Introductory Economics

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<p>THIS PAGE IS BLANK</p> <p>NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERSPUBLISHING FOR ONE WORLD</p> <p>New Delhi Bangalore Chennai Cochin Guwahati Hyderabad Jalandhar Kolkata Lucknow Mumbai Ranchi Visit us at</p> <p>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</p> <p>ISBN (13) : 978-81-224-2247-4</p> <p>PUBLISHING FOR ONE WORLD</p> <p>NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS 4835/24, Ansari Road, Daryaganj, New Delhi - 110002 Visit us at</p> <p>Dedicated to my mother Lakshmi R. Dutta</p> <p>(v)</p> <p>THIS PAGE IS BLANK</p> <p>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.</p> <p>SUBHENDU DUTTA Department of Economics, Public College of Commerce, Dimapur: Nagaland</p> <p>THIS PAGE IS BLANK</p> <p>CONTENTS</p> <p>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</p> <p>7.</p> <p>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.</p> <p>47</p> <p>8.</p> <p>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.</p> <p>54</p> <p>9.</p> <p>CONCEPTS OF REVENUE Meaning of revenue, Total, Average and Marginal revenue, Relationship between average and marginal revenue; Questions for review. UNIT-4</p> <p>63</p> <p>10.</p> <p>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</p> <p>67</p> <p>11.</p> <p>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.</p> <p>74</p> <p>12.</p> <p>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.</p> <p>81</p> <p>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</p> <p>20.</p> <p>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.</p> <p>129</p> <p>21.</p> <p>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.</p> <p>135</p> <p>22.</p> <p>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</p> <p>140</p> <p>23.</p> <p>MONEYMEANING AND FUNCTIONS Barter system, Meaning of money, Functions of money, Supply of money, Components of money; Questions for review.</p> <p>146</p> <p>24.</p> <p>BANKING Commercial banksmeaning and functions. Central bankmeaning and functions; Questions for review. UNIT-10</p> <p>154</p> <p>25.</p> <p>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</p> <p>160</p> <p>26.</p> <p>FOREIGN EXCHANGE RATEMEANING AND DETERMINATION Demand for foreign exchange, Supply of foreign exchange, Spot and forward foreign exchange transaction, Exchange rate systemsFloating exchange rates, Pegged or rigidly fixed exchange rates, Managed flexibilityadjustable peg system, Crawling or trotting or gliding parity, System of clean float and dirty float, Band system; Questions for review.</p> <p>167</p> <p>27.</p> <p>BALANCE OF PAYMENTS ACCOUNTMEANING AND COMPONENTS Goods account, Services account, Unilateral transfers account, Long-term capital account, Short-term capital account, International liquidity account, Balance of trade, Balance of payments on current account, Balance of payments on capital account, Basic balance, Overall balance of payments, Accounting balance of payments, Autonomous and accommodating transactions, Deficit and surplus balance of payments. Questions for review. APPENDICES</p> <p>173</p> <p>179 179 200 215 228 233 234</p> <p>I. II. III. IV. V.</p> <p>Solved Questions From NBSE Exam. Papers Solved Numerical Problems NBSE Question Papers (19952005) How to Pass Exam in better way! Elementary Economic Terms APPENDICES</p> <p>THIS PAGE IS BLANK</p> <p>PART A</p> <p>INTRODUCTORY MICROECONOMICS</p> <p>THIS PAGE IS BLANK</p> <p>INTRODUCTION TO MICROECONOMICS</p> <p>3</p> <p>1WHAT ECONOMICS IS ALL ABOUT?</p> <p>INTRODUCTION TO MICROECONOMICS</p> <p>Economics is about economizing; that is, about choice among alternative uses of scarce resources. Choices are made by millions of individuals, businesses, and government units. Economics examines how these choices add up to an economic system, and how this system operates. (L.G. Reynolds) Scarcity is central to economic theory. Economic analysis is fundamentally about the maximization of something (leisure time, wealth, health, happinessall commonly reduced to the concept of utility) subject to constraints. These constraintsor scarcityinevitably define a tradeoff. For example, one can have more money by working harder, but less time (there are only so many hours in a day, so time is scarce). One can have more apples only at the expense of, say, fewer grapes (you only have so much land on which to grow foodland is scarce). Adam Smith considered, for example, the trade-off between time, or convenience, and money. He discussed how a person could live near town, and pay more for rent of his home, or live farther away and pay less, paying the difference out of his convenience. Economics as a subject came into being with the publication of very popular book in 1776, An Enquiry into the Nature and Causes of Wealth of Nations, written by Prof. Adam Smith. At that time it was called Political economy, which remained operational at least up to the middle part of the 19th century. It is since then that the economists developed tools and principles using inductive and deductive reasoning. In fact, the Wealth of Nations is a landmark in the history of economic thought that separated economics from other social sciences. The word Economics was derived from the Greek words Oikos (a house) and Nemein (to manage), which meant managing a household, using the limited money or resources a household has. Let us explain a few important definitions frequently referred to in the economic theory.</p> <p>3</p> <p>UNIT-1</p> <p>4</p> <p>INTRODUCTORY ECONOMICS</p> <p>Adam Smith (June 5, 1723-July 17, 1790) was a Scottish political economist and moral philosopher. His Inquiry into the Nature and Causes of Wealth of Nations was one of the earliest attempts to study the historical development of industry and commerce in Europe. That work helped to create the modern academic discipline of Economics and provided one of the best-known intellectual rationales for free trade and capitalism. At the age of about fifteen, Smith proceeded to the University of Glasgow, studying moral philosophy under the never-to-be-forgotten (as Smith called him) Francis Hutcheson. In 1740 he entered the Balliol College of the University of Oxford, but as William Robert Scott has said, the Oxford of his time gave little if any help towards what was to be his lifework, and he left the university in 1746. In 1748 he began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of the progress of opulence, and it was then, in his middle or late 20s, that he first expounded the economic philosophy of the obvious and simple system of natural liberty which he was later to proclaim to the world in his Inquiry into the Nature and Causes of the Wealth of Nations.</p> <p>Wealth DefinitionThe early economists like J.E. Cairnes, J.B.Say, and F.A.Walker have defined economics as a science of wealth. Adam Smith, who is also regarded as father of economics, stated that economics is a science concerned with the nature and causes of wealth of nations. That is, economics deal with the question as to how to acquire more and more wealth by a nation. J.S.Mill opined that it is the practical science dealing with the production and distribution of wealth. The American economist F.A.Walker says that economics is that body of knowledge, which relates to wealth. Thus, all these definitions relate to wealth. However, the above definitions have been criticized on various grounds....</p>


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