ECONOMICS NOTES B.COM PART 1(PUNJAB UNIVERSITY LAHORE)

ECONOMICS

Q# 1: Critically examine the definition of economics given by Alfred Marshall?

Or

“Economics is the study of causes of material well being” Discuss and criticize the concept

Introduction:

The word economics has been derived from Latin word “OIKONOMOS” and there are three different concepts about the definition of economics.

Ø Classical

Ø Neo – classical

Ø Modern

According to Marshall.

“Economics is the study of mankind in the ordinary business of life it examines that part of individuals and social actions which are most closely connected with the attainment and with the use of material requisites of well-being”.

Main points of Marshall:

Following are the main points of Marshall’s definition.

Ø Ordinary business of life:

In economics ordinary business of life is studied.

Ø Primary importance to well-being:

In economics primary importance is given to human well-being and secondary importance to wealth.

Ø Social Science:

According to Marshall Economics is a social science and it is not the science of wealth only.

Ø Activities of material wellbeing:

In economics the activities of material well-being are discussed only.

Merits of Marshall’s Definition

Following are the merits of Marshall’s definition:

Ø Ordinary business of life:

Marshall’s definition is not related with the tendencies of a particular community only. In fact it discusses the general behaviour of ordinary people; this thing makes the subject important for a common man.

Ø No charge of selfishness:

As Marshall has given primary importance to human wellbeing and secondary to wealth, therefore the charges of selfishness cannot be leveled against his definition.

Ø Subject boundaries:

By discussing only the activities of material wellbeing in economics Marshall has given boundaries of the subject and he has not made the subject limitless like the definition of economics given by classical economist.

Ø Corresponds to modern economics tendencies:

In the modern age planning in every sector is made for the sake of welfare and wellbeing.similary Marshall has also given importance to welfare and wellbeing, therefore his definition is corresponds to modern economics tendencies.

Ø Social science:

Marshall has not discussed economics in terms of wealth only he treats economics as a social science.

Ø Primary importance to wellbeing:

Marshall has not given total importance to wealth, he has given primary importance to wellbeing and secondary to wealth as wealth is just means and not the ends.

Demerits of Marshall’s Definition

Does not cover all economic problems:

Marshall has just discussed the matters of material wel being and he has neglected a lot of other activities which must be brought under discussed in economics which do not cause material well-being.

Welfare is a vague concept:

Welfare is a vague concept because it differ person, time to time, place to place and need to need.

Welfare is Unmeasurable:

Welfare is the state of mind which cannot be measured numerically; therefore, the whole subject cannot depend upon unmeasurable concept.

Services neglected:

Marshall has neglected all non-material services of lawyers, teachers, doctors, etc.

Isolated people neglected:

Marshall has also neglected the activities of those people who lead isolated lives like baggers, people living in jungle.

Unnecessary classification:

Practically nobody classified consumption of wealth into well-being and non well-being groups, therefore Marshall’s definition is impractical.

Conclusion

Though Marshall’s definition is better than the definition given by classical economists, but because of some demerits, his definition may not be treated as the best definition of economics the definition of economics given by the some modern economists like Keynes, Samuelson, etc, may be treated as comprehensively in following words.

“Economics is a social science which is concerned with the proper use and allocation of resources for the achievement and maintenance of growth with stability and efficiency.

Q# 2:“Economics is the science of scarcity and choice”, discussed and criticize the concept?

There are three different concepts about the definition of economics:

1. Classical
2. Neo-Classical
3. Modern

Robbins is among modern economists. In his book, THE NATURE AND SIGNIFICANCE OF ECONOMICS SCIENCE (1932), he has defined economics as a science of scarcity and choice.

Followers of the Robbins:

His followers are Stiggler, Eastham, Keynes, Samuelson and etc.

Robbins Definition:

“Economics is the science which studies human behavior as a relationship between ends (multiple desires) and scarce means which have alternative uses.”

Main Points of the Robbins Definition:

Following are the main points of Robbins definition.

Robbins’s Definition:

“Economics is the science which studies human behavior as a relationship between ends (multiple desires) and scarce means which have alternative uses.”

Main points the Robbins’s Definition:

Following are the mains points of Robbins definition

Multiple Desires:

Human desires are multiple and these desires are changing with the passage of time.

Difference of Importance:

All desires are not equally important, some are more important and some are less important.

Limited Resources:

To satisfy human wants resources are quite limited.

Alternative uses:

Limited resources can be applied alternatively.

Merits of Robbins definition

Widened Scope:

Robbins has discussed in economics all the matters of scarcity and choice, either they cause material well being or don’t cause material well-being. In this way he has widened the scope of economics as compared it Marshall.

Universal Application:

As everyone faces the problem of scarcity and choice, therefore, the definition of economics given by Robbins’s is universally applicable.

No Charge of selfishness:

The charge of selfishness cannot be leveled against the definition of economics given by Robbins’s because he has not defined economics as a science of wealth.

Non Material Services Also Included:

Robbins has also given importance in the subject to non-material services like the services of doctors, teacher, lawyers, etc.

Isolated People Not Neglected:

Robbins has also discussed in economics the activities of those people who are not related to the society and lead their lives in isolated ways.

Factor decreasing welfare not neglected:

Robbins has also discussed in the economics antiwelfare activities like the use of cigrattes, narcotics, drugs etc.

Demerits of the Definition

Modern economists like Keynes Samuelson, etc have criticized the definition of economics given by Professor Robbins by using following points.

Social Science:

According to Robbins, economics is a positive science like Physics, Chemistry but infact positive science deals with nonliving matters, while economics is concerned with the behaviour of living human beings; therefore, economics is a social science and not a positive science.

Not a theory value only:

Robbins has reduced economics merely to a theory value and he has neglected its practical aspect.

Welfare is missing:

In the definition of Robbins welfare is quite missing because Robbins has totally neglected the aspect of welfare and well-being.

Too much widened the scope:

According to Robbins all human activities which are related with the problem of scarcity and choice, are treated as economics activities, but infact all the activities of scarcity and choice cannot be treated as economic activities.

Colorless:

The definition of economics given by Robbins has made the subject quite colorless because a common man gets nothing out of it.

Self contradictory:

Being an economist Robbins himself could not remain neutral then, how can he expect from an ordinary person to remain neutral.

Normative aspect neglected:

There are two main branches of science but he has discussed only positive aspect whereas normative has been neglected.

Planning is neglected:

Planning is an important part of economics but Robbins has totally neglected planning.

Macro aspect is neglected:

Micro and Macro are two main branches of economics but Robbins has neglected macro aspect of the economics.

Analytical concept only:

He has stressed towards neutral analysis of human behaviour while he has neglected its practical aspect.

Conclusion

Though Marshall’s definition is better than the definition given by classical economists, but because of some demerits, his definition may not be treated as the best definition of economics the definition of economics given by the some modern economists like Keynes, Samuelson, etc, may be treated as comprehensively in following words.

“Economics is a social science which is concern with the proper use and allocation of resources for the achievement and maintenance of growth with stability and efficiency

Q # 3: Give the comparison of the definitions given by Marshall and Robbins?

Before giving the comparison of the definition of economics given by Marshall and Robbins. Observe the definitions of economics given by both economists.

According to Marshall:

“Economics is the study of mankind in the ordinary business of life it examines that part of individuals and social actions which are most closely connected with the attainment and with the use of material requisites of well-being”.

According to Robbins:

“Economics is the science which studies human behavior as a relationship between ends (multiple desires) and scarce means which have alternative uses.”

If we study the above definitions of economics given by Marshall and Robbins we may give the following comparisons.

Marshall Marshall gave his view in his book principle of Economics (1890). 1. Neo Classical: Marshall is among neo classical economists and his definition is treated as neo-classical definition. 2. Social Science: According to Marshall. Economics is a social science 3.Limited Scope: Marshall has given quite limited scope of economics because he has included in economics only the activities of material well-being. 4. Classificatory Concept Marshall has classified the consumption of wealth into well-being and non wellbeing groups and he has discussed in economic only first group while he has neglected second group. So Marshall has given the classificatory concept. 5. Normative Science: Marshall has treated economics as a normative science, as it deals with the activities of material well-being. 6. Vague Concept: Welfare is a vague concept which differs from person to person, place to place, time to time and need to need. 7. Useful Subject: Marshall has given importance to welfare and well-being, which has made the subject quite useful. 8. Corresponds to modern Economic Tendencies: In the modern age planning in every sector is made for the sake of welfare and well-being, similarly Marshall has also given importance to the welfare and well-being, therefore his definition corresponds to modern economics tendencies. 9. Isolated People Neglected: Marshall has neglected the activities of isolated people who are cut away from society. 10.Non Material services neglected: Marshall has neglected non-material services like the services of doctors, teachers, lawyers, etc.

Robbins Robbins gave his view in his book the nature and significance of economics science (1932). 1. Modern: Robbins is among modern economists and his definition is treated as modern definition. 2. Neutral Science: According to Robbins Economics is a positive science in which human behaviour is studied neutrally. 3. Widened scope: Robbins has widened scope of economics as compared to Marshall because all the activities of scarcity and choice have been discussed by him either they cause material well-being or not. 4. Analytical concept: Robbins has not classified the consumption of wealth into well-being and non well-being groups, rather he has stressed towards neutral analysis of human behaviour, therefore his concept may be called analytical concept. 5. Positive Science: Robbins treated economics as a positive science, like physics, chemistry and we are forbidden to pass our judgment while studying human behaviour. 6. Based on Reality: Every individual faces the problem of scarcity and choice, therefore the definition of economics given by Robbins is closer to reality of human life. 7. Colorless Subject: Robbins definition has made it colorless and complexed because a common man gets nothing out of it. 8. Does not Corresponds to modern Economics Tendencies: Robbins has totally neglected welfare and well-being therefore; his definition does not correspond to modern economics tendencies. 9. Isolated people also Discussed: Robbins has discussed even the activities of these people who are cut away from society in other words he has not neglected isolated people. 10.Non material services not neglected: Robbins has not neglected non-material services like the services of doctors, teachers, and lawyers. He has given importance to these services in economics.

Conclusion

Though Marshall’s definition is better than the definition given by classical economists, but because of some demerits, his definition may not be treated as the best definition of economics the definition of economics given by the some modern economists like Keynes, Samuelson, etc, may be treated as comprehensively in following words.

“Economics is a social science which is concerned with the proper use and allocation of resources for the achievement and maintenance of growth with stability and efficiency”.

Q # 4: define law of diminishing marginal utility with the help of schedule and diagram?

Or

What is the first law of consumption by cardinal approach?

Introduction:

The law of diminishing marginal utility is the fundamental law of consumption if wealth indicating cardinal measurement of utility. Different economists have defined it in different words prominent of them are Marshall, Jevons and Gossen

Definitions:

According to Marshall:

“The additional benefits which a person derives from an increase in the stock of a thing, diminishes with every increase in the stock that he already has”.

Simple definition:

“If other things do not change and a consumer continuously applies units of a commodity, then marginal utility continue to decrease”.

Explanation through table:

Units of Apples	Total Utility TU	Marginal Utility MU
1	30	30
2	50	20
3	60	10
4	60	0
5	50	-10

Diagram:

Explanation:

According to above schedule and diagram as a consumer is applying unit of apples continuously, it marginal utility decreasing. At fourth unit it has become zero after that it has become negative. This decreasing tendency of marginal utility is representing the law of Diminishing Marginal Utility.

Assumption:

Following are the assumption of the law.

Continuous use:

In this law it is assumed that a consumer applies units of a commodity continuously without and gap.

Same quality:

It is also assumed that the quality of every successive unit must be same.

Same size:

It is also assumed that the size of all the units must be same.

Reasonable size:

It is assumed that there is a reasonable size of units. The size of unit should neither be very big nor very small.

No change in income:

It is also assumed that during the application of each next unit of commodity, the income of the consumer must be same.

No change in taste:

It is also assumed that the consumer is the normal person, he does not like or dislike a commodity extra ordinary.

Exception of the law

Following are the exception of the law.

Desire of money:

This law is not applicable for the desire of money as the desire money increase with the increase of the quantity of money.

Utility of knowledge:

This law is not applicable for knowledge because the utility of knowledge does not decrease by the increase of knowledge.

Use of Narcotics:

This law is not applicable for narcotics also as each next unit of narcotics does not provide lesser utility to a consumer.

Hobby:

This law is not applicable for hobbies also because a person does not feel lesser utility of every next unit in case of hobby.

Fashion:

This law is not applicable for fashion because people become more and more crazy of fashion, when they get involved in fashion.

Practical importance of the law

Following are the practical importance of the law of diminishing marginal utility.

Base of the law of demand:

This law provides base for the law of demand because a consumer always compares the utility of the commodity with the price of that commodity and takes rational decision.

Importance for customer:

Knowing the diminishing tendency of marginal utility a rational consumer applies units of money on different commodities very carefully and he tries to maximize total utility.

Consumer surplus:

A consumer may have maximum surplus by applying units of money on a commodity rationally, by keeping his eyes on diminishing tendency of marginal utility.

Q #5:State & explain the Law of Equi-marginal utility also give its exceptions and practical importance.?

Introduction:

The law of Equi-marginal utility is the second fundamental law of consumption of wealth given by Neo-classical Economists. Different Economists have defined it in different words Prominent of them are Marshall and Lipsy.

According to the Lipsy:

“The household maximizing the utility, will so allocate the expenditure between commodities that the utility of last penny spent on each item become equal”.

According to Law:

If units of money are applied on different commodities in such a way that marginal utility of each item become equal, then total maximizes.

Example:

Suppose a consumer wants to apply five units of money on mangoes and apples to maximize total utility. He also knows marginal utility of both commodities as shown in the following schedule.

Schedule:

Units of Money	Marginal Utility of Mangoes	Marginal Utility of Apples
1	30	25
2	25	20
3	20	15
4	15	10
5	10	5

According to the above schedule, if a consumer applies three units of money on mangoes and two units on apples, then the marginal utility of both commodities becomes equal, therefore total utility maximizes as:

30+25+20+25+20=120 max

If consumer applies two units of money on mangoes and three on apples, then marginal utility of both become unequal, therefore total utility does not remain maximum

30+25+25+20+15=115 not maximum

Diagram:

According to the above diagram and schedule. If three units of money are applied on mangoes and two on apples, then marginal utility of both becomes equal and total utility maximum. But if third is removed from mangoes and applied on apples then MU of both become unequal. Therefore, TU cannot remain maximum, as the loss of utility will be greater then the gain of utility as shown in the diagram.

Equation of Consumer Equilibrium:

Realizing the importance of prices Neo-Classic economists have given the following equation for consumer equilibrium

Consumer Equilibrium = MUa/Pa = MUb/Pb=--------------=MUn/Pn

C.E = 12/4 = 24/8 =------------------= 60/20

C.E = 3 = 3 = -----------------= 3

ASSUMPTIONS:

Limited Units Of Money:

The law assumes that the consumer applies limited units of money.

Rationality:

The law also assumes that the consumer behaves rationally to maximize his satisfaction.

Divisible Goods:

In the law it is assumed that the things which a consumer consumes are divisible into small units like sugar, salt.

Diminishing Marginal Utility:

As a consumer applies more and more units of a commodity, its marginal utility decreases.

Constant Price:

The law assumes that the price of the commodities remain constant either the consumer buys lesser quantity or greater of the commodity.

Choice To Use:

Consumer has the choice to use more than one commodities.

LIMITATIONS:

Measurement Of Utility:

Utility is mental state, which cannot be measured numerically; therefore, it is difficult to equalize marginal utility of different commodities numerically.

Indivisible Goods:

The law is also not applicable for those goods, which are indivisible like tube light, fan, shoe etc.

Custom and Fashion:

Sometimes, people purchase goods just for fashion or custom and do not care to maximize total utility.

Small Purchase:

Mostly the law holds only in the big purchase while it is not applicable in small purchase because we do not care for small purchases.

Ignorance of Consumer:

Sometimes a consumer cannot be benefited from the law due to ignorance of prices, substitutes and quality of goods.

Durable Goods:

The law is also not applicable for the use of durable goods because it is not possible to find their exact utility.

PRACTICAL APPLICATION:

The law of substitution is the other name of the law of equi-marginal utility. It is applicable to various economic problems.

Importance for Consumers:

The law is important for consumers because by applying this law a consumer tries to equalize marginal utility for the maximization of total utility.

Importance for Producers:

The law of substitution is also helpful for producers, as by applying this law the maximum output by using their limited resources.

Importance for Finance Minister:

The law is helpful for finance minister to collect required revenue through taxes with minimum disturbance.

Welfare of the State:

The law of substitution is also helpful for the government to provide maximum welfare to its citizens by applying its income in different sectors according to their relative importance and their share in productivity.

Q# 6: Define Demand, Explain the Law of Demand with the help of schedule and diagram?

Demand:

In the ordinary language, the desire of a commodity is considered as demand but in economics only that desire of commodity is considered as demand which is backed by purchasing power.

Demand = Desire + Purchasing Power

As demand is effected by price therefore, we may define demand in following words:

Definition:

“Different amounts of a commodity which a consumer is willing to purchase at various level of price”

Law of Demand:

The law of demand in fact shows the negative relationship between price and quantity demanded

Definition:

“If other things do not change then the demand of a good decreases with every increase in its price and the demand of a good increases with the decrease in its price”.

It may be explained with the help of following schedule and diagram.

SCHEDULE:

PRICE	QTY DEMAND
2	30
4	20
6	10

DIAGRAM:

Y
	D
6
4
Price
2
				D
	O 10 20 30 X
	Quantity demanded

Explanation:

According to above schedule and diagram, with the increases in price, demand is decreasing and with the decrease in price demand is increasing, which is representing the law of demand.

Assumptions:

Following are the assumptions of the law of demand:

1. No change in income:

In the law of demand, it is assumed that the income of the consumer should remain constant because the change in income of the consumer may also effect the demand of commodity.

2. No Change in population:

In the law of demand it is also assumed that the population should remain constant, as the demand of a commodity may change due to change in population.

3. No change in Buyer’s taste:

It is also assumed that the buyers taste should remain constant, as the change in taste may also effect the demand, positively or negatively.

4. No change in fashion:

It is also assumed that there should be no change in fashion.

5. No change in price of substitutes:

In the law of demand it is also assumed that prices of substitutes should remain constant, as it may effect the demand.

6. No change in Law and orders:

In the law of demand it is also assumed that there should be no change in law and order situation.

7. No change in quantity of money:

In the law of demand it is also assumed that quantity of money should remain constant.

Exceptions/Limitations:

1.Giffens Goods:

The law of demand is not applicable for Giffen’s goods because the demand for Giffen’s goods decreases as their price decreases, in this situation people can have choice to use better thing.

2.Life saving drugs:

The law of demand is not applicable for the consumption of life saving drugs.

3.Prestigious Goods:

The law of demand is not applicable for the use of prestigious goods like diamond.

4.Very high prices products:

It is also observed that the law of demand is not applicable for high prices products, because the demand for those products does not change, as their price changes.

5. Acute shortage:

The law of demand is not applicable, in case of acute shortage of commodities or due to the situation of war, which disturbs peace and security.

Q # 7: define elasticity of demand and also discuss methods of measurement of elasticity of demand?

Introduction

The concept of elasticity of demand was given by neo-classical economists. Different economist have defined it in different words. Prominent of them are Marshall, Stonier and Hague etc.

Definition:

According to Stonier and Hague.

“Elasticity of demand is a technical term used by economists to describe the degree of responsiveness of demand for a good to a change in its price”.

Simple definition:

“The degree of responsiveness of demand of a good due to change in its price is called Elasticity of Demand”.

Some goods have more elastic demand while some other have less elastic demand.

Methods of measurement Arc Elasticity

1. Total Expenditure Method:

(i) Negative relationship between price and total expenditure indicates more elastic.(Ed>1)

PRICE	QUANTITY DEMANDED	TOTAL EXPENDITURE
4	2	8
2	6	12

The above schedule is showing negative relationship between price and total expenditure which is representing more elastic demand.

In the above diagram horizontal tendency of demand curve is representing more elastic demand.

(ii) Positive relationship between price and total expenditure indicates less elastic demand.(Ed<1).

PRICE	QUANTITY DEMANDED	TOTAL EXPENDITURE
4	2	8
2	3	6

The above schedule is showing positive relationship between price and total expenditure which is representing less elastic demand

In the above diagram vertical tendency of demand curve is representing less elastic demand.

(iii) If the price changes but the total expenditure remain same then elasticity of demand become equal to unity.(Ed=1)

PRICE	QUANTITY DEMANDED	TOTAL EXPENDITURE
4	2	8
2	4	8

The above schedule is showing that price is changing but total expenditure remains same, which indicates that elasticity of demand is equal to unity.

The above diagram is also representing elasticity of demand is equal to one.

2. Formula Method:

Prof. Alten has given following formula for the measurement of elasticity.

Example:

PRICE	QTY DEMAND
Po 4	Qo 2
P1 2	Q1 3

= -1/5 * 6/2 =-3/5 < 1

Demand is less elastic

Measurement of Point Elasticity

3. Percentage method:

Prof. Flex has given following formula for the measurement of elasticity of demand.

Ed =

Percentage change in demand

Percentage change in Price

EXAMPLE:

Suppose 10% change in price of a commodity result 20% change in its demand.

Ed= 20%/10%

2>1

Demand is more elastic.

4. Formula Method:

Elastic of demand between two closer point is measured with the help of following formula.

Ed = q / p * p / q

PRICE	QTY DEMAND
4	2
3.7	2.8

Here: P = 4 q = 2

P = 0.3 q = 0.8

Ed = q / p * p / q

=0.8/0.3 * 4/2 = 16/3 = 5.3>1 more elastic

Demand is more elastic.

Geometrical Method:

Elasticity of demand at a particular point is measured with the help of geometrical method.

Ed at point E = Lower Segment/ Upper segment

Explain the concepts of Arc Elasticity of demand and Point Elasticity of demand? also give method of their measurement?

Arc Elasticity of demand

“The elasticity of demand between two distinct points existing on a demand curve is called Arc elasticity of demand”

Point Elasticity of demand

“Two closer points existing on a demand curve is also known as Point elasticity of demand”.

Define Income Elasticity of demand (EY) and Cross elasticity of demand (Ec). And also discuss their methods of measurement?

Income Elasticity of Demand

“The degree of responsiveness of demand of a good due to change in income of consumer is called Income Elasticity of Demand”.

Formula:

Ey = q / y * y/q

Example:

Y	Qd
100	10
180	15

Y = 100 q = 10

Y = 80 q = 5

Putting the value

Ey = 5/80 * 100/10 = 5/8< 1

Demand is Less Elastic .

Cross Elasticity of Demand (Ec)

“The degree of responsiveness of demand of a good (a) due to change in price of some other good (b)”.

Formula:

Ec = qa/ Pb * Pb/qa

Example:

Pb	Qa
10	5
16	12

Qa = 7 qa = 5

Pb = 6 Pb = 10

Putting the values

7/6 * 10/5 =70/30 = 2.3>1

Demand is more Elastic

LAW OF RETURNS

Q # 8:State and explain the law of increasing return with the help of schedule and diagram and also give its application in industrial sector?

INTRODUCTION:

In economic activities the course of production usually passes through three different stages, new classic economists have defined or discussed these stages in the form of three different laws.

1. Law of increasing Returns

2. Law of Diminishing Returns

3. Law of Constant Returns

LAW OF INCREASING RETURNS:

Different economists have defined the law of increasing returns in different words. But prominent of them are Benham, Champan & Marshall.

STATEMENT:

“In the process of production if more and more units are applied of variable factors keeping other factors constant, at first marginal production increase (because of improvement in the combination of variable factors).This increasing tendency of marginal production per unit of variable factor is known as “Law of Increasing Returns”.

Explanation with the help of schedule and diagram:

The Law of Increasing returns may be explained with the help of following schedule & diagram.

SCHEDULE:

Units of fixed factors	Units of variable factors	Total production	Marginal production
5 acres	1	10	10
5 acres	2	30	20
5 acres	3	60	30
5 acres	4	90	30
5 acres	5	110	20
5 acres	6	120	10

DIAGRAM:

According to the above schedule & diagram, the first three units Marginal Production Increases which is representing “Law of Increasing Returns”.

ASSUMPTIONS:

1. At least one factor of production should be kept fixed/constant.
2. At least one factor of production should be kept variable.
3. All the units of variable factor are assumed homogenous.
4. Methods of production should be same.
5. There is short period under consideration.
6. Equal reward should be gives to each unit of variable factor.
7. There should be equal working period for each unit of variable factor.
8. There is scope of improvement in the combination of factor.

APPLICATION:

According to neo classical economists, the law of increasing return is mostly applicable in industrial sector. Following are the main reasons for its application in industrial sector.

1. Industrial production is taken in covered places.
2. It is easier to supervise industrial production.
3. Industrial production is mostly durable in nature.
4. Industrial production is quite certain in nature.
5. Industrial production is not much effected negatively by natural climates.
6. It is easier and cheaper industrial production.
7. Some specific natural time is not required for industrial production. ( It does not grow but is obtained).
8. There bargaining power is strong for industrial goods.

CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination get improved, marginal production increases.

On the other hand, if the Combination gets defective, marginal production decrease either the sector is industrial or it is agriculture.

Q # 9: State and explain the law of Diminishing Returns with the help of schedule and diagram and also give its application?

INTRODUCTION:

In economic activities the course of production usually passes through three different stages, new classic economists have defined or discussed these stages in the form of three different laws.

1. Law of increasing Returns

2. Law of Diminishing Returns

3. Law of Constant Returns

LAW OF DIMINISHING RETURNS:

Different economists have defined the law of increasing returns in different words. But prominent of them are Benham, Champan & Marshall.

DEFINITION:

In the process of production if more and more units are applied of variable factors keeping other factor constant at first marginal production increase after reaching to a maximum point it remains constant for sometimes. If still more and more units are applied their marginal production tends to decline because of appearance of defective Combination of factors this diminishing tendency of marginal production per unit of variable factor is known as “Law of Diminishing Returns”.

Explanation with the help of schedule and diagram:

The Law of diminishing returns may be explained with the help of schedule of diagram.

Schedule:

Units of fixed factors	Units of variable factors	Total production	Marginal production
5 acres	1	10	10
5 acres	2	30	20
5 acres	3	60	30
5 acres	4	90	30
5 acres	5	110	20
5 acres	6	120	10

Diagram:

According to the above schedule and diagram in the units from 4^th to onwards marginal production is decreasing which is representing the “Law of Diminishing Returns”.

ASSUMPTIONS:

• At least one factor of production should be kept fixed/constant.
• At least one factor of production should be kept variable.
• All the units of variable factor are assumed homogenous.
• Methods of production should be same.
• There is short period of time under consideration.
• Equal reward should be gives to each unit of variable factor.
• There should be equal working period for each unit of variable factor.
• Defective Combination of factor has been obtained.

APPLICATION:

According to neo classical economists the law of Diminishing Returns is mostly applicable to agricultural sector.

Following are the main causes of its application in agriculture sector.

1. Agriculture production is taken in unsafe and open fields.

2. It is different to supervise agricultural production.

3. Agricultural production is mostly found perishable in nature.

4. It is difficult and costly agriculture production.

5. There bargaining power is quite uncertain.

6. Agriculture production is very much effected negatively by natural climates.

7. Specific time period is required to grow agriculture production.

CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination get improved, marginal production increases.

On the other hand, if the Combination get defective, marginal production decrease either the sector is industrial or it is agriculture.

Q # 10:State and explain the law of returns with the help of schedule and diagram and also give its application?

INTRODUCTION:

In economic activities the course of production usually passes through three different stages, new classic economists have defined or discussed these stages in the form of three different laws.

1. Law of increasing Returns
2. Law of Diminishing Returns
3. Law of Constant Returns

LAW OF RETURNS:

Different economists have defined the law of returns in different words. But prominent of them are Benham, Champan & Marshall.

DEFINITION:

In the course of production if more and more units are applied of variable factors keeping other factor constant at first marginal production increase because of improvement in the combination of variable factors after reaching to a maximum point it remains constant because of optimum combination of variable factors. If still more units are applied then marginal production tends to decline because of appearance of defective Combination of factors. The increasing tendency shows law of increasing return, constant tendency shows law of constant return and the diminishing tendency of marginal production show Law of Diminishing Returns.

Explanation with the help of schedule and diagram:

The Law of returns may be explained with the help of schedule of diagram.

Schedule:

Units of fixed factors	Units of variable factors	Total production	Marginal production
5 acres	1	10	10
5 acres	2	30	20
5 acres	3	60	30
5 acres	4	90	30
5 acres	5	110	20
5 acres	6	120	10

Diagram:

According to the above schedule and diagram in first three units marginal production increasing which show law of increasing return from 3rd to 4th units marginal production remain constant which shows law of constant return and from unit 4^th to onward marginal production decreases which is representing the “Law of Diminishing Returns”.

ASSUMPTIONS:

• At least one factor of production should be kept fixed/constant.
• At least one factor of production should be kept variable.
• All the units of variable factor are assumed homogenous.
• Methods of production should be same.
• There is short period of time under consideration.
• Equal reward should be gives to each unit of variable factor.
• There should be equal working period for each unit of variable factor.
• There is a scope of improvement in the combination of variable factor.

APPLICATION:

According to neo classical economists the law of increasing return is applicable to industry sector. Law of decreasing return applicable on agriculture sector and law of constant return is applicable on both sectors.

CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination get improved, marginal production increases.

On the other hand, if the Combination gets defective, marginal production decrease either the sector is industrial or it is agriculture.

Q # 11:State and explain the Law of Variable Proportion with the help of schedule and diagram?

According to modern economists increasing, constant and Diminishing Returns are infact different phases of Universal law of Variable proportion. It is called universal because it is universally applicable in each sector of the economy either industrial or agricultural.

Different economists have defined the law of Variable proportion in different words. But Prominent of them are “Simuelson & Ryan”.DEFINITION:

In the course of production if more and more units are applied of a Variable factor, keeping other factor Constant. At first marginal production increases because of improvement in the Combination of variable factors. After reaching to a maximum point it begins to decline because of appearance of defective Combination of factors even after becoming zero and becomes negative.

This tendency of variation in marginal production is known as “Law of Variable Proportion”.

ACCORDING TO SIMUELSON:

An increase in some (Variable) input (factors) relative to other comparatively fixed in input will Cause output to increase but after a point the extra output resulting from the some addition of input will become less and less.

It may be explained with the help of schedule and diagram.

SCHEDULE:

UNITS OF FIXED FACTOR	UNITS OF VARIABLE FACTOR	TOTAL PRODUCTION	AVERAGE PRODUCTION	MARGINAL PRODUCTION
5 acres	1	10	10	10
5 acres	2	30	15	20
5 acres	3	60	20	30
5 acres	4	80	20	20
5 acres	5	90	18	10
5 acres	6	90	15	0
5 acres	7	80	11.4	-10

ASSUMPTIONS:

At least one factor of production should be kept fixed/constant.

At least one factor of production should be kept variable.

All the units of variable factor are assumed homogenous.

Methods of production should be same.

There is short period of time under consideration.

Equal reward should be gives to each unit of variable factor.

There should be equal working period for each unit of variable factor.

There is scope of improvement in the combination of factor.

EXPLATION:

The law of Variable Proportion may be explained in three different stages as described below.

1^ST STAGE:

In the 1^ST stage marginal production increases while total production increase by increasing production. Average production also increases by lesser proportion as compare to increase in marginal production.

2^ND STAGE:

In the 2^nd stage marginal production decreases but it remain positive. It this stage total production increases by decreases proportion. Marginal production intersects to the Average production at the highest point of Average production.

3^rd STAGE:

This stage marginal production becomes negative while both total production and Average production use to decrease but remain positive.

FIRMS

Q#:12:Define Perfect Competition and explain How price and output is determined under a perfect competition?

OR

Q#: Explain equilibrium of a firm under perfect competition?

Perfect Competition:

It is a market situation in which a large no. of small firms produce homogeneous goods and sell their products in the market at same price. There is free entry and exit of firms in market. The price is determined in market with equilibrium of demand and supply of that commodity in market. Every firm is price taker and not price maker. The transportation cost is almost zero, which does not affect the market price.

Characteristics:

• There is large no. of buyers in the market.
• There is large no. of sellers in the market.
• There is free entry and exit in the market for firms.
• Same price of a commodity prevails in the
• The price is determined in market with equilibrium of demand and supply of that commodity in market.
• Every firm is price taker and not price maker
• The transportation cost is almost zero, which does not affect the market price
• No firm can affect market price by its individual behavior.

Determination of price:

In case of perfect competition price of commodity is determined in market with equilibrium of demand and supply of commodity in market.

As the price remains same therefore,

Price = AR = MR

Determination of output:

Following are the two different methods for determining output in perfect competition

Total cost and total revenue method:

The output at which there is maximum difference between total cost and total revenue will be the best output as shown below.

According to the above diagram OQ is the best output because it gives maximum difference between TR & TC.

Marginal cost and marginal revenue method:

According to this method following are the conditions of equilibrium.

MC = MR

MC should cut MR from below.

According to above diagram point ‘E’ fulfills both conditions therefore OQ is the output.

Cases of short run Equilibrium:

There are four cases of short run equilibrium

• Super normal profit (AR>AC or TR>TC)
• Normal Profit (AR=AC or TR=TC)
• Loss minimizing (AR
• Shut down point (AR

Super normal profit (AR>AC or TR>TC):

At that equilibrium of a firm earns super normal profit where AR>AC & TR>TC

It may be explained with the help of following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = EQ AC = E1Q AR > AC

TR = OPEQ TC = OP1E1Q TR > TC

Therefore super normal profit = PEE1P1 as shown by shaded area in the diagram.

Normal Profit (AR=AC & TR=TC):

At that equilibrium a firm earns normal profit. It may be explained with the help of diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = EQ AC = EQ AR = AC

TR = OPEQ TC = OPEQ TR = TC

Loss minimizing (AR

At this point a firm suffers minimum loss; it may be explained with the help of following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = EQ AC = E1Q AR < AC

TR = OPEQ TC = OP1E1Q TR < TC

Therefore minimum loss = PEE1P1 as shown by shaded area in the diagram.

Shut down point (AR

At this equilibrium a firm found at shut down point. It may be explained with the help of following diagram.

According to the above diagram,

AR = EQ AC = E1Q AR < AC

TR = OPEQ TC = OP1E1Q TR < TC

Therefore firm is at shut down point, the loss = PEE1P1 as shown by shaded area in the diagram.

Long run Equilibrium:

Over a long period of time number of firms, size of firms and method of production can be changed, therefore every firm can earn only normal profit. It may be explained with the help of diagram.

According to the above diagram,

LAR = EQ LAC = EQ LAR = LAC

LTR = OPEQ LTC = OPEQ LTR = LTC

Q # 13: Define monopoly; explain how price and output is determined under monopoly?

Monopoly is a market situation in which there is a single producer or seller of a commodity in market there is no close substitution of that commodity in the market. No other firm is allowed to enter into the market. The firm is price maker not a price taker.

Characteristics:

• There is a single producer or seller in market
• There is no close substitution in market.
• There is no competition in the market.
• No other firm is allowed to enter into the market.
• The firm represents s industry in the market.
• The firm is price maker not a price taker.

Determination of Output:

Following are the different methods of output.

1. TR and TC method
2. MC and MR method.

TR and TC method:

The output at which there is maximum difference between total cost and total revenue will be the best output. So ‘OQ’ is the best output.

Marginal cost and marginal revenue method:

According to this method following are the conditions of equilibrium.

MC = MR

MC should cut MR from below.

According to above diagram point ‘E’ fulfills both conditions therefore OQ is the output.

Determination of price:

Average Revenue(AR) represents price, therefore, according to previous diagram at OQ is output.

AR = E1Q or Price = E!Q

Therefore, E1Q will be the price or OP1 will be the price

Cases of short run equilibrium:

Following are the different short run equilibrium cases.

Super normal profit

Normal profit

Loss minimizing.

Super normal profit:

At that equilibrium a firm earns super normal profit

Where AR>AC OR TR>TC which is shown in the following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E1Q AC = E2Q AR > AC

TR = OP1E1Q TC = OP2E2Q TR > TC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.

Normal profit:

A firm earns normal profit at the equilibrium where

AR=AC and TR=TC, it may be explained with the help of diagram

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E1Q AC = E1Q AR = AC

TR = OP1E1Q TC = O1PE1Q TR = TC

Therefore firm is earning normal profit.

Loss minimizing:

A firm suffers minimum loss at that equilibrium where AR

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E2Q AC = E1Q AR < AC

TR = OP2E2Q TC = OP1E1Q TR < TC

Therefore minimum loss = P1E1E2P2 as shown by shaded area in the diagram.

Long run equilibrium:

In case of monopoly over a period of long time a firm mostly earns super normal profit. It may be explained with the help of following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

LAR = E1Q LAC = E2Q LAR > LAC

LTR = OP1E1Q LTC = OP2E2Q LTR > LTC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.

Q # 14:Define monopolistic competition and also explain equilibrium of a firm under monopolistic competition?

Monopolistic Competition:

“Monopolistic competition is a market situation in which relatively large numbers of small firms produces and sell a product with their identity.

Infact, monopolistic competition is a blend of monopoly and perfect competition”

Characteristics:

Following are the main characteristics of monopolistic competition.

• Relatively large number of small firms
• Product differentiation
• Relatively easier entry and exit of firm
• Roll of advertisement & publicity
• Stiff competition
• Relatively lesser control on price
• Relatively more elastic demand.

Determination of Output:

Following are the different methods of output.

3. TR and TC method
4. MC and MR method.

TR and TC method:

The output at which there is maximum difference between total cost and total revenue will be the best output. So ‘OQ’ is the best output.

Marginal cost and marginal revenue method:

According to this method following are the conditions of equilibrium.

MC = MR

MC should cut MR from below.

According to above diagram point ‘E’ fulfills both conditions therefore OQ is the output.

Determination of price:

Average Revenue (AR) represents price; therefore, according to previous diagram at OQ is output.

AR = E1Q or Price = E!Q

Therefore, E1Q will be the price or OP1 will be the price

Cases of short run equilibrium:

Following are the different short run equilibrium cases.

Super normal profit

Normal profit

Loss minimizing.

Super normal profit:

At that equilibrium a firm earns super normal profit

Where AR>AC OR TR>TC which is shown in the following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E1Q AC = E2Q AR > AC

TR = OP1E1Q TC = OP2E2Q TR > TC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.

Normal profit:

A firm earns normal profit at the equilibrium where

AR=AC and TR=TC, it may be explained with the help of diagram

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E1Q AC = E1Q AR = AC

TR = OP1E1Q TC = O1PE1Q TR = TC

Therefore firm is earning normal profit.

Loss minimizing:

A firm suffers minimum loss at that equilibrium where AR

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

AR = E2Q AC = E1Q AR < AC

TR = OP2E2Q TC = OP1E1Q TR < TC

Therefore minimum loss = P1E1E2P2 as shown by shaded area in the diagram.

Long run equilibrium:

In case of monopoly over a period of long time a firm mostly earns super normal profit. It may be explained with the help of following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the best output. At this point

LAR = E1Q LAC = E2Q LAR > LAC

LTR = OP1E1Q LTC = OP2E2Q LTR > LTC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.

Q # 15:Critically examine marginal productivity theory of distribution. ?

OR

Critically examine marginal productivity theory of pricing of factors?

Introduction:

Classical, neoclassical and modern economists have given different theories about pricing of factors; the theory given by neoclassical economists is generally known as marginal productivity theory of distribution. Different economists have defined it in different works, Prominent of them are Marshall, Jevons, Clark etc.

Definition:

“The reward is given to each unit of factors according to marginal productivity of factors, therefore greater reward is given to each unit of that factor which gives greater marginal production and less reward is given to each unit of the factor which gives less marginal productivity.”

Realizing this fact, Neo-classical economists have given for pricing of factors.

Equation:

MPPa/Pa = MPPb/Pb = . . . . . . . . . . . MPPn/Pn

Suppose price is Rs 10kg

5kg/Rs50 = 10kg/Rs100 = . . . . . . . . . . . . 18kg/Rs180

1/10 = 1/10 = . . . . . . . . . . . . . . . . 1/10

Schedule:

The theory may be explained with the help of following schedule.

Units of Labor	MPP Kg	Price/Rs Per Kg	MRP Rs	Wages Rs
1	10	10	100	60
2	9	10	90	60
3	8	10	80	60
4	7	10	70	60
5	6	10	60	60
6	5	10	50	60

Table:

According to the above schedule and diagram as more and more units of labor are being applied, then marginal production is decreasing. If five units of labor are applied the MP is 6 kg therefore Rs60 will be given to each unit of labor.

Assumption:

Following are the assumptions of the theory.

Homogeneous Units:

It is the assumed that all the units of variable factor (Labor) are homogeneous.

Factors are Substitutable:

It is also assumed that different factor can be substituted to each other.

Perfect Competition:

It is also assumed that there is perfect competition in factors market.

Mobility of Factors:

It is assumed that factors of production are, perfectly mobile or movable in other words, they can be applied for the production of on commodity or the other one.

Diminishing Returns:

The theory assumes that marginal production decreases if more and more units of factors are applied.

Elastic Supply of Factors:

The theory assumes that the supply of factors is perfectly elastic.

Criticism:

Following are the main criticism against marginal productivity theory.

Unrealistic Assumptions:

Assumptions of this theory are quite unrealistic.

No Homogeneous:

The theory assumes homogeneous units of factors but practically all the units of a factor cannot be homogeneous.

No Perfect Substitutes:

To some extent the factors are substitutable but they are not perfect substitute to each other.

No Perfect Mobility:

To some extent mobility of factor is possible but they are not perfectly movable.

No Perfect Competition:

Perfect competition is practically found no where in the world.

Only Diminishing Returns:

The theory has just discussed the tendency of diminishing returns and it has neglected increasing and constant tendency marginal production while is unwise to neglect it.

Independence:

According to marginal productivity theory, it is the reward which depends upon the marginal productivity but modern economists believe that marginal production and reward both are independent in other words both depends upon each other.

Static Theory:

It is a static theory which is not applicable in this dynamic age.

Q #16: Critically examine Keynesian theory of interest?

Or

Critically examine the liquidity preference theory of interest?

Introduction:

Interest is the reward which is paid against the services of capital. Different economist have given different theories of interest. Keynes is among modern economist, the theory given by him is generally known as

Keynesian theory of interest or liquidity preference theory of interest.

Keynes theory:

According to Keynes:

“Interest is the reward for parting with the liquidity of money for a specific period of time and the rate of interest is determined with the equilibrium of demand and supply of money”.

Demand of money:

People want to keep some money with them for transaction motive, business motive, precautionary motive and speculative motive. It is known as demand of money.

Transactional motive:

People want to keep some money with them in cash form to meet their daily needs like purchase of vegetables, meat and bread.

Business motive:

Individual and firms also keep some money with them in liquid form for their business need like the purchase of raw material, payment of wages,bills.

Precautionary motive:

Some money is also kept by people to face the situation of emergency like accident, break down of machinery, business slump etc.

Speculative motive:

Some money is also kept by people for speculative motive for purchase of shares, bonds, securities.

Relationship between rate of interest and demand of money

According to Keynes the demand of money for speculative motive is negatively related with the rate of interest.

Supply of money:

The supply of money depends upon metallic reserves, monetary policy and banking system of the country. In his theory Keynes has assumed short period of time and he believes that in case of short period the supply of money remains in-elastic.

Determination of rate of interest

According to Keynes

The rate of interest is determined with the equilibrium of demand and supply of money as shown in the following schedule and diagram.

Rate of Interest	Demand of Money	Supply of Money
5%	60	40
10%	50	40
15%	40	40
20%	30	40
25%	20	40

According to the above schedule & diagram at 15% rate of interest demand and supply of money are equal. Therefore this rate of interest will be determined in the market.

Effect on rate of interest of change in demand of money

According to the above diagram, increase in demand of money result increase in rate of interest and decrease in demand of money result decrease in rate of interest.

Effect on rate of interest of change in supply of money

According to the above diagram increase in supply of money result decrease in rate of interest and decrease in supply of money result increase in rate of interest.

Criticism:

1. Keynes has assumed short period of time and he has discussed nothing about long period.
2. Keynes has not given clean picture about supply of money as some times he includes credit money in supply of money and some times he does not include it in supply of money.
3. Keynes has given importance to demand and supply of money but he has neglected the forces which work behind saving
4. According to some modern economist like Hick, Hansom like Keynes has tried to put old wine in new bottle.

Q #17: Critically Examines Recardian Theory of Rent Or Critically examine classical theory of rent?

Introduction:

Rent is the reward which is paid against the services of land, different economists have given different theories of rent.

Ricardo is among classical economists, the theory given by him is generally known as Recardian Theory of Rent.

Definition:

According to Ricardo

“Rent is that part of production of land, which is paid to the landlord against the use of the original and indestructible power of the soil. As the fertility of different grades of land is different, therefore the difference of production of a land with the production of marginal land is treated as the rent of that land”.

Example:

Ricardo has explained his theory by giving the example of a newly populated country having four grades of land A, B, C and land D. while A land is most fertile and land D is least fertile. At first people will cultivate land A. with the increase in population they will bring under the cultivation land B, C and then land D according to the increasing tendency of population and price. If land D just covers its cost then it will be treated as marginal land and no rent will be charge on land D.The rent of other grades of land will be determined by comparing their production with the production of marginal land, as shown in following schedule.

Schedule:

Marginal production and grades of land.

Units of Input (Lab & Capital)	Land A	Land B	Land C	Land D
1	35 15	30 10	25 5	20
2	30 10	25 5	20	Marginal Land
3	25 5	20
4	20
Rent	30	15	5	No Rent

Formula:

Total production of land = ( MP * Units)

Rent of land A = 35+30+25+20 – ( 20*4 )

= 110 – 80

= 30

Similarly, we can calculate rent of each grade of land.

According to the above diagram, the shaded area is representing the rent of different grades of land.

Assumptions:-

Following are the main assumption of Ricardian theory.

Difference of fertility:

Different lands have different fertility, some are more fertile and some are less fertile.

Perfect competition:

This theory is based on the assumption of perfect competition.

No Rent Land:

The land which just covers its cost of cultivation is called as no rent land (Marginal Land).

Knowledge of fertility:

Ricardo assumes that people know, which land is more fertile and which is less fertile.

Original and indestructible quality:

It is assumed that fertility power of land is original and indestructible.

A grade land first:

It is assumed that farmers prefer to use A grade land first.

Diminishing returns:

It is also assumed that marginal production decreases as more and more units are applied.

Criticism:

Main cause of rent:

According to Ricardo

Cause of rent is the difference of productivity of soil, while according to the modern economists main cause of rent is the scarcity of the soil.

No perfect competition:

The theory assumes perfect competition, but perfect competition is found no where in the world.

No marginal land:

Ricardo has given the concept of marginal land but practically it is found no where in the world.

No perfect knowledge of fertility:

Farmers are mostly aware of the fertility of the soil a little bit but perfect knowledge about fertility is not possible.

No original and indestructible power:

According to modern economists, there is no original and indestructible power of the soil. The fertility may increase or decrease time to time.

A grade land is not preferred:

It is wrong to assume that A grade land is cultivated first. In the modern world the land nearest to the market is cultivated first instead of A grade land.

Increasing & Constant return have been ignored:

Ricardo has discussed the diminishing tendency of marginal production while he has ignored increasing and constant tendencies of marginal production.

Rent is a part of cost:

Ricardo has not included rent in the cost of production but in real sense, rent is a part of cost and it cannot be separated.

Role of human struggle in fertility:

Human struggle plays an important role in the fertility but Ricardo has ignored it.

No need to separate theory:

According to modern economists, demand and supply theory is sufficient to determined rent and there is no need of separate theory for the determination of rent.

Q # 18: Define National Income, Discuss methods of its measurement and also state the problems of measurement of N.I.

Ans: Introduction:

Different economists have defined national income in different words prominent of them are Alfred Marshall, Pigou, Fisher, Campbell, Kuznat, Samuelson and Ackley.

According to Campbell:

“Total market value of all final goods and services produced in a country during one year is called National Income”.

According to Ackley:“National Income is nothing more than the sum of all individual incomes”.

According to Samuelson:

“It is the loose name we give for the money measure of the overall annual flow of the goods and services in an economy.

Concept of National Income:

Following are the concepts of National Income, GNP, NNP, GDP, NDP, NI, PI, and DPI.

Methods of measurement:

The following are the methods of measurement

1. Productive method
2. Income method.
3. Expenditure method.

Product method:

According to this method national income can be measured by summing up the total market value of all final goods and services produced in a country.

It may be explained with the help of following example.

Number	Sector	Net value in (billion Rs.)
1 2 3 4 5 6 7	Agriculture Manufacturing Small enterprises Transport & communication Commerce & trade Mining Services	60 40 20 30 10 20 50
		230

Precautions:

To avoid double counting only final or finished goods are included. Final goods are those which are purchased by consumers for final use. Depreciation cost is not included.

Income method: National income can also be measured by taking the sum of total income of all the factors of production of a country during one year.

Example:

Sources of income	(BillionRs.)
Wages of labor Rent of land Interest of capital Profit of organizations Corporate profit(JSC) Indirect Tax	80 50 20 40 10 30
	230

Precautions:-

• Transfer payment: Transfer payments are not included in national income like zakat,charity,pension etc.
• Income from illegal sources: Income from illegal sources is also not included like income from theft or bribery.
• Depreciation cost: Depreciation cost also not included in national income.

Total expenditure method:

National income can be measured by taking the sum of total expenditures, which are incurred, in a country during one year.

Example:

Nature or head of Expenditure	Amount (Billion Rs.)
Private consumption expenditure Private investment expenditure Govt. productive expenditure Govt.non-productive expenditure Export surplus i-e (X – M)	60 50 40 30 50 ( 90 – 40)
	230

Income = Y = C + I + G + ( X – M )

Y = 60 + 50 + ( 40+ 30) + ( 90- 40)

Y = 230

Precautions:-

Expenditures should be counted once.

The expenditure on the purchase of second hand goods should not include.

Difficulties in measurement of National Income:

Following are the difficulties of national income discuss as under:

• Unpaid services
• Barter systems
• Foreign firms
• Inadequate statistical data
• Lack of trained staff
• Habit of keeping no account
• More than one job.
• Cottage industry
• Non co-operation of people
• Tax evasion ( escape from tax)

Q # 19 Define National Income, Also give concepts of National Income?

Introduction:

Different economists have defined national income in different words prominent of them are Alfred Marshall, Pigou, Fisher, Campbell, Kuznat, Samuelson and Ackley.

According to Campbell:

“Total market value of all final goods and services produced in a country during one year is called National Income”.

According to Ackley:

“National Income is nothing more than the sum of all individual incomes”.

According to Samuelson:

“It is the loose name we give for the money measure of the overall annual flow of the goods and services in an economy.

Concept of National Income:

Following are the concepts of National Income, GNP, NNP, GDP, NDP, NI, PI, and DPI.

Gross Domestic Product ( GDP):

GDP is the market value of all final good and services produced within the geographical boundaries of a country during one year. In GDP foreign remittance are not included, however the incomes of foreign firms must be included for example BATA is a foreign firm, its production and income in Pakistan will be included in the GDP of Pakistan, though a portion of profit is taken abroad by the firm.

GDP = GNP - Foreign remittance + Income of foreign firms

Example: ( for all concepts of national income)

(Suppose)

Gross National Product GNP 400 M. $

Gross Domestic Product GDP 320

Income of foreign firms (taken abroad) 40

Foreign remittance 120

Depreciation cost 30

Indirect taxes 50

Govt. subsidies 10

Transfer incomes 70

Corporate profit 60

Undistributed profit 20

Social security contribution 15

Personal taxes 55

GDP = GNP - Foreign remittance + Income of foreign firms

400-120+40

GDP=320M. $

Net Domestic Product (NDP):

If the depreciation expenditure are deducted from gross domestic product, then we get Net Domestic Product.

NDP=GDP-Depreciation cost

NDP= 320-30

=290

Gross National Product (GNP):

It is the wider term of national income as compared to GDP.

GNP of a country for a particular year is the sum of the market value of all final goods and services produced fro the consumption and investment purpose of that country.

In GNP foreign remittances are also included while income of foreign firms taken abroad is not included.

GNP=GDP+foreign remittances-income of foreign firms taken abroad

GNP=320+120-40

GNP=400

Net National Product:

If depreciation expenditure are deducted from GNP then we get NNP.

NNP=GNP-Depreciation cost

NNP+400-30

NNP=370 M

National Income:

Total income infact is not distributed among the factors as a portion is taken by the Govt. in the form of taxes while sometimes Govt gives subsidies.

If Govt taxes are deducted and Govt subsides are included in NNP then we get NI.

NI=NNP-Govt Taxes+Govt Subsides

NI=370-50+10

NI=330

Personal Income:

Personal income refers to the aggregate of all incomes actually received by all factors of production in the form of wage,rent,interest,profit. Transfer incomes also included in personal income, however corporate profit,undistributed profit and social security contribution is not included in personal income.

P.I=N.I+Tranfer Incomes-(corporate profit+undistributed profit+ s s contribution)

P.I=330+70-(60+20+15)

P.I=305

Disposable personal income(DPI):

If personal taxes are deducted from personal income then we get(DPI). Infact it is the amount which people can dispose off as like.

DPI=P.I-Personal taxes

DPI=305-55

DPI=250

Q#20: Define National Income. Explain the Circular Flow of national Income with the help of diagram.

Introduction:

Different economists have defined national income in different words prominent of them are Alfred Marshall, Pigou, Fisher, Campbell, Kuznat, Samuelson and Ackley.

According to Campbell:“Total market value of all final goods and services produced in a country during one year is called National Income”.

According to Ackley: “National Income is nothing more than the sum of all individual incomes”.

Concept of National Income:

Following are the concepts of National Income, GNP, NNP, GDP, NDP, NI, PI, and DPI.

Methods of measurement:

The following are the methods of measurement

• Productive method

• Income method.

• Expenditure method.

Circular Flow:

If we observe the National Income, we came to know that N.I. circulates between two sectors in different forms. These sectors are(i) household. (ii) Firms. The circulation of National Income between these two sectors is called circular flow of national income.

Circular flow of N.I. may be explained with the help of following diagram.

Services of Goods

Upper half

Services

Household Firms

Reward

Lower half

Prices of Goods

The diagram shows that on one side National Income moves from Household towards firms in the form of their services. On the other side in return it moves from firms toward household in the form of rewards of factors as shown by inner circle in the above diagram.

The production made by the firms is offered for sale to factors(household) in return household give price of goods to firms as shown by the outer circle of the in the above diagram .

This movement of national income from household to firms and from firms to household in different forms is known as circular flow of national income.

The above diagram shows two types of flow of National Income.

(i) Real flow.

(ii) Monetary Flow.

Real Flow:

Upper half of diagram is showing real flow of goods and services from one sector to other.

Monetary Flow:The lower half of the diagram is showing monetary flow of national income in the form of reward of factors and price of goods.

Q # 21: Define tax. Discuss various cannot of taxation?

TAX:

Tax is a compulsory contribution levied by the state on its individuals to meet the development and non-development expenditures.

“Tax is compulsory contribution by the people to the public treasury to meet the general expenditure of the government.”

Cannons of Taxation:

The qualities that a good tax should possess are described as cannons of taxation. Adam Smith has stated four cannons of taxation on the administrative side of public finance. According to him, a good tax is one which contains

1. The cannon of equality

2. The cannon of certainly

3. The cannon of convenience

4. The cannon of economy

1. The cannon equality:

This is the most important principal of taxation. It means that there should be justice. The burden of tax should be equal on every tax-payer. Equal burden does not mean that the amount of this tax is equal. It means that there should be equal sacrifice and everyone should pay tax according to his ability. Rich should pay more than the poor.

2.The cannon of certainty:

This cannon implies that the tax which each individual is bound to pay should be certain and not arbitrary. The time of payment, the mode of payment, the amount to be paid should clear so that he may adjust his expenditures accordingly.

3.The cannon of convenience:

According to this canon, there should be appropriate timings of tax collection. Method of recording payments should also be easy and convenient to the tax payers. For example, if the tax can be paid through cheque, it will be convenient. If the taxpayer has to go to an office many times, it will be inconvenient.

4. The cannon of economy:

If the cost of collection of a tax is small, it is called economical. If there is a tax in which taxpayers have to large amounts but only a small amount goes to the government treasury due to heavy salaries of staff, then tax is not economical. The cost of tax collection should be the minimum.

Others cannons of taxation:

5. Cannon of productivity:

The cannon of productivity implies that a tax should bring sufficient revenue to the government. A few taxes bringing large revenue are better than many taxes each bringing very small sum.

6. Cannon of Elasticity:

Cannon of elasticity states that the amount collected should increase or decrease according to the needs of the government. In Pakistan, income tax and custom duty are elastic because a little increase in their rates can bring in large amount of additional revenue.

7. Cannon of Simplicity:

The tax structure should be simple so that the people can easily known who has to pay the tax and how much. The taxpayer should be able to calculate the amount of tax and pay it conveniently.

8. Cannon of Diversity:

A single tax is not desirable. There should be various types of taxes, o that all classes of people have to pay some amount. In this way, all people can contribute to the state revenue.

9. Harmless for Economics Incentives:

The nature and rate of tax should be such that it does not have bad effects on people’s incentives for economic efforts.

10. Cannon of Uniformity:The tax system should be uniform and not arbitrary. For example, if people of Lahore have to pay higher rate of income tax then the people of other major cities, the tax will not be uniform.

Q # 10 (a) State and explain the laws of cost with the help of schedule and diagram?

INTRODUCTION:

In economic activities the course of production usually passes through three different stages, new classic economists have defined or discussed these stages in the form of three different laws.

1. Law of increasing Returns or Diminishing cost
2. Law of Diminishing Returns or increasing cost
3. Law of Constant Returns or constant cost

LAW OF COST:

Different economists have defined the law of cost in different words. But prominent of them are Hanson, Stainley Benham, Champan & Marshall.

DEFINITION:

In the course of production if more and more units are applied of variable factors keeping other factor constant at first marginal cost decreases because of improvement in the combination of variable factors after reaching to a maximum point it remains constant because of optimum combination of variable factors. If still more units are applied then marginal cost tends to decline because of appearance of defective Combination of factors. This diminishing tendency of marginal cost represent law of diminishing cost, constant tendency shows law of constant cost and the increasing tendency of marginal cost shows Law of increasing cost.

Explanation with the help of schedule and diagram:

The Law of returns may be explained with the help of schedule of diagram.

Schedule:

Units of fixed factors	Units of variable factors	Total production	Marginal production	Marginal cost	Reward/units of variable factor
5 acres	1	10	10	100/10=10	100
5 acres	2	30	20	100/20=5
5 acres	3	60	30	100/30=3.3
5 acres	4	90	30	3.3
5 acres	5	110	20	5
5 acres	6	120	10	10

Diagram:

According to the above schedule and diagram in first three units marginal cost is decreasing which show law of decreasing cost in 3rd & 4th units marginal cost remain constant which shows law of constant cost and from unit 4^th to onward marginal cost is increasing which is representing the “Law of increasing cost”.

ASSUMPTIONS:

• At least one factor of production should be kept fixed/constant.
• At least one factor of production should be kept variable.
• All the units of variable factor are assumed homogenous.
• Methods of production should be same.
• There is short period of time under consideration.
• Equal reward should be gives to each unit of variable factor.
• There should be equal working period for each unit of variable factor.
• There is a scope of improvement in the combination of variable factor.

APPLICATION:

According to neo classical economists the law of decreasing cost is applicable to industry sector. Law of increasing cost is mostly applicable for the production of those goods in which both industry and agriculture sector are used like sugar, carpet & textile industry.

CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination get improved, marginal production increases.

On the other hand, if the Combination gets defective, marginal production decrease either the sector is industrial or it is agriculture.