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Thursday,January12,2012
ECONOMICSNOTESB.COMPART1(PUNJAB
UNIVERSITYLAHORE)
AboutMe
BlogArchive
2016(8)
ECONOMIC
S
Q#1:Criticallyexaminethedefinitionofeconomics
givenbyAlfredMarshall?
Or
Economicsisthestudyofcausesofmaterialwellbeing
Discussandcriticizetheconcept
Introduction:
ThewordeconomicshasbeenderivedfromLatinwordOIKONOMOSandtherearethree
differentconceptsaboutthedefinitionofeconomics.
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It'sjustpaper
Wow!..
FunnyPunny
Sayings
new
HOLLYWO
OD
RELEASE
D
*WALLPAPER
S*_*
NATURE
WALLPAP
ERS*_*
Theworstwax
figuresof
celebrities
Classical
TheArtof
Extreme
Sleeping!
Neoclassical
joke
Modern
LAWYERS
AccordingtoMarshall.
Economics is the study of mankind in the ordinary business of life it examines that part of
individualsandsocialactionswhicharemostcloselyconnectedwiththeattainmentandwiththe
useofmaterialrequisitesofwellbeing.
MainpointsofMarshall:
FollowingarethemainpointsofMarshallsdefinition.
Ordinarybusinessoflife:
Ineconomicsordinarybusinessoflifeisstudied.
Primaryimportancetowellbeing:
In economics primary importance is given to human wellbeing and secondary
importancetowealth.
SocialScience:
AccordingtoMarshallEconomicsisasocialscienceanditisnotthescienceofwealth
http://cosmosshah.blogspot.com/2012/01/economicsnotesbcompart1punjab.html
JamesBond
caron
displayat
Beaulieu
Dangersof
Pork
HowtoBe
NobleBeco
minga
noble
personisa
worth...
the10
qualitiesof
Charismati
c
personality
2012World
Hunger
and
Poverty
Factsand
Statistics...
1/43
2/6/2016
only.
VOLCANO
Activitiesofmaterialwellbeing:
Ineconomicstheactivitiesofmaterialwellbeingarediscussedonly.
MeritsofMarshallsDefinition
FollowingarethemeritsofMarshallsdefinition:
Ordinarybusinessoflife:
Marshallsdefinitionisnotrelatedwiththetendenciesofaparticularcommunityonly.In
fact it discusses the general behaviour of ordinary people this thing makes the subject
importantforacommonman.
Nochargeofselfishness:
AsMarshallhasgivenprimaryimportancetohumanwellbeingandsecondarytowealth,
thereforethechargesofselfishnesscannotbeleveledagainsthisdefinition.
Subjectboundaries:
By discussing only the activities of material wellbeing in economics Marshall has given
boundariesofthesubjectandhehasnotmadethesubjectlimitlesslikethedefinitionof
economicsgivenbyclassicaleconomist.
Correspondstomoderneconomicstendencies:
In the modern age planning in every sector is made for the sake of welfare and
wellbeing.similaryMarshallhasalsogivenimportancetowelfareandwellbeing,therefore
hisdefinitioniscorrespondstomoderneconomicstendencies.
Socialscience:
Marshallhasnotdiscussedeconomicsintermsofwealthonlyhetreatseconomicsasa
socialscience.
Primaryimportancetowellbeing:
Marshall has not given total importance to wealth, he has given primary importance to
wellbeingandsecondarytowealthaswealthisjustmeansandnottheends.
DemeritsofMarshallsDefinition
Doesnotcoveralleconomicproblems:
Marshallhasjustdiscussedthemattersofmaterialwelbeingandhehasneglectedalotofother
activitieswhichmustbebroughtunderdiscussedineconomicswhichdonotcausematerialwell
being.
Welfareisavagueconcept:
Welfareisavagueconceptbecauseitdifferperson,timetotime,placetoplaceandneedto
need.
WelfareisUnmeasurable:
Welfareisthestateofmindwhichcannotbemeasurednumericallytherefore,thewholesubject
cannotdependuponunmeasurableconcept.
Servicesneglected:
Marshallhasneglectedallnonmaterialservicesoflawyers,teachers,doctors,etc.
Isolatedpeopleneglected:
Marshall has also neglected the activities of those people who lead isolated lives like baggers,
peoplelivinginjungle.
whypeople
leavetheir
parents
allthatglitter
isnotgold
TRUELOVE
STORIES
TheTrainSet
This
definitelyis
amustsee
Rainbow
Dreamland
HomeSweet
Home
Life
is...unpredi
ctable!
HERICHEST
PEOPLE
OFTHE
WOLRD
20089
FAMOUS
PERSONA
LITYOF
THE
WORLD
INVENTIONS
OFTHE
WORLD
HOLLYWOOD
,BOLLYWO
OD
MOVIES&
DRAMAS
DAILY
QURAN&
HADITH
http://www.blo
gger.com/
ECONOMICS
OF
PAKISTAN
NOTES
B.COM
PART
1(PUNJAB
UN...
AUDITING
B.COM
PARTII
PUNJAB
UNIVERSIT
YLAHORE
PA...
MONEY
,BANKING
&FINANCE
NOTES
B.COM
PUNJAB
UNIVER...
NASANEW
DISCOVER
IES
SHAKIRA
ALBUMS
POPMUSIC
Unnecessaryclassification:
POPMUSIC
Practically nobody classified consumption of wealth into wellbeing and non wellbeing groups,
thereforeMarshallsdefinitionisimpractical.
Pisces
Horoscope
2012
Conclusion
Aquarius
Horoscope
2012
Though Marshalls 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
thedefinitionofeconomicsgivenbythesomemoderneconomistslikeKeynes,Samuelson, etc,
maybetreatedascomprehensivelyinfollowingwords.
Capricorn
Horoscope
2012
Sagittarius
Horoscope
2/43
2/6/2016
Economics is a social science which is concerned with the proper use and allocation of
resourcesfortheachievementandmaintenanceofgrowthwithstabilityandefficiency.
Q#2:Economicsisthescienceofscarcityandchoice,discussedand
criticizetheconcept?
Therearethreedifferentconceptsaboutthedefinitionofeconomics:
1.Classical
2.NeoClassical
3.Modern
2012
Scorpio
Horoscope
2012
Libra
Horoscope
2012
Virgo
Horoscope
2012
Leo
Horoscope
2012
Robbinsisamongmoderneconomists.Inhisbook,THENATUREANDSIGNIFICANCEOF
ECONOMICSSCIENCE(1932),hehasdefinedeconomicsasascienceofscarcityandchoice.
Contraband
(2012)
FollowersoftheRobbins:
Shakira's
Biography
HisfollowersareStiggler,Eastham,Keynes,Samuelsonandetc.
RIHANNA
RobbinsDefinition:
ARIES
HOROSCO
PE2012
Economicsisthesciencewhichstudieshumanbehaviorasarelationshipbetweenends
(multipledesires)andscarcemeanswhichhavealternativeuses.
Taurus
Horoscope
2012
MainPointsoftheRobbinsDefinition:
Gemini
Horoscope
2012
FollowingarethemainpointsofRobbinsdefinition.
RobbinssDefinition:
Economicsisthesciencewhichstudieshumanbehaviorasarelationshipbetweenends
Cancer
Horoscope
2012
RedTails
(2012)
MainpointstheRobbinssDefinition:
Supernatural
(2005TV
Series)
FollowingarethemainspointsofRobbinsdefinition
Haywire
(2011)
MultipleDesires:
Humandesiresaremultipleandthesedesiresarechangingwiththepassageoftime.
DifferenceofImportance:
Alldesiresarenotequallyimportant,somearemoreimportantandsomearelessimportant.
LimitedResources:
Tosatisfyhumanwantsresourcesarequitelimited.
Beautyand
theBeast
(1991)
Sherlock
Holmes:A
Gameof
Shadows
(2011)
TheDevil
Inside
(2012)
TheDevil
Inside
(2012)
Alternativeuses:
Limitedresourcescanbeappliedalternatively.
MeritsofRobbinsdefinition
WidenedScope:
Robbinshasdiscussedineconomicsallthemattersofscarcityandchoice,eithertheycause
materialwellbeingordontcausematerialwellbeing.Inthiswayhehaswidenedthescopeof
economicsascompareditMarshall.
UniversalApplication:
Aseveryonefacestheproblemofscarcityandchoice,therefore,thedefinitionofeconomics
givenbyRobbinssisuniversallyapplicable.
NoChargeofselfishness:
Thechargeofselfishnesscannotbeleveledagainstthedefinitionofeconomicsgivenby
Robbinssbecausehehasnotdefinedeconomicsasascienceofwealth.
NonMaterialServicesAlsoIncluded:
Albatross
(2011)
roadtooscar
2012
SONU
NIGHAM
SINGER
RIHANNA
SHAKIRA
HOT100
MUSIC
Cancer
Horoscope
2012
ECONOMICS
NOTES
B.COM
PART
1(PUNJAB
UNIVERSIT
YLAH...
Robbinshasalsogivenimportanceinthesubjecttononmaterialservicesliketheservicesof
doctors,teacher,lawyers,etc.
Gemini
Horoscope
2012
IsolatedPeopleNotNeglected:
NEWS
UPDATES
Robbinshasalsodiscussedineconomicstheactivitiesofthosepeoplewhoarenotrelatedtothe
societyandleadtheirlivesinisolatedways.
SHAKIRAHIT
SONGS
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Factordecreasingwelfarenotneglected:
SHAKIRA
HISTORY
Robbinshasalsodiscussedintheeconomicsantiwelfareactivitiesliketheuseofcigrattes,
narcotics,drugsetc.
HOLLYWOOD
MOVIES
2012
DemeritsoftheDefinition
Taurus
Horoscope
2012
ModerneconomistslikeKeynesSamuelson,etchavecriticizedthedefinitionofeconomicsgiven
byProfessorRobbinsbyusingfollowingpoints.
ARIES
HOROSCO
PE2012
SocialScience:
BEAUTYOF
THE
KIRESTAN
AccordingtoRobbins,economicsisapositivesciencelikePhysics,Chemistrybutinfactpositive
science deals with nonliving matters, while economics is concerned with the behaviour of living
humanbeingstherefore,economicsisasocialscienceandnotapositivescience.
Notatheoryvalueonly:
Followers
Robbins has reduced economics merely to a theory value and he has neglected its practical
aspect.
withGoogleFriendConnect
Welfareismissing:
Members(3)
Jointhissite
In the definition of Robbins welfare is quite missing because Robbins has totally neglected the
aspectofwelfareandwellbeing.
Toomuchwidenedthescope:
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
cannotbetreatedaseconomicactivities.
Alreadyamember?Signin
Colorless:
The definition of economics given by Robbins has made the subject quite colorless because a
commonmangetsnothingoutofit.
Selfcontradictory:
Being an economist Robbins himself could not remain neutral then, how can he expect from an
ordinarypersontoremainneutral.
Normativeaspectneglected:
There are two main branches of science but he has discussed only positive aspect whereas
normativehasbeenneglected.
Planningisneglected:
PlanningisanimportantpartofeconomicsbutRobbinshastotallyneglectedplanning.
Macroaspectisneglected:
MicroandMacroaretwomainbranchesofeconomicsbutRobbinshasneglectedmacroaspect
oftheeconomics.
Analyticalconceptonly:
Hehasstressedtowardsneutralanalysisofhumanbehaviourwhilehehasneglecteditspractical
aspect.
Conclusion
Economicsisasocialsciencewhichisconcernwiththeproperuseandallocationofresources
fortheachievementandmaintenanceofgrowthwithstabilityandefficiency
Q#3:Givethecomparisonofthedefinitions
givenbyMarshallandRobbins?
Before giving the comparison of the definition of economics given by Marshall and Robbins.
Observethedefinitionsofeconomicsgivenbybotheconomists.
AccordingtoMarshall:
Economics is the study of mankind in the ordinary business of life it examines that part of
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individualsandsocialactionswhicharemostcloselyconnectedwiththeattainmentandwiththe
useofmaterialrequisitesofwellbeing.
AccordingtoRobbins:
Economics is the science which studies human behavior as a relationship between ends
If we study the above definitions of economics given by Marshall and Robbins we may give the
followingcomparisons.
Marshall
Robbins
Marshall gave his view in his book principle

ofEconomics(1890).
Robbinsgavehisviewinhisbook the nature

and significance of economics science
(1932).
1.NeoClassical:
Marshall is among neo classical economists
and his definition is treated as neoclassical
definition.
1.Modern:
Robbinsisamongmoderneconomistsandhis
definitionistreatedasmoderndefinition.
2.SocialScience:
2.NeutralScience:
AccordingtoMarshall.
AccordingtoRobbins
Economicsisasocialscience
Economics is a positive science in which

humanbehaviourisstudiedneutrally.
3.LimitedScope:
Marshall has given quite limited scope of
economics because he has included in
economicsonlytheactivitiesofmaterial well
being.
4.ClassificatoryConcept
Marshall has classified the consumption of
wealth into wellbeing and non wellbeing
groups and he has discussed in economic
onlyfirstgroupwhilehehasneglectedsecond
group. So Marshall has given the
classificatoryconcept.
5.NormativeScience:
Marshallhastreatedeconomicsasa
normativescience,asitdealswiththe
activitiesofmaterialwellbeing.
6.VagueConcept:
Welfareisavagueconceptwhichdiffersfrom
persontoperson,placetoplace,timetotime
andneedtoneed.
7.UsefulSubject:
Marshallhasgivenimportancetowelfareand
wellbeing,whichhasmadethesubjectquite
useful.
8.CorrespondstomodernEconomic
Tendencies:
3.Widenedscope:
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
wellbeingornot.
4.Analyticalconcept:
Robbinshasnotclassifiedtheconsumption of
wealth into wellbeing and non wellbeing
groups,ratherhehasstressedtowardsneutral
analysis of human behaviour, therefore his
conceptmaybecalledanalyticalconcept.
5.PositiveScience:
Robbins treated economics as a positive
science, like physics, chemistry and we are
forbiddentopassourjudgment while studying
humanbehaviour.
6.BasedonReality:
Everyindividualfacestheproblem of scarcity
and choice, therefore the definition of
economics given by Robbins is closer to
realityofhumanlife.
7.ColorlessSubject:
Robbins definition has made it colorless and
complexed because a common man gets
nothingoutofit.
In the modern age planning in every sector is

made for the sake of welfare and wellbeing,
similarly Marshall has also given importance
to the welfare and wellbeing, therefore his
definition corresponds to modern economics
tendencies.
8. Does not Corresponds to modern

EconomicsTendencies:
9.IsolatedPeopleNeglected:
9.IsolatedpeoplealsoDiscussed:
Marshallhasneglectedtheactivitiesof
isolatedpeoplewhoarecutawayfrom
society.
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.NonMaterialservicesneglected:
Marshallhasneglectednonmaterialservices
Robbins has totally neglected welfare and

wellbeing therefore his definition does not
correspondtomoderneconomicstendencies.
10.Nonmaterialservicesnotneglected:
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liketheservicesofdoctors,teachers,
lawyers,etc.
Robbins has not neglected nonmaterial

services like the services of doctors,
teachers, and lawyers. He has given
importancetotheseservicesineconomics.
Conclusion
Economics is a social science which is concerned with the proper use and allocation of
resourcesfortheachievementandmaintenanceofgrowthwithstabilityandefficiency.
Q#4:definelawofdiminishingmarginalutilitywiththehelpof
scheduleanddiagram?
Or
Whatisthefirstlawofconsumptionbycardinalapproach?
Introduction:
Thelawofdiminishingmarginalutilityisthefundamentallawofconsumptionifwealthindicating
cardinalmeasurementofutility.Differenteconomistshavedefineditindifferentwordsprominent
ofthemareMarshall,JevonsandGossen
Definitions:
AccordingtoMarshall:
Theadditionalbenefitswhichapersonderivesfromanincreaseinthestockofathing,
diminisheswitheveryincreaseinthestockthathealreadyhas.
Simpledefinition:
Ifotherthingsdonotchangeandaconsumercontinuouslyappliesunitsofacommodity,then
marginalutilitycontinuetodecrease.
Explanationthroughtable:
UnitsofApples
TotalUtility
MarginalUtility
TU
MU
30
30
50
20
60
10
60
50
10
Diagram:
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Explanation:
Accordingtoabovescheduleanddiagramasaconsumerisapplyingunitofapplescontinuously,
itmarginalutilitydecreasing.Atfourthunitithasbecomezeroafterthatithasbecomenegative.
ThisdecreasingtendencyofmarginalutilityisrepresentingthelawofDiminishingMarginalUtility.
Assumption:
Followingaretheassumptionofthelaw.
Continuoususe:
Inthislawitisassumedthataconsumerappliesunitsofacommoditycontinuouslywithoutand
gap.
Samequality:
Itisalsoassumedthatthequalityofeverysuccessiveunitmustbesame.
Samesize:
Itisalsoassumedthatthesizeofalltheunitsmustbesame.
Reasonablesize:
Itisassumedthatthereisareasonablesizeofunits.Thesizeofunitshouldneitherbeverybig
norverysmall.
Nochangeinincome:
Itisalsoassumedthatduringtheapplicationofeachnextunitofcommodity,theincomeofthe
consumermustbesame.
Nochangeintaste:
Itisalsoassumedthattheconsumeristhenormalperson,hedoesnotlikeordislikea
commodityextraordinary.
Exceptionofthelaw
Followingaretheexceptionofthelaw.
Desireofmoney:
Thislawisnotapplicableforthedesireofmoneyasthedesiremoneyincreasewiththeincrease
ofthequantityofmoney.
Utilityofknowledge:
Thislawisnotapplicableforknowledgebecausetheutilityofknowledgedoesnotdecreaseby
theincreaseofknowledge.
UseofNarcotics:
Thislawisnotapplicablefornarcoticsalsoaseachnextunitofnarcoticsdoesnotprovidelesser
utilitytoaconsumer.
Hobby:
Thislawisnotapplicableforhobbiesalsobecauseapersondoesnotfeellesserutilityofevery
nextunitincaseofhobby.
Fashion:
Thislawisnotapplicableforfashionbecausepeoplebecomemoreandmorecrazyoffashion,
whentheygetinvolvedinfashion.
Practicalimportanceofthelaw
Followingarethepracticalimportanceofthelawofdiminishingmarginalutility.
Baseofthelawofdemand:
Thislawprovidesbaseforthelawofdemandbecauseaconsumeralwayscomparestheutilityof
thecommoditywiththepriceofthatcommodityandtakesrationaldecision.
Importanceforcustomer:
Knowingthediminishingtendencyofmarginalutilityarationalconsumerappliesunitsofmoney
ondifferentcommoditiesverycarefullyandhetriestomaximizetotalutility.
Consumersurplus:
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Aconsumermayhavemaximumsurplusbyapplyingunitsofmoneyonacommodityrationally,
bykeepinghiseyesondiminishingtendencyofmarginalutility.
Q#5:State&explaintheLawofEquimarginalutilityalsogiveitsexceptionsandpractical
importance.?
Introduction:
ThelawofEquimarginalutilityisthesecondfundamentallawofconsumptionofwealthgivenby
NeoclassicalEconomists.DifferentEconomistshavedefineditindifferentwordsProminentof
themareMarshallandLipsy.
AccordingtotheLipsy:
Thehouseholdmaximizingtheutility,willsoallocatetheexpenditurebetweencommoditiesthat
theutilityoflastpennyspentoneachitembecomeequal.
AccordingtoLaw:
Ifunitsofmoneyareappliedondifferentcommoditiesinsuchawaythatmarginalutilityofeach
itembecomeequal,thentotalmaximizes.
Example:
Supposeaconsumerwantstoapplyfiveunitsofmoneyonmangoesandapplestomaximize
totalutility.Healsoknowsmarginalutilityofbothcommoditiesasshowninthefollowing
schedule.
Schedule:
UnitsofMoney
MarginalUtilityofMangoes
MarginalUtilityofApples
30
25
25
20
20
15
15
10
10
Accordingtotheaboveschedule,ifaconsumerappliesthreeunitsofmoneyonmangoesandtwo
unitsonapples,thenthemarginalutilityofbothcommoditiesbecomesequal,thereforetotalutility
maximizesas:
30+25+20+25+20=120max
Ifconsumerappliestwounitsofmoneyonmangoesandthreeonapples,thenmarginalutilityof
bothbecomeunequal,thereforetotalutilitydoesnotremainmaximum
30+25+25+20+15=115notmaximum
Diagram:
Accordingtotheabovediagramandschedule.Ifthreeunitsofmoneyareappliedonmangoes
andtwoonapples,thenmarginalutilityofbothbecomesequalandtotalutilitymaximum.Butif
thirdisremovedfrommangoesandappliedonapplesthenMUofbothbecomeunequal.
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Therefore,TUcannotremainmaximum,asthelossofutilitywillbegreaterthenthegainofutility
asshowninthediagram.
EquationofConsumerEquilibrium:
RealizingtheimportanceofpricesNeoClassiceconomistshavegiventhefollowingequationfor
consumerequilibrium
ConsumerEquilibrium=MUa/Pa=MUb/Pb==MUn/Pn
C.E=12/4=24/8==60/20
C.E=3=3==3
ASSUMPTIONS:
LimitedUnitsOfMoney:
Thelawassumesthattheconsumerapplieslimitedunitsofmoney.
Rationality:
Thelawalsoassumesthattheconsumerbehavesrationallytomaximizehissatisfaction.
DivisibleGoods:
Inthelawitisassumedthatthethingswhichaconsumerconsumesaredivisibleintosmallunits
likesugar,salt.
DiminishingMarginalUtility:
Asaconsumerappliesmoreandmoreunitsofacommodity,itsmarginalutilitydecreases.
ConstantPrice:
Thelawassumesthatthepriceofthecommoditiesremainconstanteithertheconsumerbuys
lesserquantityorgreaterofthecommodity.
ChoiceToUse:
Consumerhasthechoicetousemorethanonecommodities.
LIMITATIONS:
MeasurementOfUtility:
Utilityismentalstate,whichcannotbemeasurednumericallytherefore,itisdifficulttoequalize
marginalutilityofdifferentcommoditiesnumerically.
IndivisibleGoods:
Thelawisalsonotapplicableforthosegoods,whichareindivisibleliketubelight,fan,shoeetc.
CustomandFashion:
Sometimes,peoplepurchasegoodsjustforfashionorcustomanddonotcaretomaximizetotal
utility.
SmallPurchase:
Mostlythelawholdsonlyinthebigpurchasewhileitisnotapplicableinsmallpurchasebecause
wedonotcareforsmallpurchases.
IgnoranceofConsumer:
Sometimesaconsumercannotbebenefitedfromthelawduetoignoranceofprices,substitutes
andqualityofgoods.
DurableGoods:
Thelawisalsonotapplicablefortheuseofdurablegoodsbecauseitisnotpossibletofindtheir
exactutility.
PRACTICALAPPLICATION:
Thelawofsubstitutionistheothernameofthelawofequimarginalutility.Itisapplicableto
variouseconomicproblems.
ImportanceforConsumers:
Thelawisimportantforconsumersbecausebyapplyingthislawaconsumertriestoequalize
marginalutilityforthemaximizationoftotalutility.
ImportanceforProducers:
Thelawofsubstitutionisalsohelpfulforproducers,asbyapplyingthislawthemaximumoutput
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byusingtheirlimitedresources.
ImportanceforFinanceMinister:
Thelawishelpfulforfinanceministertocollectrequiredrevenuethroughtaxeswithminimum
disturbance.
WelfareoftheState:
Thelawofsubstitutionisalsohelpfulforthegovernmenttoprovidemaximumwelfaretoits
citizensbyapplyingitsincomeindifferentsectorsaccordingtotheirrelativeimportanceandtheir
shareinproductivity.
Q#6:DefineDemand,ExplaintheLawofDemandwiththehelp
ofscheduleanddiagram?
Demand:
In the ordinary language, the desire of a commodity is considered as demand but in economics
onlythatdesireofcommodityisconsideredasdemandwhichisbackedbypurchasingpower.
Demand=Desire+PurchasingPower
Asdemandiseffectedbypricetherefore,wemaydefinedemandinfollowingwords:
Definition:
Different amounts of a commodity which a consumer is willing to purchase at various
levelofprice
LawofDemand:
Thelawofdemandinfactshowsthenegativerelationshipbetweenpriceandquantitydemanded
Definition:
Ifotherthingsdonotchangethenthedemandofagooddecreaseswitheveryincreasein
itspriceandthedemandofagoodincreaseswiththedecreaseinitsprice.
Itmaybeexplainedwiththehelpoffollowingscheduleanddiagram.
SCHEDULE:
PRICE
QTYDEMAND
30
20
10
DIAGRAM:
4
Price
2
D
O102030X
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Quantitydemanded
Explanation:
Accordingtoabovescheduleanddiagram,withtheincreasesinprice,demandisdecreasingand
withthedecreaseinpricedemandisincreasing,whichisrepresentingthelawofdemand.
Assumptions:
Followingaretheassumptionsofthelawofdemand:
1.Nochangeinincome:
Inthelawofdemand,itisassumedthattheincomeoftheconsumershouldremainconstant
becausethechangeinincomeoftheconsumermayalsoeffectthedemandofcommodity.
2.NoChangeinpopulation:
Inthelawofdemanditisalsoassumedthatthepopulationshouldremainconstant,asthe
demandofacommoditymaychangeduetochangeinpopulation.
3.NochangeinBuyerstaste:
Itisalsoassumedthatthebuyerstasteshouldremainconstant,asthechangeintastemayalso
effectthedemand,positivelyornegatively.
4.Nochangeinfashion:
Itisalsoassumedthatthereshouldbenochangeinfashion.
5.Nochangeinpriceofsubstitutes:
Inthelawofdemanditisalsoassumedthatpricesofsubstitutesshouldremainconstant,asit
mayeffectthedemand.
6.NochangeinLawandorders:
Inthelawofdemanditisalsoassumedthatthereshouldbenochangeinlawandordersituation.
7.Nochangeinquantityofmoney:
Inthelawofdemanditisalsoassumedthatquantityofmoneyshouldremainconstant.
Exceptions/Limitations:
1.GiffensGoods:
ThelawofdemandisnotapplicableforGiffensgoodsbecausethedemandforGiffensgoods
decreasesastheirpricedecreases,inthissituationpeoplecanhavechoicetousebetterthing.
2.Lifesavingdrugs:
Thelawofdemandisnotapplicablefortheconsumptionoflifesavingdrugs.
3.PrestigiousGoods:
Thelawofdemandisnotapplicablefortheuseofprestigiousgoodslikediamond.
4.Veryhighpricesproducts:
Itisalsoobservedthatthelawofdemandisnotapplicableforhighpricesproducts,becausethe
demandforthoseproductsdoesnotchange,astheirpricechanges.
5.Acuteshortage:
Thelawofdemandisnotapplicable,incaseofacuteshortageofcommoditiesorduetothe
situationofwar,whichdisturbspeaceandsecurity.
Q#7:defineelasticityofdemandandalsodiscuss
methodsofmeasurementofelasticityofdemand?
Introduction
Theconceptofelasticityofdemandwasgivenbyneoclassicaleconomists.Differenteconomist
havedefineditindifferentwords.ProminentofthemareMarshall,StonierandHagueetc.
Definition:
AccordingtoStonierandHague.
Elasticity of demand is a technical term used by economists to describe the degree of
responsivenessofdemandforagoodtoachangeinitsprice.
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Simpledefinition:
ThedegreeofresponsivenessofdemandofagoodduetochangeinitspriceiscalledElasticity
ofDemand.
Somegoodshavemoreelasticdemandwhilesomeotherhavelesselasticdemand.
MethodsofmeasurementArcElasticity
1.TotalExpenditureMethod:
(i)Negativerelationshipbetweenpriceandtotalexpenditureindicatesmoreelastic.(Ed>1)
PRICE
QUANTITY
DEMANDED
TOTAL
EXPENDITURE
12
Theabovescheduleisshowingnegativerelationshipbetweenpriceandtotalexpenditurewhichis
representingmoreelasticdemand.
Intheabovediagramhorizontaltendencyofdemandcurveisrepresentingmoreelasticdemand.
(ii)Positiverelationshipbetweenpriceandtotalexpenditureindicateslesselasticdemand.(Ed<1).
PRICE
QUANTITY
DEMANDED
TOTAL
EXPENDITURE
Theabovescheduleisshowingpositiverelationshipbetweenpriceandtotalexpenditurewhichis
representinglesselasticdemand
Intheabovediagramverticaltendencyofdemandcurveisrepresentinglesselasticdemand.
(iii)Ifthepricechangesbutthetotalexpenditureremainsamethenelasticityofdemandbecome
equaltounity.(Ed=1)
PRICE
QUANTITY
DEMANDED
TOTAL
EXPENDITURE
Theabovescheduleisshowingthatpriceischangingbuttotalexpenditureremainssame,which
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indicatesthatelasticityofdemandisequaltounity.
Theabovediagramisalsorepresentingelasticityofdemandisequaltoone.
2.FormulaMethod:
Prof.Altenhasgivenfollowingformulaforthemeasurementofelasticity.
Example:
PRICE
QTYDEMAND
Po4
Qo2
P12
Q13
=1/5*6/2=3/5<1
Demandislesselastic
MeasurementofPointElasticity
3.Percentagemethod:
Prof.Flexhasgivenfollowingformulaforthemeasurementofelasticityofdemand.
Ed=
Percentagechangeindemand
PercentagechangeinPrice
EXAMPLE:
Suppose10%changeinpriceofacommodityresult20%changeinitsdemand.
Ed=20%/10%
2>1
Demandismoreelastic.
4.FormulaMethod:
Elasticofdemandbetweentwocloserpointismeasuredwiththehelpoffollowingformula.
Ed=q/p*p/q
PRICE
QTYDEMAND
3.7
2.8
Here:P=4q=2
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P=0.3q=0.8
Ed=q/p*p/q
=0.8/0.3*4/2=16/3=5.3>1moreelastic
Demandismoreelastic.
GeometricalMethod:
Elasticityofdemandataparticularpointismeasuredwiththehelpofgeometricalmethod.
EdatpointE=LowerSegment/Uppersegment
ExplaintheconceptsofArcElasticityofdemandandPoint
Elasticityofdemand?alsogivemethodoftheirmeasurement?
ArcElasticityofdemand
TheelasticityofdemandbetweentwodistinctpointsexistingonademandcurveiscalledArc
elasticityofdemand
PointElasticityofdemand
TwocloserpointsexistingonademandcurveisalsoknownasPointelasticityofdemand.
DefineIncomeElasticityofdemand(EY)andCrosselasticityof
demand(Ec).Andalsodiscusstheirmethodsofmeasurement?
IncomeElasticityofDemand
Thedegreeofresponsivenessofdemandofagoodduetochangeinincomeofconsumeris
calledIncomeElasticityofDemand.
Formula:
Ey=q/y*y/q
Example:
Y
Qd
100
10
180
15
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Y=100q=10
Y=80q=5
Puttingthevalue
Ey=5/80*100/10=5/8<1
DemandisLessElastic.
CrossElasticityofDemand(Ec)
Thedegreeofresponsivenessofdemandofagood(a)duetochangeinpriceofsomeothergood
(b).
Formula:
Ec=qa/Pb*Pb/qa
Example:
Pb
Qa
10
16
12
Qa=7qa=5
Pb=6Pb=10
Puttingthevalues
7/6*10/5=70/30=2.3>1
DemandismoreElastic
LAWOFRETURNS
Q#8:Stateandexplainthelawofincreasingreturnwiththe
helpofscheduleanddiagramandalsogiveitsapplicationin
industrialsector?
INTRODUCTION:
Ineconomicactivitiesthecourseofproductionusuallypassesthroughthreedifferentstages,new
classiceconomistshavedefinedordiscussedthesestagesintheformofthreedifferentlaws.
1.LawofincreasingReturns
2.LawofDiminishingReturns
3.LawofConstantReturns
LAWOFINCREASINGRETURNS:
Differenteconomistshavedefinedthelawofincreasingreturnsindifferentwords.Butprominent
ofthemareBenham,Champan&Marshall.
STATEMENT:
Intheprocessofproductionifmoreandmoreunitsareappliedofvariablefactorskeepingother
factorsconstant,atfirstmarginalproductionincrease(becauseofimprovementinthecombination
ofvariablefactors).Thisincreasingtendencyofmarginalproductionperunitofvariablefactoris
knownasLawofIncreasingReturns.
Explanationwiththehelpofscheduleanddiagram:
TheLawofIncreasingreturnsmaybeexplainedwiththehelpoffollowingschedule&diagram.
SCHEDULE:
Unitsoffixed
factors
Unitsofvariable
factors
Totalproduction
Marginalproduction
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5acres
10
10
5acres
30
20
5acres
60
30
5acres
90
30
5acres
110
20
5acres
120
10
DIAGRAM:
Accordingtotheaboveschedule&diagram,thefirstthreeunitsMarginalProductionIncreases
whichisrepresentingLawofIncreasingReturns.
ASSUMPTIONS:
1.Atleastonefactorofproductionshouldbekeptfixed/constant.
2.Atleastonefactorofproductionshouldbekeptvariable.
3.Alltheunitsofvariablefactorareassumedhomogenous.
4.Methodsofproductionshouldbesame.
5.Thereisshortperiodunderconsideration.
6.Equalrewardshouldbegivestoeachunitofvariablefactor.
7.Thereshouldbeequalworkingperiodforeachunitofvariablefactor.
8.Thereisscopeofimprovementinthecombinationoffactor.
APPLICATION:
Accordingtoneoclassicaleconomists,thelawofincreasingreturnismostlyapplicablein
industrialsector.Followingarethemainreasonsforitsapplicationinindustrialsector.
1.Industrialproductionistakenincoveredplaces.
2.Itiseasiertosuperviseindustrialproduction.
3.Industrialproductionismostlydurableinnature.
4.Industrialproductionisquitecertaininnature.
5.Industrialproductionisnotmucheffectednegativelybynaturalclimates.
6.Itiseasierandcheaperindustrialproduction.
7.Somespecificnaturaltimeisnotrequiredforindustrialproduction.(Itdoesnotgrowbutis
obtained).
8.Therebargainingpowerisstrongforindustrialgoods.
CONCLUSION:
Accordingtosamemoderneconomistsinfactincreasing,Diminishingandconstantreturnsare
differentphasesofuniversalLawofvariableproduction.
Asontheapplicationofmoreandmoreunitsofvariablefactor,iftheCombinationgetimproved,
marginalproductionincreases.
Ontheotherhand,iftheCombinationgetsdefective,marginalproductiondecreaseeitherthe
sectorisindustrialoritisagriculture.
Q#9:StateandexplainthelawofDiminishingReturnswiththe
helpofscheduleanddiagramandalsogiveitsapplication?
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INTRODUCTION:
LAWOFDIMINISHINGRETURNS:
Differenteconomistshavedefinedthelawofincreasingreturnsindifferentwords.Butprominent
ofthemareBenham,Champan&Marshall.
DEFINITION:
Intheprocessofproductionifmoreandmoreunitsareappliedofvariablefactorskeepingother
factorconstantatfirstmarginalproductionincreaseafterreachingtoamaximumpointitremains
constantforsometimes.Ifstillmoreandmoreunitsareappliedtheirmarginalproductiontendsto
declinebecauseofappearanceofdefectiveCombinationoffactorsthisdiminishingtendencyof
marginalproductionperunitofvariablefactorisknownasLawofDiminishingReturns.
TheLawofdiminishingreturnsmaybeexplainedwiththehelpofscheduleofdiagram.
Schedule:
Unitsoffixed
factors
Unitsofvariable
factors
Totalproduction
Marginalproduction
5acres
10
10
5acres
30
20
5acres
60
30
5acres
90
30
5acres
110
20
5acres
120
10
Diagram:
Accordingtotheabovescheduleanddiagramintheunitsfrom4thtoonwardsmarginalproduction
isdecreasingwhichisrepresentingtheLawofDiminishingReturns.
ASSUMPTIONS:
Atleastonefactorofproductionshouldbekeptfixed/constant.
Atleastonefactorofproductionshouldbekeptvariable.
Alltheunitsofvariablefactorareassumedhomogenous.
Methodsofproductionshouldbesame.
Thereisshortperiodoftimeunderconsideration.
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Equalrewardshouldbegivestoeachunitofvariablefactor.
Thereshouldbeequalworkingperiodforeachunitofvariablefactor.
DefectiveCombinationoffactorhasbeenobtained.
APPLICATION:
AccordingtoneoclassicaleconomiststhelawofDiminishingReturnsismostlyapplicableto
agriculturalsector.
Followingarethemaincausesofitsapplicationinagriculturesector.
1.Agricultureproductionistakeninunsafeandopenfields.
2.Itisdifferenttosuperviseagriculturalproduction.
3.Agriculturalproductionismostlyfoundperishableinnature.
4.Itisdifficultandcostlyagricultureproduction.
5.Therebargainingpowerisquiteuncertain.
6.Agricultureproductionisverymucheffectednegativelybynaturalclimates.
7.Specifictimeperiodisrequiredtogrowagricultureproduction.
CONCLUSION:
Ontheotherhand,iftheCombinationgetdefective,marginalproductiondecreaseeitherthe
Q#10:Stateandexplainthelawofreturnswiththehelpof
scheduleanddiagramandalsogiveitsapplication?
INTRODUCTION:
LAWOFRETURNS:
Differenteconomistshavedefinedthelawofreturnsindifferentwords.Butprominentofthemare
Benham,Champan&Marshall.
DEFINITION:
Inthecourseofproductionifmoreandmoreunitsareappliedofvariablefactorskeepingother
factorconstantatfirstmarginalproductionincreasebecauseofimprovementinthecombinationof
variablefactorsafterreachingtoamaximumpointitremainsconstantbecauseofoptimum
combinationofvariablefactors.Ifstillmoreunitsareappliedthenmarginalproductiontendsto
declinebecauseofappearanceofdefectiveCombinationoffactors.Theincreasingtendency
showslawofincreasingreturn,constanttendencyshowslawofconstantreturnandthe
diminishingtendencyofmarginalproductionshowLawofDiminishingReturns.
TheLawofreturnsmaybeexplainedwiththehelpofscheduleofdiagram.
Schedule:
Unitsoffixed
factors
Unitsofvariable
factors
Totalproduction
Marginalproduction
5acres
10
10
5acres
30
20
5acres
60
30
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5acres
90
30
5acres
110
20
5acres
120
10
Diagram:
Accordingtotheabovescheduleanddiagraminfirstthreeunitsmarginalproductionincreasing
whichshowlawofincreasingreturnfrom3rdto4thunitsmarginalproductionremainconstant
whichshowslawofconstantreturnandfromunit4thtoonwardmarginalproductiondecreases
whichisrepresentingtheLawofDiminishingReturns.
ASSUMPTIONS:
Thereisascopeofimprovementinthecombinationofvariablefactor.
APPLICATION:
Accordingtoneoclassicaleconomiststhelawofincreasingreturnisapplicabletoindustrysector.
Lawofdecreasingreturnapplicableonagriculturesectorandlawofconstantreturnisapplicable
onbothsectors.
CONCLUSION:
Q#11:StateandexplaintheLawofVariableProportionwiththehelpofscheduleand
diagram?
Accordingtomoderneconomistsincreasing,constantandDiminishingReturnsareinfactdifferent
phasesofUniversallawofVariableproportion.Itiscalleduniversalbecauseitisuniversally
applicableineachsectoroftheeconomyeitherindustrialoragricultural.
DifferenteconomistshavedefinedthelawofVariableproportionindifferentwords.ButProminent
ofthemareSimuelson&Ryan.DEFINITION:
InthecourseofproductionifmoreandmoreunitsareappliedofaVariablefactor,keepingother
factorConstant.Atfirstmarginalproductionincreasesbecauseofimprovementinthe
Combinationofvariablefactors.Afterreachingtoamaximumpointitbeginstodeclinebecauseof
appearanceofdefectiveCombinationoffactorsevenafterbecomingzeroandbecomesnegative.
ThistendencyofvariationinmarginalproductionisknownasLawofVariableProportion.
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ACCORDINGTOSIMUELSON:
Anincreaseinsome(Variable)input(factors)relativetoothercomparativelyfixedininputwill
Causeoutputtoincreasebutafterapointtheextraoutputresultingfromthesomeadditionof
inputwillbecomelessandless.
Itmaybeexplainedwiththehelpofscheduleanddiagram.
SCHEDULE:
UNITSOF
FIXED
FACTOR
UNITSOF
VARIABLE
FACTOR
TOTAL
PRODUCTION
AVERAGE
PRODUCTION
MARGINAL
PRODUCTION
5acres
10
10
10
5acres
30
15
20
5acres
60
20
30
5acres
80
20
20
5acres
90
18
10
5acres
90
15
5acres
80
11.4
10
ASSUMPTIONS:
Thereisscopeofimprovementinthecombinationoffactor.
EXPLATION:
ThelawofVariableProportionmaybeexplainedinthreedifferentstagesasdescribedbelow.
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1STSTAGE:
Inthe1STstagemarginalproductionincreaseswhiletotalproductionincreasebyincreasing
production.Averageproductionalsoincreasesbylesserproportionascomparetoincreasein
marginalproduction.
2NDSTAGE:
Inthe2ndstagemarginalproductiondecreasesbutitremainpositive.Itthisstagetotalproduction
increasesbydecreasesproportion.MarginalproductionintersectstotheAverageproductionat
thehighestpointofAverageproduction.
3rdSTAGE:
ThisstagemarginalproductionbecomesnegativewhilebothtotalproductionandAverage
productionusetodecreasebutremainpositive.
FIRMS
Q#:12:DefinePerfectCompetitionandexplainHowpriceandoutputisdeterminedundera
perfectcompetition?
OR
Q#:Explainequilibriumofafirmunderperfectcompetition?
PerfectCompetition:
Itisamarketsituationinwhichalargeno.ofsmallfirmsproducehomogeneousgoodsandsell
theirproductsinthemarketatsameprice.Thereisfreeentryandexitoffirmsinmarket.The
priceisdeterminedinmarketwithequilibriumofdemandandsupplyofthatcommodityinmarket.
Everyfirmispricetakerandnotpricemaker.Thetransportationcostisalmostzero,whichdoes
notaffectthemarketprice.
Characteristics:
Thereislargeno.ofbuyersinthemarket.
Thereislargeno.ofsellersinthemarket.
Thereisfreeentryandexitinthemarketforfirms.
Samepriceofacommodityprevailsinthe
Thepriceisdeterminedinmarketwithequilibriumofdemandandsupplyofthat
commodityinmarket.
Everyfirmispricetakerandnotpricemaker
Thetransportationcostisalmostzero,whichdoesnotaffectthemarketprice
Nofirmcanaffectmarketpricebyitsindividualbehavior.
Determinationofprice:
Incaseofperfectcompetitionpriceofcommodityisdeterminedinmarketwithequilibriumof
demandandsupplyofcommodityinmarket.
Asthepriceremainssametherefore,
Price=AR=MR
Determinationofoutput:
Followingarethetwodifferentmethodsfordeterminingoutputinperfectcompetition
Totalcostandtotalrevenuemethod:
Theoutputatwhichthereismaximumdifferencebetweentotalcostandtotalrevenuewillbethe
bestoutputasshownbelow.
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AccordingtotheabovediagramOQisthebestoutputbecauseitgivesmaximumdifference
betweenTR&TC.
Marginalcostandmarginalrevenuemethod:
Accordingtothismethodfollowingaretheconditionsofequilibrium.
MC=MR
MCshouldcutMRfrombelow.
AccordingtoabovediagrampointEfulfillsbothconditionsthereforeOQistheoutput.
CasesofshortrunEquilibrium:
Therearefourcasesofshortrunequilibrium
Supernormalprofit(AR>ACorTR>TC)
NormalProfit(AR=ACorTR=TC)
Lossminimizing(AR
Shutdownpoint(AR
Supernormalprofit(AR>ACorTR>TC):
AtthatequilibriumofafirmearnssupernormalprofitwhereAR>AC&TR>TC
Itmaybeexplainedwiththehelpoffollowingdiagram.
Accordingtotheabovediagram,EistheequilibriumpointthereforeOQisthebestoutput.At
thispoint
AR=EQAC=E1Q AR>AC
TR=OPEQTC=OP1E1Q TR>TC
Thereforesupernormalprofit=PEE1P1asshownbyshadedareainthediagram.
NormalProfit(AR=AC&TR=TC):
Atthatequilibriumafirmearnsnormalprofit.Itmaybeexplainedwiththehelpofdiagram.
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thispoint
AR=EQAC=EQ AR=AC
TR=OPEQTC=OPEQ TR=TC
Lossminimizing(AR
Atthispointafirmsuffersminimumlossitmaybeexplainedwiththehelpoffollowingdiagram.
thispoint
AR=EQAC=E1Q AR<AC
TR=OPEQTC=OP1E1Q TR<TC
Thereforeminimumloss=PEE1P1asshownbyshadedareainthediagram.
Shutdownpoint(AR
Atthisequilibriumafirmfoundatshutdownpoint.Itmaybeexplainedwiththehelpoffollowing
diagram.
Accordingtotheabovediagram,
AR=EQAC=E1Q AR<AC
TR=OPEQTC=OP1E1Q TR<TC
Thereforefirmisatshutdownpoint,theloss=PEE1P1asshownbyshadedareainthediagram.
LongrunEquilibrium:
Overalongperiodoftimenumberoffirms,sizeoffirmsandmethodofproductioncanbe
changed,thereforeeveryfirmcanearnonlynormalprofit.Itmaybeexplainedwiththehelpof
diagram.
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Accordingtotheabovediagram,
LAR=EQLAC=EQ LAR=LAC
LTR=OPEQLTC=OPEQ LTR=LTC
Q#13:Definemonopolyexplainhowpriceandoutputis
determinedundermonopoly?
Monopolyisamarketsituationinwhichthereisasingleproducerorsellerofacommodityin
marketthereisnoclosesubstitutionofthatcommodityinthemarket.Nootherfirmisallowedto
enterintothemarket.Thefirmispricemakernotapricetaker.
Characteristics:
Thereisasingleproducerorsellerinmarket
Thereisnoclosesubstitutioninmarket.
Thereisnocompetitioninthemarket.
Nootherfirmisallowedtoenterintothemarket.
Thefirmrepresentssindustryinthemarket.
Thefirmispricemakernotapricetaker.
DeterminationofOutput:
Followingarethedifferentmethodsofoutput.
1.TRandTCmethod
2.MCandMRmethod.
TRandTCmethod:
bestoutput.SoOQisthebestoutput.
MC=MR
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AverageRevenue(AR)representsprice,therefore,accordingtopreviousdiagramatOQisoutput.
AR=E1QorPrice=E!Q
Therefore,E1QwillbethepriceorOP1willbetheprice
Casesofshortrunequilibrium:
Followingarethedifferentshortrunequilibriumcases.
Supernormalprofit
Normalprofit
Lossminimizing.
Supernormalprofit:
Atthatequilibriumafirmearnssupernormalprofit
WhereAR>ACORTR>TCwhichisshowninthefollowingdiagram.
thispoint
AR=E1QAC=E2Q AR>AC
TR=OP1E1QTC=OP2E2Q TR>TC
Thereforesupernormalprofit=P1E1E2P2asshownbyshadedareainthediagram.
Normalprofit:
Afirmearnsnormalprofitattheequilibriumwhere
AR=ACandTR=TC,itmaybeexplainedwiththehelpofdiagram
thispoint
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AR=E1QAC=E1Q AR=AC
TR=OP1E1QTC=O1PE1Q TR=TC
Thereforefirmisearningnormalprofit.
Lossminimizing:
AfirmsuffersminimumlossatthatequilibriumwhereAR
thispoint
AR=E2QAC=E1Q AR<AC
TR=OP2E2QTC=OP1E1Q TR<TC
Thereforeminimumloss=P1E1E2P2asshownbyshadedareainthediagram.
Longrunequilibrium:
Incaseofmonopolyoveraperiodoflongtimeafirmmostlyearnssupernormalprofit.Itmaybe
explainedwiththehelpoffollowingdiagram.
thispoint
LAR=E1QLAC=E2Q LAR>LAC
LTR=OP1E1QLTC=OP2E2Q LTR>LTC
Q#14:Definemonopolisticcompetitionandalsoexplain
equilibriumofafirmundermonopolisticcompetition?
MonopolisticCompetition:
Monopolisticcompetitionisamarketsituationinwhichrelativelylargenumbersofsmallfirms
producesandsellaproductwiththeiridentity.
Infact,monopolisticcompetitionisablendofmonopolyandperfectcompetition
Characteristics:
Followingarethemaincharacteristicsofmonopolisticcompetition.
Relativelylargenumberofsmallfirms
Productdifferentiation
Relativelyeasierentryandexitoffirm
Rollofadvertisement&publicity
Stiffcompetition
Relativelylessercontrolonprice
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Relativelymoreelasticdemand.
DeterminationofOutput:
Followingarethedifferentmethodsofoutput.
3.TRandTCmethod
4.MCandMRmethod.
TRandTCmethod:
bestoutput.SoOQisthebestoutput.
MC=MR
AverageRevenue(AR)representspricetherefore,accordingtopreviousdiagramatOQisoutput.
AR=E1QorPrice=E!Q
Therefore,E1QwillbethepriceorOP1willbetheprice
Casesofshortrunequilibrium:
Followingarethedifferentshortrunequilibriumcases.
Supernormalprofit
Normalprofit
Lossminimizing.
Supernormalprofit:
Atthatequilibriumafirmearnssupernormalprofit
WhereAR>ACORTR>TCwhichisshowninthefollowingdiagram.
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thispoint
AR=E1QAC=E2Q AR>AC
TR=OP1E1QTC=OP2E2Q TR>TC
Normalprofit:
Afirmearnsnormalprofitattheequilibriumwhere
AR=ACandTR=TC,itmaybeexplainedwiththehelpofdiagram
thispoint
AR=E1QAC=E1Q AR=AC
TR=OP1E1QTC=O1PE1Q TR=TC
Thereforefirmisearningnormalprofit.
Lossminimizing:
AfirmsuffersminimumlossatthatequilibriumwhereAR
thispoint
AR=E2QAC=E1Q AR<AC
TR=OP2E2QTC=OP1E1Q TR<TC
Thereforeminimumloss=P1E1E2P2asshownbyshadedareainthediagram.
Longrunequilibrium:
Incaseofmonopolyoveraperiodoflongtimeafirmmostlyearnssupernormalprofit.Itmaybe
explainedwiththehelpoffollowingdiagram.
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thispoint
LAR=E1QLAC=E2Q LAR>LAC
LTR=OP1E1QLTC=OP2E2Q LTR>LTC
Q#15:Criticallyexaminemarginalproductivitytheoryof
distribution.?
OR
Criticallyexaminemarginalproductivitytheoryofpricingoffactors?
Introduction:
Classical,neoclassicalandmoderneconomistshavegivendifferenttheoriesaboutpricingof
factorsthetheorygivenbyneoclassicaleconomistsisgenerallyknownasmarginalproductivity
theoryofdistribution.Differenteconomistshavedefineditindifferentworks,Prominentofthem
areMarshall,Jevons,Clarketc.
Definition:
Therewardisgiventoeachunitoffactorsaccordingtomarginalproductivityoffactors,therefore
greaterrewardisgiventoeachunitofthatfactorwhichgivesgreatermarginalproductionandless
rewardisgiventoeachunitofthefactorwhichgiveslessmarginalproductivity.
Realizingthisfact,Neoclassicaleconomistshavegivenforpricingoffactors.
Equation:
MPPa/Pa=MPPb/Pb=...........MPPn/Pn
SupposepriceisRs10kg
5kg/Rs50=10kg/Rs100=............18kg/Rs180
1/10=1/10=................1/10
Schedule:
Thetheorymaybeexplainedwiththehelpoffollowingschedule.
Unitsof
Labor
MPPKg
Price/Rs
PerKg
MRPRs
Wages
10
10
100
60
10
90
60
10
80
60
10
70
60
10
60
60
10
50
60
Rs
Table:
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Accordingtotheabovescheduleanddiagramasmoreandmoreunitsoflaborarebeingapplied,
thenmarginalproductionisdecreasing.IffiveunitsoflaborareappliedtheMPis6kgtherefore
Rs60willbegiventoeachunitoflabor.
Assumption:
Followingaretheassumptionsofthetheory.
HomogeneousUnits:
Itistheassumedthatalltheunitsofvariablefactor(Labor)arehomogeneous.
FactorsareSubstitutable:
Itisalsoassumedthatdifferentfactorcanbesubstitutedtoeachother.
PerfectCompetition:
Itisalsoassumedthatthereisperfectcompetitioninfactorsmarket.
MobilityofFactors:
Itisassumedthatfactorsofproductionare,perfectlymobileormovableinotherwords,theycan
beappliedfortheproductionofoncommodityortheotherone.
DiminishingReturns:
Thetheoryassumesthatmarginalproductiondecreasesifmoreandmoreunitsoffactorsare
applied.
ElasticSupplyofFactors:
Thetheoryassumesthatthesupplyoffactorsisperfectlyelastic.
Criticism:
Followingarethemaincriticismagainstmarginalproductivitytheory.
UnrealisticAssumptions:
Assumptionsofthistheoryarequiteunrealistic.
NoHomogeneous:
Thetheoryassumeshomogeneousunitsoffactorsbutpracticallyalltheunitsofafactorcannot
behomogeneous.
NoPerfectSubstitutes:
Tosomeextentthefactorsaresubstitutablebuttheyarenotperfectsubstitutetoeachother.
NoPerfectMobility:
Tosomeextentmobilityoffactorispossiblebuttheyarenotperfectlymovable.
NoPerfectCompetition:
Perfectcompetitionispracticallyfoundnowhereintheworld.
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OnlyDiminishingReturns:
Thetheoryhasjustdiscussedthetendencyofdiminishingreturnsandithasneglectedincreasing
andconstanttendencymarginalproductionwhileisunwisetoneglectit.
Independence:
Accordingtomarginalproductivitytheory,itistherewardwhichdependsuponthemarginal
productivitybutmoderneconomistsbelievethatmarginalproductionandrewardbothare
independentinotherwordsbothdependsuponeachother.
StaticTheory:
Itisastatictheorywhichisnotapplicableinthisdynamicage.
Q#16:CriticallyexamineKeynesiantheoryofinterest?
Or
Criticallyexaminetheliquiditypreferencetheoryof
interest?
Introduction:
Interestistherewardwhichispaidagainsttheservicesofcapital.Differenteconomisthavegiven
differenttheoriesofinterest.Keynesisamongmoderneconomist,thetheorygivenbyhimis
generallyknownas
Keynesiantheoryofinterestorliquiditypreferencetheoryofinterest.
Keynestheory:
AccordingtoKeynes:
Interestistherewardforpartingwiththeliquidityofmoneyforaspecificperiodoftimeandthe
rateofinterestisdeterminedwiththeequilibriumofdemandandsupplyofmoney.
Demandofmoney:
Peoplewanttokeepsomemoneywiththemfortransactionmotive,businessmotive,
precautionarymotiveandspeculativemotive.Itisknownasdemandofmoney.
Transactionalmotive:
Peoplewanttokeepsomemoneywiththemincashformtomeettheirdailyneedslikepurchase
ofvegetables,meatandbread.
Businessmotive:
Individualandfirmsalsokeepsomemoneywiththeminliquidformfortheirbusinessneedlike
thepurchaseofrawmaterial,paymentofwages,bills.
Precautionarymotive:
Somemoneyisalsokeptbypeopletofacethesituationofemergencylikeaccident,breakdown
ofmachinery,businessslumpetc.
Speculativemotive:
Somemoneyisalsokeptbypeopleforspeculativemotiveforpurchaseofshares,bonds,
securities.
Relationshipbetweenrateofinterestanddemandof
money
AccordingtoKeynesthedemandofmoneyforspeculativemotiveisnegativelyrelatedwiththe
rateofinterest.
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Supplyofmoney:
Thesupplyofmoneydependsuponmetallicreserves,monetarypolicyandbankingsystemofthe
country.InhistheoryKeyneshasassumedshortperiodoftimeandhebelievesthatincaseof
shortperiodthesupplyofmoneyremainsinelastic.
Determinationofrateofinterest
AccordingtoKeynes
Therateofinterestisdeterminedwiththeequilibriumofdemandandsupplyofmoneyasshown
inthefollowingscheduleanddiagram.
RateofInterest
DemandofMoney
SupplyofMoney
5%
60
40
10%
50
40
15%
40
40
20%
30
40
25%
20
40
Accordingtotheaboveschedule&diagramat15%rateofinterestdemandandsupplyofmoney
areequal.Thereforethisrateofinterestwillbedeterminedinthemarket.
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Effectonrateofinterestofchangeindemandof
money
Accordingtotheabovediagram,increaseindemandofmoneyresultincreaseinrateofinterest
anddecreaseindemandofmoneyresultdecreaseinrateofinterest.
Effectonrateofinterestofchangeinsupplyof
money
Accordingtotheabovediagramincreaseinsupplyofmoneyresultdecreaseinrateofinterest
anddecreaseinsupplyofmoneyresultincreaseinrateofinterest.
Criticism:
1.Keyneshasassumedshortperiodoftimeandhehasdiscussednothingaboutlongperiod.
2.Keyneshasnotgivencleanpictureaboutsupplyofmoneyassometimesheincludes
creditmoneyinsupplyofmoneyandsometimeshedoesnotincludeitinsupplyof
money.
3.Keyneshasgivenimportancetodemandandsupplyofmoneybuthehasneglectedthe
forceswhichworkbehindsaving
4.AccordingtosomemoderneconomistlikeHick,HansomlikeKeyneshastriedtoputold
wineinnewbottle.
Q#17:CriticallyExaminesRecardianTheoryofRentOr
Criticallyexamineclassicaltheoryofrent?
Introduction:
Rentistherewardwhichispaidagainsttheservicesofland,differenteconomistshavegiven
differenttheoriesofrent.
Ricardoisamongclassicaleconomists,thetheorygivenbyhimisgenerallyknownasRecardian
TheoryofRent.
Definition:
AccordingtoRicardo
Rentisthatpartofproductionofland,whichispaidtothelandlordagainsttheuseoftheoriginal
andindestructiblepowerofthesoil.Asthefertilityofdifferentgradesoflandisdifferent,therefore
thedifferenceofproductionofalandwiththeproductionofmarginallandistreatedastherentof
thatland.
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Example:
Ricardohasexplainedhistheorybygivingtheexampleofanewlypopulatedcountryhavingfour
gradesoflandA,B,CandlandD.whileAlandismostfertileandlandDisleastfertile.Atfirst
peoplewillcultivatelandA.withtheincreaseinpopulationtheywillbringunderthecultivation
landB,CandthenlandDaccordingtotheincreasingtendencyofpopulationandprice.IflandD
justcoversitscostthenitwillbetreatedasmarginallandandnorentwillbechargeonland
D.Therentofothergradesoflandwillbedeterminedbycomparingtheirproductionwiththe
productionofmarginalland,asshowninfollowingschedule.
Schedule:
Marginalproductionandgradesofland.
UnitsofInput(Lab
&Capital)
LandA
LandB
LandC
LandD
3515
3010
255
20
3010
255
255
20
Rent
20
MarginalLand
20
30
15
NoRent
Formula:
Totalproductionofland=(MP*Units)
RentoflandA=35+30+25+20(20*4)
=11080
=30
Similarly,wecancalculaterentofeachgradeofland.
Accordingtotheabovediagram,theshadedareaisrepresentingtherentofdifferentgradesof
land.
Assumptions:
FollowingarethemainassumptionofRicardiantheory.
Differenceoffertility:
Differentlandshavedifferentfertility,somearemorefertileandsomearelessfertile.
Perfectcompetition:
Thistheoryisbasedontheassumptionofperfectcompetition.
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NoRentLand:
Thelandwhichjustcoversitscostofcultivationiscalledasnorentland(MarginalLand).
Knowledgeoffertility:
Ricardoassumesthatpeopleknow,whichlandismorefertileandwhichislessfertile.
Originalandindestructiblequality:
Itisassumedthatfertilitypoweroflandisoriginalandindestructible.
Agradelandfirst:
ItisassumedthatfarmersprefertouseAgradelandfirst.
Diminishingreturns:
Itisalsoassumedthatmarginalproductiondecreasesasmoreandmoreunitsareapplied.
Criticism:
Maincauseofrent:
AccordingtoRicardo
Causeofrentisthedifferenceofproductivityofsoil,whileaccordingtothemoderneconomists
maincauseofrentisthescarcityofthesoil.
Noperfectcompetition:
Thetheoryassumesperfectcompetition,butperfectcompetitionisfoundnowhereintheworld.
Nomarginalland:
Ricardohasgiventheconceptofmarginallandbutpracticallyitisfoundnowhereintheworld.
Noperfectknowledgeoffertility:
Farmersaremostlyawareofthefertilityofthesoilalittlebitbutperfectknowledgeaboutfertility
isnotpossible.
Nooriginalandindestructiblepower:
Accordingtomoderneconomists,thereisnooriginalandindestructiblepowerofthesoil.The
fertilitymayincreaseordecreasetimetotime.
Agradelandisnotpreferred:
ItiswrongtoassumethatAgradelandiscultivatedfirst.Inthemodernworldthelandnearestto
themarketiscultivatedfirstinsteadofAgradeland.
Increasing&Constantreturnhavebeenignored:
Ricardohasdiscussedthediminishingtendencyofmarginalproductionwhilehehasignored
increasingandconstanttendenciesofmarginalproduction.
Rentisapartofcost:
Ricardohasnotincludedrentinthecostofproductionbutinrealsense,rentisapartofcostand
itcannotbeseparated.
Roleofhumanstruggleinfertility:
HumanstruggleplaysanimportantroleinthefertilitybutRicardohasignoredit.
Noneedtoseparatetheory:
Accordingtomoderneconomists,demandandsupplytheoryissufficienttodeterminedrentand
thereisnoneedofseparatetheoryforthedeterminationofrent.
Q#18:DefineNationalIncome,Discussmethodsofitsmeasurementandalsostatethe
problemsofmeasurementofN.I.
Ans:Introduction:
DifferenteconomistshavedefinednationalincomeindifferentwordsprominentofthemareAlfred
Marshall,Pigou,Fisher,Campbell,Kuznat,SamuelsonandAckley.
AccordingtoCampbell:
Totalmarketvalueofallfinalgoodsandservicesproducedinacountryduringoneyeariscalled
NationalIncome.
AccordingtoAckley:NationalIncomeisnothingmorethanthesumofallindividualincomes.
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AccordingtoSamuelson:
Itistheloosenamewegiveforthemoneymeasureoftheoverallannualflowofthegoodsand
servicesinaneconomy.
ConceptofNationalIncome:
FollowingaretheconceptsofNationalIncome,GNP,NNP,GDP,NDP,NI,PI,andDPI.
Methodsofmeasurement:
Thefollowingarethemethodsofmeasurement
1.Productivemethod
2.Incomemethod.
3.Expendituremethod.
Productmethod:
Accordingtothismethodnationalincomecanbemeasuredbysummingupthetotalmarketvalue
ofallfinalgoodsandservicesproducedinacountry.
Itmaybeexplainedwiththehelpoffollowingexample.
Number
Netvaluein
(billionRs.)
Sector
Agriculture
60
Manufacturing
40
Smallenterprises
20
Transport&communication
30
Commerce&trade
10
Mining
20
Services
50
230
Precautions:
Toavoiddoublecountingonlyfinalorfinishedgoodsareincluded.Finalgoodsarethosewhich
arepurchasedbyconsumersforfinaluse.Depreciationcostisnotincluded.
Incomemethod:Nationalincomecanalsobemeasuredbytakingthesumoftotalincomeofall
thefactorsofproductionofacountryduringoneyear.
Example:
Sourcesofincome
(BillionRs.)
Wagesoflabor
80
Rentofland
50
Interestofcapital
20
Profitoforganizations
40
Corporateprofit(JSC)
10
IndirectTax
30
230
Precautions:
Transferpayment:Transferpaymentsarenotincludedinnationalincomelike
zakat,charity,pensionetc.
Incomefromillegalsources:Incomefromillegalsourcesisalsonotincludedlike
incomefromtheftorbribery.
Depreciationcost:Depreciationcostalsonotincludedinnationalincome.
Totalexpendituremethod:
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Nationalincomecanbemeasuredbytakingthesumoftotalexpenditures,whichareincurred,in
acountryduringoneyear.
Example:
NatureorheadofExpenditure
Amount
(BillionRs.)
Privateconsumptionexpenditure
60
Privateinvestmentexpenditure
50
Govt.productiveexpenditure
40
Govt.nonproductiveexpenditure
30
Exportsurplusie(XM)
50(9040)
230
Income=Y=C+I+G+(XM)
Y=60+50+(40+30)+(9040)
Y=230
Precautions:
Expendituresshouldbecountedonce.
Theexpenditureonthepurchaseofsecondhandgoodsshouldnotinclude.
DifficultiesinmeasurementofNationalIncome:
Followingarethedifficultiesofnationalincomediscussasunder:
Unpaidservices
Bartersystems
Foreignfirms
Inadequatestatisticaldata
Lackoftrainedstaff
Habitofkeepingnoaccount
Morethanonejob.
Cottageindustry
Noncooperationofpeople
Taxevasion(escapefromtax)
Q#19DefineNationalIncome,Alsogiveconceptsof
NationalIncome?
Introduction:
AccordingtoCampbell:
Totalmarketvalueofallfinalgoodsandservicesproducedinacountryduringoneyeariscalled
NationalIncome.
AccordingtoAckley:
NationalIncomeisnothingmorethanthesumofallindividualincomes.
AccordingtoSamuelson:
Itistheloosenamewegiveforthemoneymeasureoftheoverallannualflowofthegoodsand
servicesinaneconomy.
GrossDomesticProduct(GDP):
GDPisthemarketvalueofallfinalgoodandservicesproducedwithinthegeographical
boundariesofacountryduringoneyear.InGDPforeignremittancearenotincluded,howeverthe
incomesofforeignfirmsmustbeincludedforexampleBATAisaforeignfirm,itsproductionand
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incomeinPakistanwillbeincludedintheGDPofPakistan,thoughaportionofprofitistaken
abroadbythefirm.
GDP=GNPForeignremittance+Incomeof
foreignfirms
Example:(forallconceptsofnationalincome)
(Suppose)
GrossNationalProductGNP400M.$
GrossDomesticProductGDP320
Incomeofforeignfirms(takenabroad)40
Foreignremittance120
Depreciationcost30
Indirecttaxes50
Govt.subsidies10
Transferincomes70
Corporateprofit60
Undistributedprofit20
Socialsecuritycontribution15
Personaltaxes55
GDP=GNPForeignremittance+Incomeofforeignfirms
400120+40
GDP=320M.$
NetDomesticProduct(NDP):
Ifthedepreciationexpenditurearedeductedfromgrossdomesticproduct,thenwegetNet
DomesticProduct.
NDP=GDPDepreciationcost
NDP=32030
=290
GrossNationalProduct(GNP):
ItisthewidertermofnationalincomeascomparedtoGDP.
GNPofacountryforaparticularyearisthesumofthemarketvalueofallfinalgoodsand
servicesproducedfrotheconsumptionandinvestmentpurposeofthatcountry.
InGNPforeignremittancesarealsoincludedwhileincomeofforeignfirmstakenabroadisnot
included.
GNP=GDP+foreignremittancesincomeofforeignfirmstakenabroad
GNP=320+12040
GNP=400
NetNationalProduct:
IfdepreciationexpenditurearedeductedfromGNPthenwegetNNP.
NNP=GNPDepreciationcost
NNP+40030
NNP=370M
NationalIncome:
TotalincomeinfactisnotdistributedamongthefactorsasaportionistakenbytheGovt.inthe
formoftaxeswhilesometimesGovtgivessubsidies.
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IfGovttaxesaredeductedandGovtsubsidesareincludedinNNPthenwegetNI.
NI=NNPGovtTaxes+GovtSubsides
NI=37050+10
NI=330
PersonalIncome:
Personalincomereferstotheaggregateofallincomesactuallyreceivedbyallfactorsof
productionintheformofwage,rent,interest,profit.Transferincomesalsoincludedinpersonal
income,howevercorporateprofit,undistributedprofitandsocialsecuritycontributionisnot
includedinpersonalincome.
P.I=N.I+TranferIncomes(corporateprofit+undistributedprofit+sscontribution)
P.I=330+70(60+20+15)
P.I=305
Disposablepersonalincome(DPI):
Ifpersonaltaxesaredeductedfrompersonalincomethenweget(DPI).Infactitistheamount
whichpeoplecandisposeoffaslike.
DPI=P.IPersonaltaxes
DPI=30555
DPI=250
Q#20:DefineNationalIncome.ExplaintheCircularFlowofnationalIncomewiththehelp
ofdiagram.
Introduction:
AccordingtoCampbell:Totalmarketvalueofallfinalgoodsandservicesproducedinacountry
duringoneyeariscalledNationalIncome.
AccordingtoAckley:NationalIncomeisnothingmorethanthesumofallindividualincomes.
Methodsofmeasurement:
Thefollowingarethemethodsofmeasurement
Productivemethod
Incomemethod.
Expendituremethod.
CircularFlow:
IfweobservetheNationalIncome,wecametoknowthatN.I.circulatesbetweentwosectorsin
differentforms.Thesesectorsare(i)household.(ii)Firms.ThecirculationofNationalIncome
betweenthesetwosectorsiscalledcircularflowofnationalincome.
CircularflowofN.I.maybeexplainedwiththehelpoffollowingdiagram.
ServicesofGoods
Upperhalf
Services
HouseholdFirms
Reward
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Lowerhalf
PricesofGoods
ThediagramshowsthatononesideNationalIncomemovesfromHouseholdtowardsfirmsinthe
formoftheirservices.Ontheothersideinreturnitmovesfromfirmstowardhouseholdinthe
formofrewardsoffactorsasshownbyinnercircleintheabovediagram.
Theproductionmadebythefirmsisofferedforsaletofactors(household)inreturnhouseholdgive
priceofgoodstofirmsasshownbytheoutercircleoftheintheabovediagram.
Thismovementofnationalincomefromhouseholdtofirmsandfromfirmstohouseholdin
differentformsisknownascircularflowofnationalincome.
TheabovediagramshowstwotypesofflowofNationalIncome.
(i)Realflow.
(ii)MonetaryFlow.
RealFlow:
Upperhalfofdiagramisshowingrealflowofgoodsandservicesfromonesectortoother.
MonetaryFlow:Thelowerhalfofthediagramisshowingmonetaryflowofnational
incomeintheformofrewardoffactorsandpriceofgoods.
Q#21:Definetax.Discussvariouscannotoftaxation?
TAX:
Taxisacompulsorycontributionleviedbythestateonitsindividualstomeetthedevelopment
andnondevelopmentexpenditures.
Taxiscompulsorycontributionbythepeopletothepublictreasurytomeetthegeneral
expenditureofthegovernment.
CannonsofTaxation:
Thequalitiesthatagoodtaxshouldpossessaredescribedascannonsoftaxation.AdamSmith
hasstatedfourcannonsoftaxationontheadministrativesideofpublicfinance.Accordingtohim,
agoodtaxisonewhichcontains
1.Thecannonofequality
2.Thecannonofcertainly
3.Thecannonofconvenience
4.Thecannonofeconomy
1.Thecannonequality:
Thisisthemostimportantprincipaloftaxation.Itmeansthatthereshouldbejustice.Theburden
oftaxshouldbeequaloneverytaxpayer.Equalburdendoesnotmeanthattheamountofthis
taxisequal.Itmeansthatthereshouldbeequalsacrificeandeveryoneshouldpaytaxaccording
tohisability.Richshouldpaymorethanthepoor.
2.Thecannonofcertainty:
Thiscannonimpliesthatthetaxwhicheachindividualisboundtopayshouldbecertainandnot
arbitrary.Thetimeofpayment,themodeofpayment,theamounttobepaidshouldclearsothat
hemayadjusthisexpendituresaccordingly.
3.Thecannonofconvenience:
Accordingtothiscanon,thereshouldbeappropriatetimingsoftaxcollection.Methodofrecording
paymentsshouldalsobeeasyandconvenienttothetaxpayers.Forexample,ifthetaxcanbe
paidthroughcheque,itwillbeconvenient.Ifthetaxpayerhastogotoanofficemanytimes,itwill
beinconvenient.
4.Thecannonofeconomy:
Ifthecostofcollectionofataxissmall,itiscalledeconomical.Ifthereisataxinwhich
taxpayershavetolargeamountsbutonlyasmallamountgoestothegovernmenttreasurydueto
heavysalariesofstaff,thentaxisnoteconomical.Thecostoftaxcollectionshouldbethe
minimum.
Otherscannonsoftaxation:
5.Cannonofproductivity:
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Thecannonofproductivityimpliesthatataxshouldbringsufficientrevenuetothegovernment.A
fewtaxesbringinglargerevenuearebetterthanmanytaxeseachbringingverysmallsum.
6.CannonofElasticity:
Cannonofelasticitystatesthattheamountcollectedshouldincreaseordecreaseaccordingto
theneedsofthegovernment.InPakistan,incometaxandcustomdutyareelasticbecausealittle
increaseintheirratescanbringinlargeamountofadditionalrevenue.
7.CannonofSimplicity:
Thetaxstructureshouldbesimplesothatthepeoplecaneasilyknownwhohastopaythetax
andhowmuch.Thetaxpayershouldbeabletocalculatetheamountoftaxandpayit
conveniently.
8.CannonofDiversity:
Asingletaxisnotdesirable.Thereshouldbevarioustypesoftaxes,othatallclassesofpeople
havetopaysomeamount.Inthisway,allpeoplecancontributetothestaterevenue.
9.HarmlessforEconomicsIncentives:
Thenatureandrateoftaxshouldbesuchthatitdoesnothavebadeffectsonpeoplesincentives
foreconomicefforts.
10.CannonofUniformity:Thetaxsystemshouldbeuniformandnotarbitrary.Forexample,if
peopleofLahorehavetopayhigherrateofincometaxthenthepeopleofothermajorcities,the
taxwillnotbeuniform.
Q#10(a)Stateandexplainthelawsofcostwiththehelpofscheduleanddiagram?
INTRODUCTION:
1.LawofincreasingReturnsorDiminishingcost
2.LawofDiminishingReturnsorincreasingcost
3.LawofConstantReturnsorconstantcost
LAWOFCOST:
Differenteconomistshavedefinedthelawofcostindifferentwords.Butprominentofthemare
Hanson,StainleyBenham,Champan&Marshall.
DEFINITION:
Inthecourseofproductionifmoreandmoreunitsareappliedofvariablefactorskeepingother
factorconstantatfirstmarginalcostdecreasesbecauseofimprovementinthecombinationof
variablefactorsafterreachingtoamaximumpointitremainsconstantbecauseofoptimum
combinationofvariablefactors.Ifstillmoreunitsareappliedthenmarginalcosttendstodecline
becauseofappearanceofdefectiveCombinationoffactors.Thisdiminishingtendencyofmarginal
costrepresentlawofdiminishingcost,constanttendencyshowslawofconstantcostandthe
increasingtendencyofmarginalcostshowsLawofincreasingcost.
TheLawofreturnsmaybeexplainedwiththehelpofscheduleofdiagram.
Schedule:
Unitsof
fixed
factors
Unitsof
variable
factors
Total
production
Marginal
production
Marginal
cost
Reward/unitsof
variablefactor
5acres
10
10
100/10=10
100
5acres
30
20
100/20=5
5acres
60
30
100/30=3.3
5acres
90
30
3.3
5acres
110
20
5acres
120
10
10
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Diagram:
Accordingtotheabovescheduleanddiagraminfirstthreeunitsmarginalcostisdecreasing
whichshowlawofdecreasingcostin3rd&4thunitsmarginalcostremainconstantwhich
showslawofconstantcostandfromunit4thtoonwardmarginalcostisincreasingwhichis
representingtheLawofincreasingcost.
ASSUMPTIONS:
Thereisascopeofimprovementinthecombinationofvariablefactor.
APPLICATION:
Accordingtoneoclassicaleconomiststhelawofdecreasingcostisapplicabletoindustrysector.
Lawofincreasingcostismostlyapplicablefortheproductionofthosegoodsinwhichboth
industryandagriculturesectorareusedlikesugar,carpet&textileindustry.
CONCLUSION:
PostedbyShamrozshahat1:02PM
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Top comments
S.M.Ghufran Basit 1 year ago (edited) - Shared publicly
Really
a Great & appreciable work.Make sure that diagrams are visible.
Keynesian theory of Income & Employment & the other Area of Macro are
also needed to be more informative.
Looking forward for the inclusion.
Best Regards.
1 Reply
M Sarmad Rafiq 1 year ago - Shared publicly
Great
job. Very useful for students But diagrams are not visible. Kindly make
sure there visibility
1 Reply
Imran G 1 year ago - Shared publicly

good work man but diagrams are not visible plz make sure visibility
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Marshall gave his view in his book principle

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In the modern age planning in every sector is

8. Does not Corresponds to modern

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Robbins has not neglected nonmaterial

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