Microeconomic Analysis PDF - Advanced Economic Theory by H.L. Ahuja

 ADVANCED ECONOMIC THEORY MICROECONOMIC ANALYSIS H L AHUJA MA, PhD (DSE) Formerly, Associate Professor Department of Economics Zakir Husain Delhi College University of Delhi, Delh...

 ADVANCED ECONOMIC THEORY MICROECONOMIC ANALYSIS H L AHUJA MA, PhD (DSE) Formerly, Associate Professor Department of Economics Zakir Husain Delhi College University of Delhi, Delhi S Chand And Company Limited (ISO 9001 Certified Company)  S Chand And Company Limited (ISO 9001 Certified Company) Head Office: Block B-1, House No. D-1, Ground Floor, Mohan Co-operative Industrial Estate, New Delhi – 110 044 | Phone: 011-66672000 Registered Office: A-27, 2nd Floor, Mohan Co-operative Industrial Estate, New Delhi – 110 044 Phone: 011-49731800 www.schandpublishing.com; e-mail: [email protected] Branches Ahmedabad : Ph: 27542369, 27541965; [email protected] Bengaluru : Ph: 22354008, 22268048; [email protected] Bhopal : Ph: 4274723, 4209587; [email protected] Bhubaneshwar : Ph: 2951580; [email protected] Chennai : Ph: 23632120; [email protected] Guwahati : Ph: 2738811, 2735640; [email protected] Hyderabad : Ph: 40186018; [email protected] Jaipur : Ph: 2291317, 2291318; [email protected] Jalandhar : Ph: 4645630; [email protected] Kochi : Ph: 2576207, 2576208; [email protected] Kolkata : Ph: 23357458, 23353914; [email protected] Lucknow : Ph: 4003633; [email protected] Mumbai : Ph: 25000297; [email protected] Nagpur : Ph: 2250230; [email protected] Patna : Ph: 2260011; [email protected] Ranchi : Ph: 2361178; [email protected] Sahibabad : Ph: 2771238; [email protected] © S Chand And Company Limited, 1970 All rights reserved. No part of this publication may be reproduced or copied in any material form (including photocopying or storing it in any medium in form of graphics, electronic or mechanical means and whether or not transient or incidental to some other use of this publication) without written permission of the copyright owner. Any breach of this will entail legal action and prosecution without further notice. Jurisdiction: All disputes with respect to this publication shall be subject to the jurisdiction of the Courts, Tribunals and Forums of New Delhi, India only. First Edition 1970 Subsequent Editions and Reprints 1971, 75, 80, 85, 90, 92, 95, 96, 97, 98, 2000, 2001, 2003, 2004, 2005, 2006 (twice), 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2016, Twenty-first Edition 2017, Reprint 2017 (Twice), 2018 (Twice), 2019 ISBN : 978-93-5253-332-9 Product Code : H5AET41ECON10ENAU17O  Dedicated to the memory of my mother Nihal Bai with reverence and affection  PREFACE TO THE TWENTY-FIRST EDITION It gives me immense pleasure to bring out the 21st edition of this popular book. As mentioned in the previous editions, my efforts have been to incorporate in this book the latest trends and tenden- cies in microeconomic theory. In keeping with this approach, I have explained the various important economic concepts and theories such as theory of demand, cost, production, price and output determi- nation under perfect competition, monopoly and oligopoly in mathematical terms. Further, to enable the students to understand better the mathematical exposition of the theories, I have added Chapter 5 which explains the Basic Mathematical Concepts and Optimisation Techniques. In the present revised 21st edition of the book, some significant changes have been made in some chapters. Among them, mention may be made of the following: l Chapter 1: The meaning of economic efficiency has been clearly explained distinguishing between production efficiency, allocative efficiency and distributive efficiency. l Chapter 7: The concept of utility and its critique by Prof. Amartya Sen has been explained. l Chapter 8: The Hicksian substitution effect and Slutsky substitution effect have been clearly distinguished. l Chapter 17: The attitudes towards risk of different individuals have been explained and the choice by risk-averter and risk lover under risky and uncertain situations has been shown. It has been clearly shown why a risk-averter generally buys insurance and a risk lover indulges in gambling. l Chapter 28: The chapter explains how economic efficiency is claimed to be achieved under perfect competition and have shown that even in a perfectly competitive economy, there are market failures to achieve economic efficiency when there exist externalities, both positive and negative, public goods and imperfect information. Besides, it has been made clear how a perfectly competitive economy fails to achieve equity in distribution of goods and services. l Chapter 65: The Bergson-Samuelson social welfare function has been critically examined and how it differs from Classical utilitarian social welfare function and Rawl’s social welfare function which gives the highest weight to the welfare of the poorest people in a society has been brought out. l Chapter 67: The impact of imperfect and asymmetric information on individual’s choice has been explained and the problems of adverse selection and moral hazard under conditions of imperfect and asymmetric information has been clarified. With the above changes, I hope the students will find the book more useful for them. The book is intended to meet the requirements of the students of MA (Economics), MCom, MBA and related courses, BA (Hons) and candidates preparing for competitive examinations such as IAS, IES and Public Service Examinations of different States. I shall greatly appreciate the suggestions for further improvement of the book from fellow teachers. The author can be approached at [email protected] H L AHUJA  PREFACE TO THE FIRST EDITION There have been significant developments in economic theory in recent years, but the tendency has been to make it more mathematical. Postgraduate and Honours students of Indian universities, having poor background of mathematics, find it difficult to understand the various theories and con- cepts involving use of advanced mathematics. Moreover, the matter pertaining to advanced topics in economic theory is scattered in many economic journals to which most of the students of Indian universities have no access. I have endeavoured to help them. So, in this book an effort has been made to discuss the various theories of microeconomics without making use of advanced mathematics. The merit of this book is that it explains the advanced theories and concepts with the help of geometry and simple mathematics. The book is intended to meet the requirements of MA and Honours students of Indian universi- ties and of candidates who are preparing for IAS, IES and Allied Civil Services competitive exami- nations, for their paper on advanced economic theory. In this book, I have confined myself only to microeconomic theory and have covered the theories of demand, production, value and distribution. I am deeply indebted to Dr K K Dewett, formerly Head of Economics Department, Punjab Uni- versity, and Dr J D Varma, former Professor and Head, Department of Economics, Punjab University, Chandigarh, who have been my teachers as well as colleagues, for inspiring me to write this book. I am also grateful to my wife Prem Ahuja, teacher in Cambridge School, without whose generous cooperation and help, this book would not have been possible. Suggestions for making improvements in the book from fellow teachers are most welcome. January 26, 1970 H L AHUJA Disclaimer : While the authors of this book have made every effort to avoid any mistake or omission and have used their skill, expertise and knowledge to the best of their capacity to provide accurate and updated information. The author and S. Chand does not give any representation or warranty with respect to the accuracy or completeness of the contents of this publication and are selling this publication on the condition and understanding that they shall not be made liable in any manner whatsoever. S.Chand and the author expressly disclaim all and any liability/responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything and everything forming part of the contents of this publication. S. Chand shall not be responsible for any errors, omissions or damages arising out of the use of the information contained in this publication. Further, the appearance of the personal name, location, place and incidence, if any; in the illustrations used herein is purely coincidental and work of imagination. Thus the same should in no manner be termed as defamatory to any individual.  CONTENTS PART – I SCOPE AND METHODOLOGY OF ECONOMICS 1. Nature and Scope of Economic Theory 3–30 The Economic Problem: Scarcity and Choice. The Scope of Economic Theory and Basic Economic Problems. The Problem of Allocation of Resources. Choice of a Production Method. The Problem of Distribution of National Product. The Problem of Economic Efficiency. The Problem of Full Employment of Resources. The Problem of Economic Growth. Problem of Scarcity vs. Problem of Affluence. Critical Evaluation of Robbin’s Definition of Economics, Positive Economics, Normative Economics and Welfare Economics. Production Possibility Curve: A Basic Tool of Economics. Economic Growth and Shift in Production Possibility Curve. Production Possibility Frontier and the Law of Increasing Opportunity Cost. Production Possibility Curve and Basic Economic Questions. 2. Micro and Macro-Economics 31–43 Microeconomics. Importance and Uses of Microeconomics. Macroeconomics distinguished from Microeconomics. Why a Separate Study of Macroeconomics. Interdependence between Micro and Macroeconomics. 3. Methodology of Economics 44–55 Nature of Scientific Theory. Derivation of Economic Theories and Nature of Economic Reasoning. Deductive Method. Merits and Demerits of Deductive Method. The Inductive Method. Conclusion: Integration of Two Methods. Role of Assumptions in Economic Theory: Friedman’s View. The Concept of Equilibrium: Partial Equilibrium Analysis; General Equilibrium Analysis. Model Building in Economics. Endogenous and Exogenous Variables in Economic Models. 4. Methodology of Economics: Economic Statics and Dynamics 56–67 Nature of Economic Statics. Static Analysis and Functional Relationships. Micro- Statics and Macro-Statics. Assumptions of Static Analysis. Relevance of Static Analysis. Comparative Statics. Economic Dynamics. Endogenous Changes and Dynamic Analysis. Hicks’ Definition of Economic Dynamics. Expectations and Dynamics. Need and Significance of Economic Dynamics. 5. Basic Mathematical Concepts and Optimisation Techniques 68–94 Introduction. Functions: Linear and Power Functions-Slopes of Functions. Optimisation Techniques: Differential Calculus. The Concept of a Derivative. Rules of Differentiation. Differentiation of Functions with Two or More than Two Independent Variables. Applications of Differential Calculus (Derivatives) to Optimisation Problems: Use in Profit Maximisation; Minimisation Problem. Multivariate Optimisation. Constrained Optimisation. Lagrange Multiplier Technique. PART – II DEMAND ANALYSIS AND THEORY OF CONSUMER’S CHOICE 6. Demand and Demand Function 97–114 Significance of Demand Function. Individual Demand. Demand Function. Law of Demand. Reasons for the Law of Demand: Why does Demand Curve Slope Downward? Market Demand Function. Inverse demand function. Relationship between Demand Function and Demand Curve. Factors Determining Demand. Demand for Durable Goods. Derived Demand. Network Externalities: Bandwagon Effect and Snob Effect. 7. Consumer’s Behaviour: Cardinal Utility Analysis 115–133 Introduction. The Concept of Utility. Amartya Sen's Critique of the Concept of Utility. Law of Diminishing Marginal Utility; Consumer’s Equilibrium: Principle of Equi-marginal Utility. Derivation of Demand Curve and Law of Demand. Critical Evaluation of Marshall’s Cardinal Utility Analysis. (vii)  8. Indifference Curve Analysis of Demand 134–185 Consumer Preferences. Indifference Curve Approach. What are Indifference Curves? Marginal Rate of Substitution. Properties of Indifference Curves. Some Non-normal Cases of Indifference Curves: Goods, Bads and Neuters. Budget Line or Budget Constraint. Consumer’s Equilibrium: Maximising Satisfaction. Consumer’s Equilibrium: Corner Solutions. Income Effect: Income Consumption Curve. Income Consumption Curve and Engel Curve. Substitution Effect. Price Effect: Price Consumption Curve. Breaking Up Price Effect into Income and Substitution Effects. Price-Demand Relationship: Deriving Law of Demand. Derivation of Individual’s Demand Curve from Indifference Curve Analysis. Questions and Problems for Review. Appendix A to Chapter 8: Slutsky Substitution Effect 186–190 Slutsky Substitution Effect and Cost Difference: Slutsky Substitution Effect for a Decline in Price; Slutsky Substitution Effect for a Rise in Price. A Numerical Example. Appendix B to Chapter 8: Mathematical Treatment of the Theory of Consumer’s Choice 191–198 Mathematical Derivation of Conditions for Consumer’s Equilibrium: Lagrangian Method. Optimum Values of the Goods. Derivation of Demand Function. Slutsky Equation: Decomposing Price Effect. 9. Demand for Complementary and Substitute Goods 199–207 Edgeworth-Pareto Definition of Complementary and Substitute Goods. Hicksian Explanation of Complementary and Substitute Goods. Compensated Demand Curve. Relationship between Compensated and Ordinary Demand Curves. Measurement of Consumer Surplus with Ordinary and Compensated Demand Curves. 10. Marshallian Cardinal Utility Analysis vs. Indifference Curve Analysis 208–221 Similarity between the Two Analyses. Superiority of Indifference Curve Analysis. Is Indifference Curve Analysis “Old Wine in a New Bottle” ? A Critique of Indifference Curve Analysis Limitations of Maximising Behaviour. 11. Applications and Uses of Indifference Curve 222–244 Exchange between Two Individuals: Gain from Trade. Subsidies to Consumers: Price Subsidy vs. Lump Sum Income Grant. Rationing and Indifference Curve Analysis. Rationing of both the Commodities. Income-Leisure Choice. Need for Higher Overtime Wage Rate. Wage Offer Curve and the Supply of Labour. Income Effect and Substitution Effect of the Change in Wage Rate. Backward-Bending Supply Curve of Labour. Food Stamp Programmer: In-Kind Food Subsidy. Welfare Effects of Direct and Indirect Taxes. Economic Theory of Index Numbers: Assessing Changes in Standards of Living. Conclusion. 12. Revealed Preference Theory of Demand 245–262 Behaviouristic Approach to Demand Analysis. Preference Hypothesis and Strong Ordering. Deriving Demand Theorem from Revealed Preference Hypothesis. Critical Appraisal of Revealed Preference Theory. Derivation of Indifference Curves through Revealed Preference Approach.  Convexity of Indifference Curve and Revealed Preference Approach. 13. Hicks’ Logical Ordering Theory of Demand 263–278 Need for Revision of Demand Theory. Preference Hypothesis and Logic of Ordering Strong and Weak Orderings Distinguished. Hicks’ Criticism of the Logic of Strong Ordering. The Logic of Weak Ordering. The Direct Consistency Test. Derivation of Law of Demand through Logical Weak Ordering Approach: Deriving Law of Demand by the Method of Compensating Variation. Deriving Law of Demand by Cost Difference Method. Inferior Goods, Giffen Goods and Law of Demand. Appraisal of Hicksian Weak Logical Ordering Theory of Demand. 14. Elasticity of Demand 279–321 Various Concepts of Demand Elasticity. Price Elasticity of Demand. Perfectly Inelastic and Perfectly Elastic Demand. Measurement of Price Elasticity. Finding Price Elasticity from a Demand Function. Price Elasticity of Demand and Changes in Total Expenditure. Measurement of Price Elasticity of Demand at a Point on a Demand (viii)  Curve. Comparing Price Elasticity at a given Price on the Two Demand Curves with Different Slopes. Determinants of Price Elasticity of Demand. Cross Elasticity of Demand. Income Elasticity of Demand. Measuring Income Elasticity at a Point on an Engel Curve. Engel Curve and Income Elasticity: Necessities, Luxuries and Inferior Goods. Sum of Income Elasticities, Budget Constraint and Expenditure. The Elasticity of Substitution. Relationship between Price Elasticity, Income Elasticity and Substitution Elasticity. 15. Consumer Surplus 322–342 Meaning of Consumer Surplus. Marshall’s Measure of Consumer Surplus. Consumer Surplus and Changes in Price. Measurement of Consumer’s Surplus through Indifference Curves. Hicksian Four Concepts of Consumer Surplus: Price-Compensating Variation; Price-Equivalent Variation; Quantity Compensating Variation; Quantity Equivalent Variation. Critical Evaluation of the Concept of Consumer’s Surplus. Applications of Consumer Surplus: Water-Diamond Paradox, Evaluating Loss of Benefit from Tax; Evaluating Gain from a Subsidy; Use of Consumer Surplus in Cost-Benefit Analysis. Numerical Problems on Consumer’s Surplus. 16. Attribute Approach to Consumer’s Behaviour 343–351 Attribute or Characteristics Approach: Introduction. Indifference Curves of Attributes. The Budget Constraint and the Efficiency Frontier. Maximising Satisfaction from Attributes. Equilibrium with a Mixed Bundle of Products. Attribute Approach and the Price Effect. Attribute Approach and Law of Demand. Pricing a Product Out of the Market. Introduction of a New Product. An Evaluation of the Attribute Approach to Consumer Theory. 17. Individual Choice Under Risk and Uncertainty 352–378 Introduction. The Concept of Risk. St. Petersburg Paradox and Bernoulli’s Hypothesis. Utility Theory and Attitude Toward Risk: Risk Averter. Choice of a Risk Averter Under Conditions of Risk and Uncertainty. Risk Lover. Risk Neutral. Risk Aversion and Fair Bets. Risk Aversion and Insurance. Risk Preference and Gambling: Why Do Some Individuals Gamble? An Application: Farmer’s Gambling Against Nature. Friedman- Savage Hypothesis. Measuring Risk: Probability of an Outcome: Expected Value. Risk-Return Trade off and Choice of a Portfolio. Decision Making Under Risk when Investment Projects differ in their Expected Values: Some Numerical Problems. Appendix to Chapter 17: Neumann-Morgenstern Method of Constructing Utility Index under Risky Conditions 379–381 PART – III THEORY OF PRODUCTION AND COST ANALYSIS 18. Theory of Production: Returns to a Variable Factor 385–407 Introduction. Production Function. Production Function with One Variable Factor: Total, Average and Marginal Physical Products. Output Elasticity of an Input. Law of Variable Proportions: Three Stages of Production. The Stage of Operation. Causes of Initial Increasing Marginal Returns to a Variable Factor. Causes of Diminishing Marginal Returns. Causes of Negative Marginal Returns. General Applicability of the Law of Diminishing Returns. 19. Production Function with Two Variable Inputs 408–456 Isoquants. Marginal Rate of Technical Substitution. General Properties of Isoquants. Isoquants of Perfect Substitutes and Complements. Fixed Proportion and Variable Proportion Production Functions. Linear Homogeneous Production Function. Cobb- Douglas Production Function. Cobb-Douglas Production Function and Returns to Scale. Elasticity of Technical Substitution (Between Factors). The Economic Region of Production. Production Function and Technological Change. Returns to Scale— Changes in Scale and Factor Proportions. Constant Returns to Scale. Divisibility of Factors/Constant Returns to Proportionality and Scale. Increasing Returns to Scale. Decreasing Returns to Scale. Varying Returns to Scale in a Single Production Function. Returns to Scale and Marginal Returns to a Variable Factor. Important Production Functions Exhibiting Constant Returns to Scale. Constant Elasticity of Substitution (ix)  (CES) Production Function. Numerical Problems on Returns to Scale. The Estimation of Production Function. Problems in Estimation of Production Functions. 20. Optimum Factor Combination 457–478 Iso-Cost Line. Least-Cost Combination of Factors. Output Maximisation Subject to Cost Constraint. Numerical Problems. Expansion Path. Derivation of Equation for Expansion Path (in Cobb-Douglas Production Function). Numerical Problems. Profit Maximisation and Optimum Input Combination. Effect of Changes in Factor Prices: Factor Substitution. Substitute and Complementary Factors. The Expansion Path of a Linear Homogeneous Production Function. Appendix to Chapter 20: Mathematical Treatment of Production Theory 479–481 Choice of Inputs: Cost-Minimisation for a Given Output. Duality of Cost-Minimisation Problem: Output-Maximisation with a Given Cost. 21. Cost Analysis 482–536 Introduction. Technological Efficiency Versus Economic Efficiency. The Concepts of Cost: Opportunity Cost; Historical Costs as Sunk Costs; Accounting Costs and Economic Costs. Theory of Cost. Cost Functions: Short Run and Long Run. Total, Fixed and Variable Costs in the Short Run. The Short-Run Average and Marginal Cost Curves. Relationship Between Marginal Cost and Marginal Physical Product. Derivation of Short-Run Average and Marginal Cost Curves from their Total Cost Curves. Theory of Long-Run Costs: Long-Run Average Cost Curve. Long-Run Average Cost Curve in Case of Constant Returns to Scale. Minimum Efficient Scale. Explanation of the U-shape of the Long-Run Average Cost Curve: Economies of Scale; Internal Diseconomies of Scale. Long-Run Marginal Cost Curve. Relationship between STC and LTC and between LAC and SAC Curves. Long-Run Total Costs and Expansion Path. External Economies and Diseconomies and Cost Curves. Modern Developments in Cost Theory: L-shaped Long-Run Average Cost Curve.The Learning Curve. Algebraic Forms of Cost Functions: Cubic Cost Function. Quadratic Cost Function. Linear Cost Function. Numerical Problems on Cost Function. Appendix to Chapter 21: Derivation of Long-Run Cost Function 537–538 22. Linear Programming 539–559 Introduction. Meaning of Linear Programming. Basic Concepts and Terms of Linear Programming. Choice of Products: Constrained Profit Maximisation. Choice of a Process: Output Maximisation Subject to Some Constraints. Choice of a Process: Output Maximisation with Cost-Outlay Constant. Cost Minimisation for a Given Output. Multiple Optimal Solutions. Choice of a Process: Output Maximisation with Two Inputs as Constraints. Some Additional Problems and their Linear Programming Solutions. A Special Problem of Cost Minimisation: Diet Problem. 23. Supply and its Elasticity 560–570 The Meaning of Supply. Supply Function. The Relation between Price and Quantity Supplied: Law of Supply. Why Does Supply Curve Generally Slope Upward? Shift in Supply Curve: Increase and Decrease in Supply. Elasticity of Supply. Supply Function and Elasticity of Supply. Elasticity along the Supply Curve. Factors Determining Elasticity of Supply. PART – IV PRICE AND OUTPUT DETERMINATION IN VARIOUS MARKET STRUCTURES 24. Market Structures and Concepts of Revenue for a Firm 573–595 Meaning of Market. Classification of Market Structures. Market Classification and Cross Elasticity of Demand. Total, Average and Marginal Revenue and their Relationship. Deriving Average and Marginal Revenue Curves from Total Revenue Curve. Relationship between AR and MR Curves. Price Elasticity, Total Revenue and Marginal Revenue. Average Revenue. Marginal Revenue and Price Elasticity of Demand: Geometric Proof. Mathematical Derivation of Relationship between Marginal Revenue, Average Revenue and Price Elasticity of Demand. Demand Function, MR and Price Elasticity. Some Numerical Problems on MR, TR and Price Elasticity of Demand. (x)  25. Firm: A General Analysis of its Nature, Objectives and Equilibrium 596–621 Introduction: The Nature of Firm: The Firm as an Agent of Production; Organising Economic Activity by a Firm: Market Coordination Vs. Managerial Coordination. Why Does a Firm Exist: Coase's View. Objectives of a Firm: Profit Maximization Objective; A Critique of Profit Maximisation Objective: The Objective of Securing a Steady Flow of Profits. Sales-maximization Objective; Maximization of Utility Function with Leisure as a Desirable Object; Hall and Hitch’s Mark-up Pricing Approach and Profit Maximisation. Utility Maximisation by Managers of Corporate Business Firms: Satisficing Behaviour; Staff Maximisation. Case for Maximisation of Profits. Equilibrium of the Firm: Total Revenue-Total Cost Approach, Marginal Revenue-Marginal Cost Approach. Second Order Condition for Equilibrium of the Firm. A Numerical Example of Profit Maximisation. 26. Pricing in Competitive Markets: Demand-Supply Analysis 622–634 Marshallian Versus Walrasian Approaches to Price Theory: Marshall’s Partial Equilibrium Analysis, Walras’ General Equilibrium Analysis. Price Determination: Static Equilibrium Between Demand and Supply. Walrasian Price Adjustment and Marshallian Quantity Adjustment. Are Demand and Supply Final Answers to the Pricing Problem ? Demand-Supply Model of Price-Output Determination: Mathematical Analysis. Marshall’s Theory of Value: Time-Period Analysis. 27. Applications of Demand and Supply Analysis 635–651 Introduction. Price Control and Rationing. Rent Control. Minimum Support Price. Paradox of Poverty Amidst Plenty. Crop Restriction Programme and Farmers’ Income. Why did OPEC Fail to Keep the Price of Oil High for Long? Fight Against Use of Drugs. Incidence of Taxation. 28. Equilibrium of the Firm and Industry Under Perfect Competition 652–686 Conditions of Perfect Competition. Demand Curve of a Product Facing a Perfectly Competitive Firm. Short-run Equilibrium of the Competitive Firm. Shutting Down in the Short-run. Long-run Equilibrium of the Firm Under Perfect Competition. Long-run Equilibrium Adjustment of a Competitive Firm. Why Do Competitive Firms Stay in Business if they Make Zero Economic Profits in the Long Run? Short-run Supply Curve of the Perfectly Competitive Firm. Short-run Supply Curve of the Competitive Industry. The Equilibrium of the Competitive Industry. Economic Efficiency of Perfectly Competitive Market. Consumer Surplus and Producer Surplus. Economic Efficiency and Perfect Competition: Pareto Efficiency Analysis. Market Failures of a Perfectly Competitive Economy: Externalities and Market Failure. Public Goods and Market Failure. Imperfect Information. Distribution of Goods and Economic Inefficiency. Numerical Problems on Perfect Competition Model. Appendix to Chapter 28: Competitive Equilibrium Under Differential Cost Conditions 687–691 Short-run Equilibrium of the Firm: Differential Cost Conditions. Long-run Equilibrium of Firm: Differential Cost Conditions. Differential Cost Conditions and Economic Rent. 29. Comparative Static Analysis of Equilibrium and Long-Run Supply Curve of the Competitive Industry 692–705 Introduction. Comparative Static Analysis. The Concept of Supply Curve. Long-run Supply Curve under Perfect Competition: Long-run Supply Curve in Increasing-Cost Industry; Long-run Supply Curve in the Constant-Cost Industry; Long-run Supply Curve in the Decreasing-Cost Industry. Change in Competitive Equilibrium in Response to Changes in Input Prices and Technology Response of Price and Output of the Competitive Industry to Changes in Technology. 30. Existence and Stability of Equilibrium under Perfect Competition 706–716 Existence of Equilibrium. Multiple Equilibria. Stability of Equilibrium. Walrasian Price Adjustment and Marshallian Quantity Adjustment. Static Stability Vs. Dynamic Stability. Dynamic Stability with Lagged Adjustment: Cobweb Model. Stability of Equilibrium: Policy Implications. (xi)  31. Kaldor and Sraffa on Incompatibility of Equilibrium with Perfect Competition 717–731 Controversy: Incompatibility of Firm’s Equilibrium Under Perfect Competition and Decreasing Costs (Increasing Returns to scale). Incompatibility of Competitive Firm’s Equilibrium with Constant Costs (Constant Returns). Kaldor on Incompatibility of Firm’s Long-Run Static Equilibrium with Perfect Competition. Sraffa on Incompatibility of Competitive Equilibrium with Increasing Returns. Sraffa’s Challenge to Perfect Competition Model and his Advocacy of the Adoption of Monopoly Model. Comments over Sraffa’s Analysis. 32. Price and Output Determination under Monopoly 732–758 Monopoly: Its Meaning and Conditions. Sources or Causes of Monopoly. The Nature of Demand and Marginal Revenue Curves under Monopoly. Relation between Marginal Revenue and Price. MR, Price and Elasticity of Demand under Monopoly. Price-Output Equilibrium under Monopoly. Price and Marginal Cost under Monopoly. Monopoly Equilibrium and Price Elasticity of Demand. Monopoly Equilibrium in Case of Zero Marginal Cost. Long-Run Equilibrium under Monopoly. Monopoly Equilibrium and Perfectly Competitive Equilibrium Compared. Absense of Supply Curve under Monopoly. Monopoly, Resource Allocation and Social Welfare. Numerical Problem on Dead-Weight Loss. 33. Price Discrimination 759–776 Meaning of Price Discrimination. Degrees of Price Discrimination : Price Discrimination of the First Degree, Price Discrimination of the Second Degree, Price Discrimination of the Third Degree. When is Price Discrimination Possible ? When is Price Discrimination Profitable? Price and Output Equilibrium under Price Discrimination. International Price Discrimination and Dumping. Perfect Price Determination: Output Determination. Case when Output of a Commodity is Possible Only under Price Discrimination. Price Discrimination and Social Welfare. Numerical Problem on Price Discrimination. 34. Measurement of the Degree of Monopoly Power 777–783 Elasticity of Demand as a Measure of Monopoly Power. Lerner’s Measure of Monopoly Power, Lerner's Index of Monopoly Power and Price Elasticity of Demand. Critique of Lerner’s Measure of Monopoly Power. Cross Elasticity of Demand as a Measure of Monopoly Power. Criticism. 35. Price and Output under Bilateral Monopoly 784–789 Price and Output under Bilateral Monopoly. Price and Output under Bilateral Monopoly Explained with the Help of Contract Curve. 36. Price and Output Determination under Monopolistic Competition 790–808 Imperfect Competition: Monopolistic Competition and Oligopoly. Product Differentiation and Monopolistic Competition, Important Features of Monopolistic Competition. Price-Output Equilibrium under Monopolistic Competition. Individual Firm’s Equilibrium under Monopolistic Competition. Long-Run Firm’s Equilbrium and Group Equilibrium under Monopolistic Competition. Excess Capacity under Monopolistic Competition. Price-Output Equilibrium under Monopolistic Competition Compared with that under Perfect Competition. Monopolistic Competition and Economic Efficiency. 37. A Critique of Chamberlin’s Theory of Monopolistic Competition 809–822 Superiority of Chamberlin's Approach. Uniformity Assumption Challenged. Symmetry Assumption Criticised. Challenge to Chamberlin’s Concept of Group by Stigler and Triffin. Monopolistic Competition and the Concept of Marginal Revenue. Number of Firms, Demand Elasticity and Market Imperfection. Monopolistic Competition and Increasing Returns (Economies of Scale). Freedom of Entry and Monopolistic Competition. Excess Capacity Criticism. Conclusion. 38. A Critical Evaluation of Excess Capacity of Doctrine Monopolistic Competition Theory 823–834 Cassel’s Two Concepts of Excess Capacity. Chamberlin’s Concepts of Proportional and Perceived Demand Curves. Short-run Firm’s Equilibrium under Monopolistic Competition : Chamberlin’s Alternative Approach. Chamberlin’s Concepts of Ideal (xii)  Output and Emergence of Excess Capacity. Harrod’s Critique of the Excess Capacity Doctrine. Kaldor’s Critique of the Theory of Excess Capacity. Conclusion. 39. Chamberlin’s Monopolistic Competition vs. Joan Robinson’s Imperfect Competition Theories 835–842 Introduction. Chamberlin Views: Real-World Market Situations as Blend of Competition and Monopoly. Chamberlin Lays Stress on Product Differentiation. Chamberlin’s Penetrating Analysis of Non-Price Competition, that is, Product Variation and Selling Costs. Analysis of Oligopoly Problem Neglected in Robinson’s Imperfect Competition Theory. According to Chamberlin, Perfect Competition cannot be Regarded as Welfare Ideal. Differences Regarding the Concept of Exploitation of Labour. 40. Price and Output Determination under Oligopoly 843–866 Introduction. Characteristics of Oligopoly: Interdependence, Importance of Advertising and Selling Costs, Group Behaviour, Indeterminateness of Demand Curve Facing an Oligopolist. Causes for the Existence of Oligopolies. Are Price and Output under Oligopoly Indeterminate? Various Approaches to Determination of Price and Output under Oligopoly. Cooperative Vs Non-Cooperative Behaviour: Basic Dilemma of Oligopoly. Collusive Oligopoly: Cartels as a Cooperative Model. Price Leadership: Types of Price Leadership; Price-Output Determination under Low-Cost Price Leadership; Price Leadership by the Dominant Firm. Difficulties of Price Leadership. Kinked Demand Curve Theory of Oligopoly. Prof. Stigler’s Critique of Kinked Demand Curve and his Empirical Study. 41. Classical Models of Oligopoly 867–888 Introduction; Cournot’s Duopoly Model: Cournot's Approach to Equilibrium; Comparison of Cournot’s Equilibrium with Perfectly Competitive Equilibrium and Monopoly Equilibrium. Cournot’s Duopoly Equilibrium as an Example of Nash Equilibrium. Cournot’s Duopoly Model: Mathematical Illustration. Cournot’s Duopoly Equilibrium Explained with the Aid of Reaction Curves. Bertrand’s Duopoly Model. Edgeworth Duopoly Model. Comments over the Classical Models of Duopoly (Oligopoly.) Chamberlin’s Oligopoly Model. Stackelberg Model: Folloer's Problem; Leader's Profit Maximising Problem. 42. Non-Price Competition: Selling Cost and Advertising 889–901 Introduction. Selling Costs Distinguished from Production Costs. Importance of Advertising and other Selling Costs under Monopolistic Competition and Oligopoly. Effect of Selling Costs (Advertising Expenditure) on Demand. The Curve of Average Selling Cost. Optimum Level of Advertising Outlay (Selling Costs): With Price and Product Variety as Constant. Optimum Level of Advertising Expenditure or Selling Costs when Both Price and Output are Variables. Effect of Advertising (Selling Costs) on Elasticity of Demand. Effect of Advertising (Selling Costs) on Price and Output. 43. Cost-Plus (or Mark-up) Pricing Theory 902–910 Adding Mark up to Average Cost. Cost-Plus Pricing: A Critique of Cost-Plus Pricing. 44. Theory of Games and Strategic Behaviour 911–929 Introduction. Cooperative and Non-Cooperative Games. Dominant Strategy. Choice of an Optimal Strategy in the Absence of a Dominant Strategy. Nash Equilibrium. Neumann-Morgenstern’s Game Theory: Maximin and Minimax Strategies. Equilibrium (Saddle) Point. Critical Appraisal of Maximin Strategy. The Prisoners’ Dilemma and Oligopoly Theory. Prisoners’ Dilemma and Instability of a Cartel. Repeated Games and Tit-for-Tat Strategy. Strategic Moves. Entry Deterrence. 45. Sales Maximisation Model of Oligopoly Firm 930–937 Rationale for Sales Maximization Hypothesis. Sales Maximisation Model: Price-Output Determination of a Product without Advertising. Optimal Advertising Outlay. Sales Maximization Model: Pricing and Changes in Fixed Costs. Emphasis on Non-Price Competition in Sales Maximization Model. Critical Appraisal of Sales Maximization Model. 46. Managerial Theories of the Firm: Marris and Williamson's Models 938–950 Managerial Models: Separation of Control from Ownership. Marris’s Managerial Theory of the Firm; Equilibrium of the Firm. Instrument Variables in Marris' s (xiii)  Model. Evaluation of Marris's Model. Williamson’s Managerial Theory of the Firm: Williamson's Managerial Discretional Model; Managerial Utility Maximization. Graphic Representation of Williamson's Managerial Discretionary Model. 47. Behavioural Theory of the Firm: Satisficing Model 951–958 Introduction. The Firm as a Coalition of Group with Conflicting Multiple Goals. The Aspiration Level and Satisficing Behaviour. Organisational Slack. The Process of Decision Making by the Firm. Price and Output Determination in the Behavioural Theory. Critical Evaluation of Behavioural Theory. 48. Theory of Limit Pricing 959–971 Introduction. Basics of the Theory of Limit Pricing: Bain’s Model. Barriers to Entry and Limit Price. Sylos-Labini Model of Limit Pricing: Fixation of Limit Price. Modigliani’s Model of Limit Pricing: Generalisation of Sylos’s Model. Bhagwati’s Extension of Modigliani’s Model. Critical Evaluation of the Theory of Limit Pricing. 49. Government Policies Towards Monopoly and Competition 972–983 Introduction, The Drawbacks of Monopolies and Limited Competition. Public Policy towards Monopoly and Competition. Problems of Nationalised Industries. Regulation of Natural Monopolies: Public Interest Theory and Marginal-Cost Pricing; Average Cost Pricing ; Capturing Regulators, Encouraging Competition. PART – V THEORY OF DISTRIBUTION (PRICING OF FACTORS) 50. Theory of Distribution: A General View 987–1009 Functional vs. Personal Distribution. Micro and Macro Theories of Distribution. Theory of Distribution as a Special Case of Price Theory. Marginal Productivity Theory of Distribution: Marginal Productivity Theory: Clark’s Version. Marginal Productivity Theory: Marshall-Hick’s Version. Critical Evaluation of Marginal Productivity Theory. Euler’s Theorem and Product Exhaution Problem or Adding-up Problem. Wicksteed’s Solution of Product Exhaustion Problem. Wicksell, Walras, Barone, Samuelson and Hicks’ Solution of Product Exhaustion Problem. Interrelationships between Value, Production and Distribution. 51. Neo-Classical Macro-Theory of Relative Distributive Shares 1010–1024 Relative Shares of Labour and Capital - Changes in Absolute Shares of Labour and Capital - Elasticity of Substitution and Changes in Relative Factor Shares in Neo- Classical Distribution Theory. Technological Progress and Factor Shares in Income. Cobb - Douglas Production Function and Distributive Shares of Labour and Capital. Solow’s and SMAC Production Functions and Relative Shares of Labour and Capital - Critical Evaluation of Neo-Classical Theory of Relative Shares. 52. Pricing of Factors in Competitive Markets 1025–1073 Concepts of Factor Productivity. Marginal Revenue Product (MRP) and Value of Marginal Product (VMP). Factor-Employment Equilibrium of a Firm: General Conditions. Derived Demand for a Factor. Factor-Employment Equilibrium of a Firm in Competitive Markets. The Average Revenue Product and the Decision to Employ a Factor. Derivation of Demand Curve for a Single Variable Factor. Demand for a Factor (Labour) with more than One Variable Factor. Competitive Industry’s Demand Curve for Labour. Determinants of Demand for Factors. Factors Determining Elasticity of Factor Demand. The Nature of Supply of Factors: Supply of Land, Supply of Labour, Indifference Curves between Income and Leisure: Attitude towards Work and Leisure. Effect of Wage Increase on Work Effort: Income Effect and Substitution Effect. Wage Offer Curve and Supply Curve of Labour. Wage Determination in a Perfectly Competitive Labour Market. 53. Pricing of Factors in Imperfectly Competitive Markets 1074–1090 Wage Determination in Case of Perfect Competition in Labour Market and imperfect Competition in Product Market. Factor Pricing (Wage Determination) Under Monopsony. Wage Determination when there is Monopsony in (xiv)  the Labour Market and Perfect Competition in the Product Market. Wage Determination when there is Monopsony in the Labour Market and Monopoly in the Product Market. Exploitation of Labour: How Can Labour Exploitation be Removed? 54. Trade Unions, Collective Bargaining and Wages 1091–1111 Superfluous Role of Trade Unions in Traditional Wage Theories: Perfect Competition in the Labour Market. Trade Union and Wages. The Effect of a Trade Union in Case of Monopsony in the Labour Market. Alternative Union Goals. Positive Role of Trade Unions in Raising Wages. Wage Determination under Collective Bargaining. Bilateral Monopoly Model. Wage Determination under Collective Bargaining: Bilateral Monopoly Model. Hicksian Analysis of Wage Determination under Collective Bargaining. 55. Theory of Rent 1112–1134 Introduction. Ricardian Theory of Rent: Scarcity Rent: Rent as Surplus over Cost of Production - Differential Rent. Critical Evaluation of Ricardian Theory of Rent. Quasi-rent. 56. Theories of Interest 1135–1163 Introduction. Classical Theory of Interest. Critical Appraisal of the Classical Theory of Interest. Loanable Funds Theory of Interest. Critical Evaluation of Loanable Funds Theory. Keynes’s Liquidity Preference Theory of Interest. Critical Appraisal of Keynes’s Liquidity Preference Theory of Interest. Synthesis between Classical and Keynes’s Theories of Interest: LS-LM Curve Model. Why Money Interest Rate is Positive; Keynes’s View; Fisher’s Analysis. 57. Theory of Profits 1164–1174 Introduction. Profit as a Dynamic Surplus. Innovations and Profits: Schumpeter’s Theory of Profits. Risk, Uncertainty and Profits: Knight’s Theory of Profits. Monopoly Theory of Profits. 58. Alternative Macro-Theories of Distribution 1175–1199 Problem of Distributive Shares. Ricardian or Classical Theory of Income Distribution. Criticism of Ricardian Macro-Theory of Distribution. The Marxian Theory of Income Distribution. Critique of the Marxian Theory of Distribution. Kalecki’s ‘Degree of Monopoly’ Theory of Distributive Shares. Kaldor’s or Keynesian Theory of Income Distribution. Critical Appraisal of Kaldor’s Theory of Distribution. PART – VI GENERAL EQUILIBRIUM ANALYSIS AND WELFARE ECONOMICS 59. General Equilibrium Analysis 1203–1221 Partial Equilibrium and General Equilibrium Analysis. General Equilibrium of Exchange and Consumption: A Pure Exchange Economy Model. General Equilibrium of Production. Transformation Curve and General Equilibrium of Production. General Equilibrium of Production and Exchange. General Equilibrium and Initial Endowments. General Equilibrium Determines only Relative Prices. General Equilibrium and Perfect Competition. 60. Welfare Economics: An Introduction 1222–1228 What Welfare Economics is about. Individual Welfare and Social Welfare. Three Concepts of Social Welfare. Role of Value Judgements in Welfare Economics. 61. Concept and Conditions of Pareto Optimality 1229–1255 Pareto Criterion of Social Welfare: Equilibrium Approach. Marginal Conditions of Pareto Optimum: The Optimum Distribution of Products among the Consumers: Efficiency in Exchange. The Optimum Allocation of Factors: The Optimum Direction of Production. The Optimum Degree of Specialisation; The Optimum Factor-Product Relationship. The Optimum Allocation of a Factor’s Time; Inter-temporal Optimum Allocation of Money Assets. The Second Order and Total Conditions. A Critical Evaluation of Pareto Criterion and Pareto Optimality. Perfect Competition and Pareto Optimality. Perfect Competition and Optimum Distribution of Goods or Efficiency in Exchange. Perfect Competition and the Optimum Allocation of Factors between Firms. (xv)  Perfect Competition and Optimum Degree of Specialisation. Perfect Competition and Allocative Efficiency (Optimum Direction of Production). Perfect Competiton and Optimum Factor-Product Relationship. Fundamental Theorem of Welfare Economics – Does Perfect Competition always ensure Pareto Optimality and Maximum Social Welfare? Failures of Market and Role of Government. 62. New Welfare Economics: Compensation Principle 1256–1263 Introduction. Kaldor-Hicks Welfare Criterion: Compensation Principle. Scitovsky Paradox. Scitovsky’s Double Criterion of Welfare. A Critique of the Compensation Principle. 63. Grand Utility Possibility Frontier and Welfare Maximization 1264–1269 Introduction. From Factor Endowments and Production Functions to the Production Possibility Curve. From the Production Possibility Curve to the Grand Utility Possibility Frontier. From the Grand Utility Possibility Frontier to the Point of Constrained Bliss. 64. Market Failures, Externalities and Public Goods 1270–1284 Monopoly as an Obstacle to the Attainment of Pareto Optimality. Externalities and Market Failure. Positive or Beneficial Externalities in Production. Externalities in Consumption. How Externalities Cause Market Failure ? Government Intervention and Externalities. Public Goods and Market Failure: Free-Rider’s Problem, Public Goods and Pareto Efficiency. Theory of the Second Best. 65. Social Welfare Function and Theory of Social Choice 1285–1302 Introduction. The Classical Social Welfare Function. Pareto Social Welfare Function. Maximin or Rawlsian Social Welfare Function. Bergson-Samuelson’s Social Welfare Function. Representation of Bergson-Samuelson Social Welfare Function through Social Indifference Curves. Maximum Social Welfare: Point of Constrained Bliss. A Critical Evaluation of Bergson-Samuelson Social Welfare Functions. Prof. Amartya Sen's Critique. Arrow’s Theory of Social Choice. Arrow’s Impossibility Theorem. Arrow's Consequences. Amartya Sen on Arrow's Impossibility Theorem. Alternative Social Choice Theories: Classical Utilitarian Welfare Criterion. Rawl’s Concept of Social Justice and Welfare Criterion. PART – VII INTERTEMPORAL CHOICE AND MARKETS WITH ASYMMETRIC INFORMATION 66. Interest, Saving and Investment: Intertemporal Choice 1305–1323 Introduction. Intertemporal Choice: Lending. Supply Curve of Lending. Intertemporal Choice: Borrowing. Borrowing-Lending Equilibrium. Saving-Investment Equilibrium. Determination of Market Interest Rate with Saving and Investment, Borrowing and Lending. Investment Decisions and Present Value Rule. Application of Present Value Rule to Education or Human Capital. Appendix to Chapter 66: Cost-Benefit Analysis 1324–1329 Meaning. The Use of Cost-Benefit Analysis. Cost-Benefit Criterion. General Steps (or Stages) of Cost-Benefit Analysis. Importance of Cost-Benefit Analysis. 67. Information Problem and Markets with Asymmetric Information 1330–1347 The Information Problem. The Market for Lemons and Adverse Selection. Asymmetric Information. Adverse Selection. Measures Adopted to Solve the Problem of Adverse Selection. The Insurance Market and Adverse Selection. The Problem of Moral Hazard. Moral Hazard and Allocative Inefficiency. Market Signalling. The Principal-Agent Problem. The Principal-Agent Problem in Private Sector. Efficiency Wage Theory. (xvi)  PART–I SCOP SCOP OPEE AND ME THOD METHOD OL THODOL O GY OF OLO ECONOMICS ECONOMICS  Nature and Scope of Economic Theory  Micro and Macro-Economics  Methodology of Economics  Methodology of Economics: Economic Statics and Dynamics  Basic Mathematical Concepts and Optimisation Techniques  CHAPTER 1 Nature and Scope of Economic Theory T he Economic P Prroblem : Sc ar Scar cit cityy and C arcit hoice Choice Economic theory enunciates the laws and principles which govern the functioning of an economy and its various parts. An economy exists because of two basic facts. First, human wants for goods and services are unlimited, and secondly, productive resources with which to produce goods and services are scarce. With our wants being virtually unlimited and resources scarce, we cannot satisfy all our wants and desires by producing everything we want. That being the case, a society has to decide how to use its scarce resources to obtain the maximum possible satisfaction of its members. It is this basic problem of scarcity which gives rise to many of the economic problems which have long been the concern of economists. Since it is not possible to satisfy all wants with the limited means of production, every society must decide some way of selecting those wants which are to be satisfied. The necessity for economising arises therefore from the fact that we have limited productive resources such as land, raw materials, skilled manpower, capital equipment etc. at our disposal. These resources being found in limited quantity (the quantity may however increase over time), the goods they can produce are also limited. Goods are thus scarce because the productive resources are scarce. Since the resources are limited in relation to our wants, we should get most out of what we have. Thus a society is faced with the problem of choice—choice among the vast array of wants that are to be satisfied. If it is decided to use more resources in one line of production, then resources must be withdrawn from the production of some other goods. The scarcity of resources therefore compels us to choose among the different channels of production to which resources are to be devoted. In other words, we have the problem of allocating scarce resources so as to achieve the greatest possible satisfaction of wants of the people. This is the economic problem. It is also called the economising problem. The scarcity of resources relative to human wants gives rise to the struggle of man for sustenance and efforts by him to promote his well-being. That the scarcity of resources in relation to human wants is the fundamental economic problem can be easily understood in the context of poor and developing countries like India where quite a large number of population live at a bare subsistence level. The struggle for existence due to the scarcity of resources is too obvious in them to need any elaborate explanation. However, to say that the developed countries, such as the U.S.A., where affluence and prosperity have been brought about also confront the scarcity problem raises some doubts. But the fact is, despite their affluence and riches, developed societies too face the problem of scarcity. Of course, their possession of goods and services has enormously increased, but so have their wants. Indeed, their wants for goods and services have been multiplying during the course of economic growth so that their present wants still  4 Advanced Economic Theory remain ahead of their resources and capability to produce. As has been said above, the problem of scarcity of resources is not only the result of availability of limited resources and capability to produce but also of human wants. So long as human wants for goods and services remain ahead of the resources, both natural and acquired, the economic problem of scarcity would exist. If Americans today, for example, were content to live at the level of the Indian middle class people, all their wants would probably be fully satisfied with their available resources and capacity to produce. In that situation they would face little or no scarcity and economic problem for them would disappear. However, it needs to be emphasized again that the affluent and developed countries of the U.S.A. and Western Europe face the problem of scarcity even today as their present wants run ahead of their increased resources and capability to produce. Since all wants cannot be satisfied due to scarcity of resources we face the problem of choice–choice among multiple wants which are to be satisfied. If it is decided to use more resources in one line of production, some resources must be withdrawn from another commodity. Thus, the problem of choice from the viewpoint of the society as a whole refers to which goods and in what quantities are to be produced and productive resources allocated for their production accordingly so as to achieve greatest possible satisfaction of the people. An eminent English economist Lord Robbins defines economics in terms of this basic economic problem. According to him, “Economics is a science which studies human behaviour as a relationship between ends and scarce resources which have alternative uses.”1 Here ends refer to wants which are considered to be unlimited. The use and allocation of scarce resources to produce goods and services have to be such as would maximise satisfaction. This applies both to the behaviour of the individual and of the society as a whole. The scarcity of resources also compels us to decide how the different goods should be produced, that is, what production methods should be chosen for the production of goods so as to make best possible use of the available resources. If the resources were unlimited, the problem of how goods should be produced would not have arisen. This is because with unlimited resources it would not matter whichever method, efficient or inefficient, was employed for production of goods. Further, due to scarcity of resources goods cannot be produced in abundant quantities to satisfy all wants of all the people of a society. This raises another problem of choice, namely, who should get how much from the national output. This means how the national product is distributed among various members of a society. Thus, problem of scarcity gives rise to some problems generally known as basic economic problems which a society has to solve so as to promote material well-being of its people. These basic economic problems relate to what commodities are to be produced, how they are to be produced, how the national product is to be distributed among the people, and how much to provide for future growth. It is with regard to these problems of resource allocation, the choice of production methods, distribution and economic growth, which have their roots in scarcity of resources, that economists have been asking questions from time to time and providing answers for them. Besides, economists have also been raising questions about the efficiency of the resource allocation for the production of goods and their distribution among them people. This question of economic efficiency is aimed at knowing whether or not a particular allocation of resources to the production of various goods and distribution of income among them ensures maximum social welfare. The knowledge of the scope and purpose of economic theory can be obtained from the type of relevant questions that have been asked by the economists from time to time and their mode of answering them. 1. L. Robbins, Essay on the Nature and Significance of Economic Science, London, 1932, p. 15.  Nature and Scope of Economic Theory 5 T he Scope of Economic T heor heoryy and Basic Economic P Prroblems There has been a lot of controversy among economists about the true scope of economic theory or its subject-matter. The subject-matter of economics or economic theory has been variously defined. According to Adam Smith, economics enquires into the nature and causes of the wealth of nations. According to Ricardo, economics studies “how the produce of the earth is distributed”, that is, economics deals with the distribution of income and wealth. According to Marshall, economics is a study of mankind in the ordinary business of life and examines that part of individual and social action which is connected with material requisites of well-being. A. C. Pigou says, “economics studies that part of social welfare which can be brought directly or indirectly into relationship with the measuring rod of money”. Gustav Cassel has defined economics as dealing with markets, prices and market exchange. Professor Lionel Robbins defines economics as a study of the allocation of scarce resources among competing ends or uses. Ludwig Von Mises has defined economics as “the logic of rational action”. Each definition of economics given above is incomplete and inadequate since they do not indicate the true scope and subject-matter of economics. Moreover, some of them are “too wide’’ and some “too narrow”. Professor Boulding aptly remarks about some of the above definitions : “To define it (economics) as a study of mankind in the ordinary business of life” is surely too broad. To define it as the study of material wealth is too narrow. To define it as the study of human valuation and choice is again probably too wide, and to define it as the “study of that part of human activity subject to the measuring rod of money is again too narrow” A great confusion has been created about the true nature and scope of economics because of these numerous and conflicting definitions of economics. J. N. Keynes was right when he said, “Political economy is said to have strangled itself with definitions.”2 In view of the present author, the subject-matter of the science of economics has grown so wide and vast that it is extremely difficult to put it in a “nutshell” of a definition. It is because of this fact that modern economists have now stopped discussing the proper way of defining economics. In fact, they think any attempt to define economics is a useless and futile exercise. They are of the view that what economics is about can be better explained by pointing out the various issues and questions with which economists are concerned. It is because of the difficulties in putting the whole subject-matter of economics in a definition of a few words that Jacob Viner has given a pragmatic definition of economics. According to him, “Economics is what economists do.” In other words, what economics is, can be better understood from what economists do and what they have been doing. That is to say, what type of questions economists ask and have been asking and what answers they have provided for them. Thus, what economics is about or, in other words, what is the scope and subject-matter of economics can be better known by spelling out the questions economists have been asking and the basic economic problems they have been concerned with. The following are the main questions which have been asked by the economists from time to time. It is worth remembering that all these fundamental questions arise because of the basic problem of scarcity confronting an economy. 1. What goods are produced and in what quantities by the productive resources which the economy possesses ? 2. How are the different goods produced ? That is, what production methods are employed for the production of various goods and services ? 3. How is the total output of goods and services of a society distributed among its people ? 2. J. N. Keynes, Scope and Method of Political Economy, p. 3.  6 Advanced Economic Theory 4. Are the use of productive resources economically efficient? 5. Whether all available productive resources of a society are being fully utilized, or are some of them lying unemployed and unutilized ? 6. Is the economy’s productive capacity increasing, declining or remaining static over time ? The six questions listed above have been the concern of economic theory from time to time. As said above, all of them arise from the fundamental problem of scarcity. All economies whether they are capitalist, socialist or mixed, must take decision about them. Economic theory studies how these decisions are arrived at in various societies. It is worth mentioning that economic theory has been mainly evolved and developed in the framework of capitalist institutions where free market mechanism plays a dominant role in solving the above basic problems. Therefore, mainstream economic theory assumes free market system and explains how the above six problems are solved by it and with what degree of efficiency. We shall explain below above six problems and questions in detail and see how they are related to the problem of scarcity. 1. T he P Prroblem of Al loc Alloc at locat ion of Resour ation ces Resources The first and foremost basic problem confronting an economy is “What to produce” so as to satisfy the wants of the people. The problem of what goods are to be produced and in what quantities arises directly from the scarcity of resources. If the resources were unlimited, the problem of what goods are to be produced would not have arisen because in that case we should have been able to produce all goods we wanted and also in the desired quantities. But because resources are in fact scarce relative to human wants, an economy must choose among various goods and services. Wants for those goods which society decides not to produce will remain unsatisfied. Thus the question of selecting goods for production implies which wants should be satisfied and which ones to be left unsatisfied. If the society decides to produce a particular good in a larger quantity, it will then have to withdraw some resources from the production of other goods and devote them to the production of the good which is to be produced more. The greater the quantity of a good which is desired to be produced, the greater the amount of resources allocated to that good. The question of what goods are produced and in what quantities is thus a question about the allocation of scarce resources among the alternative uses. Thus, with the given scarce resources, if the society decides to produce one good more, the production of some other goods would have to be cut down. For instance, at times of war, when the society decides to produce more war goods like guns, jet planes and other armaments, some resources have to be withdrawn from the production of civilian goods and devoted to the production of war goods. Because of the scarcity of resources we cannot have more ‘guns’ and more ‘butter’; some ‘butter’ has to be scarified for the sake of more ‘guns’. What determines the allocation of resources and what are the results of attempts made to change the allocation has occupied the minds of economists from the very beginning of our economic science. Whatever the type of economy, be it capitalist, socialist or mixed, a decision has to be made regarding allocation of resources. In a capitalist economy, decisions about the allocation of resources or, in other words, about what goods are to be produced and in what quantities are made through the free-market price mechanism. A capitalist or free-market economy uses impersonal forces of demand and supply to decide what goods are to be produced and in what quantities and thereby determines the allocation of resources. The producers in a free-market economy, motivated as they are by profit considerations, take decisions regarding what goods are to be produced and in what quantities by taking into account the relative prices  Nature and Scope of Economic Theory 7 of various goods. Therefore, the relative prices of goods, which are determined by free play of forces of demand and supply in a free market economy, ultimately determine the production of goods and the allocation of resources. The branch of economic theory which explains how the relative prices of goods are determined is called Microeconomic Theory or Price Theory and has been the concern of economists from the earliest days of economics. 2. C hoice of a P Prroduct ion Method oduction There are various alternative methods of producing goods and a society has to choose among them. For example, cloth can be produced either with automatic looms or with powerlooms or with handlooms. Similarly, fields can be irrigated (and hence wheat can be produced) by building small irrigation works like tubewells and tanks or by building large canals and dams. Therefore, it has to decide whether cloth is to be produced by handlooms or powerlooms or automatic looms. Similarly, it has to decide whether the irrigation has to be done by small irrigation works or by large canals. Obviously, it is a problem of the choice of production techniques. Different methods or techniques of production would use different quantities of various resources. For instance, the production of cloth with handloom would make use of relatively more labour and less capital. On the other hand, production with automatic looms uses relatively more capital and less labour. Therefore, production with handlooms is a labour-intensive technique while production with automatic looms is a capital-intensive technique of producing cloth. Thus, a society has to choose whether it wants to produce with labour-intensive methods or capital-intensive methods of production. More generally, the problem of ‘how to produce’ means which combination of resources is to be used for the production of goods and which technology is to be made use of for their production. Scarcity of resources demands that goods should be produced with the most efficient method. If the economy uses its resources inefficiently, the output will be less and there will be unnecessary loss of goods which otherwise would have been available. The choice between different methods of production by a society depends on the available supplies and the prices of the factors of production. The criterion for the choice of a method of production should therefore be the cost of production per unit of output involved in various methods. We have noted above that economic resources are scarce relative to demand. But economic resources are unequally scarce; some are more scarce than others. Therefore, it is in society’s interest that those methods of production be employed that make the greatest use of the relatively plentiful resources and economises as much as possible on the relatively scarce resources. Why one method of production is used rather than another and consequences of the method used are dealt with in the Theory of Production. In the theory of production we study the physical relationship between inputs and outputs. This physical relationship between inputs and outputs along with prices of factors goes to determine the cost of production. Cost of production governs the supply of goods which together with demand for them determines their prices. The theory of production thus becomes a part of microeconomic theory (i.e. theory of price) and will be explained in detail in the present work. It is worth noting here that the choice of technique of production is dealt with not only in microeconomic theory but is also an important issue in the theory of economic growth. This is because the choice of a production technique determines not only the cost of production of a commodity but also the surplus which can become a source for further investment.3 The greater the surplus, the higher the rate of investment and therefore the higher the rate of growth of output and employment. An eminent economist, Prof. Amartya Sen, currently of 3. See Amartya Sen, Choice of Techniques, Basil Blackwell, Oxford, 1960.  8 Advanced Economic Theory Harvard University, has analysed the choice of technique as an important issue in economics of growth of the developing countries. 3. T he P Prr oblem of Dist Distrr ibut ion of N ibution at Nat ional P ational Prroduct This is the problem of sharing of the national product among the various individuals and classes in the society. The question of distribution of national product has occupied the attention of economists since the days of Adam Smith and David Ricardo who explained the distribution of national product between different social groups such as workers and capitalists in a free market society. Who should get how much from the total output of goods and services is a question concerning social justice or equity. Economists’ interest in this subject has increased very much’ in recent years. It is important to note that the distribution of national product depends upon the distribution of money income. Those people who have larger incomes would have larger capacity to buy goods or to use Prof. Amartya Sen’s phrase, would have larger entitlement for goods and hence will get greater share of output. Those who have low incomes, would have less purchasing power to buy things and will therefore be able to obtain a small share of output. More equal is the distribution of income, more equal will be the distribution of national product. Now, the incomes can be earned either by doing some work or by lending the services of one’s property such as land, capital. Labour, land and capital are factors of production and all of them contribute to the production of national product and get prices or rewards for their contribution. The question as to how the prices or rewards of factors of production are determined is the subject-matter of the Theory of Distribution. After the marginalist revolution in economic theory, theory of distribution has been boiled down to the theory of factor pricing which is an important part of the price theory or what is now popularly called microeconomic theory. The old division of factors into land, labour and capital is retained in modern economic theory but their old association with ‘social classes’, such as capitalist and working classes as was made by classical economists has been given up. The theory of distribution viewed as the theory of pricing of factors of production is merely an extension of the theory of price or value. Prof. A. K. Dassgupta rightly remarks,“Distribution appears an extension of the theory of value, being just a problem of pricing of factors of production. The two aspects of the economic problem are then integrated into a unified and logically self-consistent system. Value of commodities is derived in the ultimate analysis from utility, and value of factors derived from productivity imputed by the commodities which they help in producing. The old tripartite division of factors into land, labour and capital is retained but their old association with social ‘classes’ is lost. Factors are conceived as just productive agents independently of the institutional framework within which they operate.’’4 The theory of distribution viewed as the theory of factor pricing deals with the functional distribution of income rather than the personal distribution of income, since it explains only how the prices of factors, that is, wages of labour, rent of land, interest on capital and profits of entrepreneur are determined. But the question which we raised, namely, “how the national product is distributed among the various individuals that comprise a society” is not fully answered by the theory of functional distribution. It is the personal distribution of income that determines who would get how much from the national product. Now, the income of a person depends not only on the price of a factor he owns and the amount of work he does but also on how much property or assets in the form of factors of production such as land and capital he owns. Private ownership of the means of production is a sine qua non of the capitalist system. Therefore, the personal distribution of income is greatly affected by the distribution of the 4. Tendencies in Economic Theory, Presidential Address to the 43rd Annual Conference of the Indian Economic Association held at Chandigarh, December, 1960.  Nature and Scope of Economic Theory 9 ownership of property. A person who owns a large amount of property will be enjoying a higher income. In the free market capitalist economies because of the large inequalities in the ownership of the property there are glaring inequalities of income. As a result, the distribution of national product is very much unequal in capitalist economies. In recent years, the governments of the capitalist countries, like U.S.A., Great Britain have taken various steps to reduce inequalities of income and property and have accordingly tried to influence the distribution of national product. Since the distribution of the ownership of property is an institutional factor, it will not be discussed in this book which deals with pure economic theory. We shall, therefore, confine ourselves to the analysis of the theory of functional distribution which is an integral part of the microeconomic theory. 4. T he P Prroblem of Economic Efficienc Efficiencyy Resources being scarce, it is desirable that they should be most efficiently used. It is therefore important to know whether a particular economy works efficiently. It is important to note that concept of economic efficiency is related to the well-being of the members of a society. When allocation of resources is such that no one can be made better off without making anyone else worse off, economic efficiency is said to have been achieved. This concept of economic efficiency was put forward by Italian economist and sociologist, Vilfredo Pareto (1848–1923) and is therefore often called Pareto efficiency or Pareto optimality. The achievement of economic efficiency requires that the allocation of resources and the production and distribution of goods by an economy is Pareto optimal. Having asked what and how goods are being produced and how the total national product is distributed, it is but proper to ask further whether the production and distribution decisions of an economy are efficient ones. The production is said to be efficient if the productive resources are used for production of various goods in such a way that through any rearrangement it is impossible to produce more of one good without reducing the output of any other good. The production would be economically inefficient if it is possible by reorganising the use of resources to increase the production of one good without reducing the output of any other. Likewise, the distribution of the goods among individuals of a society is efficient if it is not possible to make, through any redistribution of goods, some individuals or any one person better off without making any other person worse off. It is not enough to use resources efficiently for production of goods and distribute them efficiently among individuals for consumption. The achievement of these production and distribution efficiencies will not ensure maximum well-being if the economy is allocating resources in the production of goods which do not correspond to the preferences of the people. For attaining economic efficiency, optimum product-mix must be produced, that is, allocation of resources among production of various goods should be in accordance with the preferences of people, given their incomes. If the economy is producing wrong-mix of goods, then through reallocation of resources among them it will be possible to make some people better off without any one worse off. In the later chapters of the book we will explain how under perfect competition where individual firms have no control over the price of the product, the three efficiencies, productive, allocative and distributive, are achieved. Therefore, perfect competition is considered as an ideal market form. On the other hand, under conditions of monopoly, monopolistic competition and oligopoly where individual firms have market power to set price, economic efficiency in production, distribution and allocation of resources is not achieved causing loss of social welfare. Further, it may be noted that these may prevail productive efficiency but the product-mix  10 Advanced Economic Theory produced may not conform to the consumers’ preferences so that there are long queues outside the markets or stores selling commodities whose level of production has been quite insufficient or inadequate as compared to the wants of the consumers for them. Such was the case in erstwhile USSR before the collapse of communism in late nineteen eighties. In our opinion, it is the failure to achieve economic or allocative efficiency which was the chief economic cause of the downfall of communism in erstwhile USSR and East European countries. It may however be noted that attainment of economic efficiency also involves the achievement of productive efficiency. This is because if productive efficiency in the use of resources is not achieved, it would then be possible to make some people better off by increasing production through fuller and better utilisation of resources without making others worse off. Thus with the achievement of economic efficiency a society not only produces the largest possible output with the available resources but also allocates its resources for the production of goods in such a way that conforms to consumers’ preferences. 5. T he PPrroblem of Ful ulll Emplo Ful Employy ment of Resour ces Resources Whether all available resources of a society are fully utilized is a highly significant question because answer to it would determine whether or not there will exist involuntary unemployment of labour as well as of capital stock. In view of the scarcity of resources to satisfy all wants of the people, it may look strange to ask a question whether or not all available resources of a community are being fully utilized. This is because resources being scarce, a community will try to use all the available resources to achieve maximum possible satisfaction of the people. Thus a community will not consciously allow the resources to lie idle. But in a capitalist free market society it so happens that at times of depression available resources are not fully utilised. At times of depression, many workers are rendered unemployed; they want to be employed but no jobs are there for them. At such times, factories which can employ people are there, but they are not working. Thus, at times of depression in capitalist economies, even the scarce available resources are not fully employed. This question assumed great importance in economic theory during the depression of nineteen thirties when, on the one hand, about 25 per cent of labour force in the USA, Britain and other industrialised countries was rendered unemployed and, on the other, a number of factories representing a lot of capital stock remained idle and unused. How did it come about became a controversial question at that time. An eminent British economist, J.M. Keynes put forward a different explanation from the then popularly held view advocated by neo-classical economists led by A. C. Pigou. Thanks to J.M. Keynes who in his book “General Theory of Employment, Interest and Money” published in 1936, explained what caused such involuntary unemployment of resources. Keynes’ explanation was that unemployment of labour at that time was found not because money wages were fixed at higher levels by the activities of strong labour unions and intervention of the Government but because of the fall in aggregate effective demand for goods and services. His theory of deficiency of effective demand causing recession and resulting in involuntary unemployment of labour and underutilisation of capital stock has played an important role in the formulation of economic policies to control fluctuations in economic activity. Keynesian analysis has greatly widened the scope of economic theory and improved our understanding of the working of the capitalist economic system which suffers from large fluctuations in economic activity. This branch of economic theory which deals with the problem of employment of resources (and thus with the determination of national income) is called Macroeconomic Theory. This macroeconomic theory has been greatly developed beyond the Keynesian perception in recent years and several alternative models of macroeconomics have been put forward.  Nature and Scope of Economic Theory 11 6. T he P Prroblem of Economic Grow th Gro It is very important to know whether the productive capacity of an economy is increasing. If the productive capacity of the economy is growing, it will be able to produce progressively more and more goods and services with the result that the living standards of its people will rise. The increase in the capacity to produce goods over time is called economic growth. Now, the analysis of the factors on which the rate of economic growth depends has interested economists since the days of Adam Smith who in his book “An Enquiry into the Nature and Causes of the Wealth of Nations” threw light on the subject. But after the classical economists and with the advent of marginalism the economists’ interest in the problem of economic growth almost disappeared and the marginalist theory of relative prices and resource allocation with its emphasis on scarcity and choice occupied the central position in economic theory for a long time. In the thirties and forties, with the publication of Keynes’ General Theory of Employment, Interest and Money, the problem of depression and business cycles occupied the minds of the economists. But the need for balanced equilibrium growth rate in the developed capitalist countries on the one hand and the urge to remove mass poverty, hunger and chronic unemployment in the developing countries after their achievement of political independence have once again aroused the interests of economists in the problems of economic growth and numerous growth and development models have been put forward. Some of these growth models such as Harrod- Domar model, Neo-classical growth models of Solow and Swan, Cambridge growth models of Kaldor and Joan Robinson etc. have been propounded to explain and analyse the growth problem of the industrialised developed countries.5 Likewise, to initiate and accelerate the process of growth in developing countries, the various theories and models of growth and development have been offered.6 However, it is worth noting that till 1980s the concept of economic development generally implied the active intervention of the government and the public sector in the field of production. And, with the fall of communism in the USSR and East European countries and dismal experience of the working of public sector in the developing countries, the trend all over the world today is to adopt market friendly approach to development. To what extent free-market economy approach would generate greater economic growth and ensure economic efficiency in the developing countries, only the future will tell. Two V ie ws about De iews Devv elopment Economics However, it is worth mentioning that in the scope of development economics today we are not only concerned with the promotion of growth of GNP (gross national product) and raising standards of material living of the people at the present but also with bringing out the adverse and disastrous consequences of depletion of natural resources. Besides, economists are also interested in preventing environmental pollution which occurs through reckless industrialisation and economic growth. If the interests of the future generation are to be promoted, the resources, especially energy resources, have to be conserved and also if quality of life has to be improved, the environment has to be protected and saved from pollution. It is 5. Those who are interested in knowing the various growth models concerning the industrialised developed countries may read “Growth Economics” (Penguin Modern Economics Readings) edited by Amartya Sen. 6. The various leading theories and models of development relating to the developing countries have been brought together in an edited work “Leading Issues in Economic Development” by Gerald M. Meier (Oxford University Press, 8th edition, 2005.) Another two-volume World Bank Publication “Pioneers in Economic Development”, edited by Gerald Meier and Dudley Seers (Oxford University Press, 1989) is a highly useful work describing the contributions of various pioneers in development theories and models of development. Mention may be made of Ragnar Nurkse’s Capital Formation in Underdeveloped Countries, Lewis” Economic Development with. Unlimited Supplies of Labour, Rostow’s Take off into Self-Sustained, Growth, Hirschman’s Strategy of Economic Development, Sen’s Choice of Techniques.  12 Advanced Economic Theory with this regard that the concept of sustainable growth or smtainable development has been put forward which implies that if severe damage is done to the environment and resources and if because of reckless industrialisation resources are not conserved for future, economic growth in the future will be limited. PROBLEM OF SCARCITY VS. PROBLEM OF AFFLUENCE It may be pointed out here that recently some economists in the industrially developed countries, especially USA, have pointed out that the important problem now confronting them is the problem of affluence rather than scarcity. During the past century or two there has been a rapid economic growth in these countries which has brought about unprecedented riches and prosperity to their citizens. As a result, the standards of living of their people have gone up very high. It is said, they have won over the problem of scarcity and poverty and are now facing the problems created by affluence and growth, such as problems of mental tension, optimum use of leisure, environment pollution etc. Thus having achieved growth and affluence they are now thinking with reference to what might be called “beyond economic growth”. The economist who has put forward this point of view is a noted American economist Professor J. K. Galbraith, the former United States Ambassador to India. He presented this viewpoint in his revolutionary book “The Affluent Society”. The use of the term “The Affluent Society” looks strange, since economists have always been laying a great stress on the point that the basic economic problem a society has to encounter is the problem of scarcity, which is the mother of all economic problems that arise in the society. Economists have remained so much preoccupied with scarcity and poverty that it is now difficult for them to believe that economics is concerned with problems of affluence. It is precisely because of economists’ preoccupation with the problems of scarcity even today in Western Europe and the USA that Professor Galbraith has pointed out that their concern with problems of scarcity and poverty has become outdated. According to him, the conventional economic ideas and wisdom are inadequate because the problem has changed from scarcity to affluence, from poverty to prosperity. Emphasizing the affluence of Western European countries and the United States of America he remarks, “the experience of nations with well-being is exceedingly brief. Nearly all throughout all history have been poor... in the last few generations in the comparatively small corner of the world populated by Europeans.... and especially in the United States, there has been great and quite unprecedented affluence.7 And urging the economists to change their traditional ideas about the economic world since it has fundamentally changed, he says, “The ideas by which the people of this favoured part of the world interpret their existence, and in a measure guide their behaviour, were not forged in a world of wealth. These ideas were the product of a world in which poverty had always been man’s normal lot.”8 Speaking about that old ideas about economic behaviour and conventional prescriptions about rational behaviour formed in the world of poverty have become irrelevant and obsolete in today’s world of affluence, he asserts, “No one would wish to argue that the ideas which interpreted the world of grim scarcity would serve equally well for the contemporary United States. Poverty was an all pervasive fact of that world. Obviously, it is not of ours. One would not expect that preoccupations of a poverty-ridden world be relevant in one where the ordinary individual has access to amenities– food, entertainment, personal transportation and plumbing– in which not even the rich rejoiced a century ago. So great has been the change that many of the desires of the individual are no longer even evident to him. They become so only as they synthesized, elaborated and nurtured by advertising and salesmanship.”9 7. J. K. Galbraith, The Affluent Society (1958). p. 1. 8. Ibid, p. 2. 9. Ibid, p. 2.  Nature and Scope of Economic Theory 13 It is true that United States and Western European countries have eliminated general mass poverty from their people and, with the phenomenal progress of science and technology, have achieved unprecedented affluence and enormous production of goods with which they have been able to satisfy their wants to a greater extent. But from this it should not be construed that the economic problem of scarcity has ceased to exist in the so-called affluent world of Western Europe and the USA. The term scarcity in economics is used in a relative sense, that is, in the sense of scarcity of resources relative to the wants of the people. With technological advancement, it is no doubt that developed and rich countries have greatly increased their resources and production but with growth and development new wants and desires have also been created. In view of this, it cannot be said that resources have become abundant in relation to wants in these affluent countries. Of course, it is true that mass poverty as a general phenomenon has disappeared in the affluent societies. But scarcity in the economic sense and poverty are two different things. Therefore, the affluent countries still confront the economic problem of scarcity—the problem of using resources in such a fashion as to attain the maximum possible satisfaction of wants. The problem of economic scarcity would have been won only if the resources would have become abundant in relation to wants which have been multiplying during the process of growth. Besides, the basic economic problems which arise due to the scarcity of resources in relation to wants still confront the affluent societies and they