Economics

Anmol classes / S.Y.J.
Compiled By Prof. Ramesh
Chapter - 1 THE LAW OF DIMINISHING MARGINAL UTILITY

Utility:
Utility means the capacity of a commodity to satisfy human wants or want satisfying power of commodity.
Total Utility:
Total utility refers to the sum total of all the utility derived by consumer from all units of commodity consumed during given period of time. E.g. If an individual consumes five Apple the total utility derived from all the five apples is total utility. Average Utility: The Average utility is calculated by dividing total utility by number of units consumed. If refer to per unit utility of a commodity consumed during given period of time Average Utility = Total Utility No. of units consumed
Marginal utility: It is the additional utility derived from additional unit of consumption. In other word: - It is the additional to total utility by consuming one more unit of the same commodity.
ASSUMPTION OF LAW OF D.M.U (MR. HSC. P)

1. Homogeneous unites: The law assumes that the units consumed must be homogeneous. It means, there is no difference in various units in respect of taste, colour, size etc. If such a difference exists the law does not apply. For Ex: - if the first mango is sour and the second is sweet, the consumer will get more utility from the second than the first mango and hence the law does not apply. Standard size of unit: The law assumes that the commodities must be consumed in standard units. The units should not be too big or too small. For Ex: - One mango can he standard unit of consumption, but one dozen mangos cannot. Similarly a glass of water is a standard size. If the water is consumed in jug or drops, the law will not be experienced. Continuous consumption: The laws assume that different units are consumed in continuous consumption. It is assumed that there is no time gap or interval between consumption of various units. If one mango is consumed in the morning and the second is in the evening, the law does not apply. Page 1
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Anmol classes / S.Y.J.C
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Cardinal measurement: The law assumed that utility can be numerically expressed by the consumer. Constancy: It is assumed that marginal utility of money remains constant. Rationality: It is assumed that every consumer is rational. He always tries to maximize satisfaction. No change in preference, habit & taste: It is assumed that (P.H.T) preference, habit, taste of the Consumer do not change, during the course of consumption. If it changes, the law cannot be applied. For Ex:- if person does not like an egg, he will be hesitate to consume it. Therefore the first unit gives him less utility. But after consuming it, if he begins to like the same then subsequent unit may give him more utility because the taste is changed.
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STATE AND EXPLAIN THE LAW OF D.M.U.

Statement of law: The law of D.M.U. is common experience of all individual. It is observed that as you go on satisfying your wants by consuming units after units of a commodity. The additional satisfaction i.e. marginal utility goes on diminishing. The law of diminishing marginal utility states that other thing being equal as the quantity of commodity consumed by consumer increased, the marginal utility of that commodity tends to diminishes. According to prof.Alfred marshall: The additional benefit which a person derives from a given increase in his stock of thing diminishes with every increase in the stock that he already has. Explanation of the law A Hungry person gets more utility from the first unit of the commodity, which he consumed because his hunger is very intense. As he goes on consuming more and more units, his wants get gradually satisfied and hence the utility that he get become less and less. Marshall gave an expression to this experience in the form of law of diminishing marginal utility. Total utility increases until the addition made to total utility is zero (i.e. marginal utility is zero,) at which it is maximum; any further increase beyond this point will result in disutility because it will decline the total utility. Therefore law of D.M.U. states that the more you have less you want to have more of it.
The law of D.M.U. explained with the help following schedule.
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Unit Consumed 1 2 3 4 5 6 7 8
Marginal Utility(M. U) 20 17 13 9 4 0 -2 -4
Total Utility(T.U) 20 20+17=37 37+13=50 50+9=59 59+4=63 63+0=63 62-2=61 61-4=57
Suppose a hungry person goes on consuming chapatti one after another. Here one chapatti means the one unit of consumption. We observe that the 1st Chapatti when he consumes gives him 20 utilities. As he goes on consuming the subsequent units, the M. U. diminishes 17, 13, 9 etc. During the consumption the T. U. goes on increasing. The 6th unit gives him zero (0) marginal utility at which Total utility is maximum at 63. At this point want (Hunger) is fully satisfied. Any more consumption gives him disutility. As he consumes 7th unit, M.U. Becomes -2 due to which Total utility fall to 61. Hence larger the stock of commodity smaller is the marginal utility and vice versa. It can be explained with the help of diagram.
Marginal Utility & Total Utility
On the X- axis we measure number of unit consume and on the Y- axis we measure marginal utility and total utility when different position is joined, we get marginal utility curve and total utility curve. Marginal utility curve slopping down word and total utility curve slop upward from left to right. As the consumer consume 6th unit marginal utility become zero and total utility is maximum and constant. Beyond this point if consumer consumes any unit marginal utility become negative and total utility start diminishing.
EXCEPTION OF THE LAW OF D.M.U.
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Exceptions to law of D.M. U. are only apparent and not real. The law states that an increase in stock of commodity leads to declines in its M. U. sometime commodities such as money, reading, miser etc. are mentioned as exception to this law. However they seem to be exception only because they do not satisfy the conditions of the law. Deeper analysis reveals that the law is universally valid and there is no real exception to the same. 1. Money: It is said that money is an exception to the law of D.M. U. In the case of money, as the stock of money increases, the utility goes on increasing. Utility of money depends upon the utility of commodity, which he bought, with the help of money. With less money, a poor person tries to satisfy most urgent want and with large amount, rich person turn to luxuries. Necessaries yield more utility than luxuries. This means, when stock of money is large, the utility derived by additional stock money diminishes. This means. M. U. of money to poor is greater than to rich. 2. Miser: In case of miser, the greed increases with every additional Acquisition of money. Hence, marginal utility of money does not diminish with more and more money. But when the miser spends his money, his utility of the commodity diminishing more rapidly. Hence misers behaviour cannot be real exception to the law. 3. Music and poetry: It is said that a person who loves music and poetry, becomes happier the more he listen to it. But it is not real exception because music or poetry does not mean a signal homogeneous commodity. If a person listen same poetry again and again, he bound to get bored and such utility will diminish. Rare collection /Hobbies: It is said that the law does not apply in cases of hobbies like collection of stamps and coins etc. As their stock increases, the utility goes on increasing rather than diminishing. This is not real exception because a collector collects different types of coin and stamps etc. Reading: Scholar gets more and more satisfaction by reading more and more book .This is because, they want to acquire more and more knowledge, however, this is not real exception to the law of D.M.U. because scholar would not read the same book again and again. 6. Drunkard: The law does not apply in the case of the drunker. Because intoxication increases with every successive dose of liquor and give more satisfaction. But the rationality condition is violated.
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IMPORTANCE OF LAW OF D.M.U

1. Public finance: Page 4
The law is useful to finance minister in formulating an appropriate taxation policy. The rate of income tax goes on increasing as the income increases because as income increases, marginal utility of money goes on diminishing. Therefore large income of rich people is taken away by government by imposing higher tax rates. Higher incomes are heavily taxed and the low income groups are granted exemption from paying the tax. 2. Paradox of values: The law of D.M.U. is use full to explain the paradox of value by showing the distinction between value in use and value in exchange with the help of marginal utility and total utility. For Ex: - Though the total utility of water is very high but its value in exchange is very low because its marginal utility is very low and diminishes very rapidly. On the other hand, even though the total utility of diamond may not be high as compare to its price. Its price is very high because its marginal utility is very high and diminishes very slowly. Basis of consumer Behaviour: Consumer behaviour in purchase of commodity is based on this law. At high price a consumer buy less and at low price consumer buy more because the consumer while consuming a commodity compare price with marginal utility since marginal utility diminishes with additional stock, he will buy more at low price. Social Justice: The law is useful for social justice. To achieve social justice revenue is collected from rich people by imposing heavy taxes on their income and amount so collected is utilize for the benefit of poor through public expenditure. Thus there is redistribution of money from rich to poor to promote their welfare. Basis of law of demand: The law of diminishing marginal utility serves as the basis of law of demand. It explains the reason behind the inverse functional relationship between price and demand.
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LIMITATION OF LAW OF D.M.U.

1. Unrealistic assumption: The law is based on unrealistic assumption or conditions likes homogeneity, continuity, constancy etc. which are not found in reality. Cardinal measurement: Utility is a psychological concept and it cannot be measure in numerical terms since utility is a relative concept as varies from person to person, place to place, and time to time. It cannot be measured in numerical term. Marginal utility of money: The law of D.M. U. assumes that marginal utility of money remains constant. But the marginal utility varies from person to person. It also diminishes due to change Price. Page 5
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Indivisibility: The utility analysis cannot be applied to expensive goods like cars, TV, freeze etc. because consumer does not buy successive unit of such goods. Single commodity: The law assumes that a person spends his income on a single commodity. But in reality a person does not spend his income on single commodity, he may buy number of commodities at a time.
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TYPES OF UTILITY
1. Form Utility: Form utility is created by changing the form or shape of material. For E.g. Furniture made of wood. Form utility is created by manufacturing the goods. Place utility: Place utility is created by transporting goods from the place of manufacturing to the place of marketing. Transport service is basically involved in creation of place utility. Place utility of commodity is more in an area of scarcity than in an area of abundance. For e.g. Kashmirs apples get higher price in Bombay than in Srinagar. Time utility: Hoarding, storing and preserving certain goods over a period of time may create time utility for such goods. For e.g. - By storing food grains at the time of a bumper harvest and releasing their stocks for sale at the time of scarcity, traders derive advantage of time utility and therefore they get higher price for food grains. Utility of commodity is more at the time of scarcity. Service Utility: Service Utility is created in rendering personal services to the customers by various professionals such as lawyers, doctors, teachers etc. Possession utility: Possession utility is created by transferring the ownership of goods. For instance, a seller provides possession utility to the buyer, when the seller sells the goods to the buyer. The buyer enjoys possession utility. Knowledge utility: It is created by filling the knowledge gap. For instance, advertisements can create knowledge utility by providing information about latest products in the market.
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CONCEPT OF UTILITY
In ordinary sense, the term utility means usefulness. In economics, utility means the capacity of a good to satisfy a human want. A commodity has utility to person when he buys it to satisfy his want. Page 6
FEATURES OF UTILITY The following are the characteristics of utility: 1. Subjective or Psychological Concept: Utility is a subjective Concept. It differs from person to person. The utility of a good cannot be the same for all individuals. This is due to differences in tastes, preferences, likes and dislikes. For instance, meat does have utility to non-vegetarians, but not to pure vegetarians. 2. Relative Concept: Utility of a commodity differs from time to time and from place to place. The same commodity may have different utility at different times, and at different places. For instance, umbrellas have more utility during rainy season as compared to summer season. Also woolen clothes have greater utility in colder places like Kashmir than in warmer places like Mumbai. No Moral Consideration: The concept of utility has no moral consideration. A commodity has utility as long as it satisfies a want. That want may be good or bad, ethical or unethical. For instance, pirated films do have utility, but it is unethical to use pirated products. No Objective or Cardinal Measurement: It is difficult to measure utility in objective terms. It cannot be measured in numerical terms or cardinal numbers such as 1, 2, 3, and so on. However, economists like Alfred Marshall expressed utility in numerical terms to explain the Law of Diminishing Marginal Utility. Different from Usefulness: Certain products have utility but they are not useful. A product has utility when it satisfies a want. However, it may be not useful or harmful to a person. For instance, narcotics or drugs like cocaine may have utility to some people who use them to get rid of tension, and stress. But in general, they are harmful products as it affects the health and wealth of a person. Different from Pleasure: A commodity may have utility, but its consumption may not give any pleasure to the user. For example, medicines or operations may not give any pleasure to the patients, but they have utility to them. Different from Satisfaction: Utility and satisfaction are related but they are not the same in the strict sense. Satisfaction is the end result of utility. Utility is an essential quality of a product to satisfy a want. Depends on Intensity of Wants: The utility of a commodity depends upon the intensity of the want. The more intense or urgent the want is, the more would be the utility and vice - versa. For instance, books have more utility to students just before the exams, and have very limited or no utility after the exams. Page 7
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Chapter - 2 THE LAW OF DEMAND

Concept of demand:
In Common use, demand means desire to have something. However in economic, demand means something more than mere desire or willingness. Following points must be borne in mind when we use the term demand in economics: - (3PTD) 1. Demand is relative to time: Quantity demanded at a particular price is for a specific period. Thus there can be daily demand, weekly demand, monthly demand, etc. Demand is always at a price: Wherever we speak of demand, we refer to price. Price of a commodity is explicitly stated when we mention the quantity demanded Demand is a want, supported by purchasing power: Demand implies both (DA + WC) desire plus ability to pay or willingness backed by capacity to pay. If a person wishes to have a car but cant pay the price, his desire cant become demand. Similarly if he has money (ability to buy), but does not wish to buy a car, there will not be any demand. Hence, willingness plus capacity to pay must go together to create an effective demand. Demand for a commodity may be Potential (Intended demand) or Actual (Already purchased) Demand is said to be direct: Demand is said to be direct, if a goods is purchased for direct satisfaction of a want E.g.:Apples demand for direct consumption. A Demand is said to be derived, if a factor demanded due to a demand for final goods; demand for all factor of production (Capital) is a derived demand.
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ASSUMMPTION OR CONDITION OF THE LAW OF DEMAND

This law will be true only when the following conditions are fulfilled and other things remain same. 1. Taste, Preference & habit: It is assumed that the Taste, preference & habit of the consumer do not change in favour of new product. Further, fashions & climatic Conditions remain same. 2. Level of Taxes: It is assumed that the level of taxes remains same throughout the operation of the law.
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3. Income: Income of the consumer remains same. For e.g. If income increases, demand may increase even if there is a rise in price. 4. Population: It is assumed that the size and composition of population (number of consumer) in the country remain unchanged. If there is an increase in population, demand would increase & vice versa. 5. Prices: Prices of substitutes and complementary goods do not change through the operation of law.
STATE AND EXPLAIN THE LAW OF DEMAND

1. Law of Demand: Demand is a function of price. Demand depends on price. The law of demand explains that price & demand are inversely related. Both move in opposite direction. When Price of Commodity falls, the demand for that commodity expands & when price rises, the demand contracts. Law of demand explains the function relationship between price & demand. Thus, law of demand is stated that other things being equal demand varies inversely with price, more is demanded at a low price & less is demanded at high price. 2. Demand Schedule: Demand schedule show the various quantities of commodity, which will be bought at different prices during a specific period of time. It can be an individual demand schedule expressing of an individual consumer or it can be market demand schedule expressing total demand. 3. Individual Demand Schedule: Individual demand schedule is defined as a schedule indicating various amount of a commodity that would be purchased by an individual consumer in a market at various alternative prices at a point of time or during a given period of time. 4. Individual Demand Schedule: Price (Rs.) Quantity Demanded 10 5 8 10 6 15 4 20 2 25
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We observe that when the price per orange i.e. Rs. 20, he would purchase 5 orange. Alternatively, if price fall to 8, 6, 4 and so on, he would purchase & 10, 15 etc. Thus, when price falls, consumers demand would expand and vice versa. This shown an inverse relationship price demand.
In the above diagram, price is measured along y-axis and number of orange demanded, along xaxis when the data in the individual demand schedule is plotted, we get a series of point like a, b, c etc., when these point are joined, We get a dd demand curve sloping downwards, from left to right. If has a negative slope. Demand curve is a graphical representation of a demand schedule showing relationship between price & quantity demanded. 5. Market Demand Schedule: Market demand schedule means total demand from all buyers taken together at a given price at a point of time or during a period of time. It is a schedule indicating various amount of a commodity that would be purchased by all the consumers at various alternative prices at a point of time or during a period of time.
Price (Rs.) 20 18 16 14 12
Consumer I 7 14 21 28 35
Consumer II 8 16 24 33 40
Consumer III Total Consumer 10 25 20 50 30 75 40 100 50 125
We observe that when price is Rs. 20. All consumers would purchase 25 oranges. In the alternative, when price is Rs. 18 all consumer would by 50 and so on. Market demand rises when price fall & vice versa. Thus, it shows an inverse price demand relationship.
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In the diagram price is measured on y-axis & orange demanded along x-axis DD is the demand curve. Sloping down-ward from left to right. It has a negative slope, market demand curve is a graphical representation of a market demand schedule, it shows a functional relationship between price and quantity demanded, at various alternative prices. More is demanded at a lower price and less is demanded at higher price.
EXCEPTION TO THE LAW OF DEMAND

1. Illusion: Sometime when the price of commodity is fall, consumer feel that its quality is lowered, and the demand for it would decrease, such consumers having illusion that high price means good quality and low price means bad quality. Therefore they buy more at high prices & vice versa. 2. Ignorance: People may buy more at a high price due to ignorance about prevailing market condition & price also, if the price falls and if the consumers do not know that its price has fallen. They will act contrary to the law.
3. Continues changes in price: When price of commodity are continuously changing, people buy more at a high price. For e.g. During war & famine, the price show a tendency to rise. The consumer therefore buys more for building up stocks. On the other hand, if the prices are continuously falling, people buy less at a low price as they wail further fall in price. 4. Conspicuous consumption: Certain goods are bought not because they are useful but because they give distinction to the person who owns them. When the price of such prestige goods rises, only rich people will buy more for using them as a status symbol & exhibiting their riches. On the other hand, when such commodities become cheaper, there remains no special attraction in buying the same. Hence a positively sloping demand curves in case of prestige goods.
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5. Giffen Paradox: The law of demand does not apply in the case of giffen goods. giffen goods are inferior, whose demand falls with a fall in price. When the price of giffen goods falls the real income of the consumer increase & he switches on to the consumption of superior goods. Cheap potato, cheap bread, vegetable ghee etc. Considered as inferior goods.
In all above cases, the demand curve will have a positive slope, such demand curve is called as exceptional demand curve, which slope upward from left to right. It shows that the relationship between price & demand is direct.
DETERMINANT OF DEMAND
(Factor influencing individual or market demand) 1. Price of the commodity: Demand for a commodity depends upon its price. Higher the Price, lower demand, and lower the price, higher the demand. 2. Population: Population affects the demand, more is demanded when population increase and less when it fall. At the same price, bigger family buys, more and smaller family buys lees goods. 3. Price of substitutes and complementary product: Demand for a commodity depends not only on the price of that commodity, but also on the price of other related commodities bought and sold in the market. Different commodity are substitutes or complementary to each other. For E.g. Ink pen and ball pen are substitutes, but pen and ink are complementary goods. When the price of ink pen change, it affects the demand not only of pens, but also ink and ball pens. When the price of ink pen rises, the demand for ball pen increases and the demand for ink decreases.
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4. Income: Income and demand are directly related when income increase, demand also rises. Thus a consumer may buy more or less of commodity when its income change. 5. Taste, Habit Preference: Demand for a commodity is greatly affected by the changes in the preference, habit taste of the consumer. If the consumer dislikes a commodity, its demand falls though the prices remain the same. But if the consumer start to like a new taste for a commodity, he will buy more of it. 6. Advertisement: Advertisement have a spelling effect on the minds of the consumer creating an impression that the advertised product are better than their substitutes rates. Advertisement can change consumers preference there by creating demand for them. 7. Quality of a commodity: Better the quality of the product, the greater is the demand for it, and vice versa. 8. Utility of a commodity: Higher the utility of a commodity, greater is the demand for it the demand for it and vice versa.
TYPES OF DEMAND
1. Direct demand: When a commodity satisfies human want directly, it is called direct demand. For E.g. Mango, readymade dresses etc. All the consumer goods have direct demand because they are demanded for direct consumption. 2. Derived demand: When demand for one commodity depends on the demand for some other commodity it is called derived demand. For E.g. Demand for cotton, mill- worker etc. increases when the demand for textile goods increase in the market 3. Joint or complementary demand: When two goods are demanded at the same time to satisfy a single want, it is known as joint and complementary demand. For E.g. Pen and ink, car and petrol etc. 4. Composite demand:A commodity is said to be composite demand when it is wanted for different uses. For E.g. steel is needed for manufacturing cars, Building, construction of railway etc. 5. Competitive demand: When two commodities are close substitutes, they have competitive demand. For e.g. Pepsi and coca cola.
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Chapter - 3 ELASTICITY OF DEMAND

Elasticity of demand:
The law of demand merely show the direction in which demand change due change in price, but does not indicate the amount by which demand changes due to given change in price. Thus law of demand explains qualitative but not qualitative price demand relationship. It is true that demand respond to change in price, such response varies from commodity to commodity. Some goods are more responsive to change in price, while others are less. Thus elasticity of demand means the responsiveness or sensitiveness of demand response to change in price. Elasticity of demand measures relative change in demand in response to change in price. Certain goods have elastic demand while others have inelastic demand. Demand is called elastic when small change in price brings about big change in demand. Demand is called inelastic when big change in price fails to bring about big change in demand.b Ep = Proportionate change in quantity demand Proportionate change in price Change in quantity demand Original quantity Change in price Original price Q/Q P/P Q Q Q P P P P Q
Ep=
From the above equation it can be observed that price elasticity can have 3 different values 1) When proportionate change in demand is equal to proportionate change in price (e=1) it is called unit elasticity. 2) If proportionate change in old is greater than that in price (e>1) it is elastic demand. 3) If proportionate change in demand is less than the same price (e<1) it is inelastic demand. Suppose price rise from Rs.5 to Rs.6 per unit. Demand will fall from 100 to 90 units. By using the price elasticity formula, we can measure the price elasticity. In this example, a small change in quantity is 10 (100-90) and original quantity is 100.Furthur small change in price is Rs.1. Page 15
Ep = =1/2
10 100
5 1
This means price elasticity of demand is half that is ep<1.
TYPES OF PRICE ELASTICITY OF DEMAND

There are five types of price elasticity of demand. 1) Perfectly elastic demand: When at given price or slight fall in price, there is infinite extension of demand it is known as perfectly elastic demand. This is an extreme case of infinite elasticity. It is represented by a horizontal straight line demand curve.
This represented by a horizontal straight line demand curve EP = any number = 0 2) Perfectly inelastic demand: whatever be the change in price if the demand does not change, it is known as perfectly inelastic demand. This is also theoritical case. The demand curve is shown by vertical straight line curve.
EP =
0 any number
=0 Page 16
3) Unitary elasticity of demand: When percentage change in quantity demand is same as percentage change in price it is known as unitary elasticity of demand.
Demand curve is represented by rectangular hyperbole curve. The change in demand is equal to change in price. If price fall by 10% then demand rise by 10% EP = 10/10 = 1 4) Relatively elastic demand: When percentage change in demand is greater than percentage change in price, it is known as elastic demand.
For E.g. If the price falls by5% and demand rises by more than 5% say 10% the demand is said to be elastic because the price elasticity of demand is greater than unity i.e. EP = 10/5 = 2 5) Relatively inelastic demand:When percentage change in demand is less than percentage change in price it is known as inelastic demand.
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Demand curve is represented by steeper curve. If price fall by5% and demand rise by less than 5% say 3%, the demand is said to be relatively inelastic because EP = 3/5 =0.6 EP < 1
Measurement of price elasticity of demand

There are 3 method of measuring price or point elasticity of demand
1) Total outlay method:Total outlay of consumer refers to their total expenditure which is equal to the total revenue of the seller. Total outlay is equal to price per unit of commodity multiplied by quantity purchased (TO=PQTY). In this method, we compare the total outlay before the change in price and after change in price, to find price elasticity of demand. In this connection, following position may be noted. 1) If total outlay remains constant after change in price, the price elasticity of demand is unity .(Ep=1) 2) If total outlay rises after fall in price and if it falls after rise in price, the price elasticity of demand is more than unity ep>1 3) If total outlay fall after fall in price, and if total outlay rises after rise in price, the price elasticity of demand is less than unity ep<1 Price(Rs.) 1) Original new 2) original new 3) original new 2 4 2 1 2 1 quantity 10 5 10 24 10 16 Total outlay 20 20 20 24 20 16 Elasticity of demand Ep=1 unitary Ep>1 elastic Ep<1 inelastic
2) Geometric or exact or point method: Geometric method is also called the point method because we measure the elasticity of demand at point on a demand curve which shows a particular price and a particular quantity. A demand curve may be a straight line or a convex curve. In following diagram the straight line demand curve is extended to meet the y-axis at A and the x-axis at B. now mark any point P on demand curve AB. It divides the demand curve into two segments. The price elasticity of demand at point P is measures by a ratio of lower segment of the demand curve from point P, i.e. PB and the upper segment of the same demand curve from point P.
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Price elasticity = lower segment of dd curve from P Upper segment of dd curve from P Elasticity at point P = PB/PA If PB is say 5cms and PA is also say 5cms, the point elasticity of demand is unity because 5/5=1. If PB is 6cms and PA is 4cms, the point elasticity of demand is more than unity because 6/4=1.5 If PB is 4cms, and PA is 6cms, the point elasticity of demand is less than unity because 4/6=.66 In the following diagram PB/PA at point P measure the point elasticity of demand 3) Ratio or proportionate or percentage method:It is the formula method based on definition of elasticity of demand. Elasticity of demand can be defined as percentage change in the quantity demanded, divided by the corresponding percentage change in price. Hence, price elasticity of demand is:Ep = Proportionate change in quantity demand Proportionate change in price
EP =
Q/Q P/P P P
Q Q
Where EP = price elasticity of demand Q = original quantity P = Original price = Change
Determinants of elasticity of demand or factor influencing the demand

1) Nature of commodity: Human wants are classified into necessaries, comforts and luxuries. a) For necessary the demand is inelastic. A change in price of such goods will have little effect on their demand. Even if the price rises the demand for such goods cannot reduced because these have to be consumed normally in fixed quantity. Similarly a fall in price will not induce consumers to buy more of such necessaries. Thus for rise or fall in price, Page 19
the demand for necessaries is inelastic. For e.g., Demand for food grains salt etc is inelastic. b) The demand for a goods, which is recurring in nature, its price elasticity is elastic. Whereas goods which are purchased only ones, the demand for them would be inelastic.
c) Demand for comforts and luxuries are fairly elastic. When their price rise, consumer will buy less and when price fall, he will buy more. For e.g., demand for tv, furniture, car, etc is elastic. d) Demand for a goods purchased out of habit or social custom will be inelastic. For e.g. mangalsutra to a hindu bride or cigarette to a smoker have inelastic demand. 2) Number of substitute available: Larger the substitute higher is the elasticity, because when price rises, the consumer will switch on to the substitute available and hence demand will fall. In the absence of substitute demand will become relatively inelastic because the consumers have no other alternative. For e.g. Demand for soap is inelastic as it necessary commodity, but demand for a particular soap say lux is elastic because there are various other brand available. 3) Several uses:If a commodity has many uses, the demand will be more elastic. When the price of such goods rises, its consumption will be restricted only to more important use and when the price fall the consumption will extend to less urgent uses. For ex. multipurpose goods like electricity have many uses like lighting, cooking etc when the price of per unit fall, demand for it will rise and it will put to less and less use. 4) Possibility of postponement of consumption: If consumption of a commodity can be postponed, the demand will be elastic. If the price rises people will not buy it and postpone consumption till the prices falls. Where as demand for goods, the consumption of which cannot be postponed, the demand will be inelastic. For e.g. in rainy season the use of umbrella cannot be postponed and hence its demand is inelastic. 5) Price range: The demand for very low priced and very high priced goods is generally inelastic. When the price is very high, the commodity is consumed by only rich. A rises or fall in prices will not haves much effect on demand. When the price is so low that the goods can be bought by all, a change in price will have little effect on the demand. 6) Proportion of income spent: If only a small part of income is spent on a particularly commodity say newspaper, the demand will tend to be inelastic.
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7) Consumers income: If consumers income is large, demand for goods is inelastic because his demand is not affected by significant price changes.
IMPORTANCE OF ELASTICITY OF DEMAND

The concept of elasticity of demand is important due to the following: 1) Producer: A producer must take note of elasticity of demand when he fixed the price of his commodity. If the demand for his commodity is elastic, he can sell more with a slight reduction in price and there by enjoy more profit. But if the demand for his commodity is inelastic, he can increase his profit by charging high price. 2) Price utility services: Concept of elasticity of demand is useful to government in fixing prices of public utility services and to achieve social justice. Public utility services like railways and electricity in private sector may fix their prices at a high levels because the demand for such goods, is inelastic, and thereby exploit consumers. But government fixes their prices so that these goods are sold to people at low prices. 3) International trade: Concept of elasticity of demand is useful in making export and import policies. If the foreign demand for exportable goods is elastic, export will rise with a slight fall in price. But if the foreign demand for exportable goods is inelastic, then exporters may earn more by charging high prices. Where as if demand for importable goods is elastic the importing country will be benefited. Because the foreigners will haves to charge low price. But if the demand for imported goods is inelastic then the importing country may haves to pay high prices. 4) Public utility services: Concept of elasticity of demand is useful to government in fixing prices of public utility to achieve social justice. Public utility services like railways in private sector may fix their prices at high level because the demand for such goods is inelastic, and there by exploit consumers. But government fixes their prices so that these goods are sold to public at low price. 5) Government: When government wants to raise revenue by means of new taxes on a commodity, the finance minister must consider the elasticity of demand for a commodity to be taxed. He will have to impose no taxes on goods, the demand for which is elastic and impose a high tax on goods the demand for which is inelastic.
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6) Price of factor: Price paid to the factor like land, labour and capital etc will be depending upon the elasticity of demand. If demand for the factor like labour is relatively inelastic, he will be paid high price and vice versa. 7) Trade union: Concept of elasticity of demand is useful to trade union leader in wage bargaining. If the demand for the product of an industry is elastic, its sale can be increases by slight reduction in its price and larger profit is made. In such a situation trade union may demand higher wages to the worker due to the profit enjoy by the firm.
TYPES OF ELASTICITY OF DEMAND

1) Price elasticity of demand: It measures responsiveness for the demand of a commodity due to change in a price. It is given by percentage change in quantity demand divided by percentage change in price EP= % change in quantity demand % change in quantity price
Q/Q P/P Q Q Q P P P P Q
2) Income elasticity of demand: Income elasticity of demand measures the responsiveness in a demand for a commodity due to change in a consumer income. It is given by the percentage change in quantity demand divided by percentage change in income , keeping constant all other variable. E.Y = percentage change in quantity demand Percentage change in quantity income Q/Q Y/Y
EY =
Q Q
P P Page 22

Q = Change in quality demand Y = Change in income Q = Original quantity demanded Y = Original income
Where
3) Cross elasticity of demand: Demand for a commodity may change not only due to change in its own price but due to change in the price of its substitute or complementary commodity. A change in demand for a commodity due to change in the price of its substitute & complementary goods termed cross elasticity of demand. For e.g. if the price of tea rises, the demand for coffee increases because consumers substitute coffee for tea. Cross elasticity of demand measures the responsiveness in the demand for a commodity X to change in the price of commodity Y. It is given by the percentage change in the demand for quantity commodity X divided by percentage change in price of commodity Y keeping constantly all other variable in demand function. Thus EQ = % change in quantity demand X % change in quantity price Y
EY =
Qx/Qx PY/PY Qx Qx PY PY
Where
Qx = Change in quality demand of commodity x Px = Change in price of Y Qx = Original quantity of commodity QY = Original price of Y
4) Promotional elasticity of demand: Promotional elasticity of demand is also known as advertisement elasticity of demand. Promotional elasticity of demand measure the responsiveness in demand for a commodity to change in promotional expenditure on the commodity. It is given by the percentage change in demand for the commodity devided by the percentage in promotional expenditure, keeping constant all other variable in the demand function. EA = Percentage change in quality demand Percentage change in promotional expenditure = Q/Q A/A = Q Q A A
EA
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Chapter - 4 THE LAW OF SUPPLY

ASSUMPTION TO LAW OF SUPPLY
1. No Change in cost of Production: The law assumes that cost of production such as rent, wages, interest etc. does not change. 2. Fixed scale of Production: If the scale of production change the supply will also change. Therefore it is assumed that scale of production remains constant. 3. No Change technology: If the technique of production improves the cost of production is reduced, the seller will produce more and therefore supply more, hence the technique of production remains constant. 4. No Change in Transport Cost: It is assumed that transport cost remains unchanged. If the transport cost decrease, more may be supplied at lower price. 5. No Change in climatic condition: It is assumed that weather and climatic condition remain unchanged. 6. No Change in government policies: Government polices like taxation trade policy etc remains unchanged. For e.g. an increase in duties would imply an increase in cost. This will reduce the supply. 7. Price of substitutes is held constant: The laws assumes that price of substitutes are remain constant.
Law of supply:
Supply is function of price supply depends on price. Price and supply change in the same direction. If the price of goods rises its supply will expand and if the price falls, supply will contract. Thus the law of supply stated as other things remaining the same, as the price of commodity rises, it supply is extended and as the price fall, its supply is contract. Supply Schedule:
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Law of supply can be explained by means of supply schedule and supply curve. A supply schedule means a table indicating different amount of commodity offered for sale at various alternative prices at point of time or during period of time, supply schedule are two types. 1) Individual supply schedule 2) Market Supply Schedule Individual Supply Schedule: Individual supply schedule means different quantities of a commodity that an individual firm or supplier is willing and able for sale different prices. PRICE 2 3 4 5 6 QUANTI7T SUPPLIED 20 30 40 50 60
We observe that when price is Rs. 2, he would supply 20 units. If the prices increase to Rs. 3, Supply increase to 30 units and so on. It shows that when price is low, less is supplied, and when the price rises more is supplied. Individual Supply Curve:
Price
Quantity Supply Individual Supply Curve is graphical representations of a supply schedule. When the data of individual supply schedule is plotted we get a series of points like a, b, c, d and e. When theses point is joined by continuous line, we get individual supply curve. It slopes upward from left to right. If has positives slopes indicating direct relationship between price and supply. Less is supplied at low price and more is supplied at high price. Market Supply Schedule: Page 25
Market Supply Schedule refers to the sum total of quantities of commodities offered for sale by different supplier at different price.
Prices 2 3 4 5 6
Seller I 2 4 6 8 10
Seller II 4 8 12 16 20
Seller III 6 12 18 24 30
Total Supply 12 24 36 48 60
In the above schedule supply of different individual supplier is shown as S1, S2 etc. When the price is Rs.2 all supplier supply 12 units. As the price rises to 3, 4, 5 etc then supply also rises 24, 36, 48 etc. It shows that direct relationship between prices and supply. When the price is lower, less is supplied. when the prices is high more is supplied. Marker Supply Curve:
Price
Quantity Supply
Market Supply curve is graphical representation of market supply schedule, when the data of market supply schedule is plotted on graph we get series like a, b, c, d, and e. when we joined all the point. We get market supply curve, It slopes upward from left to right. It has positive slopes indicating direct relationship between price and supply. Less is supplied at lower price and more is supplied at high price.
Determinant of supply / factor influencing supply / cause of change in supply

1. Price: Price and supply are positively related. If price rises supply will increase and vice-versa.
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2. Cost of production: Cost of production also affects the supply. If the cost of Production increases, production may be reduces and therefore supply reduces. 3. Transport Facilities: If transport facilities are improved supply can be increase. If transport facilities are not adequate, efficient and economical, supply may decreases. 4. Taxation: If the rate of taxes increased, prices of a commodity also increase and therefore supply reduces. If the tax rate are reduced, prices will fall and supply increase. 5. State of technology: Supply of commodity depends on method of production. Invention, Innovation and advances in technology greatly contribute to increase supplies at lower cost. 6. Futures trends in prices: Sellers expectation about the future price will affects the supply. If seller expects that price rises in futures he will with hold his stock at present and so there will be less supply. 7. Monetary Policy of Government: If government adopts a liberal monetary policy, production may increases. If government adopts tight monetary policy, production will decrease. 8. Natural Factor: If weather conditions are favorable supply will increase similarly if natural calamities occur, supply will reduces.
EXCEPTIONS TO LAW OF SUPPLY

(Backward - Sloping Curves) As per law of Supply, Supply varies directly with price. But they are some exceptional cases, where Supply may fall with rise in price or rise with the fall in price.
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1. Labour Supply: In the case of labour, as wages rate rises, labour supply (number of working hours,) would rise up to a point. Beyond this point, with a further rise in wages, the worker may prefer leisure (Work for less hours), because they will be in position to earn same income by working for less hours. 2. Saving: Saving of some people may fall with rise in interest rate and rise with a fall in interest rate, this exception in case of person, who is interested in a fixed income in the form of interest. 3. Anticipation about futures price: If seller expects arises in price in futures he will with hold his stock of a commodity. He will reduce his supply at the present price. Whereas,if he expects a further fall in price in future, he will sell more at low price. 4. Need for urgent money: If the need for money was is very intense, seller would supply more at lowered price. 5. Perishable goods: The Seller has to sell the perishable goods like fruits, fish, flower etc even the price falls. Because they cannot wait for a longer time to get higher price. Reservation Price Reservation price is determined by supplier. Reservation price is the minimum prices below which a seller is not ready to sell his goods.
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At this prices supply curve will touch Y-axis. In the following diagram, the rising upwards supply curves meat Y-axis at point. R. It means, at OR price the supply is zero. Hence OR is the reservation price. Reservation price varies from person to person, commodity to commodity and from time to time.
DETERMINANT OF RESERVATION PRICES

1. Natures of Commodity: Reservation price for perishable goods is very low because these goods have to be sold immediately, whatever be the price to avoid loss. Reservation prices can be higher for durable goods because if the seller does not get the expected price, the entire supply can be held back. 2. Cost of production: If the cost of production is more, the reservation price is high and vice-versa. 3. Sellers need for cash: If the seller is hard pressed for cash and his need for cash is intense, then reservation price will be low. 4. Storage Facility: If goods storage facilities are available, it is possible to hold back the stock, then the reservation price can be high and vice-versa. 5. Expiation about futures Prices: If seller expect fall in price in future, then present reservation price will be low. If seller expect rise in price in futures, then the reservation price will be high today.
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Chapter - 5 FACTOR OF PRODUCTION

Production refers to transformation of recourses in to commodities. various resources that are use for production are known as factor of production. These factors of production are broadly classified in to four groups: - land, labour, capital, entrepreneur.
LAND
Ordinarily land means soil or the surface of earth but in economics land refers to all kind of natural resources that are made available by nature are used in the production of goods. According to Alfred Marshall land refers to all material and forces which nature gives freely for mans aid in land, water, air, light & heat. Thus according to Marshall land includes all the natural resources. 1) On the surface of earth like farm or agriculture land, forest, mountains, water etc. 2) Below the surface of earth like coal, petroleum, iron, gold, silver etc. 3) Above the surface of earth like air, light, heat etc.
FEATURE OF LAND
1. Free gift of nature: Land is free gift of nature to mankind to carry out productive activity. Land is not created with the human efforts so supply price of land is zero. 2. Fixed supply: Supply of land is fixed or perfectly inelastic. Man cannot increased or decreased the supply of land. He can secure more land by drying up lake or a part of sea. But it cannot be a new land. Thus supply of land is perfectly inelastic. 3. Primary factor of production: The other factor of production cannot carry out productive activity without land therefore land become primary factor of production. 4. Passive factor of production: Land is passive factor of production. Land become productive only when other factor such as land & capital are used with it. 5. Permanent factor of production: Land is a permanent factor of Production. It cannot be destroyed completely. However its resource like Mountain and forest etc get reduced.
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6. Heterogeneous factor: The fertility of land of differs from place to place and can be graded on the basis of productive & fertility. 7. Diminishing return: Land is a subject to the law of diminishing marginal returns because as more and more input are employed on the same land, after particulars stage the productivity start diminishing. 8. No geographical mobility: Geographically land has no mobility. It cannot physically move from one place to another. It has occupational mobility i.e. some land can be used for producing various corps. 9. Derive demand: The demand for land is derived demand. The demand for agricultural land depends on demand for agricultural items produce on that land.
LABOUR
Labour is the most active factor of production without which production process is not possible. Progress and prosperity of country depends on efficiency of labour power. Labour can be defined as Any physical or mental efforts which contribute to production of goods & services and earn some income. According to Alfred Marshall Labour is any exertion of mind or body undergone partly or wholly the pleasure derived directly from work.
FEATURE OF LABOUR
1. Living factor: Labour is a human resource and it is living factor of production. Labour has its own feeling of likes and dislike. 2. Perishable factor: Labour is a perishable. If worker does not work on particular day, his labour for that day lost. Labour cannot be stored and use whenever required. Labour that is lost on any day is lost for forever. 3. Relative inelastic supply: Supply of labour cannot be adjusted in short run. It cannot be increased or decreased during short period of time. However it is elastic in the long run. 4. Inseparability: Labour is human resource of production. Labour and his service cannot be separated from each other. Labour has to be physically present at the working place to job. 5. Heterogeneous factor:
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Labour is a heterogeneous factor of production. Efficiency and skill of worker differ from worker to work, because all workers are not physically or other wish equal. Labour efficiency depends on education, training, experience. 6. Less mobility: Geographically and occupationally labour is less mobile due to factor like attachment to ones family and land, cost, transport, language etc. 7. Derived demand: Demand for labour is derived demand. The demand for labour is depends on the goods and serviced that is produce by labour. 8. Active factor: Labour is most active factor of production, without which production process is not possible. Progress and prosperity of a country depends on the efficiency of labour power. 9. No depreciation: In the case of labour, it very difficult to calculate Depreciation charges.
CAPITAL
Capital is that part of wealth which is used for further production. Wealth can be use either for consumption or for production. When it is used for production of goods and service,it is known as capital goods. Capital is manmade factor of production or produce means of production. Capital includes factory building, raw material, equipment, machine, tools etc. According to Prof.Alfred Marshall capital consists of those kinds wealth other than free gift of nature which yields income.
FEATURE OF CAPITAL
1. Man made factor: Capital is a man made factor of production. It is a artificial and not original. It is produced means of production. Because it is the man who process the capital in the form of plant & machinery. 2. Highly productive: Capital is a highly productive. Without capital production cannot be take a place. The use of capital enhance the overall productivity and lead to large scale production. 3. All capital is wealth: All capital is wealth because capital process all the characteristics of wealth such as scarcity, externality, transferability and utility. 4. Elastic supply: The supply of capital elastic in the long run. It can be increase or decrease by changing the capital formation. Capital is inelastic in the short run.
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5. Passive factor: Capital is a passive factor of production. It becomes productive only with the help of labour. Capital cannot produce anything without the help of labour.
6. Round about method of production: Use of capital involve round about method of production. It is indirectly used in the production process. Which is turn increase the production of worker. 7. Deprecation: Durable physical capital assets such as plant and machinery, furniture etc are subject to depreciation. 8. Mobile factor: Capital is the most mobile factor of production. It can be easily move from one place to another. It enjoys geographical as well as occupational mobility.
TYPES OF CAPITAL
A) On the basis of durability Fixed capital: Fixed capital refers to durable physical assets like factory building, raw material, equipment, machines, tools etc. These are used again and again in the production process for a long time until worn out. These have long life and used very slowly in the production process. Working or circulating capital: Working capital is a variable capital input. It refers to one time use to produce goods. Raw material, power, fuel, etc are the example or working capital. It is use in the single operation of production. It is called circulating capital because it change its from completely in the production process.
B)
On the basis of mobility Sunk capital: Capital equipment which is very sophisticated and having specific use is called sunk capital. Sunk capital specially develop to render a particular task in particular industry only. for E.g. Textile weaving machine can be used for weaving purpose only in industry. Floating capital: Floating capital is non specific or general type of capital. It can be used for any other purpose for E.g. electricity etc.
C) On the basis of nature Page 33
Physical capital: It is that capital which is used for production of other goods and service. It is the physical as well as tangible assets. Example: machine, plant, factory building etc. Money capital /financial capital: It is that capital which is available for investment. This is expressed in the form of money such as shares, debenture etc. D) On the basis of ownership Private capital: It is that capital which owned by private individual. It is also known as personal capital. Social capital: It is that capital which owned by society or public. Government school, government hospital, railways etc are the example of social capital.
ENERPRENEUR
An entrepreneur is one who organizes the factor of production and takes necessary action to run business. An entrepreneur is an individual who bears the risk operating a business in the face of uncertainty about the future condition.
FUNCTION OF AN ENTERPRENEUR
Entrepreneur is the Captain of an industry who co-ordinates or combines all factor, organizes, supervises, Manages, Administer and controls the production activities by bearing all sorts of risk and uncertainties. In the Modern Economy, an entrepreneur has to perform some special function. The following are the function of an entrepreneur. A) Organisation functions B) Risk and Uncertainty Bearing function C) Innovation Function
A)
Organisation Function
An entrepreneur is an organizer and initiator of the business. He has to perform the following functions to organise business. 1. Optimum combination of the factor: An entrepreneur has to co-ordinate or combine different factors of production in the best possible way so that the cost of production will be minimum. He do this function with help of THE OF SUBSTITUTION i.e. by substituting cheaper factor for dearer one. He should combine factor in such a way that their marginal productivity are equal. Page 34
2. Decision making: He should take decision regarding what product to be produced, its price, selling cost, cost of production, location of industry etc. he should start those industry and product which provide more return. He should also make decision regarding size of the firm on the basis of demand for his product. He should decide the scale of production by equating Marginal Revenue (MR) and Marginal cost (MC) he can expand the volume of production till MR =MC. 3. Policy making: Entrepreneur should also make entire business policies i.e. Policies regarding inputs (factors of production), size of the firm, advertisements and sales strategies etc. He should frame all such business policies in such a way that cost of production should be minimum and revenue (profit) should be maximum. 4. Supervision: An entrepreneur is also the supervisor of the business. He should supervise the entire functioning of the business. He should keep on monitoring the working (functioning) of factor inputs. 5. Making factor payments: It is the responsibility of entrepreneur to make payments or remuneration to the factors of production. He should pay remuneration to the factors according to their contribution in the production process.
B)
Risk and Uncertainty bearing function

It is a unique and the most important function performed by an entrepreneur. Other factor does not involve the element of risk and uncertainty. But every business is a subject to such elements. It is the responsibility of the entrepreneur to shoulder and borne such risk and uncertainties in the business. Any entrepreneur has to bear two type of risk. 6. Insurable risk : Insurable risk is that risk against which he can get insured.Such as risk due to floods, accident, fire, theft (burglary) etc. since they are anticipated, the risk can be minimized by insuring with insurance company. 7. Non insurable risks (uncertainties): Non insurable risk i.e.Unexpected risk against which he cannot get insured. Example risk to due to change in market condition, demand pattern, Govt. police, state to technology, competition etc. only entrepreneur has to borne loss due to this, since it cant be convered by insurance company. For bearing such uncertainties, an entrepreneur gets the reward in the form of profit. An efficient entrepreneur takes advantage of such change and by formulating suitable business policies, earn more profit.
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C)
Innovative function
An entrepreneur is also a good innovator. It is the duty of an entrepreneur to do in innovation. He Has to do fallowing function. 8. Knowledgeable: He should have complete knowledge about his business and market conditions. He should also have the knowledge about test development techniques which reduces cost. He should have far sightedness so that he will be able to analyze future business trends, so as to adjust production accordingly. 9. Risk taker: He should be well efficient to identify and tackle risk and uncertainties in the business. He should be able to minimize risk, rather than undertaking more of it. 10. Innovator: He should be a good innovator. He should introduce new techniques of production which minimize cost of production and should explore new raw material and market for his product.
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Chapter - 6 PERFECT COMPETITION

Perfect competition refers to the market where large number of buyer and seller, buying and selling homogeneous goods at uniform price.
Condition / Assumption / Characteristic of P. C.

1. Homogenous product: In perfect competition the product supplied in market are identical in all respect. In other words the product are homogenous in respect of test, colour, size, shape, quality etc. Therefore buyer buys the product by chance, not by choice. 2. Large number of buyer and seller: In perfect competition there larger number of buyer and seller. The number of buyer and seller is so large that a single seller or buyer cannot influence the market. In perfect competition all buyer and seller is price taker, not the price maker. 3. Freedom of entry and exit: There are complete freedom of entry and exit of all the buyer and seller in the market. Any buyer and seller can enter into the market or exit from the market whenever he wants. 4. Perfect knowledge of market: It is assume that there is perfect knowledge of market on the part of buyer and seller regarding market condition and price etc. 5. Perfect mobility of factor: It is assuming that factor of production are completely free to more from one industry, from one market to another market. 6. Absence of transport cost: In perfect competition, all the buyer and seller are close to the market, therefore there is absence of transport cost. 7. Absence of government intervention: In perfect competition, there is no government intervention regarding production, buying and selling.
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How to determine price under perfect competition? Or What is mean by equilibrium price? How it is determined? Answer: Price is determined by the demand for a commodity and supply of commodity. Demand represents consumer side and supply represents producer side. Equilibrium price is that price which brings into the equilibrium of demand and supply of a commodity. Any rise in price above this, causes decrease in demand and increase in supply when price below the equilibrium level means increase in demand and decrease in supply. Thus it is only at the equilibrium price that brings equilibrium between demand and supply.
Quality Demand 150 125 100 75 50
Price Rs. 5 10 15 20 25
Quantity Supply 50 75 100 125 150
We observe that when the price is Rs. 15, both demand and supply are equal at 100. If price is less than Rs. 15 (say 10), demand increases to 125 but supply reduces to 75. If the price is greater than equilibrium price, then demand increase to 75 and supply increase to 125.
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Quantity demand and supply We observe that when price is Rs. 15, both the demand and supply are equal at 100. If price rises above Rs. 15, says Rs. 20, the demand will be less than supply. The excess supply over demand pulls the price down to Rs. 15
Monopoly
Meaning: Monopoly is the market situation in which there is only one seller who controls the entire supply of product. The word mono means single and poly means seller. Thus monopoly means single or one producer.
Feature of Monopoly:
Single seller: There are no competitors. He is the sole seller. A monopolist is not threatened by any competitor. 1. No close substitutes: The commodity sold by the monopolist has no close substitutes. For example electricity sold by the Reliance has no close substitutes. 2. No entry: In monopoly market entry is completely restricted. If entry is allowed or anybody succeeds to enter the market and produce a close substitute, the monopolist will be no more a monopolist. 3. Downward sloping and less elastic demand curve: A monopolist can increase his sales by lowering the price. If he controls then the quantity sold depends on the market i.e. demand, therefore, monopoly face downward sloping demand curve. 4. No distinction between firm and industry: A monopolist being the sole seller constitutes the firm as well as the industry. Therefore there is no need for a separate discussion of equilibrium of industry.
Explain the different kinds of monopoly.

1) On the basis of degree of monopoly power
a. Pure monopoly: Pure monopoly means a single firm which slowly controls the supply of commodity which has no substitutes. There is no competition and he can change any price for his product. b. Limited monopoly: Page 39
Limited monopoly means a single firm which controls the supply of commodity having no close substitutes but there are remote substitutes. Limited monopolist has no absolute but limited monopoly power, because there is threat of competition from distance substitutes.
2) On the basis on nature of ownership:

a) Private monopoly: Private monopolies are owned and control by private individuals. They are profit motivated. b) Public monopoly: Public monopolys are owned and control by government. They are service motivated and welfare oriented. E.g. Railways are owned by government.
3) On the basis of source of monopoly power:

a. Legal: The government grants legal sanction to monopolist through patents, trademarks, copy right etc that other cannot imitate them. b. Natural monopoly: When there are natural advantages like good location, huge capital, natural resources, business reputation etc, then firm enjoys natural monopoly. c. Technological monopoly: Technological monopoly emerges as a result of economics of large scale production, use of capital goods, research, new method of production etc. d. Voluntary at joint monopoly: Some firm may unite and form a pool trust, cartels etc, to avoid competition and acquire monopoly. This is known as voluntary or Joint monopoly.
4) On the basis of price policy:

a. Simple monopoly power: Simple monopoly firm charges a uniform price or single price to the entire customer. A simple monopoly operates in single market. b. Discriminating monopoly: Discriminating firm charges different price to different customer. A simple monopoly operates in single market. 5) On the basis of fear of competition, entry barrier and profit motive: Page 40
a. Strong monopolist: A strong monopolist is confident and optimistic. He devices his own price output policy and maximum profit as there are strong entry barriers and no fear of competition, no government intervention and no adverse reaction of consumers. b. Weak monopolist: Lacks of confidence and pessimistic as there is fear competition, government intervention and adverse reaction of consumers. He devices his price output policy to safe guard his monopoly than maximizing his profit.
MONOPOLIST COMPETITION
Monopolist competition: Monopolist competition is a market structure in which a large number of firms produce and sell products that are differentiated but close substitute of each other. There is competition among firms producing close substitutes
Feature of monopolist competition:

1) Large number of sellers: In monopolist competition, there is large number of seller. The number of seller is so large that single firm or seller cannot influence the market price and output. The price and out policy of each seller is independent. Any action on the part of it by way of increasing or decreasing output will have no effect on other firm. 2) Freedom of entry or exit: There is complete freedom of entry and exit in the market. Any firm can inter into the market and exit from the market. Excess profit by the existing firms will attract more firms to enter the market; on the other hand, a loss will compare the firm to leave the market. 3) Selling cost: It is feature of his market. Selling cost is the cost incurred for sale promotion. Selling cost includes all types of cost, incurred to promote sale. Selling cost incurred in the form of advertisement, exhibitions, gifts, free samples and so on. Selling cost incurred to influence the customer demand. 4) Large number of buyer: There are large numbers of buyer in the market. Each buyer prefer to buy a specific brand of product, so in order to attract more and more consumers towards his product, the seller introduce the product according to the taste and preference of the buyer. Page 41
5) Product differentiation: Product is differentiated in monopolistic competition. Product differs from each other in many ways. Product differentiation takes place in the form of brand name and trademark. Product may also differentiate in terms of colour, size design, taste, perfume etc. 6) Price maker: In monopolistic competition the firm is a price maker. The firm has some control over the price due to product differentiation. Thus there is price differential between the firms producing close substitute. 7) Nature of demand curve: The demand curve for the products of each firm is downward sloping. This means that an individuals firm can sell more by reducing the price. It is comparatively more elastic than under monopoly due to availability of close substitute. 8) Existence of groups: Existence of group is yet another important feature of this market. Each firm produces similar, but not identical goods. Each firm is industry itself. Since products are not homogeneous, there is no industry as in the case of perfect competition. Therefore chamberlin introduces the term group. A group is cluster of firms producing vary closely related but differentiated product. The collection of firm that produces some type of product with high negative cross elasticity of demand will constitute group.
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Chapter - 7
COMMERCIAL BANKING
MEANING AND DEFINITIONS
The term bank comes from the French word Banco which means a bench. In earlier days, European money-lenders or money changers used to display coins of different countries in big heaps on benches or tables, for the purpose of lending or exchanging. A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends it to others. Oxford Dictionary defines a bank as an establishment for custody of money, which it pays out on customers order. The Indian Banking Regulation Act, 1949 defines banking company as a company which transacts the business of banking in india. and the word banking has been defined as accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft and order or otherwise.
FEATURES OF A BANK
1. Financial Institution: A bank is a financial institution which deals with money and other related services. 2. Accepting Deposits: The bank accepts deposits from the public. The deposits can be withdrawn either on demand or after a certain period. 3. Lending of Money: The bank advances loans to those who need it. A commercial bank normally gives short term, medium term loans and even long term. 4. Bank Money: The bank operates mostly with cash and bank money such as cheques, drafts, etc. 5. Services to Customers: A bank provides a number of services to its customers. It makes direct payments on behalf of its customers. It also receives money on behalf of its customers. 6. Vital Role: Page 43
The bank plays a vital role in modern business. Without banks, it would be highly difficult to conduct business activities in a smooth manner. A bank is a vital aid-to-trade.
FUNCTIONS OFCOMMERCIAL BANKS

The banks perform a number of vital functions. The functions of a bank can be broadly classified into two groups as follows: FUNCTIONS OF BANKS
PRIMARY FUNCTIONS FUNCTIONS Accepting Deposits Savings Deposits Fixed Deposits Current Deposits Recurring Deposits Granting Advances Overdraft Cash Credit Loans Discounting of Bills Agency Functions
SECONDARY
Utility Functions Drafts Lockers Underwriting Project Reports
Transfer of Funds Periodic Payments Collection of Cheques Portfolio Management
PRIMARY FUNCTIONS The primary functions of a bank are also known as banking functions. They are the main functions of a bank. The primary functions are as follows: Accepting Deposits: The bank collects deposits from the public. The deposits can be of different types - such as: (a) Sayings Deposits (b) Fixed Deposits (c) Current Deposits (d) Recurring Deposits
(a) Savings Deposit: It encourages saving habit among the people. The rate of interest is low. At present it is about 3.5% p.a. Withdrawals are allowed subject to certain restrictions. This account is suitable to salary and wage earners This account can be opened in single name or in joint names. (b) Fixed Deposit: Lumpsum amount is deposited for a specific period. Higher rate of interest is paid, which varies with the deposit period. Normally, withdrawal takes place on or after the maturity date. Page 44

The account holder can close the a/c before maturity date. Those who have large surplus funds go for fixed deposits.
(c) Current Deposit: This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact, there are service charges. However, at present, some banks pay nominal interest on balances. The account holders can get the benefit of overdraft facility. (d) Recurring Deposit: It is operated by salaried persons and small traders. A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid. Granting of Loans and Advances: The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit. The bank loans and advances include: (a) Overdraft (b) Cash Credits (c) Loans (d) Discounting of Bills of Exchange (a) Overdraft: It is given to current account holders. A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time, say 3 months. Interest is charged on actual amount withdrawn. An overdraft facility is granted against a collateral security. It is provided to business and non-business organisations. (b) Cash Credit: The client is allowed cash credit up to a specific limit fixed in advance. It can be given to current account holders and to others who do not have a current account with the bank. Separate cash credit account is maintained. Interest is charged on the amount withdrawn. It is given against the security of tangible assets and/or guarantees. The advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft. (c) Loans:
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Lumpsum loan amounts are given. It is normally for short term, say a period of one year or medium term say a period of five years. Nowadays, banks do lend money for long term. Repayment of money can be in the form of installments spread over a period of time or in lumpsum. The loans are granted to meet long term working capital needs and for expansion and modernisation. Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest depends upon, the amount of loan and period of loan. Loans are normally secured against tangible assets of the company.
(d) Discounting of Bills of Exchange: The bank can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected. The bank can get the bill rediscounted with the All India financial institutions such as Small Industries Bank of India (SIDBI), Export Import Bank of India (EXIM Bank), etc.
Investments: The banks invest a part of the deposit money in bonds, debentures and other securities. Investment in profitable areas brings good returns to the bank. B. SECONDARY FUNCTIONS The bank performs a number of secondary functions, also called as non-banking functions. The important secondary functions are as follows: Agency Functions: The bank acts as an agent of its customers. The bank performs a number of agency functions, which includes: a) Transfer of Funds: The bank transfers funds from one branch to another or from one place to another. b) Collection of Cheques: The bank collects the money of the cheques through clearing section of its customers. The bank also collects money of the bills of exchange. c) Periodic Payments: On standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent, etc. d) Portfolio Management: Large banks undertake to purchase and sell the shares and debentures on behalf of its clients and accordingly debits or credits the account. This facility is called portfolio management. Page 46
e) Periodic Collections: The bank collects salary, pension, dividend and such other periodic collections on behalf of the client. f) Other Agency Functions: It acts as trustees, executors, attorneys, and administrators on behalf of its clients. It acts as representatives of clients to deal with other banks and institutions. General Utility Functions: The bank also performs general utility functions, such as: a) Issue of Drafts, LCs, etc.: Banks issue drafts for transferring money from one place to another. It also issues letter of credit, especially in case of import trade. It also issues travellers cheques. b) Locker Facility: The bank provides a locker facility for the safe custody of valuable documents, gold ornaments, and other valuables. c) Underwriting of Shares: The bank underwriters share and debentures through its merchant banking division. d) Dealing in Foreign Exchange: The commercial banks are allowed by RBI to deal in foreign exchange. e) Project Reports: The bank may also undertake to prepare project reports and feasibility studies on behalf of its clients. f) Social Welfare Programmes: It undertakes social welfare programmes, such as adult literacy programmes, public welfare campaigns, etc. g) Other Utility Functions: It collects creditworthiness about clients of its customers. It provides market information to its customers, etc. It provides travelers cheque facility.
MULTIPLE CREDIT CREATION BY COMMERCIAL BANKS

Banks are said to be the manufacturers of money. They accept deposits called primary deposits from the public. These deposits form the basis of all credit creation activities.
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Apart from primary deposits, the bank also creates Derivative Deposits by way of bank loans and investments. When a bank provides a loan, it opens a deposit account in the name of the customer (who has taken loan) and credits the account with the loan amount granted. The customer can withdraw the amount as and when required. Thus according to W. F. Crick, every bank loan creates a deposit and every repayment of loan destroys the credit. Apart from loan, the investments by bank in securities and assets also create deposits. The banking system can expand its loans and investments by many times the amount received by it by way of primary deposits. This process is called as multiple credit creation (MCC). The process of MCC is based on the assumption: All the depositors do not withdraw the entire deposit amount at the same time. Therefore, the banks need not keep 100% of deposits as Reserves. For instance, if the depositors withdraw about 25% of their deposits, the banks can safely lend and invest about 75%. The banks lend or invest the money by opening an account in the favour of customers who have borrowed or obtained the investment. The amount lent creates a credit for the lending bank. The borrowers operate the account by cheque to pay to other parties. The other parties deposit the issued cheques in their account, (may be with some other bank). Thus the banking system gets more deposits. This process continues and results in multiple expansions of bank deposits or multiple credit creation. It is to be noted that the banks power to create credit is limited by the amount of cash it gets by way of deposits or other sources. It is also determined by the willingness of the customers to borrow. Also, the monetary policy of RBI, determines credit creation. For instance, if RBI adopts liberal monetary policy, there will be more money supply with the banks, which in turn increase credit creation ability of banks.
Determinants of Multiple Credit Creation:

The size of bank money at any given time will depend on a number of factors. 1. Primary Deposits: The size of primary deposit is the basis of any credit creation activity. Credit created is a multiple of the primary deposits. If the primary deposit, which is also called monetary base is low, the credit created will be low. 2. Cash at Hand: Deposits are liable for withdrawal any time. Banks normally keep a portion of the deposits in the form of cash at hand for facilitating withdrawals. The quantum of withdrawal is estimated on the basis of historical data of each bank. Cash withdrawal is drain on credit creation. Some banks also maintain an excess reserve if they are unable to correctly net cash outflows. Larger the size of cash held, lesser the ability of banks to create credit.
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3. Reserve Ratio: The Reserve Bank of India (Central Bank of the country) insists that the commercial banks maintain a certain reserve out of the deposits received from public. This is known as Cash Reserve Ratio. The reserve ratio will adversely affect credit creation capacity of banks. 4. Capital Deposit Ratio: In some countries banking rules do not permit commercial banks from accepting primary deposits of more than a certain multiple of the paid up capital. This limitation is imposed for increasing the accountability of bankers and preventing misuse of funds. If the paid up capital is low, the deposits with the bank will below, and therefore credit creation capacity will be low. 5. Liquidity Preference of Public: If the public do not want more money, banks cannot create more money. Bank money is created only if there are borrowers. If the public preference is for non- monetary assets, banks will remain as silent spectators. 6. Business Conditions: The general business conditions are a very important determinant of bank credit. If the country is facing recession or depression, people as consumers will need less money and a investor they will refrain from investing on assets. 7. Leakages: Credit creation is a process involving a flow from one bank to another and so on. If a cheque issued is not deposited immediately, a secondary deposit is not created. In India one can keep a cheque up to six months during which no money will be created. Similarly it takes many weeks and sometimes months for collection and realization of cheque due to poor interbank communication set up. This problem is now being solved by some banks due to introduction of core banking facilities. The amount of commission and collection charges levied by the banks also represents leakages. 8. Monetary Policy: Monetary policy of the central bank imposes severe limitations on commercial banks. Increasing bank rate, selling of securities, in the open market, increasing the reserve ratios and tightening of the selective controls will restrain commercial banks from creating more bank money.
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Chapter - 8 CENTRAL BANKING

MEANING OF CENTRAL BANK
The central bank is the apex bank in the country. It enjoys the apex (highest) position in the countrys monetary and banking structure. It regulates and monitors the banking and monetary system in the country. In India, the Reserve Bank of India is the central bank. It was established in 1935. Some of the prominent central banks include Bank of England, Federal Reserve Bank (USA), and Peoples Bank of China and so on. Definitions: (Bank for International Settlements defines central bank as The bank in any country, which has been entrusted the ditty of regulating the volume of currency and credit in the country. M.H. de Kock A Central Bank is one which constitutes the apex of the monetary and banking structure of its country, and which performs as best as it can in the national interest, certain functions such as note issue, banker to the government, banker to the banks, and custodian of countrys foreign exchange reserves.
FUNCTIONS OF CENTRAL BANK

The functions of central bank can be broadly divided into two groups as shown below: FUNCTIONS OF CENTRAL BANK
MONETARY FUNCTION Issue of Currency Notes Banker to Government Bankers Bank Credit Controller Custodian of Forex Reserves
NON-MONETARY FUNCTIONS Banks Supervision Development Function Data Collection Research Clearances
MONETARY FUNCTIONS
The monetary functions of the central bank are briefly explained as follow: Page 50
1) Issue of Currency Notes: The central bank has the authority to currency notes. The RBI enjoys the monopoly of note issue. The RBI has been authorized by the Government of India to issue notes of all denominations except One Rupee note (which at present is riot so in circulation). The One Rupee note is directly issued by the Government of lndia. In lndia, every note issued is backed by an asset of equal value. The assets include gold, foreign currencies, and securities. The main advantages for the monopoly of note issue by Central Bank are: It brings uniformity in note circulation. It facilitates effective supervision of RBI over currency notes in circulation. It avoids the problem of over-issue of currency notes. It develops confidence in publics mind. 2) Banker to the Government: The central bank act as banker agent and adviser to the government. The three roles are: (a) As a Banker to the Government: The central bank performs the following: It transacts all banking business of the Central Government and of the State Governments. It accepts money on account of the government and makes payment on behalf of the government. It makes temporary advances to the government. It makes extraordinary advances to the government during emergencies. It undertakes governments transactions of purchase and sale of foreign currency. (b) As an Agent of Government: The central bank performs the following: It manages public debt and is responsible for issue of new loans. It maintains exchange rate stability. It assists the government in maintaining financial relations with international financial institutions like World Bank; IP4F, Asian Development Bank, etc. (c) As an Adviser to Government: The central bank performs the following: It advises the government relating to issue of loans. It advises the government to take measures to control inflation. It advised the government in preparing financial budgets. It advises the government in respect of resource mobilization. It advises the government in framing financial schemes to various sectors. 3) Bankers Bank: The central bank acts as a banker to all other banks in the country. In this respect, the following are the functions: a. Lender of Last Resort: Whenever any commercial bank faces liquidity problems, the central bank provides funds to overcome the crisis. Normally, the funds are provided by rediscounting the bills of commercial banks. Page 51
b.
Custodian of Cash Reserves: Commercial banks have to maintain a certain percentage of their total deposits in the form of cash reserve ratio (CRR) with the central bank. The central bank pays interest to the banks on CRR balances. The CRR enables RBI to advance funds to banks that face temporary liquidity crisis. It is also an instrument to increase or decrease money supply depending upon the situation. For instance, if there is inflation in the country, the central bank would increase CRR in order to reduce money supply. In April 2007, RBI increased the CRR to 6.5% to control inflation. In April 2006, the CRR was 5%. Increase in CRR reduces liquidity of the banks, and therefore, reduces money supply in the market, which in turn helps to control inflation. Clearing House: The central bank acts as a clearing house for all the commercial banks. It clears inter-bank transactions. Since all banks have their accounts with the central bank; the claims of banks against each other are settled by simple transfers, i.e., by debit and credit-entries in their accounts.
c.
d.
4) Controller of Credit: The central bank has the responsibility to control credit in the economy.. The central bank regulates the volume of credit and money supply in the country. The credit or money supply is decreased to control inflation. And the credit or money supply is increased so that banks lend more funds to various sectors. Various quantitative and qualitative controls are used by RBI to regulate credit and money supply. The quantitative controls include: Increasing or decreasing bank rate. Increasing or decreasing CRR and Statutory Liquidity Ratio (SLR) Increasing or decreasing Repo rate. Open Market Operations.
The qualitative controls include: Ceiling on level of credit. Margin requirements. Issuing directives to banks. Moral suasion. Etc. 5) Custodian of Foreign Exchange Reserves: A country maintains foreign exchange reserves in form of gold, special drawing rights (SDRs of IMF), and foreign currency. The foreign exchange reserves indicate a sound balance of payments position. A good amount of foreign exchange reserves helps to maintain exchange rate stability.
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NON-MONETARY FUNCTIONS
6) Supervision of Banks: The central bank supervises and monitors the working of commercial banks. The RBI is given powers to supervise and monitor the working of commercial banks under the Banking Regulations Act, 1949. 7) Promotion and Development Functions: The central bank also performs the promotion and development functions. For instance, RBIs set up National Bank for Agriculture and Rural Development (NABARD) to promote agriculture and rural development. It has also set up Export-Import (EXIM) Bank of India, to promote foreign trade. 8) Data Collection and Publication: The central bank collects data on various economic matters such as foreign trade, foreign direct investments in India, investments by Indian firms in the overseas markets, inflation, and so on. It publishes he data in RBI bulletins, and other publications. Such information may be useful to business firms and other organizations. 9) Research: The central bank undertakes research work in respect of banking and other economic matters. The research work is useful to the Government authorities to frame various macroeconomic policies, such as foreign trade policy, monetary policy, taxation policy, and so on. 10) Clearances: The central bank also gives clearance to various proposals or projects involving financial consideration. For instance, it clears joint ventures abroad. It also clears proposals from Indian firms to invest in foreign countries.
METHODS OF CREDIT CONTROL

Credit control measures refer to those measures adopted by RET to increase or decrease the credit or money supply in the economy. If there is more money supply, it will lead to inflation, and therefore, RBI will adopt credit control measures to restrict money supply. The credit control measures can be broadly divided into two groups: CREDIT CONTROL MEASURES
MONETARY FUNCTION Bank Rate Open Market Operations Cash Reserve Ratio Page 53
NON-MONETARY FUNCTIONS Ceiling on Credit Margin Requirements Directives

Statutory Liquidity Ratio GENERAL CREDIT (QUANTITATIVE) CONTROLS

Moral Suasion
The general credit controls are quantitative credit controls, which maintain proper quantity of credit or money supply in the market. These methods are formulated to affect proper liquidity in the market. Some of the important general credit controls are: 1) Bank Rate: The bank fate is the rate at which RBI lends money to commercial banks. The Central Bank (RBI) lends money to commercial banks by discounting bills of exchange. In Nov. 2007, the bank rate was maintained at 6% per annum. Bank rate acts as a guideline to the banks for fixing interest rates. If the bank rate increases, the interest rates increase, and vice-versa. Through changes in bank rate, RBT affects the interest rates in the money market. 2) Open Market Operations: This involves purchase and sale of government securities. The open market operations enable to balance money supply in the economy. Through purchase of government securities from banks and FIs, the stock of securities with the seller hank is reduced and there is increase in cash with them for lending. Through sale of government securities, it reduces the cash with the banks for lending. 3) Cash Reserve Ratio: The CRR also affects money supply in the economy. It is the ratio or percentage of a banks (demand and term) deposits to be kept in reserve with RBI. Increase in CRR reduces the cash for lending, and a low CRR increases the cash for lending by banks. The CRR was L5% in 1991. Subsequently CRR was reduced. On April 18, 2008, CRR was revised at 8%. 4) Statutory Liquidity Ratio: Under SLR, the government has imposed an obligation on the banks to maintain a certain ratio to its total deposits with the RBI in the form of liquid assets like cash, gold, and other securities. The SLR has been reduced from 38.5% in 1991 to present level of 25%. The reduction in CRR and SLR improves liquidity of the banks to lend more money in the money market. 5) Deployment of Credit: Various measures have been taken by R.BI to deploy credit to various sectors of the economy. For this a certain percentage of credit has been earmarked. For example, 40% of the total net bank credit has been earmarked to the priority sector at Low interest rates. Low interest rates have been fixed for supply of credit to agriculture and to export sector as well as to other sectors in the priority list. SELECTIVE CREDIT (QUALITATIVE) CONTROLS Selective credit controls have been taken to control money supply or credit, i.e., either to increase or decrease the money supply to specific purposes. Such controls the flow of money int6uhproductive channels or purposes. The selective controls are:
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1) Ceiling on the Level of Credit: The ceiling on the level of credit restricts the lending capacity of a bank to grant advances against certain controlled commodities or securities. 2) Margin Requirements: He RBL imposes minimum margin requirements, which vary from 20% to 80% for lending against securities or commodities. Margin against a particular security is decreased or increased in order to encourage or discourage the flow of credit to a particular sector. 3) Directives: The RBI issues directives to banks regarding advances. Directives are issued in the following aspects: Minimum margin requirements against securities. Maximum limit on advances to borrowers. The percentage of CRR and SLR. Minimum lock-in period, etc.
The RBI takes necessary action on those banks, which fail to comply with its directives, such as refusal to rediscount bills or cancellation of license. 4) Moral Suasion: Under moral suasion, the RBI issues periodical letters to banks to exercise control over credit. Such periodical letters ad as a reminder to the banking sector to follow credit control norms.
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Chapter - 9 MONEY
MEANIG AND DEFINITIONS OF MONEY
Money is the measure of value and the medium of exchange. It came into existence due to the problems of the barter system. Money includes any means that can be used as a measure of value and the medium of exchange. It can include metallic money, paper money, bank money, credit and debit cards, and so on. Geoffrey Crowther Money is anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and as a store of value. Dennis Robertson Money is anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation. R.P.Kent Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.
FUNCTIONS OF MONEY
Francis Walker Money is what money does. It implies that money performs certain functions such as medium of exchange and measure of value. The functions of money can be broadly divided into three groups: FUNCTIONSOFMONEY
PRIMARY FUNCTIONS
SECONDARY FUNCTIONS
CONTINGENT FUNCTIONS
I. Primary Functions:
1) Medium of Exchange: Money acts as a medium of exchange. Money as a medium of exchange has overcome one of the major limitations of barter exchange. People accept money in exchange for the goods and services. They use it to buy some other goods and services as and when they need them. Thus, money changes hands from one person to another through transactions. 2) Measure of Value:
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Price is the value of goods and services expressed in terms of money. Expressing the value of one commodity in terms of another would be difficult. This difficulty can be solved when prices of all the goods and services are expressed in terms of money So, money assumes the role of measure of value.
II. Secondary Functions:

3) Store of Value: Under barter exchange, certain commodities lacked store of value because of perishable nature. However, people can conveniently store money and use it as and when required. Money can be stored with the individual, or invested in securities or deposited in the banks. 4) Standard of Deferred Payments: With money, it is possible to settle payments at the time of actual exchange or at a later date. The possibility of settlement at a later date, i.e. deferred payment enables people to undertake sales in anticipation of future receipts. Thus, credit transactions are possible because of this function. 5) Standard of Transfer Payment: Traders and others buy goods from far off places. Accordingly payment has to be made or transferred to those distant places. This can be done easily with money due to its portability and universal acceptability.
III. Contingent Functions:

6) Estimation of National Income: National income is the money value of all goods and services produced in country during a specified period of time. Goods and services produced are expressed in money terms and accordingly national income is determined. 7) Measure of Utility: Alfred Marshal treated money as a measuring rod of utilities. Marshall stated that utility (which is the quality of a commodity to satisfy. human wants) could be measured with the help of money to achieve maximum satisfaction. 8) Liquidity: Money is the most liquid asset. It can be available on demand (in case of bank deposits) and can be transferred without any loss of time and value. It can be converted into any other commodity almost instantly. 9) Productivity: Money helps to increase productivity of business firms. Productivity is the ratio of output (returns) to input (capital, labour hours, etc.). There can be more returns with the same amount of capital or with a lower amount of capital than before. This is because; the capital funds or money can be easily shifted from less productive use to more productive purposes. Page 57
10) Basis of Credit System: Money is the foundation on which the structure of banking and credit system is based. A bank cannot create credit without having adequate money in reserve. The credit instruments drawn by businessmen such as cheques, and letter of credit are backed by money guarantee of the bankers. In the absence of money, the credit instruments do not have any value.
CONCEPT OF GOOD MONEY

All sorts of commodities have been used as money at one time or another but gold and silver proved to have great value. They were precious, durable and generally acceptable. So the King or the ruler weighed the metal and made a coin out of it. He affixed his own seal on the coin to guarantee the value of precious metal. However, today metallic (gold or silver) currency is often very scarce or nonexistent. Instead, coins from cheaper metals and paper currency are used for transactions. Such early monetary problems led to a famous economic law. Statement of the law relating to Good Money: The law that has stood the test of time as stated as Bad Money drives out Good Money It has come to be known as Greshams Law after the Elizabethan financial expert Sir Thomas Gresham who first explained the workings of the law to Queen Elizabeth. Assumption of the Law: There are two kinds of gold coins - Royals and Sovereigns. i) Royals have not been debased, i.e. the gold in the coin is worth its face value. ii) Sovereigns have been debased, i.e. the gold in the coin is less than its face value. Explanation of the law: While making payment one would keep undebased Royals and exchange more of debased Sovereigns so that one parts with less gold. The debased coins would thus remain in circulation and the undebased coins would disappear or hoarded. Whenever people got hold of an undebased coin, they would hold on it. Whenever they got a debased coin, they would pass it on. In other words, they would not spend coins that are precious and they may in the future be more valuable than their face value; So they spent coins made from cheaper metals and paper money. In the above example undebased coins are good money and debased coins are bad money Bad money is in circulation and good money is hoarded or people hold on to it. So Bad money drives out good money. However, both good money and bad money are considered to be a good medium of exchange as they possess qualifies of good money:
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QUALITIES OF GOOD MONEY

1. General Acceptability: It must be generally acceptable as a means of exchange. 2. Homogeneity: All units of a particular kind of money such as rupee coins or notes are to look alike in features. There should be uniformity. 3. Cognizibility: It means that money must be clearly distinguishable and easily identifiable. For instance, notes of different denominations must be of different size, colour, etc. 4. Portability: It should be easy to handle and carry from one place to another. 5. Durability: A unit of money should be durable and such as a store of value. 6. Divisibility: A unit of money should be divisible into units of smaller denominations. For example, one rupee is divided into 100 paise. 7. Stability of Value: The purchasing power of money should be stable because money has to serve as a store of value. 8. Attractive: Above all, good money should be attractive with proper size, design and colour.
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Chapter - 10 INTRODUCTION TO MICRO ECONOMICS

MEANING
Micro economics is concerned with microscopic study of the economy. It gives a detailed analysis. of one part of the economy or society. It studies the behaviour of individual units of the economy, such as households, firms, industries, and markets. For instance, there can be a study of economic behaviour of certain firms with respect to their payment of wages, fixing prices of their products, allocation of resources to various departments, etc. Micro-economics is concerned with the study of behaviour of individual element(s) of an economy, whereas, macro-economics is concerned with the study of behaviour of an economy as a whole.
DEFINITIONS
Kenneth Boulding Micro-economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, and particular commodities.
FEATURES OF MICROECONOMICS
The main features of microeconomics are as follows: 1) Studies Individual Units: Micro-economics is concerned with the study of economic behaviour of individual units like households, firms, industries and markets. In other words, it makes microscopic or in-depth study of individual economic units. For instance, there can be a study of economic behaviour of certain households in the city of Mumbai, with respect to purchasing pattern: What they buy? Why they buy? How much they buy? From where they buy? How often they buy?
2) Analyses Allocation of Resources: Micro-economics analyses how resources are allocated to the production of particular goods and services in the economy. Resource allocation analyses WOLI Id enable firms to decide: Page 60
What to produce? How to produce? How much to produce? Which areas to allocate funds?
At micro level (such as individual firm) allocation of resources depends upon several factors such as size of the firm, profit earning potential, the reserves and surpluses, and so on. For instance, a large sized firm with good reserves may allocate lot of funds for research and development, in order to develop new and improved methods or products, in order to gain competitive advantage. Bin a small sized firm would not go for research and development due to Jack of funds. Instead, it may focus on effective distribution of its products. Thus, a study of microeconomics enables firms to take appropriate decisions relating to allocation of resources for productive purposes. 3) Analyses Economic Efficiency: Micro economics studies how efficiently the various resources are allocated to individual consumers and producers within the economy. Economic efficiency involves efficiency in consumption, efficiency in production and overall efficiency. Consumption and production efficiencies relate to individual welfare, and overall efficiency relates to social welfare. Micro economics indicates: The conditions under which economic efficiencies are achieved. The factors that can lead to reduction in efficiencies, and hence lead to a decline in social welfare. Flow inefficiencies can be reduced or eliminated.
4) Products Price Determination: Micro-economics studies how the price of a particular product is determined. Prices of the products depend upon the forces of demand and supply. The demand for goods depends upon the behaviour of the consumers. The supply of goods depends upon the behaviour of firms, and the conditions of production and cost. The demand and supply positions are analyzed to determine the product prices. 5) Determination of Factor Pricing: Micro-economics helps to determine the pricing of various factors of production: Wages for labour Rent for land Interest for capital Profit for the entrepreneur.
Micro-economics examines the forces determining demand and supply of each of the factors of production. It then explains how the demand and supply forces interact to determine the pricing of the factors of production. For instance, if there is more demand for labour than its supply, then the wages would be fixed at a higher level, and vice-versa. Page 61
6) Partial Equilibrium Analysis: Micro economics makes partial equilibrium analysis. Microeconomics is based on the assumption ceteris paribus (which means other things being equal or constant). Based on this assumption, we try to establish the relationship between two variables. For instance, the Law of Demand states other things (income, preference of the consumer, etc.) remaining the same, the quantity demanded of a product is inversely related to its price, i.e., more is demanded at a lower price, and less is demanded at a higher price. In partial equilibrium, we assume that other things are constant. But in general equilibrium, we assume that other things are not constant. In general equilibrium, everything depends on everything else. 7) Focus on Market Behaviour: Micro-economics is mainly concerned with market behaviour and allocation of resources. It makes an attempt to find answers to the following questions: How efficiently the resources be allocated for production and consumption in an economy? What goods to be produced with the given resources and in what quantities? Who will produce them and how? How to price these goods? To whom and how these goods to be distributed?
8) Economic Welfare: The study of micro-economics helps to maximize economic welfare. This is because; micro-economics enables efficient allocation of resources efficient allocation of resources for production of goods and services. It also facilitates efficient distribution of goods and services. The efficiency in production and distribution of goods helps in maximizing welfare of the producers as well as consumers. 9) Uses Slicing Method: Micro-economics uses slicing method for in-depth study of economic units. It divides or slices the economy into smaller units, (such as individual households, individual firms, etc.) for the purpose of in-depth study. 10) Construction of Models: Micro-economics involves construction of simple economic models to express the actual economic phenomenon. The economic models stale the relationships between two variables. For instance, the model of law of demand, states that there is an inverse relationship between demand and price, other things remaining constant.
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Chapter - 11 INTRODUCTION TO MACRO ECONOMICS

MEANING
The term macro is derived from Greek word, which means large. It is a branch of economics, which studies the behaviour of all -economic units combined together. Macroeconomics is a study of aggregates. It is the study of the economic system .as a whole. Therefore, it is also called as Aggregate Economics. Macroeconomics is the study of the overall conditions of an economy total output, total consumption, total national income, savings and investment, aggregate demand and aggregate supply, total employment, and so on. Macroeconomics helps in understanding the functioning of the economy as a whole. It helps the government in framing economic policies. It also helps the government to solve unemployment problems, and so on.
DEFINITIONS
Kenneth K. Boulding in his book Economic Analysis defines Macroeconomics deals not with individual quantities as such, but with aggregates of these quantities; not with individual incomes but with the national incomes; not with individual prices but with the price level; not with individual outputs but with the national output.
FEATURES
The important characteristics of macroeconomics are as follows: 1. Study of Aggregates: Scope of macro-economics is wide. Macroeconomics is concerned with the study of aggregates. It is concerned with concepts such as: Aggregate Demand Aggregate Supply Total Output General Price Level National Income, etc.
2. Lumping Method: Macroeconomics uses lumping method for the purpose of economic study. Microeconomic analysis uses slicing method. Under slicing method, the object under study is Page 63
divided into small individual slices. For instance, in the case of pricing, we study the prices of various products separately. However, under lumping method we study the general price level, and not prices of individual products. 3. General Equilibrium Analysis: Macroeconomics is concerned with the behaviour of aggregates and their interdependence. It is a general equilibrium analysis in which everything depends on everything else. For instance, a change in income level may result in change in savings, which in turn may influence investment. The investment in turn may affect production output, which in turn may affect employment, and finally economic growth. 4. Useful for Government Policies: The study of macroeconomics is highly useful for the formulation and implementation of economic policies of the government. The government is concerned with the regulation of aggregates of the economic system such as the general price level, the general level of production, the level of employment, and so on. Depending upon the situation, the government can frame policies to deal with the situation in the interest of the society. For instance, if the inflation or general price level rises, the government needs to adopt proper monetary policy measures to control inflation. 5. Useful for Microeconomic Analysis: The study of macroeconomics is indispensable for the purpose of microeconomic analysis. For example, the law of DMU (example of microeconomic analysis) could not have been formulated unless the experiences of masses of individuals are taken into account. No microeconomic law can he formulated without a pre-study of the aggregates having a bearing on it. 6. Income Theory: The income theory is a major aspect of macroeconomic theory. A major task of macroeconomics is the determination of national income. Macroeconomics studies the factors determining national income and the causes of the trends in national income. 7. Employment Theory: The employment theory is also a major aspect of macroeconomic theory. It studies the various factors responsible for employment, and also the causes of unemployment. Therefore, the employment theory can help the government authorities to take suitable measures to control unemployment problem. 8. Overall View of the Economy: The study of macroeconomics gives an overall view of the economy. It interlinks various aggregates so as to shown the inter-relationship between them. It tends to provide a more realistic view of the overall economy, which iii turn helps in policy formulation and implementation.
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Chapter - 12 DETERMINANT OF AGGREGATE

Aggregate demand: Aggregate demand refers to the total demand for goods and services in the economy during given period of time and given price level. Aggregate demand can be expressed as: Ad = C + 1 + G + (x-m) Whereas Ad = Aggregate demand C = Aggregate consumption expenditure I = Aggregate investment expenditure G = Aggregate government expenditure (x - m) = Earning from foreign transaction
DETERMINANTS OF AGGREGATE DEMAND

1) Consumption demand: Consumption demand is a part of aggregate demand. It refers to the consumption expenditure incurred by consumpers in the economy. It is the total demand for goods and services. Which are utilized for final satisfaction of human wants? 2) Governments demand: Government expenditure refers to the expenditure by government on consumption and capital goods to satisfy. The government expenditure can be classified as follows: a. Consumption expenditure by government: It refers to the expenditure by government for providing public utility services to the people of the country. It includes expenditure on water supply, education, health services, defense, maintenance of law and order etc. b. Investment expenditure by the government: It refers to the expenditure incurred by the government to increase the stock of capital goods in the country. It includes expenditure on roads, railways, dams, public buildings, bridges, power generation, oil and natural gas exploration etc. 3) Foreign demand:
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In the open economy foreign demand increases the aggregate demand. Foreign demand is the external sector demand. It is measured through net export i.e. export minus import. The following factor influences the foreign demand of country. I. Import and export policy of the trading country. II. Foreign exchange rate. III. Price of goods and services indifferent countries IV. Political and economic relation between trading country. 4) Investment demand: Business firms expenditure in economy is made for the production purpose. In aggregate demand it is called as investment. Investment means saving which is use for further production. There are many types of investment. a. Real investment: Real investment means that part of saving which is use for further production or new capital asset like factory building raw material, equipment, machine tool etc. b. Financial investment: Financial investment is the investment expenditure made for the purchase of share, bonds, securities, stock etc. in the country. c. Autonomous investments: An Autonomous investment means investments which are made without any calculation of income, or profit or interest rate. It is utility oriented or welfare motivated. All investment by government in providing infrastructure, socio economic overheads like roads, railways, bridges, dams etc are autonomous investments without any profit motive. d. Induce investment: Induce investments means investment which is made due to attraction of profit. All investment which is made by private entrepreneur with the expenditure of profit is inducing investment. e. Grass investment: Gross investment means total investment fixed asset like building, machine, raw materials etc during year. f. Net investment: Net investment means gross investment minus depreciation of capital assets.
Meaning of aggregate supply: Aggregate supply refers to the total amount of goods and service produced and supplied in the economy during a given period of time.
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Aggregate supply = f (N.L.K.T.) N = Natural resources (which is considered to be constant) L = supply of labour (which is considered variable) K = stock of capital (which is considered to be constant) T = sate of technology (which is considered to be constant)
DETERMINANTS OF AGGREGATE SUPPLY

The main determinates of the aggregate supply are briefly explained as follows: 1) Naturals resources: Natural resources refer to all kinds of resources which are freely available in the nature and used in the process of production. They include land, climatic, conditions, rainfall, water resources, sunshine, mineral deposits etc. Total production of goods and service in the economy depends on the availability of natural resources as well as their utilization. Since it is difficult to change the size of the natural resources they are considered to be constant. 2) Supply of labour: It refers to total labour force and human resources available and used in the production of goods and services in the economy. The supply of labour depends on the size of the population, age, composition, of the population, education and training of the labour force. The size and efficiency of the labour are very essential for increasing production it is assumed that the supply of labour can be changed in the short run. 3) Capital: Capital is produced means of production. It is a manmade factor of production. The aggregate supply of goods and services produced in the country depends on the availability and use of capital. The stock of capital is considered to be constant in the short period. 4) State of technology: The state of technology means the application of modern and advanced technology and methods of production. The application of improved technology increases overall productivity. In the short term, the state technology is assumed to be constant.
CONSUPMTION FUNCTION
Explain Keynesian psychological low of consumption The consumption function shows the relationship between income and consumption. Keynes called it the propensity to consume. It is also known as psychological law of consumption and fundamental law. It shows the functional relationship between the aggregate consumption and aggregate income. Page 67
Symbolically it is expressed as: C = F(Y) Whereas C = Aggregate consumption expenditure F = function of Y = Aggregate real income Keynes on the basis of fundamental psychological law state that as income increases, consumption also increases but less than proportionately. Hence every increased in income is generally divided in to consumption and saving. Consumption function schedule Income consumption(c) saving s = y-c 0 40 -40 100 100 0 200 180 20 300 260 40 400 340 60 The following schedule shows the functional relationship between the level of income and consumption. It shows the various amounts of consumption and various level of income. When income is zero people spend out of saving or borrowed income. It is knows as autonomous consumption. It does not depend upon income. Thereafter when income increases consumption also increases. When consumption is equal to income saving zero. It is breakeven point further rise in income is divided in to consumption and saving this can be seen in the following diagram:
OY line is the income consumption unity line point on this line shows income consumption identity. A & C curve shows consumption functional. It moves upward to the right but at slower rate. It means increases in consumption are lesser than increase in income. CC curve intersects the unity line OY at point B. this is the breakeven point where consumption is equal to income. To the left of breakeven point B consumption is greater than income. This can be met by dissaving to the right of breakeven point B consumption is lesser than income and there is positive saving.
SAVING FUNCTION
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The saving function is the counter part of the consumption funtion. The amount of saving is equal to the difference between the income and consumption expenditure. Symbolically S = y-c Where S = Saving Y = Income and C = Consumption The saving function shows the relation between saving and income.
In the diagram 'ss' curve is the saving curve, which is the counter part of consumption curve 'cc'. At 'ON' level of income, consumption equal to income at point ''B'' and the saving zero when income is lower than ON , consumption is greater than income and there is dissaving because consumption is done through borrowing so when income greater than ON consumption is saving . So saving curve SS is above ox axis. Technical Attributes of consumption function. OR What are the properties of consumption function? OR Method of measuring relationship between income and consumption. 1) Average propensity to consume: APC is the ration of aggregate consumption to aggregate income in given period of time. It is calculated by dividing consumption expenditure by income. i.e APC = C/Y As income increases, APC decreases because the proportion of income spent on consumption decreases.
2) Average propensity to save:
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APS is the ratio of aggregate saving to aggregate income. It is calculated by dividing saving by income. APS = S/Y 3) Marginal propensity to consume: Mac is the ratio of change in aggregate consumption to change income. It refers to additional increases in consumption as result of additional increases in income. MAC = S/Y 4) Marginal propensity to save: MPS is the ratio of change in aggregate saving to a change in aggregate income. MPS = S/Y
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Anmol classes / S.Y.J.

Compiled By Prof. Ramesh

Chapter - 1 THE LAW OF DIMINISHING MARGINAL UTILITY

ASSUMPTION OF LAW OF D.M.U (MR. HSC. P)

Anmol classes / S.Y.J.C

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STATE AND EXPLAIN THE LAW OF D.M.U.

The law of D.M.U. explained with the help following schedule.

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Total Utility(T.U) 20 20+17=37 37+13=50 50+9=59 59+4=63 63+0=63 62-2=61 61-4=57

Marginal Utility & Total Utility

EXCEPTION OF THE LAW OF D.M.U.

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IMPORTANCE OF LAW OF D.M.U

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LIMITATION OF LAW OF D.M.U.

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Chapter - 2 THE LAW OF DEMAND

ASSUMMPTION OR CONDITION OF THE LAW OF DEMAND

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STATE AND EXPLAIN THE LAW OF DEMAND

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Consumer III Total Consumer 10 25 20 50 30 75 40 100 50 125

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EXCEPTION TO THE LAW OF DEMAND

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Chapter - 3 ELASTICITY OF DEMAND

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This means price elasticity of demand is half that is ep<1.

TYPES OF PRICE ELASTICITY OF DEMAND

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Measurement of price elasticity of demand

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Where EP = price elasticity of demand Q = original quantity P = Original price = Change

Determinants of elasticity of demand or factor influencing the demand

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IMPORTANCE OF ELASTICITY OF DEMAND