AVC and MC curve are U-shaped reflecting the law of Variable proportion.
2. The minimum point of AVC curve (point b) will always occur to the right of the minimum point of MC
curve (point a).
3. When AVC is falling, MC is below AVC.

4. When AVC is rising, MC is above AVC
5. When AVC is neither falling nor rising, MC = AVC (point b).
6. There is a range over which AVC is falling and MC is rising. This range is between the v output
levels Xa and Xb.
Words that Matter
1. Cost in economics: It is the sum total of explicit cost, implicit cost and certain minimum profit
(normal profit).
2. Explicit Cost: It refers to the actual money expenditure of a firm on purchasing goods or hiring
factor services and non-factor inputs (like raw material, electricity, fuel, etc.)
3. Implicit Cost: Implicit cost is the imputed or estimated value of inputs supplied by the owner of the
firm himself.
4. Cost function: It shows functional relationship between output and cost of production. It gives the
least cost combination of inputs corresponding to different levels of output.
5. Short Run Cost: Short run cost are those in which some factors of production are fixed and others
are variable.
6. Total Fixed Costs: Total Fixed costs are those costs of production which do not change with a
change in output.
7. Total Variable Cost: The cost incurred on variable factors of production is known as TVC.
8. Total Cost: During production, the expenditure incurred on various factors of production is known
as total cost.
9. Average Fixed Cost: The per unit cost incurred on fixed factors of production is known as average
fixed cost.
10. Average Variable Cost: The per unit cost incurred on variable factors of production is known as
AVC.
11. Average Total Cost/Average Cost (ATC): The per unit cost incurred on various factors of
production is known as average cost. In other words, it is the sum total of average variable cost and
average fixed cost.
12. Marginal Cost: The cost incurred on additional unit of output is known as Marginal cost.
Supply –Class 12 Micro Economics
Introduction
Numerical based chapter explaining Supply, determinants of individual supply and market supply, law
of supply, movement along the supply, shift in supply, reasons and exceptions to the law of supply,
price elasticity of supply and ways to measure it. It also takes into account the factors affecting the
price elasticity of supply and concept of time horizon.
1. Stock refers to total quantity of a particular commodity that is available with the firm at a
particular point of time.
2. (a) Supply refers to the quantity of a commodity that a firm is willing and able
to offer for sale, at each possible price during a given period of time.
(b) In other words, supply is that part of stock which is actually brought into the market for sale.
Stock can never be less than supply.
(c) For example, a seller has a stock of 50 tonnes of sugar in the go down. If the seller is
willing to sell 30 tonnes at a price of Rs. 37 per kg, then supply of 30 tonnes is a part of total
stock of 50 tonnes.
3. Market supply refers to the quantity of a commodity that all firms are willing and able to
offer for sale at each possible price during a given period of time.
4. Factors affecting personal (individual) supply:
(a) Price of the commodity:
(i) Positive relationship exists between price of the commodity and supply of that commodity.
(ii) It means, with the rise in price of the commodity, the supply of that commodity also rises and vice-
versa.
(b) Price of the factors of production:
(i) This also influences the supply since price of factors (rent, wages, interest, profit) constitutes the
cost of production of a commodity.
(ii) An increase in the price of a factor of production may lead to fall in production of a commodity
shifting the supply curve to the left.
(iii) As against it, a producer may supply more of a commodity at a given price if the prices of factors
fall shifting the supply curve to the right.
(c) State of technology:
(i) When there is technological progress in the firm, then cost of production will decrease, which leads
to increase in the profit margin of the firm and thereby shifts the supply curve rightward.
(ii) Supply of those goods which are being produced with old and inferior technology causing increase
in cost of production will decrease the total output and shift the supply curve to the left.
(d) Unit tax:
(t) A unit tax is a tax that the government imposes per unit sale of output.
(ii) For example, suppose that the unit tax imposed by the government is ? 3. Then, if the firm
produces and sells 20 units of the goods, the total tax that the firm must pay to the government is 20 *
3 = 60.
(iii) So, if the unit tax increases, the firm’s cost of production increases which will shift the supply
curve leftward. Similarly, if the unit tax decreases, the firm’s cost of production decreases, which will
shift the supply curve rightward.
(e) Price of other goods:
(i) Suppose a firm produces more than one product with its given resources.
(ii) An increase in the price of other goods induces the firm to produce more of other goods to earn
more profit and less of goods whose prices remained unchanged.
(f) Objective of the firm:
(i) Sometimes a firm may be induced to increase supply of a commodity not because it is more
profitable, but because its supply is a source of status and prestige in the market.
(ii) Similarly, a firm may increase production just to achieve the goal of maximum sale or maximum
employment.
5. Factors affecting Market supply:
(a) Price of the commodity
(b) Price of the factors of production
(c) State of technology
(d) Unit tax
(e) Price of other goods
(f) Objective of the firm
(g) Number of firms in the market:
(i) When the number of firms in the industry increases, market supply also increases due to large
number of producers producing that commodity.
(ii) However, market supply will decrease, if some of the firms start leaving the industry due to losses.
(h) Future Expectation regarding price:
(i) If sellers expect a rise in price in near future, current market supply will decrease in order to raise
the supply in future at higher prices.
(ii) However, if the sellers fear that the prices will fall in the future, they will increase the present
supply to avoid losses in future.
(i) Means of transportation and communication: Proper infrastructural
development, like improvement in the means of transportation and communication, helps in
maintaining adequate supply of the commodity.
6. Supply function shows the relationship between quantity supplied for a particular commodity and
the factor influencing it.
7. Individual supply function refers to the functional relationship between supply and factors
affecting the supply of a commodity.
It is expressed as, Sx = f (Px , P0 , Pf, St , T, O) Where, Sx = Supply of the given commodity x.
Px= Price of the given commodity x.
P0 = Price of other goods.
Pf = Prices of factors of production.
St= State of technology.
T = Taxation policy.
O = Objective of the firm.
8. (a) Market supply function refers to the functional relationship between market supply and factors
affecting the market supply of a commodity.
(b) As we know, market supply is affected by all the factors affecting the individual supply.
(c) In addition, it is also affected by some other factors like number of firms, future expectations
regarding price and means of transportation and communication. Market supply function is expressed
as, Sx = f(Px, P0, Pf, St, T, O, N, F, M)
Where, Sx = Market supply of given commodity x.
Px= Price of the given commodity x.
P0 = Price of other goods.
Pf = Prices of factors of production.
St= State of technology.
T = Taxation policy.
O = Objective of the firm.
N = Number of firms.
F = Future expectation regarding price of given commodity x.
M = Means of transportation and communication.
9. Supply schedule is a table showing various quantities of a commodity offered for sale
corresponding to different possible prices of that commodity.
Supply schedule is of two types:
(a) Individual supply schedule
(b) Market supply schedule.
10. Individual supply schedule refers to the supply schedule of an individual firm in the market.
Table shows a hypothetical supply schedule for commodity ‘x’.
As seen in the schedule, quantity supplied of commodity x increases with the increase in price. The
producer is willing to sell 50 units of x at a price of ? 10. When the price rises to ? 20, supply also
rises to 100 units.
11. Market supply schedule refers to supply schedule of all the firms in the market producing a
particular commodity.
It is obtained by adding all the individual supplies at each and every level of price. Market supply is
calculated as, SM= SA + SB + ….
Where Sm is the market supply and SA + SB+ … are the individual supply of supplier A, supplier B and
so on.
Let us understand the derivation of market supply schedule with the help of Table (Assuming that
there are only 2 producers A and B in the market).
As seen in table market supply is obtained by adding the supplies of suppliers A and B at different
prices. At price of Rs. 10 market supply is 150 units. When price rises to Rs. 20, market supply rises
to 300 units. So, market supply schedule also shows the direct relationship between price and
quantity supplied.
12. Supply curve refers to a graphical representation of supply schedule. It shows direct relationship
between price and quantity supplied, keeping other factor constant. Supply curve is of two types:
(a) Individual Supply Curve (b) Market Supply Curve
13. (a) Individual supply curve refers to a graphical representation of individual supply schedule.
(b) With the help of information given in supply schedule (see table), the supply curve for an individual
firm can be drawn as shown in figure:
(c) In figure, quantity supplied is taken on the horizontal axis and price on the vertical axis. At each
possible price, there is a quantity, which the firm is willing to sell.
(d) Point ‘A’ shows that 50 units are supplied at the price of Rs. 10. Point ‘B’ shows that 100 units are
supplied at Rs. 20.
(e) By joining all the points (A to E), we get a curve that slopes upward. The supply curve SS slopes
upward due to positive relationship between price and quantity supplied.
14. (a) Market supply curve refers to a graphical representation of market supply
schedule. It is obtained by horizontal summation of individual supply curves.
(b) Let us graphically convert the market supply schedule (table) into a market supply curve (see
figure).
(c) As seen in the diagram, quantity supplied is shown on the horizontal axis and price on the vertical
axis. and SB are the individual supply curves.
Market supply curve (SJ) is obtained by horizontal summation of the individual supply curves.
(d) At the price of Rs. 10 per unit both the firms will supply a total number of 150 units. When price
rises to Rs. 20 per unit, market supply rises to 300 units.
(e) Market supply curve is also positively sloped
due to positive relationship between price and quantity supplied. Quantity Supplied
15. Market supply curve is flatter than all individual supply curves. It happens because with a rise in
price, the proportionate rise in market supply is more than the proportionate rise in individual supplies.
16. (a) Other things being constant (Ceteris Paribus), based on price of the commodity; then it is
known as Law of Supply.
It means, quantity supplied of the commodity rises due to rise in price of the commodity and vice-
versa.
(b) Ceteris Paribus means:
(i) Price of other commodity remains constant.
(ii) Technology of production should not change.
(iii) Cost of production remains constant.
(iv) Taxation policy of the government should not change.
(v) Objective of the firm remains constant.
(c) The law of supply makes a qualitative statement only and not quantitative. It indicates the
direction of change in the amount supplied and it does not indicate the magnitude of change.
(d) Law of supply is one sided. It explains only the effect of change in price on the quantity supplied.
It states nothing about the effect of change in quantity supplied on the price of the commodity.
(e) The schedule and diagram are as follows:
Movement Along The Supply Curve Or Change In Quantity Supplied
1. It is based on law of supply which states that quantity supplied of the commodity changes due to
the change in price of the commodity.
2. The change in quantity supply due to the change in the price of the commodity is known as
Movement along the supply curve. It may be of two types; namely,
(a) Expansion in supply (increase in quantity supplied)
(b) Contraction in supply (decrease in quantity supplied)

3. Expansion in supply (increase in quantity supplied or upward movement along supply curve):
(a) It is based on law of supply which states that quantity supplied of a commodity rises due to the rise in price of the
commodity.
(b) The rise in quantity supplied due to the rise in price of the commodity is known as expansion in supply.
(c) In the given diagram price is measured on vertical axis whereas quantity supplied is measured on horizontal axis.
A producer is supplying OQ quantity at OP price. But, due to the rise in price from OP to OP1, the quantity supplied
increases from OQ to OQ1; which is known as expansion in supply.
4. Contraction in supply (decrease in quantity supplied or Downward movement along Supply Curve):
(a) It is based on law of supply which states that quantity supplied of a commodity falls to the fall in the price of the
commodity.
(b) The fall in the quantity supplied due to the fall in price of the commodity is known as contraction in supply.
(c) In the given diagram, quantity supplied is measured on horizontal axis and price is measured on vertical axis. A
producer is supplying OQ quantity at OP price.
But, due to fall in price from OP to OP1, the quantity supply falls from OQ to OQ1, which is called contraction in supply.
Shift In Supply Curve Or Change In Supply
1. It is based on factor other than price. If supply changes due to the change in the factors other
than price, then it is known as shift in supply curve.
2. It may be of two types:
(a) Increase in supply (b) Decrease in supply
(a) Increase in supply:
(i) An increase in supply means that producers now supply more at a given level of price of a
commodity.
• Fall in the prices of remuneration of factors of production.
• Fall in the prices of other commodities.
• Improvement in technology.
• Taxation policy of government falls.
• Change in objective of producer (inducing them to increase supply at the same price.)
(iii) In the given diagram price is measured on vertical axis whereas, quantity supplied is measured on
horizontal axis. A producer is supplying OQ quantity at OP price.
But, due to the changes in the factors other than price, the supply curve shifts rightward from SS to S1S1.
With the rightward shift in supply curve from SS to S1S1, the quantity supplied rises from OQ to OQ1; which is known as
increase in supply.
(b) Decrease in Supply:
(i) A decrease in supply means that producers now supply less at a given level of price of a commodity.
• Rise in the prices of remuneration of factors of production.
• Rise in the prices pf other goods.
• When the technology becomes outdated.
• Taxation policy of government rises.
• Change in objective of producer (inducing them to decrease supply at the same price).
(iii) In the given diagram, quantity supplied is measured on horizontal axis whereas price is measured on vertical axis. A
producer is supplying OQ quantity at OP price.
But, due to changes in the factors other than price the supply curve shifts leftward from SS to S1S1
With the leftward shift in the supply curve from SS to
S1S1 the quantity supplied falls from OQ to OQ1, which is known as decrease in supply.
Causes And Exceptions To The Law Of Supply
1. There is a positive relationship between price of the commodity and quantity supplied for that
commodity which causes supply curve to slope upward from left to right.
2. It is because of the following reasons:
(a) Change in stock:
(i) With the increase in the price of the commodity sellers are ready to sell more from their old stock of
goods.
(ii) On the other hand, when price of a commodity decreases, sellers would like to increase their stock
to avoid losses.
(b) Profit and loss: With the rise in price producers generally increase their production in view of higher profit
possibilities and vice-versa.
(c) Entry or exit of firms:
(i) When the price of a commodity increases, new firms enter into the industry with the view to earn profits which in
turn increases the supply.
(ii) On the other hand, when price starts falling, marginal firms (or inefficient firms) leave the market to avoid expected
losses which thereby decreases the supply.
3. Exceptions to law of supply are:
(a) Future expectations:
(i) The law will not apply if there are future expectations for further change in prices.
(ii) For example, if sellers expect further fall in prices in future, they would be ready to sell more even at low prices.
(b) Agricultural goods: The supply of agricultural goods depends more on natural factors such as drought, floods, natural
calamities etc. and less on their prices.
(c) Perishable goods: The supply of perishable goods, like milk, vegetables, fish, eggs, etc. is also not affected by their
prices. Sellers cannot hold these goods for long.
(d) Rare articles:
(i) In case of some precious and rare goods also, the law of supply does not apply.
(ii) Artistic goods of high quality and poems written by top class poets come under this categoiy. Their supply cannot be
increased even when their prices rise.
(e) Backward countries:
(i) The law of supply loses its applicability in backward countries where production and supply cannot be increased
merely because of rise in prices.
(ii) Here resources which are urgently required for production are lacking.
Elasticity Of Supply And Price Elasticity Of Supply(PES/ES)
1. The degree of responsiveness of quantity supplied due to the changes in determinants of supply
(price of other commodity, price of factors of production, technology, etc.) is known as elasticity of
supply.
2. (a) The degree of responsiveness of quantity supplied due to the changes in price of the
commodity is known as price elasticity of supply.
(b) It is quantitative statement, i.e., it tells us the magnitude of the change in quantity supplied as a
result of change in price.
3. Percentage method/flux method for calculating price elasticity of supply:
According to this method, elasticity is measured as the ratio of percentage change in the quantity
supplied to percentage change in the price.
(a) Percentage change in quantity supplied = Injtw Quantity Supplie(J |Q)
(b) Change in Quantity (AQ) = New Quantity (QJ – Initial Quantity (Q)
(c)Price elasticity of supply (ES) = Now,
(d) Change in Price (AP) = New Price (P,) – Initial Price (P)
Proportionate Method: The percentage method can also be converted into the proportionate method:
Putting the values of (a), (b), (c) and (d) in the formula of percentage method, we get,
6.Factors Affecting Price Elasticity of Supply:
(a) Nature of the commodity: Elasticity of supply to some extent depends upon the nature of the
commodity.
(i) For example, perishable goods have inelastic supply (because their supply cannot be increased or
decreased) while the supply of durable goods is elastic.
(ii) Likewise, the supply of agricultural goods is inelastic while it is elastic in case of industrial goods.
(b) Cost of production
(i) If cost of production rises rapidly with the increase in output, there is less incentive to raise the
supply with the increase in price. In such cases, supply will be inelastic.
(ii) However, if cost of production increases slowly with the rise in output, supply will increase with the
rise in prices. In this case, supply will be more elastic.
(c) Time period
(i) In the market period, supply of a commodity is perfectly inelastic as supply cannot be changed
immediately with the change in price.
(ii) In the short period, supply is relatively less elastic as firm can change the supply by changing the
variable factors.
(iii) In the long period, supply is more elastic as all the factors can be changed and supply can be
easily adjusted as per changes in price.
(d) Technique of production
(i) If simple techniques of production are employed in the production of a commodity, its supply will be
elastic.
(ii) On the other hand, it becomes very difficult to change supply (in response to change in price)
under complex techniques of production.
(e) Availability of resources and facilities
(i) The production of a commodity requires adequate resources and other facilities like irrigation,
power, transportation, banking, etc. The producers feel handicapped in their absence or shortage.
Hence, supply becomes inelastic.
(ii) On the other hand, if these resources and facilities are easily and adequately available, producers
can easily respond to any change in price.
7. Time Horizons And Supply Curve
Time period which is available to a firm to adjust its supply also plays an important role in the shapes
of supply curves.
(a) Short period:

(i) In the short period, supply is relatively less elastic as firm can change the supply by changing the
variable factors only, as fixed factors cannot be change during short period.
The supply curve during short period is inelastic, i.e., percentage change in quantity supplied is less
than percentage change in price as shown in the adjacent figure.
(b) Long period:
(i) In the long period, supply is more elastic as all the factors can be changed and supply can be
easily adjusted as per changes in price.
(ii) The supply curve during long period is elastic, i.e., percentage change in quantity supplied is
greater than percentage change in price as shown in the adjacent figure.
(c) Very short period (Market Period):
(i) In very short period (Market Period), it becomes very difficult for a firm to increase its production
level even if price of its commodity has increased because factor inputs like new machinery, technical
labour, etc. do not become available immediately.
(ii) Under such a situation, individual and market supply curve will take the shape of vertical line
parallel to Y-axis as shown in the adjacent figure.
Words that Matter
1. Stock: It refers to total quantity of a particular commodity that is available with the firm at a
particular point of time.
2. Supply: It refers to the quantity of a commodity that a firm is willing and able to offer for sale, at
each possible price during a given period of time.
3. Market supply: It refers to the quantity of a commodity that all firms are willing and able to offer for
sale at each possible price during a given period of time.
4. Supply function: It shows the relationship between quantity supplied for a particular commodity
and the factor influencing it.
5. Individual supply function: It refers to the functional relationship between supply and factors
affecting the supply of a commodity.
It is expressed as, = f(Px, P0, S, T, O)
6. Market supply function: It refers to the functional relationship between market supply and factors
affecting the market supply of a commodity.
It is expressed as, Sx = f (Px, P0, Pf, St, T, O, N, F, M)
7. Supply schedule: It is a table showing various quantities of a commodity offered for sale
corresponding to different possible prices of that commodity.
8. Individual supply schedule: It refers to the supply schedule of an individual firm in the market.
9. Market supply schedule: It refers to supply schedule of all the firms in the market producing a
particular commodity.
10. Supply curve: It refers to a graphical representation of supply schedule. It shows direct
relationship between price and quantity supplied, keeping other factor constant.
11. Individual supply curve: It refers to a graphical representation of individual supply schedule.
12. Market supply curve: It refers to a graphical representation of market supply schedule. It is
obtained by horizontal summation of individual supply curves.
13. Law of Supply: It states that price of the commodity and quantity supplied are positively related
to each other when other factors remain constant (ceteris paribus).
14. Movement along the supply curve: The change in quantity supply due to the change in the
price of the commodity is known as Movement along the supply curve.
15. Expansion in supply: The rise in quantity supplied due to the rise in price of the commodity is
known as expansion in supply.
16. Contraction in supply: The fall in the quantity supplied due to the fall in price of the commodity
is known as contraction in supply.
17. Shift in supply curve: If supply changes due to the change in the factors other than price, then it
is known as shift in supply curve.
18. Increase in Supply: An increase in supply means that producers now supply more at a given
level of price of a commodity.
19. Decrease in supply: A decrease in supply means that producers now supply less at a given level
of price of a commodity.
20. Elasticity of supply: The degree of responsiveness of quantity supplied due to the changes in
determinants of supply (price of other commodity, price of factors of production, technology, etc) is
known as elasticity of supply.
21. Price elasticity of supply: The degree of responsiveness of quantity supplied due to the
changes in price of the commodity is known as price elasticity of supply.
Revenue –Class 12 Micro Economics
Introduction
This chapter is numerically based and comprises of the concepts of revenue, total revenue, average
revenue, marginal revenue and their relationships, both when price is constant and when price is
falling.
1. Revenue of a firm refers to receipts from the sale of output in a given period.
2. (a) The total money receipt of a firm from the sale of given amount of output is known as Total
Revenue.
Total Revenue = Price x Quantity
(b) For example,
(i) if a firm sells 100 chairs at a price of Rs. 200 per chair, the total revenue will be 100 Chairs x Rs.
200 = Rs. 20,000
(ii)
(c)(i)TR is summation of MR: Total Revenue can also be calculated as the sum of marginal revenues
of all the units sold.
It means, TRn = MR1 + MR2 + MR3 +……….+ MRn
(ii)
3. (a) The per revenue received from the sale of given amount of output is knows as Average
Revenue.
(b)As, sellers receive revenue according to price, price and AR are one and the same thing. This can
be explained as under,
(c) For example,

(i) if total revenue from the sale of 100 chairs at a price of Rs. 200 per chair is Rs. 20,000,
average revenue will be = Rs. 200
(ii)
(d) A buyer’s demand curve graphically represents the quantities demanded by a buyer at various
prices. In other words, it shows the various levels of average revenue at which different quantities of
the goods are sold by the seller. Therefore, in economics, it is customary to refer AR curve as the
Demand Curve of a firm.
4. (a) Marginal revenue is the additional revenue when an additional unit of output is sold.
(ii) (a) We know that MR is the change in TR when one more unit is sold. However, when change in
units sold is more than one, then MR can also be calculated as Change in Total Revenue ATR
Change in number of units AQ
(b) For example: If the total revenue realised from sale of 100 chairs is Rs. 20,000 and that from sale
of 110 chairs is Rs. 30,000, the marginal revenue will be,
(ii)
Relationship Between Revenue Curves
Case I: Relationship between Average Revenue and Marginal Revenue when Price is Constant
1. When price remains the same at all output levels, the firm cannot influence the prevailing market
price of the commodity. The price is given to it.
2. It can sell any amount of the commodity at this given price. Under such a case firm’s average and marginal revenue
remains equal and their curves coincide as shown in given schedule and diagram:
3. It can be seen from the above schedule and diagram that price remains same and equal to MR at all levels of output.
As the result of, demand curve (or AR curve) is perfectly elastic.
4. When a firm is able to sell more output at the same price, then AR = MR at all levels of output.
Case II: Relationship between Total Revenue and Marginal Revenue when Price is Constant
1. When price of the commodity is constant, then firms can sell any quantity of output
at a given price.
2. So, MR curve (and AR curve) is a horizontal straight line parallel to the X-axis. Since MR remains constant, TR also
increases at a constant rate (see Schedule).
3. Due to this reason, the TR curve is a positively sloped straight line (see Figure). As TR is zero at zero level of output,
the TR curve starts from the origin.
Case III: Relationship between Average Revenue and Marginal Revenue when Price Falls
1. When price falls, with rise in output, then AR falls, MR also falls but at a much faster rate. As a result, the revenue
from every additional unit (i.e. MR) will be less than AR.
2. As a result, both AR and MR curves slope downwards from left to right. This can be explained with the help of given
Schedule and Figure:
3. In the above schedule, both MR and AR fall with increase in output. However, the fall in MR is double than that in AR,
i.e., MR falls at a rate which is twice the rate of fall in AR. As a result, MR curve is steeper than the AR curve. When the
AR curve is extended till point B, then MR curve cuts the X-axis exactly halfway between the point of origin (O) and point
B, so that OA = AB.
Case IV: Relationship between Total Revenue and Marginal Revenue when Price Falls
1. When MR falls and remains positive, than total revenue increase at a diminishing rate.
(a) As per Schedule, till the 5th unit of output, MR falls but remains positive and, thus, TR increases at diminishing rate.
(b) In Figure, the TR curve increases at a diminishing rate (till point P) as long as MR is positive (till point P 1).
2. When MR is zero, then TR is maximum and constant.
(i) As per Schedule, at the 6th unit, MR is zero and TR is at its maximum and constant.
(ii) In Figure, when MR is zero (point P1), Total Revenue reaches its highest point (point P).
3. When MR is negative, then TR falls.
(i) As per Schedule, after 6th unit, MR not only falls, but also becomes negative due to which TR starts declining.
(ii) In Figure when MR becomes negative (after point P1), then Total Revenue Falls (after point P).
Words that Matter
1. Revenue: Revenue of a firm refers to receipts from the sale of output in a given period.
2. Total Revenue: The total money receipt of a firm from the sale of given amount of output is known
as total Revenue.
3. Average Revenue: The per unit revenue received from the sale of given amount of output is
known as Average Revenue.
4. Marginal Revenue: Marginal revenue is the additional revenue when an additional unit of output is sold.
Producer Equilibrium –Class 12 Micro Economics
Introduction
This chapter contains essentially the concept of producer equilibrium with marginal revenue and
marginal cost approach, both when price is constant and when price is falling along with the
numericals.
1. Profit refers to the excess of money receipts from the sale of goods and services (i.e, revenue)
over the expenditure incurred on producing them (i.e, cost).
For example, if a firm sells goods for Rs. 5 crores after incurring an expenditure of Rs. 3 crores, then
profit will be Rs. 2 crores.
2. A producer is said to be in equilibrium when he produces that level of output at which his profits
are maximum. Producer’s equilibrium is also known as profit maximisation situation.
3. There are two methods for determination of Producer’s Equilibrium:
(a) Total Revenue and Total Cost Approach (TR – TC Approach)
(b) Marginal Revenue and Marginal Cost Approach (MR – MC Approach)
4. A firm produces and sells a certain amount of a good. The firm’s profit, denoted by π, is defined
to be the difference between its total revenue (TR) and its total cost of production (TC). In other
words, π= TR – TC
5. Producer’s equilibrium when price is constant with a rise in output under MR/MC approach is
determined where,
(a) MR = MC (b) MC must be rising According to Table, both the conditions of equilibrium are
satisfied at 4 units of output. MC is equal to MR and MC is rising. MC is more than MR when output is
produced after 4 units of output. So, Producer’s Equilibrium will be achieved at 4 units of output.
However, MR is equal to MC at 2 units of output also.
But, second condition is not fulfilled here.
Let us understand the determination of equilibrium o with the help of a diagram.
Producer’s Equilibrium is determined at OQ level of «P output corresponding to point E as at this
point, MC MR and MC curve cuts MR curve from below.
In Figure, output is shown on the horizontal axis and £ revenue and costs on the vertical axis.
Producer’s Q Units Sold
equilibrium will be determined at OQ level of output corresponding to point E because at this, the
following two conditions are met:
(a) MC = MR; (b) MC curve cuts the MR curve from below.
When MR > MC, then producer will continue to produce as long as MR becomes equal to MC. It is so
because firm will find it profitable to raise the output level.
When MR < MC, then producer will cut down the production as long as MR becomes equal to MC. It
is so because firm will find it Unprofitable to produce an extra unit. So, it starts reducing the level of
output till MR = MC.
6. Producer’s equilibrium when price fall with a rise in output under MR/MC approach is determined
where,
(a) MR = MC (b) MC must be rising When price falls with the rise in output, MR curve slope
downwards. Let us understand this with the help of following table:
According to Table, both the conditions of equilibrium are satisfied at 4 units of output.
MC is equal to MR and MC is rising. MC is more than MR when output is produced
after 4 units of output. So, Producer’s Equilibrium will be achieved at 4 units of output.
Let us understand the determination of equilibrium ^ with the help of a diagram:
Producer’s Equilibrium is determined at OQ level of output corresponding to point E as at this point,

MC = MR and MC curve cuts MR curve from below.
In Figure, output is shown on the horizontal axis and revenue and costs on the vertical axis.
Producer’s equilibrium will be determined at OQ level of output g corresponding to point E because at
this, the following two conditions are met: OQ Units Sold
(a) MC = M, and (b) MC curve cuts the MR curve from below.
When MR > MC, then producer will continue to produce as long as MR becomes equal to MC. It is so
because firm will find it profitable to raise the output level.
When MR < MC, then producer will cut down the production as long as MR becomes equal to MC. It
is so because firm will find it Unprofitable to produce an extra unit. So, it starts reducing the level of
output till MR = MC.
So, the producer is at equilibrium at OQ units of output.
Words that Matter
1. Profit: Profit refers to the excess of revenue over cost.

2. Producer’s equilibrium: A producer is said to be in equilibrium when he produces that level of
output at which his profits are maximum. Producer’s equilibrium is also known as profit maximisation
situation.
Perfect Competition –Class 12 Micro Economics
Introduction
This chapter gives the definition of market and its structure, forms of market mainly perfect
competition and its features and related concepts (the remaining forms of market being studied in
Chapter-12) and short run equilibrium condition under it.
1. Market refers to a region where the buyers and sellers of a commodity come in contact with
each other to effect the transactions of purchase and sale of the commodity.
2. Market structure refers to number of firms and types of firms operating in the industry.
3. Three basis on which different market are defined:
(a) Nature of commodity: If homogeneous goods are produced in a market, it is sold at a
constant price. If commodity produce is of heterogeneous or differentiated in nature, it may be
sold at different prices. If commodity has no close substitute, the seller can charge higher price
from the buyer.
(b) Number of buyer and sellers: If there are large number of buyers and sellers, then buyers
and sellers are not in a position to influence the price of the commodity. If, there is a single
seller of a commodity, then the seller has control over a price.
(c) Entry and exit of a firm: If there is a free entry and exit of a firm, then the price will be
stable in the long run. It is so because then the new firm enter the industry induced by large
profit, then abnormal profit will be wiped out and if inefficient firms incurring losses are free to
leave the industry. In short due to free entry and exit, firm earns normal profit. If there is difficult
entry of a new firm (because of patent rights), then a firm can influence the price as it has no
fear of competition.
4. Main forms of market are:
(a) Perfect competition
(b) Imperfect competition.
(i) Monopoly
(ii) Monopolistic competition (iii) Oligopoly.
5. Perfect Competition refers to a market situation in which buyers and sellers operate freely
and a commodity sells at a uniform Constant) price.
6. Features of Perfect Competition:
(a) Large number of sellers and buyers:
(i) Large number of sellers
• The words ‘large number’ simply states that the number of sellers is large enough to render a
single seller’s share in total market supply of the product is insignificant.
• Insignificant share means that if only one individual firm reduces or raises its own supply, the
prevailing market price remains unaffected.
• The prevailing market price is the one which was set through the intersection of market
demand and market supply forces, for which all the sellers and all the buyers together are
responsible.
• One single seller has no option but to sell what it produces at this market determined price.
This position of an individual firm in the total market is referred to as price taker. This is a
unique feature of a perfectly competitive market.
(ii) Large number of buyers
• The words ‘large number’ simply states that the number of buyers is large enough, that an
individual buyer’s share in total market demand is insignificant, the buyers cannot influence the
market price on his own by changing his demand.
• This makes a single buyer also a price taker.
To sum up, the feature “large number” indicates ineffectiveness of a single seller or a single
buyer in influencing the prevailing market price on its own, rendering him simply a price taker.
(b) Homogeneous Products:
(i) Product sold in the market are homogeneous, i.e., they are identical in all respects like
quality, colour, size, weight, design, etc.
(ii) The products sold by different firms in the market are equal in the eyes of the buyers.
(iii) Since, a buyer cannot distinguish between the product of one firm and that of another, he
becomes indifferent as to the firms from which he buys.
(iv) The implication of this feature is that since the buyers treat the products as identical they
are not ready to pay a different price for the product of any one firm. They will pay the same
price for the products of all the firms in the industry. On the other hand, any attempt by a firm
to sell its product at a higher price will fail. To sum up, the “homogenous products” feature
ensures a uniform price for the products of all the firms in the industry.
(c) Free entry and exit of firms:
(i) Buyers and sellers are free to enter or leave the market at any time they like. New firms
induced by large profits can enter the industry whereas losses make inefficient firms to leave
the industry.
(ii) The freedom of entry and exit of firms has an important implication. This ensures that no
firm can earn above normal profit in the long run. Each firm earns just the normal profit, i.e.,
minimum necessary to carry on business.
(iii) Suppose the existing firms are earning above normal profits, i.e. positive economic profits.
Attracted by the positive profits, the new firms enter the industry. The
industry’s output, i.e. market supply, goes up. The prices come down. New firms continue to
enter and the prices continue to fall till economic profits are reduced to zero.
(iv) Now suppose the existing firms are incurring losses. The firms start leaving. The industry’s
output starts falling, prices going up, and all this continues till losses are wiped out. The
remaining firms in the industry then once again earn just the normal profits.
(v) Only zero economic profit in the long run is the basic outcome of a perfectly competitive
market.
(d) Perfect Knowledge about the market:
(i) Perfect Knowledge means both buyers and sellers are fully informed about the market.
(ii) The firms have all the knowledge about the product market and the input markets. Buyers
also have perfect knowledge about the product market.
(iii) The implication of perfect knowledge about the product market is that any attempt by any
firm to charge a price higher than the prevailing uniform price will fail. The buyers will not pay
because they have perfect knowledge. A uniform price prevails in the market.
(iv) Regarding the knowledge about the input markets the implicit assumption is that each firm
has an equal access to the technology and the inputs used in the technology.
(ii) No firm has any cost advantage. Cost structure of each firm is the same. All the firms have
a uniform cost structure.
(vi) Since there is uniform price and uniform cost in case of all firms, and since profit equals
revenue less cost, all the firms earn uniform profits.
(e) Perfect mobility:
(i) There is perfect mobility in the market both for goods and factors of production.
(ii) There should be no restriction on their movement. Goods can be sold at any place.
(iii) Similarly, factors of production can freely move from one place to another or from one
occupation to another.
(j) Absence of transportation and selling cost.
(i) In perfect competition, it is assumed that there is no transport cost for consumers who may
buy from any firm and also there is no selling cost.
(ii) This insures existence of a single uniform price of the product.
7. Demand Curve and revenue curves under perfect competition
(a) As we know, in perfect competition homogeneous goods are produced. So, price remains
constant, which makes the demand curve perfectly elastic.
(b) In perfect competition, homogeneous goods are produced, that is why price remains
constant, as price = AR, it means AR remains constant. And if, AR remains constant, then AR
= MR as per the
8. In perfect competition, industry is the price maker and firm is the price taker.
(a) As we know, in Perfect competition, homogeneous goods are produced. So, industry
cannot charge different price from different firms.
(b) So, industry will give that price to the firm where industry is in equilibrium,
i. e., where Demand = Supply. Any movement from that point would be unstable.
(c) In the above diagram, price, revenue and Cost is measured on vertical axis and units of
commodity on horizontal axis. Industry will give OP price to the firm as at that point Demand =
supply, i.e., industry is in equilibrium.
The firms will follow the same price and charges same from the consumer.
9. Relationship between TR, AR and MR under perfect competition
(a) In the perfect competition, a firm is a price taker.
(fa) ) It has to sell its product at the same price as given (determined) by the industry.
Consequently, price = AR = MR.
(c) Hence, a firm’s AR and MR curve will be a horizontal straight line parallel to X axis.
(d) Since price remains the same, i.e., MR is constant, therefore, TR increases at the constant
rate as increase in the output sold.
(e) As a result, TR curve facing a competitive firm is positively sloped straight line. Again,
because at zero output Total Revenue is zero therefore, TR curve passes through the origin O
as shown in the
10. Break-even Point
(a) Break-even point is the level of output at which total cost of production (Fixed Cost +
Variable Cost) per unit just equals to Total Revenue.
(b) At this point the firm has neither profit nor loss. In other words, firm gets only normal profit,
which is included in total cost.
(c) Normal profit is a minimum profit, that a firm must get to remain in Production.
11. Shutdown point: Shutdown point is a point where a firm is indifferent between whether to
produce or shutdown. In other words, it is a situation when a firm is able to cover its variable
costs only.
The condition of shutdown point is:
Price = Minimum of SAVC (Short run average variable cost)
Multiply by output
Price x output = SAVC x output
TR = TVC
Words that Matter
1. Market: It refers to a region where the buyers and sellers of a commodity come in contact with
each other to effect the transactions of purchase and sale of the commodity.
2. Market structure: It refers to number of firms and types of firms operating in the industry.
3. Perfect Competition: It refers to a market situation in which buyers and sellers operate freely and a commodity sells
at a uniform (Constant) price.
4. Homogeneous Products: Product sold in the market are homogeneous, i.e., they are identical in all respects like
quality, colour, size, weight, design, etc.
5. Break-even point: It is the level of output at which total cost of production (Fixed Cost + Variable Cost) per unit just
equals to Total Revenue.
6. Shutdown point: It is a point where a firm is indifferent between whether to produce or shutdown. In other words, it
is to a situation when a firm is able to cover its variable costs only.
Non-Competitive Market –Class 12 Micro
Economics
Introduction
This chapter explains non competitive market forms (monopoly, monopolistic competition and
oligopoly), their features and differences.
Monopoly
1. Meaning:
(a) ‘Mono’ means single and ‘poly’ means seller, i.e., single seller.
(b) Monopoly is a market situation where there is a single firm selling the commodity and there is no
close substitute of the commodity sold by the monopolist.
2. Reasons of Monopoly:
(a) Grant of patent rights
(i) When a company introduces a new product or new technology it applies to the government to
grant it patent certificate by which it gets exclusive rights to produce new product or use new
technology.
(ii) Patent rights prevent others to produce the same product or use the same technology without
obtaining license from the concerned company. Patent rights are granted by the government for a
certain number of years.
(iii) For example, Patent certificate was granted to Xerox company for copying machines invented by it, thereby giving
rights to monopoly.
(b) Licensing by Government
(i) A monopoly market emerges when government gives a firm license, i.e. exclusive legal rights to produce a given
product or service in a particular area or region.
(ii) For example Previously Delhi Vidyut Board (Govt. Board) had the exclusive right to distribute electricity in Delhi. Now
after privatization the same rights have been given to two private companies with exclusive areas to serve.
(c) Forming a Cartel
(i) A Cartel is a group of firms which jointly set output and prices so as to exercise monopoly power.
(ii) For example, In 1960, some oil producing companies formed a cartel, called OPEC (Organisation of Petroleum
Exporting Countries).
3. Features of Monopoly:
(a) Single Seller
(i) There is only one seller or producer of a commodity in the market.
(ii) As a result, the monopoly firm has full control over the supply of the commodity.
(iii) The monopolist may be an individual, a firm, a group of firms or a government itself.
(iv) Naturally, a monopoly firm can exploit buyers by charging almost any price for its product because of exclusive
control over the product.
(v) Monopoly firm itself is the price maker and not the price taker.
(b) Absence of close substitutes of product
(i) The product sold by the monopolist has no close substitute.
(ii) Though, some substitutes of the product may be available, yet they are not close substitutes in the sense that such
substitutes are not identical products.
(c) Difficult entry of a new firm
(i) The monopolist controls the situation in such a way that it becomes very difficult for a new firm to enter the
monopoly market and compete with the monopolist by producing the same product.
(ii) The monopolist tries his utmost to block entry of a new firm.
(d) Price Discrimination
Price discrimination refers to the practice of charging different prices from different buyers at the same time for the
same product.
(e) Price Maker
(i) A monopoly firm has market power and is itself a price-maker. It can choose any price, it likes.
(ii) Unlike perfect competition where as output increases, price remains unchanged.
(iii) In monopoly as output increases or decreases, price changes according to what consumers are willing to pay along
the demand curve. It produces and supplies a product to satisfy the entire market.
(iv) It is because a monopoly firm faces the entire demand of the market, that market demand curve is said to be a
constraint facing a monopoly firm.
4. Shape of demand curve under monopoly:
(a) As we know in monopoly there is a single seller or firm, that is why like an industry, single seller constitutes the entire
market for the product, which has no close substitutes.
(b) So, a monopolist has full freedom and power to fix price for the product.
(c) However, demand of the product is not in the control of monopoly firm. In order to increase the output to be sold,
monopolist will have to reduce the price because of price discrimination.
(d) Therefore, a monopoly firm faces a downward sloping demand curve.
(e) The elasticity of demand curve is inelastic because of no close substitute of a commodity.
5. Shape of Average revenue and marginal revenue curve under monopoly
(a) A monopoly firm faces a downward sloping demand curve as more output can be sold only by reducing the price
because of price discrimination.
(b) As, we know, Price = Average revenue. So, when price falls means Average revenue falls and when Average revenue
fall, then marginal revenue also falls but at a much faster rate. So, Marginal Revenue(MR) is less than Average Revenue
(AR).
Monopolistic Competition
1. Meaning:
(a) It refers to a market situation in which there are many firms which sell closely related but
differentiated products.
(b) Market for such products are toothpaste, soap, air conditioners etc.
(c) The market is called monopolistic competition since it contains both the competitive element and monopoly
element.
2. Features of monopolistic competition
(a) A large number of firms:

(i) The number of firms selling similar product is fairly large, but not very large as in perfect competition.
(ii) As a result, firms are in a position to influence the price of their product due to their branji names.
(b) Product differentiation:
(i) In this type of market situation a producer can produce different products, but that products should be a
close substitute to each other.
(ii) Product differentiation means differentiating the product on the basis of brand, colour, shape etc.
(iii) Due to product differentiation each firm under monopolistic competition is in a position to exercise some
degree of monopoly (inspite of large number of sellers) because buyers are willing to pay different prices for the
same product produced by different firms.
(iv) No doubt, producer has a control over a price, but he knows it very well to maximize the profit price has to be
reduced. So, price falls under monopolistic competition due to product differentiation.
(c) Selling cost:
(i) It is the expenses which are incurred for promoting sales or inducing customers to buy a good of a particular brand.
(ii) This includes the cost of advertisement through newspaper, television and radio, and cost on each other sales
promotional activities.
Note:
Persuasive Advertising: It refers to advertising so as to lure (attract) consumers avail
from one brand to another.
(d) Free entry and exit of firms:
(i) New firms can enter the market, if found profitable. Similarly, inefficient firms already operating in the market are
free to quit the market if they incur losses.
(ii) It is because of this feature that like perfect competition, monopolistic competition also gives rise to normal profit.
(iii) No firm receives abnormal profit in the long run as then new firms can emerge and old ones can expand output and
adjust supply with changing demand.
3. Shape of Demand Curve Under Monopolistic Competition
(a) The demand curve faced by a firm is negatively slope, (i.e. when price falls, demand rises) because the firm can sell
more only by lowering the price of its product because of product differentiation.
(b) The demand curve in monopolistic competition is highly elastic due to availability of close substitutes as a result, AR
curve becomes more flatter.
4. Shape of Average revenue and marginal revenue curve under Monopolistic Competition:
(a) Like a monopoly firm, the firm under monopolistic competition also fixed the price itself subject to certain
limitations.
(b) No doubt, producer has a control over a price, but he knows it very well to maximize the profit, price has to be
reduced. Price reduce means Average Revenue reduces and average revenue reduces marginal revenue but at a much
faster rate. So, under monopolistic competition MR < AR.
Oligopoly
1. Meaning:
(a) The term oligopoly is derived from two Greek words: ‘oligoi’ means few and ‘poleein’ means ‘to
sell.’
(b) Oligopoly is a market situation in which an industry has only a few firms (or few large firms
producing most of its output) mutually dependent for taking decisions about price and output.
(c) William Fellner defines oligopoly as “Competition among the few”.
(d) In India, markets for carbonated beverages, “National Newspapers” market, mobile services
provider, washing products, automobiles, cement, aluminium, etc., are the examples of oligopolistic
market. In all these markets there are few firms for each particular product.
3. Types of Oligopoly:
(a) Pure or Perfect Oligopoly:
(i) In the case of pure oligopoly, firms produce homogenous products like copper, iron, steel
and aluminium.
(ii) So, decisions by consumers to purchase the goods of a particular firm are influenced by the
price considerations.
(b) Imperfect or Impure or Differentiated Oligopoly:
(i) In differentiated oligopoly, firms produce differentiated products such as toilet soap,
cigarettes or soft drinks.
(ii) The goods produced by different firms have their own distinguishing characteristics, but
they are close substitutes of each other.
(c) Collusive Oligopoly: If the firms cooperate with each other in determining price or output
or both, it is called collusive oligopoly or cooperative oligopoly.
(d) Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is
called a non-collusive or non-cooperative oligopoly.
3. Features of Oligopoly
(a) Few Large Sellers:

(i) The number of sellers in an oligopoly market is small – when there are two or more than
two, but not many sellers.
(ii) What matters is that these few sellers account for most of the industry’s sales.
(iii) These “few” sellers consciously dominate the industry and indulge in intense competition.
Each firm is aware of that it possesses a large degree of monopoly power.
(iv) For example, the market for mobile service provider in India is an oligopolist structure as
there are only few producers of mobile service provider. There exists severe competition
among different firms and each firm tries to manipulate both prices and volume of production to
outsmart each other.
(b) Interdependence of Decisions:
(i) Interdependence means that actions of one firm affects the actions of other firms.
(ii) Since the number of sellers is small, each firm has to take into consideration the possible
reaction of its competitors, when making decisions.
(iii) The business decision of a single seller will have a substantial impact on the product price,
output and profits of the rival firms.
(iv) For example in the “National Newspapers” market, when the “Economic Times” introduced
invitation pricing policy—they offered the newspaper at a price of Rs.1.50 on weekdays. The
Hindustan Times was forced to reduce its prices from Rs. 2.50 per copy to ? 1.50 per copy on
weekdays. When Hindustan Times was celebrating its 75 years of service, they offered the
newspaper at Rs. 1/- weekdays. The Times of India responded by matching the price cut.
(c) Non-Price Competition:
(i) Oligopoly firms try to avoid price competition for the fear of price war.
(ii) They use non-price competition methods like better services to customers, advertising, etc.
to compete with each other.
(iii) Oligopoly firms are in a position to influence the prices. However, they follow the policy of
price stability or price rigidity.
(iv) Price rigidity refers to a situation in which whether there is change in demand and supply
the price tends to stay fixed.
(v) If a firm tries to reduce the price the rivals will also react by reducing their prices. Likewise,
if it tries to raise the price, other firms will not do so. It will lead to loss of customers for the firm
which intended to raise the price.
(vi) So, firms prefer non-price competition instead of price competition.
(d) Barriers to the entry of firms:
(i) The main reason why the number of firms is small is that there are barriers which prevent
entry of firms into industry.
(ii) Patents, large capital, control over the crucial raw material etc., prevent new firms from
entering into industry.
(iii) Only those who are able to cross these barriers are able to enter.
(e) Role of selling costs:
(i) Due to severe competition and interdependence of the firms various sales promotion
techniques are used.
(ii) For example, T.V. commercials war between pepsi and coke.
(iii) It relies more on non-price competition.
(f) Oligopoly firms may produce either a homogeneous or a differentiated product.
(i) Oligopoly firms may sell homogeneous products such as steel, aluminium, LPG cylinders
etc. They are called pure oligopolies, as the products of the respective firms are
indistinguishable.
(ii) Firms producing differentiated products are called impure oligopolies.
(iii) In case of a pure oligopoly market situation rival firms will rely on “price” or “lowercosts” to
compete in the market.
(iv) On the other hand, in case of impure oligopolies, with firms producing differentiated
products, firms can use “product variations” and “promotional” strategies to compete.
(g) Group Behaviour:
(i) In an oligopoly situation, there are a few firms who control the entire market and each firm
recognizes interdependence in their decision-making.
(ii) So, price-output decisions of a particular firm directly influence the competing firms.
(iii) Instead of independent price and output strategy, oligopoly firms prefer group decisions
that will protect the interest of all the firms.
(iv) Group Behaviour means that firms tend to behave as if they were a single firm even though
individually they retain their independence.
(h) Indeterminate demand curve facing an oligopoly firm:
(i) The most distinguishing feature of oligopoly is the “interdependence in decision making” of
the rival firms.
(ii) The consequence of such interdependence is the high degree of uncertainty regarding the
reaction pattern of rival oligopolists.
(iii) Interdependence and uncertainly result in “indeterminateness of the demand curve” facing
an oligopolist. The firm cannot assume that his rivals will not react to its decision regarding
change in its variables.
(iv) The demand curve facing an oligopoly firm keeps shifting as rival firms react to changes
made by this firm. The demand curve thus loses its definiteness and determinateness.
Words that Matter
1. Monopoly: It is a market situation where there is a single firm selling the commodity and there is
no close substitute of the commodity sold by the monopolist.
2. Cartel: A Cartel is a group of firms which jointly set output and prices so as to exercise monopoly
power.
3. Monopolistic competition: It refers to a market situation in which there are many firms which sell
closely related but differentiated products.
4. Product differentiation: It means differentiating the product on the basis of brand, colour, shape
etc.
5. Selling cost: It is the expenses which are incurred for promoting sales or inducing customers to
buy a good of a particular brand.
6. Persuasive Advertising: It refers to advertising so as to lure consumers avail from
one brand to another.
7. Oligopoly: It is a market situation in which an industry has only a few firms (or few large firms
producing most of its output) mutually dependent for taking decisions about price and output.
8. Pure or Perfect Oligopoly: In the case of pure oligopoly, firms produce homogenous products like
copper, iron, steel and aluminium.
9. Imperfect or Differentiated Oligopoly: In differentiated oligopoly, firms produce differentiated
products such as toilet soap, cigarettes or soft drinks.
10. Collusive Oligopoly: If the firms cooperate with each other in determining price or output or both,
it is called collusive oligopoly or cooperative oligopoly.
(i) The MR and MC schedules
(ii) The quantities for which the MR and MC are equal
(iii) The equilibrium quantity of output and the equilibrium price of the commodity.
(iv) The total revenue, total cost and total profit in equilibrium.
11. Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is called a
non-collusive or non-cooperative oligopoly.
12. Price rigidity: It refers to a situation in which whether there is change in demand and supply the
price tends to stay fixed.
Market Equilibrium with Simple Applications –
Class 12 Micro Economics
Introduction
This chapter helps to determine the market equilibrium, to define equilibrium price and equilibrium
quantity and states how equilibrium changes due to increase and decrease in demand and supply.
Determination of Market Equilibrium under Perfectly Competitive Market

1. Market equilibrium refers to that point which has come to be established under a
given condition of demand and supply and has a tendency to stick to that level, i.e. where Demand =
Supply.
2. If due to some disturbance we divert from our position the economic forces will work in such a
manner that it could be driven back to its original position, i.e., where Demand = Supply. In short it is
the position of rest.
3. It can be explained with the help of the schedule and diagram:
(a) (i) In the given schedule market equilibrium is determined at Price Rs. 3 where Market demand is
equal to Market Supply.
(ii) At price 1 and 2, there is excess demand, which leads to rise in price, resulting tendency is
expansion in supply.
(iii) Similarly, at price 4 and 5, there is excess supply, which leads to fall in price, resulting tendency is
Contraction in supply.
(b) (i) In the given diagram, price is measured on vertical axis, whereas quantity : demanded and
supply is measured on horizontal axis.
(ii) Suppose that initially the price in the market is P1. At this price, the consumer demand P1B and the
producer supply P1A, i.e. consumers want more than what the producer are willing to supply. There is
excess demand equal to AB. So, price cannot stay on P 1 as excess demand will create competition
among the buyers and push the price up till we reach equilibrium.
Due to rise in price from P1 to P2 there is upward movement along the supply curve (expansion in
supply) from A to E and upward movement along the demand curve (contraction in demand) from B
to E.
(iii) Similarly, at price supplied P2L. There is excess supply, equal to KL, which will create competition
among the sellers and lower the price. The price will keep falling as long as there is an excess supply.
Due to fall in price from P2 to P there is downward movement along the supply curve (contraction in
supply) from L to E and downward movement along the demand curve (expansion in demand) from K
to E.
(iv) The situation of zero excess demand and zero excess supply defines market equilibrium (E).
Alternatively, it is defined by the equality between quantity demanded and quantity supplied. The
price P is called equilibrium price and quantity Q is called equilibrium quantity.
Effect of Change in Equilibrium due to Increase and Decrease in Demand and Supply
Case I: Increase in Demand
1. An increase in demand leads to rightward shift of demand curve as shown in the figure below:
You Must Know When demand increases, then shifting should be such that initial price remains
constant. It is so because increase in demand is the part of the shift in demand in which other factor
changes and price remains constant.
Changes in Demand
(1) A to B because of increase in demand (shift in demand)
(2) B to C as price rises because of excess demand which leads to upward movement along the
demand curve.
A to C as price rises because of excess demand which leads to upward movement along the supply
curve.
2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above figure price is on vertical axis and quantity demanded and supplied is on horizontal
axis. But due to increase in demand due to the following reasons the demand curve shifts rightward
from DD to D1D1.
(i) Price of substitute goods rises.
(ii) Price of complementary goods falls.
(iii) Income of a consumer rises in case of normal goods.
(iv) Income of a consumer falls in case of inferior goods.
(v) When preferences are favourable.
(b) With new demand curve D1D1, there is excess demand at initial price OP because at price
OP1 demand is PB and supply is PA, so there is excess demand of AB at price OP.
(c) Due to this excess demand, competition among the consumer will rise the price. With the rise in
price, there is upward movement along the demand curve (contraction in demand) from B to C and
similarly, there is upward movement along the supply curve (expansion in supply) from A to C . So,
finally equilibrium price rises from OP to OP1, and equilibrium quantity also rises from OQ to OQ1
Conclusion
Due to increase in demand,
(i) Equilibrium price rises from OP to OP1
(ii) Equilibrium quantity also rises from OQ to OQ1
Case II: Decrease in Demand
1. A decrease in demand leads to leftward shift of demand curve as shown in the below figure:
You Must Know
When demand decreases, then shifting should be such that initial price remains constant. It is so
because decrease in demand is the part of the shift in demand in which other factor changes and
price remains constant.
Changes in Demand
(1) A to B because of decrease in demand (shift in demand)
(2) B to C as price fall because of excess supply which leads to downward movement along the
demand curve.
2. (a)A to C as price fall because of excess supply which leads to downward movement along the
supply curve.
(i) Price of substitute goods fall.
(ii) Price of complementary goods rise.
(iii) Income of a consumer falls in case of normal goods.
(iv) – Income of a consumer rises in case of inferior goods.
(v) When a preference becomes unfavourable.
(b) With new demand curve D1D1, there is excess supply at initial price OP because at price OP
demand is Pre and supply is PA so there is excess supply of AB at price OP.
(c) Due to this excess supply, competition among the producer will make the price fall. Due to fall in
price there is downward movement along the demand curve
(Expansion in demand) from B to C and similarly there is downward movement along the supply
curve (contraction in supply) from A to C. So, finally, the equilibrium price falls from OP to OP 1 and
equilibrium quantity also falls from OQ to OQ1.
Conclusion
Due to decrease in demand,
(i) Equilibrium price falls from OP to OP1.
(ii) Equilibrium quantity also falls from OQ to OQ1.
Case III: Increase In Supply
1. An increase in supply leads to rightward shift of supply curve as shown in the below figure:
You Must Know
When supply increases, then shifting should be such that initial price remains constant. It is so
because increase in supply is the part of the shift in supply in which other factor changes and price
remains constant.
Changes in Supply
(1) A to B because of increase in supply (shift in supply)
(2) B to C as price falls because of excess supply which leads to downward movement along the
supply curve.
A to C as price falls because of excess supply which leads to downward movement along the
demand curve.

axis. But due to increase in supply due to the following reasons:
(i) Fall in the prices of remuneration of factors of production.
(ii) Fall in the prices of other commodities.
(iii) Improvement in technology.
(iv) Change in objective of producer (inducing them to increase supply at the same price.)
(v) Taxation policy of government falls.
(b) The supply curve shifts rightward from SS to S1S1. With new supply curve S, S,, there is excess
supply at initial price OP because at price OP1 supply is PB and demand is PA, so there is excess
supply of AB at price OP.
(c) Due to this excess supply competition among the producer will make the price fall. Due to this fall
in price there is downward movement along the supply curve (Contraction in supply) from B to C and
similarly, there is downward movement along the demand curve (Expansion in demand) from A to C.
So, finally, equilibrium price falls from OP to OP1 and equilibrium quantity rises from OQ to OQ1
Conclusion
Due to increase in supply,
(i) Equilibrium price falls from OP to OP1.
(ii) Equilibrium quantity rises from OQ to OQ1.
Case IV: Decrease in Supply
A decrease in supply leads to leftward shift of supply curve as shown in the below figure:
You Must Know
When supply decreases, then shifting should be such that initial price remains constant. It is so
because decrease in supply is the part of the shift in supply in which other factor changes and price
remains constant.
Changes in Supply
(1) A to B because of decrease in supply (shift in supply)
(2) B to C as price rises because of excess demand which leads to upward movement along the
supply curve.
Changes in Demand
A to C as price rises because of excess demand which leads to upward movement along the demand
curve.

axis. But due to decrease in supply due to the following reasons the supply curve shifts leftward from
SS to S1S1.
(i) Rise in the prices of remuneration of factors of production.
(ii) Rise in the prices of other goods.
(iii) When the technology becomes outdated.
(iv) Change in objective of producer (inducing them to decrease supply at the same price).
(v) Taxation policy of government rises.
(b) With new supply curve S1S1 , there is excess demand at initial price OP because at price OP,
supply is PB and demand is PA, so there is excess demand of AB at price OP.
(c) Due to this excess demand competition among the consumer will rise the price. Due to this rise in
price there is upward movement along the supply curve (Expansion in supply) from B to C and
similarly, there is upward movement along the demand curve (Contraction in demand) from A to C.
So, finally, equilibrium price rises from OP to OP1 and equilibrium quantity falls from OQ to OQ1.
Conclusion
Due to decrease in supply,
(i) Equilibrium price rises from OP to OP1
(ii) Equilibrium quantity falls from OQ to OQ1
Simultaneously Increase and Decrease in Demand and Supply
Case I: Both Demand and Supply Increases: When both demand and supply increases, then there
are three possibilities:
Case A: When Demand and Supply both Increase at the Same Rate
1. When demand and supply both increase at the same rate, equilibrium price remains constant and
equilibrium quantity rises. It can be shown with the help of the following diagram.
Case B: When demand and supply both increase at the same rate, then equilibrium price remains
constant.

(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is
measured on horizontal axis.
(b) But when, “demand and supply both increase at the same rate”, then,
(i) Equilibrium price remains constant at OP and
(ii) Equilibrium quantity rises from OQ to OQ1
Case B: When demand increases, supply also increases but at a much faster rate l.When demand increases, supply also
increases but at a much faster rate, then equilibrium price falls and equilibrium quantity rises as shown below:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on
horizontal axis.
(b) But when “demand increases and supply also increases but at a much faster rate”, then,
(i) Equilibrium price falls from OP to OP1 and
(ii) Equilibrium quantity rises from OQ to OQ1
Case C: When supply increases, demand also increases but at a much faster rate
1. When supply increases, demand also increases but at a much faster rate, then equilibrium price rises and equilibrium
quantity rises as shown below:

horizontal axis.
(b) But when “supply increases and demand also increases but at a much faster rate” then,
(i) Equilibrium price rises from OP to OP1 and
(ii) Equilibrium quantity also rises from OQ to OQ1.
Case II: Both Demand and Supply Decreases: When both demand and supply decreases, then there are three
possibilities:
Case A: When Demand and Supply both Decrease at the Same Rate
1. When demand and supply both decrease at the same rate, equilibrium price remains constant and equilibrium
quantity falls as shown below:
You Must Know
When demand and supply both decrease at the same rate, equilibrium price remains constant.
Logic
Suppose demand and supply both decrease by 5%, then there is neither excess demand nor excess supply, i.e., why price
remains constant.
horizontal axis.
(b) But when “demand and supply both decrease at the same rate” then,
(i) Equilibrium price remains constant at OP1 and
(ii) Equilibrium quantity falls from OQ to OQ1.
Case B : When demand decreases, supply also decreases but at a much faster rate
l. When demand decreases, supply also decreases but at a much faster rate, then equilibrium price rises and equilibrium
quantity falls as shown below:

horizontal axis.
(b) But when “demand decreases, supply also decreases but at a much faster rate” then,
(ii) Equilibrium quantity falls from OQ to OQ1.
Case III: When supply decreases, demand also decreases but at a must faster rate
l.When supply decreases, demand also decreases but at a much faster rate, then equilibrium price and equilibrium
quantity both falls as shown below:
horizontal axis.
(b) But when “supply decreases, demand also decreases but at a much faster rate” then,
(i) Equilibrium price falls from OP to OP1 and
(ii) Equilibrium quantity falls from OQ to OQ1
Shift in Demand and Supply in Opposite Direction
Case I: When demand increases and supply decreases at the same rate
1. When demand increases and supply decreases but at the same rate, then equilibrium price rises and equilibrium
quantity remains constant as shown below:

horizontal axis.
(b) But when, “demand increase and supply decreases but at the same rate”, then,
(ii) Equilibrium quantity remains constant at OQ.
Case II: When demand decreases and supply increases at the same rate
1. When demand decrease and supply increases but at the same rate, then equilibrium price falls and equilibrium
quantity remains constant as shown below:
2. We assume that initial price is OP and equilibrium quantity is OQ as shown above: (a): In the
above diagram price is measured on vertical axis and quantity demanded and supplied are measured
on horizontal axis.
(b) But when , “demand decreases and supply increases but at the same rate”, then, (i) Equilibrium
price falls from OP to OP1 and (ii) Equilibrium quantity remains constant at OQ.
Viable Industry and Non-Viable Industry
1. Viable industry refers to an industry for which supply curve and demand curve intersect each
other in positive axes.
2. Non-viable industry refers to an industry for which supply curve and demand curve never
intersect each other in the positive axes. In India, commercial aircraft is an example of a non-viable
industry. It means, aircraft cannot be produced at all. Note that an industry which is non-viable in one
country may be viable for another country. For instance, commercial aircraft are produced in
countries like USA, UK, France etc.
Simple Applications Of Tools Of Demand And Supply
Price Ceiling (Maximum Price Ceiling)

1. When the government imposes upper limit on the price (maximum price) of a good or service which
is lower than equilibrium price is called price ceiling.
2. Price ceiling is generally imposed on necessary items like wheat, rice, kerosene etc.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market supply curve of
Wheat.
(b) Suppose, equilibrium price OP is very high for many individuals and they are unable to afford at
this price.
(c) As wheat is necessary product, government has to intervene and impose price ceiling of Pt, which
is below the equilibrium level.
(d) When the government fixes the price of a commodity at a level lower than the equilibrium price
(say it fixes the price at OP1, there would be a shortage of the commodity in the market. Because at
this price demand exceeds supply. Quantity demanded is P 1S, while quantity supplied is only P1R.
There is, thus, a shortage of RS quantity at this price (i.e., OP1). In free market, this excess demand
of RS would have raised the price to the equilibrium level of OP. But, under government price-control
consumers’ demand would remain unsatisfied.
(e) Though the intension of the government was to help the consumers, it would end up creating
shortage of wheat.
(f) To meet this excess demand, government may use Rationing system.
(g) Under rationing system, a certain part of demand of the consumers is met at a price lower than
the equilibrium price. Under this system, consumers are given ration coupons/ Cards to buy an
essential commodities at a price lower than the equilibrium price from Fair price/Ration Shop.
(h) Rationing system can create the problem of black market, under which the commodity is bought
and sold at a price higher than the maximum price fixed by the government.
Price Floor (Minimum Price Ceiling)
1. When the government imposes lower limit on the price (minimum price) that may be charged for a
good or service which is higher than equilibrium price is called price floor.
2. Price Floor is generally imposed on agricultural price support programmes and the
minimum wage legislation.
(a) Agricultural price support programmes: Through an agricultural price support programme, the
government imposes a lower limit on the purchase price for some of the agricultural goods and the
floor is normally set at a level higher than the market—determined price for these good.
(b) Minimum wage legislation: Through the minimum wage legislation, the government ensures that
the wage rate of the labourers does not fall below a particular level and here again the minimum
wage rate is set above the equilibrium wage rate.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market supply curve of
Wheat.
(b) Suppose, equilibrium price OP is not so profitable for farmers, who have suppose just faced
Drought.
(c) To help farmers government must intervene and impose price floor of P1; which is above than
equilibrium price.
(d) Since, the price P1 is above the equilibrium price P1 the quantity supplied P1B exceeds the quantity
Quantity Demanded and demanded P1A. There is excess supply. Supplied of Wheat
(e) In case of excess supply, farmers of these commodities need not sell at prices lower than the
minimum price fixed by the government.
(f) The surplus quantity will be purchased by the government. If the government does not procure the
excess supply, competition among its sellers would bring down the price to the level of equilibrium
price.
Words that Matter
1. Market equilibrium: It refers to the situation when market demand is equal to the market supply.
2. Equilibrium price: The price at which equilibrium is reached is called equilibrium price.
3. Equilibrium quantity: The quantity bought and sold at the equilibrium price is called equilibrium
quantity.
4. Equilibrium point: Equilibrium point is the point of intersection of the demand curve and supply of
commodity.
5. Viable industry: It refers to an industry for which supply curve and demand curve intersect each
other in positive axes.
6. Non-viable industry: It refers to an industry for which supply curve and demand curve never
intersect each other in the positive axis.
7. Price ceiling: When the government imposed upper limit on the price (maximum price) of a good
or service which is lower than equilibrium price is called price ceiling.
8. Price floor: When the government imposed lower limit on the price (minimum price) that may be
charged for a good or service which is higher than equilibrium price is called price floor.
9. Rationing: Under rationing system, a certain part of demand of the consumers is met at a price
lower than the equilibrium price. Under this system, consumers are given ration coupons/ Cards to
buy an essential commodities at a price lower than the equilibrium price from Fair price/Ration Shop.
10. Black market: It is a market under which the commodity is bought and sold at a price higher than
the maximum price fixed by the government.

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Main Production Activities

• Farming is the main production activity in the village Palampur.

Factors of Production (or Requirements for Production of Goods and Services)

• Multiple cropping farming

Modern farming requires a great deal of capital.

• Various Aspects of Human Resource Development

Classification of Economic Activities:

People as a Resource: People as a resource is a way of referring to a country’s workforce in terms

Nature of Unemployment in India:

• Unemployment leads to wastage of manpower resource.

Two Typical Cases Of Poverty

(i) Urban Case

Poverty Analysis by Social Scientists

• Poor level of literacy

Indicators for Poverty

Poverty Line Estimation in India

Poverty line defined by the government as follows

Organisations Involved in Estimating Poverty Line

Poverty Trends In India

Group Vulnerable to Poverty

Global Poverty Scenario

(i) Promotion of Economic Growth

(ii) Targeted Anti-Poverty Programmes

• Higher economic growth.

The most common method of determining poverty is income or consumption levels.

There is a strong linkage between economic growth and poverty reduction.

Meaning Of Food Security

Food security has the following dimensions

• All persons have the capacity to buy food of acceptable quality.

Necessity Of Food Security

Effect of Natural Calamity on Food Security

People Affected by Famine

Food Insecure People

(i) Chronic Hunger

(ii) Seasonal Hunger

Food Security In India

Programmes For Food Security In India

• Public Distribution System (PDS) for foodgrains

Current Status of Public Distribution System

Following are some remarkable achievements of PDS

• PDS has helped government to stabilise foodgrain prices, so that it is available to

• Buffer stocks are much higher than the rules.

• Diverting the grains to open market to get a better margin.

Integrated Child Development Services (ICDS)

Food-For-Work (FFW) Programme

National Food For Work Programme

Poverty Alleviation Programmes (PAPs)

Role Of Cooperatives In Food Security

Food is an essential item for the survival of human being.

Agriculture is seasonal and low paying activity.

Poverty and hunger are two dimensions of food insecurity.

Through Green Revolution, India attained self sufficiency in foodgrain production.

Different notions of development:

Human development Index:

Growing importance of Tertiary sector:

Double coincidence of wants:

Demand Deposits in Bank: