introductory economics

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Copyright 2006, New Age International (P) Ltd., Publishers Published 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 retrieval system, electronic or mechanical, without the written permission of the publisher. All inquiries should be emailed to

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


NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS 4835/24, Ansari Road, Daryaganj, New Delhi - 110002 Visit us at

Dedicated to my mother Lakshmi R. Dutta



PREFACEI have immense pleasure to bring out the present book which is basically designed to cover complete syllabus of Economics for Higher Secondary second year examination (Class XII) as introduced by the Nagaland Board of Secondary Education from the session 20042005. The book 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 exactly in conformity to NBSE syllabus. As such the present book has been written particularly keeping 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 with Macroeconomics. The new syllabus containing microeconomics and macroeconomics with eleven units in total have been suitably divided into twenty seven chapters. Unit-5 and unit-11 in the contents are meant for CBSE students only. At the end of the book, selected basic 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 subject more clearly and analytically. Past years examination question papers of the NBSE from 1995 onwards have also been incorporated. I am thankful to my wife Mili Dutta for constant inspiration and my lovely daughter Sneha who has given me much time to work on it smoothly. I am also thankful to my colleagues who have directly or indirectly lent their helping hands. I am very much grateful to Mr. Saumya Gupta (Managing Director), Mr. V.R. Damodaran (Production Editor) and Saba Khan (Development Editor) of M/s New Age International (P) Limited, New Delhi for taking prompt and sincere initiative for publishing the book in a right time. I would always invite critical views and suggestions for improvement of the book from both students and fellow teachers.

SUBHENDU DUTTA Department of Economics, Public College of Commerce, Dimapur: Nagaland



PART A INTRODUCTORY MICROECONOMICSUNIT-1 1. INTRODUCTION TO MICROECONOMICS What economics is all about? Wealth definition; Welfare definition, Scarcity definition, Subject matter of economics, Positive and normative economics; Questions for review. 2. PROBLEMS OF AN ECONOMY Central problems of an economy, Production possibility curve, Uses of production possibility curve, Opportunity cost; Questions for review. UNIT-2 3. CONSUMER BEHAVIOUR Consumers equilibriumutility maximization, Utility, Total utility, Marginal utility, Law of diminishing marginal utility; Questions for review. 4. DEMAND AND LAW OF DEMAND Meaning of demand, Market demand, Determinants of demand, Demand schedule and demand curve, Law of demand, Assumptions of the law, Why does the law of demand operate? Exceptions to the law of demand, Movement along and shifts in demand curve; Questions for review. 5. ELASTICITY OF DEMAND 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 elasticity of demand, Cross elasticity of demand, Determinants of price elasticity of demand; Questions for review. UNIT-3 6. THEORY OF PRODUCTION Meaning of production, Meaning of production function, Returns to a factor and returns to scale, Law of variable proportions, Law of diminishing returns, Assumptions of law, Returns to scale; Questions for review. 41 32 21 16 11 3


SUPPLY AND ITS DETERMINANTS Meaning of supply, Supply schedule, Supply curve, Market supply, Law of supply, Determinants of supply, Supply function, Movement along and shifts in supply curve; Questions for review.



CONCEPTS OF COST 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, Average variable cost, and Marginal costs; Relationship between average cost and marginal cost; Questions for review.



CONCEPTS OF REVENUE Meaning of revenue, Total, Average and Marginal revenue, Relationship between average and marginal revenue; Questions for review. UNIT-4



FORMS OF MARKET AND PRICE DETERMINATION Meaning of market, Forms of market, Perfect competition, Price and output determination under perfect competition, Monopoly, Monopolistic competition, Oligopoly, Duopoly; Questions for review. UNIT-5



FACTOR PRICE DETERMINATION Demand for a factor, Supply of a factor, Determination of price of a factor under perfect competition, Marginal productivity theory; Questions for review.



FACTOR PRICES, COMPARATIVE ADVANTAGE AND INTERNATIONAL TRADE Internal and International trade, Absolute factor price difference, Relative factor price difference, The classical theory of international tradeTheory of absolute advantageAdam Smith, Theory of comparative advantageDavid Ricardo, Theory of opportunity cost, Modern theory of international trade Heckscher and Ohlin, Terms of trade; Questions for review.


PART B INTRODUCTORY MACROECONOMICSUNIT-6 13. INTRODUCTION TO MACROECONOMICS Macroeconomicsmeaning, Distinction between micro and macroeconomics; Questions for review. UNIT-7 14. NATIONAL INCOME AND RELATED AGGREGATES Meaning of national income, National income at current and constant prices, Circular flow of income, Concepts of GDP, GNP, NDP, NNP (at market price and factor cost), Private income, Personal income and Personal disposal income, National disposal income (gross and net). Income from Domestic product accruing to Private Sector, Transfer paymentsCurrent transfer payments and Capital transfer payments, Relationship among important national income aggregates; Questions for review. Appendix. 15. MEASUREMENT OF NATIONAL INCOMEVALUE ADDED METHOD 107 Measurement of national incomevalue added method, Steps to estimate national income by value added/product method, Precautions in the estimation of national income by product method, Difficulties of the product method; Questions for review. 16. MEASUREMENT OF NATIONAL INCOMEINCOME METHOD Precautions in the estimation of national income by income method, Difficulties of the income method; Questions for review. 17. MEASUREMENT OF NATIONAL INCOMEEXPENDITURE METHOD 113 Components of final expenditure, Precautions in the estimation of national income by expenditure method; Questions for review. UNIT-8 18. AGGREGATE DEMAND AND AGGREGATE SUPPLY Meaning of aggregate demand, Meaning of aggregate supply; Questions for review. 19. DETERMINATION OF INCOME AND EMPLOYMENT Classical theory of employment, Says Law of Markets, Assumptions of Says Law, Full employment and involuntary unemployment, Determination of income and employment; Questions for review. 118 115 110 94 91


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



CONCEPT OF MULTIPLIER Meaning of investment multiplier and its working; Assumptions of multiplier; Importance of Multiplier; Leakages in the Working of Multiplier; Questions for review.



EXCESS AND DEFICIENT DEMAND Meaning of excess demand, Impact of excess demand in the economy, Meaning of deficient demand, Impact of deficient demand in the economy, Causes of excess and deficient demand, Measures to correct excess and deficient demand, Availability of credit, Foreign trade policy; Questions for review. UNIT-9



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



BANKING Commercial banksmeaning and functions. Central bankmeaning and functions; Questions for review. UNIT-10



GOVERNMENT BUDGETMEANING AND COMPONENTS Meaning of budget, Components of budget, Revenue budget, Capital budget, Objectives of budget; Balanced budget, Surplus budget and deficit budget, Types of deficit; Questions for review. UNIT-11





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