Namma Kalvi 11th Economics Textbook (English Medium) PDF

www.nammakalvi.com GOVERNMENT OF TAMIL NADU HIGHER SECONDARY FIRST YEAR ECON...

www.nammakalvi.com GOVERNMENT OF TAMIL NADU HIGHER SECONDARY FIRST YEAR ECONOMICS A publication under Free Textbook Programme of Government of Tamil Nadu Department of School Education Untouchability is Inhuman and a Crime First pages of 11th Economics.indd 1 12/12/2021 01:49:42 PM  www.nammakalvi.com Revised Edition - 2019, 2020,2022 (Published Under New Syllabus) The wise possess all 8 II First pages of 11th Economics.indd 2 12/12/2021 01:49:42 PM  www.nammakalvi.com HOW TO USE THE BOOK? Chapter content It presents a complete overview of the chapter Introduction Summary of the presentation in every chapter Objectives Goals to transform the class room processes into learner centric with a list of bench marks Think and Amazing facts and rhetorical questions to lead students Do to economic inquiries Boxes Additional inputs to the content is provided Directions are provided to students to conduct Activity activities in order to explore and enrich the concept. To motivate the students to further explore and enrich the concept ICT To improve the computer based learning skills. Give the values derived from functions which are graphed Tables in the diagrams Concept Conceptual diagrams that depict relationships between concepts Diagrams to enable students to learn the content schematically. Diagrams To illustrate the situations. Glossary Explanation of scientific terms Model Question Papers For Evaluation References List of related books for further details of the topic Web links List of digital resources III First pages of 11th Economics.indd 3 12/12/2021 01:49:42 PM  CAREER GUIDANCE CAREER PROSPECTS IN ECONOMICS First pages of 11th Economics.indd 4 The career prospects for economics graduates are many. Numerous fields are waiting for economic graduates both in public as well as private sectors. In the government sector, one may try for Indian Economic Services, jobs in Reserve Bank of India, PSUs and other public sector banks. All these jobs have wonderful career options. These jobs give social prestige along with financial stability. Private sector also offers jobs for economic graduates in the fields like private banks, MNCs, BPOs, KPOs, Business journals and newspapers. A good opportunity is also waiting for economic students in higher education. One can pursue Ph.D. in economics to enter into the field of teaching in schools, colleges and universities and research in hundreds of Research Institutes and funding agencies – national & international. One makes a successful career as a Corporate Lawyer after BA in economics followed by LLB. BA in economics and MBA placed one at a better position in the private sector. Economic Journalism is another shining area for job perspective. FAMOUS UNIVERSITIES AND COLLEGES OFFERING ECONOMICS There are many institutes, colleges and universities that have economics in its BA, MA and Ph.D. level courses. Here are the lists of institutions offering economics. One can easily see other information related with the respective universities/colleges/institutes with their given website. Delhi School Sri Ram College University of Delhi, University of of Economics of Commerce South Campus Agriculture Science www.econdse.org www.srcc.edu www.south.du.ac.in www.uasbangalore.edu.in IV Jawaharlal Nehru St. Stephen University Ravenshaw University, Delhi College, Delhi of Bombay University, Cuttack www.jnu.ac.in www.ststephens.edu www.mu.ac.in www. ravenshawuniversity.ac.in www.nammakalvi.com Gokhale Institute of Madras School IIT Kanpur BITS –Pilani Economics & Politics, of Economics Pune www.jnu.ac.in www.mse.ac.in www.bits-pilani.ac.in www.gipe.ac.in Indian Statistical Presidency Symbiosis School of IIT Madras Institute, Kolkata College, Kolkata Economics Bangalore https://www.iitm.ac.in www.presiuniv.ac.in www. isical.ac.in www.sse.ac.in Banaras University Centre for IGIDR-Mumbai Hindu University of Hyderabad Development Studies Thiruvananthapuram www.bhu.ac.in www.uohyd.ernet.in www.igidr.ac.in www.cds.edu For world recognised institution in the field of economics, everybody wishes to join London School of Economics 12/12/2021 01:49:43 PM  Jobs in Economics Field An array of employment opportunities is available in economics field. Meritorious candidates can get excellent job opportunities after successfully completing their BA or MA in economics. First pages of 11th Economics.indd 5 Government Sectors Economics graduates can get prestigious jobs in the government sectors like Indian Civil Services Indian Economic Services Reserve Bank of India National Sample Survey Ministry of Economic Affairs Planning Board Planning Commission (State & Central) National Council for Applied Economic Research and National Institute of Public Finance and Policy. Other than Government Sectors Job opportunities are also waiting in the private sectors, NGOs and International Aid Agencies. The firms like World Bank, Asian Development Bank, IMF, and other Development Banks, Aid agencies, Financial Consultancy firms are hiring the economic graduates for their various positions. One can assume in these organisations as economist, economic advisor, executive, analyst, consultant, researcher, financial analyst, business analyst, economic research analyst and stock market analyst. As far as salary is concerned, lots of candidates are hired through campus placement. The average salary is Rs. 4 to 8 lakh per annum. But for the deserving candidates, the field opens plethora of options and remuneration is also beyond expectation. The filed like accountancy, actuarial, banking, insurance also open many jobs opportunities. Economics Employment Opportunities The various fields are offering better job opportunity after passing BA or MA in economics. Some of the high demand sectors are given below where job prospects are huge. CAREERS FOR AN ECONOMIST V Government Banking and Finance Education and Communications Business and Public Sector www.nammakalvi.com Commodities Broker Claims Examiner Professor Market Research Analyst Bank Management Trainee Foreign Trade analyst Technical Writer Retail Buyer Financial Analyst Tax Auditor Journalist/Columnist Staff Training and Development Specialist Economic Forecaster Public Administrator Teacher Insurance Underwriting Trainee Investment Banker Legislative Assistant Higher Education, Administration Management Consultant Loan Counsellor Regional/Urban Planner Educational Television Advisor Strategic Planner Securities Analyst Financial Planner Information Analyst Business Administrator 12/12/2021 01:49:43 PM  www.nammakalvi.com Table of Contents ECONOMICS Page Chapter Contents Month No. Chapter 1 Introduction to Micro Economics 1 June Chapter  2 Consumption Analysis 25 June Chapter  3 Production Analysis 54 June Chapter  4 Cost and Revenue Analysis 80 July Chapter  5 Market Structure and Pricing 99 July I Mid-term Lessons 1-5 Chapter  6 Distribution Analysis 121 Aug Chapter  7 Indian Economy 143 Aug Chapter 8 Indian Economy Before and After Independence 166 Sep Quarterly Lessons 1-8 Chapter  9 Development Experiences in India 189 Oct Chapter  10 Rural Economy 205 Oct Chapter  11 Tamil Nadu Economy 225 Nov II Mid-term Lessons 9-11 Chapter 12 Mathematical Methods for Economics 248 Nov E - book Assessment VI First pages of 11th Economics.indd 6 12/12/2021 01:49:43 PM  www.nammakalvi.com CHAPTER 1 Introduction to Micro Economics “Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life” –Tyler Cowen Learning Objectives 1 To acquire a fundamental knowledge on the subject of Economics and to understand its nature and scope; and, 2  o understand the meaning of some of the basic concepts of Economics and T to observe how they are applied in the various definitions formulated on the science of Economics 1.1 should have an explanation of the nature and scope of the subject, i.e., whether the subject Introduction is traditional or modern, static or dynamic. The readers should be in a position to clearly A subject should have a name or a title that classify the subject as belonging to either facilitates a clear and correct understanding arts alone, or to science alone or to both. The of its contents. In a subject like Economics, significance of all the branches of the subject there are many books available with titles should find a place in it. As they go through such as ‘Introductory Economics’, ‘Economics: the introduction, the readers should be An Introduction’, ‘Basic Economics’, ‘Elements able to understand the relationships of the of Economics’, ‘Elementary Economics’, subject with other subjects. Newer areas ‘Fundamentals of Economics’ etc. But these incorporated into the subject and the newer books have the same contents, though each ways of comprehending its contents are to is intended to serve readers of a different be highlighted in the introduction. The levels of interest and capacity. methodologies applied in the derivation A good introduction to a subject, of its laws are to be stated in such an besides containing the meaning of its title, introduction. Introduction to Micro-Economics 1  www.nammakalvi.com 1.2 variety of definitions paves the way to arrive a near-complete agreement on the Economics: Meaning subject-matter of Economics. The term or word ‘Economics’ comes from A science grows stage by stage, the Ancient Greek oikonomikos (oikos and at every stage, its newer definition means “households”; and, Nemein means emerges and a concept associated with it “management”, “custom” or “law”). Thus, receives some special emphasis. However, the term ‘Economics’ means ‘management the study of a subject is made possible of households’. The subject was earlier when it possesses its clear cut definition known as ‘Political Economy’, is renamed and boundary. as ‘Economics’, in the late 19th century by Four definitions, each referring to Alfred Marshall. particular stage of the growth of the subject of Economics, are presented here. They are: 01. Smith’s Wealth Definition, 1.3 representing the Classical era; Economics: Its Nature 02. Marshall’s Welfare Definition, representing the Neo-Classical era; The nature of a subject refers to its 03. Robbins’ Scarcity Definition, contents and how and why they find representing the New Age; and, a place in the subject. This nature is 04. Samuelson’s Growth Definition, understood by studying the various representing the Modern Age. definitions given by the notable economists. The existence of multiplicity of the definitions makes some scholars 1.3.1  ealth Definition: W comment that a search for a clear definition Adam Smith of Economics is an exercise in futility. (The classical era) J. M. Keynes, for example, observes that Adam Smith (1723- “Political Economy is said to have strangled 1790), in his book “An itself with definitions”. Their presence Inquiry into Nature and makes studying a subject interesting, Causes of Wealth of exciting, enjoyable, or worthwhile. In fact, Nations” (1776) defines their presence in a social science subject “Economics as the is a clear sign of the growth of the science. science of wealth”. He It indicates that there exists freedom for explains how a nation’s wealth is created people associated with such as science and increased. He considers that the to formulate fresh definitions. These individual in the society wants to promote associates appreciate and make use of the his own gain and in this process, he is opportunity afforded to them and come guided and led by an “invisible hand”. He up with a plethora of definitions saying: states that every man is motivated by his ‘The more, the merrier’. Each definition self interest. This means that each person represents a unique generalisation. A wide works for his own good. Introduction to Micro-Economics 2  www.nammakalvi.com Smith favours the introduction attainment and with the use of the material of “division of labour” to increase the requisites of well-being. Thus, it is on one side quantum of output. Severe competition a study of wealth; and on the other, and more in factories and society helps in bettering important side, a part of the study of man.” the product. Supply force is very active The important features of and a commodity is made available to Marshall’s definition are: the consumers at the lowest price. a. Economics does not treat wealth as the be-all and end-all of economic The publication of Adam Smith’s activities. Man promotes primarily “The Wealth of Nations” in 1776, has welfare and not wealth. been described as “the effective birth b. The science of Economics contains of economics as a separate discipline”. the concerns of ordinary people who are moved by love and not merely guided or directed by the desire to get Criticism maximum monetary benefit. For Smith, Economics consists of ‘wealth- c. Economics is a social science. It studies getting’ activities and ‘wealth-spending’ people in the society who influence activities. An undue emphasis is given to one another. material wealth. Wealth is treated to be an end in itself. This view leads him to Criticism ignore human welfare as an essential part of Economics. Smith gives his definition a. Marshall regards only material things. when religious and spiritual values are He does not consider immaterial held high. Ruskin and Carlyle regards things, such as the services of a doctor, Economics as a ‘dismal science’, as it a teacher and so on. They also promote teaches selfishness which is against ethics. people’s welfare. b. In the theory of wages, Marshall ignores the amount of money that goes as 1.3.2  elfare Definition: W reward for the services of ‘immaterial’ Alfred Marshall services. (The Neo- classical era) c. Marshall’s definition is based on the Alfred Marshall concept of welfare. But it is not clearly (1842-1924) in his defined. Welfare varies from person book “Principles of to person, country to country and one Economics” (1890) period to another. Marshall clearly defines Economics thus: distinguishes between those things “Political Economy” or that are capable of promoting welfare Economics is a study of of people and those things that are not. mankind in the ordinary business of life; it Things like liquor that are not capable examines that part of individual and social of promoting welfare but command action which is most closely connected with the Introduction to Micro-Economics 3  www.nammakalvi.com a price, come under the purview of Economics, according to Robbins, is a Economics. science of choice. d. However, welfare means happiness or comfortable living conditions of an Criticism individual or group of people. The a. Robbins does not make any distinction welfare of an individual or nation is between goods conducive to human dependent not only on the stock of welfare and goods that are not. In wealth possessed but also on political, the production of rice and alcoholic social and cultural activities of the drink, scarce resources are used. nation. But the production of rice promotes human welfare, while that of alcoholic 1.3.3  carcity Definition: S drinks does not. However, Robbins Lionel Robbins concludes that Economics is neutral (The New Age) between ends. b. Economics deals not only with the Lionel Robbins micro-economic aspects of resource- published a book “An allocation and the determination Essay on the Nature of the price of a commodity, but and Significance of also with the macro-economic Economic Science” in aspects like how national income 1932. According to is generated. But, Robbins reduces him, “Economics is a Economics merely to theory of science which studies human behaviour resource allocation. as a relationship between ends and scarce means which have alternative c. Robbins’ definition does not cover uses”. the theory of economic growth and development. The major features of Robbins’ definition are: 1.3.4  rowth Definition: G a. Ends refer to human wants. Human Samuelson beings have unlimited number of (The Modern Age) wants. b. On the other hand, resources or means Paul Samuelson that go to satisfy the unlimited human published a book "An wants are limited or scarce in supply. Intradictory Analysis" The scarcity of a commodity is to in 1948. He defines be considered only in relation to its Economics as “the demand. study of how men and society choose, with c. Further, the scarce means are capable or without the use of money, to employ of having alternative uses. Hence, an scarce productive resources which could individual grades his wants and satisfies have alternative uses, to produce various first his most urgent want. Thus, Introduction to Micro-Economics 4  www.nammakalvi.com commodities over time, and distribute 1.4.1  conomics: Its Subject- E them for consumption, now and in the Matter future among various people and groups of society”. The major implications of this definition are as follows: a. Like Robbins, Samuelson states that the means are scarce in relation to unlimited ends and that such means could be put to alternative uses. b. Samuelson makes his definition dynamic by including the element of time in it. Therefore, his definition „„Economics focuses on the behaviour covers the theory of economic and interactions among economic growth. agents, individuals and groups c. Samuelson’s definition is applicable belonging to an economic system. also in a barter economy, where money It deals with the activities such as is not used. the consumption and production d. His definition covers various aspects of goods and services and the like production, distribution and distribution of income among the consumption. factors of production. The activities e. Samuelson treats Economics as a of the rational human beings in social science, whereas Robbins the ordinary business of life under regards it as a science of individual the existing social, legal and behaviour. institutional arrangement are included in the Science of Economics; Of all the definitions discussed the abnormal persons and the socially above, the ‘growth’ definition stated unacceptable and unethical activities by Samuelson appears to be the most are excluded. satisfactory. „„Economics studies the ways in which people use the available resources to satisfy their multiplicity of wants. 1.4 Scarcity is a problem indicating the Scope of Economics gap between what people want and what they are able to get. This scarcity The scope of the subject of Economics refers can be eliminated either by limiting to on the subject-matter of Economics. the human wants or by increasing the It throws light on whether it is an art or supply of the goods that satisfy the a science and if science, whether it is a positive science or a normative science. Introduction to Micro-Economics 5  www.nammakalvi.com human wants. The method of getting co-relationship between cause and effect. more is resorted to, rather than the Scientific laws derived are tested through method of wanting less. experiments; and future predictions „„Economics is concerned with activities are made. These laws are universally of human being only. Human beings applicable and accepted. Economists like are related to one another and the Robbins, Jordon and Robertson argue actions of one member affect those that Economics is a science like Physics, of the other members in the society. Chemistry etc., since, it has several similar Hence, Economics is called a Human characteristics. Economics examines the Science or Social Science. relationships between the causes and the effects of the problems. Hence, it is rightly „„The activities of rational or normal considered as both an art and a science. In human beings are the subject-matter fact, art and science are complementary to of Economics. each other. „„All human activities related to wealth constitute the subject-matter of Economics. Thus, human activities 1.4.3  conomics: Positive E not related to wealth (non-economic Science and Normative activities) are not treated in Economics. Science For example, playing cricket for Positive science deals with what it is, means, pleasure, mother’s child care. it analyses a problem on the basis of facts and examines its causes. For example, at the time It is customary to clarify whether of a price increase, its causes are analysed. Economics is an art or a science; and if it is a science, to observe its specific features. Positive Normative 1.4.2 Economics is an Art and is,was,will be ought to, should a Science If the price of Price should go up to reduce petrol petrol rises,people will buy less consumption i. Economics as an Art Can be Cannot be Art is the practical application of proved proved knowledge for achieving particular goals. Connects cause Makes recommendations & effects Not based on facts Economics provides guidance to the Descriptive Tells you should be/have solutions to all the economic problems. Based on facts Tells you what is been Prescriptive Objective Subjective A. C. Pigou, Alfred Marshall and others regard Economics as an art. ii. Economics as a Science On the other hand, normative Science is a systematic study of knowledge. science responds to a question like All its relevant facts are collected, classified what ought to be. Here, the conclusions and analyzed with its scale of measurement. and results are not based on facts, but Using these facts, science develops the on different considerations belonging Introduction to Micro-Economics 6  www.nammakalvi.com to social, cultural, political, religious is necessary when the theories associated realms. They are basically subjective in with them are studied. Only a preliminary nature. acquaintance is now attempted here. In short, positive science is concerned with ‘how? and why?’ and normative science 1.5.1 Goods and Services with ‘what ought to be’. The distinction Both goods and services satisfy human between the two can be explained. An wants. In Economics, the term ‘goods’ increase in the rate of interest, under implies the term ‘services’ also, unless positive science, would be looked into as specified otherwise. to why and how can it be reduced, whereas under normative science, it would be seen as to whether it is good or bad. Three statements about each type are given below: Positive Economics a. An increase in money supply implies a price-rise in an economy. b. As the irrigation facilities and application of chemical fertilizers expand, the Goods (also called ‘products’, ‘commodities’, production of food-grains increases. ‘things’ etc) c. An increase in the birth rate and a a. as material things, they are tangible; decrease in the death rate reflect the b. have physical dimensions, i.e., their rate of growth of population. physical attributes can be preserved over time; Normative Economics c. exist independently of their owner; a. Inflation is better than deflation. d. are owned by some persons; b. More production of luxury goods is not e. are transferable; good for a less-developed country. f. have value-in exchange; c. Inequalities in the distribution of wealth and incomes should be reduced. Kinds of Goods (and Services) a. Free and Economic goods 1.5 Free goods are available in nature and in Basic Concepts in abundance. Man does not need to incur Economics any expenditure to own or use them. For example air, and sun shine. Water was also Like other sciences, Economics also an example in the past, but at present it has has concepts to explain its theories. A exchange value. So it is not a free good. complete and clear grasp of their meaning Introduction to Micro-Economics 7  www.nammakalvi.com Milton Friedman, a Nobel laureate, Capital-goods (also called popularises a saying: “There is no such producer’s goods) don’t directly satisfy the thing as a free lunch”. He means that it is consumer wants. They help to produce impossible to get something for nothing. consumer goods. For example, machines Even those offered ‘free’ always costs a do not directly satisfy the consumers, but person or the society as a whole. Its cost, in factories, the manufacturers need them. however, is hidden. It is an externality. Someone can benefit from an externality or from a public good, but someone-else has to pay the cost of producing these benefits. In Economics, it refers to ‘opportunity cost’. PUBLIC VS PRIVATE GOODS PUBLIC GOODS A good available to everyone to consume, c. Perishable goods and Durable goods: Regardless of who pays and who doesn’t. Perishable goods are short-lived. Their Spillover benefits; life-span is limited. For example fish, Non -rival in consumption and non- excludable; fruits, flower etc., do not have a long life. E.g:National defence,Law enforcement. PRIVATE GOODS A good consumed by a single person or Household; No spillover benefits; Rival in consumption and excludable; E.g:food and drink On the other hand, economic goods are not available in plenty. They are scarce in supply. Man has to spend money to own or use them. Durable goods and semi-durable b. Consumer goods and Capital goods: goods have a little longer life-time than the Perishable goods. For example, Consumer goods directly satisfy human a table, a chair etc. wants, TV, Furniture, Automobile etc. Introduction to Micro-Economics 8  www.nammakalvi.com Services Along with goods, services are produced and consumed. They are generally, possess the following: „„Intangible: Intangible things are not physical objects but exist in connection to other things, for example, brand image, goodwill etc. But today, the intangible things are converted and stored into tangible items such as recording a music piece into a pen-drive. They are marketed as a good. „„Heterogeneous: Services vary across b. Characteristics of Utility regions or cultural backgrounds. They can be grouped on the basis of quality 1. Utility is psychological. It depends standards. A single type service yields on the consumer’s mental attitude. multiple experiences. For example, For example, a vegetarian derives music, consulting physicians etc. no utility from mutton; „„Inseparable from their makers: 2. Utility is not equivalent to Services are inextricably connected to usefulness. For example, a smoker their makers. For example, labour and derives utility from a cigarette; but, labourer are inseparable; and, his health gets affected; „„Perishable: Services cannot be stored 3. Utility is not the same as pleasure. as inventories like assets. For example, A sick person derives utility from it is useless to possess a ticket for a taking a medicine, but definitely, it cricket-match once the match is over. is not providing pleasure; It cannot be stored and it has no value- 4. Utility is personal and relative. An in-exchange. individual obtains varied utility from one and the same good in different situations and places; 1.5.2 Utility 5. Utility is the function of the a. Meaning intensity of human want. An individual consumer faces a ‘Utility’ means ‘usefulness’. In tendency of diminishing utility; Economics, utility is the want- satisfying power of a commodity 6. Utility is a subjective concept it or a service. It is in the goods and cannot be measured objectively and services for an individual consumer it cannot be measured numerically; at a particular time and at a particular 7. Utility has no ethical or moral place. significance. For example, a cook Introduction to Micro-Economics 9  www.nammakalvi.com derives utility from a knife using 6. Knowledge Utility: It is the utility which he cuts some vegetables; and, derived by having knowledge of a a killer wants to stab his enemy particular thing. Advertisement by that knife. In Economics, a serves as a source of information commodity has utility, if it satisfies on an object. a human want; d. Measurability of Utility c. Types of Utility Wants of a person are satisfied by the act The following are the types of utility of consumption. The consumer derives utility, measured in terms of ‘Utils’. 1. Form Utility: An individual An ‘Util’ is a unit of measurement of consumer obtains utility from a utility. An individual pays a price for good or service only when it is the unit of the good, equal to the utility available in a particular form. Raw derived. Marshall states that utility materials in their original form may can be measured indirectly using the not possess utility for a consumer. ‘measuring rod of money’. But in their changed forms as they become finished products, they provide utility to him. For example, 1.5.3 Price cotton as a raw material may not Price is the value of the good expressed in possess utility for a consumer; but terms of money. Price of a good is fixed as it gets a new form as a cloth, it by the forces of demand for and supply yields the consumer utility. of the good. Price determines what goods 2. Time Utility: A sick man derives are to be produced and in what quantities. time utility from blood not at the It also decides how the goods are to be time of its donation, but only at the produced. operation-time, i.e., when it is used. 3. Place Utility: A student derives 1.5.4 Market place utility from a book not at the Generally, market means a place where place of its publication (production commodities are bought and sold. centre) but only at the place of his education (consumption centre). But, in Economics, it represents where buyers and sellers enter into an 4. Service Utility: An individual exchange of goods and services over a consumer derives service utility from price. a service made available at the time when he most needs it. For example, clients obtain service utility from 1.5.5 Cost their lawyers, patients derive service Cost refers to the expenses incurred to utility from the doctors and so on. produce or acquire a given quantum of a 5. Possession Utility: When a student good. Together with revenue, it determines buys a book or dictionary from a the profit gained or the loss incurred by a book seller, then only it gives utility. firm. Introduction to Micro-Economics 10  www.nammakalvi.com b. Particular Equilibrium and General 1.5.6 Revenue Equilibrium Revenue is income obtained from the sale An equilibrium, when it pertains to a of goods and services. Total Revenue (TR) single variable, may be called particular represents the money obtained from equilibrium. the sale of all the units of a good. Thus, TR = P × Q, where TR is Total Revenue; An equilibrium, on the other P is the price per unit of the good; and, hand, when it relates to numerous Q is the Total Quantity of the goods sold. variables or even the economy as a whole, final may be called general equilibrium. 1.5.7 Equilibrium 1.5.8 Income a. Stable Equilibrium Income represents the amount of Prof. Stigler states that “equilibrium monetary or other returns, either earned NIT 1 is a position from which there is no net tendency to move”. Its absence is referred to as disequilibrium. or unearned small or big, accruing over a period of time to an economic unit. Nominal income refers to income, Consumer’s equilibrium occurs expressed in terms of money. It is termed Y when heProduction gets maximum satisfaction. Possibilities Curve as the money income. The A1 equilibrium of the Producer Real income is the amount of goods occurs A when he gets maximum profit. that can be purchased with money as income. Goods-Y Growth of resources A resource is in equilibrium when It is the purchasing power of income which it gets fully employed and gets its is based on the rate of inflation. maximum payment. Where, static equilibrium is based on given and constant 0 prices, quantities, E E1income, 1.6 X Goods-X technology, population etc. Economics: Its Diagram 1.3 Methods, Facts, Theories and Laws Y Market 1.6.1  ethods of Economics: M S D Deduction and Induction E Like any other science, Economics price also has its laws or generalisations. D These laws govern the activities in the S various divisions of Economics such as Consumption, Production, Exchange O M X and Distribution. The logical process of Quantity demanded & supplied arriving at a law or generalization in a Diagram 1.1 science is called its method. Introduction to Micro-Economics 11  www.nammakalvi.com b. Inductive Method of Economic Analysis Inductive method, also called empirical method, is adopted by the “Historical School of Economists”. It involves the process of reasoning from particular facts to general principle. Economic generalizations are derived in this method, on the basis of Economics uses two methods: deduction and induction. (i) Experimentations; a. Deductive Method of Economic (ii) Observations; and, Analysis (iii) Statistical methods. It is also named as analytical or abstract method. It consists in deriving „„Step 1: Data are collected about a conclusions from general truths; certain economic phenomenon. These it takes few general principles and are systematically arranged and the applies them to draw conclusions. The general conclusions are drawn from classical and neo-classical school of them. economists notably, Ricardo, Senior, „„Step 2: By observing the data, J.S.Mill, Malthus, Marshall, Pigou, conclusions are easily drawn. applied the deductive method in their „„Step 3: Generalization of the data and economic investigations. then Hypothesis Formulation „„Step 4: Verification of the hypothesis Steps of Deductive Method (eg.Engel’s law) „„Step 1: The analyst must have a clear and precise idea of the problem to be According to Engel’s Law “The inquired into. proportion of total expenditure „„Step 2: The analyst clearly defines the incurred on food items declines as technical terms used in the analysis. total expenditure [which is proxy for Further, assumptions of the theory are income] goes on increasing.” to be precise. „„Step 3: Deduce hypothesis from the Economists today are of the assumptions taken. view that both these methods are „„Step 4: Hypotheses should be verified complementary. Alfred Marshall through direct observation of has rightly remarked: “Inductive and events in the real world and through Deductive methods are both needed for statistical methods. (eg) There exists scientific thought, as the right and left foot an inverse relationship between price are both needed for walking”. and quantity demanded of a good. Introduction to Micro-Economics 12  www.nammakalvi.com 1.6.2  conomics: Facts, E Importance of Micro Theories Economics Using the methods, the economist „„To understand the operation of an observes facts, such as, changes in the price economy of a commodity. Similarly, the quantity „„To provide tools for economic demanded of that commodity also varies. policies And he observes these movements and „„To examine the condition of comes up with a theory that these two economic welfare movements are inversely related, i.e., when the price increases, the quantity „„Efficient utilization of resources demanded of that commodity decreases „„Useful in international trade and vice versa. Thus, he formulates his „„Useful in decision making theory of demand. „„Optimal resource allocation He tests his theory by collecting „„Basis for prediction further facts and when his theory stands the „„Price determination test of time and obtains universal acceptance, the theory is raised to the status of a law. A physical scientist carrying out controlled experiments in his laboratory can 1.6.3 Nature of Economic Laws test the scientific laws very easily by changing A Law expresses a causal relation between the conditions obtaining there. Changes two or more than two phenomena. in Economics science cannot be brought Marshall states that the Economic laws about easily. As a result, prediction regarding are statement of tendencies, and those human behaviour is likely to go wrong. There social laws, which relate to those branches are exceptions to the Law of Demand. Thus, of conduct in which the strength of economic laws are not inviodable. the motives chiefly concerned can be As unpredictability is invariably measured by money price. associated with the economic laws. Marshall In natural sciences, a definite result compares them to the laws of tides. Just as it is expected to follow from a particular cannot be predicted and said with certainty cause. In Economic science, the laws that a high tide would follow a low tide, function with cause and effect. The unpredictability prevails in Economics. consequences predicted by the data, Human behaviour is volatile. Economic necessarily and invariably follow. laws are not assertive but they are indicative. However, Economic laws are not The Law of Demand, for example, states that as precise and certain as the laws in the other things remaining the same, the quantity physical sciences. Marshall holds the demanded of a commodity increases, as its opinion that there are no laws of economics price decreases and vice versa. which can be compared for precision with The use of the assumption ‘other the law of gravitation. things remaining the same’ (ceteris Introduction to Micro-Economics 13  www.nammakalvi.com paribus) in Economics makes the of production namely Land, Labour, Economic laws hypothetical. It might be Capital and Organization and also the argued that the laws in other sciences relationship between inputs and output. can also be called hypothetical. It should be admitted however that in the case of 1.7.3 Exchange Economics, the hypothetical elements in its laws are a little less pronounced than in Exchange is concerned with price the laws of physical sciences. determination in different market forms. This division covers trade and commerce. But since money is used as the Consumption is possible only if the measuring rod, laws in economics are produced commodity is placed in the more exact, precise and accurate than the hands of the consumer. other social sciences. As the value of the measuring- rod money is not constant, 1.7.4 Distribution there is always an hypothetical element surrounding the laws of Economics. Production is the result of the coordination Some economic laws are simply of factors of production. Since a truisms. For example, saving is a function commodity is produced with the efforts of income. Another example of truism is: of land, labour, capital and organization, human wants are unlimited. the produced wealth has to be distributed among the cooperating factors. The reward for factors of production is studied 1.7 in this division under rent, wages, interest Economics: Its Sub and profit. Distribution studies about the Divisions pricing of factors of production. Economics has been divided into some 1.8 branches. Economics: Its Types 1.7.1 Consumption Economics is a rapidly growing subject and its Human wants coming under consumption horizon has been expanding. The basic thrust is the starting point of economic activity. of the subject is that there should be efficient In this section the characteristics of human allocation of the available scarce resources to wants based on the behaviour of the obtain maximum welfare to the people on consumer, the diminishing marginal utility a sustainable basis. Given below are some and consumer’s surplus are dealt with. of the major branches of the subject, where such efficient resource allocation is made. 1.7.2 Production 1.8.1 Micro-economics Production is the process of transformation of inputs into output. This division covers Micro Economics is the study of the the characteristics and role of the factors economic actions of individual units say Introduction to Micro-Economics 14  www.nammakalvi.com households, firms or industries. It studies how business firms operate under different The terms ‘micro economics’ and market conditions and how the combined ‘macro economics’ were first used in actions of buyers and sellers determine economics by Norwegian economist prices. Micro economics covers Ragner Frisch in 1933. After Prof. Frisch, the terms earned popularity when J.M. (i) Value theory (Product pricing and Keynes clearly distinguished between factor pricing) the terms through his book entitled (ii) Theory of economic welfare ‘General theory of ‘Employment, Interest and Money’ published in 1936. 1.8.2 Macro-economics Macro Economics Vs Micro Economics Macro economics is the obverse of micro economics. It is concerned with the economy as a whole. It is the study of aggregates such as national output, inflation, unemployment and taxes. The General Theory of Employment, Interest and Money published by Keynes is the basis of modern macro economics. Difference between Micro Economics and Macro Economics Micro Economics Macro Economics 1. It is that branch of economics which 1. It is that branch of economics which deals with the economic decision- deals with aggregates and averages of making of individual economic agents the entire economy. E.g., aggregate such as the producer, the consumer etc. output, national income, aggregate savings and investment, etc. 2. It takes into account small components 2. It takes into consideration the economy of the whole economy. of the country as a whole. 3. It deals with the process of price 3. It deals with general price-level in any determination in case of individual economy. products and factors of production. 4. It is known as price theory 4. It is also known as the income theory. 5. I t is concerned with the optimization goals 5. It is concerned with the optimization of of individual consumers and producers the growth process of the entire economy. Introduction to Micro-Economics 15  www.nammakalvi.com 1.8.3 International Economics 1.8.7  nvironmental E In the modern world, no country can Economics grow in isolation. Every country is having Depletion of natural resources stock and links with the other countries through pollution result from rapid economic foreign capital, investment (foreign direct development. Hence the need for the study investment) and international trade. of Environmental Economics which analyse the inter relationship between economy and 1.8.4 Public Economics environment. Environmental Economics (Public Finance) is a study of inter disciplinary tools for the problems of ecology, economy and Public finance is concerned with environment. the income or revenue raising and expenditure incurring activities of the public authorities and with the adjustment 1.9 of the one with the other. The scope of Basic Economic Public Finance covers Public expenditure, Problems Public revenue, Public debt, Financial administration and federal Finance. If resources are abundant and wants are so few, then there would be no economic 1.8.5  evelopmental D problem. But this situation can never Economics exist. Resources are always scarce and our wants are numerous. Hence in every The countries have been classified society certain choices have to be made. into developed, developing and under developed on the criteria of Per Capita Income, Human Development Index and Happiness Index. The Development Economics deals with features of developed nations, obstacles for development, Economic and Non-economic factors influencing development, various growth models and strategies. 1.8.6 Health Economics What and how much to Health Economics is an area of applied produce? economics. It covers health indicators, preventive and curative measures, Every society must decide on what goods medical research and education, Rural it will produce are and how much of these Health Mission, Drug Price control, Neo it will produce. In this process, the crucial natal care, Maternity and Child health, decisions include: Budgetary allocation for health etc. Introduction to Micro-Economics 16  www.nammakalvi.com a. Whether to produce more of food, a minimum amount of consumption be clothing and housing or to have more ensured for everyone in the society. Due luxury goods to the scarcity of resources, a society b. Whether to have more agricultural faces the compulsion of making choice goods or to have industrial goods and among alternatives. It faces the problem services of allocating the scare resources to the production of different possible goods and c. Whether to use more resources in services and of distributing the produced education and health or to use more goods and services among individuals resources in military services within the economy. d. Whether to have more consumption goods or to have investment goods e. Whether to spend more on basic 1.10 education or higher education Production Possibility Curve The problem of choice between relatively scarce commodities due to limited productive resources with the society can be illustrated with the help of a geometric device, is known as production possibility curve. Production possibility curve shows the menu of choice along which a society can choose to substitute one good for another, assuming a given state of technology and given total resources. How to Produce? The explanation and analysis of Every society has to decide whether it will production possibility curve is based use labour-intensive technology or capital upon certain assumptions, some of them intensive technology; that is whether to are following use more labour and less machines and vice versa. (i) The time period does not change. It remains the same throughout the For whom to produce? curve. Every society must also decide how (ii) Techniques of production are fixed. its produce be distributed among the (iii) There is full employment in the different sections of the society. It must economy. also decide who gets more and who gets (iv) Only two goods can be produced less. It should also decide whether or not from the given resources. Introduction to Micro-Economics 17  www.nammakalvi.com (v) Resources of production are fully mobile. (vi) The factors of production are given in quantity and quality (vii) The law of diminishing returns operates in production. Every production possibility curve is based upon these assumptions. If some of these assumptions changes or neglected, then it affects the nature of production possibility curve. To draw this curve we take the help of We can obtain a production possibility production possibilities schedule, as curve by drawing production possibilities shown below. schedule graphically. The quantity of food is shown on x-axis and the number of cars is shown on y-axis, the different six UNIT 1 Production possibilities production possibilities are being shown schedule as point P1 P2 P3 P4 P5 & P6. Production Quantity No of car possibilities of food production Y production Y Production Possibilities Curve in tonsCurve Production Possibilities A1 I 0 25 25 A Goods-Y Growth of resources No of Cars II 100 23 20 15 III 200 20 10 IV 300 15 5 V 400 8 0 0 E E1 X 100 VI 200 300 400 500 500 X 0 Goods-X Food Production Diagram 1.3 Diagram Diagram 1.21.2 This schedule suggests that if all resources are thrown into the production of food, a maximum of 500 tons of food can be Food Y production Wants produced, given the existing technology. If we assume thatMarket innumerable production S If on the other hand, all resources are possibilities D exist between any two- Consumption Efforts instead used for producing cars, 25 cars production possibilities E schedule, we can be produced. In between these two get the production possibility curve P1 price extreme possibilities exist. If we are to p6. This shows the locus of points of Distribution Production & to give up some willing food, we can have D the different possibilities of production S Exchangesome cars. of two commodities, which a firm or an O M X Quantity demanded & supplied Introduction to Micro-Economics 18 Diagram 1.1  www.nammakalvi.com economy can produce, with the help of resources between the goods for the higher given resources and the techniques of income group and the lower income production. Points outside the production group and the goods for the defense and possibility (e.g. point p) are unattainable the civilians. Since PPC is the locus of the as society’s resources of production are combination of the goods the problem of not sufficient to give output beyond choice will not arises when we choose any the curve. Points lying inside the curve point on PPC. like P₇ are attainable by the society but (ii) The Notion of Scarcity at these points resources production We can explain the notion of scarcity are not fully employed. For example, with the help of PPC. We know that every if society is producing at point P 4 then society possesses only a specific amount of it can increased the production of food resources, which can produce only limited keeping the no of cars constant or it can amount of output even with the help of increase the production of cars keeping best technology, economic scarcity of best the food grain output constant or it can fact of life. The production possibility increased the output of both the goods curve reflects the constraints imposed by simultaneously. the element of economic scarcity. Shift of production possibility curve (iii) Solution of central problems The PPC shifts upward or downward due to: The central problems of an economy can 1. The change in the supply of be explained with the help of PPC. The productive resources and solution of problem of what to produce 2. The change in the state of technology. involves the decision regarding the choice The production capacity of an economy of location on the production possibility grows overtime through increase in curves. A production combination resource supplies and improvement of represented by any point inside the technology. This enables PPC to shift PPC indicates that the economy is using upward from AE to A1E1 as shown in figure inefficient methods of production and below. This outward shift of the PPC is the inefficient combination of resources. basic feature of economic growth. 1.11 Conclusion Uses of production possibility This chapter has given a broad overview curve of economics. Moreover the present Through the device of PPC can be used certain common characteristics of for many analytical purposes. We shall economics definitions of Wealth, discuss below some of its popular uses. Welfare, Scarcity & Growth free essential (i) The problem of choice questions an economy must solve; what to produce, how to produce and for whom The problem of choice arise because of to produce and also looked at division of the given limited resources and unlimited economics, distinguishing between Micro wants, may relate to the allocation of and Macroeconomics. It has introduced Introduction to Micro-Economics 19  www.nammakalvi.com some basic concepts frequently appearing Value Power of a commodity throughout the lessons. to command other It is perhaps both importance, the commodities in an study of economics is an intellectually exchange fascinating adventure highly relevant and it affects people’s life. Every now and then Price Value of a commodity after learning lesson, think of economic expressed in terms of activities in and around you. Perhaps in money this way learning of economics makes to Income The amount of monetary think like an economist. or other returns, either earned or unearned, GLOSSARY accruing over a period of time Scarcity The gap between what people want and what Deductive Deduction is a process people can get Method in logic facilitating or arriving at an inference, Production Creation of utility moving from general to Distribution Share of the national particular income reaching the four Inductive Induction is a process factors of production Method in logic facilitative or Services Services, like goods, are arriving at an inference, economic entities; and moving from particular are inseparable from their to general owners and are intangible, perishable in nature Introduction to Micro-Economics 20  www.nammakalvi.com MODEL QUESTIONS Part-A Multiple Choice Questions 1. ‘Economics is a study of mankind in 5. Find the odd one out: the ordinary business of life’ -It is the a. “An inquiry into the nature and the statement of causes of the Wealth of Nations” a. Adam Smith b. “Principles of Economics” b. Lionel Robbins c. “Nature and Significance of c. Alfred Marshall Economic Science” d. Samuelson d. “Ceteris paribus” 2. The basic problem studied in 6. The equilibrium price is the price at Economics is which a. Unlimited wants a. Everything is sold b. Unlimited means b. Buyers spend their money c. Scarcity c. Quantity demanded equals d. Strategy to meet all our wants quantity supplied d. Excess demand is zero 3. Microeconomics is concerned with a. The economy as a whole 7. Author of “An Inquiry into the Nature and Causes of Wealth of Nations” b. Different sectors of an economy a. Alfred Marshall c. The study of individual economic units behaviour b. Adam Smith d. The interactions within the entire c. Lionel Robbins economy d. Paul A Samuelson 4. Which of the following is a 8. “Economics studies human behaviour microeconomics statement? as a relationship between ends and a. The real domestic output increased scarce means which have alternative by 2.5 percent last year. uses” is the definition of economics of b. Unemployment was 9.8 percent of a. Lionel Robbins the labour force last year. b. Adam Smith c. The price of wheat determines its c. Alfred Marshall demand d. Paul A Samuelson d. The general price level increased by 4 percent last year. Introduction to Micro-Economics 21  www.nammakalvi.com 9. Who is the Father of Economics? c. Economics is the study of material a. Max Muller welfare b. Adam Smith d. Economics deals with unlimited wants and limited means c. Karl Marx 14. Growth definition takes into account d. Paul A Samuelson a. The problem of choice in the 10. “Economics is a science” The basis of dynamic framework of Economics this statement is— b. The problem of unlimited means a. Relation between cause and effect in relation to wants b. Use of deductive method and c. The production and distribution of inductive method for the wealth formations of laws d. The material welfare of human c. Experiments beings d. All of the above 15. Which theory is generally included 11. Utility means under micro economics ? a. Equilibrium point at which a. Price Theory demand and supply are equal b. Income Theory b. Want-satisfying capacity of goods c. Employment Theory and services d. Trade Theory c. Total value of commodity 16........................ have exchange value d. Desire for goods and services and their ownership rights can be 12. A market is established and exchanged a. Only a place to buy things a. Goods b. Only a place to sell things b. Services c. Only a place where prices adjust c. Markets d. A system where persons buy and d. Revenue sell goods directly or indirectly 17. Identify the correct characteristics of 13. Which one of the following is not utility a point in the Welfare Definition of a. It is equivalent to ‘usefulness’ Economics? b. It has moral significance a. Study of an ordinary man c. It is same as pleasure b. Economics does not focus on wealth alone d. It depends upon consumer’s mental attitude Introduction to Micro-Economics 22  www.nammakalvi.com 18. Who has given scarcity definition of b. Inductive method economics? c. Positive economics a. Adam Smith d. Normative economics b. Marshall 20. Total revenue is equal to total output c. Robbins sold multiplied by d. Robertson a. Price 19. The process of reasoning from b. Total cost particular to general is c. Marginal revenue a. Deductive method d. Marginal cost Answers Part-A 1 2 3 4 5 6 7 8 9 10 c c c c d c b a b d 11 12 13 14 15 16 17 18 19 20 b d d a a a d c b a Part-B Answer the following questions in one or two sentences. 21. What is meant by Economics? 25. Name any two types of utility. 22. Define microeconomics. 26. Define positive economics. 23. What are goods? 27. Give the meaning of deductive method. 24. Distinguish goods from services. Part-C Answer the following questions in one paragraph. 28. Explain the scarcity definition of 31. What are the different features of Economics and assess it. services? 29. What are the crucial decisions involved 32. What are the important features of utility? in ‘what to produce?’ 33. Distinguish between microeconomics 30. Explain different types of economic and macroeconomics. activities. 34. Compare positive economics and normative economics. Introduction to Micro-Economics 23  www.nammakalvi.com Part-D Answer the following questions in about a page 35. Compare and contrast various 37. Elaborate the nature and scope of definitions of Economics. Economics. 36. Explain various Steps of Deductive 38. Explain basic problems of the economy and Inductive methods. with the help of production possibility curve. ACTIVITY Meet ten of your class-mates and prepare a Report on the advantages of studying Economics. References „„Shashi kumar – Micro Economics (2004) - Anmol Publication Pvt Ltd „„Ben S.Bernake – Principles of Micro Economics (2001) - MC Graw Hill Education „„M.L.Seth – Micro Economics (2012) - Lakshmi Narain Agarwal Publication „„M.L. Jhingan – Modern Micro Economics (Fourth Edition) (2012) - Virnda Publication Pvt Ltd „„Ryan C. Amacher – Principles of Micro Economics (1980) - South-Western Pub.Co „„http://wikieducator.org/Introduction_to_Economics_and_Microeconomic_Theory Introduction to Micro-Economics 24  www.nammakalvi.com CHAPTER 2 Consumption Analysis “Consumption is the sole end and object of economic activity” – J. M. Keynes Learning Objectives 1 To understand the consumer behaviour when price changes. 2 To perceive the consumer equilibrium in terms of cardinal and ordinal approaches. 2.1 2.2 Introduction Human Wants Consumption is an essential economic In ordinary language desire and want activity. The quantity and quality of mean the same thing. But in economics consumption determine the standard of they have different meanings. Wants are living of the people. Consumption is the act the basis for human behaviour to buy and of satisfying one’s wants. Consumption is consume goods. defined as “the use of goods and services for satisfying wants”. In economics, consumption 2.3 is studied both at micro level and macro level. Characteristics of Human Consumption is the beginning Wants of economic science. In the absence of consumption, there can be no production, a. Wants are unlimited exchange or distribution. Consumption is also an end of production. Producers produce Human wants are countless in goods to satisfy the wants of the people. number a