A-4

CONTENTS
UNIT-I
Industrial Economics: Law of demand
P.10
Demand analysis
P26
Types of demand
Determinants of demand
P.6

Supply
5
A-1
Law of diminishing marginal utility
P.32
Elasticity of demand P.14
Types of elasticity of demand
P.16
UNIT- II
Factors of production
P.39
Firm and Industry
A-2
Law of return
P.64
Cost concepts
P.68
Fixed variable
P.69
Average
P.70
Marginal and Total cost
P.70
Depreciation and methods for
depreciation P.100
Direct and indirect taxes
P.130
UNIT III
Inflation, Effect of inflation
P.120
Monetary and fiscal measures P.124
to control inflation
Deflation P.125
Market and market structures P.8
Perfect competition P.82
Monopoly P.75

EE)
ENGG. ECO. & IND. MGMT. (B.Tech. VI Sem.
 Monopolistic competition P.76
Oligopoly
P.77, 79
Concept and overview of share market A-3
Effect of share market on economy A-5
Share market terminologies A-7
UNIT- IV
. Definition P.165
Nature and scope of management P.169
Functions of management P.175, 177
Meaning and concepts of Marketing management P.209, 215
Marketing Mix P.222
Channels of distribution P.225
Advertising and sales promotion P.230, 245
UNIT V
Meaning P.253
Nature and scope of financial management P.254
Brief outline of profit and loss account P.260
Balance sheet P.257
Budgets and their importance P.262, 263, 267
Types of budgets - Rigid and flexible budgets P.263

ENGG. Eco. & IND. MGMT. (B.Tech. VI Sem. EE)

 UNIT- 1
THEORY OF DEMAND
AND UTILITY
o.1. Explain the concept of demand in Economics.
Also
plain the
yexpla determinants of demand.
Ans. Meaning of demand:- In Economics, demand
has a
ecific meaning. emand refers to "the various
quantities of a
oods or services which consumers are willing to and are able
to
purchase at variou prices during a period of time."
An important point in this context is that, demand is different
from a desire or a need. For example, a person may
desire a mobile
phone. Some other person may need a heart surgery. However,
such
acdesires and needs do not constitute demand. When a person is
willing to and is able to pay for this desires and needs, the desires
and needs change into demand (as understood in Economics)
Definition of demand:
"By demand we mean the various quantities of a given
commodity or service which consumers would buy in one market in
a given period of time at various prices, or at various incomes, or at
various prices of related goods." Bober
-

Important characteristics of demand :-

1.Demand is always expressed at a given price. It is
meaningless to speak of demand without reference to price.
2.Demand always relates to a given period. It is always
expressed per unit of time. For e.g. per hour, per day, per week, per
month, per year, etc.
Determinants / Conditions of demand:
The above definitions takes into considerations some factors
Which affects the demand for a good/service like price, income and
Dices of related goods. These and some more factors are known as
the determinants/conditions of demand. The quantity of a good/
cTVICe demanded changes with a change in any of these factors.
VBD ENGG. ECONOMICS & INDUSTRIAL MGMT. (B.E. EN, EE) 5
 & INDUSTRIAL MGMT.
MGMT
GMT.
ENGG. ECONOMICS (6.E.
(8.E.EN,
EN,EE
B) EE
aMD ENGG. ECONOMICS
& INDUSTRIAL MGMT. (B.E. EN, EE)
change at ths
e same time
determinants of demand
However, if all the Complementary goods are those goods which are consumed
almost impossible
to study the effect
effes of such
then it would be together or simultaneously. For e.g.. tea and sugar, pen and ink,
purpose of economic studies
f economie
demand. Hence for the , it
change on changes is automobiles and petrol, etc.
determinant of demand
assumed that only one This ace mption Q.3.What are the causes which bring about a change in the
remaining determinants remain constant.
the being equal or "ceteris
paribus demand?
known as "other things
OR What are the factors which influence demand?2
Determinants of demand:-
demand are as follows OR Explain the various determinants/conditions of
Important determinants of
service, demanded. demand.
1. Price of good/
2. Price of other
related commodities (complementar goods Ans. There are various factors which cause a change in
demand. These factors are known as conditions/ determinants of
and substitutions)
3. Level of household
income. demand. They are:-
consumers. 1. Price of commodity/service:- Price is an imporiant
4.Tastes and preferences of
5.Size and compositions of population. consideration while purchasing. Generally, there is an inverse
6.Income distribution in society. relationship between price and the quantity demanded. Lower the
7.Various sociological factors price, the greater the demand and vice versa.
8.Weather conditions/seasons. 2. Income level:- Usually, if the disposable income level is
9.Conditions of trade (boom and depression). higher, then more is the demand for the goods. However, this may
Q.2. What are the different types of demand? not be true always because the quantity demanded also depends upon

Ans. Types of demand :-There are three types of demand the nature of the goods.
1) Price demand 2) Income demand and 3) Cross demand
a) Necessities :- If a particular good is a necessity of life (i.e.
without which a household cannot sustain itself, for e.g. salt, flour,
1) Price demand:- It refers to the different quantities of a
water, clothes, ctc.), then as income increases, the demand for
particular commodity or service demanded by a consumer of a given
necessities increases initially, then it becomes constant, even if
time in a given market at various hypothetical prices, provided other
income rises further.
things remain constant.
b) Comforts and luxuries:- The demand for comforts and
2) Income demand: It refers to the various quantities of
luxuries(for e.g. T.V., fridge, car, microwave appliances, etc.) is
goods and services that a consumer would purchase at various levels
of incomes, provided other things remain unchanged. generally directly proportional to the income level of a household.
c) Inferior commodities:- Generally, when there is a rise in
3) Cross demand:- It refers to the
various quantities of goo the income level of a household, its demand for inferior quality
and services that would be purchased when prices of inter-tci ate
goods goes down.
goods undergo a change. Inter-related goods are substitutes or
3. Prices of related goods: Related goods may be
complementary goods. For ex. "Mirinda'" can substitute "Fanta tea
Complementary goods or substitutes. In case of complementary
can substitutecoffee, etc.
 ECONOMIcS
ENGG. EE) BD ENGG. ECONOMICS & INDUSTRIAL MGMT. (B.E. EN,
VBD pen and ink) there EE) 9

petrol, pencil and sharpener, is Q.4. Discuss merits of

car and demand price of Such goods.
andprice mixed economy with special
goods (eg.relationship between If reference to India.
inverse cars will be purchased
purch: and W-03 EE
an cars fall, then
more this Ans. Mixed economy may also be called a
new type of
theprice of the demand for petrol. Fanta an Mirinda) conomy seems to be shopping itself. For example, in
would increase substitutions (Cg. tea and coffee, Britain, which
case of may be regarded as the home of capitalism and
In consumption ol
one Will lead to a se in free enterprise,
in the relationshi. certain important industries have been Nationalized. India
an increase direct tionship between
Thus there 1s a is also
demand for the others. following her example. Britain Nationalized the Bank of
such goods. England
demand and price of and the steel Industry, but steel industry was later denationalized
Any change in the tastes
Tastes and preferences:- and by
4. people atfects the demand of the concerned the conservative Government.
preferences of the
India has Nationalized the Reserve Bank of India,
good/service. For e.g people Started prererring the cable the Life
connections and this led to a decrease in the demand for Insurance business and 14 major Commercial Banks. If the
R
th Government of India had
With a growing fashion and preference for well-toned bodies not been handicapped by the lack of funds
the
demand for health clubs and related services have gone up. and trained personnel and if it had not been engrossed in more urgent
5. Size and composition of population:- Generally, a large problems, India would have also Nationalized
certain industries. The
size of population means greater demand for commodities. Also, the Government of India declared in 1948 that for ten years there would
composition of population effects demand for commodities. be no nationalisation, which meant that when 10
For years were over,
instance, if the percentage of children is more then there
would be a steps towards nationalisation might be taken.
substantíal demand for goods for children. According to the industrial policy of
the Government of India,
6.Distribution of income in society:- Equal distribution of announced in 1948 and later in 1956, some industries have been
incomein society leads to an increase in under state control. These industries put
distribution generally demand while unequal are owned by the Government.
pulls it down. Such industries may be
7. Various sociological
considered to constitute the socialised or
factors: Sociological factors public sector. In a mixed
marital status, place of ik economy, the private sector (capitalism)
residence, education, and public sector
influencethe demand for goods family culture, (socialism) exist side by ide. There are
and which are industries
marricd Hindu woman services. For e.g. in naa , a owned by private capitalists, there are industries
demand Sindoor Owned exclusively by which are
marriage, But, before which is a necesSitya the state, and there are industries
marríage she
will not have any State and the private in which
Sindoor. deman Dr capitalists form partnerships. In fact,
Capitalist countries, today all
8. Weather including the
conditions/seasons:- U.S.A. and the U.K., may be better
season. the demand For c.g. rainy callcd mixed
economies,
for raincoats durinE because of emergence of a considerable
9. Conditions and umbrellas public sector in
of trade: Generally, increases them.
the demand for during econo boom, In India,
everything is under the five-year plans, the scope
While during depression, greater even Operation, of State-
there is though priceCs
though prices are rising State-control and State-interference
has been very much
generally aa
Cnerally slackening Oof dema r ged. The private sector
operates according to wider policies
 VBD ENGG. E. EN,
EE 11
10
Our mixed my
economy tends
tend. aBD ENGG. ECONOMIcs & INDUSTRIAL MGMT. (B.E. EN, EE)
Govemment. to assunp
laid down by the ultimately. Under it. he Demand schedule
theshape of
democratic socialism th private
Price (Rs.) Quantity demanded (units)
shall operate, but the private sector
secto. will wor
and public sectors Government. India
50 100
control of the has
has decided
under the overall Durnos to 40 1 50
socialistic pattern oft society. For this
establish a ublic 30 200
being expanded. Taxation nd
of the rich and benefic.
beneficent 20 350
sector is state
the poor and measures of social security ane 10 600
activities for social
the steps taken in the direction Demand curve:- A demand curve is a goemetric
welfare are some of
Q.5. State the law of demand. Why does a demand curve representation of the law of demand. On the basis of the above
slope downward to the right?
demand schedules. a demand curve can be plotted.
[S-04, EE
Ans. The law of demand explains the relationship between Y
e the
price of a commodity and its quantity demanded.
50
Statement of the law of demand: -"Other things being
equal
if the price of a commodity falls, the quantity demanded of it L0
will
rise and ifthe price of a commodity rises, its quantity demanded will
decline". Thus, other things remaining
equal, the price of a
30
20
commodity and its demand at that price is
inversely related. The
other things which are assumed to be equal are 10
the various
determinants of demand. They are:
1. The prices of related commodities, 100 200 300 400 500 600
Thus, it is clear that the SUANT
ITY
2. The income of households,
demand curve slopes downwards
3. The tastes and preferences the right. In other
words, a demand curve to
of consumers, This is in accordance has a negative slope.
4. The income distribution, with the law of demand, more
etc. demanded at a lower i.e. quantity is
price and vice versa.
If these factors also undergo a change,
then the inverse Reason for the
relationship between downward sloping demand
price and demand
will not hold good.
demand curve slopes
downwards to the right
curve:- The
Demand schedule 1. The law because: -
and demand curve: - of diminishing marginal
may be illustrated The law of demand of a commodity utility operates. The supply
with the help increases when its
curve. of a demand schedule and a and
utility of that prices rise. Thus. the marginal
de commodity will fall.
Demand schedule: of that commodity People will tend to purchase
It is a table in order to attain less
hypothetical quantities which represen
nts the Commodities. maximum utility from other
a Unless and until
of commodity demanded lowered, people the price of that
hypothetical prices
(in accordance a varous
at will not buy. Hence, commodity is
with the law of demand) that commodity, to induce people to buy
prices will have more of
to be lowered. Thus
when price
 12 VBD E
ENGG. ECONOMIcs & INDUSTRIAL MGMT. (B.E. EN, EE) 13
buy
more. This is nothing but the law BD
will of
will fall, people accordance with Exception to the law of demand: The following are the
the demand curves is in law
of
demand and exceptions to the law of demand:
demand. a change in price
prica 1. Shortages:- In times of shortage, a commodity is in short
in demand due to can be
2. The changes Substitution eff
Income effect and (1) supply. Its price is on the higher side. Still people purchase more.
explained withthe (i)
When price of a good falls, the Sumer This is out of fear that the commodity may not be available readily in
G)Income effect:- lesser money. In other
her words, the
same quantity with future.
can buy the
him to buy
This induces him buv mor 2. Ignorance:- Sometimes, a customers ignorance about the
consumer's real income increases. at market leads him to purchase a commodity at a higher price.
reduced prices.
Substitution effect: When price of a good falls, 3. Necessities of life:- Goods which are the necessities of life
ii)
commodities. No. are an integral part of almost all households, for e.g. salt, sugar, etc
becomes cheaper as compared to other
consumer substitutes this relatively cheaper commodity for other a If there is any increase in the prices of such commodities, the entire
relatively expensive commodities. Thus, he demands more of the household budget has to be readjusted. Because these necessary
relatively oheaper commodity. That 15, demand increases whe
commodities have to be purchased even at a higher price. Thus, other
hen
prices fall. expenditure is cut down to buy these goods.
Thus,the demand curve slopes downwards to the right. 4. Goods that are status symbols:- Certain goods like
Q.6. What are the exceptions to the law of demand? diamonds, imported cars, etc. are purchased especially when their
OR Under what circumstances does a demand curve slopes prices go up. This is so because these goods confer a status symbol
upwards to the right? to their buyer in the society. If the commodity is expensive,
S-04, EE] the
OR. What is meant by an exceptional demand curve? prestige value attached to it is more.
Ans. There are certain cases where the law 5. Emergencies:-During times
of demand does not of emergencies like war,
hold good. Such cases or circumstances famine, floods, drought, etc. there arises
are known as the exceptions scarcities for goods. In such
to the law of demand. Under such times, people purchase more even at
exceptions the demand curve higher prices.
slopesupwardsto the right and is known 6. Giffen goods:- Giffen gocds are those goods
curve. In such conditions,
as an exceptional demand which are
people buy more when considered inferior by the consumers
Exceptional demand the price rise. and which occupy a substantial
curve- place in the consumer's budget.
For example, coarse grains like
bajra, low quality rice, etc.
In case of giffen goods,
even if the prices go up, there
reduction in the demand. is no
This is so because those households
consume giffen goods who
generally have very low income.
spend their valuable income They cannot
on buying something else. Hence
have to buy their required they
quantity even at higher prices.
7. Changes in trends
and fashion: A sudden change in
and fashion affects trend
the demand for a commodity.
GUANTITY goes out of fashion The goods that
DEMANDED has a very poor demand. Even
reduced substantially, if its prices are
nobody is ready to buy it.
 14 VBL EN,EE
circumstances, the law of demande fails
s INDUSTRIAL MGMT. (B.E. EN, EE)
15
Thus, under thesè ENGG. ECONOMICS &
e is any significant changeto PBD
also fail if there IS-04 (EN)J
operate. The law will depends. If in Degrees of elasticity of demand:
demand of a commodity depends, If
other factors on which there is ,
go 1.Perfectiy elastic demand : - When a small reduction in price
household or in prices of related goodsetc zero to infinity, it is known as perfectly
change in income of the raises the demand from
not hold good. measure of perfect elasticity is co
the law of demand will elastic demand. Te numerical
demand. List and describefactors
0.7. Define elasticity of Graphically: -
Y
affecting elasticity of demand. S-03 (EE
of demand? What are
OR What is meant by elasticity the
Perfecty elastic demand
different degrees of elasticities of demand?
[S-03, 04, 05 (EE, EN); W-04, (EE
Ans. Definition of elasticity of demand
:
When the deme
aUANTITY
extends or contracts, respectively, with a fall or rise in price This
quality of demand by virtue of which t changes (increases Or 2. Relatively elastic demand: When
the percentàge change
decreases) is called elasticity of demand. Elasticity means responce in quantity demanded is greater
than the percentage change in price,
elastic.
of demand and change in price. This change in responsiveness, mav then the demand is said to be relatively
be small or great. Its numerical value is greater than one but less than
infinity.
Dr. Marshall has defined elasticity as "The Elasticity (or Graphically:
responsiveness) of demand in a markett is great or small according as
he amount demanded increases much or little for a given fall in
price, and decreased by litter or much for a given rise in price"
Elasticity of demand is the 'rate of change' or 'degree of
change' in price, other things remaining constant.
Definition: - "Elasticity of demand is a measure of the relative
change in amount purchased in response to the relative change in QUANTITY
price on a given demand curve".
3. Unitary elastic demand or unit elasticity:- When the
Explanation: Generally a change in price of a commodity percentage change in quantity demanded is equal to the percentage
leads to a change in its demand. An increase in price leads to
change in price, then the demand is said to be unitary elastic demand.
contraction of demand and a decrease in price leads to an expansion
Its numerical value is equal to 1(one).
of demand. However, these change (expansion/ contraction)are nol YA
always proportionate to the changes in price. A small price change
may lead to a great change in demand. Thus, the degree of response
of demand is different for different commodities. This degree o
response of demand is known as elasticity of demand. It can D
found out by comparing percentage change in prices and quantiu
demanded.
aUANTITY
 EN,
4. Relatively inelastic demand: when the percent
ntage EE qBD ENGG. ECONOMICS & INDUSTRIAL MGMT. (B.E. EN, 17
in quantity demanded is less than the percentage change chan Cha EE)

then the demand is said to be relatively inelastic, TH inprie

ly inelastic. Price elasticity
_Proportionate
=- change in quantity demanded
The numeric
merica Proportionate change in price
value of relatively inelastic demand is greater an
than zero, hu
but less 2) Income elasticity :- It is defined as, "the responsiveness
one. tha of
demand for a commodity to change in income, other determinants
Graphically:- remaining constant. Thus,
= Proportionate change in quantity purchased
Income elasticity
Proportionate change in income
3) Cross-elasticity of demand When demand for a
commodity changes due to a change in the price of another related
commodity, cross elasticity is said to exist. Thus, cross-elasticity of
aUANTITY demand for products A and B
Proportionate change in quantity purchased of A
5, Perfectly inelastic
demand: When there is no chanoe.
-
Proportionate change in price ofB
allin quantity demanded when price changes, then the demandiat
said to be perfectly inelastic.
is Cross-elasticity arises in case of substitutes and complementary
It numerical value is zero. goods.
Graphically: - Factors influencing elasticity of demand- The elasticity of
demand for different products (like salt, tea, car, etc.) is different
because of the various factors that influence elasticity of demand.
1) Nature of commodity :- Necessities or essential goods
have
a high intensity of want and hence have relatively inelastic
demand.
For example : Salt is a necessity and thee quantity purchased will
be
more or less the same even at higher prices. On the other
hand,
luxuries (for example, car) do not have the same intensity
QUANTITY of want
and hence the elasticity of demand is quite high.
Q.8. What are the different types of elasticity of demand? 2) Availability of substitutes:- Any commodity which has its
Explain the factors which influence the elasticity of demand. substitute(s) will have an elastic demand; whereas a commodity
IS-04 (EE) having no substitutes will have inelastic demand.
Ans.Types of elasticity of demand:- Broadly. there are 3 3) Share in total consumption:- Goods having large share
types- a
of a household's income usually have elastic demand,
while those
) Price elasticity, 2) Income ity.
Commodities (e.g. match box, incense sticks, toothpaste, tissue paper,
elasticity, and 3) Cross elas
Price elasticity :- It is defined as the percentage ot ca etc.) on which a very little part of income is spent,
in quantity demanded divided will have inelastic
by the percentage change in pi demand.
Thus.
 VBD ENGG. ECONOMICS INDUSTRIAL MGMT. (B.E
&
8 19
EN,ER INDuSTRIAL MGMT. (B.E. EN, EE)

, ECONOMICS &
habits:- fa consumer is habituated wBD ENGG.
4) Consumer to, decrease in demand: If a man buys
less
a particular ommodity theen the price ii) Contraction and
addicted to, consuming ofth rises, it is simply a case of
contraction of demand.
may rise, will not affect the the price
commodity, however high it when
less, irrespective of the price, it
means a decrease in
if he buys
demand inelastic. For e.g. Tea. But
a decrease in demand, a
consumer may,
it. This will make its demand. In the case of
can also be considered as having a cul.bstitu circumstances, buy less or a
(Note- Tea owing to change in fashion or other
buying
coffee. In that
case the demand for tea will be elastic. However. in remains the same or may continue
t good even when the price
to other depending upon hic t. price.
will vary from one consumer the same
quantity as before in-spite of a fall in
demand means less demand at a
preterences.) Thus, in short, contraction of
5) Postponing consumption?- lf the consumptinn of high price.
commodity can be postponed (Tor example, purchase of demand at the same price or
of costly Decrease in demand means less
furniture, car, washing machine, microwave, etc.) then th demand demanded at a lower price.
will be elastic.
food items, milk,
If consumption
etc.) then
cannot
demand
be
will be
postponed
inelastic.
(e.o. mod
Cines,
the same quantity
.
Thus, due to the above factors the elasticities of d for
different products vary.
Q.9. Distinguish Between:
i) Extension and increase in demand.
ii) Contraction and decrease in demand. [S-04(EN)J
Ans. (1) Extension and increase in demand When the
demand changes merely because the price has changed; it is a case of
M'
AMOUNT DEMANDED M'M
AMOUNT DEMANDÉD
extension or contractions. Increase and decrease are different, the Extension and Contraction Increase and Decrease
differences are: of Demand of Demand
Q.10. How is elasticity of demand measured'?
If a man buys more milk because its price has fallen, it is an
OR What are the different methods of measuring elasticity
extension of demand. But if the demand changes independently of
of demand? IS-03, 05(EN), W-03, 04(EE)]
the prices, that is, a man buys more not because the price has fallen
OR Explain any one method of measuring elasticity of
but for some other reason, for example, due to a rise in his income, it
will be called an increase of demand
demand.
In some, extension of demand means more demand at less OR Explain total outlay method of measurement of
elasticity of demand.
price Increase in demand means greater demand at the same price
or the same quantity, demanded at a higher price. OR Explain the relation between elasticity of demand and
total revenue.
An increase in a consumer's demand signifies that he
Ans. Elasticity of demand can be measured by the following
prepared to spend a larger amount of money on a commodity tnau
or methods 1) Total outlay method 2) Proportional method
before on account of some changes in his circumstances,
3) Geometrical method or point elasticity.
example, increase in his income or increase in the size of his fami
 20 VBD ENGG. ECONOMICS & INDUSTRIAL MGMT
21
(B.E.
1) Total outlay method - Here price elasticity ismeasured
mea,.
EN
D ENGG.
ECONOMICS & INDUSTRIAL MGMT. (B.E. EN, EE)
-
It is used to
the basis of change in total outlay of the consumer (or ured
method or point elasticity
total evenue (3) Geometrical demand curve:
following a change in the price of a commodity. Total oO
otaloutlay elasticity of demand at any point on the
measure the straight line
revenue is the product (multiplication) of the price of a. ortou range. This method can be used on a
a price
a commodiy and not over curve.
and the number of units purchased at this point. on a curvilinear demand
demand curve and also curve :- It
There can be 3 different cases: elasticity on a straight line demand
(a) Point
is infinitesimal and
then makes use
i) Elasticity of demand is unity (or equal to one) assumes that the change in price
:- It mea formula-
that even though the price has changed (risen/fallen), the
ofthe following segment of the demand curve
remains the same.
Price
elasticity=wer the demand curve
ii) Elasticity of demand is greater than unity :- It means
Price elastcyUpper segment of
meas measurement is used as
the demand is elastic. And with a decrease in the price tha this method of
Graphically,
outlay or total revenue increases, while with an increase in totl
tho
heprice
the total outlay or total revenue decreases.
i) Elasticity of demand is less than unity-) means that
the
demand is inelastic or less elastic. Here, with rise in prices the
total
revenue increases and with a fall in prices the
total reven
venue
decreases.
This explains the relation between elasticity of demand
and
total revenue.
2) Proportional method of measuring elasticity of QUANTITY
demand- In this method, the percentage change in price of a
commodity is compared with the percentage change in its demand According to the above graph,
The ratio thus obtained indicates the elasticity of demand. =-MB
6i) Elasticity of demand at M
. Price elasticity =TOportionate change in quantity demanded AM
Proportionate change in price Since MB AM, elasticity of demand at M = 1
Aq/q D
(i) Elasticity of demand at D=i.e. <1 (:: DB<AD)
Ap/p AD
where, B
Aq= change in quantity demanded,
9=quantity demanded,
ii) Elasticity of demand at C
Ace >1 (CB< AC)
=,i.e.
AB
Ap = change in price, (iv) Elasticity of demand at A ,i.e. = co (:A = 0)
P= price. B =0)
The elasticity of dermand will be unity, greater than unity, (v)Elasticity of demand at B=-AB i.e. O(:B
= 0 (B

less than unity, accordingly as the change in demand s

o Thus, it can be inferred that on a straight line demand curve,
proportionate, more than proportionate, or less than proportionac demand is unitary elastic at the middle
point, inelastic below the
the change in price respectively.
 GMT. (B.E.
INDUSTRIAL MGMT.
22 gBDENGG. ECONOMIcS & (BE
EN,ER 23
INDUSTRIAL MGMT. (B.E. EN, EE)
middie point, infinite at the Y-axis ECONOMICS &
middle point, elastic above the D ENGG.
demanded
is Rs. 4/-, and initial quantity
and zero at X-axis. Ans. The initial price
(b) Point elasticity on
urve .
a curvilinear demand curve -
th It can = 12
units.
case) by average
drawing a tangent on the demand curve ve at
at the of demand (First and second
be measured by
demandPoin poin a) Elasticity
measured. Thus, elasticity of
where elasticity is to be willbe method:
segment of the tangent to the
equal to the ratio of the lower 1, P-PL
ED
segment of the tangent. q+91 P+PI
Thus, as per the following
graph;

Elasticity of demandat point

R =
RF , i.e. <1 (:RF < ER)
where
q=Original quantity demanded
New quantity after change in
price,
ER q=
p=Original price,
and
PB PI=New price afterchange.
Elasticity of demand at point P =- , i.e.>1 ( PB > AP)
AP 15-12 4-3
27 7 27
15+12 4+3
21
, i.e. less than unity.
27
b) Elasticity of demand (Second and third case):
12-10 10-4
ED 12+10 10+4
26
22 14
2 .e. less than unity.

Q.12. How is price elasticity over an arc of the

demand
curve measured?
QUANTITY
OR Explain Arc elasticity method of measurement of price
Price elasticlty on a curvitinear demand curve /S-04, (ENJ
elasticity.
Q.11. In the demand schedule given in table (1-1), calculate Ans. The price elasticity over an arc of the demand curve can
be measured using the are method. In the measurement of elasticity
the elasticity of demand considering Rs. 4/- as the initial price.
by the point method, the main limitation was that elasticity of a
Price Quantity of Demand
particular point(s) on the demand curve could be measured. When it
) Rs. 3/- per Unit 15 Units Is desired to find out the price elasticity between two prices (or two
i) Rs. 4/- per Unit 12 Units points on the demand curve), then the arc method is used. It
ii) Rs. 10/- per Unit 10 Units measures elasticity of segment of a curve between the two desired

IS-03 (EE) points.

 qAPDENGG. ECONOMICS & INDUSTRIAL MGMT.
MGMT. (8.E.
(BE
24 EN,E 25
& INDUSTRIAL MGMT. (B.E. EN, EE)
elasticities at the twO points on the demand
denms ENGG. ECONOMICS
Since, the D elasticity of
any confusion, the a. cur Determination of wages :- By considering the
will be different, generally to avoid rages (2) instance, if demand
demanded at thee two o wages can be influenced. For
the two prices and the quantities demand for labour,
points wages will be high.
specific type of labour is inelastic then an
taken as the base. Thus, for a
effectiveness of price controls :- With
(3) Determines the
Aq black-marketing would
a controlled product, its
q1+92 inelastic demand for
increase.
2
- Elasticity of demand is a very
Arc elasticity of demand =
(4) Demand forecasting
Ap forecasting of demand for commodities.
effective tool used in the
PI+P2 policy :- The elasticity of demand is
(5) Importance in fiscal
2
consideration while formulating the tax
policy or in
given a due
Aq budget formulation.
revenues, the government can levy
91+92 -aqy P1 +P2 For collecting large tax
Ap 91 +92 Ap high tax rates on goods
having inelastic demand, by directing the
consumers of such goods. People will
PI+ P2 incidence of tax on the
continue to buy such goods even when
the prices (due to imposition
where, q1 and Pi are the original quantity and price, respectivel
the other hand, if the demand is elastic,
and g2 and p2 are the new quantity and price, respectively of high tax rates) rise. On
revenues cannot be
people will purchase less quantities and adequate
Thus, the only difference between this formula and the poin
accumulated by the government.
elasticity formula is the use of average quantities and average prices
Also, the state takeover of public utilities is explainable with
as base.
the help of elasticity of demand. Usually, public utilities like power,
Q.13. Write a short note on the practical importance of
electricity, water, public transport, etc, is inelastic. If the government
elasticity of demand. allows their privatisation then there is every likelihood that private
OR Explain the importance of elasticity of demand in fiscal entrepreneurs may charge exorbitant price for these services and
policy of Government. W-03(EN) exploit the general public. Hence, keeping in mind the social welfare
Ans. The concept of elasticity of demand has substantial of the people. govermment keeps their administration and control
practical applications in various situations: under its purview.
) Price determination- The elasticity of demand for a Moreover, the terms of trade of a nation depend upon the
particular commodity is a very practical tool in the determination of elasticity of demand and supply. If the demand for a country's
the market price of that commodity. An inelastic demand or a less product in the international market
is inelastic, and its import
elastic demand suggests that scope is therefore a high market phcc demand is elastic then the international trade will be favourable
to
On the other hand, an elastic demand signifies that if the produces that country.
or entrepreneurs will decrease the price even slightly then the Sacs The effect of devaluation of currency also
depends upon
will hike up and total revenue will elasticity of demand and elasticity of
increase. supply of goods and services in
 ECONOMICS&INDus MGMT. (B.E.
26
YBDENGG. EN,
EN,
EE 27
nand for imporis
impo as INDUSTRIAL MGMT. (B.E. EN, EE)
inelastic demand ENGG. ECONOMICS &
international trade. Incase ol well BD
exports, devaluation may not he beneficial utility and marginal
inelastic supply for Q.15. What is the meaning of total IS-04, (EE)
adverse balance of payments. i utility? Explain in short.
terms ofreducing the utility derived from the consumptions
by theory of demand?
d? State Ans. Total utility the
is
O.14. What is meant
se
the mangoes and if a
to the theory of demand. all the units in question. For e.g., if there are 4
different approaches of
the total utility would be the utility
Theory of demand deals with person consumes 2 of them; then
Ans. Theory of demand:- the mangoes. If he consumes 3 mangoes, then
of derived from both the
sum of utilities derived from all 3 mangoes,
of demand. The theory demand is concerned with
analysis the total utility would be the
relationship between the variations/changes in demand. Ther have and so on.
in the theory of emand increase in total utility resulting
It is the
been different stages of development and Marginal utility:-
do
accordingly there are different approaches.to the analysis of mand from the consumptions
of one additional unit. That is, while
from consumptions of the
Different approaches to the analysis of demand calculating the marginal utility derived
additional unit is considered. Thus,
Following are the different approaches used for the analysis of
=
change in total utility
demand: Marginal utility
change in quantity consumed
1.Utility analysis.
Thus, marginal utility measures the ratio of
change in the two
2.Indifference curve technique.
variables that is total utility and quantity consumed.
3.Revealed preference theory of demand analysis developed by
Marginal utility and its relation with price:- Price and
Samuelson. marginal utility are inter-related. If price changes, then obviously
4.Statistical utility theory. marginal utility will also change. Price and marginal utility are
5.Marginal preference theory. directly related. That is, if the price of a good rises, then its marginal
Of these approaches the oldest approach to demand analysis is utility also rises.
the utility approach. It was propounded by Marshall and it is also Marginal utility and supply: - Supply and marginal utility are
inversely related. In case of a good whose supply is unlimited, the
known as the Marshallian marginal utility approach. This approach
marginal utility is zero. In case of scarcely available goods, the
explains the demand for a commodity and it derives the law of marginal utility is positive. Thus, marginal utility increases as supply
demand from (i)the law of diminishing marginal utility and (i1) The goes down and vice-versa.
law of equi-marginal utility. These are the two basic laws of Uahty Q.16. What are the major assumptions of the utility
analysis. analysis of demand ?
After the modern economists pointed out certain flaws in the Ans. The utility analysis of demand is based on certain basic
utility analysis, the 'Indifference curve technique, gained importal assumptions:
1. Uility can be measured and expressed in quantitative terms.
for demand analysis. It was developed by J.R.Hicks and R.U.D.
This is known as cardinal measurement of utility.
Allen. It seeks to explain the
consumers demand for commodity 2. Utility derived from one commodity is independent from
and consumers equilibrium. was
However, even this approa that of another commodity.
criticized for its limitations were 3. Utilities
and further new approaches of various goods are additive, i.e. they can be added
developed for demand analysis together.
as already mentioned above
 NOUSSTRIAL
MGMT
4. The marginal utility of money remains BE.E
constant
the amount of money at a consumers disposal even
e
makes certain purchases.
decreases thoyth VBD ENGG. ECONOMICS &INDUSTRIAL MGMT. (B.E. EN, EE) 29

5. The mind of different men

afte
ter Statement of the law:- The additional benefit which a person
"

work identically
situations. derives from a given increase in stock of a thing diminishes with
in simi every increase in the stock that he already has."
6. Utility is subjective, 1.e. it varies -Marshal.
from person t In simple words, as a consumer goes on consuming a good,
from place to place. to Person
person
(goes on taking additional units of a good), the extra satisfaction that
Q.17. Explain the law of diminishing
he enjoys from consuming an additional (one more) unit goes on
explain its relation with the law of demand. marginal utilit decreasing with every successive unit. Thus, the marginal utility
w-02, 03, S-03 (EN); diminishes. When the marginal utility is zero, point of saturation is
OR How is the law of diminishing W-04, reached and at this point the total utility is maximum.
marginal utility (ER The marginal utility of a commodity X can be represented
to the law of demand? Explain the law relate
of demand
OR Explain the law of diminishing in Ecor graphically as follows:
-

return. Does Utility schedule

only to agriculture? W/ou(EN,
i app
Ans. Before explaining the law of diminishing S -0503 (ER Number of Total utility (T.U.)Marginal utility
the various assumptions or conditions on marginal utilit units consumed (M.U.)
which it is based mue 0 0
stated, if these assumptions are not nust
fulfilled then the b
apply. Hence, these assumptions law dna 8
are also the limitations 14
Assumptions of the law of of the law
diminishing marginal utility: 18
1.It is assumed that the units which are consumed 20
suitable size. That is, the unit are taken in
is neither too small nor too 20
big in size.
2. Another assumption is that the units are consumed within a 6 18
certain reasonable time. That is, the time interval between 7 15
consumption of two successive
units is neither too short nor too long Graphically:-
3. It is also assumed that there is
no change in the consumers
tastes, preferences and character.
4. The income of the consumer is 25
assumed to be constant.
5. It is assumed that the 20
consumers are normal persons w TU
behave in a rational manner.
15
The law of diminishing marginal
utility was propounded by ue
classical Economist, Marshall. -10
The law is based on an importan
that every particular human
need is suitable even though the nu MU
of human needs may be
unlimited. Since every need can be Sauiisfied.
as a consumer consumes Point of saturation
more units of a thing, the urgency his
need for that particular thing point of 3 7 8
goes on decreasing and a No of Unit
saturation is reached where the thing
consumer no longer needs u
(i.e. his need is satisfied.)
 INDUSTRIAL MGMT.
MGMT. (8.E.
(8.E EN
VBD ENGG. ECONOMICS
&
30 t wPD ENGa. ECONOMICS
& INDUs1 HIAL MGMT.(B.E. EN, EE) 1

Thus. Thus, there is a close relation between the law of diminishing

consummt
consumption
initially increases with the marginal utility and the law of demand.
(i) Total utility Ultimately itit stan
Ultimately
a commodity. Applications of the aw in Economics:- As such, the law of
every additional unit of
diminishing. diminishing marginal utility has a universal application and
goes on diminishing conti ntinuously with
(ii) Marginal utility the operation, barring some exceptions (provided the assumptions of the
additional unit. to some cases like accumulation of
law are present). does not apply
It
Consumption of every
utility 1s zero, the total utility i ximan money, hobby items like coins, antiques, etc. and music. While this
(ii) When marginal
and that is the point of
saturation. may be so in the initial stages, eventually they will also be subject to
point, marginal utility becomes negative an diminishing utility.
(iv) Afters this
total utility starts
diminishing. As the law is based upon a basic fact of human behaviour. it
marginal utility with lawwd has several applications in Economics:
Relation of law of diminishing
- cause and effect. It can he The law is made use of in
"
progressive taxation", in the
demand [S-03 (EE)]: It is that of
diminishin
that the law of demand holds good because the law of sphere of taxation by the government. As wealth increases, rate of
marginal utility operates. tax also increases.

Toelaborate, the law of demand proposes that when the nrin Since it explains the operation of law of demand, it applies to
falls,more quantity of a product is demanded. The reasondiminishine
as to wh the determination of market price (whether it should be lowered or
law of
this is so is given by the operation of the iked) according to the supply.
marginal utility. As the supply of a product or products will increase
The law applies prominently to all households. As households
marginal utility will fall. People will tend to purchase les are considered to be having a limited amount of money at their
quantity of that product to maximize their total utility. Hence, t disposal; all of it cannot be spent on purchasing only one commodity.
encourage people to purchase more of that product, priçes will have
A consumer stops purchasing a particular commodity when the
to be lowered. Thus, when prices will fall people will buy more
utility of money spent is equal to the utility of the last unit of the
which is exactly what the law of demand states.
Thiscan be represented graphically too, by the same curve. commodity purchased. Rest of the money is spent on other
commodities to maximize the total utility.
Certain important concepts and law in economics have been
50 derived from the law of diminishing marginal utility. For instance:
40 the law of demand, the law of substitution, concept of consumer's
S 30 Surplus, etc.
Law of diminishing returns and agriculture :
20 The law of diminishing returns begins to operate in agriculture
10 at an earlier stage than in the manufacturing industry. First, the
amount of land available is more or less fixed, so returns are bound
23
No.of
34 S
Units Purchased/
6 to diminish after certain point is reached. As a result of
consumed
 32 VBD ENG ECONOMICS &INDUSTRIAL MGMT (B.E.
EN,E
33
improvements in agriculture, the operation of the law can be m OMICS&INDUSTRIAL MGMT. (B.E. EN, EE)
ECONOMICS4
ENGa,
9D some other age, say the Moghuls Age or
the
less effective for a while, its influence cannot be altogeth.ether coin belongin to of different
eliminated. anold should remember here that two coins
We
Chola Age.
Age.
In agriculture, the part played by nature is greater then that oe as units of the same commodity.
ofa ages cannot be regarde apply to
man. Nature acts against man. Agriculture depends upon many man economists argue that the law does not
2 Some
an some truth in it. For there is no limit to
natural factors such as weather, rain, sunshine and so on. If in any money. There is no doubt
In Soviet Russi a man to make
money. But even here we should
year a short fall of rain, then agriculture will fail. desire of
the person has earned some money, a stage may
they have got the best results in many fields of economic activityb by remember that when a
to money. For example, some
their system of economic planning. But agriculture is still in 4a bad Dadach
reac he would preter leisure
where
because they have entered the
cine-field were
shape. There is not much progress in Russian agriculture actors betore
of the cinema money as possible
plans are made by man and agriculture depends upon nature. Nature In the early stages, they may make as much
poor.
does not obey the commands of the planners. But,But, however, we
We
as many pictures as possible.
But after a certain stage is
by acting in
should not think that the law of diminishing returns applicable leisure to money and act only in a few
reached, they would prefer
is
them.
only to agriculture. of money begins to diminish for
pictures. Marginal utility
Q.18. Explain Law of diminishing marginal utility. What Q.19. What is meant by
indifference curves? Explain with
are the exceptions to the law? [W-04 (EE)
the help of suitable
diagrams the properties of indifference
Ans. Exceptions to the law of diminishing marginal utility.
curves. Discuss the main characteristic features of indifference
1. The law does not apply to those abnormal persons who have [W-02, 03, S-04 (EN)]
curves.
a mad desire for certain things (e.g. drunkards and misers). For a
or graphical
Ans. The indifference curve is a geometrical
drunkard, intoxication may increase with every additional dose. He all
presentation of a consumer's scale of preferences. It represents
may feel that each additional step takes him a step nearer to the gates
those combinations of goods which give the same level of
of Heaven. And in the case of the miser, greed increases with more
satisfaction to the consumer. As all the combinations on one
and more money.
2. Sometimes, it is said that in certain cases, marginal utility
indifference curve give equal satisfaction to the consumer, he is

does not diminish with every additional unit; on the other hand, it to the different combinations. In other words, the
indifferent

may increase. For example some persons have the hobby of
collecting old coins and stamps. For them, the marginal utility of old
oldof
coins may not diminish. But we have to note one thing here. No
person may be interested in collecting a number of units of the same
Coin. Suppose a person gets an old coin or the Gupta Age in India.
he may not like to have another unit of the same coin. Certainly,
consumer has an equal preference for all those combinations and
does not care about which combination he gets.
Indifference curve analysis is an ordinal approach towards the
analysis of demand as it assumes that human satisfaction cannot be
neasured quantitatively and can only be compared amongst its
dnfferent levels. This is in stark contrast to the Marshallian utility

marginal utility will diminish in such a case. But he may like to have nalysis of demand which stands for a quantitative measurement of
utilities.
 MGMT. (B.E. EN, EE)
35
VBD ENGG. ECONOMICS
& INDUSTRIAL MGMT.
GMT.(B.E. OMICS & INDUSTRIAL
ECONoN
3A E ENGG.
indifference
curves 1s called an indifferen ma
BD
A set of indifference
the combinations on the hig
consumer will definitely prefer
the lower end becauco
indifference curve to those on Y-axis
-commodity "Y' Y3
level of satisfaction. On
indifference curve signifies higher Y2
-commodity 'X'
Indifferenceschedule On X-axis
Commodity B
Commodity A
Combination 1c
1st 20
2nd 14 2 X2 X3

curves can never intersect each other

3Td 9
(2) Indifference
4th 5
because () each indifference curve signifies a different
This is so particular
(11) each and every point on one
5h level of satisfaction and
level of satisfaction.
6h 2 6 indifference curve gives equal
In case of intersection,
the point of intersection would imply
level and that at a lower level are equal,
20 that the satisfaction at higher
which is preposterous according
to the assumptions of the
16
indifference curve analysis.
12

Commodity X
OnX-axis
On Y- axis Commodity Y

01 2 3
45
Commodity '8'
6

1C2(Higher level of
Properties of indifference curves or the main characteris statisfaction)
IC(Lower level of statisfact ion)
features of indifference curves
Following are the main characteristic features or the propen
Indifference curves are always convex to the origin
(3)
of the indifference curves This characteristics is based upon the principle of "diminishing
left
(1) Indifference curves always slope downwards Irom marginal rate of substitution". According to this principle, "as more
right:- This characteristic of an indifference curve implies and more of one commodity (X) is substituted for another (Y), the
consumer will have to curtail consumption Consumer is willing to part with less and less of the commodity being
of one commodily
wants to consume large quantity of maintSubstituted (i.e. Y)". This is called as the principle of diminishing
another commodity tOo ain
the same level of satisfaction. iarginal rate of substitution. This happens mainly because human
 36 VBD ENGG. ECONOMICS & INDUSTRIALMGMT.(B.E. 37
EN, EE)
MGMT
OMICS&INDUSTRIAL MGMT. (B.E.
want for a particular good
is satiable and as a person E ECONOo effect, broadly
consu ENGG. equilibrium and price demand
and more of a good, his intensity consumer's
of want tor that good BD study of indifference curve to approach to
diminishing. This diminishing marginal goe The of
rate of substitutionsarsthe subject-matter
convex shape to the indifference curves. ions forms
line.
analysis. short note on Budget line. It is an
a as the price
(4) Higher indifference curve shows
higher 0.21. Write known
evel Budget line is
also With the help of
satisfaction:- Ans. indifference curve analysis. explain
concept in the it is possible to
An indifference curve which is placed above and ortant budget line,
to therigh impo
indifference
map and the
another represents a higher level of satisfaction than the lower ina equilibrium. of two
One consumer eauilibrium.
all the possible combinations
Q.20. Explain in brief "Indifference curve approac line shows income and at
A budget buy with his limited consumer
can
demand analysis'". a consumer assumed that the
g0ods which goods. It is
Ans. In 1934, J.R.Hicks and R.G.D.Allen systematio of the two
oiven prices on the two goods.
developed thè ordinal utility concept. Indifference curves analysi spends all nhis money income
based on the ordinal utility concept. J.R.Hicks and R.G.D.Allen
this indifference curve technique to analyse demand and consun
behavior.
The indifference curve approach is based on consum Budget-line
preferences. It believes that, all that is required D Or
price-tine
to analyse consum
behavior is that the consumer should be able to rank his preferenc
for different commodities. This approach is F
different fro
Marshallian utility analysis. It is also
known as the ordinal utilh E
approach because it believes that human
satisfaction cannot GOOD A
measured in terms of cardinal numbers. It
believes that the consum given price line, like point F.
Any point which lies outside the
can only tell his order of preferences.
will be beyond the reach of the consumer and any combination lying
The indifference curve technique explains how
a consum within the line. like point E, shows under-spendHig by the consun er
attains equilibrium with his given income and at given
prices Q.22. Explain consumer equilibrium with the help of
goods and services. This technique can also be used to derive.thi /W-02, (EN)
indifference curve.
law of demand by examining the changes in consumer behavior du Ans. Consumer's equilibrium is attained when he spends his
to changes in prices of goods and services; other things remairn money income on different commodities in such a manner that he
constant. This is known as the price effect and is caused by twi derives maximum satisfaction. In order to explain how this
factors which can be studied under the following two heads:- equilibrium is achieved we assume that:-
1. Income effect, and
.Theconsumer has a given indifference map which shows his
SCales of preferences for
2. Substitution effect. various combinations of the two goods X
and Y.
 38 39
D ENGaG. ECONOMICS &INDUSTRIAL MGMT
&INDUSTRIAL MGMT. (B.E. EN,
EE)
OMICS
EcONOM
2. The consumer has a fixed money ncome which
ID
ENGG.
substitution of X for Y (MRSxy)
he Marginal rate of
spend entirely on X and Y. h Marginal utility of X(MUx)
3.The prices of X and Y are given (fixed).
Marginal utility of Y (MUy)
The budget line PL shows the various combinations of A
Price of X (Px)
which he can buy with his given income and at given A line PL= Price of Y (Py)
The slope of price
Bringing the consumer's indifference map and his bude get
point Q.
together, we get- At cquilibrium
Y

MRSxY
MUx P
MUy
equilibrium is:-
Thecondition for to the indifference
curve; or in other
must be tangent
Price line good X and Y must be
marginal rate of substitution of
words, the
respective prices.
equal to the ratio of their with a
-1C5
The consumer's equilibrium is subject to change
Note:- the two
1C consumer's income, or the prices of
IC3 change in either the
1C2 goods or a change in both
the income and the prices.
IC Q.23. What do you mean by
factors of production? What
M
characteristic
GOOD Xx
different factors of production? Give their
are the
Now we consider points R. S, Q. T and U which lie
onfeatures or peculiarities.
budget line PL. Every combination on he budget line costs the su e in detail.
OR Deseribe the various factors of production
to the consumer. Thus, in order to reach equilibrium, the consun W-03(EE)]
will choose that combination which lies on the
highest indiffere
Ans. Factors of production are the various inputs which
are
curve. From the above graph it is seen
that the combinal needed
represented by point Q lies on the budget line needed to to produce product. A product has to pass
produce a particular prouuc
and is also on through many stages
highest indifference curve IC3. Hence, the consumer through many stages and and many hands until it reaches the consumer's
hands unu
will b
cquilibrium at the point Q. hands in a finished form. The various productive TeSu
which are required in the entire process of production are known as
Conditions of equilibrium-
At the equilibrium point Q, the budget line PL is tangent factors of production.
tol
indifference curve 1C3. That is, the slopes of the budget line PLa Definition: "Factors of production is a group or class of
that of the indifference curve IC3 are equal. original productive resources". -by Fraser.
But the slope of an indifference curve shows the marginal There are four main factors of production:
of substitution of one commodity for another which is equal to ) Land, 2) Labour, 3) Capital, and 4) Enterprise or
organisation.
ratio of arginal utility of the two goodb.
 All these &INoSTRIAL RIALMGMT.
factors are
required
Services. Even to produce various ENGG.ECONOMICSs &INDUSTRIAL MGMT. (B.E. EN, EE) 41
a small piece ABD
active participation of bread cannot
be produced Land as a renewable and non-renewable resources- Since
of these factors of production.
"land" in E
Economics is an exhaustive term and includes all
Definition and
characteristics the term
of factors of production resources that yield an income, it can be viewed in the light
1) Definition atural
hat
natu
on:
Torces which
of land: "Land means the
materal, ofuba
eof the vanous
nature of the various natural resources that it encompasses.
nature gives freely for
man's ad, in land stands for soil, water resources, fisheries, mineral resources,
air and light and Land
and heat".
farests, climate, marine resources, rainfall and topography. Some of
The term 1and' is used -Mar resources are renewable, 1.e. they can be used repeatedly and
not mean soil or earth's
in aSpecial
special sense Feo
sense in Economice
in the e supply is more or less perpetual. For example, land, water.,
nature which would include
surface alone but reters their
to all fres
natural resources, fertility fisheies and forests.
air, natural vegetation of soil
etc. The income which is derived On the other hand, certain resources have a non-renewable
from
called rent. omnature, i.e. their use is contined to one time application and they are
Characteristics of land: exhaustible. They do not have an unending supply nor can their

Specific features There are supply be developed by man artificially.

certain specific featuresof
as a factor For example various minerals, natural gases and mineral oils.
of production which make it distinct and sentafan has to make a rational and careful use of the non-renewabie
other factors of production, especially
capital. They are
resources and has to maintain the quality of the renewable resources
1)Free gitt of nature Land is neither produced nao. in the process of development. Thus, land can be Viewed as
made. It is a natural endowment both
to mankind. renewable as well as non-renewable resource.
ii) Permanent Land is permanent and has some inha
2) Definition of labour [S-04, (EN)]:- "Any exertion of mind
properties which Ricardo called 'original
and indestructible or body undergone partly or wholly with a view
Shape or physical appearance might
to some good other
change but land remi than the pleasure derived directly from the work is called
whatsoever. labour

ii) No supply - Marshall.

price: Since the amount of land availabk The term labour refers to various types of human
earth is fixed, it cannot have supply effort which
a price. That is, the suppi require the
use of physical exertion, skill and intellect. Also, any
land is independent of its market
price. Whatever may bethe
prwork done for the sake of pleasure or love does not represent
land (high or low) its supply labour
or quantity will remain unchanged
iv) Immobile:- Land is in Economics. It is for
this reason that the services of a housewite are
not mobile, i.e. it cannot be puynot
treated as labour, while those
camed over from one place of a maid-servant are treated as
to another. Thus, in the geu labour. The income which
is derived from labour is called as wages.
sense, land is immobile.
However, its products can be transpu
Characteristics of labour:
V) Intinite variety
No two pieces of land are same T Peculiarities of labour: Certain peculiarities
vary in soil quality, fertility, of labour make
situation, etc. The land offes distinctly different from the other factors of production. These
variety.
peculiarities affect the
demand for, and supply of labour and thu
These peculiarities of land affect the income fromland ccessitate a special
theory of wages. The very fact that
labour 1

rent
 INDUSTRIAL MGMT. 43
42 VBD ENGG. ECONOMICS & MT. (B.E. OMICS& INDUSTRIAL MGMT. (B.E. EN,
ECONOM EE)
E BD
ENGG.
living while the other factors of productions are halt and or decrease in price
i) Supply of labour might increase
are reduced
case of labours, if the price, i.e. wages,
the difference.
The peculiarities of labour are-
(wages) :
os) t- In the
point then its supply might increase,
because more
a certain po
below
holow add to the total
i) Labour inseparable from labourer
:- Labour is inses
mily will have to start working to
fami
nembers of a
from the labourer himself in the sense that a labourer has family income.
caca
is not only the means but
also an end of
personally deliver his labour work. T'his is not so in ix) Labour while an
commodity produced. The producer can transport onlv :- "Means are the ways to achieve something,
yoroduction
a aimed to achieve. So in the
case of labour,
commodity to a market for selling while he himself stays
ays at end' is that which is
on
used to achieve production i.e. when a worker will work
native place. But labourer
a has to seil his labour personally. labour is then
of production (like machines, land etc.), only
1) Perishable- Labour is perishable. If he does not
dhe other means
achieved. Thus, labour is a 'means ot production
thou oroduction will be
employment for a day, then that day is gone forever, i.e. for is there, or unless production is
However, unless production
labourer will earn no wages as his labour has perished. Thus, lab will not exist. Labour is there because
aimed to be achieved, labour
does not last.
is taking place. Thus, labour is
an end of production.
Workes production
ii) Weak bargaining power Since the workers means but also an end of
Hence. labour is not only the
financially the weaker side as compared to their employees,
production.
has a very weak bargaining power and usually gets exploited due
3) Definition of capital: "Capital is that part
of wealth of an
production of
this.
individual or community which is used for further
iv) Less mobility :- As compared to capital and other god wealth". Capital is known as a "produced factor of production
the mobility of labour is much less. A labour usually does not w Thus, it is different from both land and labour because both land and
to leave his native place easily. labour are not produced factors. They are primary or original factors
:
v)Supply independent of demand The supply of labou of production, but capital is produced by man working with nature
independent of its demand because there can be no rapid adjustm Therefore, capital may well be defined as man-made instruments or
ofits supply according to demand. Labour can neither be made production. Examples of capital are:
order; nor can it be reduced or destroyed at will. Machine tools and instruments, factories, dams, canals,
vi) Varicd efficieney Different labourers are differedansport equipments, stock of
raw material, goods in process, fuel
efficient and are not at all exactly interchangeable. Thus, wages cC. All of them are produced by man to help in the production of
labourer are also varying according further goods.
to their efficiency.
vii) Living being:- Since labourer is a The income earned from capital is called interest.
human being, he
feelings, sentiments and limitations 4) Definition of enterprise or organization: Enterprise is the
of health and stamina. He
wotk Or pertorm like a
machine and needs a humane and
cfourth factor of production. It is brought into the production process
by an
treatment to work efficiently entrenreneur. He mobilises the other three actos
production (land, labour and capital), combines them in the right
 44 VBD ENGG. ECONOMICS & INDUSTRIAL
MGMT. ( INDUSTRIA
ECONOMICS&
ECONOMICS & NDUSTRIAL MGMT. (B.E. EN, EE) 45
oportion, then initiates the process of production and VBDENGG.
and
sksinvolved in it. The entrepreneur also remunerates TE all available
resources are employed for the production of
f
the1acton
roduction. 15,000 quintals of it can be produced. If, on the other hand,
whea
The income derived from enterprise is called profit, vailable resources are utilized for the production of cotton, 5000
Th.all
Thu, all ava
uintals are
produced. These are the two extremes represented by A
he four factors of production are vital to the process of prod
duci in between them are the situations represented by B, C, D
No single factor is more important than the other. tenerally,
they
and F and
At B, the economy
can produce 14,000 quintals of wheat and
complementary to each other. Thus, the importance of none eand and E.
cotton. AtC the production possibilities
are 12,000
can be over-emphasized. th 1000 quintals of
quintals of wheat and
2000 quintals of cotton. As we move from A
Q.24. What is production possibility curve? What some units of cotton For
at dogto E. we give up some units of wheat for
doe
does
point inside the curve indicate? [S-03 we sacrifice 1000 quintals of wheat to
oU3 (E (E instance, moving from A to B,
Ans. The production possibility curve reprints graphic cotton, and so on. As we move from A to
produce 1000 quintals of
alternative production possibilities open to an economv, n cacrifice increasing amounts of cotton. This means that, in a
productive resources of the community can be used for Lemplovment economy, more and more of one good can De
production of various alternative goods. But they are eas obtained only by reducing the production of another good. This is
obtained, a choice has to be made between the alternative goods resources are limited.
t due to the basic fact that the economy's
canbe produced. In other words, the economy has to choose whi The following diagram(A) illustrates
the production
goods to produce and in what quantities. If it is decided to produ
possibilities set out in the above table.
more of certain goods, the production of certain other goods has
be curtailed.
For example, let us suppose that the economy can produce
commodities, cotton and wheat. We suppose that
H
the product 2
resources are being fully utilized and there is
no change
technology. The following table gives the
various producti
possibilities.
Alternative production possibilities P
Production 01 23 5
Cloth
Cotton Wheat
Cloth
possibilities (in 000 quintals)
Fig. (A) Production possibility
(in 000 quintals) curve
A
15 Fig. (B) Problem of under-utilisation
of resources.
B possibility curve, also
14 n this diagram AF is the production
C vanous
12
Or the production possibility frontier, which shows the
D
produce with
cOmbinations of the two goods which the economy can
9
E
5
a given amount resources.
F
0 of
 44 VBD ENGG. ECONOMICS & IN MI. 8.E.EN,B ENGG. ECOF D.E. EN, EE) 45
RD
process or production and he. available esources are employed for the production
proportion, then initiates the If all
involved in it. The
nerates the factors
entrepreneur also remunerates fas 15,000 quintals ofit can be produced. If, on the other hand,
risks wheat,
resources are utilized for the production of cotton, 5000
production.
The income derived from enterprise us, ouintals are produced. These
is called profit. Thu ese are the two extremes represented by A
to the process of productig
produe are the ations represented by B, C, D
the four factors of production are vital and in between them
andF
other. Generally, thev the economy can produce 14,000 quintals of wheat and
No single factor is more important than the a and E. At B,
At C the production possibilities are 12,000
complementary to each other. Thus, the importance of none of then 1000 quintals of cotton.
quintals of wheat and 2000
quintals of cotton. As we move from AA
can be over-emphasized.
Q.24. What is production possibility curve? What does. es to F, we ive up some units of wheat for some units of cotton For
point inside the curve indicate? IS-03 (EE instance, moving fromA to B, we sacrifice 1000 quintals of wheat to
TS-03
so on. As we move from A to
Ans. The production possibility curve reprints graphicalaoduce 1000 quintals of cotton, and
means that, in a
alternative production possibilities open to an economy. Th Ewe sacrifice increasing amounts of cotton. This
productive resources of the community can be used for good can be
t ful-employment economy, more and more of one
production of various alternative goods. But they are easi obtained only by reducing the production of another good. This is
obtained, a choice has to be made between the alternative goods thu due the basic fact that the economy's resources are limited.
to
can be produced. In other words, the economy has to choose whid following diagram(A) illustrates the production
The
goods to produce and in what quantities. If it is decided to produ pDOssibilities set out in the above table.
more of certain goods, the production of certain other goods has t
be curtailed.
For example, let us suppose that the economy can produce tw 15
commodities, cotton and wheat. We suppose that 12
the productie
resources are being fully utilized and there is
no change
technology. The following table gives
the various productio
possibilities.
Alternative production possibilities
Production Cotton Wheat
0
12 3 5 o Cloth
possibilities (in 000 quintals) Cloth
(in 000 quintals) curve
A Fig.(A) Production possibility
B
15 Fig. (B) Problem of under-utilisation of
resource
14 possibility curve, also
C diagram AF is the production
D
12 nis
LCd or the production possibility frontier, which shows the
various
can produce with
ations of the two goods which the economy
agiven amount of resources.
 AT.(B.E.E
47
The production possibility curve is also called tr eD RD ENGG. ECONOMICS & INDUSTRIAL MGMT. (B.E. EN, E)
ransforma
function:
curve, because when we move from one position
toanother, Nature of production
really transforming one good into another by shiftino res. Production function can be expressed as under
... )
one use to another. X =f(a, b, c, d
a,
Here X is the output ot commodity per unit of time and b,
a
It is to be remembered that all the points representin
various production pOssibilities must lie on the production posng C.d .onnornnr are the various productive resources which are the
curve AF and notinside or outside it. quantity of the commodity.
of For example, the function, the
com For understanding the nature of production
output of the two goods can neither be at U nor
H. (See gFioa following points may be emphasised :

This is so because at U the economy will be under-employins a purely technical

resources and H is beyond the resources available. () The production function represents
the inputs of factors and
relationship in physical quantities between
Q.25. What do you mean by production
function? Exp the output of the prouu
briefly Cob-Duglas production function.
Slo3 (EE) Cobb-Douglas production function:
Ans.Production function is the name formulated production
given to the physa Paul H. Douglas and C.W. Cobb
to
Spnysical inputs and outputs depen function on the basis of studies. This was originally applicable
Ondgiven state of technical knowledge. Like demand it refers whole of the manufacturing industry in the U.S.A. In Cobb-Douglas
ne. Accordingly. it refers to a flow of inputs resulinsi production function, output are of the factory goods and inputs au
a tlow of outputs over a period of time, leaving prices aside. capital and labour. The Cobb-Douglas function can be stated as
shows the maximum amount of output
that can be produced from follows
given set of inputs in the existing
state of technology. The ou Q=KL" c (1- a) (a 1)
will change, when the quantity of any
Factors affecting production
input is changed. where Q stands for quantity produced, L' for labour and e' for
function:
Production function depends, capital and K a positive constants. According to them, about 75
inter-related on (a) quantities
resources used, (b) percent of the increase in output is due to labour and 25 percent due
state of technical knowledge,
processes, (c) possi to capital. In recent years, economists are showing greater interest in
(d) size of the firms, (e) Nature of firm's
organisation, Cobb-Douglas production function on account oof its simplicity, its
relative prices of the factors of production
and the manner in whd uses
the factors of production are combined. The less and good statistical results itI yields.
ye
efficient are Q.26. Explain Mobility of labour, which factors affect
techniques, the smaller will be
the output.
mobility of labour?
Production changes with period
of time. In the long period.
changes altogether because Ans. Mobility of labour:- By mobility, we mean the abihty to
the same inputs produce
outputs. differe move.
VC. In the
the case
case of labour, mobility
mobiy includes not only geographical
In the short run, the choices open to the producer
restricted, because some mobility
Dty but
but also occupational moDi
also occupational mobility. Thus, mobility of labour
of the factors are fixed and cannot means working
changed in the short period the ability of labour to move to a different place of
and only some can be varied.
 MT.(.E
RD ENGG ECONOMICS & INDUSTRIAL MGMT.
48 (n
ECONOMICS & NDUSTRIAL MGT. (B.E EN, EE)
D ENGG
(by remaining in the same occupation or by changing i mobility of labour
aining in Factors which prevents
ability of labourtochange his occupation (by remainino the .
language of custom
) Differences in culture,
in

place or by changing it) climate,

2) Differences in
Mobility of labour is of 3 types: -
place, and
3) Attachment to native
1) Geographical mobility accept change casily
4) Man's natural dislike to
2) Horizontal mobility. and its merits?
Q.27. What is division of labour? What are
3) Vertical mobility.
/W-04, S-05 (EN; W-03, 04 (EE
1) Geographical mobility:-Moving from one plac localization of industries ?
another OR What are the causes of
allocation of specific labour to a
2) Horizontal mobility:- Moving from one occupatin
Ans. Division of labour means
with their skzlls,
specific set of activities of process(es) in accordance
r bul n the same level, e.g. a teacher changing the subieg
he/she is teaching. knowledge, aptitude and geographical location.
3) Vertical mobility:- Moving from a lower level to a hip Division of labour is organising labour in an
organisation such
level,whetheror not in the same organisation place for e.g. Promoti that production is efficient. It is a chief feature of
modern industrial
Merits of mobility of labour : production
1) Helps adjustment of supply:- Easy mobility ofTypes- Division of Labour is of the following types
labe
helps in adjusting its supply to the demand for
it, as labour can
traveltoan area of greater demand from an area of congestion or 1)Simple/Functional Dividing the society on the basis of
fre

demand
lyarious occupations. e.g.goldsmiths, tailors. Cl
proper The various sub-processes in
2) Offers better prospects:- Mobility works to the benefitan 2) Complex / Labour
labour as he can look for better entire process of production are carried oul by separa of
prospects by moving around
opting for an employment which is abour
best suited to his temperame
skills and his financial needs. For 3) Territorial/ Localization of industriest- Certain temitories
instance, villagers find be
prospects by shifting to nearby (lowns, villages or cities) which specialize in the production of a
towns and cities.
ustrial structure Mobility of labe particular commodity are established in that particular territory only
cs shilting oflabour from decaying
expanding industries. industries to erowine This is known as territorial division of labour ot localuzat
Thus, the overall industrial industries.
improved and labour structure
is not wasted in dying For eg
Factors which help to units. (0 Jute industry in Bengal.
increase mobility of labour
1) Means
of transport and communication. ii) Cotton mills in Maharashtra and Gujarat
2) Education, (ii) Iron and steel industry in Bihar
3) Industrial development (iv) Tie and Dye industry in Rajasthan and Cujarat
4) Vocational guidance, (v) Bangles of Ferozabad
and
5) Wiping of political boundaries (vi) Brass articles of Moradabad
 INDUSTRIAL MGMT. (B.E.EN,ER
50 VBD ENGG. ECONOMICS & r
ECONOMICS & INDUSTRIAL MGMT. (B.E. EN,
EE)
ENGG.
BD
Causes of iocalization of industries dam Smith's example of Pin-making industry:
materials Proximity (fact of h being
1) Proximity to raw Pin-making industry 1s divided into 18 distinct operations, 10
tactor in the localiza
near) to raw materials supply is a dominant zatio
an Droduce 48000 pins per day, hence one worker may be
econOmi
lower transport costs and thu considered to have made 4800 pins per day.
of an industry. It means
production. However, in the absence of division of labour, it is not possible
2) Proximity to sources of power - Nearness to vario
ariou prouucc even a single complete pin.
to produce
for one man to
one
localization of industries in that reoinnfor Since division of labour engages a
power resources enable
industry.
2) Increase in skill
running of an performance
power is indispensable to the particular labour in a particular job, repetitive
are close by knowledge.
3) Proximity of markets: Wben markets worker perfect in his skills and
a
transportation costs are reduced. Thus, those industries which 3) New inventions are possible:- Division of labour leaves
localised near the markets will always have an edge over ample time for a labourer to think freely. Thus he can devise and
thos

located far-off. invent new ways and methods of

performing a job, which might lead
4) Labour availability For modern industrial production tonew inventions.
mechanised production, skilled and trained labour is needed 4) Time is saved: Under division of labour, a worker
Availabilty of trained labour is a major factor in localisation ofa
specializes in a sub-process. Thus, there is saving of time.
specific industry. 5) Saving in tools and equipments:- Since a worker does
5) Capital availability:- Places where finance or capital only a part job, he does not require all the tools and implements of
easily and abundantly available offer great attraction for tethe entire production process. He has to be supplied with only
development of industries because capital is the backbone d particular tools at a time. Thus, the same set of tools can serve the
industry. Usually metros have an excess of banks and financi need of various workers simultaneously, thereby resulting in savings.
institutions offering industrial finance at
attractive rates a 6) Large scale production: As division of labour to involve
incentives. Specialisation, production improves not only quantity-wise but alšo
6) Political factors:They play quality-wise. All the economics of large-scale production are gained
an important role i
localisation of industries. For instance in through division of labour.
Andhra-Pradesh, the Che
Minister Mr. Chandrababu Naidu ) Right man is assigned to the right job:- Division of labour
made special efforts for the
involves placement job by taking into
industry to be localised there. So that now Hyderabad oVes pacement of right man man to the right
rignt jo
is also knoConsideration iIS no
as 'Cyberabad' in the computer trainings, skills and abilities. Thus, there
SIderation his trainings,
industry.
mis-match of
7) Religious factor :- Certain labour and job.
pilgrimage centres have the
industries localised there which Thus, these are the merits of division of labour.
produce articles used by
pilgrims. Demerits: Division of labour has proved harmful to the
ndividual workers
Merits of division of labour in certain ways:
Monotony: Doing the same work over and over again, without
1) Increase in productivity
: eall) any change.
Division of labour gre "gCproduces mental fatigue. Work becomes
irksome and
enhances the productivity of labour. monoton workers will not
lakea
take Lhere is no pleasure in the job. The
any interest.
The quality of work may suffer.
 ECONOMICS &INDUSTRIAL MG
52 BD ENGG. (B.EE ECO OMICS&INDUSTRIAL MGMT. (B.E
VBD ENGG. EE) 53
instinct: Since many men contribute to
Kills creative Q.28. What is efficiency of labour? What are the factors
none can claim the credit of
of making
mab:. it..
making of an article, M determine/ affecet) intluence efficiency of labour?
satisfied. The work gives him
him no pride that
creativeinstinctis not product as his Or
IS-04, (EN)
no workercan claim the Definition of labour:- "Any exertion of mind or body
pleasure, since
deteriorates in technical skill
Loss of skill:The
worker Inse undergone partiy or wholly with aa view to some
ndergone partly
s
good other than the
article, the worker is required just toTepea directly from the work is called labour"- Marshall.
ofmaking the whole The skill with which the artisan ong pleasure derived
few simple movements. The term labour refers to various types of human effort which
gradually dies out. He simply becomes
exertion, skill and intellect. Also, any
the artistic products reauire the use of physical
machine tender. work done for the sake of pleasure
or love does not represent labour
worker is dismissed
Risk of Unemployment: If the from.
It is for this reason that the services of a housewife are
in Economics.
he
factory, he may have to search far and wide before secures
aj not treated as labour, while those of a maid-servant are treated as
only legs of a ch
in which he has specialized. He may be making labour. The income which
is derived from labour is called as
ot
It is doubtful if he can get the same job elsewhere. On the wages.Efficiency of labour is the ability of labour to deliver the
hand, if he knew how to make the complete chai, his chance gOods. In other words, efficiency of labour is a measure of quality of
getting a job elsewhere would be brighter. labour force, i.e. the capability of labour to do their
work efficiently.
Loss of sense of responsibility: None can be held responsit Efficiency of labour does not remain same over the entire
in efficiency.
for bad production because none makes the whole article. When labour force. In fact, each and every worker is different
result is bad, everybody tries to shift the responsibility to somebo A particular worker may be more efficient while
some other worker
else. This adds to the difficulties of administration. might be less efficient. Thus, efficiency of labour varies from
worker
Problem of Distribution: When there is no division of labou to worker and is affected by some factors which are discussed below.
a.worker makes the whole article independently. He gets its vali
Factors affecting efficiency of labour:
) Personal/ Racial qualities of a worker :- Personal/
and there is no trouble. But under division of labour, many perso Racial
contribute to the production of an article. They must
receive a qualities of a worker greatly determine his labour efficiency. For
share oof the product, and it not easy to determine
this share. Th Instance, a hardworking, sincere, intelligent and enthusiastic person
the problem of distribution is made difficult. It
has divided would have greater labour efficiency as compared to a dull, lazyaand
community into two working camps, viz.
Labour and Capital.1 dishonest worker. Also, it has been seen that persons of certain races
gap between the master and the men
is daily growing wider are more efficient than
unbridgeable. others in certain spheres.
2) Natural or climatic factors Climatic factors influence
Conclusion: Division of labour is
no doubt attended wil the quantity by humans. For
number of drawbacks. But the advantages of work that can be efficiently done
certainly outweigh Instance,
nce, a cool climate is quite and energizing and thus
soothing anu
quite soothing
disadvantages. The evils can
be minimised by shortening
the hoConducive to greater labour efficiency. while on the other hand, hot
of work and providing more leisure
to the worker. It is no lo climate tends
and renders
him incapable of
possible, nor is it desirable, to drain a person's energy and
to do away with this doing much
system. work.
 MGMT. E
54 VBDENGG. ECONOMICS &INDUSTRIAL (B.E, EN,EE
EN,
BD ENGG.
ONOMICS & USTRIAL MGMT. (B.E. EN, EE) 55

3) Level of education:- The level of education also income. It includes

not only cash but also stock of raw materials,
General as well as technical capital goods, plant
and machinery, fuel, tools and equipments, etc.
determines the labour efficiency.
resourcefulness and intelligence of Capital' is a produced means of production.
vocational education add to the
alert
af
.a
worker. It makes him more skillful,
responsible and and adde
dsto Meaning of capital lormation?- Capital formation in its
cimplest sense would
mean working or creation of more capital. It
his overall efficiency.
more capital goods, machines, factories,
4) Working environment:
Safe, cheerful and hygienic involves creation of
labour efficiency, wherea electricity, power, fuel, etc. which are all used up to produce further
working condition greatly increase the
dull, conjested and stuff goods.
poor working conditions, i.e. hazardous,
Thus, capital formation means "increase
in the stock of real
places deteriorate labour efficiency.
capital in a country".
5) Working hours: If the working hours are long
and

Income, savings and investment are three pillars on which

uninterrupted, the worker will get tired soon and his
labour
capital formation stands. Without savings and without proper
efficiency will be reduced. take
then investment of savings, the process of capital formation cannot
6) Payments:- If labour payments are prompt and proper
place.
labour efficiency will definitely be positively influenced. On
the

Process of capital formation : According to Prof. Nurkse,

other hand, poor wages, late payments etc. make a worker miserable for capital formation. The society has to forego some present
s
and rob his enthusiasm for work. Thus the labour efficjency
consumption and direct a part of it to the making of capital goods. If
negatively influenced and goes down.
sOciety consumes all that it produces and saves nothing, future
7) Proper organisation of industry and equipments productive capacity of the economy will fall as the present capital
Labour efficiency is improved when there is proper organisation o
equipment wears out.
business, industry, equipments and also of labour. Organised workes
"The essence of the process of capital formation, then, is the
are generally better workers and their labour efficiency is more.
diversion of a part of society's currently available resources to the
The quality of tools and equipments supplied to workers as purpose of increasing the stock of capital goods so as to make
affects labour efficiency.
expansion of consumable output in the tuture.
possible an
8) Sense of security Various social and political factop
1nere are broadly 3 stages in the process of capital formation
affect labour efficiency. Social security schemes and politicu
assurances which remove the fear of unemployment from
Creation of savings Savings depend upon the 'power to
thsave' and also 'the will to save'. Power to save' depends upon the
workers pysche greatly and to labour efficiency.
O income; while the 'Will to save' depends upon the various
Thus, labour efficiency is dependent on the above factors. A personal, social and national considerations.
or any of these factors, can affect labour efficiency either way, 1 There are 3 sources of savings
either positively or negatively. savings).
Davings by individuals and households (voluntary
Q.29. What is meant by capital
formation? 0) Savings by business enterprises, and
Ans. Meaning of capital:- Capital is such as through
that part of a m
taxes
Savings by government (forced savings
wealth which is used in producing further a and profits of public undertakings).
wealth orwhich yields
 &INDUSTRIAL MGMT.(B.E.
BDENGG.ECONOMICS (B.
EN,ER

determinant of savings income. Whe

is n ENGG. ECONOMICS
& INDUSTRIAL MGMT. (B.E. EN, EE) 57
The most important is the captain of the ship called as
then the level of savings will also s
0.30. Entrepreneur
the level of income is low, industry". Explain with respect to functions of an entrepreneur.
capital formation will be low Whe
This implies that the rate of [W-03(EN)]
prosper economically The
capital is scarce then a country will not
sa Ans. Entrepreneur is the person who undertakes an enterprise.
low; which again means that aving
is, the national income will be other words, an
n ou
In
entrepreneur supplies the fourth factor of
poverty goes on and on. Heene
will be low and the vicious circle of Droduction, i.e. enterprise. Entrepreneurship abilities determine the
savings.
income has an utmost bearing on the creation of SIICCess/failure of an enterprise to a large extent. This is so because
2) Mobilisation of savings It the next stage in the proces
1S
entrepreneur 1s the binder that connects all the factors of
PEan
of capital formation. It means that the amount of savings production together and directs them such that they result in efficient
individuals and households should be properly transferred t production, remunerates them and also bears the risks associated
investment by businessmen and entrepreneurs. This is achieve with runaing an enterprise.
through a well-developed capital market and financial mechanism "An entrepreneur is the captain of the ship called as industry".
as a captain is incharge of organising all the
a country. In an organised capital market, savings are made availabeThis is so because just
a ship, similarly in an industry an entrepreneur has the
for business and industry through individual investors, banksactivities on
responsibility of organising all the production, selling and risk
finance corporations. government agencies. investment trusts, etc.
bearing aspects of a business.
Sometimes indigenous bankers and money-lenders also form
A captain steers the ship on the right path through to its
the link between savings and business; like it is prevalent in India.
destination while taking care of all the ups and downs throughout the
3) Investment of savings- The savings which are mobilise
cruise.
to the entrepreneur must be made use of realistic, so that they resu
Similarly, an entrepreneur steers the industry on the path of
in capital formation. For this, it is very necessary that there a
profit making by taking care of the ups aud downs of business. This,
competent, honest and dynamic entrepreneurs, who are capabie he
does. by nerforming many different functions which includes
bearing risks and uncertainties of business.
1) Taking the initiative : An entrepreneur is the person who
Also, there must be enough encouragement to invest,
wntakes the initiative of starting a business. He conceives a business
depends on the marginal efficiency of capital (i.e. prospective rate ideas
and then starts directing his energies and resources to start l.
profit on one hand and rate of interest on the other hand). General
2) Organizing resources : After deciding upon the business,
when the rate of interest is low, investment is more and vice versa
Cntrepreneur then takes steps to organize and arrange uthe various
However, the greatest investment to invest is the
size of mar resources that
are required to start production. For instance, he has to
TOr goods. Bigger markets attract more investment and thus resullarrange
finance, capital goods, labour and also 1ook Ou for
greater capital formation. For example, countries like
U.S.A. and prOspective markets for the products.
U.K.
) Supervision:- Once the necessary productive resources are
Foreign capital can also help in capital
formation through direobilized and harnessed, the production process starts. Now, the
private investments by foreigners, loans by and cntrepreneur
foreign governments, has to perform the function of supervising the entire
loans by international agencies. production
process so that he achieves his target.
 & INDUSTRIAL MGMT. (B.E. EN,BR
58 VBD ENGG.ECONOMICS VBD ENGG.
ECONOMIcs &INDUSTRIAL MGMT. (B.E. EN, EE)
59
responsibility of business starts the work, organises and supervises
4) Taking the entire factors of production.
ie
An
final responsibility or outcome of th: also undertakes to remunerate all the factors of production
entrepreneur takes the
businesS 1S a success or a fiasco, he has cuch as to pay
such rent to the landlord, interest on the borrowed capital,
business. Whether the
own shoulders. The entire onus of risk and and wages to abour, and
ays them in advance of the sale of goods.
accept it on his his part. If nothing may be left after, he
Tf anything remains then it
1s
upon his shoulders.
uncertainties of the business lies necessary payments, then in that case, his venture will
Innovator An entrepreneur's most important qualihas made the
5) have been miscarried.
But it is also possible that he may be lucky to
That is, he should always seek to find out e the out-come
could be to innovate.
make nandsOCprolt
make wnatever may be
handsome profit. Whatever be the out-come, he must be
improve the efficiency of enterprise. This can b it. So, he takes the final
ideas and ways to epared to accept responsibility of the
done in a variety of
ways, viz: business.
a) Search for new opportunities (in products or markets), The entrepreneur is the innovator. Innovation by the
b) Introduce new method of production, entrepreneur implies a variety of things. It may mean the
c) Improvements in the existing methods of production, introduction of a new modern method of production for an
d) Introduction of a new product or a new use of product, bette improvement of the old method. The new modern method consist of
the introduction of a new commodity like the transistor radio sets or
management of resources,
a new model of an old product. For example, yet another brand of
e) New source of finance or raw materials or labour, etc.
tooth-paste. Innovation may refer to the discovery of new materials
Thus, an entrepreneur performs a wide range of functions
andrefresh sources of old materials, or final goods. These also includes
starting from conception of a business to running it smoothly an
the opening of new markets. Innovation may also take the form of
profitably with an eye for any scope for innovations; and bearing am) new
techniques in the way of administration, finance, marketing, or
risk/uncertainty associated with it. Hence, an entrepreneur is
Tghuman relations inside the business and public relations ontside, i.e
called the captain of the ship called industry. With suppliers of materials and consumers of products. It is involved
Q.31. Explain the importance of capital and entrepreneu finally, when new forms of business organisation are instituted, such
in modern system of production. Lw-02(EM s chain stores, the merger of several establishments among
Ans. () Iinportance of capital Capital refers to the part producers.
man's wealth which is used for producing further wealth
or whO Q32. Explain the concept of advertising elasticity of
yields an income. The term capital' is generally used for cap demand. [W-02, 03, (EN) S-04, (EE))
goods, for example plant and machinery, tools and accessore Ans. The advertising elasticity of demand is a very important
business
stocks of raw materials, goods in process and fuel.
The ept, which can be applied across a range of areas in response
materials are used up in a single act
of consumption. Moreove es. It measures how the demand for a good changes in
o a change in the level of advertising.
money spent on them is fully recovered,
when goods made responsiveness
them are sold in the market, whereas s, Advertising elasticity of demand is the
the plant and machinery of changes in the level of
permanent investment. dvers: in the quality demand to changes
advertising
(ii) Importance of entrepreneur:
The role thatthat the Cal
aleulation advertising elasticity of
demand:- It is
entrepreneur plays, consists in co-ordinating othe calculated as of demanded.divided by
and co-relating the Culated the percentage
as as the
the in quantity
percentage change in quatty
 &INDUSTRIAL MGMT.
D ENGG. ECONOMIcS (B.E ENB ENGG
ONOMICS & INDUSTRIAL MGMT (B.E. EN EE)

level of advertising.
8D
REPEATEDLYASKED UNIVERSITY QUESTIONS
in
the percentage change
Thus, 0.1. Discuss merits of mixed economy with special reference
demand
Advertising elasticity of
India /W-03 EE)
changein demand to
expenditure IRefer Q-4,P.9)
%change in advertising 0.2. State the law of demand. Why does a demand curve slope
Example:-Original level of advertising expenses Rs.10.0
=

downward to the right? S-04, EE)

Original quantity demanded = 500 units
12000/ Refer Q.5,P.10
New level of advertising expenses Rs.
=

7500 units Q.3. What are the exceptions to the law of demand?
New quantity demanded =

Advertising elasticity of demand

OR Under what circumstances does a demand curve slopes
upwards to the right? S-04, EE)
(7500-5000)
100 IRefer Q.6,P.12)
5000
02000-10000)
502.5
20 Q4. Define elasticity of demand. List and describe factors
100 /S-03 (EE))
10000 affecting elasticity of demand.
Thus, advertising clasticity of demand is 2.5. That is, a 19
OR What is meant by elasticity of demand? What are the
increasein the level of advertising will cause a 2.5% increase
quantity demanded.
in
t different degrees of elasticities of demand?
IS-03, 04, 05 (EE, EN); W-04, (EE))
Interpretation of the value of advertising elasticity Refer Q.7,P.141
demand:- 9.5. What are the different types of elasticity of demand?
Thevalue of advertising elasticity of demand indicates
sou Explain the factors
which influence the elasticity of demand.
the characteristics ofa good. For instance.,
/S-04 (EE)
)A value greater than 1:- It implies a relatively elas
cause Refer Q.8,P.16]
demand. That is, an increase in the level of advertising will
Q.6. Distinguish Between:
proportionately greater increase in the demand for the good.
() A value of less than 1 :- It implies a relatively inelas ) Extension and increase in demand.
demand. That is, an increase in the level of advertising will caue i) Contraction and decrease in demand. IS-04(EN)J
proportionately smaller increase in the demand for the good. IRefer Q.9,P.18)
The advertising elasticity of demand is an extremely importu Q.7. How is elasticity of demand measured?
concept for a firm's marketing department. It helps immensely
OR What are the different methods of measuring elasticity of
deciding the level of advertising expenses for various producemand?
/S-03, 05(EN), W-03, 04(EE)J
various markets. It also enables in knowing the effect on demand IRefer Q.10, P.18
to advertising. Further, a firm can casily know the effect on 1ts to calculate the
theof demanddemand schedule given in table (1-1),
revende due to changes in advertising expenses. Thus, advertisin tauticity
elasticity of demand helps the marketing department take stral considering Rs. 4/-as the initial price.
to
decisions regarding a product/ service.
 INDUSTRIAL MGMT .(B.E.
62 VBDENGG. ECONOMICS EN,E ENGG.
ECONOMICS & INDUSTRIAL MGMT. (B.E. EN, EE)
63
Quantity of Demand 9D
Price Q.14. What is meant by indifference curves? Explain
o14. with the
15 Units suitable diagrams the properties of indifference curves.
suitabl
i) Rs. 3/-per Unit help
f
of
12 Units ss the main aracteristic features of indifference curves.
ii) Rs. 4/- per Unit [W-02, 03, S-04, W-04 (EN)]
10 Units
ii) Rs. 10/- per Unit
10.19, P.33)
S-03 (EB consumer equilibriu with the help of
15. Explain
[Refer Q.11, P.22]] indifference curve. W-02, (EN)
elasticity over an arc of the demand
Q.9. How is price 10.22, P.37)
measured? 0.16. What do you mean by tactors of production? What are
nrio
method of measurement of price characteristic features
OR Explain Arc elasticity thedifferent factors of production? Give their
S-04, (EN| peculiarities.
elasticity. or
in detail.
Q.12, P.23] OR Describe the various factorS of production
o
Q.10. Write a short note on the practical importance W-03(EE))
elasticity of demand. I0.23, P. 39
OR Explain the importance of elasticity of demand in fisca Q.17. What is production possibility curve? What does a point

policy of Government. [W-03(EN inside the curve indicate? IS-03 (EE)

Q.13, P.24] Refer Q.24, P.44)
Q.11. What is the meaning of total utility and marginal utiliy| Q.18. What is division of labour? What are its merits?

Explain in short. IS-04, (EB) [W-04, S-05 (EN); W-03, 04 (EE)]

Q.15, P.27] Refer Q.27,P.49]
Q.19. What is efficiency of labour? What are the factors that
Q.12. Explain the law of diminishing marginal utility
" S-04, (EN)
explain its relation with the law of demand. /
determine affect/ influence efficiency of labour?

[Refer Q.28,P.53]
W-02, 03, S-03 (EN); W-04, (EE
OR How is the law of diminishing marginal utility related Q.20. "Entrepreneur is the captain of the ship called as
the law of demand? Explain the law of demand in Economics. hdustry". Explain with respect to functions of an entrepreneur.

OR Explain the law of diminishing return. Does it apply.0 (W-03(EN)]

TRefer Q.30,P.57]
to agriculture? (W-04 (EN), S-03, 05 (E
Q:21. Explain the importance of capital and entrepreneur, in
0.17, P.28 modern
system of production. [W-02
What at
Q.13. Explain Law of diminishing marginal utility. What
Refer Q.31,P.58]
the exceptions to the law? (W-04 (EE
L Explain the concept of advertising elasticity of demand.
10.18, P.32
[W-02, 03, (EN) S-04, (EE)]
Refer Q.32,P.59]