Notes

URP 1157: Principal of Economics: Fatema Tuj Johora
Department Of Urban Planning: Khulna University Bangladesh

Political economy (Mode of production)
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of
production (in German: Produktionsweise, meaning 'the way of producing') is a specific
combination of:
Productive forces: these include human labour power and means of production (e.g. tools,
equipment, buildings, technologies, knowledge, materials, and improved land).
Social and technical relations of production: these include the property, power, and control
relations governing society's productive assets (often codified in law), cooperative work
relations and forms of association, relations between people and the objects of their work,
and the relations between social classes.
Marx regarded productive ability and participation in social relations as two essential
characteristics of human beings and that the particular modality of these relations
in capitalist production are inherently in conflict with the increasing development of human
productive capacities
Means of Production:
In economics and sociology, the means of production are physical, non-human inputs used in
production, such as machinery, tools and factories, infrastructural capital and natural capital.
The means of production has two broad categories of objects: instruments of labour (tools,
factories, infrastructure, etc.) and subjects of labor (natural resources and raw materials). If
creating a good, people operate on the subjects of labor, using the instruments of labor, to create
a product; or, stated another way, labour acting on the means of production creates a good.
In an agrarian society the means of production is the soil and the shovel. In an industrial
society it is the mines and the factories, and in a knowledge economy the offices and computers.
In the broad sense, the "means of production" includes the "means of distribution" such as stores,
the internet and railroads.
Ownership of the means of production and control over the surplus product generated by their
operation is a key factor in categorizing different economic systems. In classical economics the
means of production is the "factors of production" minus financial capital and minus human
capital.
Different method of calculating National Income:
There are mainly Three Approaches to measure GNP.
2.1 Output or value added approach: The total value of all final goods and services (i.e.
outputs) can be found out by adding up the total values of outputs produced at different stages of
production .This method it to avoid the so called double-counting or an over-estimation of GNP.
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However, there are difficulties in the collection and calculation of data obtained; caution should
be taken to take Final Goods not Intermediate goods as it will result in Double Counting.
For example in a Cycle Manufacturing Unit, computing the

total value of cycles produced in a year the final value of the
cycle (Multiplied by total no of units produced) which is
ready to be marketed for sale will be taken not the cost of
intermediate goods which are used in the process of
manufacture as it will result in double counting. I.e. The
market price of a cycle is suppose Tk.2000 which includes
say profit margin of Tk.200 besides the cost of
manufacturing of Tk.1800. This 1800 includes all costs
including components and parts etc. (these are intermediate
goods which are used in the process of production.)If the
costs of parts etc. are also taken while computing final value
of total units produced, it will give inflated figure and hence
result in double counting error. Same way at macro level,
while computing the National Income under Value Added
Method the value of final goods and services should be
taken up to avoid the double counting error as the cost of
Intermediate Goods are already counted in the final value of
the product.
2.2. Expenditure approach: Amount of Expenditure refers to all spending on currentlyproduced final goods and services only in an economy. In an economy, there are three main
agencies which buy goods and services. These are: Households, Firms and the Government. In
Economics, we use the following Terms:
C = Private Consumption Expenditure (of all Households)
I = Investment Expenditure (of all firms)
G = Government Consumption Expenditure (of the local government).
In an economy the entire output which is produced in a year is not fully consumed by that
economy as some goods are exported and in the similar way the domestic consumption
(expenditure) may also include imports. Hence under the expenditure approach to measure the
GNP, the value of exports must be added to C, I and G whereas the values of imports must be
deducted from the above amount.
Finally, we have: GNP at market prices = C+I+G+X-M (Where X-M = Exports Imports)
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Gross Domestic Product (GDP):
We can only find the amount of outputs which are produced within the domestic boundary of an
economy in a specific period, say a year. To arrive at the value of GNP, Net Factor Income
Earned from Abroad (NFIA) has to be added to the GDP.
Income from abroad = income earned by local citizens form the provision of factors services
abroad.
Income to abroad = income earned by foreign citizens form the provision of factors services
locally
Net Factor Income from abroad Income earned from abroad Income sent to abroad
GNP = GDP + Net Factor Income Earned from Abroad
2.3 Income approach: The Income approach tries to measure the total flows of income earned
by the factor-owners in the provision of final goods and services in a current period. There are
four types of factors of production and four types of factors incomes accordingly i.e. Land,
Labour, Capital, and Organization as Factors of Production and Rent, Wages, Interest and Profit
as Factor Incomes correspondingly.
National Income = Wages+ Interest Income + Rental Income +*Profit
The term* Profit can be further sub-divided into; profit tax; dividend to all those shareholders;
and retained profit (or retained earnings).
3. Relevant concepts of National Income
3.1 Net National Product (NNP) The investment expenditure of the firms is made up of two
parts. One part is to buy new capital goods and machinery for production. It is called net
investment because the production capacity of the firms can be expanded. Another partconsumption allowance or depreciation- is spent on replacing the used-up capital goods or the
maintenance of existing capital goods will face wear and tear out over time. Depreciation refers
to all non-cash provision charged against profit each year to replace the fixed assets due to wear
and tear, obsolescence, destruction and accidental loss etc. The sum of these two amounts is
called Gross Investment in economics.
Gross Investment= Net investment + Depreciation
Net investment will increase the production capacity and output of a nation, but not by
depreciation expenditure. So we have, NNP = GNP-Depreciation
3.2 GNP at Factor Cost: The amount of National Income calculated under the Income
Approach will not be the same as the amount of GNP at market prices found by the expenditure
approach. In the expenditure approach, the value of GNP included some types of expenses which
are not factor incomes earned by the citizens. They include depreciation, indirect business taxes,
and government subsidies.
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GNP at factor Cost = GNP at market price = Indirect Business Taxes + Subsidies = GNP at
market price = Indirect Business Taxes less Subsidies
GNP at factor cost carries the meaning that we are measuring the total output by their costs of
production. As output generates income to the factor-owners, it is also related with the value of
national income.
GNP at factor Cost = National Income + Depreciation.
Depreciation is also a type of costs of production but will not become a source of income
directly. So it is included in the factor cost but excluded in the value of national income.
3.3 GNP (GNP at Current Market Prices) GNP is a measure based on market prices which are
expressed in terms of money. In reality, market prices changes all the time. The same amount of
outputs may different total market values provided that price change. In order to isolate the effect
of prices change on the value of GNP, economists have developed the concept and techniques of
constant market prices.
GNP at the base year (1990) = 1X 6 + 2 x 4 +2 x 2m. = 18 million
GNP at current market prices in 1995 = 1x 6 +2 x6 +3 x 4m. = 30 Million.
The 2 value of GNP at current market prices in 1995 & 2000 are calculated by using the money
prices in that year, eg. The nominal growth rate is 66.67 % between 1990 to 2000.
GNP at constant market prices of 1995 = 1 x 6 + 2 x 6 +2 x 4m. = 26 million
The real output changes from 18 to 26 million from 1990 to 1995. GNP at constant marker prices
is called real GNP. The growth rate of real GNP is called real growth rate of GNP.
Difficulties of calculating National Income:
All the countries face some special difficulties in estimating national income. Some of these
difficulties are given below:
(1) Problems of Definition: What should we include in the National Income?
Ideally we should include all goods and services produced in the course of the year, but there are
some services which are not calculated in terms of money, e.g., services of housewives.
(2) Lack of Adequate Data:
The lack of adequate statistical data makes the task of estimation of national income more acute
and difficult.
(3) Non-availability of Reliable Information:
The reason of illiteracy, most producers has no idea of the quantity and value of their output and
do not follow the practice of keeping regular accounts.
(4) Choice of Method:
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The selection of method while calculating National Income is also an important task. The wrong
method leads to poor results.
(5) Lack of Differentiation in Economic Functioning:
In all the countries the occupational specialization is still incomplete so that there is a lack of
differentiation in economic functioning. An individual may receive income partly from farm
ownership and partly from manual work in industry in the slack season.
(6) Double Counting:
Double counting is also an important problem while calculating national income. If the value of
all goods and services totaled, the total will overtake the national output, because some goods are
currently consumed being used in the making of others. The best way to avoid this error is to
calculate only the value of those goods and services that enter into final consumption.
(7) Transfer Payments
Individual get pension, unemployment allowance and interest on public loans, but these
payments creates difficulty in the measurement of national income. These earnings are a part of
individual income and they are also a part of government expenditures.
(8) Capital Gains or Loss
when the market prices of capital assets change the owners make capital gains or loss such gains
or losses are not included in national income.
(9) Price Changes
National income is the money value of goods and services. Money value depends on market
price, which often changes. The problem of changing prices is one of the major problems of
national income accounting. Due to price rises the value of national income for particular year
appends to increase even when the production is decreasing.
(10) Wages and Salaries paid in Kind
Additional payments made in kind may not be included in national income. But, the facilities
given in kind are calculated as the supplements of wages and salaries on the income side.
(11) Petty Production
there are large numbers of petty producers and it is difficult to include their production in
national income because they do not maintain any account.
(12) Public Services
Another problem is whether the public services like general administration, police, army
services, should be included in national income or not. It is very difficult to evaluate such
services.
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(13) Non-Monetary Transactions
The first problem in National Income accounting relates to the treatment of non-monetary
transactions such as the services of housewives to the members of the families. For example, if a
man employees a maid servant for household work, payment to her will appear as a positive item
in the national income. But, if the man were to marry to the maid servant, she would performing
the same job as before but without any extra payments. In this case, the national income will
decrease as her services performed remains the same as before.
Factors determining countries standard of living:
The standard of living is defined as the level of wealth experienced by a county which is
indicated by the average disposable income of the population, ownership of capital equipment,
the level of research and access to modern technology and the quality and quantity goods and
services enjoyed by citizens.
Level of goods and services available: goods and services are needed to satisfy the needs and
wants of a society.
Average disposable income: per capita GNP reveals the average amount of earnings of each
person in an economy.
Ownership of capital equipment: Capital goods/investment goods are used to create consumer
goods and services locally and for export.
Research and technology leads to innovation and increases production.
Whereas the standard of living is measured by physical quantity, a countrys quality of life is
determined by the quality of goods and services enjoyed by citizens. These include: safety (low
crime rates), good diet and nutrition, environmental quality, quality of health and educational
facilities, life expectancy, rate of infant mortality and the access to public utilities such as water.
Functions of Money:
Money is any good that is widely accepted in exchange of goods and services, as well as
payment of debts. Most people will confuse the definition of money with other things, like
income, wealth, and credit. Three functions of money are:
1. Medium of exchange: Money can be used for buying and selling goods and services. If there
were no money, goods would have to be exchanged through the process of barter (goods would
be traded for other goods in transactions arranged on the basis of mutual need). For example: If I
raise chickens and want to buy cows, I would have to find a person who is willing to sell his
cows for my chickens. Such arrangements are often difficult. But Money eliminates the need of
the double coincidence of wants.
2. Unit of account: Money is the common standard for measuring relative worth of goods and
service.
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3. Store of value: Money is the most liquid asset (Liquidity measures how easily assets can be
spent to buy goods and services). Moneys value can be retained over time. It is a convenient
way to store wealth.
Relations between inflation and unemployment:
The relationship between inflation rates and unemployment rates is inverse. Graphically, this
means the short-run Phillips curve which is L-shaped.
The Phillips curve relates the rate of inflation with the rate of unemployment. The Phillips curve
argues that unemployment and inflation are inversely related: as levels of unemployment
decrease, inflation increases. The relationship, however, is not linear. Graphically, the short-run
Phillips curve traces an L-shape when the unemployment rate is on the x-axis and the inflation
rate is on the y-axis.
The Phillips Curve is a graph that illustrates the observed relationship between the inflation rate
and the unemployment rate. It is a downward sloping curve, indicating that a trade-off exists
between inflation and unemployment. This has important implications for government policies
that attempt to achieve economic stability. Expansionary policies may reduce unemployment at
the expense of higher inflation. Contractionary policies may reduce inflation at the cost of
higher unemployment. Activist government policies, then, require that the costs and benefits
associated with such policies be considered.
Perfect competition versus imperfect competition:

Perfect competition is a microeconomics concept that describes a market structure controlled
entirely by market forces. In a perfectly competitive market, all firms sell identical products and
services, firms cannot control prevailing market prices, market share per firm is small, firms and
customers have perfect knowledge about the industry, and no barriers to entry or exit exist. If any
of these conditions are not met, a market is not perfectly competitive.
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Describe the Assumptions of a Competitive Market.
To measure how competitive a market is, we need to define what an ideal or perfectly
competitive market looks like. There are four main characteristics of a competitive market:
1. Many Buyers and Sellers There is a very large number of firms and consumers in the market.
No single firm or consumer having extra influence on the market, and consequently all firms are
very small compared to the overall market.
2. No Barriers to Entry and Exit (Full Mobility of Resources) Any firm can enter and leave
the market if it wants to. There is nothing stopping a new firm from entering a market, or an
existing firm leaving a market if it wants to. Put another way, firms are free to move their
resources in or out of a market. Barriers such as high setup costs, consumer loyalty schemes,
legal barriers (e.g. patents) do not exist in a perfectly competitive market. Only one factor - time
- affects firms ability to move in or out of a market, and all firms are affected exactly the same.
We will look at this idea (short run vs long run) later in this standard.
3. Identical Product All firms produce exactly the same product. Every firms product look the
same, has the same design and features, is the same quality, has the same guarantees, etc. For
consumers, the product of one firm is a perfect substitute for the product of any other firm.
4. Perfect Knowledge All firms and consumers in the market know everything about the
product, consumers and other producers. Firms know each others costs of production and
design features. If one firm were to improve its design, all other firms would immediately find
out about this and be able to copy it. Consumers also know about all firms costs of production,
selling prices, and the features of their products. If one firm tries to sell its (identical) product at a
higher price, consumers will immediately know that this price is higher than all other firms ...
and not buy from that firm.
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Imperfect competition, in which a competitive market does not meet the above conditions, is
very common. Examples of imperfect competition include oligopoly, monopolistic competition,
monopsony and oligopsony.
In an oligopoly, there are many buyers for a product or service but only a few sellers. The cable
television industry in most areas of the United States is a prototypical oligopoly. While an
oligopolistic market is competitive - the few active firms within an industry compete with one
another - it falls well short of perfect competition in several key areas. The firms involved
usually sell similar products, but they are not identical. Because of the small number of firms, a
singular firm has the power to influence market prices; in fact, collusion, an underhanded tactic
in which competing firms join forces to manipulate market prices, has historically been rampant
in oligopolies. By its very nature, an oligopoly provides large market share to each firm. Perfect
knowledge does not exist, and the barriers to entry are typically high, ensuring the number of
players remains small.
Monopolistic competition describes a market that has a lot of buyers and sellers, but whose firms
sell vastly different products. Therefore, the condition of perfect competition that products must
be identical from firm to firm is not met. The restaurant, clothing and shoe industries all exhibit
monopolistic competition; firms within those industries attempt to carve out their own
subindustries by offering products or services not duplicated by their competitors. In many ways,
monopolistic competition is closer than oligopoly to perfect competition. Barriers to entry and
exit are lower, individual firms have less control over market prices and consumers, for the most
part, are knowledgeable about the differences between firms' products.
Monopsony and oligopsony are counterpoints to monopoly and oligopoly. Instead of being made
up of many buyers and few sellers, these unique markets have many sellers but few buyers. The
defense industry in the U.S. constitutes a monopsony; many firms create products and services
and attempt to sell them to a singular buyer, the U.S. military. An example of an oligopsony is
the tobacco industry. Almost all of the tobacco grown in the world is purchased by less than five
companies, which use it to produce cigarettes and smokeless tobacco products. In a monopsony
or an oligopsony, it is the buyer, not the seller, who has the ability to manipulate market prices
by playing firms against one another.
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Law of diminishing marginal returns:
The law of diminishing marginal returns means that the productivity of a variable input declines
as more is used in short-run production, holding one or more inputs fixed. This law has a direct
bearing on market supply, the supply price, and the law of supply. If the productivity of a
variable input declines, then more is needed to produce a given quantity of output, which means
the cost of production increases, and a higher supply price is needed. The direct relation between
price and quantity produced is the essence of the law of supply.
Example:
To illustrate this important law, consider the production of Super Making Tacos
Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno
peppers). The table to the right presents the hourly production of
Gargantuan Tacos as Waldo's TexMex Taco World employs different
quantities of labor, the key variable input for short-run taco
production. The first column is the number of workers, the second is
the total hourly production of Gargantuan Tacos and the third column
is the marginal product generated by each additional worker.
For the first two workers marginal product actually increases. This
reflects increasing marginal returns and commonly results when the
variable input is able to make increasingly effective use of a
given fixed input.
For the third worker on, however, marginal product decreases. This
reflects decreasing marginal returns and the law of diminishing
marginal returns. The marginal product of the third worker is 25
tacos, compared to 30 tacos for the second worker. The marginal
product of the fourth worker then declines to 20 tacos. For the fifth
worker, the marginal product falls to 15. For each subsequent
worker, the marginal product declines. Marginal product eventually
reaches zero for the eighth worker and even declines for the ninth
and tenth workers.
The decreasing values of marginal product exhibited for taco
production by Waldo's TexMex Taco World reflect the law of
diminishing marginal returns.
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Financial Institutions:
A financial institution is an establishment that conducts financial transactions such as
investments, loans and deposits. Almost everyone deals with financial institutions on a regular
basis. Everything from depositing money to taking out loans and exchanging currencies must be
done through financial institutions.
Major categories of financial institutions and their roles in the financial system.
Commercial Banks
Commercial banks accept deposits and provide security and convenience to their customers. Part
of the original purpose of banks was to offer customers safe keeping for their money. By keeping
physical cash at home or in a wallet, there are risks of loss due to theft and accidents, not to
mention the loss of possible income from interest. With banks, consumers no longer need to keep
large amounts of currency on hand; transactions can be handled with checks, debit cards or credit
cards, instead.
Commercial banks also make loans that individuals and businesses use to buy goods or expand
business operations, which in turn leads to more deposited funds that make their way to banks. If
banks can lend money at a higher interest rate than they have to pay for funds and operating
costs, they make money.
Investment Banks
Investment banks may be called "banks," their operations are far different than deposit-gathering
commercial banks. An investment bank is a financial intermediary that performs a variety of
services for businesses and some governments. These services include underwriting debt and
equity offerings, acting as an intermediary between an issuer of securities and the investing
public, making markets, facilitating mergers and other corporate reorganizations, and acting as a
broker for institutional clients.
Insurance Companies
Insurance companies pool risk by collecting premiums from a large group of people who want to
protect themselves and/or their loved ones against a particular loss, such as a fire, car accident,
illness, lawsuit, disability or death.
Brokerages
A brokerage acts as an intermediary between buyers and sellers to facilitate securities
transactions. Brokerage companies are compensated via commission after the transaction has
been successfully completed.
Investment Companies
An investment company is a corporation or a trust through which individuals invest in
diversified, professionally managed portfolios of securities by pooling their funds with those of
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other investors. Rather than purchasing combinations of individual stocks and bonds for a
portfolio, an investor can purchase securities indirectly through a package product like a mutual
fund.
Nonbank Financial Institutions
The following institutions are not technically banks but provide some of the same services as
banks.
Savings and Loans
Savings and loan associations, also known as S&Ls or thrifts, resemble banks in many respects.
Most consumers don't know the differences between commercial banks and S&Ls. By law,
savings and loan companies must have 65% or more of their lending in residential mortgages,
though other types of lending is allowed.
Credit Unions
Credit unions are another alternative to regular commercial banks. Credit unions are almost
always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions can be
chartered at the federal or state level. Like S&Ls, credit unions typically offer higher rates on
deposits and charge lower rates on loans in comparison to commercial banks.
Law of supply and demand:

Law of Demand: The law of demand states that, if all other factors remain equal, the higher the
price of a good, the less people will demand that good. In other words, the higher the price, the
lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less
because as the price of a good goes up, so does the opportunity cost of buying that good. As a
result, people will naturally avoid buying a product that will force them to forgo the consumption
of something else they value more. The chart below shows that the curve is a downward slope.
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A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation
between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1
and the price will be P1, and so on. The demand relationship curve illustrates the negative
relationship between price and quantity demanded. The higher the price of a good the lower the
quantity demanded (A), and the lower the price, the more the good will be in demand (C).
Law of Supply:
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation
between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and
the price will be P2, and so on.
Utility:
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected,
derived from the consumption of a commodity. Utility differs from person- to-person, place-toplace and time-to-time. In the words of Prof. Hobson, Utility is the ability of a good to satisfy a
want. In short, when a commodity is capable of satisfying human wants, we can conclude that
the commodity has utility.
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Measurement of Utility:
Cardinal Utility is the idea that economic welfare can be directly observable. For example,
people may be able to express the utility that consumption gives for certain goods. This is
important for welfare economics which tries to put values on consumption. For example,
allocative efficiency is said to occur when MC = Marginal Utility.
One way to try and put values on goods utility is to offer choices for consumers. This is a rough
guide to the utility given to a good.
Ordinal Utility. In ordinal utility the utility derived from a good is not observable
Total Utility (TU):
Total utility refers to the total satisfaction obtained from the consumption of all possible units of
a commodity. It measures the total satisfaction obtained from consumption of all the units of that
good. For example, if the 1st ice-cream gives you a satisfaction of 20 utils and 2nd one gives 16
utils, then TU from 2 ice-creams is 20 + 16 = 36 utils. If the 3rd ice-cream generates satisfaction
of 10 utils, then TU from 3 ice-creams will be 20+ 16 + 10 = 46 utils.
TU can be calculated as:
TUn = U1 + U2 + U3 +. + Un
Where:
TUn = Total utility from n units of a given commodity
U1, U2, U3,. Un = Utility from the 1st, 2nd, 3rd nth unit
n = Number of units consumed
Marginal Utility (MU):
Marginal utility is the additional utility derived from the consumption of one more unit of the
given commodity. It is the utility derived from the last unit of a commodity purchased. As per
given example, when 3rd ice-cream is consumed, TU increases from 36 utils to 46 utils. The
additional 10 utils from the 3rd ice-cream is the MU.
MU = Change in Total Utility/ Change in number of units = TU/Q
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Ice-creams
Marginal Utility
Consumed
(MU)
Total Utility (TU)
20
20
16
36
10
46
50
50
-6
44
In Fig. 2.1, units of ice-cream, are shown along the X-axis and TU and MU are measured along
the Y-axis. MU is positive and TU is increasing till the 4th ice-cream. After consuming the
5th ice-cream, MU is zero and TU is maximum.
Elasticity:
Elasticity is a measure of how much the quantity demanded of a service/good changes in relation
to its price, income or supply.
If the quantity demanded changes a lot when prices change a little, a product is said to be elastic.
This often is the case for products or services for which there are many alternatives, or for which
consumers are relatively price sensitive. For example, if the price of Cola A doubles, the quantity
demanded for Cola A will fall when consumers switch to less-expensive Cola B.
When there is a small change in demand when prices change a lot, the product is said to
be inelastic. The most famous example of relatively inelastic demand is that for gasoline. As the
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price of gasoline increases, the quantity demanded doesn't decrease all that much. This is because
there are very few good substitutes for gasoline and consumers are still willing to buy it even at
relatively high prices.
Income Elasticity of Demand: the responsiveness of quantity demanded to a change in income.
Price Elasticity of Demand (PED): the responsiveness of quantity demanded to a change in price.
Elasticity of Supply: the responsiveness of the quantity supplied to a change in price.
Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In
technical terms it is the ratio of the percentage change in demand to the percentage change in
price. Thus,
Ep = Percentage change in quantity demanded/Percentage change in price
in mathematical terms it can be represented as: Ep = (q/p) (p/q)
From the definition it follows that
1. When percentage change in quantity demanded is greater than the percentage change in
price then, price elasticity will be greater than one and in this case demand is said to be
elastic.
2. When percentage change in quantity demanded is less than the percentage change in
price then, price elasticity will be less than one and in this case demand is said to be
inelastic.
3. When percentage change in quantity demanded is equal to the percentage change in price
then price elasticity will be equal to one and in this case demand is said to be unit elastic.
Numerical example to calculate price elasticity of demand:

Let us consider a situation where Price of tea has increased from Rs.7 to Rs 8and as a result of
this demand for tea has declined from 50 cups to 48 cups.
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The price elasticity in this case can be calculated as follows:
Percentage change in demand = ( New demand Old demand)/Old demand
= (48-50)/50
= -0.04
Percentage change in price = (New price Old Price)/ Old price
= ( 8- 7)/ 7
= o.14
Price elasticity of demand = (percentage change in demand)/(Percentage change in price)
= - 0.04 /0.14
= -0.28
Since the Elasticity of Demand is less than one Demand is inelastic . In other words we can say
that for a 14% increase in price, demand has declined only by 4%. The negative sign indicates
the inverse relationship between demand and price.
Diagrammatic representation Of Price Elasticity of Demand
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Income elasticity of demand is a measure of how much demand for a good/service changes
relative to a change in income, with all other factors remaining the same.
The formula for income elasticity is:
Income Elasticity = (% change in quantity demanded) / (% change in income)
An example of a product with positive income elasticity could be Ferraris. Let's say
the economy is booming and everyone's income rises by 400%. Because people have
extra money, the quantity of Ferraris demanded increases by 15%.
We can use the formula to figure out the income elasticity for this Italian sports car:
Income Elasticity = 15% / 400% = 0.0375
An example of a good with negative income elasticity could be cheap shoes. Let's again assume
the economy is doing well and everyone's income rises by 30%. Because people have extra
money and can afford nicer shoes, the quantity of cheap shoes demanded decreases by 10%.
The income elasticity of cheap shoes is:
Income Elasticity = -10% / 30% = -0.33
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the
price of a good, with all other factors remaining the same.
The formula for elasticity of supply is:
Elasticity of Supply = (% change in quantity supplied) / (% change in price)
As demand for a good or product increases, the price will rise and the quantity supplied will
increase in response. How fast it increases depends on the elasticity of supply. Let's look at an
example. Assume when pizza prices rise 40%, the quantity of pizzas supplied rises by 26%.
Using the formula above, we can calculate the elasticity of supply.
Elasticity of
Supply =
(26%) /
(40%) =
0.65
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Factors of production:
In economics, factors of production, resources, or inputs are what is used in the production
process in order to produce outputthat is, finished goods. The amounts of the various inputs
used determine the quantity of output according to a relationship called the production function.
There are three basic resources or factors of production: land, labour, and capital. Some modern
economists also consider entrepreneurship or time a factor of production.
Difference between classical and neo classical economics:
"Classical" and "neoclassical" are the names for two philosophical approaches to economics. As
the names suggest, classical economics was a predecessor of neoclassical economics. The
differences between the two, however, aren't merely a matter of one coming before the other.
Each had a distinctive approach to analyzing the economy.
1) Attitude of Analysis
Classical economics focuses on what makes an economy expand and contract. As such, the
classical school emphasizes production of goods and services as the key focus of economic
analysis. Neoclassical economics focuses on how individuals operate within an economy. As
such, the neoclassical school emphasizes the exchange of goods and services as the key focus of
economic analysis.
2) Methods of Analysis
Because the classical school aims at explaining how economic systems grow and contract,
economists from this school take a holistic view of such systems. All their analyses and
predictions are based on this wide perspective on the economy as a whole system. The
neoclassical school, on the other hand, explains the behaviors of individual people or companies
within a whole system. The neoclassical method takes a focused view of one small part of an
entire system.
3) Importance of History
Classical economics grounds its analysis in history, specifically the history of the nation or
culture of which a certain economic system is a part. History provides a notion of how this
economy expanded and contracted in the past, which can then be used to try to predict how it
might expand and contract in the future. Neoclassical economics, on the other hand, grounds its
analysis in mathematical models that are not grounded in history. These models provide a notion
of how an individual economic actor might behave in response to certain events.
4) Value in Analysis
Because classical economics focuses so heavily on economic systems and on the production of
those systems, the school emphasizes the inherent value of goods and services. These goods and
services are thought to be worth something regardless of who produces them and who uses them.
August 14, 2015

Neoclassical economics, with its focus on individuals within systems, emphasizes the variable
value of goods and services. These goods and services are only thought to be worth something
depending upon who produces them, who uses them and how they are used.
How market force determine the price:
Market forces generally is taken to mean the determinants of supply and demand. Generally
where supply and demand meet is the equilibrium price ie optimum price for a given product. If
either the supply or demand changes then the price will be affected.
Thus, market price is derived by the interaction of supply and demand. The resultant market
price is dependent upon both of these fundamental components of a market. An exchange of
goods or services will occur whenever buyers and sellers can agree on a price. When an
exchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing
price. This can be graphically illustrated as follows: (Figure 3)
In figure 3, both buyers and sellers are willing to
exchange the quantity "Q" at the price "P". At this
point supply and demand are in balance or
"equilibrium". At any price below P, the quantity
demanded is greater than the quantity supplied. In this
situation consumers would be anxious to acquire
product the producer is unwilling to supply resulting
in a product shortage. In order to ration the shortage
consumers would have to pay a higher price in order
to get the product they want; while producers would
demand a higher price in order to bring more product
on to the market. The end result is a rise in prices to
the point P, where supply and demand are once again
in balance. Conversely, if prices were to rise above P,
the market would be in surplus - too much supply
relative to the demand. Producers would have to lower their prices in order to clear the market of
excess supplies. Consumers would be induced by the lower prices to increase their purchases.
Prices will fall until supply and demand are again in equilibrium at point P.
What is stock?
Stock is a share of a company held by an individual or group. Corporations raise capital by
issuing stocks and entitle the stock owners (shareholders) to partial ownership of the corporation.
Stocks are bought and sold on what is called an exchange. There are several types of stocks and
the two most typical forms are preferred stock and common stock.
Total Revenue and Marginal Revenue:
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Revenue
Revenue is the income a firm retains from selling its products once it has paid indirect tax, such
as VAT. Revenue provides the income which a firm needs to enable it to cover its costs of
production, and from which it can derive a profit. Profit can be distributed to the owners, or
shareholders, or retained in the business to purchase new capital assets or upgrade the firms
technology.
Revenue is measured in three ways:
Total revenue
Total revenue (TR), is the total flow of income to a firm from selling a given quantity of output
at a given price, less tax going to the government. The value of TR is found by multiplying price
of the product by the quantity sold.
Average revenue
Average revenue (AR), is revenue per unit, and is found by dividing TR by the quantity sold, Q.
AR is equivalent to the price of the product, where P x Q/Q = P, hence AR is also price.
Marginal revenue
Marginal revenue (MR) is the revenue generated from selling one extra unit of a good or service.
It can be found by finding the change in TR following an increase in output of one unit. MR can
be both positive and negative.
Revenue schedule
A revenue schedule shows the amount of revenue generated by a firm at different prices.
TOTAL MARGINAL
PRICE QUANTITY
REVENUE REVENUE
() (000) DEMANDED
(000)
(000)
10
10
18
24
28
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6
30
30
28
-2
24
-4
18
-6
10
10
-8
Revenue curves
Total revenue
Initially, as output increases total revenue (TR) also increases, but at a decreasing rate. It
eventually reaches a maximum and then decreases with further output.
Less competition in a given market is likely to lead to higher prices and the possibility of higher
super-normal profits.
Average revenue
However, as output increases the average
revenue (AR) curve slopes downwards. The
AR curve is also the firms demand curve.
Marginal revenue
The marginal revenue (MR) curve also slopes
downwards, but at twice the rate of AR. This
means that when MR is 0, TR will be at its
maximum. Increases in output beyond the
point where MR = 0 will lead to a negative
MR.
Elasticity of demand: exam problem
Price elasticity of demand: The ratio of the percentage of change in quantity demanded to the
percentage of change in price; measures the responsiveness of demand to changes in price.
August 14, 2015

price elasticity of demand
% change in quantity demanded

% change in price
Value of Marginal product of labor:

The Production Function and the Marginal Product of Labor
Production Function is the relationship between quantity of inputs used to make a good and
the quantity of output of that good.
Marginal Product of Labor the increase in the amount of output from an additional unit of
labor.
Note: In general, MPL = dQ /dL ;
Diminishing Marginal Product is the property whereby the marginal product of an input
declines as the quantity of the input increases.
Diminishing Marginal Product is the property whereby the marginal product of an input declines
as the quantity of the input increases.
Value of the Marginal Product the marginal product of an input times the price of the output:
VMPL = P MPL:
Opportunity Cost:
An opportunity cost is defined as the value of a forgone activity or alternative when another item
or activity is chosen. Opportunity cost comes into play in any decision that involves a trade-off
between two or more options. It is expressed as the relative cost of one alternative in terms of the
next-best alternative. Opportunity cost is an important economic concept that finds application in
a wide range of business decisions.
Human capital and theory
Human capital is the stock of knowledge, habits, social and personality attributes,
including creativity, embodied in the ability to perform labor so as to produce economic value.
Alternatively, Human capital is a collection of resourcesall the knowledge, talents, skills,
abilities, experience, intelligence, training, judgment, and wisdom possessed individually and
collectively by individuals in a population. These resources are the total capacity of the people
that represents a form of wealth which can be directed to accomplish the goals of the nation or
state or a portion thereof.
Human-capital theory this is a modern extension of Adam Smith's explanation of wage
differentials by the so-called net (dis)advantages between different employments. The costs of
learning the job are a very important component of net advantage and have led economists such
as Gary S. Becker and Jacob Mincer to claim that, other things being equal, personal incomes
vary according to the amount of investment in human capital; that is, the education and training
undertaken by individuals or groups of workers. A further expectation is that widespread
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investment in human capital creates in the labour-force the skill-base indispensable for economic
growth.
What is CPI and what are the different methods is of adjust inflation
A consumer price index (CPI) measures changes in the price level of a market basket of
consumer goods and services purchased by households.
Inflation:
The inflation rate is widely calculated by calculating the movement or change in a price index,
usually the consumer price index. The inflation rate is the percentage rate of change of a price
index over time. The Retail Prices Index is also a measure of inflation that is commonly used in
the United Kingdom. It is broader than the CPI and contains a larger basket of goods and
services.
To illustrate the method of calculation, in January 2007, the U.S. Consumer Price Index was
202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage
rate inflation in the CPI over the course of the year
is:
The resulting inflation rate for the CPI in
this one-year period is 4.28%, meaning the general level of prices for typical U.S. consumers
rose by approximately four percent in 2007.
How can we calculate the optimal quantity of public good?
The government is providing an efficient quantity of a public good when its marginal benefit
equals its marginal cost. To determine the optimal quantity of a public good, it is necessary to
first determine the demand for it. Demand for public goods is represented through price-quantity
schedules, which show the price someone is willing
to pay for the extra unit of each possible quantity.
Unlike the market demand curve for private goods,
where individual demand curves are summed
horizontally, individual demand curves for public
goods are summed vertically to get the market
demand curve. As a result, the market demand curve
for public goods gives the price society is willing to
pay for a given quantity. It is equal to the marginal
benefit curve. Due to the law of diminishing
marginal utility, the demand curve is downward
sloping.
Often, the government supplies the public good. The supply curve for a public good is equal to
its marginal cost curve. Because of the law of diminishing returns, the marginal cost increases as
the quantity of the good produced increases. The supply curve therefore has an upward slope.
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As already noted, the demand curve is equal to the marginal benefit curve, while the supply
curve is equal to the marginal cost curve. The optimal quantity of the public good occurs where
MB (society's marginal benefit) equals MC (provider's marginal cost), or where the two curves
intersect. When MB = MC, resources have been allocated efficiently.
Define Economics?
Economics is the science that deals with production, exchange and consumption of various
commodities in economic systems. It shows how scarce resources can be used to increase wealth
and human welfare. The central focus of economics is on scarcity of resources and choices
among their alternative uses. The resources or inputs available to produce goods are limited or
scarce. This scarcity induces people to make choices among alternatives, and the knowledge of
economics is used to compare the alternatives for choosing the best among them.
According to Adam Smith (Early Definition: As the Science of Wealth; 1776)
Economics is concerned with the enquiry into the nature and Cause of wealth of nation.
According to Alfred Marshall (Marshallian Definition: As the Science of Material Welfare;
1890):
Economics is the science of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connect with the attainment and with the use
of the material requisites of wellbeing
According to Lionel Robinson (Robinsons Definition: As the Science of Choice; 1931):
Economics is the science which studies the human behavior as a relationship between ends and
scarce means which have alternative uses.
According Paul Samuelson (Modern Definition: On the basis of the concept of growth criteria):
Economics is a study of how men and society choose with of without the use of money, to
employ scarce productive uses resources which could have alternative uses, to produce various
commodities over time and distribute them for consumption, now and in the future among the
various people and groups of society.
Economics is the study of how men and society choose, with or without the use of money, to
employ scarce productive resources which could have alternative uses, to produce various
commodities over time and distribute them for consumption now and in the future amongst
various people and groups of society (P.A Samuelson).
Thus we can conclude the definition of Economics as;
Economics is a social science concerned with the way the society chooses to employ its limited
resources, which have alternative uses to produce goods and services for present and future
purposes or consumption.
Economics is not only science but also arts, discuss?
August 14, 2015

I agree with the statement that economics is a combination of both science and art. In order for
economists to theorize mathematical models explaining any type of economic behavior, whether
its a supply and demand chart or a production possibilities frontier chart, economists must base
their theories on the future behavior of consumers. This economical behavior is assumed to be
rational by economics, creating an error in their theories when human behavior turns out to be
irrational. Therefore, no economist is able to precisely calculate how humans will respond to
future decisions in the economy. For that reason, this element of uncertainty makes economics an
art. So yes, economics does include various amounts of mathematics, laws, and principles, which
is why most people often are fooled into thinking its a science, but you cannot run controlled
experiments in a lab on future consumer behavior.
Economics - A Science and an Art
a) Economics is a science: Science is a systematized body of knowledge that traces the relationship
between cause and effect. Another attribute of science is that its phenomena should be amenable to
measurement. Applying these characteristics, we find that economics is a branch of knowledge
where the various facts relevant to it have been systematically collected, classified and analyzed.
Economics investigates the possibility of deducing generalizations as regards the economic motives
of human beings. The motives of individuals and business firms can be very easily measured in terms
of money. Thus, economics is a science.
b) Economics - A Social Science: In order to understand the social aspect of economics, we should bear
in mind that labourers are working on materials drawn from all over the world and producing
commodities to be sold all over the world in order to exchange goods from all parts of the world to
satisfy their wants. There is, thus, a close inter-dependence of millions of people living in distant
lands unknown to one another. In this way, the process of satisfying wants is not only an individual
process, but also a social process. In economics, one has, thus, to study social behaviour i.e.,
behaviour of men in-groups.
c) b) Economics is also an art. An art is a system of rules for the attainment of a given end. A science
teaches us to know; an art teaches us to do. Applying this definition, we find that economics offers us
practical guidance in the solution of economic problems. Science and art are complementary to each
other and economics is both a science and an art.
The economist has to study both micro and macro-economic problems, two studies are
complementary each other than being alternative matters of the study, discuss?
The study of economics is divided into parts which is both necessary to understand the economy as a
whole. I agree with the statement that both subjects are complementary rather than alternative
1. Microeconomics analyses the economic behaviour of any particular decision making unit such as a
household or a firm. Microeconomics studies the flow of economic resources or factors of production
from the households or resource owners to business firms and flow of goods and services from
business firms to households. It studies the behaviour of individual decision making unit with regard
to fixation of price and output and its reactions to the changes in demand and supply conditions.
Hence, microeconomics is also called price theory.
2. Macroeconomics studies the behaviour of the economic system as a whole or all the decisionmaking units put together. Macroeconomics deals with the behaviour of aggregates like total
employment, gross national product (GNP), national income, general price level, etc. So,
macroeconomics is also known as income theory.
August 14, 2015

Microeconomics cannot give an idea of the functioning of the economy as a whole. Similarly,
macroeconomics ignores the individuals preference and welfare. What is true of a part or individual
may not be true of the whole and what is true of the whole may not apply to the parts or individual
decision making units. By studying about a single small-farmer, generalization cannot be made about
all small farmers, say in Tamil Nadu state. Similarly, the general nature of all small farmers in the
state need not be true in case of a particular small farmer. Hence, the study of both micro and
macroeconomics is essential to understand the whole system of economic activities.
Three main differences separate micro-and macroeconomics?
First, microeconomics studies individual components, whereas macroeconomics studies the economy as a
whole. Microeconomics treats the economy as so many separate components, whereas macroeconomics
treats the components of the economy as one unit, as one aggregate, that is looks for relationships
between the various components.
Second, controversy aside, government involvement in microeconomics is relatively small, and relegated
to public goods, regulation, and welfare. But, controversy notwithstanding, government involvement in
macroeconomics is rather substantial, nearly total; it is only government that makes and enforces
monetary and fiscal policy.
Third, whereas microeconomics has been around since the mid eighteenth century, macroeconomics
began only as a reaction to the Great Depression of the 1930s.
Discuss significance of opportunity cost?

The opportunity cost of anything is the alternative that has been foregone. This implies that one
commodity can be produced only at the cost of foregoing the production of another commodity. In the
words of Prof. Byrns and Stone opportunity cost is the value of the best alternative surrendered when a
choice is made. In the words of John A. Perrow opportunity cost is the amount of the next best produce
that must be given up (using the same resources) in order to produce a commodity.
As Adam Smith observed, if a hunter can bag a deer or a beaver in the course of a single day, the cost of a
deer is a beaver and the cost of a beaver is a deer. A man who marries a girl is foregoing the opportunity
of marrying another girl. A film actor can either act in films or do modeling work. She cannot do both the
jobs at the same time. Her acting in film results in the loss of an opportunity of doing modeling work.
Importance of the Concept of Opportunity Cost

1. Determination of Relative Prices of goods
The concept is useful in the determination of the relative prices of different goods. For example, if a given
amount of factors can produce one table or three chairs, then the price of one table will tend to be three
times equal to that one chair.
2. Fixation of Remuneration to a Factor
The concept is also useful in fixing the price of a factor. For example, let us assume that the alternative
employment of a college professor is work as an officer in an insurance company at a salary of $4,000 per
month. In such a case, he has to be paid at least $4,000 to continue to retain him in the college.
August 14, 2015

3. Efficient Allocation of Resources
The concept is also useful in allocating the resources efficiently. Suppose, opportunity cost of 1 table is 3
chairs and the price of a chair is $100, while the price of a table is $400. Under such circumstances, it is
beneficial to produce one table rather than 3 chairs. Because, if he produces 3 chairs, he will get only
$300, whereas a table fetches him $400, that is, $100 more.
Describe the use of production possibility curve?

Production possibility frontier is a curve on a graph that depicts combination of quantities of different
goods that can be produced by an economy with the fixed quantities of factors of production available
with it. A point on the curve represents situations when the combination of goods produced will utilize
full available quantity of at least one of the factors of production completely. In this situation production
of any good cannot be increased without increasing the quantity of this factor of production, or reducing
production of some other good. A point inside the curve indicates combination quantities of goods
produced will underutilized at all the factors of production to some extent. This represents a situation that
is inefficient. A point outside the production possibility frontier represents a combination of quantities of
different goods that cannot be achieved practically with the existing quantities of factors of production
available.
The production possibility frontier is useful in taking meaningful decisions on allocating the resources of
economy to different sectors of development, and on different types of goods. It enable to identify what is
possible, compare it with what is desirable, and identify resource gaps for achievement of the desirable.
What is substitute goods and complementary goods?

In economics, a complementary good or complement is a good with a negative cross elasticity of demand,
in contrast to a substitute good. This means a good's demand is increased when the price of another good
is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.
If goods A and B are complements, an increase in the price of A will result in a leftward movement along
the demand curve of A and cause the demand curve for B to shift in; less of each good will be demanded.
A decrease in price of A will result in a rightward movement along the demand curve of A and cause the
demand curve B to shift outward; more of each good will be demanded.
Complementary goods exhibit a negative cross elasticity of demand: as

the price of good Y rises, the demand for good X falls.
In consumer theory, substitute goods or substitutes are products that a consumer perceives as similar or
comparable, so that having more of one product makes them desire less of the other product. Formally, X
and Y are substitutes if, when the price of X rises, the demand for Y rises. Potatoes from different farms
August 14, 2015

are an example: if the price of one farm's potatoes goes up, then it can be presumed that fewer people will
buy potatoes from that farm and source them from another farm instead. A substitute good, in contrast to
a complementary good, is a good with a positive cross elasticity of demand. This means a good's demand
is increased when the price of another good is increased. Conversely, the demand for a good is decreased
when the price of another good is decreased. If goods A and B are substitutes, an increase in the price of
A will result in a leftward movement along the demand curve of A and cause the demand curve for B to
shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A
and cause the demand curve for B to shift in.
Discuss
different types of demand?
the
The different types of demands have been explained below as follows:

Individual demand:
It is the quantity of a commodity demanded by an individual consumer at a particular price during a given
period of time. Market demand: It is the total quantity of a commodity demanded by all the consumers
in the market during a given period of time. Joint demand: When two or more commodities are jointly
needed to satisfy a single want, then the demand for such goods are said to be joint demand. Composite
demand: When a commodity is demanded for a number of uses, then the demand for that commodity is
said to composite in nature. Competitive demand: When two goods are close substitutes of one another,
then the demand for such goods is said to be competitive in nature. Derived demand: When demand for
a commodity gives rise to demand for another commodity, then it is said to be as a derived demand.
Variation in demand: It refers to extension or contraction in demand which is exclusively due to change
in the price of a product. Changes in demand: Change in demand refers to increase or decrease in
demand which is due to change factors other than price of the commodity. Giffen goods: It refers to
some inferior goods which are demanded in smaller quantities when their price falls. Direct demand:
Goods which yield direct satisfaction to a customer can be termed as the direct demand.
What is price elasticity of demand? Suppose price increase from 10 taka to 12 taka and
demand falls from 96 unit to 80 unit. Find the price elasticity of demand? Suppose you are
the seller of the product what will be your strategy?
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or
elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus. More
precisely, it gives the percentage change in quantity demanded in response to a one percent change in
price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income).
August 14, 2015

% change in Q.D = (-16/96)*100 = 16.67%

% change in price (2/10)*100= 20%
Therefore PED = 16.67/20 = -0.8335
The negative sign indicates that P and Q are inversely related. Now as a seller the decision will depends
on the revenue and the degree of response of quantity demanded to a change in price.
Revenue: Before 10*96= 960
After: 12*80= 960. So the total revenue is same in both cases, thus change in TR=0. As a seller best
strategy would be to set the price at the point whether elasticity will be less and revenue would be
positive.
Explain the law of supply?

The law of supply is a fundamental principle of economic theory which states that, all else equal, an
increase in price results in an increase in quantity supplied. In other words, there is a direct relationship
between price and quantity: quantities respond in the same direction as price changes. This means that
producers are willing to offer more products for sale on the market at higher prices by increasing
production as a way of increasing profits. In short, Law of Supply is a positive relationship between
quantity supplied and price and is the reason for the upward slope of the supply curve.
Draw the elasticity of supply and define how it can be measured the various point of
supply curve?
The elasticity of supply measures the percentage change in the quantity of supply compared to the
percentage change in a supply determinant. The price elasticity of supply measures the percentage
change in supply quantity compared to the percentage change in the price, which, in turn,
determines the change in total revenue.
Quantity Change Percentage
Price Elasticity of Supply
=
Price Change Percentage
If supply is elastic, producers can increase output without a rise in cost or a time delay
If supply is inelastic, firms find it hard to change production in a given time period.
The formula for price elasticity of supply is:

Percentage change in quantity supplied divided by the percentage change in price
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When Pes > 1, then supply is price elastic
When Pes < 1, then supply is price inelastic
When Pes = 0, supply is perfectly inelastic
When Pes = infinity, supply is perfectly elastic following a change in demand
What is supply function? What are the determinant of supply?

The supply function is the mathematical expression of the relationship between supply and those
factors that affect the willingness and ability of a supplier to offer goods for sale. An example
would be the curve implied by
where
is the price of the good and
is
the price of a related good. The semicolon means that the variables to the right are held constant
when quantity supplied is plotted against the good's own price. The supply equation is the
explicit mathematical expression of the functional relationship. A linear example is
. Here
is the repository of all non-specified factors that affect
supply for the product. The coefficient of
is positive following the general rule that price and
quantity supplied are directly related.
is the price of a related good. Typically its coefficient
is negative because the related good is an input or a source of inputs.
Determinants of the supply curve.
1. Production cost:
Since most private companies goal is profit maximization. Higher production cost will lower profit, thus
hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and
taxes, etc.
2. Technology:
Technological improvements help reduce production cost and increase profit, thus stimulate higher
supply.
August 14, 2015

3. Number of sellers:
More sellers in the market increase the market supply.
4. Expectation for future prices:
If producers expect future price to be higher, they will try to hold on to their inventories and offer the
products to the buyers in the future, thus they can capture the higher price.
Discuss the factors of production in brief?

In economics, factors of production, resources, or inputs are what is used in the production process in
order to produce outputthat is, finished goods. The amounts of the various inputs used determine the
quantity of output according to a relationship called the production function. There are three basic
resources or factors of production: land, labour, and capital. Some modern economists also consider
entrepreneurship or time a factor of production. These factors are also frequently labeled "producer
goods" in order to distinguish them from the goods or services purchased by consumers, which are
frequently labeled "consumer goods." All three of these are required in combination at a time to produce a
commodity. Factors of production may also refer specifically to the primary factors, which are land, labor
(the ability to work), and capital goods applied to production. Materials and energy are considered
secondary factors in classical economics because they are obtained from land, labour and capital. The
primary factors facilitate production but neither become part of the product (as with raw materials) nor
become significantly transformed by the production process (as with fuel used to power machinery). Land
includes not only the site of production but natural resources above or below the soil. Recent usage has
distinguished human capital (the stock of knowledge in the labor force) from labor. Entrepreneurship is
also sometimes considered a factor of production. Sometimes the overall state of technology is described
as a factor of production.
Why division of labor is advantageous?

The various advantages of division of labour are gives below:
1. Right person in the right Job: Every worker is assigned the task for which he is best suited. This helps
to provide, opportunities for the best utilisation of natural talents as a person performs the job which he
likes he gets pleasure in work. Right man in the right job leads to higher output. Secondly, due to division
of labour, a worker continuously repeats his work. He becomes an expert in performing the job Repetition
of the same work improves his dexterity and skills.
2. Greater Efficiency: Division of labour helps to increase the efficiency of workers due to two reasons.
First, every worker is assigned a job that suits his skills, experience, training and aptitude.
3. Better Quality of Work: Division of labour not only increases the quantity of work it also improves the
quality of production. Better and modern machines and equipment are used. Better quality products help
to increase the goodwill and profits of business.
4. Saving of time: Division of labour helps to avoid waste of time and effort caused by changes from one
type of work to another. The worker does not have to shift from one process to another.
5. Economies of large scale production: Division of labour facilitates mass production. Large scale
production provides economies in the use of resources, such as raw materials, labour, tools etc. Optimum
use of means of production helps to reduce cost of production.
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6. Less learning period: Under division of labour a worker needs to learn only a part of the whole task.
Therefore, lesser time and expenditure is involved in training workers.
7. Inventions and Innovations: A worker doing the same task again and again tries to find new and better
ways of doing the job. Small and simple parts of a task can easily be done by machines. Thus, division of
labour increases scope for inventions and innovations.
8. Less Strain: Division of labour makes tasks small and simple Workers can perform them without much
strain and physical tiredness is reduced. Less skilled labour is required to perform the divided and subdivided tasks.
9. Wider Market: Division of labour makes available cheaper goods of a wide variety. As a result demand
for goods and services increases.
10. Benefits to society: Society is benefited due to (a) reduced cost on account of large scale production
(b) higher productivity which leads to economic growth (c) employment of unskilled workers and (d)
better quality of goods and services for consumers.
Capital formation tends to be low in under develop countries? Describe

The lack of real capital is so characteristic a feature of all under-developed economies that they are often
called capital-poor economies. Low productivity, in under-developed countries, is mainly due to the
small amount of capital per head of population. Low capital for underdeveloped countries can be describe
by the vicious circle whether less productivity generates less per capita income, les savings, less
investment, finally low capital formation.
However, not only is the existing stock of capital very small in the underdeveloped countries, but also the
current rate of capital formation is also very low. In most under-developed countries, investment is only
5% to 8% of the national income, whereas in the United States, Western European countries and in Japan,
it generally varies from 15% to 20% of the national income and even higher.
The low rate of capital formation in under-developed countries is due to the following reasons:
(a) Domestic savings are very small.
(b) There is a dearth of daring, honest and dynamic entrepreneurs who should perform the task of making
investment and bearing risks.
(c) Inducement to invest is very weak.
(d) Weak financial system.
Why should planner need to have a clear understanding about the macroeconomic
variables?
Planners should have a clear idea how the macroeconomic variables such as total income, output,
employment and general price level works to analyze the effects of the functioning of the economy. It
helps to explain them how and why the economy grows and fluctuates over time based on the decisions
made, in the aggregate, by consumers, businesses, and governments. By studying macro variables
planners can develop simple models that can generate useful and realistic explanations about the behavior
of important macroeconomic variables and apply these models to analyze historical and current
macroeconomic developments and to make predictions about future events. It is essential for the
formulation and evaluation of good economic policy.
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What do you mean gross domestic products?
The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's
economy. It represents the total dollar value of all goods and services produced over a specific time
period - we can think of it as the size of the economy.
Difference between nominal and real GDP?

The main difference between nominal and real values is that real values are adjusted for inflation, while
nominal values are not. As a result, nominal GDP will often appear higher than real GDP. Nominal values
of GDP (or other income measures) from different time periods can differ due to changes in quantities of
goods and services and/or changes in general price levels. As a result, taking price levels (or inflation)
into account is necessary when determining if we are really better or worse off when making comparisons
between different time periods. Values for real GDP are adjusted for differences in prices levels, while
figures for nominal GDP are not.
Describe the expenditure method of measuring GDP?

A method for calculating GDP that totals consumption, investment, government spending and net exports.
Although GDP can be calculated through other methods, the expenditure method is the most common.
The formula for its calculation is often expressed as.
GDP = C + G + I + NX
This calculation gives us nominal GDP, which must then be adjusted for inflation to give us the real GDP.
Discuss the divergence between individual and social welfare?

Under the welfare economics individual welfare maximization depends on individual utility function
whether utility derives from their preference and choice, whereas social welfare function uses
microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level by
summing all the individual utility functions. Social welfare function treat all individual equally. In using
welfare measures of persons in the society as inputs, the social welfare function is individualistic in form.
One use of a social welfare function is to represent prospective patterns of collective choice as to
alternative social states. The social welfare function is analogous to the consumer theory of indifferencecurve/budget constraint equilibrium for an individual, except that the social welfare function is a mapping
of individual preferences or judgments of everyone in the society as to collective choices, which apply to
all, whatever individual preferences are for (variable) constraints on factors of production. One point of a
social welfare function is to determine how close the analogy is to an ordinal utility function for an
individual with at least minimal restrictions suggested by welfare economics, including constraints on the
amount of factors of production.
What are the obstacles to welfare maximization?

If maximum welfare is to be attained optimum allocation of factors of production is essential. This
allocation must he in keeping with the consumers preferences. For this purpose there must prevail
perfect competition. But in the real world perfect competition docs not prevail instead there is imperfect
competition. This constitutes a big obstacle in the way of the attainment of maximum welfare.
Imperfect competition may take the form of monopoly or monopolistic competition or oligopoly. We see
how these market forms stand in the way of welfare maximization.
August 14, 2015

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URP 1157: Principal of Economics: Fatema Tuj Johora

Department Of Urban Planning: Khulna University Bangladesh

August 14, 2015

URP 1157: Principal of Economics: Fatema Tuj Johora

For example in a Cycle Manufacturing Unit, computing the

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URP 1157: Principal of Economics: Fatema Tuj Johora

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URP 1157: Principal of Economics: Fatema Tuj Johora

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URP 1157: Principal of Economics: Fatema Tuj Johora

Perfect competition versus imperfect competition:

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URP 1157: Principal of Economics: Fatema Tuj Johora

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Law of supply and demand:

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URP 1157: Principal of Economics: Fatema Tuj Johora

Total Utility (TU)

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URP 1157: Principal of Economics: Fatema Tuj Johora

Numerical example to calculate price elasticity of demand:

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URP 1157: Principal of Economics: Fatema Tuj Johora

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% change in quantity demanded

Value of Marginal product of labor:

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URP 1157: Principal of Economics: Fatema Tuj Johora

Discuss significance of opportunity cost?

Importance of the Concept of Opportunity Cost

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