HSSRPTR - +2 Economics Fa-Thelima by Nss

Downloaded from www.hssreporter.
com
MICRO ECONOMICS
Chapter – 1
Economics became a full-fledged social science with the publication of Adam Smith’s Master
piece “An Enquiry into the Nature and Cause of Wealth of Nations” in 1776. He is known
as the father of modern economics.
Economy and Economic Activity
An economy is a total system that provides goods and services to satisfy human wants. The
activity that generates income is called economic activity.
E.g. A man working in a hotel, the manager of a company.
There are four basic economic activities namely production, consumption, distribution and
exchange. The activity that does not generate income is called non-economic activity.
E.g. Services of housewife, gardening at home.
Central problem of an economy
The problem concerning the choice of scarce resource is called economic problem or central
problem. It is the scarcity of resource and unlimited wants that give rise to economic
problem.
a)What to produce and in what quantity?
b)How to produce?
c)For whom to produce?
How are central problems solved in different economic systems?

There are three types of economic system. They are capitalist economy, socialist economy
and Mixed economy.
1. Capitalist economy (Market economy) - An economy where all resources and factors of
production are under the control of private individual is called capitalist economy. The
ultimate aim of capitalist economy is to achieve maximum profit. In such an economy
central problems are solved through Price Mechanism. Eg. America, U.K.
2. Socialist Economy (Centrally Planned Economy)
It is an economic system where government controls everything. The objective of socialism
is the welfare of the people. In a socialist economy central problems are solved through
Planning Mechanism.
3. Mixed economy
It is an economic system that combines the good features of both capitalism and socialism.
In a mixed economy, the central problems are solved by both price mechanism and
planning mechanism.
Positive and Normative Economics
There are two kinds of economic analyses.
1.Positive Economic Analysis
If we analyse an economic problem as it is, it is called Positive Economic Analysis. There is
no value judgment.
Eg. The GDP growth of Indian economy is 7.6%.
2 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

Downloaded from www.hssreporter.com
2. Normative Economic Analysis
Normative economic analysis deals the problem as what it ought to be. It checks whether a
mechanism is good or bad for the society.
Eg. The GDP growth rate below 7% is not good for an economy.
Chapter – 2
Theory of consumer Behavior
Consumer
Consumer is a person who purchases various goods and services to satisfy his wants.
For eg. When a man buys vegetables from the market, he is a consumer.
Utility
Utility is the want satisfying power of a commodity. In Economics there are various theories
that explain the measurement of utility and how does a consumer attain maximum
satisfaction (equilibrium). At +2 level we study only two theories:
1. Cardinal Utility Approach

2. Ordinal Utility Approach
1. Cardinal Utility Approach
This theory was developed by Alfred Marshell.
Features
1. Utility can be measured by number.

Eg: A consumer can measure the utility he gets when he eats one ‘Dosa’. Say
it is 10 units.
2. Utility is subjective. ie, the utility of a same commodity may not be the same
for every consumer. It may vary from person to person, from time to time and
from place to place.
Eg: An ice cream gives high utility in summer season than winter.
Measurement of Utility
The utility is usually measured in two ways. They are Total Utility (TU) and Marginal
Utility (MU).
a) Total Utility (TU)

Suppose when a hungry man eats a ‘dosa’ , he gets 10 utils. He buys and eats
one more ‘dosa’ and gets 8 more utils. Here what is the total utility he gets
HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 3

from 2 ‘dosa’. ie, 18 utils. Thus total utility is the total satisfaction that a
consumer gets from the consumption of all units of same commodity.
b) Marginal Utility (MU)

In the above example, he gets 10 utils from 1st dosa and 8 utils from 2nd dosa.
Total utility from 2 dosas is 18 utils. Here what is the utility does he gets from
2nd dosa alone ? It is 8 utils. This is called ‘MU’. Marginal Utility is the net
addition to Total Utility by consuming one more units of the same
commodity.
Consumption Bundle
The combination of quantities of two goods that a consumer purchases is called

Consumption Bundle. In general (x1, x2) is a Consumption Bundle. It means that the
consumer purchases X1 units of good I and x2 units of good II.
Consumers Budget
It is the amount of money available for a consumer for purchasing various goods and
services. A consumer budget is shown by a letter ‘M’.
Budget Set
Budget set is a collection of all bundles of two goods that a consumer can purchase given his
income and price of two goods. Budget set contains all bundles which cost less than or equal
to his income. The equation for constructing a budget set is given below.
P1X1 + P2X2 ≤ M
This equation is known as budget constrain.
Budget Line
A line joining all the bundles that cost exactly his income is known as budget line.
The equation of budget line is P1X1 + P2X2 = M
Slope of the Budget Line and Price Ratio
The slope of the budget line shows how much amount of good II that a consumer has
to sacrifice to get one more unit of good I. Slope of budget line can also be calculated by
using price ratio.
 P1
Slope of BL =
P2

Monotonic preferences
The preference of a consumer may be indifferent or monotonic. A preferences is

said to be monotonic when consumer prefer a bundle that has more of at least one good
and no less of other good compared to all other bundles. A preference is said to be
indifferent when it has two or more bundles which give same level of satisfaction.
Eg. In a budget set (1, 2), (2, 1), 2, 2) and 2, 0)
In this budget set (2, 2) is considered as monotonic bundle. Because it has more of
at least one good and no less of other good.
Indifference Curve
Indifference curve is a curve that shows different combinations of two goods that
give same level of satisfaction to the consumer.
Properties of an Indifference Curve
1. Indifference curves do not intersect each other.

2. It is convex to origin.
3. Higher indifference curves show higher level of satisfaction
4. Indifference curve is negatively sloped.
Consumer Equilibrium
A consumer is in equilibrium when he gets maximum satisfaction from his limited

income. A consumer is in equilibrium when his budget line is tangent to an indifference
curve. It is explained below.

In the above diagram “BL” is the budget line and IC curve represents indifference
curve. The budget line is tangent to the indifference curve at point‘d’. Therefore, the
consumer is in equilibrium at point ‘d’ by purchasing ‘OM’ of good I and “OP” of good II.
Demand
In economics demand is the desire backed by the ability and willingness to pay for
a commodity. Eg. A beggar may have the desire to buy a car. He is willing to spend the
money also, but he is not able to buy a car. Therefore, it is not a demand.
Factors Determining Demand
1. Price of the commodity
2. Income of the consumer
3. Price of related goods.
4. Taste and preference
Law of Demand
The law of demand can be stated as follows “when other determinants of demand
remain the same, the quantity demanded of a commodity varies inversely with its price”
Normal and Inferior good
A commodity which has negative relationship between price and demand and
positive relationship between income and demand is called a normal commodity.
A good that has positive relationship between price and demand and negative
relationship between income and demand is called inferior good.
Market Demand Schedule
Market demand schedule is a table that shows the total quantity demanded by all
consumers in a market at different prices. Market demand schedule of apple is given below.

Price Qty Market demand
A B C A+B+C
120 - 2 5 7
100 5 10 15 30
80 10 15 20 45
50 15 20 30 65
For simplicity we assume that there are only there consumers namely A B and C in
the market of apple. At Rs. 120, consumer ‘A’ does not enter into the market, B demands 2
kg and C demands 5 kg. Therefore, market demand at Rs. 120 (A+B+C) is 7 kg. At Rs. 50,
market demand increases to 65 kg.
Expansion and Contraction of demand
Change in demand due to change in price alone is called expansion and

contraction. Increase in demand due to decrease in price is called expansion of demand.
Decrease in demand due to increase in price is called contraction of demand.
Increase and decrease in demand
OR
Shift in demand
Change in demand due to change in factors other than price is called shift in
demand. Shift in demand is divided into two:- Increase or decrease in demand.
Increase in demand
Increase in demand due to change in factors other than price is called increase in
demand. Increase in demand is indicated by rightward or upward shift of the demand
curve.
E.g. Increase in demand of ice cream due to high temperature.
Decrease in demand due to change in factors other than price in called decrease in
demand. Decrease in demand indicated by the downward or leftward shift of the demand
curve.
E.g. Decrease in the sale of ice cream due to decrease in income.

Elasticity of Demand
Elasticity of demand refers to the degree of change in demand due to change in price.
There are five degrees of elasticity.
a) Perfectly Elastic (ep=  )

Elasticity is said to be perfectly elastic when a small change in price leads to infinite
change in demand.
b) Perfectly Inelastic ( ep = 0)
Elasticity is said to perfectly inelastic, when a change in price does not lead to any
change in quantity demanded.
c) More Elastic (ep> 1)

Elasticity is said to be more elastic when a proportionate change in price leads to more
than proportionate change in demand.
d) Less Elastic (ep< 1)

The elasticity is said to be less elastic when a proportionate change in price leads to less
than proportionate change in demand.
e) Unit Elastic (ep= 1)

The elasticity is said to be unit elastic when a proportionate change in price leads to
equal proportionate change in demand.
Measurement of Elasticity
1) Percentage or proportionate Method
q p
ep = 
p q
Where  q = Change in demand
 p = Change in Price
P = Initial price
Q = Initial quantity
Eg. The quantity demanded of a commodity at Rs. 50 is 1000. When price

increases to Rs. 70, quantity demanded decreases to 750. Calculate the elasticity.
Price Demand
50 1000
70 750

P = 50, q= 1000,  p = 20,  q = 250
q p
Ep = 
p q
250 50
=  = 0.62
20 1000
CHAPTER – 3
Production and Cost
Production is the transformation of inputs into output.
Production Function
The functional relationship that exists between inputs and output is called
production function. The inputs used for production are called factors of production. The
primary factors of production are land, labour, capital and organization. The
remuneration given to them are called factor income. The factor incomes are rent wages,
interest and profit. The production function can be written in the following equation
There are two types of production function namely short run production
function (SPF) and long run production function (LPF)
Short run production Function
Short run production function is a method of production where a producer increases

the output by varying one input alone keeping all other inputs constant.
1:1:1 - 10 Kg
1:1:2 - 13 Kg
In short run there are variable inputs and fixed inputs. The inputs whose quantity is
varied is called variable input. The inputs whose quantities are kept constant is called fixed
inputs.
Long run production function
It is a method of production function where a producer increases the output by

varying all inputs in an equal proportion. In the long run all factors are variable factors.
Eg. 1:1:1 → 30 kg
2:2:2 → 65 kg

Total product, Average product and Marginal Product
Total product (TP)
It is the total output produced at a particular level of variable input.
Average Product (AP)
It is the output per unit of variable input.
AP = TP
Number of variable input
Marginal Product (MP)
Marginal product is the net addition to total product by the employment of one
more unit of variable input.
Eg. Complete the following table
Variable input TP AP MP
1 50 50 50
2 120 60 70
3 160 53.3 40
4 180 45 20
Law of variable proportion(Short Run Production Function)
The law can be stated as follows “when more and more variable inputs are combined
with fixed quantities of other inputs, the increase in total product after a point become
smaller and smaller”. In such situation total product passes through three stages.
1. Increasing return to a factor

2. Decreasing return to a factor
3. Negative return to a factor.
10

Variable T.P. A.P. M.P.
input
1 10 10 10
2 24 12 14
3 39 13 15
4 56 14 17
5 70 14 14
6 78 13 8
7 84 12 6
8 84 10.5 0
9 81 9 -3
10 76 -7.6 -5
Stage I
In stage I, total product increases at an increasing rate. Both AP and MP are

increasing. The first state ends when AP and MP are equal.
Stage II
In the second stage, TP increases at a diminishing rate. Both AP and MP are

decreasing. Second stage ends when T P reaches its maximum and MP is equal to zero.
State III
In the 3rd stage, TP starts declining and AP again decreases and MP becoming negative
Returns to Scale (Long run production Function)
Returns to scale refers to changes in output when all inputs are changed in equal
proportion. When we change inputs by equal proportion, TP passes through three stages.
1. Increasing Return to Scale (IRS)

2. Constant Returns to Scale (CRS)
3. Diminishing Returns to Scale (DRS)
11

Cost
Cost is the money expenses incurred in the production process. Cost is very
important for a producer because his profit depends upon cost.
Short run cost
Short run is a period where a producer uses both fixed inputs and variable inputs.
Therefore, there are two types of costs in the short run – fixed cost (FC) and variable cost
(VC)
Fixed Cost
The money expenses on fixed inputs like land, building, machinery etc are called
fixed cost.
Variable cost
The money expenses on variable inputs such as raw material etc are called variable
cost.
Total fixed cost (TFC)
The total cost incurred by a firm for purchasing fixed inputs is called TFC. There is
TFC even when the output is zero. TFC remains constant at all levels of output.
Total Variable Cost (TVC)
The total cost incurred by a firm for purchasing variable input is called TVC. When
output is zero TVC is also zero. When output increases TVC also increases.
Total Cost = TVC + TFC
Output TFC TVC TC
0 50 0 50
1 50 10 60
2 50 20 70
3 50 30 80
4 50 60 110
5 50 100 150
6 50 150 200
12

Average Cost (AC)
It is the cost per unit of output.
TC
AC 
Output
Average Variable Cost (AVC)
It is the variable cost per unit of output.
TVC
AVC 
Output
Average Fixed Cost (AFC)
It is the fixed cost per unit of output.
TFC
AFC 
Output
Marginal cost (MC)
It is the net addition to total cost by the production of one more unit of output
Eg. Complete the following table
Output TFC TVC TC AC AFC AVC MC
0 500 0 500 - - - -
1 500 100 600 600 500 100 100
2 500 200 700 350 250 100 100
3 500 500 1000 333.3 166.67 166.67 300
4 500 1000 1500 375 125 250 500
5 500 2000 2500 500 100 400 1000
Relationship between AC and MC
1. As long as MC is below AC, AC decreases.

2. When AC and MC are equal, AC reaches its minimum.
3. As long as MC is above AC, AC increases
13

Break even Point
Breakeven point is a point where TR and TC are equal.
Supply
Supply is the quantity offered for sale in the market at a price. The supply of a
commodity is changed mainly due to two factors – price and Non- price factors
1. Price
The most important factor determining supply is its own price. There is direct
relationship between price and supply. That is, when price increases, supply also
increases and when price decreases, supply decreases.
Non – price factors
>Technological progress
>Input prices
>Unit tax
> Natural factor
>Future expectation of price
Law of supply
The law of supply states that when other determinants of supply remain the same,
the quantity supplied of a commodity varies directly with its price.
Expansion and contraction of supply.
Changes in supply due to changes in price are called expansion and contraction of
supply.
Increase in supply due to increase in price is called expansion of supply. On the other
hand, decrease in supply due to decrease in price is called contraction of supply. In
expansion and contraction we move along the same supply curve.
Shift in supply (Increase or decrease)
Change in supply due to factors other than price is called shift in supply. Shift in supply
is divided into two- Increase in supply and Decrease in supply.
Increase in supply
Increase in supply due to change in factors other than price is called increase in
supply. Increase in supply is indicated by the rightward shift of supply curve.
14

Decrease in Supply
Decrease in supply due to factors other than price is called decrease in

supply. Decrease in supply is indicated by the leftward shift of the supply curve.
Elasticity of supply
It is the degree of change in supply due to degree of change in its price. It is also
known as price elasticity of supply (ES)
Five degrees of elasticity of supply
Perfectly elastic supply (es=α )

Perfectly Inelastic supply (es=o)
Unit elastic (es =1)
More elastic supply (es>1)
Less elastic supply (es<1)
Measurement of elasticity
There are two methods of measuring price elasticity of supply.
1. Percentage method.
q p
es  
p q
Where,  q = Change in quantity,  p =Change in price, p = initial price, q = initial quantity
eg. The quantity supplied of a commodity at Rs. 50 is 100kg. When price increases to Rs.
80, the quantity supplied also increased to 125 kg. Calculate price elasticity of supply.
q p
es  
p q
25 50 1250
  = 0.416
30 100 3000
2. Geometric method
a. More elastic
If the supply curve extended meets with the negative portion of ‘x’ axis, the elasticity
is more elastic.
b. less elastic
If the supply curve extended meets with positive portion of ‘x’ axis, the elasticity is less
elastic.
15

c. Unit elastic
If the supply curve extended passes through the origin, the elasticity is unity.
Chapter – 4
Theory of firm under Perfect Competition
Market
Market is an area where buyers and sellers are in contact with each other for
purchase and sale various goods and services. There are different kinds of market.
Perfect Competition
It is a market situation, where there are large number of buyers and sellers dealing
with homogeneous product and selling at uniform price.
Features
1. Large no. of buyers and sellers.
2. Homogeneous product
3. Uniform price
4. Freedom of entry and exist.
Market Equilibrium
A market in perfect competition is said to be in equilibrium, when demand &
supply are equal. It is shown in the following diagram.
In the above diagram demand and supply are equal at point ‘Q’. Therefore the
economy is in equilibrium at point ‘Q’. The equilibrium price is ‘OP’ and equilibrium quantity
is ‘OM’. In a Perfect competition price is determined in the market by the forces of demand
& supply. This price is accepted by each firm. A firm cannot determine the price. It can only
16

accept the price which is fixed in the market. Therefore a firm in perfect competition is
called a ‘Price Taker’.
Practical Application
The Equilibrium Price may not be desirable always. Sometimes the equilibrium price
may be too high and will be harmful to ordinary consumers. Sometimes the equilibrium
price may too low and it is harmful to ordinary producers. When equilibrium price is not
desirable, government regulate the price through price ceiling and price floor.
a. Price Ceiling
It is a price which is lower than equilibrium price fixed by the government to protect
ordinary consumers.
The equilibrium price of sugar is Rs. 50. This equilibrium price is not good for ordinary
consumers. Therefore government fixes price ceiling at Rs. 35.
Price floor
It is a price which is greater than equilibrium price fixed by the government to protect
ordinary producers.
17

The equilibrium price of coconut is Rs. 10 which is not profitable for ordinary
producers of coconut to supply coconut. In order to protect ordinary producers of coconut,
government fixes price at Rs. 15.
Equilibrium of a Firm under Perfect competition
A firm under perfect competition attains equilibrium when the following there
conditions are satisfied.
1. MC is equal to MR
2. MC cuts MR from below.
3. Price is equal to or greater than average cost.
The demand curve of a firm under perfect competition is horizontal to X axis. In a perfect
competition AR and MR are equal. At point Q the above mentioned 3 conditions are
satisfied. Therefore, a firm is in equilibrium at point ‘Q’ and equilibrium quantity is ‘OM’.
Shut down Point
If a firm has to continue the production, the firm has to get minimum price. This
minimum price is called shut down point. If it does not get this minimum price, the firm will
shut down its production. In other words, shut down point is the minimum point of average
cost.
18

Chapter – 6
Non – Competitive Market
In the last chapter we studied about perfect competition, but perfect competition is
a rare market form. In real world we cannot see a market where all features of perfect
competition are present. Some market forms are just opposite to perfect competition. In
this chapter we study some non – competitive market forms;
1. Monopoly
Monopoly is a market situation where there is only a single seller who controls the entire
supply of goods which has no close substitutes.
Features of Monopoly
1. Only a single seller
2. He has full control over the supply.
3. The product has no close substitute.
4. Entry is restricted.
5. Firm and industry are same.
Since the firm has full control over the supply he can determine the price. Therefore a
firm under monopoly is called Price Maker.
Monopolistic Competition
It is a market situation where there are large numbers of buyers and sellers, dealing
with close substitute goods and engages in acute competition. Monopolistic competition
was introduced by Prof. Chemperlin. The essence of monopolistic competition is product
differentiation
Features
1. Large numbers of buyers and sellers

2. Close substitute goods.
3. Product differentiation
The product under monopolistic competition is different in color, packing, shape,

smell etc. even though the content is same. The aim of product differentiation is to attract
more customers.
4. Selling cost
Under monopolistic competition there is selling cost. The expenditure on
advertisement and sales promotion is called Selling cost. The aim of selling cost is to attract
more consumers.
Oligopoly
Oligopoly is a market situation, where there are only a few firms dealing with
homogeneous or close substitute goods. Eg. Mobile Company, Air Service, Oil companies
etc.
19

Features
1. Only a few firms
2. Selling Cost
3. Group behavior
Duopoly
Duopoly is a market situation where there are only two sellers.
MACRO ECONOMICS
INTRODUCTION TO MACRO ECONOMICS
Say’s law of market
Say’s Law states that “Supply creates its own demand”.
THE GREAT DEPRESSION
In 1929 the world economy experienced a great depression. It started in America, spread
to Europe and finally to all countries. As a result of depression the rate of unemployment
increased, the price fell down, the demand decreased, banks collapsed etc. The great
depression questioned classical theory. In 1936 J.M. Keynes published his book “General
theory of employment, interest and money”.
Subject Matter of Macro Ecomomics.
1. National income calculation

2. General price level, inflation and deflation.
3. Monetary policy and fiscal policies.
4. Money supply, RBI and commercial banks.
Macro economic paradox
What is true of an individual unit may not be true for the economy as a whole. It is
called macro economic paradox. eg. Wage cut is good for an individual firm but it is not
good for the economy.
Market Economy
A Market economy is divided into four sectors namely household sector, firm sector,
government sector and external sector.
20

Closed Economy
An economy that has no relationship with rest of the world is called a closed
economy.
An open economy
An economy that has economic relationship with other nations is called an open
economy. Now all the economies are open economy.
Difference between Micro and Macro Economics
1. The scope of micro economics is limited while the scope of macro economics is
vast and wide.
2. The objective of micro economics is individual study. But the objective of macro
economics is aggregate study.
3. Micro economics deals with partial equilibrium while macro economics deals
with general equilibrium.
4. Micro economics is also known as price theory. The other names of macro
economics are income theory and employment theory.
CHAPTER – II
National Income Accounting
Basic terms
1. Final good
The goods that are used for final consumption is called final good. These goods do
not enter into production process again. There are three types of final goods.
a. Consumer goods
The goods that are used by the final consumer for consumption are called
consumer goods. A consumer good is disappeared with consumption.
b. Consumer durable
The goods that are used by the final consumer for consumption but does not
disappear with one use are called consumer durables. eg. T.V, pen, fan etc.
c. Capital good
It is also a final good. But these goods are used for the production of other
goods. eg. machinery, mixi etc.
21

2. Intermediate goods
The goods that again enter into production process to become a final goods
are called intermediate goods. eg. cement, wood, flour, rubber etc.
Stock
Stock is an economic variable that can be measured at a particular point of time. eg.
water in a tank, capital, wealth, etc.
Flow
Flow is an economic variable that can be measured only over a period of time. eg.
water in a river, GDP, Investment, income etc.
Depreciation
Depreciation is the loss of value of fixed capital due to normal wear and tear. The
other name of depreciation is consumption of fixed capital.
Circular flow of Income
Circular flow is a picture that shows the interdependence and interrelationship

among different sectors of the economy. There are mainly two flows between different
sectors. They are real flow and money flow.
Real flow
Flow of goods and services from one sector to another sector is called real flow.
Money flow
Flow of money from one sector to another sector is called money flow.
22

Money flow
1. Flow of rent, wages, interest and profit from firm sector to household sector.
2. Flow of expenditure from household sector to firm sector.
Real flow
1. Flow of land, labour, capital and organization from household to firm.

2. Flow of goods and services from firm sector to household sector.
Inventory
Inventory refers to the quantities of unsold stock of goods or unused raw materials
that a firm carries from one financial year to next financial year
Value of output
The money value of goods and services that a firm produces in a financial year is
called value of output.
Value of output = Sales + closing stock - opening stock
eg. Sales -1, 25,000
Closing stock - 30,000
Opening stock-12000
Calculate the value of output.
Value of output = 1, 25,000 + 30000 – 12000
= 143000
Value added
A firm is not responsible for the entire value of its output. It only adds value to the
existing raw materials.
Therefore,
Gross Value added MP (GVAMP) = Value of output – intermediate consumption.
Net value added MP (NVAMP) = GVAMP – Depreciation
Net value added FC (NVAFC) = NVAMP – Net indirect tax.
23

Eg. The data regarding a firm is given below
Sales – 66,000, indirect tax- 900, Subsidy – 150, Consumption of fixed capital – 1500, closing
stock – 3600, opening stock – 14200, intermediate consumption – 22,000.
a) Calculate value of output.

b) Calculate NVAFC
Ans
= 66,000 + 3600 - 14200 = 55,400
GVAMP = Value of output – intermediate consumption
= 55400-22000 = 33,400
NVAMP = GVAMP - depreciation = 33400 – 1500 = 31900
Net indirect tax = indirect tax – subsidy.
NVAFC = NVAMP - Net indirect tax
= 31900 – 750 = 31,150
Methods of Measuring National Income
There are mainly three methods of measuring national income.
1. Product Method (Value added method)

2. Income Method
3. Expenditure Method
1. Product Method
In product method, we approach national income from product side. Here GDP MP is
the sum of gross value added (GVA) of all production units in the economy.
GDPMP = GVA + GVA2 + ………………… + GVAn)
NDPMP = GDPMP – depreciation
NDPFC = NDPMP – Net indirect tax
Last step is to add net factor income from abroad to NDP FC
NNPFC = NDPFC + NFIA
NNPFC is the real national income.
24

2. Income Method
In income method, we approach national income from income side.
By adding all factor income (wages, Rent, Interest, profit) of all households we get
GDPMP
GDPMP = W +  R +  I +  P
NDPMP = GDPMP - Depreciation
NNPFC = NDPMP + NFIA
3. Expenditure Method
In expenditure method we approach national income from expenditure side. The

total expenditure of the economy has four components.
(1) Private final consumption expenditure. (C)

(2) Private final investment expenditure (I)
(3) Government final expenditure (G)
(4) Net export (X-M)
X = Value of export
M = Value of import
GDPMP =  C +  I +  G + X-M
NDPMP = GDPMP - Depreciation
NNPFC = NDPFC + NIFA
GDP at current price
GDP calculated at current year price is called GDP at current price
GDP at constant price
GDP at constant price =
GDP at current price × Base year price level
Current year price level
Base year price level in always kept as 100.
25

Eg. The GDP at current price of India during 2013-14 is 4,32,300 crores. The price level
during the same year is 122.
a. Calculate GDP at constant price.

b. Evaluate the result.
Ans. a) GDP at constant price = GDP at current price × Base year price level
Current year price level
100
= 432300× = 354344 cores.
122
b) GDP at constant price is lower than GDP at current price. Therefore, GDP at current
price is influenced by price rise.
GDP Deflator
GDP deflator = GDP at current price 100

Real GDP
Eg. The money GDP and real GDP of a country during an year are 1,27,000 crores and
1,13,240 crores respectively. Calculate GDP deflator and examine changes in general price
level.
GDP deflator = Money GDP × 100

Real GDP
1,27,000
= 100 = 112.15
1,13,240
The general price level of the country has increased by 12.15% during this financial
year.
Personal Income
Personal income refers to income actually received by all households together from
national income.
Personal Disposable Income (PDI)
PDI is that part of personal income which is actually available for households for
consumption.
GDP and Welfare
Is GDP a true indicator of welfare of a nation?
Since GDP consider only monetary exchange, we can’t consider GDP as a true indicator. The
following are the reasons.
26

1. GDP does not consider distribution of income
2. GDP does not consider Non-economic activity
3. GDP does not consider negative externalities
Chapter – 3
Money and Banking
Barter System
Barter system is a system of exchange where goods are directly exchanged for other
goods.
Difficulty in Barter System
1. Problem of Double Coincidence of wants.

2. Problem of indivisibility
3. Lack of common measure of value
4. Difficulty in storing value
5. Difficulty in transferring value
6. Difficulty in future payments
Money
According to Prof. Waller ‘money is what money does’.
Evaluation of Money
Commodity money Metallic money Paper money Credit money Plastic Money -
Digital money
Functions of Money
1) Primary Function
1. Act as a medium of exchange
2. Act as a measure of value
2) Secondary Function
1. Act as a store of value
2. Helps in transferring value
3. Act as a standard of future payment
4. Act as a base of credit instruments.
27

Supply of Money
It is the total amount of money available in the economy. Money supply includes
coins and currency with the public, demand deposit, time deposit, post office savings
etc…Money supply is a stock variable. Money supply shows the total purchasing power of
the economy.
Measures of Money Supply in India.
In India RBI publishes four measures of Money Supply they are known as M 1, M2,
M3 and M4.
M1 = CU + DD
CU = Coins and Currency with the people.
DD = demand deposit with bank.
M2 = M1 + Saving deposit with post office saving a/c
M3 = M1 + Net time deposit
M4 = M3 + deposit with post office savings.
Definition
The money supply can be divided into two category.
Narrow Definition of money Supply
M1 and M2 are known as Narrow definition of money supply
Broad Definition of Money Supply
M3 and M4 are known as broad definition of money supply.
In India by Money Supply we mean ‘M3’.
Commercial Bank
A commercial bank is a financial institution that accepts deposit and provides loans to
the public.
Functions
1) Primary Functions
a) Accepting Deposit
b) Providing loans
2) Secondary Function
a)Agency Services
1. Insurance Premium
2. Electricity bill
3. Receive Salary for the Customer
4. Receive pension
b)General Utility Function
1. Provide ATM card / credit card
2. Issue traveler cheque
3. Debit card etc.
3.Developmental Function
1. Provide loan for education purposes.
2. Provide agricultural loans.
28

3. Provide loan to weaker sections of the society
4. Provide interest free loan for the construction of house, toilet etc. for poor
people.
5. Encourage small scale industry by giving interest free loans.
High Powered Money
High Powered Money refers to total liability of monitory authority of a country (RBI).
It includes currency, coins of the people and deposit held by bank and government.
Central Bank
Every country has a central bank. Reserve Bank of India (RBI) is the central bank of
India. It is the institution that is responsible for safe guarding financial stability of a nation.
Functions Of RBI
1 Banker of Note Issue (Minimum Reserve System)
2 Banker to the Government
3 Banker’s Bank
Monitary Policy
It is the policy of RBI to control and to regulate money supply in the economy.
Instruments of Monitary Policy
 Bank Rate
 Open Market Operation
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio (SLR)
 Margin Requirements
 Moral Suasion.
Chapter – 4
Income Determination
The main aim of macro economics is to study income and employment

determination. There are two approaches explaining income and employment
determination.
1. Keynesian Theory
J.M. Keynes believed in under employment equilibrium. According to him full
employment is a rare situation. The essence of keynesian theory is ‘Effective Demand’.
Effective Demand is the point where aggregate demand and aggregate supply are equal.
This effective demand determines income and employment in an economy.
Aggregate Demand
Aggregate demand refers to total demand in the economy. The total demand has four
components.
29

A. Home hold Consumption Demand (C)
B. Investment Demand (I)
C. Government Demand (G)
D. Net Expert (X- M)
Consumption Function (Propensity to Consume)
Consumption function is the relationship between income and consumption. There is
positive relationship between income and consumption.
Income Consumption Savings
0 100 -100
100 150 -50
200 200 0
300 250 50
400 300 100
There are four terms related to saving function and consumption function.
1. APC (Average Propensity to Consume)

APC =
C = Consumption
Y = Income
2. Marginal Propensity to Consume (MPC)
MPC =
3. Average Propensity to Save
APS =
4. Marginal Propensity to Save
MPS =
Equation of Consumption Line
C = a + by
C = Consumption (dependent variable)
a = autonomous consumption (consumption at 0 level of income)
30

b = Marginal Propensity to Save (MPC)
y = Income (independent variable)
Eg : The income of a person is 800, 1000, 1200, 1400, 1600 and 2000. Calculate his
consumption and saving if his consumption function is C = 500 + .5y, also draw the diagram
of consumption function and saving function.
Income Consumption Savings
800 500 + .5 × 800 = 900 - 100
1000 1000 0
1200 1100 100
1400 1200 200
1600 1300 300
2000 1500 500
2. Investment Demand (I)

Expenditure on asset creation is called investment. The expected return from investment is
called Marginal Efficiency of Investment (MEI) or Marginal Efficiency of Capital (MEC).
Investment in an economy is mainly depends on rate of interest and MEC.
3. Government Demand (G)
Government also demand a lot of goods and services in order to services like health,
education, defense, administration etc.
4. Net Export (X-m)
The difference between value of export and value of import is called net export.
Therefore AD = C + 1 + G + X- M
Ex- ante and Ex- post measures.
We are familiar with terms like investment, savings, aggregate demand etc. All these
terms are expressed in Ex-ante and Ex-post measures.
Ex-ante means planned and Ex-post means actual. In economic theory Ex-ante
measure is more important.
Premetric Shift of a Line
. Changes in the slope and position of a graph due to changes in the parameters is called
parametric shift of a line.
Paradox of Thrift
Paradox of thrift can be stated as follows “If all people increase the proportion of their
savings, the total savings in the economy will not increase. This situation is called paradox of
thrift
31

Multiplier Mechanism
The term multiplier was developed by R.F Khan, J.M. Keynes borrowed this idea
from R.F. Khan and developed investment multiplier (output multiplier).
Investment multiplier =
Example
The government of India invest 12 crores in a new project. Calculate multiplier and
change in income if MPC is .6 .
Investment multiplier = = = 2.5.
Income = 12 ×2.5
= 30
Change in Income = 30 – 12 = 18
Chapter – 5
Government Budget & the Economy
Functions of Budget or Government
>Allocation Function
> Distribution Function
>Stabilization Function
Budget
Budget is a statement that shows the planned revenue and planned expenditure of the
government during a financial year.
Components of a Budget
Budget
Revenue Budget Capital Budget
Revenue Receipt Revenue Expenditure Capital Revenue Capital Expenditure
Tax Non- Tax Planned Expenditure Planned Capital Non- Planned

Non- Planned
Expenditure Expenditure Capital
Expenditure
32 Borrowing Loans

Types of Budget
There are three types of budget they are;

1. Deficit Budget
2. Balanced Budget
3. Surplus Budget
If the planned total expenditure (ex-ante) is greater than planned total revenue, it is
called Deficit Budget.
In most of the developing countries government declare a deficit Budget.
If the expected total expenditure is equal to planned total revenue, it is called
Balanced Budget.
Surplus Budget
It is the budget where total revenue is greater than total expenditure.
Type of deficit
a. Budget Deficit
Budget deficit = Total Expenditure – total revenue
b. Fiscal deficit
Fiscal deficit = Total expenditure – Total Revenue Excluding
borrowing.
OR
Fiscal deficit= Total expenditure - revenue receipt + capital receipt-
borrowing
c. Revenue Deficit
Revenue deficit = Revenue Expenditure – Revenue Receipt.
d. Primary Deficit
Primary deficit = fiscal deficit – interest payment
e. Monetised deficit
It is that part of the deficit which is financed by printing currency.
Fiscal Policy
Fiscal Policy is the Policy of the Government to stabilize the economy from inflation
and deflation . Three weapons of fiscal policy are
1. Taxation
2. Public Expenditure
3. Public Borrowing
33

Chapter – 6
Open Economy
All modern economies are open economy. In order to make our model more
realistic we should include the volume of foreign trade (Export and import) in our
model. In an open economy we can notice three kinds of linkages.
1. Product Market Linkage
Product market linkage refers to the flow of various goods and services from one
country to other countries.
2. Financial Market Linkage
In an open economy there is flow of investment from one country to other
country (purchase of share, bond, security etc.)
3. Factor Market Linkage
It refers to the movement of various factors of production from one country to
other countries
In an open economy export and import can influence aggregate demand.
Export increase aggregate demand an import can decrease aggregate demand.
Therefore our model becomes
AD = C + 1 + G +X - M
Balance of Payment (BOP)
Balance of payment is a record that shows all economic transaction (visible

and invisible) of a country with the rest of the world.
Balance of Trade (BOT) is a record that shows economic transactions of

visible goods. Therefore Balance of payment is more wider and compressive than
BOT.
Balance of Payment Accounting
In balance of payment, there are three accounts;
a. Current A/c
It consists of all transactions relating to trade of goods and services and
transfer payment.
b. Capital A/c
It consists of all international borrowing, lending, investment etc.
c. Official Reserve Accounts
It consists of data relating to foreign exchange reserve of a nation.
Exchange Rate
Exchange rate is the amount of domestic currency required for purchasing one
unit of foreign currency. 50 : 1
It means that 50 rupees is needed to purchase one dollar.
34

Nominal and Real Exchange rate
Nominal exchange rate refers to price of one unit of foreign currency. In
Real Exchange rate we measure the purchasing power of currency. In other words real
exchange rate is expensed in terms of purchasing power.
RER = (Real Exchange rate)
Where : e = nominal exchange rate
PF = Price level abroad
f = Domestic Price Level.
Determination of Exchange Rate
There are three methods of determining exchange rate.
1. Flexible
2. Fixed
3. Managed
1. Flexible Exchange Rate
At present most of the countries follow flexible exchange rate system. Exchange
rate is determined by the forces of demand and supply of foreign currency in our
country. Usually demand of foreign currency comes from importers and supply comes
from exporters.
Exchange rate is the rate at which demand and supply of foreign currencies are
equal.
Fixed Exchange Rate System (Pegged Exchange Rate)

It is an exchange rate system which is fixed by government of a country. In
other words in this system by considering many factors government fix the exchange
rate.
Managed Floating Exchange Rate
It is a mixture of flexible and fixed exchange rate. Flexible exchange rate is
allowed to a certain upper and lower limit. When exchange rate is out of these limits,
government fix an exchange rate suitable for the country.
35


HSSRPTR - +2 Economics Fa-Thelima by Nss

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HSSRPTR - +2 Economics Fa-Thelima by Nss

Uploaded by

Copyright:

Available Formats

Downloaded from www.hssreporter.

How are central problems solved in different economic systems?

2 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

Theory of consumer Behavior

1. Cardinal Utility Approach

1. Utility can be measured by number.

a) Total Utility (TU)

HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 3

b) Marginal Utility (MU)

The combination of quantities of two goods that a consumer purchases is called

This equation is known as budget constrain.

Slope of the Budget Line and Price Ratio

4 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

The preference of a consumer may be indifferent or monotonic. A preferences is

Eg. In a budget set (1, 2), (2, 1), 2, 2) and 2, 0)

Properties of an Indifference Curve

1. Indifference curves do not intersect each other.

A consumer is in equilibrium when he gets maximum satisfaction from his limited

HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 5

Factors Determining Demand

1. Price of the commodity

2. Income of the consumer

3. Price of related goods.

4. Taste and preference

Normal and Inferior good

Market Demand Schedule

6 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

Expansion and Contraction of demand

Change in demand due to change in price alone is called expansion and

Increase and decrease in demand

E.g. Increase in demand of ice cream due to high temperature.

E.g. Decrease in the sale of ice cream due to decrease in income.

HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 7

a) Perfectly Elastic (ep=  )

c) More Elastic (ep> 1)

d) Less Elastic (ep< 1)

e) Unit Elastic (ep= 1)

1) Percentage or proportionate Method

Where  q = Change in demand

Eg. The quantity demanded of a commodity at Rs. 50 is 1000. When price

8 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

Production and Cost

Production is the transformation of inputs into output.

Short run production Function

Short run production function is a method of production where a producer increases

Long run production function

It is a method of production function where a producer increases the output by

HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 9

Total product (TP)

It is the total output produced at a particular level of variable input.

Average Product (AP)

It is the output per unit of variable input.

Number of variable input

Marginal Product (MP)

Eg. Complete the following table

Law of variable proportion(Short Run Production Function)

1. Increasing return to a factor

10 HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME

In stage I, total product increases at an increasing rate. Both AP and MP are

In the second stage, TP increases at a diminishing rate. Both AP and MP are

Returns to Scale (Long run production Function)

1. Increasing Return to Scale (IRS)

HIGHER SECONDARY NATIONAL SERVICE SCHEME | THELIMA EDUHELP PROGRAMME 11