Economics by tr jain l

Economics
JKSSB | Accounts Assistant Exam notes

Index
General Economics
1. Introduction of Economics – Basics concepts and Principles.
2. GDP and Budgeting including own resources generation and

budgeting for panchayat.
3. Fiscal policy, meaning , Scope and Methodology.

4. Growth and development.
5. Inflation meaning types effects.
6. Production cost and efficiency.

7. Factors of production and laws.
8. Demand analysis.
9. Theory of consumers demand using in difference and
relevance.
10. Pricing under various forms of Markets .
11. Concepts of GRAM Panchayat Development Plan (GPDP)
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Lecture - 1
Introduction to Economics – Basics Concepts and Principles
▪ Economics word has come form a Greek word “Oikonomia” which means house
hold management.
▪ Father of Economics – ADAM SMITH (Scottish philosopher) – (the economics that

we study today as a subject)
▪ His books -
▪ An enquiry into the nature and causes of wealth of Nations (1776)
▪ Theory of moral sentiments.
▪ Father of Micro economics – Adam Smith
▪ Father of Macro Economics – J M Keynes (book: General theory of employment
interest and money, 1936)
▪ Great economic depression results in Macro Economics.

▪ Who coined the terms microeconomics and macroeconomics – Ragnar Frisch
▪ Definition – Economics is social science concerned with the production, distribution

and consumption of goods and services (optimal use).
▪ Economy is of an individual, country, state, etc., when we measure its income,

expenditures in a broader way.
▪ Economics tells us how can we best utilize our resources, for maximum profit.
▪ Any thing which can be used (directly or indirectly) to do some economics activity
is called Resource.
▪ Economics is studied under two boarder topics: -

1. Micro Economics (at smaller level of an individual level, single shop,
household income etc.)
2. Macro Economics (at larger level of something big like a firm(like amazon),
city, state, country budget etc.)
Economics as Science
Positive Science – related to the current situation of the economy. Its present the real
picture of facts without any comment and suggestion.
Normative Science – its promotes social and economic value. Suggests ways and
measures to be adopted for economics betterment of the people.
❑ Consumer – one who consume resources for satisfaction of needs.
❑ Consumption – the process of using utility value of goods and resources in order to
satisfy your needs.
❑ Producer – One who produces or sell goods and services for the generation of
income.
❑ Saving – Part of income which is not used, Income = saving + expenditure
❑ Investment – expenditure by producer which helps in generate income.
❑ Economic activity – which helps to generate income in particular area. These
includes production consumption and goods and services.
❑ Demand – Consumer willingness and ability and ability to consumer goods in return
money or anything.
❑ Supply – Quantity of goods available at a specific price.
3 sectors in economy
1. Primary sector – deals with extraction, cultivation, domestication rearing of
animals, etc.,
2. Secondary sector – deals with the production and conversion of raw material
3. Tertiary sectors – Provide support to primary and secondary sector provide
services like telephone, transport, banks, warehousing, telecommunication,
internet etc.,
Types of economy
1. Capitalist economy / market economy

Full privatization main focus on profit also known as market economy
Example – USA, Germany, Canada, UK
2. Socialist economy / command economy / centrally planed economy
Focuses on society welfare owned by the government
Example - China, North Korea, Russia, Thailand
3. Mixed economy
Partial privatization and partial owned by government
Example – India, Pakistan, Bhutan
4. Traditional economy
Based on agriculture in rural areas
Example - Africa
Why do economic problem arise

• Unlimited wants.
• Limited resources.
• Resources having alternative uses.
Difference Microeconomics Macroeconomics
Definition Microeconomics is the Macroeconomics studies

study of economic actions the economy as a whole
of individual and small and not a single unit but
groups of individuals. combination of all.
Concern with Particular households, firms National income, general
and industries. price levels, national
output, unemployment and
poverty
Objective On demand side is the Full employment, price
maximize utility whereas on stability, economics growth
the supply side is to and favorable balance of
minimize profits at payment
minimum cost.
Basis Prices mechanism which National income, output
operates with the help of and employment which are
demand and supply forces. determined by aggregate
demand and aggregate
supply.
Assumptions Rational behavior of Aggregate volume of
individuals. output of an economy, the
extent to which its
resources are employed.
Limitations Existence of full Involvement of “Fallacy of
employment. Composition” which
doesn’t prove true.
Top Three Central Problems of economy.
What to How to produce? For whom to

produce in For maximum produce?
what quantity? output and
Problem of
minimum input.
distribution
-> Labour intensive
-> Capital intensive
technique
Lecture – 2-A
GDP and Budgeting including own resources generation and
National Income
▪ Best method to calculate the national income of a country is considered to be
as its GDP(gross domestic production).
▪ The value of final (one thing should not be counted again and again) goods
and services produced in the domestic boundaries(suppose if adidas is an
MNC so its profit will go out of the country, but since whatever they are doing
is within the boundaries of the country so we will also count that) of a country
in a financial year (form 1 April to 31st March next year) is called it GDP.
▪ Mesoeconomics
▪ Studies intermediate level of economic organisation in b/w Micro and Macro
economics like institutional arrangements etc.,
▪ Economic Problem
▪ Resources are scare while wants are unlimited.
National Income/Output [GDP|GNP|NNP|NDP]

▪ GDP is a way to measure the national Income.
▪ Gross domestic product | one produced thing should not be used again and
again in the calculations.
▪ Estimates the value of final goods and services produced in an economy in a
given period of time – usually a calendar year of time – usually a calendar year
or financial year (from 31st march to 1st April of next year)
▪ Can be Real GDP or Nominal GDP
• At base year prices • At current years prices

• More accurate • May give inflated national
• Inflation adjusted GDP income
▪ Only financial marketable goods and services are considered.
▪ When it is compared to base year figures the growth levels are seen.
▪ It includes income of foreign people also like of MNC’s KFC royalty is paid to
them.
▪ Gain from resale are excluded but services provided by agents are counted.
▪ Similarly, transfer payments(like scholarships, pensions etc.,)
▪ Are excluded as there is income received but no good or service produced in
return.
▪ 2019 estimates - 2.9 $ Trillion India Economy

21 $ Trillion US Economy
▪ GNP (Gross National Product)
▪ = GDP + Net property income from abroad
It will cut the money going out of the country and add what Is
coming to our country.
Net Remittance = (Jo aa Rha Hai) - (Jo Jaa Rha Hai)
▪ NNP (Net National Product)

▪ GNP – Depreciation
Example value of things drop with time
▪ NDP (Net Domestic Product)
▪ GDP – Depreciation
Growth of every year is w.r.t base year(previous year) example : -

Financial year Growth % age Inc/Dec
2015 – 2016 100 -
2016 – 2017 110 10 %
Economy
slows down
2017 – 2018 115 4.5 %
2018 – 2019 116 0.869 %
2019 – 2020 150 2.6 %
GDP is preferred when we compare with other countries because different countries
have different level of development.
GVA (Gross Value Addition)

• GVA = GDP - Indirect Taxes.
• Helps to understand TAX – GDP link.
▪ Benefits of economic growth

▪ Wealth creation (means Assets etc.,)
▪ Increases Jobs and Incomes
▪ Increased TAX revenue
▪ Investment
▪ Decrease Poverty.
▪ Side Effects → Inequalities and environment degradation.
▪ Per Capita Income = (GDP / Population)

GDP per capita is calculated by dividing nominal GDP by the total population of a
country. It expresses the average economic output (or income) per person in the
country
▪ Calculating GDP
1. Output Approach
GDP = Adds the market value of final goods and services
2. Expenditure Approach
GDP = Consumption + Investment + Government expenditure + Export net.
3. Income Approach
GDP = Wages + profits + Rent | per year
▪ Law of Demand
1
▪ Demand ∝
Price of the Object
Price
Demand
▪ Low of Supply
▪ Supply ∝ Price of the Objects.
Price
Supply
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
▪ GDP deflector = 𝑥100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
▪ It gives idea of how much inflation is there.
• Equitable distribution – Jisko Jitni zaroorat hai use utna do.

• Equal Distribution – Sabko equal to.
Nominal GDP Real GDP

Also called as GDP at current price Also called GDP at constant Prices (against a
Base Year)
Doesn’t account for Inflation Inflation adjusted GDP
Is generally much higher because of Is generally lower because base year prices
increased prices of commodities. have been used
Can be compared with the quarters(4 Can be compared with two or more financial
quarters of the year)of the given year years
Depreciation
• The monetary value of an asset decreases over time due to use, wear and tear or
obsolescence. This decrease is measured as depreciation.
• Machinery, equipment, currency are some examples of assets that are likely to
depreciate over a specific period of time.
• Opposite of depreciation is appreciation which is increase in the value of an asset
over a period of time.
Domestic Territory
Domestic territory is defined as the area administered by a govt within which persons,
goods and capital can circulate freely.
The domestic territory of a country includes the following: -

i) Territory lying within the political borders including territorial waters of a country.
ii) Ships and aircrafts operated by residents of the country across different parts of the
world. For example, planes operated by Air India between England and Canada are
part of the domestic territory of India.
iii) Embassies and military establishments of the country located abroad. For example,
Indian embassy located in the USA is a part of domestic territory of India.
Normal Resident of a country:-

• A normal resident is said to be one who ordinarily resides in a country (for at least
one year or more) and whose center of economic interest lies in that country.
• A person is said to have his economic interest in a country when he conducts his
economic transactions (relating to production, consumption or investment) in that
country.
• The following observations need to be borne in mind:-
a) Normal residents include individuals as well as institutions (excluding
international financial institutions like IMF and World Bank).
b) It is not necessary that normal resident of a country is also a citizen of that
country. A person may be a normal resident of one country even when he is a
citizen of another country.
Factor Income Transfer Income

Factor Income is a payment received in Transfer Income is received without
exchange of any good or service. rendering any service or good.
1. It comprises rent, wages, interest and 1. It comprises gifts, subsidies, donations,
profit. scholarships, etc.
2. It is received in return for rendering 2. It is received without providing any good
productive service. or service in return.
3. It is an earned income (earning concept). 3. It is an unearned income (receipt
concept).
4. It is bilateral payment. 4. It is unilateral payment.
5. It is included in national income 5. It is not included in national income.
• Gross Domestic Product (GDP) is the total money value of all final goods and
services produced within the domestic territory of a country.
• To avoid double-counting, GDP includes the monetary value of final goods and
services. For example, a footwear manufacturer uses shoelaces and other materials
to make shoes, but only the value of the shoe gets counted; the shoelaces don’t.
• The components of GDP include consumption expenditures (C), investments (I),

government spending (G) and net exports (Difference between exports and
imports).
Therefore, GDP = C + I + G + (X - M).
• The first basic concept of GDP was invented at the end of the 18th century.
• The modern concept was developed by the American economist Simon Kuznets in
1934 and adopted as the main measure of a country's economy at the Bretton
Woods conference in 1944.
• GDP in India is calculated by the Central Statistical Office which comes under the
Ministry of Statistics and Programme Implementation.
Not included in GDP

• Unpaid work: work performed within the family, volunteer work, etc.
• Goods not produced for sale in the marketplace
• Bartered goods and services
• Black market
• Illegal activities
• Transfer payments
• Sales of used goods
• Intermediate goods and services that are used to produce other final goods and
services.
❖ When an economy experiences several consecutive quarters of positive GDP

growth, it is considered to be in an expansion (also called economic boom).
❖ Conversely, when it experiences two or more consecutive quarters of negative GDP
growth, the economy is generally considered to be in a recession (also called
economic bust).
❖ In India, the tertiary sector or the service sector contributes the most to the GDP.
Factor cost: Total cost of all factors of production or factor inputs (land, labour, capital
and entrepreneur) consumed or used in producing a good or service.
Market price: Market price is the price at which a product is sold in the market.
It includes the cost of production in the form of wages, rent, interest, input prices, profit
etc. It also includes the taxes imposed by the government. When the governments roll
out subsidies for the producers that also would be reflected in the price.
Subsidy:-
Subsidy refers to the discount given by the government to make available the essential
items to the public at affordable prices. Specific entities or individuals can receive these
subsidies in the form of tax rebate or cash payment.
• This helps to keep essential items such as food, fuel, fertilizers within the reach of
poor people.
• Indirect Taxes:- Indirect taxes are basically taxes that can be passed on to another
entity or individual. They are usually imposed on a manufacturer or supplier who
then passes on the tax to the consumer.
• The most common examples of indirect taxes include sales tax, excise duty, custom
duty etc.
• GDP at Factor Cost is defined as the sum total of all factor payments (wages, interest,
rent, profit and depreciation).
• GDP at market price is defined as “the market value of all the final goods and
services produced in the domestic territory of a country by normal residents during
an accounting year including net indirect taxes.
GDP mp = GDP fc + Net Indirect Taxes
Lecture – 2-B
GDP and Budgeting including own resources generation and
• when the union finance minister presents annual budget of the government – Feb 1
The budget unfolds two things:-
a) The financial performance of the government over the past one year; and
b) The financial programmes and policies of the government for the next one
year.
• The programmes and policies of the govt (as presented in the budget) are known as
“Budgetary Policy” of the government, or “Fiscal Policy” of the government.
It has two aspects:-

a) Revenue aspect;
The budgetary policy unveils expected receipts of the govt.
b) Expenditure aspect.
it unveils the expected expenditure of the government.
It is a way of managing the budgetary revenue and budgetary expenditure that the govt
tries to increase the GDP growth along with stability of the economy.
Govt budget is a statement of expected receipts and expected expenditure of the govt
(for the financial (April 1 to March 31) year to follow) that reveals budgetary policy of the
govt to achieve the twin objective of growth with stability.
Article 112 of the constitution requires the central government to prepare “Annual
Financial Statement” (Budget) for the country as a whole before the two houses of the
Parliament i.e., Lok Sabha and Rajya Sabha.
Article 202 of the constitution requires every state govt to prepare “Annual Financial
Statement” for the concerned state before the state legislative assembly.
Objectives of Govt Budget
GDP Growth:- Achieved in two ways:-

a) By making public investment on infrastructure; and
b) By inducing private investment.
Balanced Regional growth:- The fiscal policy or budgetary policy focuses on the
development of the backward regions in the country.
This is achieved through liberal tax laws for the backward regions.
Redistribution of income and wealth:- The government imposes heavy taxation on a high
income groups redistribute it among the people of weaker section in the society.
The government can provide subsidies and other amenities to people whose income
levels are low. These increase their disposable income and this reduces the inequalities.
Reallocation of Resources: Reallocation of resources in the manner such that there is a

balance between the goals of profit maximization and social welfare. Government uses
budgetary policy to allocate resources.
This is done by imposing higher rate of taxation on goods whose production is to be

discouraged and subsidies provided on goods whose production is to be promoted.
Managing Public Enterprises: In the budget, government can make various provisions to
manage public sector enterprises and also provides them financial help.
Economic Stability:- Government budget is a tool to prevent economy from inflation or

deflation and to maintain economic stability.
The budget is divided into three types

1. Balanced Budget – A government budget is assumed to be balanced if the expected
expenditure is similar to anticipated receipts for a fiscal year.
2. Surplus Budget – A budget is said to be surplus when the expected revenues surpass
the estimated expenditure for a particular business year. Here, the budget becomes
surplus, when taxes imposed, are higher than the expense.
3. Deficit Budget – A budget is on deficit if the expenditure surpasses the revenue for a
designated year.
❑ Components of Government Budget

Government Budget
Revenue
Capital budget
budget
Capital Capital
Revenue Revenue receipts expenditure
receipts expenditure
Non – tax
Tax revenue
revenue
Indirect tax Direct tax

Revenue Budget
This financial statement includes the revenue receipts of the government i.e. revenue
collected by way of taxes & other receipts. It also contains the items of expenditure met
from such revenue.
a) Revenue Receipts:-
These are the incomes which are received by the government from all sources in
its ordinary course of governance.
• These receipts do not create a liability or lead to a reduction in assets.
• Revenue receipts are further classified as tax revenue and non-tax revenue.
2. Tax Revenue :- Tax revenue consists of the income received from different taxes
and other duties levied by the government. It is a major source of public revenue.
Every citizen, by law is bound to pay them and non-payment is punishable.
Taxes are of two types, viz., Direct Taxes and Indirect Taxes.
Direct taxes are those taxes which have to be paid by the person on whom they
are levied. Its burden cannot be shifted to someone else.
E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes.
Indirect taxes are those taxes which are levied on the production of goods and
services. Here the burden can be shifted to some other person.
E.g. Custom duties, sales tax, GST, services tax, excise duties, etc. are indirect
taxes.
3. Non-Tax revenue: -Apart from taxes, governments also receive revenue from
other non-tax sources. The non-tax sources of public revenue are as follows :-
▪ Fees – The government provides variety of services for which fees have to be paid.
E.g. fees paid for registration of property, births, deaths, etc.
▪ Fines and penalties – Fines and penalties are imposed by the government for not
following (violating) the rules and regulations.
▪ Profits from public sector enterprises – Many enterprises are owned and managed
by the government. The profits receives from them is an important source of non-
tax revenue.
For example in India, the Indian Railways, Oil and Natural Gas Corporation
(ONGC), Air India, Indian Airlines, etc. are owned by the Government of India. The
profit generated by them is a source of revenue to the government.
▪ Gifts and grants – Gifts and grants are received by the government when there are
natural calamities like earthquake, floods, famines, etc.
Citizens of the country, foreign governments and international organizations like
the UNICEF, UNESCO, etc. donate during times of natural calamities.
▪ Special assessment duty – It is a type of levy imposed by the government on the
people for getting some special benefit. For example, in a particular locality, if roads
are improved, property prices will rise.
The Property owners in that locality will benefit due to the appreciation in the
value of property. Therefore the government imposes a levy on them which is
known as special assessment duties.
b) Revenue Expenditure
Revenue expenditure is the expenditure incurred for the routine, usual and normal day
to day running of government departments and provision of various services to citizens.
It includes both development (Plan) and non-development (non-plan) expenditure of the
Central government.
Usually expenditures that do not result in the creation of assets nor reduction of liability
are considered revenue expenditure.
Expenses included in Revenue Expenditure :-

1. Interest payments.
2. Expenditure on agricultural and industrial development, scientific research,
education, health and social services.
3. Expenditure on Defence and civil administration.
4. Expenditure on exports and external affairs.
5. Grants given to State governments even if some of them may be used for creation of
assets.
6. Payment of interest on loans taken in the previous year.
7. Expenditure on subsidies.
2. Capital Budget – The budget which allocates money for the acquisition and
maintenance of fixed assets such as land, buildings and equipment is known as capital
budget.
Capital budget consists of capital receipts & Capital expenditure.
(a) Capital Receipts:-

Receipts which create a liability or result in a reduction in assets of the government are
called capital receipts.
They are obtained by the government by raising funds through borrowings.
Items included in Capital Receipts :

1. Loans raised by the government from the public through the sale of bonds and
securities. They are called market loans.
2. Borrowings by government from RBI and other financial institutions.
3. Loans and aids received from foreign countries and other international
Organizations like International Monetary Fund (IMF), World Bank, etc.
4. Recoveries of loans granted to state and union territory governments and other
parties.
(b) Capital Expenditure:-

Any expenditure which is incurred for creating assets for the govt. And reducing liabilities
of the govt. is known as capital expenditure. Thus, expenditure on land, machines,
equipment, irrigation projects, oil exploration etc. are capital expenditure.
Budgeting for Panchayats and Own Resource Generation By Panchayats
Panchayati Raj Act

▪ (73rd Amendment) Act, 1992
▪ It came into force with effect from April 24, 1993.
▪ It has a 3-tier system of Panchayati Raj for all States having population of over 20
lakh.
▪ Panchayats have been one of the basic features of the Indian society.
But the real strength in terms of both autonomy and efficiency of these
institutions is dependent on their financial position (including their capacity
to generate own resources).
In general, Panchayats in our country receive funds in the following ways:

1. Grants from the Union Government based on the recommendations of the Central
Finance Commission as per Article 280 of the Constitution.
2. Devolution from the State Government based on the recommendations of the State
Finance Commission as per Article 243 I
3. Loans/grants from the State Government
4. Own Resource Generation (tax and non-tax).
But,
Across the country, States have not given adequate attention to fiscal empowerment of
the Panchayats.
One can draw the following broad conclusions:

1. Internal resource generation at the Panchayat level is weak.
2. Panchayats are heavily dependent on grants from Union and State Governments.
3. A major portion of the grants both from Union and the State Governments is
scheme specific. Panchayats have limited discretion and flexibility in incurring
expenditure.
4. In view of their own tight fiscal position, State Governments are not keen to
devolve funds to Panchayats.
Overall, a situation has been created where Panchayats have responsibility but grossly
inadequate resources.
This calls for a two-fold approach

- first demarcation of a fiscal domain for PRIs and
- second devolution of funds from the Union and State Governments.
Own Resource Generation
Though, in absolute terms, the quantum of funds the Union/State Government transfers
to a Panchayat forms the major component of its receipt, the PRI’s own resource
generation is the soul behind its financial standing.
It is not only a question of resources; it is the existence of a local taxation system which
ensures people’s involvement in the affairs of an elected body.
It also makes the institution accountable to its citizens.
In terms of own resource collection, the Gram Panchayats are, comparatively in a better
position because they have a tax domain of their own, while the other two tiers are
dependent only on tolls, fees and non-tax revenue for generating internal resources.
The taxation power of the Panchayats essentially flow from Article 243 H which reads as
follows: “the Legislature of a State may, by law
1. Authorize a Panchayat to levy, collect and appropriate such taxes, duties, tolls and
fees in accordance with such procedure and subject to such limits;
2. Assign to a Panchayat such taxes, duties, tolls and fees levied and collected by the
State Government for such purposes and subject to such conditions and limits;
3. Provide for making such grants-in-aid to the Panchayats from the Consolidated Fund
of the State;
4. Provide for constitution of such funds for crediting all moneys received, respectively,
by or on behalf of the Panchayats and also for the withdrawal of such moneys
therefrom as may be specified in the law.”
State Panchayati Raj Acts have given most of the taxation powers to Village
Panchayats.
A gram panchayat fund has been created on the pattern of the consolidated
fund of the state.
All money received by the Gram Panchayat (like contribution or grants made by the State
Government, Union Government, Zila Parishad and all sums received by the panchayat
in the form of taxes, rates, duties, fees, loans, fines and penalties, compensation, court
decree, sale proceeds and income from panchayat property etc.) goes into that fund.
State Finance Commission (Article 243 I):
State Government needs to appoint a finance commission every five years, which shall
review the financial position of the Panchayats and to make recommendation on the
following:
The Distribution of the taxes, duties, tolls, fees etc. levied by the state which is to be
divided between the Panchayats.
Allocation of proceeds between various tiers. Taxes, tolls, fees assigned to Panchayats
Grant in aids.
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Lecture – 3
Fiscal policy, meaning , Scope and Methodology.

• The word “Fisc” means “state treasury”
• Fiscal policy refers to the policy related to the use of this state treasury or
government finances to achieve certain macroeconomic goals(economic
growth, employment, income equality, price stability etc.)
• Fiscal policy is a policy of the government.
• The government makes important changes in the pattern and level of its
expenditure, taxation and borrowings.
• such as In fact, it was Keynes who popularized this great instrument of
macroeconomic policy during the 1930s’ Depression.
Fiscal Policy
FISCAL POLICY Relates the raising and speeding money in Quantitative and Qualitative
terms – How much and How?
The entire Budget exercise with all policies within it, is the core of FISCAL policy
(Budgetary policy).
ARTICLE 122 requires the government to present to parliament the statement of

estimated receipts and expenditures for every fixed.
– Budget word is not used anywhere in out Constitution

Instead of that what is written in the constitution is – Annual Final Statement
2 headings
Revenue Account Capital Account
Receipts (money came to us) Expenditure Receipts (money came to us) Expenditure
(money goes away form you) (money goes away form you)
Tax and non tax Recovery of loans
Interest payments Loans to states or
revenue, (of loans which govt has Borrowing form
UT’s.
user charge, taken) domestic or foreign
To create Capital
Interest on loans Subsidies (provided to banks.
asset
lower class people)
Public expenditure
3 funds
Consolidated Fund of India Contingency fund of india Public Account
Deficits
1. Budget Deficits
= (Total expenditure – total revenue.)
2. Revenue Deficits
= (Revenue receipts – revenue expenditure.)
3. Effective Revenue Deficits
= (Revenue deficits – grants for capital creation.)
Capital is infrastructure like road, bridge, buildings etc. that is assets creation.
4. Fiscal Deficits
= (Total expenditure – Non Debt. Capital receipts.)
Objectives of Fiscal Policy:

1. Economic Growth;
2. Full Employment;
3. Price stabilization –
▪ Instability in price level, i.e., either inflation or deflation, produces some
undesirable consequences.
▪ That is why the government prepares its budget in such a way that both
inflation and deflation are controlled.
4. Economic equality –
▪ Modern welfare governments provide social justice by providing equitable
distribution of income and wealth.
▪ Fiscal policy is an important instrument that aims at reducing income and
wealth gaps between people.
▪ Government can use its tax- expenditure policies in such a way that income
distribution can be made more equitable.
▪ For this, it imposes new taxes and raises tax rates in a progressive manner. On
the other hand, it spends money for the persons who belong to the low
income group.
▪ Thus, by taxing the rich at a progressive rate and spending those revenues for
the betterment of the poor people, economic disparities between them can
be minimized.
5. Balanced Regional Development –
▪ A large part of the government tax revenues are given out to less developed
states as statutory and discretionary grant. This helps in the balanced regional
development of the country.
While presenting budget of 2020 – 21 | first week of Feb
2018 – 19 Actual Estimate | exact values of estimates.
2019 – 20 Revised Estimate | with some data of estimate.
2020 – 21 Budget Estimate | future planning.
Fiscal Policy government follow are classified into following

categories –
1. Automatic or Built-in Fiscal Policy
▪ Change in fiscal policy that is triggered by the state of the economy.
▪ This kind of fiscal policy adjusts automatically and, hence, no
explicit action by the government is needed.
▪ Example -
2. Discretionary Fiscal policy
▪ The deliberate policy changes which are meant to influence the
level of economic activity may be called discretionary fiscal policy.
▪ Government deliberately alters tax schedules and various
expenditure programmes.
❑ Contractionary Fiscal Policy

Government spending < Tax Revenue
❑ Expansionary Fiscal Policy

(when we take help form outside like in form of loans etc.,)
Government Spending > Tax Revenue
Types of Fiscal policy Changes in govt spending Changes in taxes

Expansionary Increase Decrease
Contractionary Decrease Increase
❑ Neutral Fiscal Policy

Implies a balanced budget, Government Spending = Tax Revenue
Tools of Fiscal Policy
1. Components of spending (Expenditure Policy)

A. Maintenance (e.g., Salaries of workers, etc.)
B. Loan Payments
C. Subsidies (this is monitory government support, which is provided to give to
those who cannot afford a particular rate)
D. Welfare schemes etc. (like, NAREGA etc.,)
2. Components of Earning
1. Taxation Policy
• The government gets revenue from direct and indirect taxes.
• Direct taxes include taxes on personal incomes, corporate incomes,
wealth and property. Whereas,
• Indirect taxes (also known as commodity taxes) include taxes on
production and sale of goods and services like excise duty, custom duty,
service tax etc.
• Balanced taxation decisions are very important for economy because of
two reasons:
1. Higher than usual tax rate will reduce the purchasing power of
people and will lead to a decrease in investment and production.
2. Lower than usual tax rates would leave more money with people
to spend and this would lead to inflation.
Thus, the government has to make a balance and impose correct
tax rate for the economy.
2. Borrowings
➢ If the income of the government is more than its expenditure, it is
called surplus budget
➢ If the expenditure is more than income, it is called deficit budget.
To fund the deficit budget, the government has to borrow from domestic or
foreign sources. This is known as Deficit financing.
Like – borrowing by the government from the RBI during excess demand
deficit financing is avoided to the extent possible.
Public borrowings include both internal and external borrowings.

A. Internal borrowings include
1. Borrowings from public in the form of treasury bills and
government bonds and
2. The central bank.
B. External borrowings include borrowings from foreign governments,
international organizations like World Bank and IMF etc.
3. Sale and lease of assets (like government selling PSUs shares etc.,)
4. Profits on PSU’s (public sector undertakings)
3. Budgetary Policy
• It is a policy of the government to keep its budget in balance.
• When the govt keeps its expenditure equal to its revenue, it is known as a
balanced budgetary policy.
• When the govt decides to spend more than its expected revenue, this is
known as deficit budgetary policy.
• When the govt adopts the policy of keeping its expenditure lower than its
revenue, it is known as a surplus budgetary policy.
Adoption of different types of budgetary policies by the government
depends upon the need of hour
Debt Trap
Situation where the borrower has to borrow again for its payments of an installment on
a previous debt.
A Borrower able to meet Debt service obligations without borrowing is known to be in
Debt Trap.
Fiscal Federalism
It refers to distribution of resources between center and state.
Fiscal Consolidation
It is a set of policies followed by government to improve the fiscal health of the country
by reducing fiscal deficit, improving TAX Revenue realization and better aligned
expenditure.
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Lecture – 4
Growth and Development
Growth
• Economics growth refers to an increase in a country’s national income over a
period of time. That is increase in the production of goods and services in an
economy over a particular period of time, usually one year.
It is measured by indicators like GDP, GNP, PCI etc.
• But growth does not necessarily mean equal distribution of resources among all.
• Many indicators like Income inequality, gender inequality, poverty, Literacy etc., are
not into account in its calculation.
So, growth alone cannot be a good measure of a country’s progress.
Economic growth is expressed in two ways –

1. A sustained annual increase in an economy’s real national income over a long period
of time.
2. Annual increase in real per capita income of a country over a long period.
Arthur Lewis, “Economic growth means the growth of output per head of population”.
Objective of economic growth – To raise the standard of living of people.

Rates of economic growth are measured in terms of an overall increase in National
Income, Real GDP and an increase in Per Capita Income. (Per capita income and Real GDP
are the most appropriate)
Economic growth can occur in two ways:

1. Extensive Growth – An economy can grow extensively i.e. by using more resources
such as physical, human, or natural resources.
2. Intensive Growth – An economy can grow intensively by using the same amount of
resources more efficiently.
Various indices are used to measure economic growth are –
Physical Quality of life Index (PQLI)
▪ Developed by David Morris in mid 1970s.
▪ Developed by Morris at the US Overseas Development Council.
▪ PQLI is the average of three values:-
a) Life expectancy at age one;
b) Basic Literacy Rate; and
c) Infant Mortality Rate.
• As of 2020, Denmark is the country holding rank 1 in terms of PQLI.
• India ranks at no. 58 as of 2020.
Purchasing Power Parity (PPP)

Propounded by Gustav Cassel, a Swedish Economist in 1918.
▪ It is an economic theory that shows the comparison of the purchasing power of
various world currencies to one another. It compares various currencies in terms of
US Dollar.
▪ Defined as no. Of units of a country’s currency required to buy the same amount of
goods and services in the domestic markets as one Dollar would buy in the US.
▪ Economic growth is a quantitative concept.
Theories of Economic Growth

Classical Theory or Steady State Theory
The evolution of economic growth theories can be drawn back from Adam Smith’s book,
Wealth of Nation.
In his book, he emphasized a view that the growth of an economy depends on division
of labor.
The theory states that every economy has a steady state of GDP and any
deviation from that steady state is temporary and will eventually return.
This is based on the concept that when GDP rises, population will increase. The increase
in population has thus an adverse effect on GDP due to the higher demand on limited
resources from a larger population.
So, GDP will eventually lower back to the steady state.

When GDP declines below the steady state, population will decrease and thus, there will
be lower demand for resources. In turn, the GDP will rise back to its steady state.
So Economic growth follows a “Rising Falling Trend”.
Neo-Classical Theory
This theory was propounded by T.W. Swan and Robert Solow. Hence, it is known as
Solow-Swan model of growth.
The theory focuses on three important factors that impact growth. i.e., labour, capital
and technology.
The output per worker (growth per unit of labour) increases with the output per capita
(growth per unit of capital) but at a decreasing rate.
This is referred as diminishing marginal returns.
Therefore, a point will reach where labour and capital can be set to reach an equilibrium
state.
Since a nation can theoretically determine the amount of labour and capital necessary to
remain at the steady point, it is technological advances that really impact economic
growth.
So, once an advance in technology has been made, then labour and capital should be
adjusted accordingly.
Economic Development
Economic development refers to the process by which the overall health, wellbeing, and
academic level of the general population of a nation improves.
It also means improved production volume due to the advancements of technology.
It is the qualitative improvement in the life of citizens of a country and is most

appropriately determined by Human Development Index (HDI).
The overall development of a country is based on many parameters such as

standard of living, technological advancements, living conditions, quality of life, the
creation of job opportunities, per capita income, infrastructural and industrial
development, GDP and much more.
Factors Affecting Economic development
1. Infrastructural improvement – Development in the infrastructure improves the
quality of life of people. Therefore, an increase in the rate of infrastructural
development will result in the economic development of a nation.
2. Education – Improvement in literacy and technical knowledge will result in a better
understanding of the usage of different equipment. This will increase labour
productivity and in turn, will result in the economic development of a nation.
3. Increase in the capital – Increase in capital formation will result in more
productive output in an economy and this will affect the economic development
positively.
Human Development Index (HDI)

A need was felt to put forward an index which would truly and correctly reflect the level
of economic growth of a nation.
Thus, the United Nations Development Programme (UNDP) introduced the HDI in its
first Human Development Report under the leadership of Dr. Mehboob ul Haq and Prof.
Amartya Sen.
In order to measure the Human development Index, three criteria are considered:-
a) Life Expectancy rate at the age of one;
b) Adult Literacy Rate;
c) Standard of living.
As of 2020, | HDI world ranking

Norway is the country holding Rank 1 in terms of HDI.
India holds 129th Rank in terms of HDI as of 2020.
Models of Economic Development

1. Harrod-Domar Model -
• Developed in 1930s
This model mainly depends on two factors:-
1. Savings
2. Investment
▪ In this model, the main strategy is a mobilization of saving and to generate
investment to increase economic growth.
▪ It means investment leads to growth and it comes from saving.
▪ Higher income means higher savings.
▪ Economic growth measured by saving ratio and capital input-output ratio.
2. Lewis Structural Change Model
• It is also called as DUEL-SECTOR model.
• This model has two sectors:
Tradition sector – It has surplus of labour for i.e. Agriculture sector
Modern sector – Modern sector focuses on the transfer of surplus labour to the
modern sector for i.e. Industrial sector
3. Rostow's Model
• the 5 Stages of Economic Development
• The American Economist, W W Rostow developed this theory by saying that
nation passed through five stages of economic growth development.
1) The traditional society
2) The pre-conditions for off-take
3) The takeoff
4) The drive to maturity
5) The age of high mass consumption
4. Chenery’s pattern of development

• Chenery along with his colleagues examined patterns of development for
countries at different per capita income levels.
• Shift from agriculture to industrial production.
• A steady accumulation of physical and human capital.
• Change in consumer demands.
• Increased urbanization.
• A decline in family size.
• Demographic transition.
5. Neoclassical Dependence Model

• This model is based on the condition, dependence is a condition by which
one country's economic development depends on others.
6. The International Dependence Revolution (IDR)

• This model opposes the tradition's emphasis on the GNP growth for the
development.
• It mainly emphasis on the international relations and policy reforms.
• IDR model stated that developing countries as intercept by institutional,
political, and economic rigidities in both domestic and international setup.
7. Traditional Neoclassical Growth Theory

• This theory mainly depend on these three Output growth results
• Increase in labor.
• Increase in capital.
• Changes in technology.
Growth Development
It refers to an increase in the National It means an upward movement of the
income over a period of time. entire social system in terms of
incomes, savings, investments etc.,
It is a Quantitative concept It is a Qualitative + Quantitative
concepts
Narrow concept Broader concept
Short Term Process Long Term Process
Unidimensional Multidimensional
It is just a mean to achieve It is an end
development,
Indicators GDP, GNP, PCI, etc. Indicators HDI(human development
index), GNH(gross national
happiness), income, inequality,
gender, irregularity etc.,
Lecture – 5-A
RBI
RBI Not in syllabus directly
- HQ Mumbai
- Statutory body
- Called Bankers Bank
- Establishment year 1935
- Established under RBI Act 1934
- RBI board contains more than 20 members including 1 governors and 4 Deputy
Governors
- First RBI governor was a British person –
- First Indian person RBI governor –
- New post created as CFO – Chief financial officer
- RBI nationalize in 1949
- RBI deals with – Central govt and State govt.
- RBI deals with – commercial banks (both public sector banks and private sector
banks)
- RBI gives loans to these banks.
NBFI
- Non banking financial Institutions
- Can also give you loan (do public dealing
- But not having banking status (Banking license they don’t have)
- Example – Muthoot finance etc.,
If demand is high, less supply -> Prices increase after a limit -> Inflation
Hyperinflation -
If demand is less, high Supply -> Prices decreases after a limit -> Deflation
Hyper deflation -
Subsidy – it is the monetary help to the lower class people who cannot support there living
for what he earns on his own.
Since all these rules are decided by the RBI board so as to make these decisions more
transparent, a committee of 6 members were made – MPC (monitory policy committee)
- RBI governor is one of the member of MPC and Chairmen of MPC
- Decision by majority
- Chairman has a casting vote power.
- And in one financial year, at least 4 meetings are important, In each quarter.
RBI functions
1. Issues banking license
2. Rupee Value calculations
3. Currency printings
On RBI instructions one mini Ratna company – Security printing and minting corporation
of india limited (SPMCIL)
• Paper prancing and coin minting
• Postal stamp printing
• Stamp paper printing
• 2 rupee and above currency notes are printed by SPMCIL on RBI instruction only.
• 1 rupee note and all coins are minting on instruction of GOI by ministry of
finance BUT, in circulation through RBI only.
• Rupee symbol given by -
• Total no of languages on the rupee panel – 15
• Total no of languages on the currency – 17
4. To regulate the Monetary Policy(Money Flow) using different types of tools (all are
decided by RBI board)
• SLR
• CRR
• BANK RATE
• RAPO RATE
• Reverse repo rate
• Marginal
• MSF
• Open market operations
5. To maintain balance in the market to prevent Inflation and deflation
Inflation Deflation
- Already government giving money - Supply so much
to support lower class - No buyer is available (or they don’t
- If inflation will be there, prices have money)
increase - Company will shut down
- Lower class people cannot survive - Loose jobs
- Crimes increase - Company will leave the country so its
- Loose Jobs not good for the overall national
- Mass protests economy for a longer run.
- Government tax collection - So, RBI has to control and Increase
ultimately will decrease liquidity in the Market.
- Mainly cause due to excessive
money (liquidity) in the market.
- So RBI has to control and limit
liquidity in the Market.
RBI Regulates Banks -> Banks give money in form of load for all costly items (like 20
lac car, 1 crore house etc., because banks earn interest (there only source of income))
Banks use your deposited money in the banks to give loans, Giving you an interest rate.
Saving Accounts – personal accounts
Current Accounts – Company accounts
FD (Fixed Deposit) – When you deposit complete money at a single time for a fixed time.
RD(Recurring Deposit) – After a time you deposit an amount regular for a certain period.
Example – If SBI has 100 crore rupees, now if decide to give all money as a loan.
• RBI came and said you cannot do so, you have to keep some money as a
reverse. (SLR/CRR)
• all rules of RBI are same for all banks
SLR (statuary liquidity reserve/ratio)

• Certain percent of total money, Bank has to maintain SLR (which it has to keep with
itself)
• In form of liquid assists – which can be easy converted to cash
• Bonds
• Cash itself
• gold
• Current value of SLR is _______(Eg… 16%)
CRR (cash reserve ratio)

• Currently it is _______ (e.g... 4%)
• Every bank has to keep this CRR (only in cash form) to the RBI (This is kept with RBI)
For day to day activities (some money is kept) Banks itself will decide that for there
customers!
• For cash in ATMs
• At banks to give the cash to the customers
Now the left over money, Banks can give that money as the Load.
How MPC will use SLR

➢ To control money flow, in case of Inflation(more money in the market) – MPC will
increase the SLR. (say form 16% to 24%) hence, Money with the bank will decrease
to be used to give loan, therefore, for same profits now bank will Increase the
interest rate.. Hence less people will take the loan. (Money is blocked now)
➢ Case of Deflation
CRR (Works similar as SLR)

➢ This Part of total Money is kept with the RBI. (say 4%)
➢ To control Inflation -> CRR increase.
Bank Rate
➢ Long terms borrowings given by the RBI to the banks and interest charged
by RBI is called Bank Rate.(say for 5%)
➢ To control Inflation – means now if MPC will increase Bank Rate, bank has
to inc the Interest rates for there customers(e.g.- for car loan, house loan
etc.,), people will take less loans from banks.
Open Market Operations (Not a guaranty tool, does not work always)
➢ If RBI give the loans to center government or state govt. etc.,.
Then government has to give some security (BOND paper) like shares value in the
PSUs(public sector units like BHEL, SIAL, GAIL, ONGC etc.,.) (but share value is of variable
value) or Infrastructure (is a fixed value).
➢ Against Such Security RBI can also give loan to the banks also.
➢ Example – if you deposited 5 lac rupee in FD(fixed deposit), then they give you a
paper, that is such a security. And against this security also you can take the loan with
out breaking the FD.
➢ In Open Market operations, RBI announces a date and say come to me I will sell some
bonds.
➢ But it may be the case that no one purchase these Bonds(banks do not came to RBI to
purchase these Bonds). So this Open Market Operation may not work always. (as if
these Banks will not buy the BONDS, money will not be controlled in the Market)
Liquidity Adjustment Facility

If bank need long term loan, but RBI refuse Or sometimes Mismatching occurs. So
urgently bank needs money, so how to resolve this problem.
Repo rate (Best tool to Control Inflation)

➢ Shor term loans give by the RBI to the Bank against the security(which he would have
purchased in the open market operations of RBI previously)
➢ Interest charged by the RBI is called Repo Rate.
➢ And bank has to give the assurance that it will give the money back in the short period
of time and take my Bonds back.
➢ To control Inflation, Repo Rate Must increase
➢ As Repo Rate inc -> banks will inc its own loans ultimately people will not take the
loan and money will decrease in the market.
Reverse Repo rate

= Repo Rate– 0.25% (example)
Hence from this formula, to control inflation, Reverse Repo also increase.
➢ If bank earned lot of money from the loans given, hence it has so much money now
and is not interested to take loans form RBI
➢ So this time, RBI will take Loans and will give the interest. (it will also reduce the
money with the bank hence will also control the money excess in the market)
Marginal Standing Facility (MSF)
- Suppose if the banks needs loans(urgently) and they even don’t have the Security
Bonds.(then what)
- So to solve this problem Marginal standing Facility was introduced in 2011, by RBI
- Out of total public deposited(say 100 crore)
- So 1% of total public deposited (1 crore) SLR based bond, RBI will except and will give
the loan.
- But risk is higher so RBI will put more interest rate.
- Will give less loan as compared to bond value. (say 75% = 75 lac)
Conclusion –
To control Inflation all rates Will Increase!

Qualitative Tools
1. Rebutting – RBIs act of warning the banks (Dantna)

2. Direct Action – directly canceling the Banking license of the Banks.
3. Moral Suasion
If RBI Decrease Repo rate – but banks are charging the same interest rate form
public…. Then RBI will call a meeting that on Moral Grounds banks should also have
to Decrease the Interest rates.
4. Selective Credit Control
RBI tells that there are some bad/week sectors, so be more careful while finding
them.
5. Customer Credit Control
Suppose if you have to purchase 1 crore house… bank cannot give you loan full
crore. According to RBI 80: 20 ratio rule is decided. Where 80 lac bank will give and
20 lac you have to give form your own
This ratio can be modified by the RBI.
6. Margin Requirement
If Someone need 100 crore loan, and if he gives Shares as the security, but the value
of shares may Dec to half in next month. So some margin has to be kept, Like giving
only 35% of it.. Considering 75% as the margin. (It is decided by the MPC only)
Problems Which Banks Faces –
NPA (non performing Assets)

- Loan given by the bank, but not recovered.
- The day loan becomes default (means you stop paying the EMI)
- Then, If with in 90 days there is no settlement, according to RBI Loan becomes NPA
(Non performing Assets)
- Why banks give such loans?
- Because of the political influences, so mostly Government banks only have such
NPA loans.
- When new govt came, It was 9 lac crore as NPA

- HOW government deal with this problem? (recover Money form Public)
- Jan – dhan yojna.
- Announce “demonetization” (13 lac crore deposited into the banks) (But the
public start withdraw money)
- Increased the Tax on OIL.
- “Indhradhanush” Program
- To Strengthen Our Banks
- 2 lac crore rupee given to the banks
On what basis RBI prints currency and why it does

not print unlimited currency?
Up to 1960 RBI took GOLD as reference(which it has kept which itself) to print the
currency notes.
After 1960 now GDP is taken as reference to print the currency notes.
- More and more currency (Token), printing will lead to Depreciation of currency and
ultimately leads to Inflation.(when that huge amount of money will reach the market)
Lecture – 5 B
Inflation meaning Types and Effects
The rate at which the general level of prices for goods and service is
on Rise. Inflation is measured by consumer price index(CPI).
On the basis of causes –
Demand Pull Inflation
When there is strong consumer demand and many individuals purchasing the same good
it will increase price of goods, so it is called Demand pull Inflation.
• General price level increases, when aggregate demand increases much more rapidly
than the aggregate supply
• In demand pull inflation, AD > AS.
• According to J M Keynes, (father of modern Economics) either the demand increases
over the same level of supply or supply decreases with the same level of demand.
• So, Demand pull inflation is caused by demand side factors.
• However, for the monetarist school of thought, demand pull inflation is the result of
creation of extra purchasing power over the same level of production. In such a
situation. Too much money in the market.
• Demand pull inflation is caused by monetary as well as real factors.
✓ Monetary factors include the increase in money supply over the same level of output.
✓ Real factors include increase in govt. Spending, cut in tax rates, increase in
population, rapid GDP growth, which leads to more employment and higher wages.]
• Note:-
According to Keynes, the price rise only at the state of full employment is
inflation. If the economy is below the full employment level, price rise in such a
situation is not inflation.
Cost Push Inflation

Inflation caused by an increase in the price of inputs like labour, raw material etc. The
increased price of the factors production leads to a decreased supply of the goods.
• The price rise which is the result of increase in production cost is known as cost-push
inflation.
• This type of inflation is caused by supply side factors.
• Cost push inflation is caused by factors like rise in labour cost, higher cost of imported
materials, monopoly of a single supplier enabling him to set prices etc.
It has the following three types –
1. Wage-Push Inflation
• Wages constitute an important part of price. Therefore, a rise in wages causes a rise
in prices.
• Wage push inflation is caused by the exercise of monopoly power by labour unions
to get the money wages enhanced.
• When prices rise due to rise in wages, it is known as inflation spiral.
2. Profit Push Inflation

• The use of monopoly power by the monopolistic and oligopolistic firms to raise the
price in order to enhance their profits is also one of the aspects of cost push
inflation.
• Existence of monopolistic and oligopolistic firms (Imperfect Competition) and the
use of their monopoly power to increase their prices is a necessary condition.
3. Supply-Shock Inflation
• Supply shock is a sudden and unexpected decrease in the supply of major
commodities. This leads to the rise in general price level.
Some other terms

Deflation
• When the overall price level decrease so that Inflation rate becomes negative, it is
called Deflation.
• It is opposite to Inflation.
• It is decrease in general level price for shorter period.
• Inflation reduces the value of currency over time, but sudden deflation increases it.
Reflation
• Reflation is the act of stimulating the economy by increasing the money supply or by
reducing taxes, seeking to bring the economy (specifically price level) back to its
original position.
• It is actually a deliberate policy adopted by the central govt or central bank of a
country to bring the original level of prices back.
Disinflation
• Disinflation is a situation of decrease in the rate of Inflation over successive time
period. It is simply slowing of inflation for a longer period of time.
Stagflation
• It is a condition of sow economic growth and relatively high unemployment and
there is decline in GDP.
Hyper Inflation
• Hyperinflation is an extremely rapid period of INFLATIONN, usually caused by a rapid
increase in the money supply.
Stagflation
• It is a situation when inflation and unemployment are both at higher levels. Such a
situation arose first in the US economy in 1970s.
• The concept of Phillip’s Curve thus proved to be false.
Skewflation
• A price rise in one or a small number of commodities is known as Skewflation. A
price rise in a single sector of the economy is also known as Skewflation
Inflation targeting
• The announcement of an official target range for inflation is known as inflation
targeting.
• It is done be central bank as a part of monetary policy to realize the objective of
stable rate of inflation.
• In India, the target range of inflation ranges between 4-5 % popularly known as
“Comfort Zone” of inflation in India.
Core Inflation
• It represents the long term trend in the price level.
• In measuring long run inflation (Core inflation), transitory price changes are to be
excluded.
• It can be done by excluding items frequently subject to volatile prices like food and
energy (e.g., rise in prices of petrol or diesel).
Inflationary Gap
• An inflationary gap is a macroeconomic concept that describes the difference
between the current level of gross domestic product (Actual GDP) and the
anticipated GDP that would be experienced if an economy is at full employment
(Potential GDP).
• Under such a situation, AD>AS at full employment of resources.
Phillip’s Curve:
• It is a curve which advocates a relationship between inflation and unemployment in
an economy.
• As per the curve, there is an inverse relationship between inflation and
unemployment.
• It implies that for reducing unemployment, higher rate of inflation has to be
witnessed and for reducing inflation, higher rate of unemployment has to be
witnessed.
• It is a downward sloping curve.
• It is named after Alban William Phillips, a British Economist.
• Conclusion:- Inflation reduces unemployment.
EFFECTS OF INFLATION
Inflation has certain effects on certain sections of the society.

❑ Creditors and debtors:
▪ During inflation, creditors lose because they receive in effect less in goods and
services than if they had received the repayments during a period of low prices.
▪ Debtors, on other hand, as a group gain during inflation, since they repay their debts
in currency that has lost its value (i.e., the same currency unit will now buy less
goods and services).
❑ Producers and workers:

▪ Producers gain because they get higher prices and thus more profits from the sale of
their products. As the rise in prices is usually higher than the increase in costs,
producers can earn more during inflation.
▪ But, workers lose as they find a fall in their real wages as their money wages do not
usually rise proportionately with the increase in prices. They, as a class, however,
gain because they get more employment during inflation.
❑ Fixed income-earners:
• Fixed income-earners like the salaried people, rent-earners, landlords, pensioners,
etc., suffer greatly because inflation reduces the value of their earnings.
❑ Traders, businessmen and black-marketers:

• They gain because they make more profits from the persistent rise in prices.
❑ Farmers:
• Farmers also gain because the rise in the prices of agricultural products is usually
higher than the increase in the prices of other goods.
• Effects on Production:
• The rising prices stimulate the production of all goods—both of consumption
and of capital goods.
• As producers get more and more profit, they try to produce more and more
by utilizing all the available resources at their disposal.
• But, after the stage of full employment the production cannot increase as all
the resources are fully employed.
• Moreover, the producers and the farmers would increase their stock in the
expectation of a further rise in prices.
• As a result hoarding and cornering of commodities will increase.
• Effects on Growth:
• A mild inflation promotes economic growth, but a runaway inflation obstructs
economic growth as it raises cost of development projects.
• Thus, inflation brings a shift in the pattern of distribution of income and
wealth in the country, usually making the rich richer and the poor poorer.
• Thus during inflation there is more and more inequality in the distribution of
income.
Lecture - 6
Production cost and efficiency. About the producer
▪ Production is carried out by producer or firms
▪ In order to acquire inputs a firm has to pay for it, called as Cost of production.
▪ Finally products are soled in the market and the firm earns the revenue
▪ The difference between the revenue and the cost is called as the firms profit.
Production
Production is a process of combining various inputs(resources, raw material) to convert
them into useful finished products (in the form of goods and services.)
Factors of Production:
Anything that helps in production of goods and services is the factor of production.
Also known as factor inputs.
1. Entrepreneurship (startups, innovation ideas etc.,)

2. Land
• It refers to all natural resources. Either on the surface of the earth or below
the surface of the earth or above the surface of the earth is Land.
• It is the primary and natural factor of production.
• All gifts of nature such as rivers, oceans, land, climate, mountains, mines,
forests etc. are treated as land.
3. Labour
• All human effort that assists in production,
• The payment for labour is the wage.
4. Capital
• man made resources like – technology, Machinery etc.
• The payment for capital is interest.
Production Function
Production function thus is a functional relationship between physical inputs and
physical output of a commodity.
Usually it is expressed in terms of the following equation

Qx = f(L, K)
It says that Qx (production of commodity X) is the function of L (labour) and K (capital).
According to Watson, “Production Function is the relation between a firm’s production

(output) and the material factors of production (input)”.
Fixed and variable factors
1. Fixed factor
▪ Fixed factors are those the application of which does not change with the
change in output.
▪ In fact, fixed factors (like machines) are installed before output actually starts.
Thus, a machine is there even when output is zero.
▪ Let’s assume that a machine can produce maximum 1000 units of commodity-
X. It means that for any change in output ranging between 0-1000 units, input
of machine (fixed factor) remains constant.
2. Variable factors
▪ Variable factors are those the application of which varies with the change in
output. Labour is an example of variable factor.
▪ We need more labour to produce more units of a commodity, other things
remaining constant. Thus use of variable factor is zero when output is zero. It
increases when output increases.
Short-run production function

• Short run is a period of time when production can be increased only by increasing
the application of variable factors. Fixed factor, by definition, remains constant.
• Thus, production capacity remains constant during the short period
Long run production function

• Long Run is a period of time when the distinction between fixed factor and variable
factor vanishes. All factors are variable factors.
• Long period is long enough to increase production capacity of a firm, to change size
of the plant or to install more and more plants.
• Thus, what is fixed factor during the short period becomes variable factor over the
long period.
Law of Variable Proportions or Returns to a Factor

The Law of Variable Proportions” or “Returns to a Factor” states that keeping other factors
constant, when you increase the variable factor, then the total product initially increases at
an increases rate, then increases at a diminishing rate, and eventually starts declining.
Assumptions of the Law

The law of variable proportions holds good under the following conditions: -
1. Constant State of Technology: First, the state of technology is assumed to be given

and unchanged. If there is improvement in the technology, then the marginal
product may rise instead of diminishing.
2. Fixed Amount of Other Factors: Secondly, there must be some inputs whose
quantity is kept fixed. It is only in this way that we can alter the factor proportions
and know its effects on output. The law does not apply if all factors are
proportionately varied.
3. Possibility of Varying the Factor proportions: Thirdly, the law is based upon the
possibility of varying the proportions in which the various factors can be combined
to produce a product. The law does not apply if the factors must be used in fixed
proportions to yield a product.
example:
Fixed Factors: Variable TPP MPP
Land Factors (total physical product) (Marginal Physical product)
(Acres) Land (Quantity) (Quality)
(units)
1 0 0 -
1 1 2 2 Stage
1 2 6 4 I
1 3 12 6
1 4 16 4
Stage
1 5 18 2
II
1 6 18 0
1 7 14 -4 Stage
1 8 8 -6 III
In this example, the land is the fixed factor and labour is the variable factor. The table
shows the different amounts of output when you apply different units of labour to one
acre of land which needs fixing.
The law has three stages as explained below:
1. Stage I – The TPP increases at an increasing rate and the MPP increases too. The MPP
increases with an increase in the units of the variable factor. Therefore, it is also called
the stage of increasing returns.
2. Stage II – The TPP continues to increase but at a diminishing rate. However, the
increase is positive. Further, the MPP decreases with an increase in the number of units
of the variable factor. Hence, it is called the stage of diminishing returns.
3. Stage III – Now, the TPP starts declining, MPP decreases and becomes negative.
Therefore, it is called the stage of negative returns.
Any rational producer avoids the first as well as third stages of production. Therefore,
producers prefer Stage II – the stage of diminishing returns. This stage is the most relevant
stage of operation for a producer according to the law of variable proportions.
Total Product, Marginal Product and Average Product
Total product
• Suppose if we vary only a single input and keep all other inputs constant. Then for
different levels of that input, we get different levels of output.
• This relationship between that input and the output is called, Total Product(TP) of
the variable input.
• Also sometimes called as Total return to or total physical product of the variable
input.
Marginal product
MP refers to change in TP when one more unit of the variable factor is used(fixed
factor remaining constant).
Or
MP of an input is defined as, the change in the Output per unit of change in the
input when all other change in the input are held constant.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑢𝑡𝑝𝑢𝑡
MPL =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑝𝑢𝑡
• For example,
if output increase from 40 to 45 units when the input of labour is increased from 5
to 6 units (input of capital remaining constant), then
MP = 45-40= 05
MP = 5 is related to the 6th unit of labour.
• Marginal Product in Undefined at Zero level of input change.

• Some of MP of every proceeding unit of that input gives the total product TP. So
Total product(TP) is the sum of marginal products.
Average product
• AP is output per-unit of the variable factor used in the process of production. It is
estimated as under:-
AP = TPL /L | if labor is the only input we are considering to vary.
(Where AP means Average Product, TP means Total Product and L means labour).
Example:- If TP = 40 when 5 units of L (labour) are used, then
AP = TP/L =40/5=8 units of output.
• AP of an input at any level of employment is the average of al MPs up to that level.

average
Costs
Output needs inputs. Broadly, there are two types of inputs;
1. Factor Inputs (Land, labour, capital and entrepreneur); and
2. Non-factor inputs (raw-materials).
Cost refers to the expenditure incurred by the producer (explicitly or implicitly) on the
factor as well as non-factor inputs for a given output of a commodity.
Explicit and Implicit Cost

• All inputs may not be purchased from the market. A producer may use self owned
inputs.
• For Example: Instead of hired workers from the market, producer may use his family
labour. Likewise, a producer may use his own land instead of taking it on lease.
• Expenditure incurred by the producer on the purchase of inputs from the market is
called explicit cost. Estimated expenditure on the use of self owned inputs is called
implicit cost.
• In economics, total cost is estimated considering both its elements, viz., explicit cost
and implicit cost.
Total Cost = Explicit Cost + Implicit Cost
Selling Cost and Production Cost
• Selling costs refer to the expenditure incurred by the producer to promote sale of
the commodity. E.g., Expenditure on advertisement.
• Production cost refers to the expenditure incurred by the producer on the inputs for
producing a given level of output.
Short Run Cost and Long Run Cost
Short run is a period of time during which some factors are fixed and some are variable.
Accordingly, short run costs have two components, viz.,
i) fixed costs, referring to expenditure on fixed factors, and
ii) variable costs, referring to expenditure on variable factors. Thus, in short run;
Total Cost = Total Fixed Cost + Total Variable Cost

Fixed Costs
• Costs related to the use of fixed factors of production are known as fixed costs.
• Also known as supplementary costs, overhead costs or indirect costs.
• These costs don’t change with the change in output. Fixed costs are incurred even
when the output is zero.
• For example, expenditure on machine and plant, land and buildings, license fee,
wages and salaries of permanent staff.
Variable Costs
Variable costs refer to the expenditure incurred by the producer on the use of variable
factors of production.
• These costs change with the change in level of output. As output increases, these
costs also increase and vice versa. When output is zero, these costs are also zero.
• These costs include cost of raw material, wages of casual workers, expenses on
electricity, wear and tear expenses (depreciation) etc.
Fixed costs Variable costs

1. Fixed costs are the costs incurred on 1. Variable costs are the costs incurred
the forced factors of production. on the variable factors of production.
2. Fixed costs do not change with 2. Variable costs increase with increase
increase or decrease in output in output and decrease with in
3. Fixed cost remain constant even when output.
output is zero. 3. Variable costs are zero when output is
4. Fixed costs are incurred even before zero.
output actually starts. 4. Variable costs are incurred only when
output actually starts.
Average Cost and marginal Cost

Average Cost
Cost per unit of output is known as average cost.
AC = TC / Q (Where AC is Average Cost, TC is Total Cost and Q is Quantity Produced).
The most important components in average cost are fixed cost and Variable cost.
It is also called as Unit cost.
Marginal Cost
Marginal Cost is the change in total cost when an additional unit of output is produced.
It is an additional cost or extra cost as a result of an increase in the production of one

more unit of product.
Formula: Change in Total Cost / Change in number of units Manufactured

In a Shop
❖ Economic Order quantity (Inventory)
It is the optimum size of the inventory or raw material which we order to prevent
Overstocking and Understocking.
Opportunity Cost
Opportunity cost represents the benefit and individual investors or business missies out
when choosing one alternative over other.
Opportunity cost = FO - CO
Were, FO = Return on best forgone option (which he did not chose)
CO = Return on chosen option
Production Possibility Frontier (PPF)

• It is a curve that illustrates the variations in the amounts of two products that can be
produced if both depend upon same finite resource for their manufacture.
• PPF demonstrates what combination of goods and services should be produced to
achieve maximum efficiency.
• It can be used to measure the efficiency, with which two commodities can be
produced simultaneously.
Trucks
cars
Ex: - To choose the best point where with same resources company Maruti will decide how many
CARS and how many Trucks to be manufactured.
Lecture - 7
Factors of production and laws
The Four Factors of inputs for the production are –

1. Capital
2. Land
3. Labour
4. Entrepreneurship
S.No. Input Output
1 Capital Interest
2 Land Rent
3 Labour Wages
4 Entrepreneurship Profit
Law of Return to Sales

The effects to a change in the scale of factors (input) upon output on
the long run when the combinations of factors are changed in the
same proportion.
It is a set of three interrelated and sequential laws of:

1. Law of increasing returns to scale (IRS)
Suppose, if we double the input but output inc more than just
double(say 3 times), then we say is it “Increasing returns to
scale.”
2. Law of constant returns to scale (CRS)
Suppose, if we double the input and output also inc to two
times,(2 times)then we say is it “constant returns to scale.”
3. Law of diminishing return to scale.(DRS)
Suppose, if we double the input but output inc less than just
double(say 1.5 times), then we say is it “decreasing returns to
scale.”
Utility
Ultimate goal of a consumer is always assumed to be the satisfaction of his wants. Wants
are satisfied by consumption of goods and services.
• For instance, when we take food, our wants are satisfied.

• Every commodity has a want satisfying capacity which is known as utility.
Measurement of utility:- Different opinions regarding measurement of utility.

1. Cardinal Utility Approach
• Given by Alfred Marshall.
• Utility can be measured in terms of cardinal numbers like 1, 2, 3,........etc.
• When we consume a bread, for instance, we can say that we got 3 utils (Units)
of utility.
2. Ordinal Utility Approach
• Given by Hicks.
• Utility can only be ranked as “high” or “Low”;
• It can’t be expressed in terms of units.
• We can only say that a cup of tea gives us more satisfaction than a cup of
coffee.
Types of Utility:-
1. Total Utility:- Hypothetical unit of measuring Utility is Called as Util
• Sum total of utility derived from the consumption of all the units of a
commodity.
2. Marginal utility:-
• Additional Utility on account of consumption of one more unit of a commodity.
• For instance, if 10 units of a commodity yield 100 utils and 11th unit of the
commodity yields 110 utils, then marginal utility is 110-100=10 utils.
It is measured as under:- 𝑀𝑈𝑛 = 𝑇𝑈𝑛 + 𝑇𝑈𝑛−1

Law Of Diminishing Marginal Utility
Intensity of wants tends to decrease as more and more units of a commodity are
consumed.
• So, the successive units of commodity give less and less satisfaction.
• It means that MU tends to decline with the consumption of more and more units of a
commodity.
• Law of Diminishing MU states that as more and more units of a commodity are
consumed, MU derived from every additional unit must decline. It happens
in respect of all goods and services.
• Also known as Fundamental Law of Satisfaction or Fundamental Psychological Law.
Lecture - 10
Demand analysis
Demand
The ability and willingness to buy a particular quantity of a commodity at the prevailing
price in a given period of time.
For example:
Daily demand of milk of a person.
Demand and Quantity Demanded

Demand refers to different possible quantities to be purchased at different possible prices
of a commodity.
Quantity demanded refers to a specific quantity to be purchased against a specific price of
the commodity.
Demand Schedule
It is a table showing the relation between different quantities of a commodity to be
purchased at different prices of that commodity.
It has two types:-
1. Individual Demand Schedule

Individual demand schedule refers to demand schedule of an individual buyer or
consumer of a commodity in the market. It shows quantities of a commodity which
an individual buyer will buy at different possible prices of that commodity at a point
of time. Following table represents an individual demand schedule.
2. Market Demand Schedule.

In Every market, there are several buyers/ consumers of a commodity. Market
demand schedule represents demand for a commodity by all consumers in the
market. It shows different quantities of a commodity which the consumers demand at
different possible prices of the commodity at a point of time.
• If we suppose that there are only two consumers in the market, market demand
schedule for Good-x may be shown as under –
Assumption:- There are only two consumers in the market.
Note:- It must be noted here that the inverse relationship between own price of the
commodity and its quantity demanded holds good both in case of individual demand
schedule and market demand schedule.
Demand Curve
Slope of Demand Curve
Normally, a demand curve slopes downward from left

to right, indicating a negative relationship between
price of a commodity and its quantity demanded.
Demand curve is a graphic presentation of demand schedule showing how quantity

demanded of a commodity is related to its own price. Like demand schedule, demand curve
also includes:-
1. Individual Demand Curve
2. Market Demand Curve.
1. Individual Demand Curve

It is a curve showing different quantities of a commodity that one particular buyer is
ready to buy at different possible prices of the commodity at a point of time.
2. Market Demand Curve:-
Market demand curve is the horizontal summation of individual demand curves. It shows
various quantities of a commodity that all the buyers in the market are ready to buy at
different possible prices of the commodity at a point of time.
It is a graphic presentation of market demand schedule.
Types of Demand
• Individual and market demand (like Monthly milk demand of house is 60 kg at 40
rupees per kg, Market demand is like of a whole city jammu)
• Organisation and industry demand(like demand of two wheelers in india is an
industry demand, or demand of Royal Enfield – organisation demand)
• Autonomous And derived demands(demand of a petrol is a derived demand)
• Short Term and long term demand (seasonal demand – study material of accounts
assistant exam, long term demand of JK Board books)
Determinants of Demand or Demand Function
Demand function shows the relationship between demand for a commodity and its various
determinants. It shows how demand of a commodity is related to own price of the
commodity, income of the consumer or other determinants. Let’s discuss these
determinants one by one.
𝐷𝑥 = 𝑓 𝑃𝑥 , 𝑃𝑟 , 𝑌, 𝑇
1. Price of the commodity – Other things being constant, with a rise in own price of
the commodity, its demand contracts, and with a fall in its own price, the demand
increases.
This inverse relationship between price of the commodity and its demand is known
as Law of Demand.
2. Price of Related Goods – Demand for a commodity is also influenced by change in
the price of related goods. They are of two types
I. Substitute Goods
II. Complementary Goods
Substitute Goods Complementary goods
1. Substitute goods are those goods 1. Complementary goods are those
which can be interchanged for use. goods which complete the demand
2. When price of a substitute good for each other.
increase, demand for a given good 2. When price of a complementary
(say Good-X) rises and vice versa. good increases, demand for a given
Example – tea and coffee, Pepsi and coke, good (say Good - X) falls and vice
ball pen and ink pen. versa.
3. Income of the consumer – Change in the income of the consumer also influences
his demand for different goods. The demand for normal goods increases with
increase in income and vice versa. On the other hand, the demand for inferior goods
decreases with increase in income and vice versa.
Normal Goods Inferior Goods

• Positive relationship between income • Negative (or inverse) relationship
and quantity demanded. between income and quantity
• Income effect is positive. demanded.
• Normal goods may or may not be the • Income effect is negative,
essential of life • Inferior goods are essential of life.
• Always inverse relation between own • In case of inferior goods, there may or
price of the commodity and quantity may nor be an inverse relation and
demanded (called as law of demand) quantity demanded (law of demanded
may fail).
4. Tastes and Preferences – Tastes and preferences of the consumer are influenced
by advertisement, change in fashion, climate, new inventions etc.
5. Future Expectations - If a consumer expects a fall in the price of a commodity in
the near future, his demand for the commodity also falls and vice versa.
6. Population size/ Number of Buyers - Positive relationship
Law of Demand
The law of Demand states that other factors remaining constant, there is an inverse
relationship between quantity demanded and price of the commodity. i.e.,
Quantity demanded increases with decrease in price and decreases with increase in price.
The term “other factors remaining constant” means that all the other determinants of
demand other than its price, remain constant.
The law may be explained with the help of the following demand schedule and demand
curve. Demand Schedule
𝑃𝑥 (𝑹𝒖𝒑𝒆𝒆𝒔) 𝑄𝑥 (𝑼𝒏𝒊𝒕𝒔)
10 100
9 150
8 200
The schedule shows that quantity demanded increased from 100 to 150 units when own
price of the commodity reduces form Rupees 10 to Rupees 9 per unit. Likewise, quantity
demanded increases from 150 to 200 units when own price of the commodity reduces
from Rs 9 to Rs 8 per uni. It may be further illustrated with the help of a Demand curve.
If a price determinant will change, like

Law of Demand price of the product increase or
4500 decrease, you will move along the curve
4000 Contraction in up or down.(considering contraction or
3500 demand
expansion of demand)
3000
Cost 2500 Expansion in
If in determinants there is any change in
2000 demand
any non price determinant, the whole
1500
curve will shift.
1000
500 Example: -
0 Your Income increase
2 3 4 5 6 7 8 9 10 - This Curve will shift left
Demand
Your Income Decrease
- Curve will shift right
Assumptions of the Law:
• Law of demand holds good when the determinants of demand other than its price
remain the same.
• So, income of the consumer, his tastes and preferences price of related goods, future
expectations etc., are assumed to be the same and do not change.
Exceptions of the Law

There are some commodities in case of which the law of demand fails and hence the
demand of the commodity rises with rise in its price and falls with fall in its price. In
such situations, the demand curve slopes upward from left to right.
1. Articles of Distinction – There are certain goods which are considered as

“Articles of Social Distinction”.
• These articles are demanded only because their prices are very high.
• Thus, these goods defy the law of demand. Precious Diamonds and vintage
cars are some examples.
2. Giffen Goods – Giffen goods are highly inferior goods, showing a very high
negative income effect.
• As a result, when price of these goods falls, their demand also falls.
• This is popularly known as Giffen Paradox.
3. Irrational Judgement – Law of demand fails when buyers judge the quality
of a commodity by its price. It is an irrational judgement.
• Accordingly, quantity demanded of these products rises even when their
prices are extremely high.
Lecture - 10
Theory of consumers demand using in difference and relevance
Indifference Curve
Important Assumptions for Indifference curve
1. Use of Ordinal Utility approach.
2. Money income of the consumer is given and does not change.
3. The consumer spends his income on two goods which are substitutes of each other.
4. The consumer is rational. He always tries to maximize his satisfaction.
5. Application of law of diminishing marginal utility.
Indifference set
It is a set of those combinations of two goods which offers the consumer the same level of
satisfaction. So that, the consumer is indifferent across all combinations in his indifference
set.
Mango Peach
2 10
Peach
3 5
4 3
5 2
Example – here with all combinations of mango
and peach, satisfaction is equal Mango
Each point on the curve shows a combination of two goods, offering same level of
satisfaction to the consumer. Thus, the consumer remains indifferent at every point of the
curve. Hence, the curve is known as Indifference curve
Indifference curve is a diagrammatic representation of an indifference set of a consumer.

It is a locus of all such points which show different combinations of two commodities
(like apple and oranges) offering the same level of satisfaction to the consumer.
Properties of an Indifference Curve

1. IC Slopes Downward:- IC Slopes downward from left to right. It means that IC has a
negative slope which implies that if the consumer wishes to have more of one good,
he must have less of the other.
Higher IC shows Higher level of
satisfaction
The below figure shows a set of
indifference curves one above the other.
A set of ICs drawn in a graph is known as
Indifference Map.
ICs do not touch or intersect

each other
Consider points A and B. These are on
the same IC1. Therefore, they are equal
in terms of satisfaction. So, A=B.
Similarly A=C, as these are on the same
indifference curve IC2.
Since A=B and A=C, we can conclude

that B=C. But this is not logical.
IC does not touch X-axis or Y-axis

This is because IC analysis assumes the consumption of two substitute goods. If IC touches
X-axis, it would mean that consumption of good Y is zero.
• Similarly, if IC touches X-axis, it would mean that the consumption of Good-Y is zero.
Budget Set
Assumptions:-
1. A consumer has a budget of Rs. 60 to be spent on two substitute goods, Good-X and
Good-Y.
2. Price of Good-X is Rs. 2per unit and Price of Good-Y is Rs. 1 per unit. 3. Income of
the consumer and price of the two substitute goods remains constant.
Accordingly, the following budget set can be formed.
Units of Good-X (price = Rs. 2 per unit) Units of Good –Y (Price = Rs.1 per Unit)
0 60
10 40
20 20
30 0
Budget Line:
• Diagrammatic presentation of budget Set.
• A line showing different possible combinations of two substitute goods (Here Good-X
and Good-Y), which a consumer can buy, his budget and price of the goods being
constant.
• Anywhere on the budget line, the consumer is spending his entire income on both
Good-X and Good-Y.
Budget Line slopes downwards. Because, given consumers’ income and prices of Good-X
and Good-Y, the consumer can buy more of Good-X only when he buys less of Good-Y.
Consumer’s Equilibrium
Such a situation is arrived when the price line is tangent to the indifference curve
(touches the IC from below).
Marginal Rate of Substitution

The Marginal Rate of Substitution can be defined as the
The Marginal Rate of Substitution is used to analyze the indifference curve.

Lecture - 10
Pricing under various forms of Markets
Pricing Under Various Forms of Market
Market – A market is a place where two parties can gather to facilitate the exchange of
goods and services.
The parties usually involved are buyers and sellers.
Market may be physical or virtual.(internet or telephony). Therefore, the existence of

shopping complexes is not a necessary condition for the existence of markets.
Market
Perfectly Monopolistic Monopoly Oligopoly

Competitive
Market
Perfectly Competitive Market: (ex: - Pen)

Firms cannot decide price on there own, market itself decides the price.
Demand line in a perfectly competitive market is always a horizontal straight line.
Features:
1. Large no of Buyers and sellers.
2. Homogeneous Product.(size, quality, features of the good or services will be same)
3. Buyers and sellers have full knowledge of prices.
So there is no price discrimination.
4. Freedom of entry and exit to any firm.
Short period is too short for a firm that it cannot leave the industry and too short
for a new firm to enter into the industry. Whereas,
Long period is long enough for a firm to leave the industry as well as long enough
for the new firm to enter the industry.
Thus, Entry and exit of firms is possible only in the long period, not in the short
period.
Important conclusions –
1. Firm is a price taker, not a price maker.
• In perfect competition, price is determined by the forces of market demand
and market supply. A firm sells its product at a given market price.
• A firm under perfect competition is a price taker, not a price maker.
• This is because of
a. Large number of firms;
b. Homogeneous product; and
c. Perfect Knowledge.
2. Demand Curve of the firm is perfectly elastic.

• It means that the firm can sell any amount of the product at the prevailing
market price.
• But a small increase in price would lead to zero demand.
12
10
8
Price per
unit 6
product 4
2
0
10 20 30 40 50
demand
3. A firm under perfect competition earns only normal profits in the long
run.
• It is owing to the fact that the firms have no control over price and cannot
increase the price to earn more profit.
________________________________________________________________________
Average Revenue | suppose company is selling pen for Rs 10, in which there profit for
one pen is = Rs 1, which is Average revenue.
Marginal Revenue | Suppose same company were producing 100 objects, now if they
produce 1 extra unit of the product so due to that extra unit, what they earn is called
Marginal Revenue, here Marginal revenue = Rs 1.
So in this case of market, AR = MR

Monopoly
• Mono refers to a single and poly to control.
• monopoly refers to a market situation in which there is only one seller of a commodity.
• Under monopoly there is no difference between firm and industry (An industry is a
group of firms producing a particular product).
• There are no close substitutes of the monopoly product and there are legal, technical
or natural barriers to the entry of new firms in the monopoly market.
• A monopolist has complete control over price and can also practice price
discrimination.
• Cartels
It refers to the formation of a group by the competing firms in the market. Of
course, this is possible when the number of firms is small. The group as a whole
secures monopoly control of the market.
Main features
1. One seller and large number of buyers
• Under monopoly, there is a single producer. He may be alone, or there may be
a group of partners or a joint stock company .
• However there is a large number of buyers of the product.
• Because he is a single seller, the monopolist enjoys full market control.
• He can fix the price of his product as he desires.
• The monopolist, thus, is a price maker.
2. Restrictions on the entry of new firms

• Usually there are patent rights.
• Because of these restrictions, the monopolist earns extra-normal profits both
in the short period as well as in the long period.
3. No Close Substitutes
• A monopoly firm produces a commodity that has no close substitutes.
• For instance, there is no close substitute of railways in India as a bulk carrier.
4. Full control over price

• Being a single seller of the product, a monopolist has full control over price. A
monopolist is therefore a price maker.
5. Price Discrimination
• Price discrimination refers to the practice of charging different prices from
different buyers for the same good. A monopolist may charge different prices
from different customers according to his own will.
Monopolistic Competition
• Monopolistic competition is a form of the market in which there are many buyers and
sellers of the product, but the product of each seller is different from the other. Thus,
there are many sellers selling a differentiated product.
• This product differentiation is generally promoted through brand name or trademark.
Trademark or brand name gives some monopoly to the firms For example:- Firms
producing different brands of toothpastes viz., Colgate, Pepsodant, and Close up.
• Monopolistic competition shares features of both perfect competition and monopoly.
• Different firms often charge different prices for their product and therefore, tend to
exercise some control over price.
• On the other hand, since many firms are producing a commodity (like toothpaste),
there is competition in the market.
• No firm is able to exercise full control over price of the product.
• Therefore, we can say that a firm under monopolistic competition exercises only a
partial control over price.
Features of Monopolistic Competition

1. Large Number of Sellers:
• There are large numbers of firms selling closely related, but not homogeneous
products.
• Each firm acts independently and has a limited share of the market. So, an
individual firm has limited control over the market price.
• Large number of firms leads to competition in the market.
2. Product Differentiation:
• Each firm is in a position to exercise some degree of monopoly control over
price through product differentiation.
• Product differentiation refers to differentiating the products on the basis of
brand, size, color, shape, etc. The product of a firm is close, but not perfect
substitute of other firm.
• Implication of ‘Product differentiation’ is that buyers of a product differentiate
between the same products produced by different firms. Therefore, they are
also willing to pay different prices for the same product produced by different
firms. This gives some monopoly power to an individual firm to influence
market price of its product.
• Some examples of Product Differentiation:
i. Cycles: Atlas, Hero, Avon, etc.
ii. Tea: Tata tea, Today tea, Taj mahal etc.
iii. Soaps: Lux, Hammam, Lifebuoy, Pears, etc.
3. Selling costs:
Under monopolistic competition, products are differentiated and these differences
are made known to the buyers through selling costs.
• Selling costs refer to the expenses incurred on marketing, sales promotion and
advertisement of the product.
• Such costs are incurred to persuade the buyers to buy a particular brand of the
product in preference to competitor’s brand.
• It must be noted that there are no selling costs in perfect competition as there
is perfect knowledge among buyers and sellers. Similarly, under monopoly,
selling costs are of small amount (only for informative purpose) as the firm
does not face competition from any other firm.
4. Freedom of Entry and Exit:

Under monopolistic competition, firms are free to enter into or exit from the
industry at any time they wish.
5. Lack of Perfect Knowledge:

Buyers and sellers do not have perfect knowledge about the market conditions.
• Selling costs create artificial superiority in the minds of the consumers and it
becomes very difficult for a consumer to evaluate different products available
in the market.
• As a result, a particular product (although highly priced) is preferred by the
consumers even if other less priced products are of same quality.
6. Pricing Decision:
A firm under monopolistic competition is neither a price- taker nor a price-maker.
However, by producing a unique product, each firm has partial control over the
price. The extent of power to control price depends upon how strongly the buyers
are attached to his brand
Oligopoly
It is a form of market in which there are few big firms and a large number of buyers of a
commodity. Each firm has a significant share of the market.
• Price and output decisions of one firm affect the price and output decision of the
other firms in the market.
• For example, there are only a few car producers in the Indian auto market like Ford,
Toyota, Audi, BMW etc. Each one of them has a significant share in the market
Features:-
1. Small number of Big Firms
There is a small number of bigger firms.
• A firm in oligopoly enjoys partial control over price through brand loyalty
(positive feeling towards a brand). Brand loyalty is achieved through heavy
advertisement.
• However, full control over price is not possible as there are other competitors in
the market.
2. High Degree of interdependence

• There is a very high degree of interdependence among the competing firms
with regard to their price and output policy.
• Price and output behavior of one firm often leads to reaction by the other
firms.
3. Formation of Cartels
• When there are a few producers in the market, there is a tendency to form
cartels in order to avoid price competition and to achieve monopoly control
over the market.
• Formation of Organisation of Oil Producing Countries (OPEC) is an example in
this regard.
• In this way, Oligopoly is converted into monopoly. As a result, there is low level
of output, high product price and extra-normal profits.
4. Entry Barriers
• there are barriers to the entry of new firms created largely through patent
rights.
• In this way, existing firms continue to control the market.
5. Difficult to trace firm’s demand curve

• It is not possible to determine a firm’s demand curve under oligopoly. This is
because of high interdependence among the competing firms.
• Thus, when a firm raises its price, the buyers will shift to other firms.
• When the firm lowers its price, the other firms may lower their price more,
• It implies that there is no specific response of demand to change in price. This
makes it impossible to draw any specific demand curve for a firm under
oligopoly.
6. Non-price competition
• Under Oligopoly, firms always try to avoid price competition.
• Instead they focus on non price competition.
• For example, in India, both Coke and Pepsi sell their product at the same price.
But, in order to increase its share in the market, each firm adopts the policy of
aggressive non-price competition.
• Coke and Pepsi sponsor different games and sports. They also offer schemes.
• Non price competition leads to brand loyalty. Greater the brand loyalty, higher
the market control or control over price
Classification of Oligopoly
1. Collusive oligopoly
It is a form of oligopoly in which there are few firms in the market and all of them
decide to avoid competition through a formal agreement. They agree to form a
cartel. Price and output of the member firms is decided in cooperation with each
other.
• This is the reason it is also known as Cooperative Oligopoly.
• Sometimes, a leading firm in the market is accepted as a price leader. Members
of the cartel accept the price policy as specified by the price leader.
2. Non-Collusive Oligopoly
It is a form of Oligopoly in which there are few firms in the market and each firm
pursues its own price and output policy independent of the other firms.
• Each firm tries to increase its market share through competition.
• Competition is preferred over collusion (Agreement) for profit maximization.
• Because there are only a few big firms in the market, there is a cut throat
competition. Brand loyalty is developed through aggressive advertisement
3. Perfect Oligopoly
If Oligopoly firms are producing homogeneous products, it is called perfect
oligopoly.
4. Imperfect Oligopoly
If Oligopoly firms are producing differentiated products, it is called imperfect
Oligopoly.
Monopoly Monopolistic Oligopoly
(Eg Indian Railways)
No of firms = Large no of Firms Few/Limited but Large.

single/group of partners
Substitutes = no class Available (differentiated) Few
substitutes
Entry of new Firms = Allowed Restricted
Restricted firms
Price Control = Partial Partial
Complete
Therefore price Lack of knowledge of High degree of

discrimination possible Market Interdependence
Price Price Price
demand demand demand
Demand curve of Monopoly Monopolistic Oligopoly
Due to
• Higher level of investment
• Merger
• Economies of scale (combinedly use each others resources to inc profitability)
________________________________________________________________
Demand supply graph for Perfectly Competitive Market
Equilibrium Price
point
Lecture - 11
Concepts of GRAM Panchayat Development Plan (GPDP)
Gram Panchayat Development Plan (GPDP)

- Sabki yojana, Sabka Vikas
- By the ministry of Panchayati Raj (created in May 2004)
First time -
- Peoples plan campaign (2nd October 2018- 31st December 2018)
- the peoples plan campaign was rolled out as “Sabki yojana Sabka Vikas” from
2nd October to 31st December 2018.
- During the campaign, structural gram Sabha meetings held for preparing gram
panchayat development plan for the next financial year 2019-2020.
- The campaign is being undertaken on a large scale, given the number of gram
panchayats in the country.
- Special efforts have been made to ensure maximum participation of vulnerable
sections of society like SC/ST/women etc.
- The Gram panchayat development plan aims to strengthen the role of 31 lakh
elected panchayat leaders and 2.5 crore SHG women under DAY-NRLM in
effective gram Sabha.
- There will be a public information campaign of all programmes in Gram
panchayat office and on Gram Samvad App.
- The structured gam Sabha meetings will be spread over 2nd October – 31st
December, with physical presence and presentation by frontline workers/
supervisors on 29 sectors –
1. Agriculture 13. Roads 23. Health and sanitation
2. Land improvement 14. Rural electrification 24. Family welfare
3. Minor irrigation 15. Non-conventional 25. Women and child
4. Animal husbandry energy development
5. Fisheries 16. Poverty alleviation 26. Social welfare
6. Social forestry program 27. Welfare of weaker
7. Minor forest produce 17. Education sections,
8. Small scale industries 18. Vocational education 28. public distribution
9. Khadi, Village and 19. Adult and informal system
cottage industry education 29. Maintenance of
10. Rural housing 20. Libraries community assets
11. Drinking water 21. Cultural activities
12. Fuel and fodder 22. Markets and fairs
Why GRAM Panchayat development plan?
1. Judicious planning with the involvement of all the stakeholders is critical for the
success of the planning.
2. Consolidation of all financial resources at GP level.
3. Polling of resources for optimum outcomes.
4. Development works in GP in prioritized manner through collective vision.
5. Community involvement leading to quality works and acceptance by local
inhabitants.
6. Planning only way to facilitate poverty free GPs
7. Activate specific time frame development goals.
8. Strengthens bonds between govt. GP and local inhabitants leading to responsive
government.
Aims
1. To structure gram Sabha meetings for preparing gram panchayat development plan
for the next financial year.
2. Special efforts were made for the maximum participation of vulnerable sectors of
the society like ST/SC/Women etc.,
3. To promote transparency in this campaign by involving members of Gram Sabha
Development of rural areas.
4. Aims to strengthen the role of 31 lakh elected panchayat leaders and 2.5 cr SHG
women.
5. There will be public info campaign and gram Samvad app.
6. Total 29 sectors.
7. Public display all sources of funds
Scope
Human development Sex ratio | malnutrition | drop out rate
CIVIC SERVICE Sanitation| drinking water | playground
Economic development Agriculture | irrigation
Disaster Management Drought | Famine.
Shortcomings
1. Lack of awareness and participatory planning.
2. Departments working in isolation.
3. Review of GPDP at block/district/state level nonexistence.
4. No Relation between GPDP and work actually undertaken.
5. Lack of technical support to GPs for GPDP preparation.
6. Lack of plan integration.
7. Wishlist.
The Prime Minister launched the e-Gram Swaraj portal and app on occasion of
Panchayati Raj Day (24 APRIL) via video conference.
About the Portal
• It is launched under the Union Ministry of Panchayati Raj single interface which will
provide details about development projects under Village Panchayats- from the
planning to implementation stage.
• It will list works being carried out under the Gram Panchayat Development Plan.
• The government mandates all the Gram Panchayats to formulate a GPDP for
economic development and social justice.
A campaign initiated under the ‘Sabki Yojana Sabka Vikas’ called People’s Plan Campaign
was launched for preparing the GPDP.
The People's Plan Campaign commenced from

1st May to 15th June, 2020 for preparing GPDP for 2020-21.
▪ Gram Panchayats have been mandated for the preparation of Gram Panchayat Development
Plan (GPDP) for economic development and social justice utilizing the resources available to
them.
▪ The GPDP planning process has to be comprehensive and based on participatory process
which involves the full convergence with Schemes of all related Central Ministries / Line
Departments related to 29 subjects enlisted in the Eleventh Schedule of the Constitution.
▪ Panchayats have a significant role to play in the effective and efficient implementation of
flagship schemes on subjects of National Importance for transformation of rural India.
▪ The campaign initiated under "Sabki Yojana Sabka Vikas" will be an intensive and structured
exercise for planning at Gram Sabha through convergence between Panchayati Raj
Institutions (PRIs) and concerned Line Departments of the State .
▪ The structured Gram Sabha meetings will have physical presence and presentation by
frontline workers/supervisors on 29 sectors of the 11th schedule.
▪ It is comprehensive and a participatory process which involves the full convergence with
Schemes of all related Central Ministries / Line Departments.
▪ Community involvement leading to quality works and acceptance by local inhabitants.
▪ Activates Panchayat Raj level bureaucracy.
▪ Strengthens bond between Government, Gram Panchayat & local inhabitants leading to
responsive government.

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Economics

JKSSB | Accounts Assistant Exam notes

1. Introduction of Economics – Basics concepts and Principles.

2. GDP and Budgeting including own resources generation and

3. Fiscal policy, meaning , Scope and Methodology.

6. Production cost and efficiency.

10. Pricing under various forms of Markets .

11. Concepts of GRAM Panchayat Development Plan (GPDP)

▪ Father of Economics – ADAM SMITH (Scottish philosopher) – (the economics that

▪ Great economic depression results in Macro Economics.

▪ Definition – Economics is social science concerned with the production, distribution

▪ Economy is of an individual, country, state, etc., when we measure its income,

▪ Economics is studied under two boarder topics: -

1. Capitalist economy / market economy

Why do economic problem arise

Definition Microeconomics is the Macroeconomics studies

Top Three Central Problems of economy.

What to How to produce? For whom to

National Income/Output [GDP|GNP|NNP|NDP]

• At base year prices • At current years prices

▪ 2019 estimates - 2.9 $ Trillion India Economy

▪ NNP (Net National Product)

Growth of every year is w.r.t base year(previous year) example : -

GVA (Gross Value Addition)

▪ Benefits of economic growth

▪ Side Effects → Inequalities and environment degradation.

▪ Per Capita Income = (GDP / Population)

• Equitable distribution – Jisko Jitni zaroorat hai use utna do.

Nominal GDP Real GDP

The domestic territory of a country includes the following: -

Normal Resident of a country:-

Factor Income Transfer Income

• The components of GDP include consumption expenditures (C), investments (I),

Not included in GDP

❖ When an economy experiences several consecutive quarters of positive GDP

It has two aspects:-

Objectives of Govt Budget

GDP Growth:- Achieved in two ways:-

Reallocation of Resources: Reallocation of resources in the manner such that there is a

This is done by imposing higher rate of taxation on goods whose production is to be

Economic Stability:- Government budget is a tool to prevent economy from inflation or

The budget is divided into three types

❑ Components of Government Budget

Indirect tax Direct tax

Expenses included in Revenue Expenditure :-

(a) Capital Receipts:-

Items included in Capital Receipts :

(b) Capital Expenditure:-

Panchayati Raj Act

In general, Panchayats in our country receive funds in the following ways:

One can draw the following broad conclusions:

This calls for a two-fold approach

Fiscal policy, meaning , Scope and Methodology.

ARTICLE 122 requires the government to present to parliament the statement of

– Budget word is not used anywhere in out Constitution

Revenue Account Capital Account

Objectives of Fiscal Policy:

Fiscal Policy government follow are classified into following

❑ Contractionary Fiscal Policy

❑ Expansionary Fiscal Policy

Types of Fiscal policy Changes in govt spending Changes in taxes

❑ Neutral Fiscal Policy

1. Components of spending (Expenditure Policy)

Public borrowings include both internal and external borrowings.