Class 12 Economics Textbook PDF - Maharashtra

The Coordination Committee formed by GR No. Abhyas - 2116/(Pra.Kra.43/16) SD - 4 Dated 25.04.2016 has given approval to prescribe this textbook in its meeting held on 30.01.2020 and it has been decided to implement it from academic year 2020-21. ECONOMICS STAND...

The Coordination Committee formed by GR No. Abhyas - 2116/(Pra.Kra.43/16) SD - 4 Dated 25.04.2016 has given approval to prescribe this textbook in its meeting held on 30.01.2020 and it has been decided to implement it from academic year 2020-21. ECONOMICS STANDARD TWELVE Download DIKSHA App on your smartphone. If you scan the Q.R.Code on this page of your textbook, you will be able to access full text and the audio-visual study material relevant to each lesson provided as teaching and learning aids. 2020 Maharashtra State Bureau of Textbook Production and Curriculum Research, Pune. First Edition : 2020 © Maharashtra State Bureau of Textbook Production and Second Reprint : 2022 Curriculum Research, Pune - 411 004. The Maharashtra State Bureau of Textbook Production and Curriculum Research reserves all rights relating to the book. No part of this book should be reproduced without the written permission of the Director, Maharashtra State Bureau of Textbook Production and Curriculum Research, ‘Balbharati’, Senapati Bapat Marg, Pune 411004. Economics Subject Committee: Illustrations and Cover : Shri Bhatu Ramdas Bagale Dr. Manjusha Musmade (Chairperson), Pune Translation Coordination : Mrs. Sunita Sunil Kamte, Mumbai Shri Ravikiran Jadhav Shri Rajendra Fakir Wekhande, Thane Special Officer (Economics) Mrs. Shital Sampat Nimase, Ahmednagar Typesetting : Miss. Archana Shriniwas, Mumbai DTP Section, Textbook Bureau, Pune Shri Ravikiran Jadhav, Member-Secretary Paper : 70 GSM Cream wove Print Order : Printer : Economics Study Group: Shri Subhash Rajdhar Patil, Jalgaon Mrs. Usha Bhaskar Kale, Kolhapur Production : Mrs. Shobha Subhash Nagare, Nashik Shri Sachchitanand Aphale Mrs. Swati Milind Wagh, Mumbai Chief Production Officer Shri Raghunath Narayan Patil, Shri Prashant Harne Kolhapur Production Officer Shri Sharadkumar Uttam Shete, Sindhudurg Mrs. Vandana Dilip Patil, Pune Publisher : Mrs. Kavita Vilas Pol, Kolhapur Shri Vivek Uttam Gosavi Dr. Sudhakar Ramkrishna Kute, Controller Aurangabad Maharashtra State Textbook Shri Kashiram Parshuram Bawisane, Bureau, Prabhadevi, Buldhana Mumbai - 400 025  Preface Dear Students, We welcome you to Std. XII. You have already been acquainted with the subject of Economics as a separate discipline in Std. XI. The textbook of Std. XI includes various important changes that have taken place in Indian economy in the recent times. This textbook has also introduced many terms and concepts in Economics. The revised syllabus of Std. XII is also based on the maxims of teaching such as simple to complex, concrete to abstract etc. with ‘constructivism’ as the most important goal of education. This book prepared by the Maharashtra State Bureau of Textbook Production and Curriculum Research, incorporates both Micro and Macro approach to the study of Economics. It covers a detailed explanation of micro-economic concepts such as utility, laws of demand and supply, different market structures etc. For the first time, macro-economic concepts such as public finance, money market and capital market in India, foreign trade etc. have been introduced to the students. Index Numbers from Statistics have been included as a remarkable change in the revised syllabus. This will significantly benefit the students to pursue their advanced studies. Statistics has been introduced intentionally, to prepare the students to face new challenges in this competitive age based on Information and Technology. The study of Economics is of utmost importance to understand the process of development of a country. Units in this book are logically arranged with the purposeful intention of providing comprehensive introduction as well as developing interest for the subject among the students of Std. XI and XII. Following the practice similar to Std. XI, no compromise has been made whatsoever with respect to the use of economic language. A list of abbreviations and glossary of economic terms is provided towards the end of the textbook. Use QR code given in the text book for extra information and reference. The units in the syllabus are innovative and have practical application. They are selected without hindering the basic principles and goals of education. This will enable the students to be alert and capable to face the challenges of 21st century. Innovative exercises at the end of each unit will motivate the students to prepare for the competitive examinations in future. We look forward to a positive response from the teachers and students. Our best wishes to all! Vivek Gosavi Director Pune Maharashtra State Bureau of Date : 21 February 2020 Textbook Production and Bharatiya Saur : 2 Phalguna 1941 Curriculum Research, Pune  Class 12 Economics Competency Statement x Explains the subject matter of Micro and Macro Economics. x Explains the features of Micro and Macro Economics. x Explains the importance of the study of Micro and Macro Economics in practice. x Defines Total utility and Marginal utility. x Explains the Law of Diminishing Marginal Utility with the help of a table and diagram. x Examines cardinal approach to the measurement of utility. x Defines the concept of Demand. x Explains the Law of Demand with the help of a demand schedule and a demand curve. x Defines the concepts of Price, Income and Cross-elasticity of demand. x Analyses the various types of price elasticity of demand with illustrations. x Applies quantitative skills to measure price elasticity of demand. x Defines the concept of Supply. x Explains the Law of Supply with the help of a supply schedule and a supply curve. x Defines various Revenue and Cost concepts and derives their calculations. x Defines Market. x Defines Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition. x Explains the features of different market structures. x Explains Equilibrium Price with the help of a suitable illustration. x Defines Index Numbers and examines its features. x Differentiates between Simple and Weighted Index Numbers. x Explains the steps in the construction of Index Numbers. x Applies quantitative skills to calculate Simple and Weighted Index Numbers. x Defines National Income. x Explains the concepts of GDP, GNP, NDP and NNP. x Explains the Output, Income and Expenditure methods of computing National Income. x Examines the structure of Public Finance. x Defines Public Revenue, Public Expenditure and Public Debt. x Analyzes the Tax and Non-Tax Sources of Public Revenue. x Examines the causes of rising Public Expenditure in India. x Defines Fiscal policy and Budget. x Explains the meaning and classification of Financial Markets. x Explains the structure of Money market and Capital market in India. x Defines Central Bank and Commercial Bank. x Explains the functions of Central Bank and Commercial Bank. x Examines the role and problems of Money market and Capital market in India. x Explains the reforms introduced in the Money and Capital markets in India. x Explains the role of Foreign Trade with reference to India. x Explains the Composition and Direction of India’s foreign trade. x Defines the concepts of Balance of Payments and Balance of Trade.  - For Teachers - Dear Teachers, Teacher erss, students the importance of data collection We are hhappy appy to introduce in the revised and data analysis. textbookk of Ec Econ Economics nomics for Std. 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Teachers as well as the introduced in a graded manner manner to facilitate students can use these references for extra knowledge building. reading and in-depth understanding of the thhe 3 Statistics is placed plac aced as the sixth sixt xthh unit un itt to to subject. facilitate integrative i nt ntegra a ti tive ve learning l ea earn rniing rn i n g through 3 Economic terms included in the Glo Glossary oss ssaryy are ar interdisciplinary inte in terd rdis isci cipl plin pl inar in aryy approach. ar a proach. ap highlighted in blue colour in each eacch chapter. ea cha haapt pter. 3 Askk questions q uestions on statistical information 3 List of abbreviations is pprovided rovi ro vidded totowards owa wards the related rel re lated to trends and patterns. Efforts have end of the textbook for for further f rtther clarification. fu claarification. cl been made to provide the latest data Best wishes forr a wonderful wonder erff ul teaching available. Teachers must explain to the experience!  Contents Tentative number Sr. No. Name of the Chapter Page No. of periods INTRODUCTION TO MICRO AND MACRO 1. 1-7 10 ECONOMICS 2. UTILITY ANALYSIS 8 - 16 10 3. A DEMAND ANALYSIS 17 - 26 10 3. B ELASTICITY OF DEMAND 27 - 36 10 4. SUPPLY ANALYSIS 37 - 45 12 5. FORMS OF MARKET 46 - 52 10 6. INDEX NUMBERS 53 - 60 10 7. NATIONAL INCOME 61 - 69 16 8. PUBLIC FINANCE IN INDIA 70 - 80 16 MONEY MARKET AND CAPITAL MARKET 9. 81 - 92 16 IN INDIA 10. FOREIGN TRADE OF INDIA 93 - 98 10 x GLOSSARY OF ECONOMIC TERMS  x LIST OF ABBREVIATIONS 99 - 104 Total : 130 x REFERENCES, IMPORTANT WEBSITES/LINKS DISCLAIMER Note : All attempts have been made to contact copy right/s (©) but we have not heard from them. We will be pleased to acknowledge the copy right holder (s) in our next edition if we learn from them. Front Page : Students of Std. XI have now come to Std. XII. They are going to study Economics as an independent subject. The front cover is a visual presentation of different economic concepts discussed in the textbook. Back Page : It shows various economic activities and symbolic representation of different financial institutions.  1 Introduction to Micro and Macro Economics Let's recall : likely the first person to have referred to the You have already studied in Class XI, study of individual firm and producer as the meaning and definitions of economics “Microeconomics.” Moreover, he referred given by different economists. to the study of the aggregate economy as “Macroeconomics.” You should know : Historical review of Micro Economics : Micro Economic analysis was developed first. It is a traditional approach. Origin of this approach can be traced back to the era of Classical Economists- Adam Smith, David Ricardo, J. S. Mill etc. Fig. 1.1 It was popularized by Neo-Classical Introduction : Economist, Prof. Alfred Marshall in his Micro economics and Macro economics are book, 'Principles of Economics', published the two main branches of modern economics. in 1890. Other economists like Prof. Pigou, The term ‘micro’ is derived from the Greek word, J. R. Hicks, Prof. Samuelson, Mrs. Joan ‘Mikros’ which means small or a millionth part. Robinson, etc. have also contributed to the The term ‘macro’ is derived from the Greek development of Micro Economics. word, ‘Makros’ which means large. These terms Historical Review of Macro Economics : were coined by Norwegian Economist Ragnar Macro Economics did exist in the past Frisch of Oslo University in 1933. before the evolution of Micro Economics. Main Branches of Economics In the 16th and 17th century, followers of Mercantilists (a group of English merchants) advocated policies to the Micro Economics Macro Economics government which were based on macro Do you know? approach. In the 18th century, Physiocrats Ragnar Anton Kittil Frisch (1895-1973), (French Thinkers) tried to analyse the a Norwegian econometrician concept of national income and wealth. and economist was a joint Even the Classical Economic theories winner with Jan Tinbergen of Prof. Adam Smith, Prof. Ricardo and of the first Nobel Prize for Prof. J. S. Mill discussed the determination Economics in 1969. He was of national income and wealth. But their a pioneer of econometrics- macro analysis was combined with micro the application of mathematical models and analysis. Thus, micro analysis ruled the statistical techniques to economic data and world of economics till the Great Depression theories. He coined many economic terms. of 1930s. In an article on business cycles, Frisch was After the Great Depression, Lord John 1  (a) Theory of Product Pricing : The price of Maynard Keynes published his famous an individual commodity is determined by book the "General Theory of Employment, Interest and Money" in 1936. Keynes the market forces of demand and supply. used macro economic approch to analyse Micro economics is concerned with demand economic problems. The credit for the analysis i.e. individual consumer behaviour, development of macro economic approach and supply analysis i.e. individual producer goes to Lord Keynes. Besides Keynes, behaviour. Malthus, Wicksell, Walras, Irving Fisher are other economists who have contributed (b) Theory of Factor Pricing : In Micro to the development of macro economics. economics, land, labour, capital and entrepreneur are the factors that contribute Meaning of Micro Economics : to the production process. Micro economics Micro means a small part of a thing. Micro helps in determining the factor rewards for economics thus deals with a small part of the land, labour, capital, and entrepreneur in national economy. It studies the economic the form of rent, wages, interest, and profit actions and behaviour of individual units such as an individual consumer, individual producer respectively. or a firm, the price of a particular commodity or (c) Theory of Economic Welfare : Theory of a factor etc. Welfare basically deals with efficiency in Definitions of Micro Economics : the allocation of resources. Efficiency in the You have already studied some important allocation of resources is attained when it definitions of micro economics, let us review results in maximization of satisfaction of some more definitions : the people. Economic efficiency involves 1) Maurice Dobb - “Micro economics is in three efficiencies : fact a microscopic study of the economy.” Efficiency in production : Efficiency in 2) Prof A. P. Lerner - “Micro economics production means producing maximum consists of looking at the economy through possible amount of goods and services from a microscope, as it were, to see how the the given amount of resources. millions of cells in the body of economy – Efficiency in consumption : Efficiency the individuals or households as consumers in consumption means distribution of and individuals or firms as producers play their part in the working of the whole produced goods and services among the economic organism.” people for consumption in such a way as to The following chart gives an idea of the maximize total satisfaction of the society. scope of micro economics. Overall economic efficiency : It means the production of those goods which are most Scope of Micro Economics desired by the people. Micro economic theory shows under what Theory of Theory of Theory of Product Pricing Factor Pricing Economic conditions these efficiencies are achieved. Rent Welfare Thus, the focus of micro economics Demand Supply Wages is mainly confined to price theory and Analysis Analysis Interest resource allocation. It does not study the Profit aggregates relating to the whole economy. Efficiency in Efficiency in Overall Economic This approach does not study national Production Consumption Efficiency economic problems such as unemployment, 2  poverty, inequality of income etc. Theory of an additional unit. Marginal analysis helps growth, theory of business cycles, monetary to study a variable through the changes. and fiscal policies etc. are beyond the limits Producers and consumers take economic of micro economics. decisions using this principle. Features of Micro Economics : 7) Analysis of Market Structure : Micro 1) Study of Individual Units : Micro economics analyses different market economics is the study of the behaviour structures such as Perfect Competition, of small individual economic units, like Monopoly, Monopolistic Competition, individual firm, individual price, individual Oligopoly etc. household etc. 8) Limited Scope : The scope of micro 2) Price Theory : Micro economics deals with economics is limited to only individual determination of the prices of goods and units. It doesn’t deal with the nationwide services as well as factors of production. economic problems such as inflation, Hence, it is known as price theory. deflation, balance of payments, poverty, 3) Partial Equilibrium : Equilibrium is unemployment, population, economic the balance between two factors. Micro growth etc. economic analysis deals with partial Importance of Micro Economics : equilibrium which analyses equilibrium 1) Price Determination : Micro economics position of an individual economic unit explains how the prices of different i.e. individual consumer, individual firm, products and various factors of production individual industry etc. It isolates an are determined. individual unit from other forces and studies 2) Free Market Economy : Micro economics its equilibrium independently. helps in understanding the working of a free 4) Based on Certain Assumptions : Micro market economy. A free market economy economics begins with the fundamental is that economy where the economic assumption, “Other things remaining decisions regarding production of goods, constant” (Ceteris Paribus) such as perfect such as ‘What to produce?, How much to competition, laissez-faire policy, pure produce?, How to produce? etc.’ are taken capitalism, full employment etc. These at individual levels. There is no intervention assumptions make the analysis simple. by the Government or any other agency. 5) Slicing Method : Micro economics uses slicing method. It splits or divides the whole 3) Foreign Trade : Micro economics helps economy into small individual units and in explaining various aspects of foreign then studies each unit separately in detail. trade like effects of tariff on a particular For example, study of individual income commodity, determination of currency out of national income, study of individual exchange rates of any two countries, gains demand out of aggregate demand etc. from international trade to a particular country etc. 6) Use of Marginalism Principle : The concept of Marginalism is the key tool 4) Economic Model Building : Micro of micro economic analysis. The term economics helps in understanding various 'marginal' means change brought in total by complex economic situations with the help 3  of economic models. It has made a valuable 2) Prof Carl Shapiro - “Macro economics contribution to economics by developing deals with the functioning of the economy various terms, concepts, terminologies, tools as a whole.” of economic analysis etc. Economic models The following chart gives an idea about are built using various economic variables. the scope of macro economics. Scope of Macro Economics 5) Business Decisions : Micro economic theories are helpful to businessmen for Theory of Theory of Theory of Macro taking crucial business decisions. These Income and General Economic Theory of decisions are related to the determination Employment Price Growth and Distribution of cost of production, determination of Level and Development Inflation prices of goods, maximization of output Theory of Theory of and profit, etc. Consumption Investment 6) Useful to Government : It is useful to Function Function government in framing economic policies Theory of such as taxation policy, public expenditure Business Cycles policy, price policy etc. These policies i) Theory of Income and Employment : help the government to attain its goals Macro economic analysis explains which of efficient allocation of resources and factors determine the level of national promoting economic welfare of the society. income and employment and what causes 7) Basis of Welfare Economics : Micro fluctuations in the level of income, output and economics explains how best results can employment. To understand, how the level of be obtained through optimum utilization employment is determined, we have to study of resources and its best allocation. It also the consumption function and investment studies how taxes affect social welfare. function. Theory of Business Cycles is also a part and parcel of the Theory of Income and Meaning of Macro Economics : Employment. Macro economics is the branch of economics which analyses the entire economy. ii) Theory of General Price Level and It deals with the total employment, national Inflation : Macro economic analysis shows income, national output, total investment, total how the general price level is determined and consumption, total savings, general price level further explains what causes fluctuations interest rates, inflation, trade cycles, business in it. The study of general price level is fluctuations etc. Thus, macro economics is the significant on account of the problems study of aggregates. created by inflation and deflation. iii) Theory of Growth and Development : Definitions of Macro Economics : Macro economics consists of the theory 1) J. L. Hansen - “Macro economics is that of economic growth and development. It branch of economics which considers the explains the causes of underdevelopment relationship between large aggregates such and poverty. It also suggests strategies for as the volume of employment, total amount accelerating growth and development. of savings, investment, national income iv) Macro Theory of Distribution : Macro etc.” theory of distribution deals with the relative 4  shares of rent, wages, interest and profit in various factors that contribute to economic the total national income. growth and development. It is useful in Features of Macro Economics : developing growth models. These growth models are used for studying economic 1) Study of Aggregates : Macro economics development. For example, Mahalanobis deals with the study of economy as a whole. growth model emphasized on basic heavy It is concerned with the aggregate concepts industries. such as national income, national output, national employment, general price level, 7) General Price Level : Determination and business cycles etc. changes in general price level are studied in macroeconomics. General price level is the 2) Income Theory : Macro economics studies average of all prices of goods and services the concept of national income, its different currently being produced in the economy. elements, methods of measurement and 8) Policy-oriented : According to Keynes, social accounting. Macro economics deals macro economics is a policy oriented with aggregate demand and aggregate science. It suggests suitable economic supply. It explains the causes of fluctuations policies to promote economic growth, in the national income that lead to business generate employment, control of inflation, cycles i.e. inflation and deflation. and depression etc. 3) General Equilibrium Analysis : Macro Importance of Macroeconomics : economics deals with the behaviour of 1) Functioning of an Economy : Macro large aggregates and their functional economic analysis gives us an idea of the relationship. General Equilibrium deals functioning of an economic system. It helps with the behaviour of demand, supply and us to understand the behaviour pattern prices in the whole economy. of aggregative variables in a large and 4) Interdependence : Macro analysis takes complex economic system. into account interdependence between 2) Economic Fluctuations : Macro economics aggregate economic variables, such as helps to analyse the causes of fluctuations income, output, employment, investments, in income, output and employment and price level etc. For example, changes in makes an attempt to control them or reduce the level of investment will finally result their severity. into changes in the levels of income, levels of output, employment and eventually the 3) National Income : Study of macro level of economic growth. economics has brought forward the immense importance of the study of national income 5) Lumping Method : Lumping method is the and social accounts. Without a study study of the whole economy rather than its of national income, it is not possible to part. According to Prof. Boulding, “Forest formulate correct economic policies. is an aggregation of trees but it does not 4) Economic Development : Advanced studies reveal the properties of an individual tree.” in macro economics help to understand the This reveals the difference between micro problems of developing countries such as economics and macro economics. poverty, inequalities of income and wealth, 6) Growth Models : Macro economics studies differences in the standards of living of the 5  people etc. It suggests important steps to achieve economic development. Tools Individual Aggregate Demand and Demand and 5) Performance of an Economy : Macro Individual Aggregate economics helps us to analyse the Supply Supply performance of an economy. National Income (NI) estimates are used to measure Scope Demand, National the performance of an economy over time supply, prod- income, by comparing the production of goods and uct pricing, general services in one period with that of the other factor pricing, price level, period. production, employment, consumption, money etc. 6) Study of Macro economic Variables : To economic understand the working of the economy, welfare, etc. study of macro economic variables are important. Main economic problems are Importance Price Economic related to the economic variables such determination, fluctuations, as behaviour of total income, output, Model Study of employment and general price level in the building, national economy. Business income, decisions etc. Economic 7) Level of Employment : Macro economics development helps to analyse the general level of etc. employment and output in an economy. Theory Price Theory Income and You should know : Employment Theory Micro Economics and Macro Economics Examples Individual National at a glance income, income, Basis for Micro Macro Individual National comparison economics economics output etc. output etc. Meaning Micro Macro economics economics studies the studies the Try this : behaviour of behaviour of 1) Visit the vegetable market in the nearest individual aggregates of area and try to get information about unit of an the economy income and expenditure items of a economy as a whole particular seller 6  EXERCISE Q. 1. Choose the correct option : 4) Makros : Macro economics : : Mikros : 1) The branch of economics that deals with the 5) General equilibrium : Macro economics :: allocation of resources. : Micro economics a) Micro economics b) Macro economics Q. 3. Identify and explain the concepts from the c) Econometrics d) None of these given illustrations : Options :1) a, b and c 2) a and b 1) Gauri collected the information about the 3) only a 4) None of these income of a particular firm. 2) Concepts studied under Micro economics. 2) Ramesh decided to take all decisions related to a) National income b) General price level production, such as what and how to produce? c) Factor pricing d) Product pricing 3) Shabana paid wages to workers in her factory Options :1) b and c 2) b, c and d and interest on her bank loan. 3) a, b and c 4) c and d Q. 4. Answer the following : 3) Method adopted in micro economic analysis. 1) Explain the features of Micro economics. a) Lumping method b)Aggregative method 2) Explain the importance of Macro economics. c) Slicing method d) Inclusive method 3) Explain the scope of Macro economics. Options :1) a, c and d 2) a, b and d Q. 5. State with reasons whether you agree or 3) only c 4) only a disagree with the following statements : 4) Concepts studied under Macro economics. 1) The scope of micro economics is unlimited. a) Whole economy b) Economic development 2) Macro economics deals with the study of c) Aggregate supply d) Product pricing individual behaviour. Options :1) a, b and c 2) b, c and d 3) Macro economics is different from micro 3) only d 4) a, b, c and d economics. Q. 2. Complete the correlation : 4) Micro economics uses slicing method. 1) Micro economics : Slicing method : : Macro 5) Micro economics is known as Income theory. economics : 2) Micro economics : Tree : : Macro economics : Q. 6. Answer in detail : 1) Explain the importance of Micro economics. 3) Macro economic theory : Income and 2) Explain the concept of Macro economics and employment : : Micro economics : its features.  7  2 Utility Analysis Let's recall : 2) Subjective concept : It is a psychological concept. Utility differs from person to 1) Want denotes a feeling of lack of person. This is due to differences in taste, satisfaction. preferences, likes, dislikes, nature, habits, 2) Wants are unlimited. profession etc. For example, stethoscope 3) They are recurring in nature. has utility to a doctor but not to a layman. 4) They differ with age, gender, seasons, habits and culture. 3) Ethically neutral concept : The concept of 5) Utility is the capacity of a commodity utility has no ethical consideration. It is a morally colourless concept. The commodity to satisfy human wants. In other words, should satisfy any want of a person without utility is the want satisfying power of a consideration of what is good or bad, good. desirable or undesirable. For example, a Introduction : knife has utility to cut fruits and vegetables You have been already introduced to the as well as it can be used to harm someone. concept of utility in class XI. This unit gives a Both wants are of different nature but are detailed explanation of consumer’s behaviour. satisfied by the same commodity. Thus, In practice, every individual tries to utility is ethically neutral. satisfy his wants with available resources. 4) Utility differs from usefulness : Utility It is true that all human wants cannot be is the capacity of a commodity to satisfy satisfied fully at a specific time. Utility analysis human wants, whereas usefulness indicates explains a consumer’s behaviour in relation to value in use of the commodity. For example, maximization of satisfaction. milk has both utility as well as usefulness to a consumer, while liquor has utility only to Try this : an addict, but has no usefulness. 1) Make a list of 10 commodities which 5) Utility differs from pleasure : A satisfy your wants. commodity may possess utility but it may 2) Make a list of 10 commodities which not give any pleasure to the consumer. For satisfy the wants of particular individuals example, injection for a patient has utility performing specific activities. For because it cures the ailment but it hardly example, A chalk has utility for a teacher. gives any enjoyment or pleasure to him. 6) Utility differs from satisfaction : Utility Features of Utility : is a cause of consumption, satisfaction is Following are the features of utility : the end result of consumption. They are 1) Relative concept : Utility is related to interrelated but still different concepts. For time and place. It varies from time to example, a thirsty person drinks a glass time and place to place. For example, (i) of water since water has the capacity to woollen clothes have a greater utility in the satisfy thirst. Utility of water is the cause of winter. (ii) sand has greater utility at the consumption and the satisfaction derived is construction site than at the sea shore. the end result of consumption. 8  7) Measurement of utility is hypothetical : 2) Place utility : When utility of a commodity Utility is an abstract concept. Cardinal or increases due to a change in its place, it is numerical measurement of utility is not called place utilities. For example, woollen possible. For example, a thirsty person clothes have more utility at cold places than after drinking water, may derive higher or at warm places. Transport creates place lower level of utility. Thus, utility can only utility. be experienced and found either positive, zero or negative. Negative utility is called disutility. 8) Utility is multi-purpose : A commodity can satisfy the want of more than one person, it can also be put to several uses. For example, electricity can be used to serve many purposes and for many people Fig. 2.2 at some point of time. 3) Service utility : Service utility arises when 9) Utility depends on the intensity of want : personal services are rendered by various Utility depends on the intensity of a want. professionals. For example, services of More intense the want, greater will be the doctors, teachers, lawyers etc. utility. As and when the urgency of want declines, utility diminishes. For example, a hungry person finds more utility in food, than a person who is not hungry. 10) Utility is the basis of demand : A person will demand a commodity only if it gives utility to him. For example, a sick person has utility in medicines hence, he demands medicines. Fig. 2.3 Types of Utility : 4) Knowledge utility : When a consumer Following are some of the different types of utility acquires knowledge about a particular 1) Form utility : When utility is created due product, it is called knowledge uitility. For to a change in the shape or structure of an example, utility of a mobile phone or a existing material, it is called form utility. computer increases when a person knows For example, toys made of clay, furniture about its various functions. from mw wood ood etc. oo Fig. 2.1 Fig. 2.4 9 5) Possession utility : Possession utility arises Try this : when the ownership of goods is transferred Following are the various types of utility from one person to another. For example, and their respective examples. Arrange the transfer of goods from the sellers to the information in the form of pairs: buyers.. Types of utility : Time utility, possession utility, service utility and place utility. Examples : 1) A dentist giving dental treatment to a patient. 2) A mountaineer using oxygen cylinder at a high altitude. 3) A farmer selling rice stored in the Fig. 2.5 warehouse at the end of the season. 4) A retail trader purchasing 100 chairs 6) Time utility : When the utility of a from the wholesale trader. commodity increases with a change in its time of utilization, it is called time utility. Concepts of Utility : For example, a student has more utility for Following are the two main concepts of text books during examinations than in the utility : vacations. Time utility is also observed 1) Total Utility (TU) : Total utility refers when goods are stored and used at the time to the aggregate of utility derived by the of scarcity. For example, Blood bank. consumer from all units of a commodity consumed. It is an aggregate of utilities from all successive units of a commodity consumed. 2) Marginal Utility (MU) : Marginal utility refers to the additional utility derived by a consumer from an additional unit of a commodity consumed. In other words, it is the addition made by the last unit of a Fig. 2.6 A commodity consumed. Fig. 2.6 B Fig. 2.6 C Fig. 2.6 D 10  TU Curve = Total Utility Curve You should know : Formulae explaining the relationship MU Curve = Marginal Utility Curve between total utility and marginal utility : X axis measures the units of the commodity TU = 6 MU or consumed while Y axis indicates the figures of TU = MU1 + MU2 + MU3 ……….. + MUn total and marginal utility. MUn = TUn – TU(n–1) Where TU = Total Utility Fig. 2.7 shows that total utility curve slopes MU = Marginal Utility upwards whereas marginal utility curve slopes MU1, MU2, MU3 = Marginal Utility of each unit. downwards. Marginal utility curve shows zero MUn = Marginal Utility of nth unit. and negative levels of marginal utility whereas TUn = Total Utility at nth level. total utility curve shows maximum and constant TU(n–1) = Total Utility at previous level. total utility level. Relationship between Total Utility and 1) Total utility and marginal utility of the very Marginal Utility : first unit of x consumed, are the same. Marginal utility derived from various 2) As the consumer consumes further units of a commodity and its total utility are units of x, the total utility increases at a interrelated. This can be easily followed from diminishing rate and marginal utility goes the hypothetical example given in the table 2.1 on diminishing. (TUK MUL) Table 2.1 Utility Schedule 3) At a particular stage, total utility reaches to Units of x Total utility Marginal utility 1 10 10 its maximum and remains constant whereas 2 18 8 marginal utility becomes zero. This is called 3 24 6 the point of satiety. (TU highest, MU = 0) 4 28 4 4) After this point, any additional unit 5 30 2 6 30 0 consumed further results in a decline in the 7 28 –2 total utility, while marginal utility becomes Table 2.1 explains the relationship between negative. (TUL MU negative) total utility and marginal utility. 5) After reaching the point of satiety, a rational On the basis of Table 2.1 Total utility and consumer should stop his consumption Marginal Utility curves (TU and MU) can be since the maximum limit of satisfaction is derived with the following diagram. reached and there is no addition to total Y Point of satiety 32 utility by any further increase in the stock S 28 of a commodity. TU 24 Curve 6) Consumption beyond the point of satiety Total and Marginal utility transforms satisfaction into dissatisfaction. 20 In other words, a consumer starts 16 experiencing ill effects of consumption. 12 8 Try this : Complete the following chart with proper 4 statement and bring about the difference 0 1 2 3 4 5 6 7 X between the two concepts i.e total utility MU -4 Disutility Curve and marginal utility. Units of Commodity x Fig. 2.7 11  which a person derives from a given increase Total Utility Marginal Utility in his stock of a thing, diminishes with every 1) Total utility is the 1) Marginal utility increase in the stock that he already has.” sum total of the is the addition In other words, marginal utility that any individual utilities made to the total consumer derives from successive units of a derived from the utility from every consumption of a additional unit particular commodity goes on diminishing as single unit of good. consumed. his or her total consumption of that commodity 2) Total utility 2) increases. In short, the more of a thing you have, increases at a the less you want to have more of it. diminishing rate. Assumptions : 3) 3) At the point of Following are the assumptions of the law of satiety MU = O diminishing marginal utility : 4) Total utility 4) 1) Rationality : Consumer is assumed to declines if be rational. It means that his behaviour consumption is normal and he tries to maximize his continues. satisfaction. 5) Total utility deter- 5) mines value in use 2) Cardinal measurement : The law assumes of a commodity. that utility can be cardinally or numerically 6) 6) Marginal utility measured. Hence, mathematical operations can be positive, are easily possible to know and compare negative, zero. the utility derived from each unit of a 7) Diagram : 7) Diagram : commodity. y 3) Homogeneity : All units of a commodity 4 consumed are exactly homogeneous or TU TU curve identical in size, shape, colour, taste etc. 2 4) Continuity : All units of commodity are 0 Units x consumed in quick succession without any lapse of time. Law of Diminishing Marginal Utility : 5) Reasonability : All the units of a commodity Introduction : consumed are of reasonable size. They are This law was first proposed by Prof. Gossen neither too big nor too small. but was discussed in detail by Prof. Alfred 6) Constancy : All the related factors like Marshall in his book ‘Principles of Economics’ income, tastes, habits, choices, likes, published in 1890. dislikes of a consumer should remain The law of diminishing marginal utility constant. Marginal utility of money is also is universal in character. It is based on the assumed to be constant. common consumer behaviour that utility derived 7) Divisibility : The law assumes that the diminishes with the reduction in the intensity of commodity consumed by the consumer is a want. divisible so that it can be acquired in small Statement of the Law : quantities. According to Prof. Alfred Marshall, “Other 8) Single want : A given commodity can things remaining constant, the additional benefit satisfy a single want of a person. The law 12  assumes an experience of a single want brings disutility (negative utility) which is shown which is completely satiable at a given by the shaded portion in the diagram. point of time. Exceptions to the Law of Diminishing Table 2.2 explains the Law of Diminishing Marginal Utility : Marginal Utility. Following are the exceptions to the law of Table : 2.2 diminishing marginal utility : Units of x Marginal Utility (MU) 1 10 1) Hobbies : In certain hobbies like collection 2 8 of various stamps and coins, rare paintings, 3 6 music, reading etc., the law does not hold 4 4 true because every additional increase in the 5 2 stock gives more pleasure. This increases 6 0 marginal utility. However, this violates the 7 –2 assumption of homogeneity and continuity. The table shows that marginal utility keeps 2) Miser : In the case of a miser, every on diminishing with increase in consumption, additional rupee gives him more and more further it becomes zero and then negative. satisfaction. Marginal utility of money Y tends to increase with an increase in his MU MU = Marginal Utility Curve 10 stock of money. However, this situation ignores the assumption of rationality. 8 Marginal utility 3) Addictions : It is observed in case of a 6 drunkard that the level of intoxication 4 increases with every additional unit of 2 liquor consumed. So MU received by drunkard may increase. Actually it is 0 1 2 3 4 5 6 7 X only an illusion. This condition is similar -2 MU Disutility to almost all addictions. However, this Units of Commodity x violates the assumption of rationality. Fig. 2.8 4) Power : This is an exception to the law Explanation of the Diagram : because when a person acquires power, his In the above diagram, units of commodity x lust for power increases. He desires to have are measured on X axis and marginal utility is more and more of it. However, this again measured on Y axis. Various points of MU are violates the rationality assumption. plotted on the graph as per the given schedule. 5) Money : It is said that the MU of money When the locus of all the points is joined, MU never becomes zero. It increases when the curve is derived. stock of money increases. This is because MU curve slopes downwards from left to money is a medium of exchange which is right which shows that MU goes on diminishing used to satisfy various wants. However, with every successive increase in the consumption according to some economists, this law of a commodity. is applicable to money too. For example, When MU becomes zero, MU curve intercepts marginal utility of money is more to a poor the X axis. Further consumption of a commodity person than to a rich person. 13  However, these, exceptions are only resources, it is necessary to ‘diversify’ the apparent. Since they violate some or the consumption. other assumptions of the law and hence, 2) Useful to the government : The law is they are not real exceptions. useful to the government in framing various Criticisms of the Law : policies such as progressive tax policy, The law of diminishing marginal utility is trade policy, pricing policy etc. criticised on the following grounds. 3) Basis of paradox of values : The law 1) Unrealistic assumptions : The law of of diminishing marginal utility helps us diminishing marginal utility is based upon to understand the paradox of values. It various assumptions like homogeneity, includes goods that have more value-in-use continuity, constancy, rationality etc. but and zero or less value-in-exchange such as in reality it is difficult to fulfil all these air, water, sunshine etc. as well as goods conditions at a point of time. that have more value-in-exchange and less value-in-use such as gold, diamonds etc. 2) Cardinal measurement : The law assumes 4) Basis of law of demand : The law of demand that utility can be expressed cardinally so is based on the law of diminishing marginal it can be added, compared and presented utility. According to the law of demand, the through a schedule. In reality cardinal quantity demanded of a good rises with a measurement of utility is not possible fall in price and falls with an increase in because utility is a psychological concept. price. When a consumer purchases more 3) Indivisible goods : The law is not and more units of a good, its marginal applicable to indivisible and bulky goods utility steadily declines. Hence, he would like refrigerator, car, TV sets etc. which are buy additional units of a commodity only normally purchased in single unit at a time. at a lower price. 4) Constant marginal utility of money : The law assumes that MU of each unit of money Try this : remains constant. However, critics argue Write an informative note on paradox of that MU of money differs from person to values along with examples. person. It is influenced by changes in prices, Relationship between Marginal Utility and stock of money etc. Price : 5) A single want : The law is restricted to Let us discuss the relationship between the satisfaction of a single want at a point marginal utility and price in order to understand of time. However, in reality, a man has to how the law of diminishing marginal utility satisfy many wants at a point of time. forms the basis of law of demand. It is a perfect Significance of the Law : example of practical application of the law of In spite of the criticisms, the law of Diminishing Marginal Utility (DMU). diminishing marginal utility is a very popular To understand the relation, it is essential and an important law in Economics because of to convert marginal utility in terms of money so its universal application. that it can be compared with market price. 1) Usefulness to the consumers : This law Let us assume : One unit of marginal utility = creates awareness among the consumers. ` 10. To obtain maximum utility from the limited Market price per unit of x = ` 50. 14  Table 2.3 marginal utility and price : No MU/ MU in terms Market Comparison 1) Units which a consumer willingly buys of units of money price/unit between MU because MU is greater than price are called units of x 1unit = ` 10 of x = ` 50 and price “Intra-marginal units” (MUx>Px) 1 10 100 (10 × `10 ) ` 50 100 MU> `50 2) Unit at which MU becomes equal 2 8 80 (8 × ` 10 ) ` 50 80 MU> `50 with market price is “marginal unit”. 3 7 70 (7 × ` 10 ) ` 50 70 MU> `50 (MUx=Px) = Consumer’s equilibrium 4 5 50 (5 × ` 10 ) ` 50 50 MU = `50 3) Units which a rational consumer is not 5 3 30 (3 × ` 10 ) ` 50 30 MU< `50 willing to buy and consume where he has 6 1 10 (1 × ` 10 ) ` 50 10 MU< `50 to pay more than the MU are called “Extra- marginal units.” (MUx technique for economic development. estimated Government Expenditure. Importance of Budget : A surplus budget may prove useful Union Budget is important because it during the period of inflation. In the period affects people and economy in general in a 78 number of ways. Taxes are the most interesting because Governments use it as a medium for part of any budget. Taxes determine the fate implementing economic policies in the country. of businesses and individuals. The level of Budgetary actions of the Government affect disposable income of the taxpayers depends on production, size and distribution of income and the tax rates presented in the budget. Government utilization of human and material resources of expenditure on various heads such as defence, the country. administration, infrastructure, education and Thus, the scope and importance of public health care etc. affects the lives of the citizens finance in a modern economy has undergone an and overall economy. Also, budget is important immense change since last 100 years. EXERCISE Q. 1. A) Choose the correct option : c) Fees 1) Optional functions of Government : d) Special Levy a) Protection from external attack Options : 1) b and c 2) a and c b) Provision of education and health services 3) a, b, c and d 4) c and d c) Provision of social security measures 5) Trends shown by Public expenditure of any d) Collection of tax Government shows following trend. Options : 1) b and c 2) a, b and c a) Constant b) Increasing 3) b, c and d 4) All of the above c) Decreasing d) Fluctuating 2) Obligatory functions of the Government : Options : 1) only a 2) only b a) Provision of employment 3) only c 4) only d b) Maintaining internal law and order 6) Identify the right group of pairs from the given c) Welfare measures options. d) Exporting goods and services i) Direct tax a) Non-tax revenue Options : 1) c and d 2) a and b ii) Indirect tax b) Inflation 3) only b 4) a, c and d iii) Fees and Fines c) GST 3) Public finance is one of those subjects which iv) Surplus budget d) Personal income tax are on the borderline between economics and Options : a) i-d ii-c