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P r i n c i p l e s o f E c o n o m i c s 1

Part – I

Micro Economics

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Chapter No. 1

Nature and Scope of Economics

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Q. 1.1 Define Economics in the views of different economist?

Ans. Definitions of Economics: -

Keeping in view an individual every one is well versed that people earn and consume, basically every
person has its own sources by which he creates his money and he also have some sources upon which
he consumes his money which he earns. Therefore economics completely refers to the creation of
money and services which a person perform in his daily life.

Introduction: -

Word economics has been derived from two Greek words OIKOS and NEMEIN, OIKOS means House
and NEMEIN means manage. Therefore we can say that economics is a study of man’s daily activities.
Different Economists defined economics in their own views and words some of important definitions are
given as under: -

1- Adam Smith’s Definition: -

Adam Smith is known as a father of Economics. He was firs person who considered Economics as a
subject and tried to define Economics. In this contest he wrote a book in 1776 entitled “An Enquiry Into
the Nature and Causes of Wealth of Nations” in which he discussed the problem of production of wealth,
distribution, consumption and exchange of wealth. He defined economics as

“Economics is a science of wealth”

2- Alfred Marshal’s Definition: -

After Adam Smith, Alfred Marshal presented definition about economics. He was the person who
considered economics as a material science and defined economics as a material approach. Alfred
Marshal’s definition is given as under: -

“Economics is a study of mankind in ordinary business of life, it examines those individual and social
action which are concerned with the attainment and use of material requisities of well-being”

3- Lionel Robbins’s Definition: -

After Alfred Marshal, Robbins’s period started and in views of Robbins economics studies in those areas
which are related with human behavior and wants, therefore he completed emphasis on human behavior
and wants of the men. In 1931 he gave his definition in his book “Nature and Significances of Economics
Science” and he defined economics as

“Economics is the science, which studies human behavior as a relationship between ends (unlimited
wants) and scare resources which have alternative uses”

4- In Our Views

Keeping in view above cited discussion we may also define economics as

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“Economics is a science which examines those activities which are related with money and human
behavior which is related with creation, distribution, and exchange of wealth between limited resources
and un limited wants.

Conclusion: -

From above discussion we may conclude that economics is a study of science which considers how to
produce, how to distribute, how to consume and how to exchange money with in the limited resources
and un limited wants.

Q. 1.2 Define and discuss Adam Smith’s Definition in details?

Ans. Adam Smith’s Definition of Economics

Adam Smith (1723-1790) was the father of Economics. He was a classical thought economist. He wrote
a book which was published in 1776 entitled “An Enquiry into the Nature and Causes of Wealth Nations”
in which he defined economics as

“Economics is a Science of Wealth”

Explanation: -

Keeping in view above definition of economics we can say that Adam emphasized the word wealth in his
above cited definition and this definition can be explored and explained with the help of following points: -

1-Production of Wealth: -

Adam’s definition say that economics is a study which tells how wealth can be produced and it explained
all those activities of the people or individuals which are carried on for creation and production of the
wealth.

2-Exchange of Wealth: -

An other aspect of this definition is that from above definition we can say that economics also studies
those aspects which explain how a surplus money / wealth can be exchanged to the needed country for
other goods.

3-Consumption of Wealth: -

Adam’s definition also explains and clear how wealth can be consumed to satisfy the human wants
because as in the views of Robbins “wants of the people are unlimited” therefore an other aspect of
economics is that it tells us how one can consume wealth to fulfill his wants and requirements.

4-Distribution of Wealth: -

Distribution means to transfer wealth from one hand to other. It is well know that distribution of wealth is
very important to reward the four factors of production (Land, Labour, Capital and Organization and their
rewards are Rent, Wage, Interest and Profit). Therefore, according to Adam Smith’s view economics also
explain how wealth can be transferred to satisfy the four factors of production.

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From above discussion we can say that economics is a study of wealth which explains how to produce
wealth, how to consume wealth, how to distribute wealth and how to exchange wealth.

Criticism about Adam Smith’s Definition: -

Although it is very important definition of Economics because Adam Smith was the first person who
defined economics and he considered economics as a subject, however this definition was criticized due
following reasons: -

1-Selfish Behavior: -

As there is discussion about wealth only, and it ignores the concept of human welfare, therefore when we
considers economics as a subject, it results in selfish behavior of human

2-Dismal Science: -

Adam’s this definition is emphasized only on wealth, it seems that Adam’s views are to create wealth and
just to worship of money and wealth only, therefore it is said that it leads to darkness.

3-Sordid Inquiry: -

Billy (Economist) called Adam’s definition as a sordid inquiry because it does not considered any social
and welfare aspect, and it emphasized on wealth only.

4-Rational Approach: -

Adam’s definition has only rational approach and ignores social interest, in other words we can say that
this definition does not consider anything else other than of wealth and complete ignores the people
interest, customs and social values.

5-Gospel of Mammonism: -

An other criticism about this definition is that this definition of economics just explains as economics as a
study which shows the behavior of a group of people who worship wealth and it results in regional
disparities.

6-Ignores Means: -

Adam’s definition explains about the production of wealth but it does not explain the means for
production of wealth. In other words it ignores the explanation of the sources by which wealth can be
produced.

7-Narrow Scope: -

Adam Smith’s definition of Economics contains very narrow scope, because it considers production,
distribution, consumption and exchange of wealth with very limited ways.

Conclusion; -

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From Above discussion we can conclude that Adam’s definition was a first step towards the economic
development and he was the person who begins his approaches and it was a perfect definition as per
period when it was explained by him, however it above mentioned criticism is considered properly that it
would be a good definition of economics.

Q. 1.3 Define Marshal’s definition of Economics and discuss criticism on it?

Ans. Marshal Definition of Economics

Alfred Marshal, the famous economist belongs to Neo-Classical School of Thought (1824-1924). He was
in concept that study of economics considers the material welfare of the human. He was first person who
explained economics as a materialized sense and define economics.

“Economics is a study of mankind in ordinary business of life. It examines the part of individual and social
action which are mostly connected with the use and attainment of material requisites of well-being or
human being”

Explanation: -

Alfred Marshal’s definition about economics can be explained with the help of following points.

1-Social Science: -

As per Marshal’s point of view Economics is a social science which studies social and individual actions
in ordinary business of life, it means economics is considering social action of the people and society,
therefore, it is a social science.

2-Concept of Welfare: -

Marshal is in views that Economics considers the welfare and all the activities and efforts which are
carried on by an individual or a society are for the purpose of welfare.

3-Material Actions: -

An other approach which is adopted by Marshal is materialization. He says all the economics activities
which are done by people for welfare are based on the material. Because human being tries to attain
welfare in the sense of material welfare.

4-Ordinary Business of Life: -

Marshal’s definition explains that economics activities are related with the Ordinary Business of life, it
means all efforts and action which are done by an individual who is living in the society will be taken into
the consideration and if any person cuts off from the society then it is not a subject of the economics
studies.

5-Wealth for Man’s Welfare: -

Marshal‘s view about economics is that Economics is not only the study of wealth but also it is a study of
man.

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Criticism of Marshal Definition: -

Although it was an important works which was done by Marshal however Marshal’s definition has been
criticized by Lionel Robbins and his fellows. The main objections about this definition are given as under:
-

1-Does not cover all Economics Problems

As per Marshal’s definition that economics studies those person who live in the society and their efforts
for the material requisites only but it ignores all other who may have problems.

2-Relatrion Between Economics and Welfare: -

Marshal said that all economics activities are carried on for the welfare of the people but sometimes most
of activities are not performed for the welfare of the people and society e.g. Alcoholic Goods, Opium etc.
These things are not used for the welfare of the people.

3-Welfare is not Measurable: -

An other objection on this definition was that as Marshal considers welfare of the people and society but
welfare itself is not measurable because welfare satisfaction varies from person to person and liking or
disliking of the people may differ from man to man.

4-Classifictory Rather than Analytical: -

An other criticism about this definition was that this definition classify human activities on the basis of
economic and no economic values (money/wealth) but sometime most of activities are performed by the
influence of society (Customs and Traditions).

5-No Moral Judgment: -

Marshal considers material welfare of the people and human being but he ignores the moral values of
the people because of most the human activities are based on the moral welfare which does not fulfill the
material approach of the Marshal (i.e. Charity etc)

6-Ignores Non Material Services: -

An other objection about this definition is that I does not consider the non-material services of the human
(i.e. Donations etc.)

7-No Normative Science: -

Marshal considers human welfare in ordinary business of life, but by Robbins it is just to consider
economics only as a positive science which tells us what is it only because a economist is never to
remark what is good or bad.

8- Considers Material Welfare Only: -

An other criticism about this definition is that it considers only material welfare and ignores the non
material welfare and the activities of the people.

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9-Ordinary Business of Life: -

A criticism on Marshal definition is that it only consider ordinary business of life and does not explain
extra-ordinary business of life.

Conclusion: -

From above discussion we may conclude that Marshal’s approach on economics definition was an
improvement and it gave a new concept regarding economics values and scope of economics.

Q. 1.4 Define economics in the views of Robbins?

Write in details the explanation and critical evaluation of the definition?

Ans. Introduction: -

Prof. Robbins not only pointed out the defects of Marshal Definition but he gave a new concept about the
economics. Robbins in 1932 in his book “An essay on the nature and significances of economics
science” criticised the concept of neo classical school of thoughts and put forth a new definition.

“Economics is the science which studies human behaviour as a relationship between wants and
resources which have alternative uses.”

This was a concept which was given by Robbins in his views wants are unlimited and resources are very
scare and these resources can be used as alternative for each other.

This definition can be explained with help of these points.

a) Unlimited Ends: - (Unlimited Wants)

Human wants are unlimited which means that they never come to and end. Some wants rise again and
again other keep on rising . all human being are always after their wants. Multiplicity of wants call forth a
ceaseless effort on the part of individuals for their satisfaction. If wants had been limited, they would have
been completely satisfied and further incentive to economics

b) Limited Resources.

As resources are very limited therefore all wants are not fulfilled, therefore some wants have less
importance and some wants have much importance. Due to limited resources a man can not increase his
resources and due to this reason he postponed his wants i.e. he tries to complete important want and
postponed less important wants for future.

c) Human Behaviour: -

An other important point of Robbins definition is that he considers human behaviour for study of
economics and in his view human behaviour also influences the wants to people and due the behaviour
a person is in position to compare his want and resources.

d) Alternative use of Resources: -

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According to Robbins resources of people can be a alternative use of each other, because these
resources are very limited therefore these resources are used as alternatives. For example if a student
has 10 rupees in his pocket and he want buy pencil, ice cream or book then he would left any thing from
these option either he can buy ice cream or pencil to satisfy his want.

Critical Evaluation of Robbins Definition: -

Although it was a good definition however Robbins definition has been criticized due to following reason.

a). Human Behaviour: -

First criticism on this definition was that human behaviour does not remain same forever, Robbins
considers human behaviour a constant factor but human behaviour always varies time to time, place to
place and person to person.

b). Scarcity & Abundance: -

Although Robbins says that all the economics problems are due to limited resources and un-limited
wants but sometime economics problems may be due abundance of the resources and 1930’s
depression was result of abundance of the resources.

c). No Normative Concept: -

As human behaviour is a major factor with relations to limited wants and un limited resources therefore,
in the views of Robbins Economics is a pure science because he is in opinion that the duties of an
economist is to diagnose problem not solution therefore we can say he ignores normative concepts.

d). No Macro Concepts: -

In the views Robbins economics is a social science which studies human behaviour with relations to
limited resources and un-limited wants. When he considers human behaviour as a factor this means he
considers behaviour in a scientific ways and human behaviour varies time to time, person to person and
place to place. Therefore, we can study human behaviour of a single person but on the whole economy
this definition ignores most of concept regarding a whole country.

e). Limited Resources: -

In the views of Robbins Resources are very much limited and wants are un-limited but in production
sector especially in developing countries labour is source of production and it is not limited and with in
increase in population, therefore this concept of Robbins does not applicable completely.

f). Complex & Narrow Scope: -

An other draw back of this definition is that this definition made economics more abstract and complex
and hence difficult. This reduces its utility for the common man.

Conclusion: -

Robbins definition is not the last word on the subject but it is an important landmark in regard to the
discussion of the nature of economic science. In spite of many objections most of the modern economist

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use Robbins’s views in their explanation. It would be better definition if above cited objections are to be
carefully covered.

Q. 1.5 Define economics?

Write in details the Scope of Economics?

Ans. Definitions of Economics: -

Keeping in view an individual every one is well versed that people earn and consume, basically every
person has its own sources by which he creates his money and he also have some sources upon which
he consumes his money which he earns. Therefore economics completely refers to the creation of
money and services which a person perform in his daily life. Word economics has been derived from two
Greek words OIKOS and NEMEIN, OIKOS means House and NEMEIN means manage. Therefore we
can say that economics is a study of man’s daily activities. Different Economists defined economics in
their own views and words some of important definitions are given as under: -

1- Adam Smith’s Definition: -

Adam Smith is known as a father of Economics. He was firs person who considered Economics as a
subject and tried to define Economics. In this contest he wrote a book in 1776 entitled “An Enquiry Into
the Nature and Causes of Wealth of Nations” in which he discussed the problem of production of wealth,
distribution, consumption and exchange of wealth. He defined economics as

“Economics is a science of wealth”

2- Alfred Marshal’s Definition: -

After Adam Smith, Alfred Marshal presented definition about economics. He was the person who
considered economics as a material science and defined economics as a material approach. Alfred
Marshal’s definition is given as under: -

“Economics is a study of mankind in ordinary business of life, it examines those individual and social
action which are concerned with the attainment and use of material requisitions of well-being”

3- Lionel Robbins’s Definition: -

After Alfred Marshal, Robbins’s period started and in views of Robbins economics studies in those areas
which are related with human behaviour and wants, therefore he completed emphasis on human
behaviour and wants of the men. In 1931 he gave his definition in his book “Nature and Significances of
Economics Science” and he defined economics as

“Economics is the science, which studies human behaviour as a relationship between ends (unlimited
wants) and scare resources which have alternative uses”

4- In Our Views

Keeping in view above cited discussion we may also define economics as

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“Economics is a science which examines those activities which are related with money and human
behaviour which is related with creation, distribution, and exchange of wealth between limited resources
and un limited wants.

Conclusion: -

From above discussion we may conclude that economics is a study of science which considers how to
produce, how to distribute, how to consume and how to exchange money with in the limited resources
and un limited wants.

Scope of Economics: -

Scope means the field of study. Therefore while discussing the nature and scope of economics we have
to consider the following aspects

1. The Subject Matter


2. Economics as a Science or Arts
3. Economics as a Positive or Normative Science
4. Economics as a Social Science

1)-The Subject Matter of Economics

The subject matter of economics has been varied time to time and different economist presented
different view and discussed the subject matter of economic according to their views and approaches.

a)-Marshall’s Views: -

According to Marshal and his fellows the subject matter of economics is a study of those economics
problems, which are related to material welfare of man. They say the man who performs numerous
economics activities as a member of a society and not as an isolated person or extra ordinary individuals
like a peer, saint and a person who has cut of from the society for any reason.

b)-Robbins’s Views: -

According to Robbins the subject matter of economics is a human behavior and use of scare resources
to fulfill unlimited wants and alternative use of scare means. As human wants are unlimited and
resources are very limited. Therefore, economics considers those matters which are related with the
behaviour of a man and it studies how a man be able to use his resources alternative ways.

c)-Modern Economist’s Views: -

Today’s economists consider also the subject matter of economics and they are in view that “all those
human beings economics activities made for making choices among scare resources to allocate them for
present and future, aiming at maximizing the gain are the subject matter of economics”

d)-Our Views: -

In fact, economics is a progressive science. Its subject matter is increasing and expanding with the
passage of time. The boundaries of economics are in fact not precisely chartered, nor can it be. New
dimensions are arising and new combinations are creating and combining with each other this is why

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today we study mathematics, Statistics, Econometrics, Developments, Planning, Monetary and Finance,
International Trade, Micro Economics Macro Economics to get accurate and suitable results.

2-Eocnomics is a Science or Arts: -

In order to decide whether economics is a science or an arts, first of we should be cleared about these
concepts. Science: The term science has been defined as “It is a systematized body of knowledge which
traces the relationship between causes and effects” Arts: The term Arts may be defined as “It is a
system of rules for attainment of given ends” Economics as a Science: Applying above definitions to
economics we find that it is a branch of knowledge wherein the various relevant facts have been
systematically collected, classified and analyzed. Therefore we may say and conclude that economics is
a science because it makes use of scientific methods in its investigation and analysis. Another point of
science is that its phenomenon/process should be easily measurable. Keeping in view economics
studies approaches we have come to know that economics also qualifies this condition because the
economist have the measuring rode of money which can easily measure individual and business
motives. So from above discussion we may conclude that study of economics is a related with science
and it rightly deserves the status of science. Economics as an Art: In words of Luigi Cossa “A science
teaches us to know and arts teaches us to do” so economics may be considered as an arts. There are
various branches of economics which provide practical guide for solution of the problem. Therefore it
would be fair to say that economics can be considered as a science as well as arts simultaneously.

3-Eocnomics as a Positive or a Normative Science: -

Positive Science is a body knowledge concerning what is it, and a Normative Science is a body
knowledge relating to the criteria of what ought to be. This means that positive science only identifies the
problem and a normative science also gives information about the solution of the problems. Considering
the economics study it is cleared that economics tells us about the problems and with these problems
there are also solutions of the related problems i.e. inflation, demand & Supply, trade cycle, employment,
models, economics theories all are related with the economics problems and their solutions also.
Therefore, we can conclude from above discussion that economics not only a positive science of what is,
but also a normative science of what ought to be (what should be).

4-Economics as a Social Science: -

Before discussing economics as a social science, first we should be cleared what is a social science.
Social Science is a study which studies human behaviour, social activities which a man offered in his
daily life.

In this contest Alfred Marshal considers economics as a study of mankind in ordinary business of life, it
considers those individual and social actions which are connected with the attainment of material
requisition of the people. In the views of Lionel Robbins economics is study of human behaviour as a
relationship between scare resources and unlimited wants. Therefore, keeping in view above definition
and consideration may be concluded that economics is a social science because while formulating
economics laws economists observe the aggregate behaviour of men, and all the economics laws are
based on the actions of men, taken collectively like the consumer society of particular commodity. This
we may say that economics is a social science.

Conclusion: -

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From above discussion we may conclude that an economics is a study of man kin in ordinary business of
life, its subject matter is vast, it behaves as social science, it behaves as an arts and science and it works
also as positive and normative science.

Q. 1.5 Write in details the Importance of Economics?


Ans. Importance of Economics
This is an age of economics as people all over the world have become highly economics minded.
People living in the third world countries in particular have realized that study of economics can provide
them solution to their economics problems and social problems. Hence study of economics has gained
tremendous importance these days. We now discuss a) Theoretical use and b) Practical uses of
Economics.
Theoretical uses of Economics: -
Theoretical importance of economics can be discussed as under: -
a)- Widening of Mental Horizon: -
The study of economics widens the mental horizon of the people because it enables them to
understand the economics realities of the life. e.g. the usefulness of saving and investment, behaviour of
general price level, the need of boost exports and to control imports the role of banking in business etc.
b)- Adjustment with Economics Situations: -
We can learn to adjust with the changing economics situation of the county provided we have studied
the subject of economics. We know that the problems of inflation employment, deflation, deficit balance
of payment, the structure of taxes etc. Hence all of us must have at least general awareness about
economics to cope with any economic problem.
c)- Sense of Responsibility: -
Study of economics helps us to solve the problems, therefore after studying economics we are enable
to cope with these problems and when we have sufficient knowledge of economics problem then it
realise our responsibilities to solve these issues and we take economics activities to solve our problems.
d)- Attitude towards Thrifts: -
The consumption theory of economics tells about the maximization of utility by minimizing expenditures.
Therefore it develops an attitude towards thrift. This helps us to promote the level of saving and
investment for growth and development of the country.
e)- Information about Economics Systems: -
By the study of economics we can learn the working of different economics systems e.g. Capitalism,
Socialism and Islamic economics Systems. Therefore it enables us to go for the best system for the
welfare of the people.
Practical uses of Economics: -
Practical importance of economics can be discussed as under: -
a)- Solution to Economic Problems: -
The study of theoretical and applied economics enables us to identify economics problems of a country
and leads us to the measures for their solutions. These problems are big obstacles in our way to to
economics development. Economics has given us the solution to these problems e.g. Industrial
backwardness, inequality of income distribution, deficit in balance of payment etc.
b)- Helpful for producers: -

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Study of economics is also very much helpful for producers and manufacturers because manufacturer’s
aim to maximize profit, and profit can be maximize by reducing cost or increasing number of units
produced. Therefore economics helps and let us know how to reduce our cost of production to earn
maximum profit i.e. Revenue – Cost of Production = Profit
c)- Helpful for Finance Minister: -
The knowledge of economics is very much important for finance minister because if he does not know
economics he will remain handicapped in his office. Hence he must learn the principles of economic
particularly public finance, so that he is also to implement the manifesto of the political party in power.
d)- Fair Distribution of Wealth: -
The major problem of less developed countries and developing countries like Pakistan, India and
Bangladesh is un-equal distribution of wealth which results in the rich become richer and poor poorer.
This is highly dangerous because it can shatter the solidarity of the nation. Study of economics helps to
learn measures to check the tendency about far distribution of wealth.
e)- Helpful for Social Values: -
People in developing countries like Pakistan follow orthodox and obsolete customs and traditions which
involve wastage of resources e.g. a lot of unnecessary expenditures are made on marriages and death
ceremonies in Pakistan. Better planning and proper use of money and resources is very much important
for maintaining such type of customs and economics helps us how we can properly allocate our
resources and how much money and resource should be essential for these types of customs are
required.
f)- Helpful for Agricultural Sector: -
Study of economics is also very much helpful for agricultural sector because developing countries like
Pakistan base on agricultural sector and good planning for agricultural sector is very much helpful for
production of crops in Pakistan and study of economics helps us how we can better plan our resources
to get maximum produce.
g)- Optimum use of resources: -
There is lot of wastage of resources in third world countries which is mainly responsible for their
poverty. Therefore study of economics is also very much essential for them so that they are able to make
the optimum / better use of their resources available with them to get maximum output.
Conclusion: -
From above discussion we can conclude that economics is very much important in theoretical and
practical point of views especially the people living in the third world.

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Chapter No. 2

Demand

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Q- 2.1 a) Define Demand? What are main conditions for demand?


b) Explain in details the law of demand with the help of schedule and diagram?
c) What are the main assumption of Law of Demand?
Ans. a) Demand: -
General meanings of the demand are desire for any thing. But in economics demand means i)
willingness to purchase ii) power to purchases good at a certain price e.g. if a person purchase 10 kg
sugar at price Rs. 15/Kg this will be his demand for sugar.
Conditions for demand: -
The main conditions for demand are
i) Willingness to Buy:
The first condition for demand is that buyer must be willing to buy certain good. If a buyer is not
willing to buy certain good then we can not say it demand e.g. a big landlord has the power to
purchase a care but he is not interested in buying it. This will not also be the demand for care.
ii) Ability to Buy
The second condition for demand is that buyer must be able to buy certain good and if he is not in
position to buy that commodity then we can consider it for demand e.g. a beggar is always willing
to buy car but he has no money to buy car therefore this will not be the demand for car.
iii) Price of the Good
Price of goods must be in knowledge for demanding any good. If price of good is un-known than
we will not in position to demand any good e.g. we go to shop and see different goods but we can
demand without knowing about the price of goods.
b) Law of Demand
It is matter of common observation that when the price of a product falls consumers purchase more
quantity of the product and when its price rises consumer purchases less quantity of that product. This
behaviour of consumer show a negative relationship between quantity demanded and price of a product
which is called the law of demand.
Definition of the law of demand: -
The law of demand may be defined in the views of Alfred Marshal as under: -
“Other things being equal, the amount of demanded (a product) increases with fall in price and diminish
with rise in price.”
Explanation (Law of Demand): -
Law of demand can be explained with the help of mathematical as well as graphical ways
Mathematical Explanation: -
As it is cleared that price is function of demand i.e. P = 1/d
Mathematically this law can be explained with the help of demand schedule of a person / individual who
purchases different quantities of eggs at different price: -

Demand Schedule

Price (Per Egg) Quantity Demanded (Number)

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Rs. 8 2
Rs. 7 3
Rs. 6 4
Rs. 5 5
Rs. 4 6

Above mentioned table shows relationship between price of egg and quantity demanded for egg. The
table shows when price is Rs. 8/ egg then demand for egg is 2 egg, when price is Rs. 7/egg then
demand for egg is 3 eggs. When price is Rs. 6/ege then demand for egg is 4 egg and when price is Rs.
4/egg then demand is 6 eggs. This means when price is decreased then demand for egg is increased. If
we see this table from top to bottom it is cleared that price is goes on decreasing and in its response
demand for eggs is goes on increasing and when we see this table from bottom to top it shows price is
goes on increasing and demand is decreasing therefore it is cleared from table that when price is
increased then demand for good is decreased and when price is decreased then demand for good is
increased.
Graphical Representation: -
The above schedule / table can be converted into a diagram such as given below: -

9
8
7
6
Pri
ce

5
4
3
2
1
0
0 1 2 3 4 5 6 7

Demand

The above diagram shows that on vertical axis we measure Price and on horizontal axis we measure
demand for eggs. It is cleared that when price is 8, then demand for good is 2 eggs which is represented
at point A, when price is Rs. 7, then demand for eggs is 3 eggs which can be shown at point B, when
price is Rs. 6 then demand for eggs is 4 eggs which can be shown at point c.. And when price is Rs. 4
then demand is 6 eggs which can be shown at point e. By joining a, b, c, d and e point we get a straight
line DD that is called demand curve which have negative slope.
Assumptions of the Law: -
The law of demand will prove to be true if all other factors remain constant: -
a)- No Change in Income of the Consumer: -

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For the law of demand it is assumed that the income of a consumer should be remained constant
because if the income of the consumer does not remain constant, this law will not prove to be true
e.g. if the price of the cloth goes up and the income of the consumer also goes up his demand for
cloth will not fall. Instead his demand for cloth will be high even at a higher price.
b)- No change in Habit, Taste and Fashion: -
An other assumption for this law is that there must be no change in the fashion, habit or taste of the
consumer, if consumer is habitual of using a product his demand for the product will not fall even its
price increase.
c)- prices of Substitutes should not change: -
Prices of substitutes influence the demand of a product. Therefore they are assumed to remain
constant for the application of the law e.g. if we consider demand for tea we have to assume that the
price of coffee should remain constant. If it doest not remain constant then this law will not be
applicable.
d)- Future Expectation Should not be changed:-
An other assumption for this law is that there should be no change in future expectation, and if there
are some future expectation then this law will not be applicable e.g. If we think and expect that there
would be strike of Petrol pumps in next month than people would prefer to buy and store oil for future
prospect even than there is no change in prices.
e)- No New Substitutes: -
It is also assumed that there is no new entry of the substitutes because if there is new entry of
substitutes then this law will not be proved to correct and people will buy even there is no change in
the prices.
f)- Population Must be Same:
An other assumption for the law of demand is that there should be no change in population and if
there is an increase in population then this law will not properly operate e.g. if there are 3 people and
they use 10 breads daily at price of Rs. 3 each and if number of people is increased to 6 then
demand for bread would be increased at the prices of Rs. 3 per bread because population has been
increased.
Exceptions of Law: -
Sometime and under some circumstances law of demand is not properly operated which are called
exception of law of demand which are given as under: -
a) This law does not apply in case of the products whose prices are very high e.g. luxury cars,
diamonds etc. These products are demanded by the rich people only. They however purchase
more when prices of these products are increased.
b) This laws is also not valid in case of very low price products or inferior gods e.g. the demand for
salt will not increase even if its price falls.
c) Sometimes consumers remain ignorant about the increase of the prices of some products and
therefore, the quantity demanded of these products does not fall. In this situation the law of
demand does not apply.
Conclusion: -
From above discussion we can conclude that law of demand is an important law that explains the
relationship between price and demand.

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Q 2.2 a) What do you understand by Change in quantity demanded and change in demand?
b) Slope of Demand curve is negative? What are the reasons for negative slope of demand
curve?
Ans. a) Changes in Demand: -
Demand does not remain constant. Instead it keeps on changing there are two types of changes that
take place in demand.
i) Change in quantity Demanded (Extension and Contraction in Demand)
ii) Change in Whole Demand (Rise and Fall in Demand)
i)- Change in Quantity Demanded (Extension and Contraction in Demand): -
When Consumer moves on his demand curve and purchases more quantity of goods due to fall in
prices it is called extension in demand and when he purchases less quantity of goods due to rise in
prices it is called contraction in demand. Therefore we can say an increase and decrease in quantity
demanded due change in price is called extension and contraction in demand (change in quantity
demanded). It can be explained mathematically and graphically with the help of following table and
graph.
Extension and Contraction in Demand

Prices Quantity Demanded


(Rs) (Markers)

3 5
Contraction
Extension

2 10
1 15

Above table shows prices and demand for markers. If we read this table from top to bottom we will
find that quantity demanded of a product increased from 5 to 15 Markers due to fall in prices from Rs.
3 to Rs. 1, this is called extension in demand. Contrary to it by reading the table from bottom to top
we will find that the quantity demanded falls from 15 to 5 Markers due to rise in prices from Rs. 1 to
Rs. 3, this is called contraction in demand.
Extension and Contraction in Deamnd
4

3
Extension
Price

Contraction

1
Demand

0
0 5 10 15 20

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From above diagram we can find the movement along the demand curve. When we move from left
down to the right quantity demanded increases in response to change in price. This is extension of
demand. And the movement from right up to the left along the demand curve shows the contraction
of demand because in this the quality of the product decrease due to rise in its prices.
ii- Change in whole demand (Rise and fall in demand)
Sometime demand does not change due to change in price; it changes due to other factors like
fashion, taste, habit and weather etc. This type of change is called change in whole demand. There
are two types of change under change in whole demand i.e. Rise in Demand and Fall in Demand.
i)- Rise in Demand: -
Rise in demand means
• when quantity demanded Increased at the same price. or
• Quantity demanded remains the same at a higher price this would be the rise of demand.

ii)- Fall in Demand: -


The fall in demand means: -
• When quantity demanded decreases at the same price or
• Quantity demanded remains same at lower price.
It can be explained with the help of following table and diagram.
Change in Demand

Prices D1 Demand D2 Demand


Rs Quantity Demanded Quantity Demanded
(Markers) (Markers)

3 10 15
2 15 20

The above table shows that quantity demanded for product increases when prices are decreased,
here we find two types of demand i.e. Demand D1 and Demand D2. We change price from Rs. 3 to
Rs. 2 for markers and in response of this fall in prices results that demand D1 increases from 10
markers to 15 Markers and demand D2 increases demand from 15 markers to 20 markers and vice
versa.It can be explained with the help of following graph.

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Rise in Demand

4 D1
D2
3 D1 D2

Price
2 D1 D2

0
0 5 10 15 20 25
Demand

The above diagram shows that on vertical axis we take price and on horizontal axis we measure
demand and try to plot above mentioned table in the graph the graph shows two types of demand i.e.
D1 and D2. At initially when price changes from Rs. 3 to Rs. 2 the demand D1 Changes from 10 to
15 markers which is represented by curve D1D1 and the demand D2 changes from 15 to 20 which is
being represented as D2D2 curve. This shows demand changes from D1D1 to D2D2 which shows
that demand D1D1 has been increased to D2D2 and vice versa (Demand has been decreased from
D2D2 to D1D1).
b)- Negative Slope of Demand Curve: -
If we look at the individual or market demand curve, we find that it slops from left down to right this
means that demand curve has negative slope and shows the negative correlation between price and
quantity demanded. Why the slope of demand curve is negative. The reasons for negative slope of
the demand curve are as follow:-
1- Income Effect: - When the price of a product falls, the purchasing power of a consumer
increases with his given income and therefore he purchases more at low price e.g. when price of a
pencil is Rs. 2 a consumer purchases 2 pencil for Rs. 4. but when the price of pencil falls to Rs. 1
then a consumer can buy 4 pencils for Rs. 4. This is the income effect due to which demand curve
slopes down to right.
2- Substitution Effect: - When the price of a product falls and the price of its substitute
remains constant, the product appears to be much cheaper than its substitutes, so people purchase
more quantity of the product and therefore its demand increases e.g. if the price of the tea falls and
that at of coffee remains constant, people will purchase more tea as substitute to coffee.
3- Entry of New Buyers: When prices of product falls more people get interested in buying it.
Hence due to the entry of new buyers in the market quantity demanded of the product increases. In
this way the demand curve of the product shows negative slope.

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Chapter No. 3

Supply

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Q-3.1 a) Define Supply ? What are main conditions for supply?


b) Explain the law of Supply with the help of Schedule and Graph?
c) What are main assumption of the law of supply?
Ans. Supply: -
Generally from supply we take it just flow of any thing from the point of production to the point of
consumption however in economics we can define it as
“The quantity of a product which is offered for the sale in a market at a certain price for a given period of
time is called supply for example if 500 kg rice is offered for sale in the market at Rs. 40/kg for one month
this would be supply of rice.”
Difference between Supply and Stock: -
Stock is the total quantity of output which is being produced by the producer and seller however the
supply is a quantity of good which is offered for sale. In other words we can supply has some price
where as stock has no price e.g. the producer produces 2000 kg of rice and keep them in godowns. This
will be stock of rice and if he is agree to sell 500 kg of rice at Rs. 40/Kg it would be supply of rice i.e.
Stock : 2000 Kg
Supply: 500 Kg at the price of Rs. 40 per Kg.

Conditions for Supply: -


There are following condition of supply
1- Willingness: Supplier should be willing to sell goods
2- Ability: - Supplier must be able to sell goods
3. Price of Goods: there should be specific sale price otherwise it would be known as stock.
4. Period of Time: Specific period of time must be there.

Law of Supply: -
It is a matter of common observation that when prices are increased then supplier increases supply and
when prices are decreased then supplier decreases the supply in other words it has direct relationship
with each other. This tendency of supply with prices is called law of supply. It may be defined as: -
“If all other things remain equal , quantity supplied of a product increases as a result of an increase in
price and the quantity supplied decreases as a result of fall in price”.

Explanation: -
The law of supply clearly shows the positive co relationship between price and quantity supplied of a
product this is also shown in the schedule and a diagram below: -
a) Mathematical Explanation : -
As we know that price and supply have direct relationship with each other it means when prices are
increased then supply automatically increased. i.e.
P ∞ Qs or P= Qs

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We may explain with the help of this table.

Supply Schedule

Price (Per Kg) Quantity Demanded (Kg)

Rs. 10 100 Kg
Rs. 15 200 Kg
Rs. 20 300 Kg
Rs. 25 400 Kg
Rs. 30 500 Kg

From above table we see that there is a direct relationship between price and quantity supplied because
when price increases supply automatically increases. We see that when price is Rs. 10 per kg then
quantity supplied is 100 Kg. When price is Rs. 15/kg then supply is 200 Kg, when price is 20 Rs/Kg then
supply is 300 kg and when price is Rs. 30/Kg then supply is 500 kg. When we see table from top to
bottom it is cleared that pries are increasing and supply is also increasing and when see table from
bottom to top we see that prices are decreasing and with this quantity supply is also decreasing. Law of
supply also says when prices are increased then supply is increased and when prices are decreased
then supply is also decreased.

Graphical Representation of Law of Supply: -


We can explain this law with the help of this graph also.

35

30

25

20
Price

15

10

0
0 100 200 300 400 500 600
Qty Supply

Series1

On vertical axis we take price and on horizontal axis we take qty supply. Above graph shows that when
price is Rs. 10 per kg then quantity supplied is 100 Kg. When price is Rs. 15/kg then supply is 200 Kg,
when price is 20 Rs/Kg then supply is 300 kg and when price is Rs. 30/Kg then supply is 500 kg.
Assumption of the law: -

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Law of supply has following assumptions: -

a)- cost of production should not change: -


The main assumption of the law of supply is that cost of production should not be changed if cost of
production is changed then law of supply will not operate properly because when cost of production is
reduced it result in maximum profit and in its result supplier tries to increase supply to get maximum
profit.
b) - Production Techniques should not change:-
An other assumption of the law is that production techniques should be remain same. If production
techniques are changed it result is change is supply without any change in price because production
techniques result in low cost of production and due to this supplier tries to increase the supply.
c)- Govt. Policy: -
Govt. policy should be remain same if govt. involves then this law will not operate properly because if
govt. banned any product to produce than supplier will not produce this product and even there is an
increase in prices supply will not increase.
d)- Production Methods Must be Remain Same: -
it is also important that production methods must be remain unchanged if we change our production
methods then this law will not operate in proper ways.
Conclusion: -
From above discussion we can conclude that law of supply is an important law which let us know a
relation between supply and price.

Q. No. 3.2 a) What do mean by Change in Supply


b) Write in details about change in quantity supply and change in Supply only.
Ans. a) Changes in supply: -
Supply does not remain constant. Instead it keeps on changing there are two types of changes that
take place in demand.

• Change in quantity Supply (Extension and Contraction in Supply)


• Change in Whole Supply (Rise and Fall in Supply)
a) Change in Quantity Supply (Extension and Contraction in Supply)
When supplier moves on his curves he supply more goods when prices are increased and he supplies
less quantity of goods when prices and decrease. This phenomenon is known as change in quantity
supply or extension and contraction in supply. In other words law of supply is called change in quantity
supply and this law is also called extension and contraction in supply. It can be explained as under: -
Explanation: -
The law of supply clearly shows the positive co relationship between price and quantity supplied of a
product this is also shown in the schedule and a diagram below: -
b) Mathematical Explanation : -

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As we know that price and supply have direct relationship with each other it means when prices are
increased then supply automatically increased. i.e.
P ∞ Qs or P= Qs
We may explain with the help of this table.

Supply Schedule

Price (Per Kg) Quantity Demanded (Kg)

Rs. 10 100 Kg
Rs. 15 200 Kg
Rs. 20 300 Kg
Rs. 25 400 Kg
Rs. 30 500 Kg

From above table we see that there is a direct relationship between price and quantity supplied because
when price increases supply automatically increases. We see that when price is Rs. 10 per kg then
quantity supplied is 100 Kg. When price is Rs. 15/kg then supply is 200 Kg, when price is 20 Rs/Kg then
supply is 300 kg and when price is Rs. 30/Kg then supply is 500 kg. When we see table from top to
bottom it is cleared that pries are increasing and supply is also increasing and when see table from
bottom to top we see that prices are decreasing and with this quantity supply is also decreasing. Law of
supply also says when prices are increased then supply is increased and when prices are decreased
then supply is also decreased.

Graphical Representation of Law of Supply: -


We can explain this law with the help of this graph also.

35

30

25

20
Price

15

10

0
0 100 200 300 400 500 600
Qty Supply

Series1

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On vertical axis we take price and on horizontal axis we take qty supply. Above graph shows that when
price is Rs. 10 per kg then quantity supplied is 100 Kg. When price is Rs. 15/kg then supply is 200 Kg,
when price is 20 Rs/Kg then supply is 300 kg and when price is Rs. 30/Kg then supply is 500 kg.

b)- Change in Supply: - (Change in whole Supply).


Sometime supply does not change due to change in price; it changes due to other factors like fashion,
taste, habit and weather etc. This type of change is called change in whole Supply. There are two types
of change under change in whole Supply i.e. Rise in Supply and Fall in Supply.
i)- Rise in Supply:
ii)- Fall in Supply

i) Rise in Supply: -
It means the shifting of supply curve to the right which shows a change in supply behaviour of a product.
So we can define it as
• when quantity supplied Increased at the same price. or
• Quantity supplied remains the same at a lower price this would be the rise of supply.
ii) Fall in Supply: -
It means that supply curve shifted to the left which shows a change in supply behaviour of a product. It
may be defined as : -
• when quantity supplied decrease at the same price. or or
• Quantity supplied remains the same at a higher price this would be the rise of supply.
It can be explained with the help of this table and diagram.
It can be explained with the help of following table and diagram.

Change in Supply

Prices S1 Supply S2 Supply


Rs Quantity Supply Quantity Demanded
(Sugar) (Sugar)

5 100 kg 200 kg
10 200 kg 300 kg
15 300 kg 400 kg
20 400 kg 500 kg
25 500 kg 600 kg

The above table shows that quantity supplied of product increases when prices are increased, Here
we find two types of supply i.e. supply S1 and Supply S2. We change price from Rs. 5 to Rs. 25 for

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Sugar and in response of this rise in prices results that supply S1 increases from 100 Kg Sugars to
500 Kg of sugar and Supply S2 increases from 200 kg of sugar to 600 kg of sugar. It can be
explained with the help of following graph.

Rise / Fall in Supply

35

30 S1 S2

25 S1 S2

20 S1 S2
Price

15 S1 S2

10 S1 S2

0
0 100 200 300 400 500 600 700
Qty Supply

The above diagram shows that on vertical axis we take price and on horizontal axis we measure
supply and try to plot above mentioned table in the graph the graph shows two types of supply i.e. S1
and S2. At initially when price changes from Rs. 2 to Rs. 25 the supply S1 Changes from 100 to 500
Kg of sugar which is represented by curve S1S1 and the Supply S2 changes from 200 Kg to 600 kg
which is being represented as S2S2 curve. This shows Supply changes from S1S1 to S2S2 which
shows that Supply S1S1 has been increased to S2S2 and vice versa (supply has been decreased
from S2S2 to S1S1).

Causes of Rise and Fall in Supply


Following are the causes of rise and fall in supply
a)- A Change in Cost of Production: -
When wages of labours are increased cost of production increases and due to this supply of good falls
on other hand when cost of production is fall this result in rise in supply of good because supplier in this
situation increases his profit.
b)- A Change in Agricultural Products: -
With the introduction of new technology in agriculture per acre yield increases. So the supply of
agricultural out increased the production level and in this sense raw material is easily provided at
cheaper rates and it rise the production of good and also increase the supply of good.
c)- Change in Tax Rates: -
When government increases the rates of custom duties on imports. The supply of imported goods falls
and govt. reduces these taxes supply of imported goods increases.
d)- Development in Science and Technology: -
With the introduction of most modern technology automatic plants to produce goods are coming into
existence. Hence the cost of production is being reduced. In this way the supply of industrial goods is
rising fast.

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e)- Development in Transportation: -


With the development of transportation system in a country under developed region are being connected
with cities. In this ways markets of good are being extended. So the supply of output is rising.
f)- Law and Order: -
When there is peace in a country entrepreneurs work with dedication and increase the supply of output.
But when political crisis arises in the country the supply of out put falls.

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Chapter-1

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Q. 1 Define Public Finance and what are its major division?

Ans. Public Finance: -

Public Finance deals with the revenue-expenditure activities of government. It studies the ways and
means by which government income is secured through taxation, borrowing and other sources. It may be
defined as under: -

Á field of inquiry that treats of the income and outgo of government (federal, provincial and local).

Explanation: -

From above definition we may say that basically public finance is consisted of the govt. revenue and
expenditures which are done for the public by the government.

Division of Public Finance: -

Public finance is divided into following majors groups

a) Public Revenue
b) Public Expenditures
c) Public Debts.

a) Public Revenue: -

Public revenue includes the study of the methods of raising public revenue and the principles of taxation.
Basically the most important and major sources of public revenue are taxes and govt. tries to impose
taxes to collect maximum revenue. Govt. imposes different types of taxes the most common taxes are
Indirect Taxes and Direct Taxes. Direct taxes are those taxes which are imposed on total income of an
individuals, firms and companies earned during the financial and fiscal years and indirect taxes are those
taxes which are paid by end users of the goods these types of taxes are paid by pubic on the use of
goods and they based on the value of sales of the goods and services.

b) Public Expenditures

Public expenditures are those expenditures which are done by the government for the welfare of the
public they are consisted of the study of the principles and the effects of the public expenditures. These
types of expenditures are in the shape of those mega projects which are started by the govt. for the
welfare of the public and they include Dams, Motorways, Construction Project etc.

c) Public Debts

Public debts includes those debts which are owned by the government, in other words these are those
loans and advances which are borrowed by govt. for the development of the countries and as govt. takes
these loan for the welfare of the people and these types of loan are obtained from World Bank, IMF and
other foreign countries.

Q.2 Define Public Revenue, What are different sources of the Public Revenue?

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Ans. Public Revenue: -

Public Revenue is income of the government which is collected through various sources. In other words
public revenue includes the study of the methods of raising public revenue and the principles of taxation.
Basically the most important and major sources of public revenue are taxes and govt. tries to impose
taxes to collect maximum revenue. Govt. imposes different types of taxes the most common taxes are
Indirect Taxes and Direct Taxes. Direct taxes are those taxes which are imposed on total income of an
individuals, firms and companies earned during the financial and fiscal years and indirect taxes are those
taxes which are paid by end users of the goods these types of taxes are paid by pubic on the use of
goods and they based on the value of sales of the goods and services.

Sources of Public Revenue: -

The main sources of public revenue are given as under: -

a) Tax Revenue
b) Non Tax Revenue

a) Tax Revenue: -

These are those revenue which are manage through various taxes is called tax revenue. A tax is a
compulsory contribution imposed by the govt. It is in fact a legal as well as a persona obligation of a tax
payer to pay his due tax regularly. Different forms of taxes are given as under: -

i) Direct Taxes
ii) Indirect Taxes
iii) Proportional Taxes
iv) Regressive Taxes
v) Digressive Taxes

b) Non-Tax Revenue: -

These are those types of revenue which are collected through administration, commercial enterprises,
grants and gifts.

The administrative revenue arise from the administrative function of the govt. They include fees, license
fee, fines and penalties and forfeitures etc. Commercial revenue includes those income which is earned
by the public enterprises by selling their goods and services. Grants play very important role in modern
revenue system. They are given from one govt. to an other govt. Basically highly developed countries
give grants to less developed countries.

Q-3 Define Public Finance & Private Finance? What are main similarities and differences them?

Ans: Public Finance: -

Public Finance deals with the revenue-expenditure activities of government. It studies the ways and
means by which government income is secured through taxation, borrowing and other sources. It may be
defined as under: -

Á field of inquiry that treats of the income and outgo of government (federal, provincial and local).

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Explanation: -

From above definition we may say that basically public finance is consisted of the govt. revenue and
expenditures which are done for the public by the government.

Private Finance: - Private finance is related with the financial matters between the individuals and
people, in the same ways when all activities which are taken in public finance are taken by an individual
this is known as private finance

Similarities and Differences between them: -

The major similarities in public finance and private finance are given as under: -

Economic Behavior: -

Both type of finance have same behavior in economical point of view because it is well know that there
are limited resources but wants are un limited, therefore both kinds of fiancé are mostly useful to
accomplish with scare resources and un limited wants.

Debts: -

An individual gets loan to make up the shortage. In the same ways govt. also have to borrow to bridge
the gap between income and expenses.

Additional Resources: -

An individual tries to discover new resources of new income and he might invest his money to find out
more resources and in the same sense govt. also tries to invest the money at those areas from where
much more welfare for his people can be acquired.

Rationality: -

As it well knows that the economic behavior is rational and each person always try to get maximum
welfare with in the scare resources. So both type of finance behavior is rational because either it is
private finance or public finance its behavior will be rational and both types of users will try to get
maximum out from given amount of finance.

Balancing: -

As there are two ends i.e. Income and Expenses, therefore an individual as well as the Govt. coupe with
their expenditures and incomes.

Satisfaction of Human Wants: -

As per economics laws and principles every user needs and tries to get maximum satisfaction with their
given resources, therefore, both types of finance are used to achieve much mores satisfaction. So govt.
aims to satisfy the social wants and an individual tries to satisfy his personal wants.

Dissimilarities between Private and Public Finance

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Different Approaches:

Major difference between public and private finance is that a personal always get funds & finance to
meet his expenditure to his income. In other words he cut, his coat according to cloth. But gout , I
approach is different. Govt. first of then tries to raise the funds.

Period of time

As public finance is related with those funds which are with govt. therefore govt. involves a period of time
for his funds management. Therefore govt. prepare budget. But an individual does not need any period
for his funds income & expenditure. Therefore private finance has no specific period to meet his Exp. &
income.

Nature of Resources

As private finance is related with an individual and an individual has limited resources as compared with
Govt. . . . Because govt. may use different sources i.e Taxes, borrows and external loan from World
Bank, IME, IDB, ADB etc. But an individual has very limited powers to meet with his expenses & income.

Secrecy

Public Finance is always an open affairs. It is discussed in parliament, Press and in budget. Therefore it
is well known that public finance is not secret and mostly known by the public. But private finance is a
mystery and even its neighbor does not know about his financial position.

Nature of Budget

Private finance is mostly for an individual. Therefore an individual always tries to keep his budget surplus
but for Govt. it does not compulsory because in the period of depression Govt. mostly prepare difficult
budget to stimulate effective demand.

Pattern of Expenditure: -

Pattern of expenditure for any govt. it based on the purpose economic policy of the govt. i.e. Fiscal Policy
or Monetary Policy, but pattern of expenditure for an individual is influenced by the habits, customs and
his social Status.

Objective: -

An individual tries to maximize his total satisfaction allocating his income according to the laws of equi
marginal utility, but govt. tries to get maximum social advantages. Therefore the major aim of private
economy is wealth getting and wealth using but public finance is used for the social welfare.

Provision for Future: -

Govt. is very much liberal and foresighted and govt. spends money & finance for those schemes which
base on long run returns but an individual always tries to spend money on that project form where he can
get quick response and results.

Financial Modes: -

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Govt. has different modes to meet with the expenditure like govt. may also issue currency notes to meet
his expenditures but an individuals has no such types of option to reduce his expenditures burden.

Q. 4 Define Tax? What are different Cannons or Principles of a good taxation system?

Ans Tax:

Almost all the economist seems to be agree on this point that a tax is compulsory payment by tax payer
to the govt. without any expectation of any direct return or benefit. Therefore a tax may be defined as: -

“A tax is a compulsory payment or contribution imposed by a public authority in respect of exact amount
of services rendered to the tax payer and not imposed as a penalty for any legal offence”

OR

“A tax is a compulsory payment to the govt. to defray the expenses incurred in the common interest of all
without references to special benefits conferred”

Explanation: -

From above definition we may explain that a tax is a payment which is paid to the government to meet
those expenses which are carried out for the welfare of the public and it contains: -

a) Compulsory Payment: Which has to paid every person who is included in the limit of the tax
b) Govt. will impose all taxes on people or public
c) Tax rate is fixed by govt. and every tax payer is liable to pay that tax.

Features of the Tax: -

There are following features of the taxes.

i) It is a compulsory payment to the government.


ii) A tax payer can not claim any benefit in its return
iii) A tax is payment to meet the common expenses for the welfare of the public.
iv) It is a personal obligation.

Cannon / Principles of a goods Taxation System: -

Adam Smith’s contribution to the economics regarding taxation system are very important and a vital role
while establishing a good taxation system. The major rules / principles of a goods taxation system are
given as under: -

Cannon of Equality/ Equity: -

According to these cannon/principles of tax is that every tax payer should pay tax equally or equitably.
Therefore Adam suggests that taxes should be proportional to the income and every body should pay
the tax according to his ability. In other words rich people should pay more tax and poor people pay
lesser tax.

Cannon of Certainty: -

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This cannon implies that the tax system must have an element of certainty. The tax payer should be well
informed about the whole taxation system. He should be cleared about

i) The time of payment.


ii) Amount to be paid.
iii) Method of payment of the tax.

Cannon of Convenience: -

This principle suggests that a tax system must be convenient for the tax payment that it must arranged in
that ways that the tax payer can pay his tax easily i.e. If the land revenue is collected at the time of
cultivation it would be more convenient for the landlords and farmers to pay it because at this time they
would easily pay it. Similarly it would be convenient to collect tax from the salaried person if it is collected
at the time when salaries have been paid.

Cannon of Economy: -

This cannon suggests that there should not make un-necessary expenditures while collecting tax. If any
government spends much money on collecting taxes that there will be nothing added to the National
Income, therefore taxation system should be very much simple.

Cannon of Productivity: -

This laws states that tax system should be in such ways that there must be a sufficient amount from
taxes to meet government expenditures. It must not be in that way that a government can not get
maximum revenue from taxes.

Cannon of Simplicity: -

This principle suggests that a taxation system must be very simple and calculation of tax should be very
simple. It should be understandable to every one because simplicity results in honesty and complication
causes chances of fraud and misunderstandings.

Cannon of Elasticity: -

This cannon of elasticity suggests that a tax system must be very much elastic. It should be so elastic
that required amount of revenue can be increased or decreased with the least inconvenience.

Cannon of Diversity: -

This principle suggests that a tax system should be in that ways that it includes all types of taxes so that
every one can contributes towards the government revenue.

Cannon of Flexibility: -

Flexibility and elasticity of tax are two different things in the taxation system. Elasticity means that a tax
can be increased or decreased but flexibility is referred to the ways that the new conditions can easily be
adjusted in the taxation system.

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Cannon of Variety: -

This principle says that a taxation system must be board based and it must have wide range over
commodities and people.

Conclusion: -

From above discussion we may conclude that above cited cannons / principles / rules are very important
while farming any taxation system and any taxation system must contain these cannons.

Q. 5 Define and explain in details the Malthus Theory of Population? How you can critically
estimate this theory?

Ans Malthus Theory of Population: -

Thomas Malthus was a priest by profession. He studied the population growth of various countries of
Europe. Malthus explained his theory of population in his book “Essay on Population” which was
published in 1798. His theory may be defined as

“Population increased geometrical progression (i.e. 1,2,4,8,16,32,64,128,256) and food supply increases
in arithmetical progression (i.e. 1,2,3,4,5,6,7,8,9,10), as a result population outruns the food supply,
therefore rapid growth of population must be checked by mans of preventive checks otherwise nature
restore balance in population and food supply by positive checks”

Explanation of Malthus Theory: -

Malthus theory is consisted of the following parts and it can be explained with the help of following points:

a) Population increased in Geometrical Progression: -

Under normal condition population tends to increase in geometrical progression this means that
population must have to increase in 1, 2, 4, 8, 16, 32, 64, 128, 256 (after 200 years). If population
remains unchecked it doubles itself every 25 years.

b) Food Supply increase in Arithmetical Progression: -

Food supply on the other hands increase as slow in arithmetical progression it means it increase in 1, 2,
3, 4, 5, 6, 7, 8, 9, 10 (after 200 years). This happens due to the operation of law of diminishing return.

c) Population Outruns Food Supply: -

Since population increases at much faster than of food supply therefore population outruns foods supply
and there is gap between food supply and population.

d) Preventive Checks must be adopted: -

According to Malthus as due to low foods supply and rapid growth in the population the result is that
population outruns foods supply therefore it is important that there must be preventive checks to adopt
i.e. mad made or artificial checks like living un married life, late marriages, and voluntary controls in the
married life. If preventive checks are ignored then nature sets its own course to restore balance in

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population and foods supply like Famine, Drought, Earthquakes, diseases and wars because positive
checks are very crude therefore, preventive checks are better than positive checks .

Critical Estimation of Malthus Theory: -

Although Malthus theory is very important and helpful for analyzing population growth however it has a
criticism over and its criticism can be explained as under :-

Lack of Historical Proof: -

This theory says that population increases geometrical progression and food increases in arithmetical
progression but historically we have no proof like this that a population & food supply of any country have
been increases in this way.

Ignores Scientific Discoveries: -

Malthus ignores the scientific research and discoveries that this theory is based on the assumption in this
theory here is operation of law of diminishing return in foods supply and he ignores scientific research
and development. He in fact could not visualize the possibility of checking the operation of this law
through scientific discoveries.

Ignored a vital biological fact of life: -

Malthus ignores and fails to explain the most important biological fact of life that certain forces also
influence the birth rate of a country. Therefore fear of excessive growth of population is baseless.

Neglect the Manpower Aspect: -

Malthus ignored the manpower aspect in population growth. He forgot according to cannon that “a baby
comes to the world not only with a mouth and stomach, but also with a pair of hands”

Ignores the Relationship between populating and wealth

Malthus also does not included and neglect the concept that there is a relationship between population
and wealth and rich countries of the world may import food from any country for his people and therefore
this shortage can easily be removed.

Increase in Population is not harmful to every country: -

Increase of population is not harmful to every country. It may be harmful only t an under populated
country, because population may also be useful and can be utilized as manpower.

Positive Checks are not Peculiar/seen to over populated

Malthus viewed over population as a heavy burden on earth, which had been automatically lessened by
God in the form of femine, earthquakes, diseases and wars in the past, but he ignores that this checks
have not compulsory for over-populated country we may see these checks in low populated countries
also.

One Sided Theory: -

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This theory is one sided theory because it explains only side and it also ignores that rate of increase in
population and number of population increase is due low rate of death and not due to increase in
population.

Application of this Theory: -

The Malthus theory, inspite of its weakness is considered by some experts applicable of r Pakistan to
some extent due the following reason: -

a) Population of Pakistan is increasing very rapidly at the rate of 3% per annum which is very
highest rate in population increase.
b) Foods production is not increasing at this rate, that is why Pakistan so far could not attain self
sufficiency in food.
c) The average expectation of life is very low due to malnutrition.
d) The standard of living of the people is perhaps the lowest in the world due to non availability of
necessary facilities.
e) There is almost complete absence of preventive checks in the country expect in big cities.
f) An increase of population is often checked by positive checks such as floods, earthquakes and
epidemics etc.

Conclusion: -

Form above discussion we may conclude that Malthus theory is an important aspect and it contains an
analytical approach about the population increase and food supply and although there are some critical
estimated points which may help to bring more efficient approach of this theory.

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