Introductory Economics- Micro and Macro

Download Introductory Economics- Micro and Macro

Post on 07-Jul-2016

98 views

Category:

Documents

0 download

Embed Size (px)

DESCRIPTION

A must-have book on introductory economics. Well presented and illustrated.

TRANSCRIPT

  • New Delhi Bangalore Chennai Cochin Guwahati HyderabadJalandhar Kolkata Lucknow Mumbai RanchiVisit us at www.newagepublishers.comPUBLISHING FOR ONE WORLD

    NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS

  • Copyright 2006, New Age International (P) Ltd., PublishersPublished by New Age International (P) Ltd., Publishers

    All rights reserved.No part of this ebook may be reproduced in any form, by photostat, microfilm,xerography, or any other means, or incorporated into any information retrievalsystem, electronic or mechanical, without the written permission of the publisher.All inquiries should be emailed to rights@newagepublishers.com

    ISBN (13) : 978-81-224-2247-4

    PUBLISHING FOR ONE WORLD

    NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS4835/24, Ansari Road, Daryaganj, New Delhi - 110002Visit us at www.newagepublishers.com

  • Dedicated to my motherDedicated to my motherDedicated to my motherDedicated to my motherDedicated to my motherLakshmi R. DuttaLakshmi R. DuttaLakshmi R. DuttaLakshmi R. DuttaLakshmi R. Dutta

    (v)

  • PREFACE

    I have immense pleasure to bring out the present book which is basically designed to covercomplete syllabus of Economics for Higher Secondary second year examination (Class XII) asintroduced by the Nagaland Board of Secondary Education from the session 20042005. Thebook will also be useful for the students appearing in class XII examination under CBSE.

    The introduction of new syllabus has created vacuum in respect of suitable books exactlyin conformity to NBSE syllabus. As such the present book has been written particularlykeeping in mind the problems faced by students studying economics as a paper under NBSE.The book will equally serve the purpose of students opting either Arts or Commerce stream.The book is written in a very simple language understanding that it is meant for beginners.The book contains two Parts-A and B. Part-A analysis Microeconomics and Part-B deals withMacroeconomics. The new syllabus containing microeconomics and macroeconomics witheleven units in total have been suitably divided into twenty seven chapters. Unit-5 andunit-11 in the contents are meant for CBSE students only. At the end of the book, selectedbasic economic terms have been included under the heading Elementary Economic Terms.These are the terms most commonly and frequently used in economics and also in real life.The underlying idea is to provide a student general understanding of economics as a subjectmore clearly and analytically. Past years examination question papers of the NBSE from 1995onwards have also been incorporated.

    I am thankful to my wife Mili Dutta for constant inspiration and my lovely daughterSneha who has given me much time to work on it smoothly. I am also thankful to mycolleagues who have directly or indirectly lent their helping hands. I am very much gratefulto Mr. Saumya Gupta (Managing Director), Mr. V.R. Damodaran (Production Editor) and SabaKhan (Development Editor) of M/s New Age International (P) Limited, New Delhi for takingprompt and sincere initiative for publishing the book in a right time.

    I would always invite critical views and suggestions for improvement of the book fromboth students and fellow teachers.

    SUBHENDU DUTTADepartment of Economics,

    Public College of Commerce,Dimapur: Nagaland

    Email:Subhendu99@rediffmail.com

  • CONTENTS

    PART AINTRODUCTORY MICROECONOMICS

    UNIT-1

    1. INTRODUCTION TO MICROECONOMICS 3

    What economics is all about? Wealth definition; Welfare definition, Scarcitydefinition, Subject matter of economics, Positive and normative economics;Questions for review.

    2. PROBLEMS OF AN ECONOMY 11

    Central problems of an economy, Production possibility curve, Uses ofproduction possibility curve, Opportunity cost; Questions for review.

    UNIT-2

    3. CONSUMER BEHAVIOUR 16

    Consumers equilibriumutility maximization, Utility, Total utility, Marginalutility, Law of diminishing marginal utility; Questions for review.

    4. DEMAND AND LAW OF DEMAND 21

    Meaning of demand, Market demand, Determinants of demand, Demandschedule and demand curve, Law of demand, Assumptions of the law, Whydoes the law of demand operate? Exceptions to the law of demand, Movementalong and shifts in demand curve; Questions for review.

    5. ELASTICITY OF DEMAND 32

    Meaning of price elasticity of demand, Kinds of price elasticity of demand,Measurement of price elasticity of demandpercentage, total expenditure/outlay, arc method, geometrical method and revenue method. Income elasticityof demand, Cross elasticity of demand, Determinants of price elasticity ofdemand; Questions for review.

    UNIT-3

    6. THEORY OF PRODUCTION 41

    Meaning of production, Meaning of production function, Returns to a factorand returns to scale, Law of variable proportions, Law of diminishing returns,Assumptions of law, Returns to scale; Questions for review.

  • 7. SUPPLY AND ITS DETERMINANTS 47

    Meaning of supply, Supply schedule, Supply curve, Market supply, Law ofsupply, Determinants of supply, Supply function, Movement along and shiftsin supply curve; Questions for review.

    8. CONCEPTS OF COST 54

    Cost of production, Real cost and nominal cost, Explicit and Implicit costs,Opportunity Alternative Transfer cost, Private, External and Social costs,Economic costs, Short run costs and long run costs; Fixed and variable costs;Total fixed cost, Total variable cost, Average cost, Average fixed cost, Averagevariable cost, and Marginal costs; Relationship between average cost andmarginal cost; Questions for review.

    9. CONCEPTS OF REVENUE 63

    Meaning of revenue, Total, Average and Marginal revenue, Relationshipbetween average and marginal revenue; Questions for review.

    UNIT-4

    10. FORMS OF MARKET AND PRICE DETERMINATION 67

    Meaning of market, Forms of market, Perfect competition, Price and outputdetermination under perfect competition, Monopoly, Monopolistic competition,Oligopoly, Duopoly; Questions for review.

    UNIT-5

    11. FACTOR PRICE DETERMINATION 74

    Demand for a factor, Supply of a factor, Determination of price of a factorunder perfect competition, Marginal productivity theory; Questions for review.

    12. FACTOR PRICES, COMPARATIVE ADVANTAGE ANDINTERNATIONAL TRADE 81

    Internal and International trade, Absolute factor price difference, Relativefactor price difference, The classical theory of international tradeTheory ofabsolute advantageAdam Smith, Theory of comparative advantageDavidRicardo, Theory of opportunity cost, Modern theory of international tradeHeckscher and Ohlin, Terms of trade; Questions for review.

  • PART BINTRODUCTORY MACROECONOMICS

    UNIT-6

    13. INTRODUCTION TO MACROECONOMICS 91

    Macroeconomicsmeaning, Distinction between micro and macroeconomics;Questions for review.

    UNIT-7

    14. NATIONAL INCOME AND RELATED AGGREGATES 94

    Meaning of national income, National income at current and constant prices,Circular flow of income, Concepts of GDP, GNP, NDP, NNP (at market priceand factor cost), Private income, Personal income and Personal disposalincome, National disposal income (gross and net). Income from Domesticproduct accruing to Private Sector, Transfer paymentsCurrent transferpayments and Capital transfer payments, Relationship among importantnational income aggregates; Questions for review. Appendix.

    15. MEASUREMENT OF NATIONAL INCOMEVALUE ADDED METHOD 107

    Measurement of national incomevalue added method, Steps to estimatenational income by value added/product method, Precautions in the estimationof national income by product method, Difficulties of the product method;Questions for review.

    16. MEASUREMENT OF NATIONAL INCOMEINCOME METHOD 110

    Precautions in the estimation of national income by income method, Difficultiesof the income method; Questions for review.

    17. MEASUREMENT OF NATIONAL INCOMEEXPENDITURE METHOD 113

    Components of final expenditure, Precautions in the estimation of nationalincome by expenditure method; Questions for review.

    UNIT-8

    18. AGGREGATE DEMAND AND AGGREGATE SUPPLY 115

    Meaning of aggregate demand, Meaning of aggregate supply; Questions forreview.

    19. DETERMINATION OF INCOME AND EMPLOYMENT 118

    Classical theory of employment, Says Law of Markets, Assumptions of SaysLaw, Full employment and involuntary unemployment, Determination ofincome and employment; Questions for review.

  • 20. CONSUMPTION FUNCTION 129

    Propensity to consume or psychological law of consumption, Average andmarginal propensity to consume and save; Propensity to save/saving function,Relationship between APC and MPC, Implication and Importance ofPsychological Law of Consumptions, Factors influencing consumption function,Questions for review.

    21. CONCEPT OF MULTIPLIER 135

    Meaning of investment multiplier and its working; Assumptions of multiplier;Importance of Multiplier; Leakages in the Working of Multiplier; Questionsfor review.

    22. EXCESS AND DEFICIENT DEMAND 140

    Meaning of excess demand, Impact of excess demand in the economy, Meaningof deficient demand, Impact of deficient demand in the economy, Causes ofexcess and deficient demand, Measures to correct excess and deficient demand,Availability of credit, Foreign trade policy; Questions for review.

    UNIT-9

    23. MONEYMEANING AND FUNCTIONS 146

    Barter system, Meaning of money, Functions of money, Supply of money,Components of money; Questions for review.

    24. BANKING 154

    Commercial banksmeaning and functions. Central bankmeaning andfunctions; Questions for review.

    UNIT-10

    25. GOVERNMENT BUDGETMEANING AND COMPONENTS 160

    Meaning of budget, Components of budget, Revenue budget, Capital budget,Objecti