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HSSRPTR - +2 Economics Fa-Thelima by Nss
HSSRPTR - +2 Economics Fa-Thelima by Nss
HSSRPTR - +2 Economics Fa-Thelima by Nss
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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?
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:
Features
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).
Consumption Bundle
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
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
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
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.
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.
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”
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 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.
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.
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.
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.
Elasticity of demand refers to the degree of change in demand due to change in price.
There are five degrees of elasticity.
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.
Measurement of Elasticity
q p
ep =
p q
p = Change in Price
P = Initial price
Q = Initial quantity
Price Demand
50 1000
70 750
q p
Ep =
p q
250 50
= = 0.62
20 1000
CHAPTER – 3
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)
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.
Eg. 1:1:1 → 30 kg
2:2:2 → 65 kg
AP = TP
Marginal product is the net addition to total product by the employment of one
more unit of variable input.
Variable input TP AP MP
1 50 50 50
2 120 60 70
3 160 53.3 40
4 180 45 20
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.
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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
Stage II
State III
In the 3rd stage, TP starts declining and AP again decreases and MP becoming negative
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.
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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 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.
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.
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.
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
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TC
AC
Output
TVC
AVC
Output
TFC
AFC
Output
It is the net addition to total cost by the production of one more unit of output
0 500 0 500 - - - -
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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.
>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.
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.
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.
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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)
1. Percentage method.
q p
es
p q
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.
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If the supply curve extended passes through the origin, the elasticity is unity.
Chapter – 4
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
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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.
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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’.
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.
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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
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.
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Duopoly
MACRO ECONOMICS
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”.
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.
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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.
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
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.
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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.
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.
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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
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.
Opening stock-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,
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Sales – 66,000, indirect tax- 900, Subsidy – 150, Consumption of fixed capital – 1500, closing
stock – 3600, opening stock – 14200, intermediate consumption – 22,000.
= 55400-22000 = 33,400
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.
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By adding all factor income (wages, Rent, Interest, profit) of all households we get
GDPMP
GDPMP = W + R + I + P
NDPMP = GDPMP - Depreciation
3. Expenditure Method
M = Value of import
GDPMP = C + I + G + X-M
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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
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.
PDI is that part of personal income which is actually available for households for
consumption.
Since GDP consider only monetary exchange, we can’t consider GDP as a true indicator. The
following are the reasons.
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Chapter – 3
Barter System
Barter system is a system of exchange where goods are directly exchanged for other
goods.
Money
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.
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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.
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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
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.
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0 100 -100
200 200 0
300 250 50
There are four terms related to saving function and consumption function.
MPC =
3. Average Propensity to Save
APS =
4. Marginal Propensity to Save
MPS =
C = a + by
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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.
1000 1000 0
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Chapter – 5
Government Budget & the Economy
>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
32 Borrowing Loans
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
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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.
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