GOVERNMENT OF TAMIL NADU

HIGHER SECONDARY FIRST YEAR

ECONOMICS

A publication under Free Textbook Programme of Government of Tamil Nadu

Department of School Education

Untouchability is Inhuman and a Crime

First pages of 11th Economics.indd 1 12/12/2021 01:49:42 PM

 Revised Edition - 2019, 2020,2022

(Published Under New Syllabus)

The wise
possess all

II

First pages of 11th Economics.indd 2 12/12/2021 01:49:42 PM

 HOW TO USE THE BOOK?

Chapter content It presents a complete overview of the chapter

Introduction Summary of the presentation in every chapter

Objectives Goals to transform the class room processes into learner

centric with a list of bench marks

Think and Amazing facts and rhetorical questions to lead students

Do to economic inquiries

Boxes Additional inputs to the content is provided

Directions are provided to students to conduct

Activity activities in order to explore and enrich the concept.

To motivate the students to further explore and enrich the concept

ICT To improve the computer based learning skills.

Give the values derived from functions which are graphed

Tables in the diagrams

Concept Conceptual diagrams that depict relationships between concepts

Diagrams to enable students to learn the content schematically.

Diagrams To illustrate the situations.

Glossary Explanation of scientific terms

Model Question
Papers For Evaluation

References List of related books for further details of the topic

Web links List of digital resources

III

First pages of 11th Economics.indd 3 12/12/2021 01:49:42 PM

 CAREER GUIDANCE
CAREER PROSPECTS IN ECONOMICS

First pages of 11th Economics.indd 4

The career prospects for economics graduates are many. Numerous fields are waiting for economic graduates both in public as well as private sectors. In the government
sector, one may try for Indian Economic Services, jobs in Reserve Bank of India, PSUs and other public sector banks. All these jobs have wonderful career options. These
jobs give social prestige along with financial stability. Private sector also offers jobs for economic graduates in the fields like private banks, MNCs, BPOs, KPOs, Business
journals and newspapers. A good opportunity is also waiting for economic students in higher education. One can pursue Ph.D. in economics to enter into the field of
teaching in schools, colleges and universities and research in hundreds of Research Institutes and funding agencies – national & international.
One makes a successful career as a Corporate Lawyer after BA in economics followed by LLB. BA in economics and MBA placed one at a better position in the private
sector. Economic Journalism is another shining area for job perspective.

FAMOUS UNIVERSITIES AND COLLEGES OFFERING ECONOMICS

There are many institutes, colleges and universities that have economics in its BA, MA and Ph.D. level courses. Here are the lists of institutions offering economics.
One can easily see other information related with the respective universities/colleges/institutes with their given website.

Delhi School Sri Ram College University of Delhi, University of

of Economics of Commerce South Campus Agriculture Science

www.econdse.org www.srcc.edu www.south.du.ac.in www.uasbangalore.edu.in

IV
Jawaharlal Nehru St. Stephen University Ravenshaw
University, Delhi College, Delhi of Bombay University, Cuttack

www.jnu.ac.in www.ststephens.edu www.mu.ac.in www. ravenshawuniversity.ac.in

Gokhale Institute of
Madras School
IIT Kanpur BITS –Pilani Economics & Politics,
of Economics
Pune
www.jnu.ac.in www.mse.ac.in www.bits-pilani.ac.in www.gipe.ac.in

Indian Statistical
Presidency Symbiosis School of
IIT Madras Institute, Kolkata
College, Kolkata Economics
Bangalore
https://www.iitm.ac.in www.presiuniv.ac.in www. isical.ac.in www.sse.ac.in

Banaras University Centre for

IGIDR-Mumbai
Hindu University of Hyderabad Development Studies
Thiruvananthapuram
www.bhu.ac.in www.uohyd.ernet.in www.igidr.ac.in www.cds.edu

For world recognised institution in the field of economics, everybody wishes to join London School of Economics

12/12/2021 01:49:43 PM
 Jobs in Economics Field
An array of employment opportunities is available in economics field. Meritorious candidates can get excellent job opportunities after successfully completing their BA or MA in
economics.

First pages of 11th Economics.indd 5

Government Sectors
Economics graduates can get prestigious jobs in the government sectors like
• Indian Civil Services • Indian Economic Services • Reserve Bank of India • National Sample Survey
• Ministry of Economic Affairs • Planning Board • Planning Commission (State & Central)
• National Council for Applied Economic Research and • National Institute of Public Finance and Policy.
Other than Government Sectors
Job opportunities are also waiting in the private sectors, NGOs and International Aid Agencies. The firms like World Bank, Asian Development Bank, IMF, and other Development
Banks, Aid agencies, Financial Consultancy firms are hiring the economic graduates for their various positions. One can assume in these organisations as economist, economic
advisor, executive, analyst, consultant, researcher, financial analyst, business analyst, economic research analyst and stock market analyst. As far as salary is concerned, lots of
candidates are hired through campus placement. The average salary is Rs. 4 to 8 lakh per annum. But for the deserving candidates, the field opens plethora of options and
remuneration is also beyond expectation. The filed like accountancy, actuarial, banking, insurance also open many jobs opportunities.
Economics Employment Opportunities
The various fields are offering better job opportunity after passing BA or MA in economics. Some of the high demand sectors are given below where job prospects are huge.

CAREERS FOR AN ECONOMIST

V
Government
Banking and Finance Education and Communications Business
and Public Sector

Commodities Broker Claims Examiner Professor Market Research Analyst

Bank Management Trainee Foreign Trade analyst Technical Writer Retail Buyer

Financial Analyst Tax Auditor Journalist/Columnist Staff Training and Development Specialist

Economic Forecaster Public Administrator Teacher Insurance Underwriting Trainee

Investment Banker Legislative Assistant Higher Education, Administration Management Consultant

Loan Counsellor Regional/Urban Planner Educational Television Advisor Strategic Planner

Securities Analyst Financial Planner Information Analyst Business Administrator

12/12/2021 01:49:43 PM
 Table of Contents

ECONOMICS
Page
Chapter Contents Month
No.
Chapter������1 Introduction to Micro Economics 1 June

Chapter �����2 Consumption Analysis 25 June

Chapter �����3 Production Analysis 54 June

Chapter �����4 Cost and Revenue Analysis 80 July

Chapter �����5 Market Structure and Pricing

99 July
I Mid-term Lessons 1-5

Chapter �����6 Distribution Analysis 121 Aug

Chapter �����7 Indian Economy 143 Aug

Chapter����� 8 Indian Economy Before and

After Independence 166 Sep
Quarterly Lessons 1-8

Chapter �����9 Development Experiences in India 189 Oct

Chapter ���10 Rural Economy 205 Oct

Chapter ���11 Tamil Nadu Economy

225 Nov
II Mid-term Lessons 9-11

Chapter 12 Mathematical Methods for Economics 248 Nov

E - book Assessment

VI

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 CHAPTER

1 Introduction to
Micro Economics

“Economics is everywhere, and understanding economics can

help you make better decisions and lead a happier life”
–Tyler Cowen

Learning Objectives

1 To acquire a fundamental knowledge on the subject of Economics and to

understand its nature and scope; and,

2  o understand the meaning of some of the basic concepts of Economics and

T
to observe how they are applied in the various definitions formulated on the
science of Economics

1.1 should have an explanation of the nature and

scope of the subject, i.e., whether the subject
Introduction
is traditional or modern, static or dynamic.
The readers should be in a position to clearly
A subject should have a name or a title that classify the subject as belonging to either
facilitates a clear and correct understanding arts alone, or to science alone or to both. The
of its contents. In a subject like Economics, significance of all the branches of the subject
there are many books available with titles should find a place in it. As they go through
such as ‘Introductory Economics’, ‘Economics: the introduction, the readers should be
An Introduction’, ‘Basic Economics’, ‘Elements able to understand the relationships of the
of Economics’, ‘Elementary Economics’, subject with other subjects. Newer areas
‘Fundamentals of Economics’ etc. But these incorporated into the subject and the newer
books have the same contents, though each ways of comprehending its contents are to
is intended to serve readers of a different be highlighted in the introduction. The
levels of interest and capacity. methodologies applied in the derivation
A good introduction to a subject, of its laws are to be stated in such an
besides containing the meaning of its title, introduction.

Introduction to Micro-Economics 1
 1.2 variety of definitions paves the way to
arrive a near-complete agreement on the
Economics: Meaning
subject-matter of Economics.

The term or word ‘Economics’ comes from A science grows stage by stage,
the Ancient Greek oikonomikos (oikos and at every stage, its newer definition
means “households”; and, Nemein means emerges and a concept associated with it
“management”, “custom” or “law”). Thus, receives some special emphasis. However,
the term ‘Economics’ means ‘management the study of a subject is made possible
of households’. The subject was earlier when it possesses its clear cut definition
known as ‘Political Economy’, is renamed and boundary.
as ‘Economics’, in the late 19th century by Four definitions, each referring to
Alfred Marshall. particular stage of the growth of the subject
of Economics, are presented here. They are:
01. Smith’s Wealth Definition,
1.3 representing the Classical era;
Economics: Its Nature 02. Marshall’s Welfare Definition,
representing the Neo-Classical era;
The nature of a subject refers to its 03. Robbins’ Scarcity Definition,
contents  and how and why they find representing the New Age; and,
a place  in the subject. This nature is
04. Samuelson’s Growth Definition,
understood by studying the various
representing the Modern Age.
definitions given by the notable
economists. The existence of multiplicity
of the definitions makes some scholars 1.3.1  W
 ealth Definition:
comment that a search for a clear definition Adam Smith
of Economics is an exercise in futility. (The classical era)
J.  M. Keynes, for example, observes that
Adam Smith (1723-
“Political Economy is said to have strangled
1790), in his book “An
itself with definitions”. Their presence
Inquiry into Nature and
makes studying a subject interesting, Causes of Wealth of
exciting, enjoyable, or worthwhile. In fact, Nations” (1776) defines
their presence in a social science subject “Economics as the
is a clear sign of the growth of the science. science of wealth”. He
It indicates that there exists freedom for explains how a nation’s wealth is created
people associated with such as science and increased. He considers that the
to formulate fresh definitions. These individual in the society wants to promote
associates appreciate and make use of the his own gain and in this process, he is
opportunity afforded to them and come guided and led by an “invisible hand”. He
up with a plethora of definitions saying: states that every man is motivated by his
‘The more, the merrier’. Each definition self interest. This means that each person
represents a unique generalisation. A wide works for his own good.
Introduction to Micro-Economics 2
 Smith favours the introduction attainment and with the use of the material
of “division of labour” to increase the requisites of well-being. Thus, it is on one side
quantum of output. Severe competition a study of wealth; and on the other, and more
in factories and society helps in bettering important side, a part of the study of man.”
the product. Supply force is very active The important features of
and a commodity is made available to Marshall’s definition are:
the consumers at the lowest price.
a. Economics does not treat wealth as
the be-all and end-all of economic
The publication of Adam Smith’s activities. Man promotes primarily
“The Wealth of Nations” in 1776, has welfare and not wealth.
been described as “the effective birth b. The science of Economics contains
of economics as a separate discipline”. the concerns of ordinary people who
are moved by love and not merely
guided or directed by the desire to get
Criticism maximum monetary benefit.
For Smith, Economics consists of ‘wealth- c. Economics is a social science. It studies
getting’ activities and ‘wealth-spending’ people in the society who influence
activities. An undue emphasis is given to one another.
material wealth. Wealth is treated to be
an end in itself. This view leads him to Criticism
ignore human welfare as an essential part
of Economics. Smith gives his definition a. Marshall regards only material things.
when religious and spiritual values are He does not consider immaterial
held high. Ruskin and Carlyle regards things, such as the services of a doctor,
Economics as a ‘dismal science’, as it a teacher and so on. They also promote
teaches selfishness which is against ethics. people’s welfare.
b. In the theory of wages, Marshall ignores
the amount of money that goes as
1.3.2  W
 elfare Definition: reward for the services of ‘immaterial’
Alfred Marshall services.
(The Neo- classical era)
c. Marshall’s definition is based on the
Alfred Marshall concept of welfare. But it is not clearly
(1842-1924) in his defined. Welfare varies from person
book “Principles of to person, country to country and one
Economics” (1890) period to another. Marshall  clearly
defines Economics thus: distinguishes between those things
“Political Economy” or that are capable of promoting welfare
Economics is a study of of people and those things that are not.
mankind in the ordinary business of life; it Things like liquor that are not capable
examines that part of individual and social of promoting welfare but command
action which is most closely connected with the

Introduction to Micro-Economics 3
 a price, come under the purview of Economics, according to Robbins, is a
Economics. science of choice.
d. However, welfare means happiness or
comfortable living conditions of an Criticism
individual or group of people. The a. Robbins does not make any distinction
welfare of an individual or nation is between goods conducive to human
dependent not only on the stock of welfare and goods that are not. In
wealth possessed but also on political, the production of rice and alcoholic
social and cultural activities of the drink, scarce resources are used.
nation. But the production of rice promotes
human welfare, while that of alcoholic
1.3.3  S
 carcity Definition: drinks does not. However, Robbins
Lionel Robbins concludes  that Economics is neutral
(The New Age) between ends.
b. Economics deals not only with the
Lionel Robbins
micro-economic aspects of resource-
published a book “An
allocation and the determination
Essay on the Nature
of the price of a commodity, but
and Significance of
also with the macro-economic
Economic Science” in
aspects like how national income
1932. According to
is generated. But, Robbins reduces
him, “Economics is a
Economics merely to theory of
science which studies human behaviour
resource allocation.
as a relationship between ends and
scarce means which have alternative c. Robbins’ definition does not cover
uses”. the theory of economic growth and
development.
The major features of Robbins’
definition are:
1.3.4  G
 rowth Definition:
a. Ends refer to human wants. Human
Samuelson
beings have unlimited number of
(The Modern Age)
wants.
b. On the other hand, resources or means
Paul Samuelson
that go to satisfy the unlimited human published a book "An
wants are limited or scarce in supply. Intradictory Analysis"
The scarcity of a commodity is to in 1948. He defines
be considered only in relation to its Economics as “the
demand. study of how men and
society choose, with
c. Further, the scarce means are capable
or without the use of money, to employ
of having alternative uses. Hence,  an
scarce productive resources which could
individual grades his wants and satisfies
have alternative uses, to produce various
first his most urgent want. Thus,
Introduction to Micro-Economics 4
commodities over time, and distribute
1.4.1  E
 conomics: Its Subject-
them for consumption, now and in the
Matter
future among various people and groups of
society”.
The major implications of this
definition are as follows:

a. Like Robbins, Samuelson states that

the means are scarce in relation to
unlimited ends and that such means
could be put to alternative uses.
b. Samuelson makes his definition
dynamic by including the element of
time in it. Therefore, his definition
„„Economics focuses on the behaviour
covers the theory of economic
and interactions among economic
growth.
agents, individuals and groups
c. Samuelson’s definition is applicable belonging to an economic system.
also in a barter economy, where money It deals with the activities such as
is not used. the consumption and production
d. His definition covers various aspects of goods and services and the
like production, distribution and distribution of income among the
consumption. factors of production. The activities
e. Samuelson treats Economics as a of the rational human beings in
social science, whereas Robbins the ordinary business of life under
regards it as a science of individual the existing social, legal and
behaviour. institutional arrangement are
included in the Science of Economics;
Of all the definitions discussed the abnormal persons and the socially
above, the ‘growth’ definition stated unacceptable and unethical activities
by Samuelson appears to be the most are excluded.
satisfactory. „„Economics studies the ways in which
people use the available resources to
satisfy their multiplicity of wants.
1.4 Scarcity is a problem indicating the
Scope of Economics gap between what people want and
what they are able to get. This scarcity
The scope of the subject of Economics refers can be eliminated either by limiting
to on the subject-matter of Economics. the human wants or by increasing the
It throws light on whether it is  an art or supply of the goods that satisfy the
a science and if science, whether it is a
positive science or a normative science.
Introduction to Micro-Economics 5
 human wants. The method of getting co-relationship between cause and effect.
more is resorted to, rather than the Scientific laws derived are tested through
method of wanting less. experiments; and future predictions
„„Economics is concerned with activities are made. These laws are universally
of human being only. Human beings applicable and accepted. Economists like
are related to one another and the Robbins, Jordon and Robertson argue
actions of one member affect those that Economics is a science like Physics,
of the other members in the society. Chemistry etc., since, it has several similar
Hence, Economics is called a Human characteristics. Economics examines the
Science or Social Science. relationships between the causes and the
effects of the problems. Hence, it is rightly
„„The activities of rational or normal
considered as both an art and a science. In
human beings are the subject-matter
fact, art and science are complementary to
of Economics.
each other.
„„All human activities related to wealth
constitute the subject-matter of
Economics. Thus, human activities 1.4.3  E
 conomics: Positive
not related to wealth (non-economic Science and Normative
activities) are not treated in Economics. Science
For example, playing cricket for
Positive science deals with what it is, means,
pleasure, mother’s child care.
it analyses a problem on the basis of facts and
examines its causes. For example, at the time
It is customary to clarify whether
of a price increase, its causes are analysed.
Economics is an art or a science; and if it
is a science, to observe its specific features.

Positive Normative
1.4.2 Economics is an Art and is,was,will be ought to, should

a Science If the price of Price should go up to

reduce petrol
petrol rises,people
will buy less consumption

i. Economics as an Art
Can be Cannot be
Art is the practical application of proved proved

knowledge for achieving particular goals. Connects cause Makes recommendations

& effects Not based on facts
Economics provides guidance to the Descriptive Tells you should be/have

solutions to all the economic problems. Based on facts

Tells you what is
been
Prescriptive
Objective Subjective
A. C. Pigou, Alfred Marshall and
others regard Economics as an art.

ii. Economics as a Science On the other hand, normative

Science is a systematic study of knowledge. science responds to a question like
All its relevant facts are collected, classified what ought to be. Here, the conclusions
and analyzed with its scale of measurement. and results are not based on facts, but
Using these facts, science develops the on different considerations belonging
Introduction to Micro-Economics 6
to social, cultural, political, religious is necessary when the theories associated
realms. They are basically subjective in with them are studied. Only a preliminary
nature. acquaintance is now attempted here.
In short, positive science is concerned
with ‘how? and why?’ and normative science 1.5.1  Goods and Services
with ‘what ought to be’. The distinction Both goods and services satisfy human
between the two can be explained. An wants. In Economics, the term ‘goods’
increase in the rate of interest, under implies the term ‘services’ also, unless
positive science, would be looked into as specified otherwise.
to why and how can it be reduced, whereas
under normative science, it would be seen
as to whether it is good or bad.
Three statements about each type
are given below:

Positive Economics
a. An increase in money supply implies a
price-rise in an economy.
b. As the irrigation facilities and application
of chemical fertilizers expand, the Goods (also called ‘products’, ‘commodities’,
production of food-grains increases. ‘things’ etc)
c. An increase in the birth rate and a a. as material things, they are tangible;
decrease in the death rate reflect the b. have physical dimensions, i.e., their
rate of growth of population. physical attributes can be preserved
over time;
Normative Economics
c. exist independently of their owner;
a. Inflation is better than deflation.
d. are owned by some persons;
b. More production of luxury goods is not
e. are transferable;
good for a less-developed country.
f. have value-in exchange;
c. Inequalities in the distribution of wealth
and incomes should be reduced.
Kinds of Goods (and Services)
a. Free and Economic goods
1.5 Free goods are available in nature and in
Basic Concepts in abundance. Man does not need to incur
Economics any expenditure to own or use them. For
example air, and sun shine. Water was also
Like other sciences, Economics also an example in the past, but at present it has
has concepts to explain its theories. A exchange value. So it is not a free good.
complete and clear grasp of their meaning
Introduction to Micro-Economics 7
 Milton Friedman, a Nobel laureate, Capital-goods (also called
popularises a saying: “There is no such producer’s goods) don’t directly satisfy the
thing as a free lunch”. He means that it is consumer wants. They help to produce
impossible to get something for nothing. consumer goods. For example, machines
Even those offered ‘free’ always costs a do not directly satisfy the consumers, but
person or the society as a whole. Its cost, in factories, the manufacturers need them.
however, is hidden. It is an externality.
Someone can benefit from an externality or
from a public good, but someone-else has
to pay the cost of producing these benefits.
In Economics, it refers to ‘opportunity cost’.

PUBLIC VS PRIVATE GOODS

PUBLIC GOODS
A good available to everyone to consume, c. Perishable goods and Durable goods:
Regardless of who pays and who doesn’t.
Perishable goods are short-lived. Their
Spillover benefits;
life-span is limited. For example fish,
Non -rival in consumption and non- excludable;
fruits, flower etc., do not have a long life.
E.g:National defence,Law enforcement.
PRIVATE GOODS
A good consumed by a single person or
Household;
No spillover benefits;
Rival in consumption and excludable;
E.g:food and drink

On the other hand, economic

goods are not available in plenty.
They are scarce in supply. Man has to
spend money to own or use them. Durable goods and semi-durable
b. Consumer goods and Capital goods:
goods have a little longer life-time than
the Perishable goods. For example,
Consumer goods directly satisfy human
a table, a chair etc.
wants, TV, Furniture, Automobile etc.

Introduction to Micro-Economics 8
Services
Along with goods, services are produced
and consumed. They are generally, possess
the following:
„„Intangible: Intangible things are
not physical objects but exist in
connection to other things, for
example, brand image, goodwill etc.
But today, the intangible things are
converted and stored into tangible
items such as recording a music piece
into a pen-drive. They are marketed as
a good.
„„Heterogeneous: Services vary across
b. Characteristics of Utility
regions or cultural backgrounds. They
can be grouped on the basis of quality 1. Utility is psychological. It depends

standards. A single type service yields on the consumer’s mental attitude.

multiple experiences. For example, For example, a vegetarian derives
music, consulting physicians etc. no utility from mutton;

„„Inseparable from their makers: 2. Utility is not equivalent to

Services are inextricably connected to usefulness. For example, a smoker
their makers. For example, labour and derives utility from a cigarette; but,
labourer are inseparable; and, his health gets affected;

„„Perishable: Services cannot be stored 3. Utility is not the same as pleasure.

as inventories like assets. For example, A  sick person derives utility from
it is useless to possess a ticket for a taking a medicine, but definitely, it
cricket-match once the match is over. is not providing pleasure;
It cannot be stored and it has no value- 4. Utility is personal and relative. An
in-exchange. individual obtains varied utility
from one and the same good in
different situations and places;
1.5.2 Utility
5. Utility is the function of the
a. Meaning intensity of human want. An
individual consumer faces a
‘Utility’ means ‘usefulness’. In
tendency of diminishing utility;
Economics, utility is the want-
satisfying power of a commodity 6. Utility is a subjective concept it
or a service. It is in the goods and cannot be measured objectively and
services for an individual consumer it cannot be measured numerically;
at a particular time and at a particular 7. Utility has no ethical or moral
place. significance. For example, a cook
Introduction to Micro-Economics 9
 derives utility from a knife using 6. Knowledge Utility: It is the utility
which he cuts some vegetables; and, derived by having knowledge of a
a killer wants to stab his enemy particular thing. Advertisement
by that knife. In Economics, a serves as a source of information
commodity has utility, if it satisfies on an object.
a human want;
d. Measurability of Utility
c. Types of Utility Wants of a person are satisfied by the act
The following are the types of utility of consumption. The consumer derives
utility, measured in terms of ‘Utils’.
1. Form Utility: An individual
An ‘Util’ is a unit of measurement of
consumer obtains utility from a
utility. An individual pays a price for
good or service only when it is
the unit of the good, equal to the utility
available in a particular form. Raw
derived. Marshall states that utility
materials in their original form may
can be measured indirectly using the
not possess utility for a consumer.
‘measuring rod of money’.
But in their changed forms as they
become finished products, they
provide utility to him. For example, 1.5.3 Price
cotton as a raw material may not Price is the value of the good expressed in
possess utility for a consumer; but terms of money. Price of a good is fixed
as it gets a new form as a cloth, it by the forces of demand for and supply
yields the consumer utility. of the good. Price determines what goods
2. Time Utility: A sick man derives are to be produced and in what quantities.
time utility from blood not at the It also decides how the goods are to be
time of its donation, but only at the produced.
operation-time, i.e., when it is used.
3. Place Utility: A student derives 1.5.4 Market
place utility from a book not at the
Generally, market means a place where
place of its publication (production
commodities are bought and sold.
centre) but only at the place of his
education (consumption centre). But, in Economics, it represents
where buyers and sellers enter into an
4. Service Utility: An individual
exchange of goods and services over a
consumer derives service utility from
price.
a service made available at the time
when he most needs it. For example,
clients obtain service utility from 1.5.5 Cost
their lawyers, patients derive service Cost refers to the expenses incurred to
utility from the doctors and so on. produce or acquire a given quantum of a
5. Possession Utility: When a student good. Together with revenue, it determines
buys a book or dictionary from a the profit gained or the loss incurred by a
book seller, then only it gives utility. firm.
Introduction to Micro-Economics 10
 b. Particular Equilibrium and General
1.5.6  Revenue
Equilibrium
Revenue is income obtained from the sale An equilibrium, when it pertains to a
of goods and services. Total Revenue (TR) single variable, may be called particular
represents the money obtained from equilibrium.
the sale of all the units of a good. Thus,
TR  =  P  × Q, where TR is Total Revenue; An equilibrium, on the other
P  is the price per unit of the good; and, hand, when it relates to numerous
Q is the Total Quantity of the goods sold. variables or even the economy as a whole,
final
may be called general equilibrium.

1.5.7 Equilibrium
1.5.8 Income
a. Stable Equilibrium Income represents the amount of
Prof. Stigler states that “equilibrium monetary or other returns, either earned

NIT 1 is a position from which there is no

net tendency to move”. Its absence
is referred to as disequilibrium.
or unearned small or big, accruing
over a period of time to an economic
unit. Nominal income refers to income,
Consumer’s equilibrium occurs expressed in terms of money. It is termed
Y
when heProduction
gets maximum satisfaction.
Possibilities Curve as the money income.
The 
A1
equilibrium of the Producer Real income is the amount of goods
occurs
A when he gets maximum profit. that can be purchased with money as income.
Goods-Y

Growth of resources
A resource is in equilibrium when It is the purchasing power of income which
it gets fully employed and gets its is based on the rate of inflation.
maximum payment. Where, static
equilibrium is based on given and
constant
0 prices, quantities, E E1income,
1.6
X
Goods-X
technology, population etc. Economics: Its
Diagram 1.3 Methods, Facts,
Theories and Laws

Y
Market 1.6.1  M
 ethods of Economics:
S
D Deduction and Induction
E Like any other science, Economics
price

also has its laws or generalisations.

D These laws govern the activities in the
S various divisions of Economics such as
Consumption, Production, Exchange
O M X
and Distribution. The logical process of
Quantity demanded & supplied
arriving at a law or generalization in a
Diagram 1.1
science is called its method.
Introduction to Micro-Economics 11
 b. Inductive Method of Economic
Analysis
Inductive method, also called  empirical
method, is adopted by the “Historical
School of Economists”. It involves the
process of reasoning from particular facts
to general principle.
Economic generalizations are
derived in this method, on the basis of
Economics uses two methods:
deduction and induction. (i) Experimentations;

a. Deductive Method of Economic (ii) Observations; and,

Analysis (iii) Statistical methods.

It is also named as  analytical or

abstract method. It consists in deriving „„Step 1: Data are collected about a
conclusions from general truths; certain economic phenomenon. These
it takes few general principles and are systematically arranged and the
applies them to draw conclusions. The general conclusions are drawn from
classical and neo-classical school of them.
economists notably, Ricardo, Senior, „„Step 2: By observing the data,
J.S.Mill, Malthus, Marshall, Pigou, conclusions are easily drawn.
applied the deductive method in their „„Step 3: Generalization of the data and
economic investigations. then Hypothesis Formulation
„„Step 4: Verification of the hypothesis
Steps of Deductive Method (eg.Engel’s law)
„„Step 1: The analyst must have a clear
and precise idea of the problem to be
According to Engel’s Law “The
inquired into.
proportion of total expenditure
„„Step 2: The analyst clearly defines the incurred on food items declines as
technical terms  used in the analysis. total expenditure [which is proxy for
Further, assumptions of the theory are income] goes on increasing.”
to be precise.
„„Step 3: Deduce hypothesis from the Economists today are of the
assumptions taken. view that both these methods are
„„Step 4: Hypotheses should be verified complementary. Alfred Marshall
through direct observation of has rightly remarked: “Inductive and
events in the real world and through Deductive methods are both needed for
statistical methods. (eg) There exists scientific thought, as the right and left foot
an inverse relationship between price are both needed for walking”.
and quantity demanded of a good.
Introduction to Micro-Economics 12
1.6.2  E
 conomics: Facts, Importance of Micro
Theories Economics
Using the methods, the economist „„To understand the operation of an
observes facts, such as, changes in the price economy
of a commodity. Similarly, the quantity „„To provide tools for economic
demanded of that commodity also varies. policies
And he observes these movements and
„„To examine the condition of
comes up with a theory that these two
economic welfare
movements are inversely related, i.e.,
when the price increases, the quantity „„Efficient utilization of resources
demanded of that commodity decreases „„Useful in international trade
and vice versa. Thus, he formulates his „„Useful in decision making
theory of demand.
„„Optimal resource allocation
He tests his theory by collecting „„Basis for prediction
further facts and when his theory stands the
„„Price determination
test of time and obtains universal acceptance,
the theory is raised to the status of a law.
A physical scientist carrying out
controlled experiments in his laboratory can
1.6.3  Nature of Economic Laws test the scientific laws very easily by changing
A Law expresses a causal relation between the conditions obtaining there. Changes
two or more than two phenomena. in Economics science cannot be brought
Marshall states that the Economic laws about easily. As a result, prediction regarding
are statement of tendencies, and those human behaviour is likely to go wrong. There
social laws, which relate to those branches are exceptions to the Law of Demand. Thus,
of conduct in which the strength of economic laws are not inviodable.
the motives chiefly concerned can be As unpredictability is invariably
measured by money price. associated with the economic laws. Marshall
In natural sciences, a definite result compares them to the laws of tides. Just as it
is expected to follow from a particular cannot be predicted and said with certainty
cause. In Economic science, the laws that a high tide would follow a low tide,
function with cause and effect. The unpredictability prevails in Economics.
consequences predicted by the data, Human behaviour is volatile. Economic
necessarily and invariably follow. laws are not assertive but they are indicative.
However, Economic laws are not The Law of Demand, for example, states that
as precise and certain as the laws in the other things remaining the same, the quantity
physical sciences. Marshall holds the demanded of a commodity increases, as its
opinion that there are no laws of economics price decreases and vice versa.
which can be compared for precision with The use of the assumption ‘other
the law of gravitation. things remaining the same’ (ceteris
Introduction to Micro-Economics 13
paribus) in Economics makes the of production namely Land, Labour,
Economic laws hypothetical. It might be Capital and Organization and also the
argued that the laws in other sciences relationship between inputs and output.
can also be called hypothetical. It should
be admitted however that in the case of 1.7.3  Exchange
Economics, the hypothetical elements in
its laws are a little less pronounced than in Exchange is concerned with price
the laws of physical sciences. determination in different market forms.
This division covers trade and commerce.
But since money is used as the Consumption is possible only if the
measuring rod, laws in economics are produced commodity is placed in the
more exact, precise and accurate than the hands of the consumer.
other social sciences. As the value of the
measuring- rod money is not constant,
1.7.4 Distribution
there is always an hypothetical element
surrounding the laws of Economics. Production is the result of the coordination
Some economic laws are simply of factors of production. Since a
truisms. For example, saving is a function commodity is produced with the efforts
of income. Another example of truism is: of land, labour, capital and organization,
human wants are unlimited. the produced wealth has to be distributed
among the cooperating factors. The
reward for factors of production is studied
1.7 in this division under rent, wages, interest
Economics: Its Sub and profit. Distribution studies about the
Divisions pricing of factors of production.

Economics has been divided into some 1.8

branches.
Economics: Its Types

1.7.1 Consumption Economics is a rapidly growing subject and its

Human wants coming under consumption horizon has been expanding. The basic thrust
is the starting point of economic activity. of the subject is that there should be efficient
In this section the characteristics of human allocation of the available scarce resources to
wants based on the behaviour of the obtain maximum welfare to the people on
consumer, the diminishing marginal utility a sustainable basis. Given below are some
and consumer’s surplus are dealt with. of the major branches of the subject, where
such efficient resource allocation is made.
1.7.2 Production
1.8.1  Micro-economics
Production is the process of transformation
of inputs into output. This division covers Micro Economics is the study of the
the characteristics and role of the factors economic actions of individual units say
Introduction to Micro-Economics 14
households, firms or industries. It studies
how business firms operate under different The terms ‘micro economics’ and
market conditions and how the combined ‘macro economics’ were first used in
actions of buyers and sellers determine economics by Norwegian economist
prices. Micro economics covers Ragner Frisch in 1933. After Prof. Frisch,
the terms earned popularity when J.M.
(i) Value theory (Product pricing and
Keynes clearly distinguished between
factor pricing)
the terms through his book entitled
(ii) Theory of economic welfare ‘General theory of ‘Employment, Interest
and Money’ published in 1936.

1.8.2  Macro-economics Macro Economics Vs Micro Economics

Macro economics is the obverse of
micro economics. It is concerned with
the economy as a whole. It is the study
of aggregates such as national output,
inflation, unemployment and taxes. The
General Theory of Employment, Interest
and Money published by Keynes is the
basis of modern macro economics.

Difference between Micro Economics and Macro Economics

Micro Economics Macro Economics
1. It is that branch of economics which 1. It is that branch of economics which
deals with the economic decision- deals with aggregates and averages of
making of individual economic agents the entire economy. E.g., aggregate
such as the producer, the consumer etc. output, national income, aggregate
savings and investment, etc.
2. It takes into account small components 2. It takes into consideration the economy
of the whole economy. of the country as a whole.
3. It deals with the process of price 3. It deals with general price-level in any
determination in case of individual economy.
products and factors of production.
4. It is known as price theory 4. It is also known as the income theory.
5. I t is concerned with the optimization goals 5. It is concerned with the optimization of
of individual consumers and producers the growth process of the entire economy.

Introduction to Micro-Economics 15
1.8.3  International Economics 1.8.7  E
 nvironmental
In the modern world, no country can Economics
grow in isolation. Every country is having Depletion of natural resources stock and
links with the other countries through pollution result from rapid economic
foreign capital, investment (foreign direct development. Hence the need for the study
investment) and international trade. of Environmental Economics which analyse
the inter relationship between economy and
1.8.4 Public Economics environment. Environmental Economics
(Public Finance) is a study of inter disciplinary tools for
the problems of ecology, economy and
Public finance is concerned with
environment.
the income or revenue raising and
expenditure incurring activities of the
public authorities and with the adjustment 1.9
of the one with the other. The scope of Basic Economic
Public Finance covers Public expenditure, Problems
Public revenue, Public debt, Financial
administration and federal Finance. If resources are abundant and wants are
so few, then there would be no economic
1.8.5  D
 evelopmental problem. But this situation can never
Economics exist. Resources are always scarce and
our wants are numerous. Hence in every
The countries have been classified society certain choices have to be made.
into developed, developing and under
developed on the criteria of Per Capita
Income, Human Development Index
and Happiness Index. The Development
Economics deals with features of developed
nations, obstacles for development,
Economic and Non-economic factors
influencing development, various growth
models and strategies.

1.8.6  Health Economics

What and how much to
Health Economics is an area of applied
produce?
economics. It covers health indicators,
preventive and curative measures, Every society must decide on what goods
medical research and education, Rural it will produce are and how much of these
Health Mission, Drug Price control, Neo it will produce. In this process, the crucial
natal care, Maternity and Child health, decisions include:
Budgetary allocation for health etc.
Introduction to Micro-Economics 16
a. Whether to produce more of food, a minimum amount of consumption be
clothing and housing or to have more ensured for everyone in the society. Due
luxury goods to the scarcity of resources, a society
b. Whether to have more agricultural faces the compulsion of making choice
goods or to have industrial goods and among alternatives. It faces the problem
services of allocating the scare resources to the
production of different possible goods and
c. Whether to use more resources in
services and of distributing the produced
education and health or to use more
goods and services among individuals
resources in military services
within the economy.
d. Whether to have more consumption
goods or to have investment goods
e. Whether to spend more on basic 1.10
education or higher education
Production
Possibility Curve

The problem of choice between relatively

scarce commodities due to limited
productive resources with the society
can be illustrated with the help of a
geometric device, is known as production
possibility curve. Production possibility
curve shows the menu of choice along
which a society can choose to substitute
one good for another, assuming a given
state of technology and given total
resources.
How to Produce?
The explanation and analysis of
Every society has to decide whether it will
production possibility curve is based
use labour-intensive technology or capital
upon certain assumptions, some of them
intensive technology; that is whether to
are following
use more labour and less machines and
vice versa. The time period does not change. It
(i)
remains the same throughout the
For whom to produce? curve.
Every society must also decide how (ii) Techniques of production are fixed.
its produce be distributed among the (iii) There is full employment in the
different sections of the society. It must economy.
also decide who gets more and who gets (iv) Only two goods can be produced
less. It should also decide whether or not from the given resources.

Introduction to Micro-Economics 17
 (v) Resources of production are fully
mobile.
(vi) The factors of production are given
in quantity and quality
(vii) The law of diminishing returns
operates in production.
Every production possibility curve is
based upon these assumptions. If some of
these assumptions changes or neglected,
then it affects the nature of production
possibility curve.
To draw this curve we take the help of We can obtain a production possibility
production possibilities schedule, as curve by drawing production possibilities
shown below. schedule graphically. The quantity of food
is shown on x-axis and the number of
cars is shown on y-axis, the different six

UNIT 1
Production possibilities
production possibilities are being shown
schedule
as point P1 P2 P3 P4 P5 & P6.
Production Quantity No of car
possibilities of food production
Y production Y
Production Possibilities Curve
in tonsCurve
Production Possibilities
A1
I 0 25
25 A
Goods-Y

Growth of resources
No of Cars

II 100 23
20
15 III 200 20
10 IV 300 15
5
V 400 8
0 0 E E1 X
100 VI 200 300 400 500 500 X 0 Goods-X
Food Production
Diagram 1.3
Diagram
Diagram 1.21.2
This schedule suggests that if all resources
are thrown into the production of food,
a maximum of 500 tons of food can be Food
Y
production
Wants
produced, given the existing technology. If we assume thatMarket
innumerable production
S
If on the other hand, all resources are possibilities
D exist between any two-
Consumption Efforts
instead used for producing cars, 25 cars production possibilities
E
schedule, we
can be produced. In between these two get the production possibility curve P1
price

extreme possibilities exist. If we are to p6. This shows the locus of points of
Distribution Production
& to give up some
willing food, we can have D
the different possibilities of production
S
Exchangesome cars. of two commodities, which a firm or an
O M X
Quantity demanded & supplied
Introduction to Micro-Economics 18
Diagram 1.1
economy can produce, with the help of resources between the goods for the higher
given resources and the techniques of income group and the lower income
production. Points outside the production group and the goods for the defense and
possibility (e.g. point p) are unattainable the civilians. Since PPC is the locus of the
as society’s resources of production are combination of the goods the problem of
not sufficient to give output beyond choice will not arises when we choose any
the curve. Points lying inside the curve point on PPC.
like P₇ are attainable by the society but (ii) The Notion of Scarcity
at these points resources production
We can explain the notion of scarcity
are not fully employed. For example,
with the help of PPC. We know that every
if society is producing at point P 4 then
society possesses only a specific amount of
it can increased the production of food
resources, which can produce only limited
keeping the no of cars constant or it can
amount of output even with the help of
increase the production of cars keeping
best technology, economic scarcity of best
the food grain output constant or it can
fact of life. The production possibility
increased the output of both the goods
curve reflects the constraints imposed by
simultaneously.
the element of economic scarcity.
Shift of production possibility curve
(iii) Solution of central problems
The PPC shifts upward or downward due to:
The central problems of an economy can
1. The change in the supply of be explained with the help of PPC. The
productive resources and solution of problem of what to produce
2. The change in the state of technology. involves the decision regarding the choice
The production capacity of an economy of location on the production possibility
grows overtime through increase in curves. A production combination
resource supplies and improvement of represented by any point inside the
technology. This enables PPC to shift PPC indicates that the economy is using
upward from AE to A1E1 as shown in figure inefficient methods of production and
below. This outward shift of the PPC is the inefficient combination of resources.
basic feature of economic growth.
1.11 Conclusion
Uses of production possibility
This chapter has given a broad overview
curve
of economics. Moreover the present
Through the device of PPC can be used certain common characteristics of
for many analytical purposes. We shall economics definitions of Wealth,
discuss below some of its popular uses. Welfare, Scarcity & Growth free essential
(i) The problem of choice questions an economy must solve; what to
produce, how to produce and for whom
The problem of choice arise because of
to produce and also looked at division of
the given limited resources and unlimited
economics, distinguishing between Micro
wants, may relate to the allocation of
and Macroeconomics. It has introduced
Introduction to Micro-Economics 19
some basic concepts frequently appearing
Value Power of a commodity
throughout the lessons.
to command other
It is perhaps both importance, the commodities in an
study of economics is an intellectually exchange
fascinating adventure highly relevant and
it affects people’s life. Every now and then Price Value of a commodity
after learning lesson, think of economic expressed in terms of
activities in and around you. Perhaps in money
this way learning of economics makes to Income The amount of monetary
think like an economist. or other returns, either
earned or unearned,
GLOSSARY accruing over a period of
time
Scarcity The gap between what
people want and what Deductive Deduction is a process
people can get Method in logic facilitating or
arriving at an inference,
Production Creation of utility moving from general to
Distribution Share of the national particular
income reaching the four Inductive Induction is a process
factors of production Method in logic facilitative or
Services Services, like goods, are arriving at an inference,
economic entities; and moving from particular
are inseparable from their to general
owners and are intangible,
perishable in nature

Introduction to Micro-Economics 20
 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. ‘Economics is a study of mankind in 5. Find the odd one out:

the ordinary business of life’ -It is the a. “An inquiry into the nature and the
statement of causes of the Wealth of Nations”
a. Adam Smith b. “Principles of Economics”
b. Lionel Robbins c. “Nature and Significance of
c. Alfred Marshall Economic Science”
d. Samuelson d. “Ceteris paribus”

2.
The basic problem studied in 6. The equilibrium price is the price at
Economics is which
a. Unlimited wants a. Everything is sold
b. Unlimited means b. Buyers spend their money
c. Scarcity c. Quantity demanded equals
d. Strategy to meet all our wants quantity supplied
d. Excess demand is zero
3. Microeconomics is concerned with
a. The economy as a whole 7. Author of “An Inquiry into the Nature
and Causes of Wealth of Nations”
b. Different sectors of an economy
a. Alfred Marshall
c. The study of individual economic
units behaviour b. Adam Smith

d. The interactions within the entire c. Lionel Robbins

economy d. Paul A Samuelson

4.
Which of the following is a 8. “Economics studies human behaviour
microeconomics statement? as a relationship between ends and
a. The real domestic output increased scarce means which have alternative
by 2.5 percent last year. uses” is the definition of economics of

b. Unemployment was 9.8 percent of a. Lionel Robbins

the labour force last year. b. Adam Smith
c. The price of wheat determines its c. Alfred Marshall
demand d. Paul A Samuelson
d. The general price level increased
by 4 percent last year.

Introduction to Micro-Economics 21
 9. Who is the Father of Economics? c. Economics is the study of material
a. Max Muller welfare

b. Adam Smith d. Economics deals with unlimited

wants and limited means
c. Karl Marx
14. Growth definition takes into account
d. Paul A Samuelson
a. The problem of choice in the
10. “Economics is a science” The basis of dynamic framework of Economics
this statement is—
b. The problem of unlimited means
a. Relation between cause and effect in relation to wants
b. Use of deductive method and c. The production and distribution of
inductive method for the wealth
formations of laws
d. The material welfare of human
c. Experiments beings
d. All of the above
15. Which theory is generally included
11. Utility means under micro economics ?
a. Equilibrium point at which a. Price Theory
demand and supply are equal b. Income Theory
b. Want-satisfying capacity of goods c. Employment Theory
and services
d. Trade Theory
c. Total value of commodity
16. ....................... have exchange value
d. Desire for goods and services
and their ownership rights can be
12. A market is established and exchanged
a. Only a place to buy things a. Goods
b. Only a place to sell things b. Services
c. Only a place where prices adjust c. Markets
d. A system where persons buy and d. Revenue
sell goods directly or indirectly
17. Identify the correct characteristics of
13. Which one of the following is not utility
a point in the Welfare Definition of a. It is equivalent to ‘usefulness’
Economics?
b. It has moral significance
a. Study of an ordinary man
c. It is same as pleasure
b. Economics does not focus on
wealth alone d. It depends upon consumer’s
mental attitude

Introduction to Micro-Economics 22
 18. Who has given scarcity definition of b. Inductive method
economics? c. Positive economics
a. Adam Smith d. Normative economics
b. Marshall
20. Total revenue is equal to total output
c. Robbins sold multiplied by
d. Robertson a. Price
19.
The process of reasoning from b. Total cost
particular to general is c. Marginal revenue
a. Deductive method d. Marginal cost

Answers  Part-A

1 2 3 4 5 6 7 8 9 10
c c c c d c b a b d
11 12 13 14 15 16 17 18 19 20
b d d a a a d c b a

Part-B  Answer the following questions in one or

two sentences.

21. What is meant by Economics? 25. Name any two types of utility.

22. Define microeconomics. 26. Define positive economics.

23. What are goods? 27.

Give the meaning of deductive
method.
24. Distinguish goods from services.

Part-C  Answer the following questions in one paragraph.

28. Explain the scarcity definition of 31. What are the different features of
Economics and assess it. services?

29. What are the crucial decisions involved 32. What are the important features of utility?
in ‘what to produce?’
33. Distinguish between microeconomics
30. Explain different types of economic and macroeconomics.
activities.
34. Compare positive economics and
normative economics.

Introduction to Micro-Economics 23
Part-D  Answer the following questions in about a page

35.
Compare and contrast various 37. Elaborate the nature and scope of
definitions of Economics. Economics.

36. Explain various Steps of Deductive 38. Explain basic problems of the economy
and Inductive methods. with the help of production possibility
curve.

ACTIVITY
Meet ten of your class-mates and prepare a Report on the
advantages of studying Economics.

References

„„Shashi kumar – Micro Economics (2004) - Anmol Publication Pvt Ltd

„„Ben S.Bernake – Principles of Micro Economics (2001) - MC Graw Hill Education
„„M.L.Seth – Micro Economics (2012) - Lakshmi Narain Agarwal Publication
„„M.L. Jhingan – Modern Micro Economics (Fourth Edition) (2012) - Virnda
Publication Pvt Ltd
„„Ryan C. Amacher – Principles of Micro Economics (1980) - South-Western Pub.Co
„„http://wikieducator.org/Introduction_to_Economics_and_Microeconomic_Theory

Introduction to Micro-Economics 24
 CHAPTER

2 Consumption Analysis

“Consumption is the sole end and object of economic activity”

– J. M. Keynes

Learning Objectives

1 To understand the consumer behaviour when price changes.

2 To perceive the consumer equilibrium in terms of cardinal and ordinal approaches.

2.1 2.2
Introduction Human Wants

Consumption is an essential economic

In ordinary language desire and want
activity. The quantity and quality of
mean the same thing. But in economics
consumption determine the standard of
they have different meanings. Wants are
living of the people. Consumption is the act
the basis for human behaviour to buy and
of satisfying one’s wants. Consumption is
consume goods.
defined as “the use of goods and services for
satisfying wants”. In economics, consumption
2.3
is studied both at micro level and macro level.
Characteristics of Human
Consumption is the beginning Wants
of economic science. In the absence of
consumption, there can be no production,
a. Wants are unlimited
exchange or distribution. Consumption is
also an end of production. Producers produce Human wants are countless in
goods to satisfy the wants of the people. number and various in kinds. When
Consumption Analysis 25
 one want is satisfied another want 2.4
crops up. Human wants multiply
with the growth of civilization and Classification Of
development. Goods
b. Wants become habits
Goods are broadly classified into three
Wants become habits; for example, categories.
when a man starts reading news paper
in the morning, it becomes a habit.
Same is the case with drinking tea or
chewing pans.
c. Wants are Satiable
Though we cannot satisfy all our
wants, at the same time we can satisfy
particular wants at a given time. When
one feels hungry, he takes food and
that want is satisfied. Necessaries
d. Wants are Alternative Goods which are indispensable for the
There are alternative ways to satisfy human beings to exist in the world are
a particular want eg. Idly, dosa or called “Necessaries”. For example, food,
chappathi. clothing and shelter.
e. Wants are Competitive
Comforts
All our wants are not equally
important. So, there is competition Goods which are not indispensable for
among wants. Hence, we have to life but to make our life easy, convenient
choose more urgent wants than less and comfortable are called “Comforts”.
urgent wants. Example: TV, Fan, Refrigerator and Air
conditioner.
f. Wants are Complementary
Sometimes, satisfaction of a
particular want requires the use of
more than one commodity. Example:
Car and Petrol, Ink and Pen.
g. Wants are Recurring
Some wants occur again and again.
For example, if we feel hungry, we take
food and satisfy our want. But after
sometime, we again feel hungry and
want food.

Consumption Analysis 26
Luxuries 3. The consumer should be a rational
consumer and his aim is to attain
Goods which are not very essential but
maximum satisfaction with
are very costly are known as “Luxuries”.
minimum expenditure.
Example: Jewellery, Diamonds and Cars.
However, for people with higher income 4. The units of the commodity consumed
they may look necessaries or comforts. must be reasonable in size.
5. The commodity consumed should
be homogeneous or uniform in
character like weight, quality, taste,
2.5
colour etc.
Cardinal Utility
6. The consumption of goods must take
Analysis
place continuously at a given period
of time.

2.5.1 The Law of Diminishing 7. There should be no change in the

Marginal Utility (DMU) taste, habits, preferences, fashions,
income and character of the
consumer during the process of
Introduction consumption.
H.H.Gossen, an Austrian Economist was
the first to formulate this law in Economics Explanation
in 1854. Therefore, Jevons called this law The Law of Diminishing Marginal Utility
as “Gossen’s First Law of Consumption”. states that if a consumer continues to
But credit goes to Marshall, because he consume more and more units of the same
perfected this law on the basis of Cardinal commodity, its marginal utility diminishes.
Analysis. This law is based on the This means that the more we have of a thing,
characteristics of human wants, i.e., wants the less is the satisfaction or utility that we
are satiable. derive from the additional unit of it.

Definition Illustration
Marshall states the law as, “the additional The law can be explained with a simple
benefit which a person derives from a illustration. Suppose a consumer wants to
given increase of his stock of a thing, consume 7 apples one after another. The
diminishes with every increase in the utility from the first apple is 20. But the
stock that he already has”. utility from the second apple will be less
than that of the first (say 15), the third less
Assumptions than that of the second (say 10) and so
1. Utility can be measured by cardinal on. Finally, the utility from the fifth apple
numbers such as 1, 2, 3 and so on. becomes zero and the utilities from sixth
and seventh apples are negative (or disutility
2. The marginal utility of money of the
or disliking). This tendency is called the
consumer remains constant.
Consumption Analysis 27
“The Law of Diminishing Marginal Utility’. In Table 2.1, we find that the total utility
This is illustrated in table 2.1. goes on increasing but at a diminishing rate.
Table 2.1 The Law of On the other hand, marginal utility goes
Diminishing Marginal Utility on diminishing. When marginal utility
becomes zero, the total utility is maximum
Units of Total Marginal
and when marginal utility becomes
Apple Utility Utility
negative, the total utility diminishes.
1 20 20
2 35 15 (35-20) Criticism
3 45 10 (45-35) 1. Utility cannot be measured
4 50 5 (50-45) numerically, because utility is
5 50 0 (50-50) subjective.
6 45 -5 (45-50) 2. This law is based on the unrealistic
assumptions.
7 35 -10(35-45)
3. This law is not applicable to
indivisible commodities.
Y Y
Y
Q Exceptions to the Law
50 M P

40 1. Hobbies 2. Drunkards 3. Misers B3

MU of Apple

4. Music and
A1 Poetry and 5. Readings
TU / MU

30 B1
MU of Apple

B TU
20
ImportanceA3or Application of
10
C the Law of DMU
1 2 3 4 5 6 7 X
0
Units 1. The Law of DMU is one of the
Zero Utility
Negative Utility
MU fundamental
A A2 laws Nof consumption.
X 0 B2 B1

Diagram 2.1
It has applications
Units of Apple in several fields of Un
study.
Diagram 2.2
Consumption Analysis 28
2. This law is the basis for other Equilibrium”, “Gossen Second Law” and
consumption laws such as Law of “The Law of Maximum Satisfaction”.
Demand, Elasticity of Demand,
Consumer’s Surplus and the Law of Definition
Substitution etc. Marshall states the law as, “If a person has
3. The Finance Minister taxes a more- a thing which he can put to several uses, he
moneyed person more and a less- will distribute it among these uses in such a
moneyed person less. When a way that it has the same marginal utility in
person’s income rises, the tax-rate all. For, if it had a greater marginal utility
rises because the MU of money in one use than another he would gain by
to him falls with every rise in his taking away some of it from the second use
income. Thus, the Law of DMU is the and applying it to first”.
basis for progressive taxation.
Assumptions
4. This law emphasises an equitable
distribution of wealth. The MU of 1. The consumer is rational in the
money to the more-moneyed is low. sense that he wants to get maximum
Hence, redistribution of income satisfaction.
from rich to poor is justified. 2. The utility of each commodity is
5. Adam Smith explains the famous measurable in cardinal numbers.
“diamond-water paradox”. Diamond 3. The marginal utility of money
is scarce, hence, its MU is high and remains constant.
its price is high, even though it is 4. The income of the consumer is given.
not very much needed. Water is 5. There is perfect competition in the
abundant, hence, its MU is low and market
its price is low, even though it is very
6. The prices of the commodities are given.
much essential.
7. The law of diminishing marginal
utility operates.
2.6
Explanation
The Law of
The law can be explained with the help of
Equi-Marginal Utility
an example. Suppose a consumer wants to
spend his limited income on Apple and
The law of diminishing marginal utility
Orange. He is said to be in equilibrium,
is applicable only to the want of a single
only when he gets maximum satisfaction
commodity. But in reality, wants are
with his limited income. Therefore, he
unlimited and these wants are to be
will be in equilibrium, when,
satisfied. Hence, to analyze such a situation,
the law of diminishing marginal utility Marginal utility of Apple
is extended and is called “Law of Equi- Price of Apple
Marginal Utility”. It is also called the “Law Marginal utility of Orange
 K
of Substitution”, “The Law of Consumers Price of Orange
Consumption Analysis 29
 MUA MUO MUA MUo
i.e.,= PA  PO  K In case is less than
Eg. 50/10= 20/4=5 PA Po
he would transfer the money from Apple
K- Constant Marginal Utility of Money to Orange till it is equal. This process
In views of this equilibrium, this Law is also of substitution gives him maximum
called the “Law of Consumers Equilibrium”. satisfaction both from Apple and Orange.
Hence, this Law is also called “Law of

Table 2.2 The Law of Equi-Marginal Utility

Apple Orange
Units of
Commodities Total Marginal MUA Total Marginal MUO
Utility Utility PA Utility Utility PO
1. 25 25 25/2 = 12.5 30 30 30/1 = 30
2. 45 20 20/2 = 10 41 11 11/1 = 11
3. 63 18 18/2 = 9 49 8 8/1 = 8
4. 78 15 15/2 = 7.5 54 5 5/1 = 5
5. 88 10 10/2 = 5 58 4 4/1 = 4
6. 92 4 4/2 = 2 61 3 3/1 = 3

Y Y

M P
MUm of Orange

B3
A1 B1
MUm of Apple

A3

0 A A2 N X 0 B2 B1 Q X
Units of Apple Units of Orange

Diagram 2.2

Substitution”. Eg. For Apple 50/25; for this entire income (i.e., ₹14) on Apple and
Orange 20/4. In such situation, spending Orange. The price of an Apple is ₹2 and the
more money on orange is wiser. price of an Orange is ₹1. This law can be
illustrated with the help of Table 2.2
Illustration
This Law can be illustrated with the help of If the consumer wants to attain
table 2.2. Let us assume that the consumer maximum utility, he should buy 5 units of
has a given income of ₹14. He wants to spend

Consumption Analysis 30
apples and 4 units of oranges, so that he rather than go without the thing, over that
can get (88+54) 142 units. which he actually does pay is the economic
MUA MUo 10 5 measure of this surplus satisfaction. This
Here = ie, = =5 may be called consumer’s surplus”.
PA PO 2 1
A2 A3 and B2 B3 lines have not been
Assumptions
used for explanation.
1. Marshall assumed that utility can be
Diagrammatic Illustration measured.
In diagram 2.2, X axis represents the 2. The marginal utilities of money of
amount of money spent and Y axis the consumer remain constant.
represents the marginal utility of Apple 3. There are no substitutes for the
and Orange respectively. If the consumer commodity in question.
spends ₹10 on Apple and ₹4 on Orange, 4. The taste, income and character of
the marginal utilities of both are equal the consumer do not change.
i.e.,AA 1=BB 1 (5=5). Hence, he gets
5. Utility of one commodity does
maximum utility.
not depend upon the other
Criticisms commodities.

1. In practice, utility cannot be

Explanation
measured, only be felt.
2. This Law cannot be applied to The concept of consumer’s surplus can
durable goods. be explained with help of an example.
Suppose a consumer wants to buy an
apple. He is willing to pay ₹4, rather than
2.7 go without it and the actual price of the
Consumer’s Surplus apple is ₹2. Hence the consumer’s surplus
is ₹2(₹4 – ₹2). Thus, consumer’s surplus
The concept of consumer surplus was is the difference between the price that a
originally introduced by classical economists consumer is willing to pay (potential price)
and later modified by Jevons and Jule and what he actually pays. Therefore,
Dupuit, the French Engineer Economist in
1844. But a most refined form of the concept Consumer’s = What a person is
of consumer surplus was given by Alfred surplus willing to pay – What
Marshall. This concept is based on the Law he actually pays.
OR
of Diminishing Marginal Utility.
Consumer’s = Potential price–
surplus Actual price.
Definition
Alfred Marshall defines consumer’s Mathematically,
surplus as, “the excess of price which a Consumer’s surplus = TU – (P x Q)
person would be willing to pay a thing

Consumption Analysis 31
 Table 2.3 Consumer’s Surplus
Willingness to pay or Consumer’s Surplus
Actual

UNIT 2
Potential Price (Marginal = Potential Price –
Units of commodity (Apple) Price
Utility) Actual Price
1 6 2 6-2=4
2 5 2 5-2=3
3 4 2 4 - 2= 2
4 3 2 3-2=1
5 2 2 2-2=0
Total 20 10 10

where, Y

TU = Total Utility, P = Price and

Y
D
Q= Quantity of the commodity
P
The Consumer’s Surplus
B3 measurement of consumer’s
MU of Apple

Price

surplus is illustrated in Table 2.3.

B1
In Table 2.3 the consumer is willing C
P
to pay rupees 6, 5, 4, 3 and 2 for purchasing D1
the successive units of apples. Hence, he
is willing to pay (Potential Price Total
Utility) ₹20 for apples. But, he actually 0 Q X
X pays
0 ₹10 B2 (₹2 Q
B1 x 5)) for getting 5 apples.
X Quantity Demanded
Hence, Units of Orange Diagram 2.3
DiagramConsumer’s
2.2 Surplus = Total Utility (Actual
Price x units of
Commodity) Hence, actual price is OPCQ (OP x OQ).
Potential Price (Total Utility) is ODCQ.
= TU – (P x Q)
Therefore,
= 20 –(2 x 5)
Consumer’ Surplus = ODCQ – OPCQ
= 20-10 = 10. = 20-10 = 10
The concept of Consumer’s Surplus = PDC (the shaded area) Y
can also be explained
d' d with the help of a d d'
Y
diagram. Criticism
Y
1. Utility cannot be measured, because
In the diagram 2.3, X axis shows the utility is
B A A subjective.
B
amount P1 demanded and Y axis represents P
Price

P1
2. Marginal utility of money does not
the price. DD1 shows the utility which
Price

remain constant.
Price

the consumer derives from the purchase

of different amounts of commodity. When
d 3. Potential price is internal, dit' might be
price is OP, the amount demanded d' is OQ.
known to the consumer d
himself. O
O O
Q2
Consumption Analysis Q1 X 32 Q1 Q2 X
Quantity Demanded Quantity Demanded
 2.8 Definitions
Law of Demand The Law of Demand says as “the quantity
demanded increases with a fall in price
Demand is essential for the creation, survival and diminishes with a rise in price”.
and profitability of a firm. “Demand in –Marshall
economics is the desire to possess something “The Law of Demand states that people will
and the willingness and the ability to pay a buy more at lower price and buy less at higher
certain price in order to possess it”. prices, other things remaining the same”.
–J. Harvey - Samuelson

“Demand in economics means desire Assumptions of Law of Demand

backed up by enough money to pay for the 1. The income of the consumer remains
good demanded” constant.
–Stonier And Hague 2. The taste, habit and preference of the
consumer remain the same.
2.8.1 Characteristics of
3. The prices of other related goods
Demand
should not change.
„„Price : Demand is always related to price. 4. There should be no substitutes for
„„Time : Demand always means demand the commodity in study.
per unit of time, per day, per week, per 5. The demand for the commodity
month or per year. must be continuous.
„„Market : Demand is always related to 6. There should not be any change in
the market, buyer and sellers. the quality of the commodity.
„„Amount: Demand is always a specific Given these assumptions, the law of demand
quantity which a consumer is willing operates. If there is change even in one of
to purchase. these assumptions, the law will not operate.

2.8.2  Demand Function Table 2.4 Demand Schedule

Price Quantity Demanded
Demand depends upon price. This means (₹) (Units)
demand for a commodity is a function of 5 1
price. Demand function mathematically is 4 2
denoted as, 3 3
D = f (P) where, D = Demand, f = function 2 4
P = Price 1 5

2.8.3  Law of Demand Explanation

The Law of Demand was first stated by The law of demand explains the relationship
Augustin Cournot in 1838. Later it was between the price of a commodity and the
refined and elaborated by Alfred Marshall. quantity demanded of it. This law states
Consumption Analysis 33
 price falls, the demand expands and when
price rises, the demand contracts.

Market Demand for a

Commodity

A's Demand B's Demand

that quantity demanded of a commodity

expands with a fall in price and contracts
with a rise in price. In otherY words, a Y Y Y
A’s Demand B’s Demand C’s Demand Tot
rise in price of a commodity is4 followed 4 C's Demand 4 Market Demand 4
by a contraction demand and3 a fall in 3 3 3
2 2 2 2
price is followed by extension in demand.
1 1 1 1
Therefore, the law of demand states that D(A) D(B) D(C)

there is an inverse relationshipO between

2 4 6 8 10 X O 2 4 6 8 10 X O 2 4 6 8 10 X O 5

the price and the quantity demanded of a

Diagram 2.5
commodity.
D
The market demand curve for a commodity
4 5 X
Y D is derived by adding the quantum demanded
ed (in units) 5 of the commodity by all the individuals
4 constituting the market. In the diagram
4
given above, the final market demand curve
Price (in ₹)

3 represents the addition of the demand curve

2 of the individuals A, B and C at the same price.
1 When Price is ₹3, the Market demand is
D 2+2+4 = 8
0 1 2 3 4 5 X When Price is ₹1, the Market demand is
Quantity Demanded (in units) 6+8+8 = 22
Diagram D As in the case of individual demand
Y e2.4
=o
schedule, the Market Demand Curve is at
P1 a price, at a place and at a time.
In the diagram 2.4, X axis represents
the quantity demanded
P2 and Y axis
Price

D 2.8.4 Determinants of
represents the Pprice of the commodity.
3
DD is the demand curve, which has a Demand
negative slope i.e., slope downward from 1. Changes in Tastes and Fashions: The
D
left to right which
O indicates that when demand for some goods and services
Q X
X
Consumption Analysis 34
Quantity Demanded

Diagram 2.10
 Q
50
40

TU / MU
30
is very susceptible to changes in tends to decrease B the demand TU
20
tastes and fashions (if other things remain constant).
10
2. Changes in Weather: An unusually C

dry summer results in a increase in 1 to

2.8.5 Exceptions
0 2 the3 law 4 5of 6 7 X
Units
the demand for cool drinks. demand Zero Utility M
Negative Utility
3. Taxation and Subsidy: If fresh Normally, the demand Diagram curve slopes
2.1
taxes are levied or the existing rates downwards from left to right. But there
of taxation on commodities are are some unusual demand curves which
increased their prices go up. The do not obey the law and the reverse occurs.
subsidies will bring down the prices. A fall in price brings about a contraction
Therefore taxes reduce demand and of demand and a rise in price results in an
subsidies raise demand. extension of demand. Therefore the demand
4. Changes in Expectations: Expectations curve slopes upwards from left to right. It is
also bring about a change in demand. known as exceptional demand curve.
Expectation of rise in price in future
results in increase in demand.
Y D Y
5. Changes in Savings: Savings and
P
demand are inversely related. E1
6. State of Trade Activity: During the P2 P

Price
periods of boom and prosperity, the E
Price

P
P1
demand for all commodities tends
to increase. On the contrary, during D
times of depression there is a general
O Q1 Q2 X
slackening of demand.
Quantity
7. Advertisement: In advanced
capitalistic countries advertising is a Diagram 2.6
powerful instrument increasing the
In the diagram 2.6, DD is the demand
demand in the market.
curve which slopes upwards from left to
8. Changes in Income: An increase right. It shows that when price is OP1,
in family income may increase the OQ1 is the demand and when the price
demand for durables like video risesYto OP2, demand also extends to OQ2. Y
recorders and refrigerators. Equal e >1 D
distribution of income enables poor P1
P1
2.8.6 
Reasons for Exceptional
to get more income. As a result P2
Demand Curve
consumption level increases. D P2
Giffen Paradox: The Giffen good or
Price

1.
Price

9. Change in Population: The demand

for goods depends on the size of inferior good is an exception to the law
population. An increase in population of demand. When the price of an inferior
tends to increase the demand for good falls, the
O Q0
poor willQ buy less and vice
1 X
goods and a decrease in population versa. For Example: Rice, Ragi O
Quantity Demanded
Consumption Analysis 35 Diagram 2.11
2. Veblen or Demonstration effect:
D
D
Veblen
Y has explained the exceptional Y
B
demand curve through his doctrine P1
E1
of conspicuous consumption. Rich A
P2 P2
people buy certain goods because it C

Price
E
Price

gives P3
P1 social distinction or prestige.
For example, diamonds.
D D
3. Ignorance: Sometimes, the quality of
the O
commodity isQjudged Q2 by it’s
X price. O Q1 Q2 Q3
1
X
ConsumersQuantity
think that the product is
Quantity
superior if the price is high. As such
Diagram 2.6 Diagram 2.7
they buy more at a higher price.
4. Speculative effect: If the price of the to OP1 (movement from A to B) quantity
commodity is increasing then the demanded decreases to OQ1.
consumers will buy more of it because
of the expectation that it will increase 2.8.9 Shift in the Demand
Y
still
Y further. Eg stock markets. Curve
e >1 D e <1
5. Fear of shortage: During times of A shift1 in
P the demand curve occurs with a
P1
emergency or war, people may expect change in the value of a variable other than
P2
shortage of a commodity and D so buy its price
P2 in the general demand function.
more. An increase or decrease in demand due to
Price
Price

changes in conditions of demand is shown

2.8.7 Extension and by way of shifts in theDdemand curve.
Contraction of Demand
O Q0 Q1
X
On the left hand side of the diagram
The changes Quantity
in the Demanded
quantity demanded O original
2.8, the Q0 Q1 demand curve is dd, the X
for a commodity due to the change in price is OP1 and the Demanded
Quantity quantity demanded
Diagram 2.11
its price alone are called “Extension and Diagramin2.12
is OQ1. Due to change the conditions of
Contraction of Demand”. In other words, demand (change in income, taste or change
buying more at a lower price and less at a in prices of substitutes and /or complements)
higher price is known as “Extension and the quantity demanded decreases from OQ1
Contraction of Demand”. to OQ2. This is shown in the demand curve
to the left. The new demand curve is d1d1.
2.8.8 Movement along This is called decrease in demand.
Demand
Y Curve Y
On the Y right hand side of the
diagram 2.8, the original price is OP1 and
CommoditY Y

In the diagram 2.7, at point A, the price

Commodity Y

Commodity Y

OP 2 and quantity demanded is OQ 2. B the quantity demanded is OQ B 1 . Due to

When price falls toA OP3 B(movement along changes in other conditions, the quantity
A purchased has increased Ato OQ2 . Thus
the demand curve A to C) the quantity
demanded increases to OQ3. If price rises the demand curve shifts to the right d1d1.
This is called increase in demand.
0 0
Commodity X X Commodity X X 0 Commodity X X
Consumption Analysis 36

Diagram 2.17
 d'' d d d''
d d d d' d Y
Y d' d Y d
Y Y
Y Y

B A A B
B A A B
P1 B A P1 A B
P1 P1 P

Price
P1 P1
Price
Price

Price
Price

Price
Price
d d''
d d
d d'
D d'' d
D d d
O d' d O
O Q2 Q1 O Q1 Q2
X O Q2 Q1 X O Q1 Q2 X
X Q2 QuantityQDemanded X O Q1 Q2 X
X X
Quantity
1
Demanded Quantity
Quantity Demanded
Demanded
Quantity Demanded Quantity Demanded
Diagram
Diagram 2.8
Diagram
Diagram 2.82.82.8
‘Extension’ and ‘Contraction’ of demand follow a change in price. Increases and
decreases in demand take place when price remains the same and the other factors bring
about demand changes.
Y
Y
Y Y
Y
Y R ep=α
2.9 R
R ep=α
ep=α
P0
e =1 P0
Elasticity
P0 Dof Demand
D e =1
e =1 Upper
D Upper ep>1
P1 Upper Segment ep>1
P1 Segment
ep>1

Price
P Segment Q ep=1

Price
Price

The Law1 of Demand explains the direction Q ep=1

Price
Price

Q ep=1p
Price

of change in demand due to change in the p ep<1

p ep<1
ep<1SS
price. It fails to explain the rate D
of change
D S
D Lower Segment
in demand due to a given change in price. Lower Segment
Lower Segment ep=0
Elasticity of Odemand 0
O Q0 explains
Q1 the rate of
0
0 Quantity M
X Q Q X Quantity
X change Oin quantity
Q0 Q1 demanded due to a
0 1
Quantity Demanded X Quantity
Quantity DemandedX Diagram 2.14
Quantity Demanded
given change in price. Diagram 2.13 amount due to a little rise in the price.
Diagram
Diagram 2.13 Diagram 2.14 2.14
Diagram 2.13 To be more scientific, Elastic demand is
“Elasticity of demand is, therefore,
called as “More Elastic Demand”.
a technical term used by the Economists
to describe the degree of responsiveness
of the Quantity demand for a commodity 2.9.1 Types of Elasticity of
to a change
Y in its price”. Demand
Y Y
Y Y
Y
- Stonier And Hague A
A
oditYYY

A
CommoditY Y

oditYYY

Elastic demand or More Elastic

CommoditY

CommoditY Y

demand
CommoditY
Comm

Demand for a commodity is said to be

Comm

C A IC2
“Elastic” when the quantity
C
C
A demanded
A
IC2
IC2
increases by a large amount due toB a little IC
IC11 IC
B IC1 IC
fall in the
0 price and decreases by a large
B
0
IC
X 0 Commodity
Commodity X
X X 0 Commodity X
B
B X
X 0 Commodity X X 0 Commodity XB X
X Commodity X X
Consumption Analysis 37
Diagram 2.18 Diagram
Diagram 2.19
Diagram
Diagram 2.18 2.18 Diagram 2.19 2.19
Price Elasticity of Demand Proportionate change in Quantity
Price elasticity of demand is commonly Demand for a product
EY 
known as elasticity of demand. This is Proportion
nate change
because price is the most influential factor in Income
affecting demand. “Elasticity of demand
measures the responsiveness of the quantity For most of the goods, the income
demanded to changes in the price”. elasticity of demand is greater than
one indicating that with the change
1. Price Elasticity of Demand: The price
in income the demand will also
elasticity of demand, commonly known
change and that too in the same
as the elasticity of demand refers to the
direction, i.e. more income means
responsiveness and sensitiveness of
more demand and vice-versa.
demand for a product to the changes
in its price. In other words, the price 3. Cross Elasticity of Demand:  The
elasticity of demand is equal to cross elasticity of demand refers to
the percentage change in quantity
Proportionate change in demanded for one commodity as a
Quantity Demanded result of a small change in the price
Ep 
Proportionate change of another commodity. This type
in Price of elasticity usually arises in the
Numerically, case of the interrelated goods such
Q P as substitutes and complementary
Ep  X
P Q goods. The cross elasticity of demand
ΔQ = changes in demand. for goods X and Y can be expressed as:

ΔP = changes in price. Proportionate change in demand

P = original price. of Commodity X
Ec =
Q = original quantity. Proportionate change in price
of Commodity Y
where, ΔQ = Q1  –Q0, ΔP = P1  – P0,
Q1= New quantity, 4. Advertising Elasticity of Demand:  The
responsiveness of the change in demand
Q0= Original quantity, P1 = New price,
due to the change in advertising or
P0 = Original price.
other promotional expenses, is known
2. Income Elasticity of Demand:  The as advertising elasticity of demand. It
income is also a factor that influences can be expressed as:
the demand for a product. Hence, the
Proportionate change
degree of responsiveness of a change
in demand for a product due to the in Demand
Ea 
change in the income is known as Proportionate change in
income elasticity of demand. The Advertising Expenditure
formula to compute the income
elasticity of demand is:
Consumption Analysis 38
 D
0 1 2 3 4 5 X
X Quantity Demanded (in units)
2.9.2 Levels or Diagram
Degrees2.4 of Price D
Elasticity of Demand Y Ep = o

Definition: The Price Elasticity of Demand P1

is commonly known as the elasticity of
P2

Price
demand, which refers to the degree of
responsiveness of demand to the change in P3

the price of the commodity.

D
1. Perfectly Elastic Demand (Ep = ∞):  O
Q D X
Y Y e=o
Y Quantity Demanded
e=
88

Ep = P1
Diagram 2.10
P2

Price
P D
i.e. quantity OQ remains unchanged
Price

P D P3
Price

at different prices, P1, P2, and P3.

3. Relatively Elastic Demand
D (Ep>1): The
O
O Q X
X
O Quantity Demanded X Y
Quantity Demanded Ep >1Quantity Demanded
X
Diagram 2.9 P1 Diagram 2.10
P2
The demand is said to be perfectly elastic D
when a slight change in the price of a
Price

commodity causes an infinite change in

its quantity demanded. Such as, even a
small rise in the price of a commodity
Y can O Q0 Q1 Y
X
result in greater fall in demand even to
Quantity Demanded
zero. In some cases a little fall
P0 in the price
Diagram 2.11
can result in the increase in demand to
ORANGE

ep>1 infinity. In perfectly elastic3demand the R

ORANGE

Q demand is relatively elastic when the

ep=1 demand curve is a  horizontal straight
p 2 S proportionate change in the demand
ep<1 line parallel to x axis.
S T for a commodity is greater than the
1
2. Perfectly Inelastic Demand (Ep =0):  proportionate
IC change in its price.
wer Segment ep=0
When there is no change 0 in the Here, the demand curve is  gradually
M X 1 2 3
Quantity demand for a product due to the sloping which 0
X shows that a proportionate
APPLE APPL
change in the price, then the demand change in quantity from 5 to 10 is greater
Diagram 2.14 Diagram 2.15 than the proportionate change in the Diagram
is said to be perfectly inelastic. Here,
the demand curve is a  vertical price from 11 to 10. Change in demand
straight line  which shows that is: 10–5/5 × 100 = 100%
the demand remains unchanged Change in price =10%. Hence, it is
irrespective of change in the price., more elastic demand.
Consumption Analysis 39
Y Y
A
4. Relatively Inelastic Demand (Ep<1): 5. Unitary Elastic Demand (Ep =1):
Y Y
D
Ep<1
P1
D
Ep=1
P2 P0 R0
Price

Price
P1 R1

D D

O Q1 Q2 X O Q0 Q1
X
Quantity Demanded Quantity Demanded
Diagram 2.12 Diagram 2.13

When the proportionate change The demand is unitary elastic

in the demand for a product is less when the proportionate change
than the proportionate change in in the price of a product results in
the price, the demand is said to be the same propionate change in the
relatively inelastic. It is also called quantity demanded. Here the shape
as the elasticity less than unity. Here of the demand curve is a rectangular
the demand curve is steeply sloping, hyperbola, which shows that area
which shows that the change in under the curve is equal to one.
the quantity from OQ0  to OQ1  is Here OP0 R0Q0 = OP1 R1Q1
relatively smaller than the change in
the price from OP1 to Op2.

Table 2.5 Degrees of Price Elasticity of Demand

Shape of the
Numerical Value Terminology Description
Demand curve
ep = ∞ Perfectly Change in demand is infinite at a Horizontal
elastic given price

ep = 0 Perfectly Demand remains unchanged Vertical

inelastic whatever be the change in price

ep = 1 Unitary % Q  % P Rectangular
elastic Hyperbola

0 < ep < 1 Inelastic % Q  % P Steeper

∞ > ep > 1 Elastic % Q  % P Flatter

Consumption Analysis 40
2.9.3. Determinants of Here, a rise in the price of lubricating
Elasticity of Demand oil may not reduce the demand for
lubricating oil. Hence, the complementary
There are many factors that determine
good, here, lubricating oil, will be price
the degree of price elasticity of demand.
inelastic.
Some of them are described below:
e) Time: In the long run, the price
a) Availability of Substitutes:
elasticity of demand for many goods
If close substitutes are available for a will be larger. This is so because, in
product, then the demand for that product the long run many substitutes can be
tends to be very elastic. If the price of discovered or invented. Therefore,
that product increases, buyers will buy its the demand is generally more elastic
substitutes; hence fall in its demand will in the long run, than in the short
be very large. Hence, price elasticity will run. In the short run bringing out
be larger. Eg. Vegetables. new substitutes is difficult.
For salt no close substitutes are available.
Hence even if price of salt increases the 2.9.4 Measurement of
fall in demand may be zero or less. Hence Elasticity of Demand
salt is price inelastic.
There are three methods of measuring
b) Proportion of consumer’s income price elasticity of demand.
spent’ if smaller proportion of
1. The Percentage Method
consumer’s income is spent on
particular commodity say X, price
ep =
∆Q P
elasticity of demand for X will be
×
∆P Q
smaller. Take for example salt, people
spend very small proportion of their It is also known as ratio method,
income on salt. Hence, salt will have when we measure the ratio as:
small elasticity of demand, or inelastic.
ep =
Q where,
c) Number of uses of commodity: P
If a commodity is used for greater number %Q= percentage change in demand
of uses, its price elasticity will also be
larger. For example, milk is used as butter %P = Percentage change in price
milk, curd, ghee and for making ice cream 2. Total Outlay Method
etc. Hence, even the small fall in the price Marshall suggested that the simplest
of milk, will tempt the consumers to use way to decide whether demand is
more milk for many purposes. Hence milk elastic or inelastic is to examine the
has greater price elasticity of demand. change in total outlay of the consumer
d) Complementarity between goods: or total revenue of the firm.
For example, along with petrol, lubricating Total Revenue = ( Price x Quantity Sold)
oil is also used for running automobiles. TR = (P x Q)

Consumption Analysis 41
Y A’s De
4
Y
5 D 3
D
2

Consumer’s Surplus 4 1

Table 2.6 Total Outlay Method3 L

Price (in ₹)
O
lower segment 2 4

Price Q u a n t i t y Total Elasticity ep = =

P
C
Demanded Outlay
2
U upper segment
D1 1
Where ‘ep’ stands for point elasticity, ‘L’
150 3 450 e>1 D
0 1 2 stands
3 4 for5 the lower
X
segment and ‘U’ for
125 4 500 e=1 the upper segment.
0 Q X Quantity Demanded (in units)
100Demanded
Quantity 5 500 e <1
Diagram Diagram 2.4
75 2.3 6 450
2.9.5 Importance of Elasticity
Where there is inverse relation between of Demand
Price and Total Outlay, demand is elastic. The concept of elasticity of demand is of
Direct relation means inelastic. Elasticity is much practical importance.
unity when Total Outlay is constant.
1. Price fixation: Each seller under
3. Point or Geometrical Elasticity monopoly and imperfect competition
When the demand curve is a straight has to take into account elasticity D
Y Y e=o
d d' line, it is said to be linear. Graphically, of demand while fixing the price
the point elasticity of a linear demand e= for his product. If the demand for
8
P1
curve is shown by the ratio of the the product is inelastic, he
P2 can fix a

Price
A B higher price.
D
segments of the line to thePright and to
Price

P3
the left of the particular point. 2. Production: Producers generally
decide their production level on the
Lower segment of the
d' D
basis of demand for the product.
O
d demand curve
O X
Q
Point Quantity Demanded
3. Distribution: Elasticity of demand
Quantity Demande
Q Q Xbelow the given point
1
Elasticity 
2
also helps in the determination of
Quantity Demanded Upper segment of Diagram 2.9 Diagram 2.10
rewards for factors of production.
the demand curve 4. International trade: Elasticity of
above the given point demand helps in finding out the
terms of trade between two countries.
Terms of trade depends upon the
Y Y Y
elasticity of demand for the goods of
R ep=α
the two countries.
P0

Upper 5. Public finance: Elasticity of demand

ORANGE

ep>1
Segment helps the Rgovernment in formulating
ORANGE

3
Price

Q ep=1
p tax
2
policies.S For example, for
ep<1
S imposing tax on aTcommodity.
1
Lower Segment ep=0 6. Nationalization: The ICconcept
0
of elasticity of3 demand enables
0 M X 1 2 X 0
Quantity
the government
APPLE to decide over
Diagram 2.14 nationalization
Diagramof2.15
industries.

Consumption Analysis 42
2.10 Scale of Preference

Ordinal Analysis (or) This theory is also based on scale of

Ordinal Utility Approach preference. A rational consumer usually
(or) Hicks and Allen prefers the combination of goods which
Approach (or) Indifference gives him maximum level of satisfaction.
Curve Analysis Thus, the consumer can arrange goods
and their combination in order of their
Introduction satisfaction. Such an arrangement of
combination of goods in the order of
level of satisfaction is called the “Scale of
Preference”.

Assumptions
1. The consumer is rational and his aim
is to derive maximum satisfaction.
2. Utility cannot be cardinally
measured, but can be ranked or
compared or ordered by ordinal
F.W.EdgeWorth (English Economist) number such as I, II, III and so on.
and Vilfredo Pareto (Italian Economist)
3. The Indifference Curve Approach is
criticised the Cardinal Utility Approach.
based on the concept “Diminishing
They assumed that utility cannot be
Marginal Rate of Substitution”.
measured absolutely, but can be compared
or ranked or ordered by ordinal numbers 4. The consumer is consistent.
such as I, II, III and so on. Edgeworth first This assumption is called as the
developed a more scientific approach to assumption of transitivity. If the
the study of consumer behaviour, known consumer prefers combination A to
as “Indifference Curve Approach” in1881. B and B to C, then he should prefer
In 1906, Vilfredo Pareto modified the A to C. If A>B and B>C, then A>C.
“Edgeworth Approach”. Again J.R.Hicks and
R.G.D.Allen refined the Indifference Curve An Indifference Schedule
Approach in 1934. Later, in 1939 J.R.Hicks An indifference schedule may be defined
in his book “ Value and Capital” gave a final as a schedule of various combinations
shape to this “Indifference Curve Analysis”. of two commodities which will give the
same level of satisfaction. In other words,
Indifference Schedule is a table which
The theory of indifference curve was
shows the different combination of two
given by J R Hicks and RJD Allen, ‘A
goods that gives equal satisfaction to the
reconsideration of the theory of value’,
consumer.
Economics in 1934.

Consumption Analysis 43
 A’s Demand B’s Demand C’s Demand
4 4 4
D 3 3 3
2 2 2
1 1 1
D(A) D(B) D(C
Table 2.7: Indifference Schedule O an2 4indifference
6 8 10 X Ocurve 2 4 is6 the
8 10 locus
X O 2 of4 6 8 10
all combinations of commodities from
Apple Oranges Points Diagram
which the consumer derives the2.5same
1 20 R
level of satisfaction. It is also called “Iso-
2 D 15 S
1 2 3 4 53
Utility Curve” or” Equal Satisfaction
X 12 T
Curve”. Indifference Curve is illustrated
Quantity Demanded (in4units) 10 U
in diagram 2.15. X axis represents apple
5 9 V
Diagram 2.4 and Y axis represents orange. Point ‘R’
Table has five combinations of two represents combination of 1 apple and 20
commodities Apple and Orange. Each of oranges, at ‘S’ 2 apples and 15 oranges and
these combinations give the consumer at ’T’ 3 apples and 12 oranges. Similarly
the same level of satisfaction without U,V points are obtained. These five points
discrimination. In the schedule, the give the same level of satisfaction. The
combinations are arranged in such a way consumer will be neither better off nor
that the consumer is indifferent among worse off in choosing any one of these
the combinations. Hence, this Y schedule D points. When one joins all these five points
e=o
is called as, “Indifference Schedule”. He R, S, T, U, V one can get the Indifference
e= will neither be better off norP1 worse off Curve ‘IC’.
8

whichever combination he chooses.

P2
Price

D
P3
2.12
2.11 An Indifference Map
An Indifference Curve D
O
Q One can draw
X several indifference
X
uantity Demanded curves each representing an indifference
Quantity Demanded
Y IC
schedule. Hence, an Indifference Map is a
Diagram 2.9 R Diagram 2.10
20 family or collection or set of indifference
curves corresponding to different levels
S
of satisfaction. The Indifference Map is
ORANGE

15

12 T illustrated in Diagram 2.16.

10 U
V
9
Y IC Y
0 1 2 3 4 5
X
P0 APPLE
Diagram 2.15
ORANGE

R
ORANGE

3
Different combinations of two
2 S
commodities (as found T
in Indifference
IC3
Schedule)
1 can be presented in a diagram. IC2
IC
Then consumer gets different points IC1
0
and when such points are connected,
1 2 3 X 0 X
APPLE
a curve is obtained. The said curve is APPLE
Diagram 2.15
called as “Indifference Curve”. Therefore, Diagram 2.16

Consumption Analysis 44
 A
P2 P2
C

Price
E

Price
P3
P1
In D
the diagram 2.16, the indifference Since y decrease as X increases, the
D
Curves IC1, IC2 and IC3 represent the change in Y is negative i.e., –Δy, so the
Indifference
O Map,QUpper
1
Q2 IC representing
X equation
O is Q1 Q2 Q3 X
higher levelQuantity
of satisfaction compared to ∆Y
Quantity
MRS =− and
lower IC. xy
∆X
Diagram 2.6 Diagram 2.7
Marginal Rate of Substitution However, as with price elasticity of
The shape of an indifference curve provides demand the convention is to ignore the
useful information about preferences. minus sign in
Indifference curve replaces the concept ∆Y
MRSx y =
isMRS
of marginal utility with the concept of the Y ∆X
Y
marginal rate of substitution.
e >1 D e <1
According to Leftwich “The P
2.14
P1 1

marginal
P2 rate of substitution of X for
Properties of the
Y (MRSxy) is defined as the D maximum P2
Indifference Curves
amount of Y the consumer is willing to give Price
Price

up for getting an additional unit of X and

still remaining on the same indifference Indifference curvesD are subjective and
curve”. unique to each person. Nevertheless they
O Q0 Q1
X
have in common the following properties:
2.13 Quantity Demanded O Q0 Q1 X
1. Indifference curve must have
Diminishing Quantity
slope Demanded
Diagram Marginal
2.11 Rate negative
of Substitution
Diagram 2.12
An indifference curve has a negative
slope, which denotes that if the quantity
It explains the concepts of diminishing of commodity (y) decreases, the quantity
marginal rate of substitution. of the other (x) must increase, if the

Y Y Y
CommoditY Y

Commodity Y

Commodity Y

B
B
A B
A A

0 0
Commodity X X Commodity X X 0 Commodity X X

Diagram 2.17

Consumption Analysis 45
 p

Pr
P
d d' ep<1
S
D
d' d Segment O
Lower ep=0
O O
Q Q Q Q
O consumer
Q Q1 is to2 stay on the
1
same level Xof 0
At the1 point of2 intersection,
X
Quantity
M
C=B X
Quantity Demanded X Quantity
on IC1 Demanded
0
satisfaction.
Quantity (a necessary consequence
Demanded and C=A on IC2. So A=B
of theDiagram
non satiety Diagram 2.14
2.13postulate). Diagram 2.8 whereas, A is in upper IC and B is on
The curves that do not have negative lower IC. This is not possible.
slopes such as those shown in diagram 2.17 4. Indifference curves do not touch
cannot be indifference curves, in all three the horizontal or vertical axis.
cases combination B is clearly preferable Y
Y
to combination A.
Y Y
R ep=α
2. Indifference
P0 Curves are convex to A
e =1
the origin
CommoditY Y

D Upper
ep>1

CommoditY Y
Segment
Indifference
P1 curves are not only

Price
Q ep=1
Price

negatively sloped, but are also p

convex to the origin. The convexity ep<1
S
of the indifference
C A D2
IC
curves implies
Lower Segment ep=0
that not only the two commodities
IC1
B 0 IC M
areO substitutes
Q0 Q1 for each other but Quantity
0 X 0
also the factX
Commodity that the
Quantity marginal
X
Demanded rate Commodity X
B X
Diagram 2.14
of substitution (MRS) between the
Diagram 2.18Diagram 2.13 Diagram 2.19
goods decreases as a consumer
moves along an indifference curve.
If they touch the axis, it violates the
3. Indifference curve cannot intersect basic assumption that the consumer
purchases two commodities in a
Y combination.
Y Purchasing only one
commodity
A means monomania
that is consumers’ lack of interest
CommoditY Y

in the other commodity or his

CommoditY Y

insistence on purchasing only one

commodity.
C A IC2

IC1 2.15
B IC
0 Commodity X Price line
0 or Budget line  B
X Commodity X X

Diagram 2.18 Demand for a goodDiagram 2.19 upon

depends
(i) preference for that good and (ii)
IC 1 is lower indifference curve purchasing power. The preference pattern
denoting lesser satisfaction. is represented by set of indifference
Combination C and B fall on IC1. curves. The purchasing power depends on
IC 2 is upper indifference curve his money income and price of the goods.
denoting higher satisfaction. C and The money income and price level are
A combinations are on IC2. represented by budget line. The budget
Consumption Analysis 46
 T is the point of equilibrium as budget
Y
A line AB is tangent on indifference curve
IC3 the upper IC which implies maximum
CommoditY Y

possible level of satisfaction.

Budget Line
At equilibrium point, the slope of
IC refers to MRSXY and the slope of BL
(Budget Line) refers to ratio of price of X
to price of Y ie Px/Py . Therefore MRSx,y =
Px/Py.
0 Commodity X B X
2.17
Diagram 2.20
Conclusion
line is a downward sloping straight line
connecting X axis and Y axis as follows. An understanding of consumer behaviour
is an important part of comprehending
BA is the budget line with a given
income (C). C/OA is the price of commodity the allocation of resources by individuals.
Y and C/OB is the price of commodity X. Consumption decisions are made based
The budget line is the line joining various upon a logical process of valuing utility,
combinations of the two goods which the price and income alternatives. Demand
consumer can buy at given prices and income. analysis enables the producers to
understand consumer behaviour and take
2.16 proper decisions accordingly.

Consumer Equilibrium

GLOSSARY
The consumer reaches equilibrium at the
point where the budget line is tangent on Consumption: The use of goods and
the indifference curve. services for satisfying
one’s wants.
Y
A
Demand: Demand is desire
backed by sufficient
purchasing power and
willingness to spend
N T on it.
Tea

Needs: It is defined as goods

IC4
IC3
or services that are
IC2 required. This would
IC1 include the needs for
0 M B X food, clothing, shelter
Coffee and health care.
Diagram
Diagram2.21
2.21

Consumption Analysis 47
Utility: Utility is the capacity of Indifference A set of indifference
a commodity to satisfy Map: curves upper ICs
human wants. denoting higher and
Marginal Marginal utility is the lower ICs lesser level
utility: utility derived from of satisfaction.
the last or Marginal Price line or The line joining various
unit of consumption. Budget line: combination of the
Elasticity of The Elasticity of two goods which the
Demand: Demand refers to consumer can buy
the rate of change in at given prices and
demand due to a given income.
change in price. Consumer’s It refers to a situation
Consumer’s The difference Equilibrium: under which a consumer
Surplus: between the potential spends his entire income
price and actual price. on purchase of a goods
Indifference ICs means all those in such a manner that
Curves: combinations of any it gives him maximum
two goods which give satisfaction and he has
equal satisfaction to the no tendency to change
consumer. it.

Consumption Analysis 48
 ICT CORNER
Inverse Relation Between Price and Consumer’s Surplus

Inverse Relation helps

in the study of Relation
Between Price and
Consumer’s Surplus.

Steps:
•O  pen the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear. In
this several work sheets for Economics are given, Open the worksheet
named “Inverse Relation Between Price and Consumer’s Surplus”
• This work sheet is to give an Idea about the Consumer’s Surplus
and an Inverse relation. In this worksheet Green coloured triangle
is the Consumer’s Surplus. The vertical line shows the price and the
Horizontal line shows the Quantity.
• Move the point C so that the triangle area is increased when the
price is decreased and the triangle area is decreased when the price
increases. This is called the Inverse relation between the price and
Consumer’s Surplus.

Step1 Step2 Step3 Step4

Pictures are indicatives only*

URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code

Consumption Analysis 49
 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. Pick the odd one out 6. Gossen’s first law is known as.
a. Luxuries a. Law of equi-marginal utility.
b. Comforts b. Law of diminishing marginal
c. Necessaries utility

d. Agricultural goods c. Law of demand.

d. Law of Diminishing returns.
2. Choice is always constrained or
limited by the _____ of our resources. 7. The basis for the law of demand is
related to
a. Scarcity
a. Law of diminishing marginal
b. Supply
utility
c. Demand b. Law of supply
d. Abundance c. Law of equi-marginal utility.
3. The chief exponent of the Cardinal d. Gossen’s Law.
utility approach was
8. The concept of consumer’s surplus is
a. J.R.Hicks associated with
b. R.G.D.Allen a. Adam Smith
c. Marshall b. Marshall
d. Stigler c. Robbins
4. Marginal Utility is measured by using d. Ricardo
the formula of
9. Given potential price is Rs.250 and
a. TUn-TUn-1 the actual price is Rs.200. Find the
b. TUn-TUn+1 consumer surplus.
c. TUn+TUn+1 a. 375 b. 175
d. TUn-TUn+1 c. 200 d. 50

5. When marginal utility reaches zero, 10. Indifference curve approach is based
the total utility will be on
a. Minimum a. Ordinal approach
b. Maximum b. Cardinal approach
c. Zero c. Subjective approach
d. Negative d. Psychological approach

Consumption Analysis 50
 11. The concept of elasticity of demand 16. Indifference curve was first introduced
was introduced by by
a. Ferguson a. Hicks
b. Keynes b. Allen
c. Adam Smith c. Keynes
d. Marshall d. Edgeworth

12. Increase in demand is caused by 17. Elasticity of demand is equal to one

a. Increase in tax indicates
b. Higher subsidy a. Unitary Elastic Demand
c. Increase in interest rate b. Perfectly Elastic Demand
d. decline in population c. Perfectly Inelastic Demand

13. The movement on or along the given d. Relatively Elastic Demand

demand curve is known as____
18. The locus of the points which gives
a. Extension and contraction of same level of satisfaction is associated
demand. with
b. shifts in the demand. a. Indifference Curves
c. increase and decrease in demand. b. Cardinal Analysis
d. all the above c. Law of Demand
14. In case of relatively more elastic d. Law of Supply
demand the shape of the curve is
19. Ordinal Utility can be measured by
a. Horizontal
a. Ranking
b. Vertical
b. Numbering
c. Steeper
c. Wording
d. Flatter
d. None of these
15. A consumer is in equilibrium when
marginal utilities from two goods are 20. The indifference curve are
a. Minimum a. vertical
b. Inverse b. horizontal
c. Equal c. positive sloped
d. Increasing d. Negatively sloped

Consumption Analysis 51
Answers  (Part- A)

1 2 3 4 5 6 7 8 9 10
d a c a b b a b d a
11 12 13 14 15 16 17 18 19 20
d b a d c d a a a d

Part-B 
Answer the following questions in one or two sentences.

21. Define Utility. 25. State the meaning of indifference

curves.
22. Mention the classifications of wants.
26. Write the formula of consumers
23.
Name the basic approaches to
surplus.
consumer behaviour.
27. What are Giffen goods? Why it is
24. What are the degrees of price elasticity
called like that?
of Demand?

Part-C  Answer the following questions in one paragraph.

28. Describe the feature of human wants. 32. Distinguish between extension and
contraction of demand.
29. Mention the relationship between
marginal utility and total utility. 33. What are the properties of indifference
curves?
30. Explain the concept of consumer’s
equilibrium with a diagram. 34.
Briefly explain the concept of
consumer’s equilibrium.
31. Explain the theory of “consumer’s
surplus” .

Part-D  Answer the following questions in about a page

35. Explain the law of demand and its 37. Explain the law of Equi-marginal
exceptions. utility.

36. Elucidate the law of diminishing 38. What are the methods of measuring
marginal utility with diagram. Elasticity of demand?

Consumption Analysis 52
 ACTIVITY
1. Prepare a budget line on the basis of your family income to
purchase any two commodities.
2. Visit a vegetable market in your locality and write a report about
the level of price and demand for a particular commodity over
a period of time.

References

„„Shashi kumar – Micro Economics (2004) - Anmol Publication Pvt Ltd

„„Ben S.Bernake – Principles of Micro Economics (2001) - MC Graw Hill Education
„„M.L.Seth – Micro Economics (2012) - Lakshmi Narain Agarwal Publication
„„M.L. Jhingan – Modern Micro Economics (Fourth Edition) (2012) - Virnda
Publication Pvt Ltd
„„Ryan C. Amacher – Principles of Micro Economics (1980) - South-Western Pub.Co
www.managedstudy.com
http://slideplayer.com/slide/7656075/.
http://www.brainkart.com/subject/Economics_14/
http://www.yourarticlelibrary.com/consumers/measurement-of-utility-cardinal-
utility-and-ordinal-utility/46782

Consumption Analysis 53
 CHAPTER

3 Production Analysis

“Production is any activity diverted to the satisfaction of other

people’s wants through exchange”.
- J R Hicks

Learning Objectives

1 To understand the various factors of production and its characteristics.

2 To understand the short run and long run production function.

3 To understand the concept of supply.

3.1 Production may be at varying

levels. The scale of production
Introduction
influence the cost of production. All
manufacturers are aware that when
Production  is a process of using various production of a commodity takes place
material and immaterial inputs in order to on a larger scale, the average cost of its
make output for consumption. Production production is low. This is the reason
process creates economic well-being. why the entrepreneurs are interested
The satisfaction of needs originates from in enlarging the scale of production
the output.  Production is the result of of their commodities. They stand to
cooperation of four factors of production benefit from the resulting economies
(land, labour, capital and organisation). of scale. There is also the possibility of
In Economics, production refers to the making their products available in the
creation or addition of value. It simply market at lower prices.
transforms the inputs into output.

Production Analysis 54
 3.2
Features of the Factors of
Production

Factors of production means resources

used in the process of production of
commodities. There are of four types viz.,
land, labour, capital and organization or
enterprise. Here, land represents natural wealth are determined by the nature of
resources (such as soil, mineral deposits, soil, climate and rainfall. The agricultural
seas, rivers, natural forests, fisheries etc). products are the basis of trade and industry.
Labour represents human resources. Industry survives on the availability of
Together, these two factors are called the coal-mines or waterfall for electricity
‘primary factors of production’. production. Hence, all aspects of economic
life like agriculture, trade and industry are
These two factors produce
generally influenced by natural resources
some units of goods for the purpose
which are called as “Land” in economics.
of consumption. And as consumption
of these goods takes place, there is the
Characteristics of Land
possibility of some of these goods getting
left over. Thus, saving is production minus „„Land is a primary factor of production.
consumption. This saved amount is called „„Land is a passive factor of production.
as capital, which serves as investment in „„Land is the free gift of Nature.
the production process. Also, organisation
„„Land has no cost of production.
or enterprise is a special form of labour.
The third and the fourth factors are called „„Land is fixed in supply. It is inelastic
‘secondary factors of production’. in supply.
„„Land is permanent.
These four factors depend on each
other. They have a coordinated impact on „„Land is immovable.
production of goods and services. „„Land is heterogeneous as it differs in
fertility.
3.2.1 Land „„Land has alternative uses.
In ordinary sense ‘land’ refers to the soil „„Land is subject to Law of Diminishing
or the surface of the earth or ground. Returns.
But, in Economics, land means all gifts of
Nature owned and controlled by human
3.2.2 Labour
beings which yield an income. Land is the
original source of all material wealth. The Labour is the active factor of production.
economic prosperity of a country depends In common parlance, labour means
on the richness of her natural resources. manual labour or unskilled work. But in
The quality and quantity of agricultural Economics the term ‘labour’ has a wider
Production Analysis 55
 „„Labour is a means as well as an end.
It is both the cause of production and
consumer of the product.
„„Labour units are heterogeneous.
Labour differs in ability.
„„Labour-supply determines its reward
(wage).
„„Labour has weak bargaining power.

meaning. It refers to any work undertaken 3.2.3 Capital

for securing an income or reward. Such
work may be manual or intellectual. For
example, the work done by an agricultural
worker or a cook or rickshaw puller or a
mason is manual. The work of a doctor or
teacher or an engineer is intellectual. In
short, labour in economics refers to any Marshall says “capital
type of work performed by a labourer for consists of all kinds of
earning an income. wealth other than free
According to Marshall, labour gifts of nature, which
represents services provided by the factor yield income”. Bohm-
labour, which helps in yielding an income Bawerk defines it as
to the owner of the labour-power. ‘a produced means
of production’. As
Characteristics of Labour said earlier, capital
is a secondary means of production. It
„„Labour is the animate factor of
refers to that part of production which
production.
represents ‘saving used as investment’
„„Labour is an active factor of in the further production process. For
production. example, the entire mango is not eaten; a
„„Labour implies several types: it may part of that (its nut) is used to produce
be manual (farmer) or intellectual more mangoes.
(teacher, lawyer etc). It is a stock concept. All capital
„„Labour is perishable. is wealth but all wealth is not capital.
„„Labour is inseparable from the For example, tractor is a capital asset which
Labourer. can be used in cultivation (production) of
farm, but due to some reason the same
„„Labour is less mobile between places
is kept unused (idle) for some period.
and occupations.
It cannot be termed as capital for that
period. It is only wealth.

Production Analysis 56
Characteristics of Capital The man behind
organizing the business
„„Capital is a man-made factor.
is called as ‘Organizer’
„„Capital is mobile between places and or ‘Entrepreneur’. An
persons. organiser is the most
„„Capital is a passive factor of important factor of
production. production. He represents a special type
„„Capital’s supply is elastic. of labour. Joseph Schumpeter says that an
„„Capital’s demand is a derived demand. entrepreneur innovates, coordinates other
factors of production, plans and runs a
„„Capital is durable.
business. He  not only runs the business,
„„Capital yields Income. but also bears the risk of business. His
„„Capital depriciates. reward is residual. This residual is either
positive (profit) or negative (loss) or zero.
Capital may be tangible or intangible.
For example, buildings, plants and Functions of an Organizer
machinery, factories, inventories of (Entrepreneur)
inputs, warehouses, roads, highways
„„Initiation: An organizer is the initiator
etc are tangible capital. The examples
of the business, by considering the
for intangible capital are investment on
situation and availability of resources
advertisement, expenses on training
and planning the entire process of
programme etc.
business or production.
„„Innovation: A successful entrepreneur
Financial Capital means the assets is always an innovator. He introduces
needed by a firm to provide goods new methods in the production process.
and services measured in term of „„Coordination: An organizer applies a
money value . It is normally raised particular combination of the factors
through debt and equity issues .The of production to start and run the
prime aim of it is to a mass wealth in business or production.
terms of profit.
„„Control, Direction and Supervision:
An organiser controls so that nothing
3.2.4.  Organization prevents the organisation from
achieving its goal. He directs the factors
to get better results and supervises
for the efficient functioning of all

An entrepreneur is a person who

combines land, labour and capital in
the production process to earn a profit.

Production Analysis 57
 the factors involved in the process of The short-run is the period where
production. some inputs are variable, while others are
„„Risk-taking and Uncertainty-bearing: fixed. Another feature is that firms do not
There are risk-taking and uncertainty- enter into the industry and existing firms
bearing obstacles. Risks may be insured may not leave the industry.
but uncertainties cannot be insured. Long run, on the other hand, is the
They reduce the profit. period featured by the entry of new firms
to the industry and the exit of existing
3.3 firms from the industry.
Production Function In general, Production function
may be classified into two
Production function refers to the „„Short-run Production Function as
relationship among units of the factors illustrated by the Law of Variable
of production (inputs) and the resultant Proportions.
quantity of a good produced (output).
„„Long-run Production Function as
According to George J. Stigler, explained by the Laws of Returns to Scale.
“Production function
is the relationship
between inputs of 3.4
productive services Law of Variable
per unit of time and Proportions
outputs of product per
unit of time.” The law states that if all other factors are fixed
Production and one input is varied in the short run, the
function may be total output will increase at an increasing
expressed as: Q = f (N, L, K, T) Where, rate at first instance, be constant at a point
Q = Quantity of output, N = Land; L = and then eventually decrease. Marginal
Labour; K = Capital; and T = Technology. product will become negative at last.
Depending on the efficiency of the According to G.Stigler, “As equal
producer, this production function varies. increments of one input are added, the
The function implies that the level inputs of other productive services being
of output (Q) depends on the quantities of held constant, beyond a certain point,
different inputs (N, L, K, T) available to the resulting increments of product will
the firm. decrease, i.e., the marginal product will
Short-run Production and Long diminish”.
run Production
Assumptions
In Micro economics, the distinction
between long run and short run is made on the The Law of Variable Proportions is based
basis of fixed inputs that inhibit the production. on the following assumptions.

Production Analysis 58
„„Only one factor is variable while to the change in the units of the input. It is
others are held constant. expressed as
„„All units of the variable factor are
homogeneous. MP=ΔTP/ΔN

„„The product is measured in physical where, 

units. MP = Marginal Product
„„There is no change in the state of
ΔTP = Change in total product
technology.
ΔN = Change in units of input 
„„There is no change in the price of the
product. It is also expressed as 

Total Product (TP) MP = TP (n) – TP (n-1)

It refers to the total amount of commodity
Where, 
produced by the combination of all inputs
in a given period of time. MP = Marginal Product
„„Summation of marginal products, i.e.
TP(n) = Total product of employing nth
TP = ∑MP
unit of a factor
where, TP= Total Product, MP= Marginal
Product TP(n-1) = Total product of employing the
previous unit of a factor, that
Average Product (AP)  is, (n-1)th unit of a factor.

It is the result of the total product divided The Law of Variable Proportions is
by the total units of the input employed. explained with the help of the following
In other words, it refers to the output per schedule and diagram:
unit of the input.  In table 3.1, units of variable factor (labour)
Mathematically, AP = TP/N are employed along with other fixed factors
of production. The table illustrates that there
Where,
AP= Average Product  Y
TP= Total Product 18
TPL 16 TPL
14 Stage I Stage III
N= Total units of inputs employed
Output

APL 12 A
10
MPL 8
Marginal Product (MP) 6
4
It is the addition or the increment made to 2 APL
0
the total product when one more unit of the -2 1 2 3 4 5 6 7 x
L

variable input is employed. In other words, it Units of Variable Factor

is the ratio of the change in the total product Diagram 3.1

Production Analysis 59
 Table 3.1 Stages of Production
Units of variable Total Product Marginal Product Average Product Stages
factor (L) (TPL) (MPL) (APL)

1 2 2 2
2 6 4 3 I
3 12 6 4
4 16 4 4
5 18 2 3.6 II
6 18 0 3
7 16 -2 2.28 III

are three stages of production. Though total tendency of total product to increase
product increases steadily at first instant, at an increasing rate stops at the point A
constant at the maximum point and then and it begins to increase at a decreasing
diminishes, it is always positive for ever. rate. This point is known as ‘Point of
While total product increases, marginal Inflexion’.
product increases up to a point and then
decreases. Total product increases up to Stage II
the point where the marginal product is
In the second stage, MPL decreases up
zero. When total product tends to diminish
to sixth unit of labour where MPL curve
marginal product becomes negative.
intersects the X-axis. At fourth unit of
In diagram 3.1, the number of labor MPL = APL. After this, MPL curve
workers is measured on X axis while is lower than the APL. TPL increases at a
TPL, APL  and MPL  are denoted on decreasing rate.
Y axis. The diagram explains the three
stages of production as given in the above
Stage III
table.
Third stage of production shows that the
Stage I sixth unit of labour is marked by negative
MPL, the APL continues to fall but remains
In the first stage MPL increases up to
positive. After the sixth unit, TPL declines
third labourer and it is higher than the
with the employment of more units of
average product, so that total product
variable factor, labour.
is increasing at an increasing rate. The

Production Analysis 60
Relationship among Total, Average and Marginal Products

Stages Total Product Marginal Product Average Product

Stage I Initially it increases at an At the beginning At the first instant it
increasing rate and then it increases, then increases, then attains
increases at a decreasing reaches a maximum maximum
rate and starts to decrease
Stage II It continues to increase It continues to It is equal to MP
at a diminishing rate and diminish and and then begins to
reaches maximum. becomes equal to zero diminish
Stage III It diminishes It becomes negative It continues to
diminish but always
greater than zero
(positive)

3.5 Three Phases of Returns to

Scale
Laws of Returns to Scale
(1) Increasing Returns to Scale:

In the long- run, there is no fixed In this case if all inputs are increased
factor; all factors are variable. The by one percent, output increase by
laws of returns to scale explain the more than one percent.
relationship between output and the (2) Constant Returns to Scale:
scale of inputs in the long-run when In this case if all inputs are increased
all the inputs are increased in the same by one percent, output increases
proportion. exactly by one percent.
(3) Diminishing Returns to Scale:
Assumptions
In this case if all inputs are increased
Laws of Returns to Scale are based on the by one percent, output increases by
following assumptions. less than one percent.
„„All the factors of production (such as
land, labour and capital) are variable
but organization is fixed. Diagrammatic Illustration
„„There is no change in technology. The three laws of returns to scale can be
„„There is perfect competition in the explained with the help of the diagram
market. below.
„„Outputs or returns are measured in In the diagram 3.2, the movement
physical quantities. from point a to point b represents

Production Analysis 61
 d
K, Unit of capital
8
q=8

4 c
q=6
2 b q=3
1 a q=1
0 1 2 4 8
Labour
Diagram 3.2

Stages Input Output Returns to

Scale
a to b 100% ↑ 200% ↑ Increasing
b to c 100% ↑ 100% ↑ Constant by the internal and external factors of the
c to d 100% ↑ 33.33% ↑ Decreasing firm. Accordingly, Economies are broadly
divided into two types by Marshall.
increasing returns to scale. Because, 1. Internal Economies and
between these two points input has
2. External Economies
doubled, but output has tripled.
Economies of scale reduces the cost of
The law of constant returns to production: and, diseconomies of scale
scale is implied by the movement from increases the cost of production.
the point b to point c. Because, between
these two points inputs have doubled and
output also has doubled. 3.6.1 Internal Economies of
Decreasing returns to scale are Scale
denoted by the movement from the point c ‹The term Internal Economies of Scale›
to point d since doubling the factors from refers to the advantages enjoyed by
4 units to 8 units produce less than the the production unit which causes a
increase in inputs, that is, by only 33.33% reduction in the cost of production of the
commodity. For example, a firm enjoying
3.6 the advantage of  an application of most
Economies of Scale modern machinery, generation of internal
capital, an improvement in managerial
‘Scale of Production’ refers to the ratio skill etc.  are sure to reduce the cost of
of factors of production. This ratio can production. They are of various types:
change because of availability of factors. „„Technical Economies: When the size of
The Scale of Production is an important the firm is large, large amount of capital
factor affecting the cost of production. can be used. There is a possibility to
Every producer wishes to reduce the costs introduce up-to-date technologies;
of production. Hence he (he includes she this improves productivity of the
as well) uses an advantage of economy of firm. Here research and development
scale. This economy of scale is effected both strategies can be applied easily. 
Production Analysis 62
„„Financial Economies: Big firms can 4. Development of information and
float shares in the market for capital communication
expansion, while small firms cannot
easily float shares in the market.  3.7
„„Managerial Economies: Large  scale Diseconomies of Scale
production facilitates specialisation
and delegation.  The diseconomies of the scale are a
„„Labour Economies: Large scale disadvantage to a firm or an industry or
production implies greater and an organisation. This necessarily increases
minute division of labour. This leads the cost of production of a commodity or
to specialisation which enhances the service. Further it delays the speed of the
quality. This increases the productivity supply of the product to the market. These
of the firm. diseconomies are of two types:

„„Marketing Economies: In the a) Internal Diseconomies of Scale: and

context of large scale production, the b) External Diseconomies of Scale
producers can both buy raw-materials
in bulk at cheaper cost and can take 3.7.1 Internal Diseconomies
the products to distant markets. They of Scale
enjoy a huge bargaining power. 
When the scale of production increases
„„Economies of Survival: Product
beyond optimum limit, its efficiency may
diversification is possible when there
come down.
is large scale production. This reduces
the risk in production. Even if the
market for one product collapses, 3.7.2 External Diseconomies
market for other commodities of Scale
offsets it. The term “External diseconomies of scale”
refers to the threat or disturbance to a firm
3.6.2 External Economies of or an industry from factor lying outside it.
Scale For example a bus strike prevents the easy
External Economies of Scale refer to and correct entry of the workers into a firm.
changes in any factor outside the firm Similarly the rent of a firm increases very
causing an improvement in the production much if new economic units are established
process. This can take place in the case of in the locality.
industry also. These are the advantages
enjoyed by all the firms in the industry 3.8
due to the structural growth. Important
Iso-quants
external economies of scale are listed below.
1. Increased transport facilities
Production function may involve, at a
2. Banking facilities
time, the use of more than one variable
3. Development of townships input. This is presented with the help of
Production Analysis 63
iso-quant curves. The two words ‘Iso’ Iso-quants are based on the
and ‘quant’ are derived from the Greek following assumptions.
language, meaning ‘equal’ and ‘quantity’
1. It is assumed that only two factors
respectively. In our presentation only two
are used to produce a commodity.
factors, labour and capital are used.
2. Factors of production can be divided
In Economics, an  iso-quant  is a into small parts.
curve drawn by joining the combinations
3. Technique of production is constant.
of changing the quantities of two or more
inputs which give the same level of output. 4. The substitution between the two
Isoquants are similar to indifference factors is technically possible. That
curves. is, production function is of ‘variable
proportion’ type rather than fixed
An iso-quant curve can be defined
proportion.
as the locus of points representing various
combinations of two inputs capital and 5. Under the given technique, factors
labour yielding the same output. The iso- of production can be used with
quant is also called as the “Equal Product maximum efficiency.
Curve” or the “Product Indifference
Curve” Iso-quant Schedule
Let us suppose that there are two
3.8.1  Definition of Iso-quant factors namely., labour and capital. An
According to  Ferguson,  “An iso-quant is Iso-quant schedule shows the different
a curve showing all possible combinations combinations of these two inputs that
of inputs physically capable of producing a yield the same level of output. It is given
given level of output” below.

Table 3.2 Iso-quant

Combination Units of Labour Units of Capital Output of Cloth ( meters)
A 2 30 400
B 4 22 400
C 6 16 400
D 8 12 400
E 10 10 400

It is seen from the table 3.2 that

3.8.2  Iso-quant Curve
the five combinations of labour units and
units of capital yield the same level of An equal product curve represents all
output, i.e., 400 meters of cloth. those combinations of two inputs which

Production Analysis 64
 3.8.4 Properties of Iso-quant
Y
Iso-quant curve Curve 

30 Y
Capital

22
A
16 K4
B

Capital
12 K3
10 IQ=400 C
K2
D
K1
6 8 10 IQ
0 2 4 X
Labour
0 L4 L3 L2 L1 X
Diagram 3.3 Labour
Diagram 3.5

are capable of producing the same level

of output. An iso-product curve can 1. The iso-quant curve has  negative
be drawn with the help of isoquant slope. It slopes downwards from left
schedule. to right indicating that the factors
are substitutable. If more of one
3.8.3 Iso-quant Map factor is used, less of the other factor
is needed for producing the same
level of output.
Y
IQ4 In the diagram combination A refers
IQ3 to more of capital K5 and less of
IQ2
IQ1 labour L2. As the producer moves
to B, C, and D, more labour and less
Capital

capital are used.

400 Unit
300 Unit
200 Unit
2. Convex to the origin.
100 Unit
This explains the concept of diminishing
0 X Marginal Rate of Technical Substitution
Labour
Diagram 3.4 (MRTSLK). For example, the capital
substituted by 1 unit of labour goes on
decreasing when moved from top to
An iso-quant map has different iso- bottom. If so, it is called diminishing
quant curves representing the different MRTS. Constant MRTS (straight line)
combinations of factors of production, and increasing MRTS (concave) are
yielding the different levels of output. In also possible. It depends on the nature
simple term, an iso-quant map is a family of iso-quant curve.
of iso-quants. In other words, if more than This means that factors of
one iso-quant is drawn in a diagram, it is production are substitutable to each
called iso-quant map. other. The capital substituted per

Production Analysis 65
 MARGINAL RATE OF TECHNICAL SUBSTITUTION

Y Diminishing MRTS Y Constant MRTS Y Increasing MRTS

Y Y
Capital

Capital

Capital
Isoquant curve IQ4
IQ3
IQ2
30 IQ1
Capital

Capital
22 0 0 0
X X X
16 Labour Labour Labour 400 Unit
12 300 Unit
10 IQ=400 200 Unit
Diagram 3.6 100 Unit
0 2 4 6 8 10 Y X
Labour
Labour
Diagram 3.4
Diagram 3.3
unit of labour goes on decreasing when upper iso-quant curve implies the use
the iso-quant is convex to the origin. of more factors than the lower isoquant
3. Non inter-section of Iso-quant curve.
curves.

Y Y
IQ2 IQ1 IQ3
Y
IQ1
Capital

A
Capital

c
Capital

A
c 300 Units
300 Units 300 Unit
B
B 100 Units 100 Unit
100 Units
0 Labour X 0 X
Labour
Labour X
Diagram 3.7 Diagram 3.8
Diagram 3.7
For instance, point A lie on the iso-
quants IQ1 and IQ2. But the point C The arrow in the figure shows
shows a higher output and the point an increase in the output with a right
B shows a lower level of output IQ1. and upward shift of an iso-quant
If C=A, B=A, then C=B. But C>B curve.
which is illogical. 5. Iso-quant curve does not touch ES>
Y Y
4. An upper iso-quant curve represents either X axis or
S Y axis.
C
a higher level of output. 5 No iso-quant curve
a touches the X axis or A
Higher IQ 2 show higher outputs Y axis because in IQ1, only capital is used,
Price

4 b
and lower IQ1 show lower outputs, for and in IQ2 only labour is used.
3 c
Price

o B
Production Analysis 66
2 d
 Y Suppose that a producer has a
C total budget of ₹120 and for producing a
certain level of output, he has to spend
this amount on two factors Labour (L)
Capital

and Capital (K). Prices of factors K is

IQ IQ2
₹30 and L is ₹10. Iso Cost Curve can be
drawn by using the following hypothetical
0 L X table.
Labour
As shown in Table, there are
Diagram 3.9 five combinations of capital and labour
such as combination A represents
4 units of capital and zero units of
3.9 labour and this combination costs ₹120.
Similarly other combinations (B,C,D
The Iso-cost Line and E) cost same amount of rupees
(₹120).
The iso-cost line is an important
component in analysing producer’s
behaviour. The iso-cost line illustrates all
Y
the possible combinations of two factors
that can be used at given costs and for a 4
A
given producer’s budget. Simply stated,
B
an iso-cost line represents different 3
Capital

C
combinations of inputs which shows the 2 Iso-cost line
same amount of cost. The iso-cost line gives D
1
information on factor prices and financial E
resources of the firm. It is otherwise called
0 2 4 6 8 10 12 X
as “iso-price line” or “iso-income line”
Labour
or “iso-expenditure line” or “total outlay
curve”. Diagram 3.10

Table 3.3 The Iso-cost

Combinations Units of Capital Units of Labour Total Expenditure
Price = ₹30 Price = ₹10 ( in Rupees)
A 4 0 120
B 3 3 120
C 2 6 120
D 1 9 120
E 0 12 120

Production Analysis 67
 c

Cap
B

0 Symbolically, 0
„„At point of tangency, the iso-quant
Labour
X X
4KLabour
+ 0L= ₹.120 curve must be convex to the origin or
Diagram 3.7
3K + 3L= ₹.120 MRTSLk must be declining.
Diagram 3.6
2K + 6L= ₹.120
When the outlay and prices of two factors,
1K + 9L= ₹.120, and namely, labour and capital are given,
0K + 12L= ₹.120. producers attain equilibrium (or least cost
Thus, all the combinations combination of factors is attained by the
A, B, C, D and E cost the firm) where the iso-cost line is tangent to
an iso-product curve. It is illustrated in
same total expenditure.
the following Diagram 3.11.
From the figure 3.10, it is shown that the
costs to be incurred on capital and labour Y
are represented by the triangle OAE. The

Units of a capital
B P3
line AE is called as Iso-cost line. H
C P2
P1 K
Isocost line
3.10
D P
N E
E
Producer’s Equilibrium R S IQ(500 Units)
4 6 8 10 12 X
O M L L1 L2 L3 X
Labour
Producer equilibrium implies the situation Units of labour
Diagram 3.10
where producer maximizes his output. It Diagram 3.11
is also known as optimum combination
of the factors of production. In short, the
In the above figure, profit of the firm (or
producer manufactures a given amount
the producer) is maximised at the point of
of output with ‘least cost combination of
equilibrium E.
factors’, with his given budget.
At the point of equilibrium, the
Optimum Combination of slope of the iso cost line is equal to the
Factors implies either slope of iso product curve (or the MRTS
of labour for capital is equal to the price
„„there is output maximisation for given
ratio of the two factors)
inputs or
Hence, it can be stated as follows.
„„there is cost minimisation for the
given output. PL
MRTS L ,K = =10/30=1/3=0.333
PK
Conditions for Producer’s
Equilibrium At point E, the firm employs OM units of
labour and ON units of capital. In other
The two conditions that are to be fulfilled for
words, it obtains least cost combination or
the attainment of producer equilibrium are:
optimum combination of the two factors
„„The iso-cost line must be tangent to to produce the level of output denoted by
iso-quant curve. the iso-quant IQ.
Production Analysis 68
 The other points such as H, K, R and The Cobb-Douglas production
S lie on higher iso cost lines indicating that function can be expressed as follows.
a larger outlay is required, which exceeds
the financial resources of the firm. Q = AL α Kß
Where, Q = output; A = positive constant;
K = capital; L = Labor α and β are positive
3.11
fractions showing, the elasticity coefficients
Cobb-Douglas Production of outputs for the inputs labor and capital,
Function respectively.

ß = (1- α) since α + ß = 1. denoting

constant returns to scale.
Factor intensity can be measured by the
ratio ß / α.
The sum of α + ß shows the returns to scale.

i) (α + ß) =1, constant returns to scale.

W.Cobb and Paul H.Douglas ii) (α + ß) <1, diminishing returns to
scale.
iii) (α + ß) >1, increasing returns to scale.
Cobb-Douglas Production Function
is a specific standard equation „„The production function explains that
applied to describe how much output with the proportionate increase in the
can be made with capital and labour factors, the output also increases in
inputs. It is used in empirical studies the same proportion.
of manufacturing industries and in „„Cobb-Douglas production function
inter-industry comparisons. The implies constant returns to scale.
relative shares of labour and capital in „„Cobb-Douglas production function
total output can also be determined. considered only two factors like
It is still used in the analysis of
„„Cobb-Douglas Production Function
economies of modern, developed and
is a specific standard equation applied
stable nations in the world.
to describe how much output can be
made with capital and labour inputs.
The  Cobb-Douglas Production Function It is used in empirical studies of
was developed by Charles W. Cobb and Paul manufacturing industries and in inter-
H. Douglas, based on their empirical study industry comparisons. The relative
of American manufacturing industry. It is shares of labour and capital in total
a linear homogeneous production function output can also be determined. It is
which implies that the factors of production still used in the analysis of economies
can be substituted for one another up to a of modern, developed and stable
certain extent only. nations in the world.

Production Analysis 69
„„labour and capital. Production takes place expectations and so on. Mathematically
only when both factors are employed. the supply function is
„„Labour contributes three-fourth of
Qs = f (Px, Pr, Pf, T, O, E )
production and capital contributes
one-fourth of production. Where Qs = Quantity supplied of x
„„The elasticity of substitution between commodity
the factors is equal to one. Px = Price of x Commodity
Pr = Price of related goods
3.12
Pf = Price of factors of production
Law of Supply
T = Technology
Law of Supply is associated with O = Objective of the producer
production analysis. It explains the E = Expected Price of the commodity.
positive relationship between the price
of a commodity and the supply of that Assumptions
commodity. For example, if the price of
cloth increases, the supply of cloth will also Law of Supply is based on the following
increase. This is due to the fact that when assumptions.
price rises, it is profitable to increase the „„There is no change in the prices of
production and hence supply increases. factors of production
„„There is no change in price of capital
Law of Supply describes a direct goods
relation between price of a good and „„Natural resources and their availability
the supply of that good. remain the same
„„Prices of substitutes are constant
„„There is no change in technology
Definition
„„Climate remains unchanged
The Law of Supply can be stated as: „„Political situations remain unchanged
“Other things remaining the same, if the „„There is no change in tax policy
price of a commodity increases its quantity
supplied increases and if the price of a Explanation
commodity decreases, quantity supplied Suppose that the supply function is
also decreases”.
Qs = f(P) or Q = 20P
3.12.1  Supply Function P is an independent variable. When its value
changes, new values of Qs can be calculated.
The supply of a commodity depends on
the factors such as price of commodity,
Supply Schedule
price of labour, price of capital, the
state of technology, number of firms, A supply schedule shows the different
prices of related goods, and future price quantities of supply at different prices.
Production Analysis 70
This information is given in the supply on the Y axis. The points such as a, b, c,
schedule given below. d and e on the supply curve SS’, represent
various quantities at different prices.
Table 3.4 Price and Supply
3.12.3 Factors determining
Price (P) Supply (Qs) supply
1 20
1. Price of the commodity
2 40
Qs = 20P Higher the price larger the supply.
3 60
Price is the incentive for the
4 80 producers and sellers to supply more.
5 100 2. Price of other commodities

The supply of a commodity
depends not only upon its price
3.12.2  Supply Curve but also price of other commodities.
For instance if the price of commercial
A supply curve represents the data given crops like cotton rise, this may
in the supply schedule. As the price of result in reduction in cultivation
the commodity increases, the quantum of food crops like paddy and so its
supplied of the commodity also increases. supply.
Thus the supply curve has a positive slope
3. Price of factors
from left to right. (see diagram 3.12.)
When the input prices go up, this
Y results in rise in cost and so supply
S will be affected.
5 e 4. Price expectations
4 d The expectation over future prices
determines present supply. If a rise in
3 c price is anticipated in future, sellers
Price

2
tend to retain their produce for
b
future sale and so supply in present
1 a market is reduced.
S 5. Technology
0 20 40 60 80 100 X With advancement in technology,
Commodity x production level improves, average cost
Diagram 3.12 declines and as a result supply level
increases.

The quantum supplied of 6. Natural factors

commodity x is represented on X axis. And In agriculture, natural factors like
the price of the commodity is represented monsoon, climate etc. play a vital

Production Analysis 71
 role in determining production
3.12.4  Elasticity of Supply
level.
7. Discovery of new raw materials Elasticity of supply may be defined as the
degree of responsiveness of change in supply
The discovery of new raw materials
to change in price on the part of sellers.
which are cheaper and of high
quality tends to increase supply of It is mathematically expressed as:
the product.
Elasticity = proportionate change in
8. Taxes and subsidies
of supply supply / proportionate
Subsidies for inputs, credit, power change in price
etc. encourage the producers to
produce more. Withdrawal of such es=(∆Qs/Qs) / (∆P/P); es = ∆Qs / ∆P × P/Qs
incentives will hamper production. Where Q s represents the supply, P
Taxes both direct and indirect kill represents price, ∆ denotes a change.
the ability and willingness to produce
more.
3.12.5 Types of Elasticity of
9. Objective of the firm Supply
When the goal of the firm is sales There are five types of elasticity of supply.
maximisation or improving market
share, the supply of the product is 1. Relatively elastic supply (see
likely to be higher. Diagram 3.13)

ES>1 s1 ES=1 s2 ES<1 s3

Y Y Y
C C C
A
A
Price

Price

Price

o B D x o B D x o B D x
Supply Supply Supply
ES=0 s4 ES=α
Y Y

C
A s5
A
Price

Price

o D x o B D x
Supply Supply
Diagram 3.13

Production Analysis 72
 The co-efficient of elastic supply is they get a high price. Once they get
greater than 1(Es  > 1). One percent higher price, larger supply is possible.
change in the price of a commodity The elasticity of supply of durable
causes more than one per cent change in goods is high. But perishables are to
the quantity supplied of the commodity. be sold immediately. So perishables
2. Unitary elastic supply (see Diagram have low elasticity of supply.
3.13) 2. Cost of production
The coefficient of elastic supply is When production is subject to either
equal to 1 (Es = 1). One percent change constant or increasing returns,
in the price of a commodity causes an additional production and therefore
equal ( one per cent) change in the increased supply is possible. So
quantity supplied of the commodity. elasticity of supply is greater. Under
3. Relatively inelastic supply diminishing returns, increase in
(see Diagram 3.13) output leads to high cost. So elasticity
of supply is less.
The coefficient of elasticity is less
than one (Es < 1). One percent change 3. Technical condition
in the price of a commodity causes a In large scale production with huge
less than one per cent change in the capital investment, supply cannot be
quantity supplied of the commodity. adjusted easily. So elasticity of supply
4. Perfectly inelastic supply (see is lesser. Where capital equipment
Diagram 3.13) is less and technology simple, the
supply is more elastic.
The coefficient of elasticity is equal
to zero (Es = 0). One percent change 4. Time factor
in the price of a commodity causes During very short period when
no change in the quantity supplied of supply cannot be adjusted, elasticity
the commodity. of demand is very low. In short
5. Perfectly elastic supply (see Diagram period, variable factors can be added
3.13) and so supply can be adjusted to
some extent. So elasticity of supply
The coefficient of elasticity of supply
is more. In long period, even the
is infinity. (E s  =  α  ). One percent
fixed factors can be added and hence
change in the price of a commodity
supply is highly elastic.
causes an infinite change in the
quantity supplied of the commodity.
3.13
Conclusion
3.12.6 Factors governing
elasticity of supply
Production takes place with the view to
1. Nature of the commodity fulfilling the demands of the consumers. Today
Durable goods can be stored for a long consumption expands in a variety of ways.
time. So, the producers can wait until Hence, production has to necessarily expand
Production Analysis 73
in size and improve in quality. Production „„Supply: The quantity of output
should also help in the determination of the which producers are willing and
price of the factors so that the amount of the able to offer to the market at various
income generated be appropriately spent on prices.
the factors of production. „„Elasticity of Supply: Responsiveness
of the quantity supplied of a good to a
Glossary change in its price.
„„Production: An activity that „„Iso-quant: All the combination of two
transforms input into output. inputs which are capable of producing
„„Factors of Production: Four factors same level of output.
are Land, Labour, Capital and „„Iso-cost: All combination of two
Organisation. Factor services are used inputs shows that a firm can purchase
in the process of production. with the same amount of money.
„„Land: All gifts of Nature. „„Short-run Production Function:
„„Labour: Physical or mental effort Relationship between inputs and
of human being in the process of output, when there is at least one fixed
production. factor in the production process.

„„Capital: Man-made material source „„Long-run Production Function:

of production. Relationship between inputs and
output when all factors are variable.
„„Organisation: which takes decisions
and bears risk. „„Economies of Scale: A proportionate
saving in costs gained by an increased
„„Production function: Technological
level of production.
relationship between inputs and
output.

Production Analysis 74
 ICT CORNER
LAW OF VARIABLE PROPORTION

Analyse the changes in TPL and

APL with respect to the changes
in MPL.

Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Law of Variable Proportions”
• In the Right side of the work sheet Total Product, Marginal Product
and Average Product are given and in the left side Respective graph
is shown. Analyse the data and the graphs drawn and the points.
• vAnalyse the change in MPL and click the check boxes, STAGE-
I,STAGE-II and STAGE-III so that Each stage appears in different
colours. Now analyse TPL and APL in each stage and compare what
is given in the text book lesson.

Step1 Step2 Step3 Step4

Pictures are indicatives only*

URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code

Production Analysis 75
 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. The primary factors of production

are:
a. Labour and Organisation
6. The functional relationship between
b. Labour and Capital
“inputs” and “outputs” is called as
c. Land and Capital
a. Consumption Function
d. Land and Labour.
b. Production Function
2. The man-made physical goods used to c. Savings Function
produce other goods and services are
d. Investment Function
referred to as.
a. Land b. Labour 7. In a firm 5 units of factors produce
24units of the product. When the
c. Capital d. Organization.
number of factor increases by one,
3. Formula for calculating AP is the production increases to 30 units.
Calculate the Avarage Product.
a. ΔTP/N
a. 30
b. ΔTP/ΔN
b. 6
c. TP/MP
c. 5
d. TP/N
d. 24
4. Which factor is called the changing
agent of the Society 8. The short-run production is studied
through
a. Labourer
a. The Laws of Returns to Scale
b. Land
b. The Law of Variable Proportions
c. Organizer
c. Iso-quants
d. Capital
d. Law of Demand
5. Who said, that one of the key
of an entrepreneur is “uncertainty- 9. The long-run production function is
bearing”. explained by
a. J.B.Clark a. Law of Demand
b. Schumpeter b. Law of Supply
c. Knight c. Returns to Scale
d. Adam Smith d. Law of Variable Proportions

Production Analysis 76
 10. An Iso-quant curve is also known as 16. Modern economists have propounded
a. Inelastic Supply Curve the law of
b. Inelastic Demand Curve a. Increasing returns
c. Equi-marginal Utility b. decreasing returns
d. Equal Product Curve c. Constant returns
11. Mention the economies reaped from d. variable proportions.
inside the firm
a. financial 17. Producer’s equilibrium is achieved at
b. technical the point where:
c. managerial a. Marginal rate of technical
d. all of the above substitution(MRTS) is greater than
the price ratio
12. Cobb-Douglas production function
assumes b. MRTS is lesser than the price
ratio
a. Increasing returns to scale
b. Diminishing returns to scale c. MRTS and price ratio are equal to
each other
c. Constant returns to scale
d. All of the above d. The slopes of isoquant and isocost
lines are different.
13. Name the returns to scale when the
output increases by more than 5%, for
a 5% increase in the inputs, 18. The relationship between the price
of a commodity and the supply of
a. Increasing returns to scale
commodity is
b. decreasing returns to scale
a. Negative
c. Constant returns to scale
b. Positive
d. All of the above
c. Zero
14. Which of the following is not a
characteristic of land? d. Increase
a. Its limited supply. 19. If average product is decreasing, then
b. It is mobile marginal product
c. Heterogeneous a. must be greater than average
d. Gift of Nature product
15. Product obtained from additional b. must be less than average product
factors of production is termed as
c. must be increasing
a. Marginal product
d. both a and c
b. Total product
c. Average product
d. Annual product

Production Analysis 77
 20.
A production function measures
the relation between
a. input prices and output prices c. the quantity of inputs and the
b. input prices and the quantity of output quantity of output.
d. the quantity of inputs and input
prices.

Part-A  Answers

1 2 3 4 5 6 7 8 9 10
d C d c c b c b c d
11 12 13 14 15 16 17 18 19 20
d C a b a a c b b c

Part-B 
Answer the following questions in one or
two sentences.
21. Classify the factors of production.
22. Define Labour.
23. State the production function.
24. Define Marginal Product of a factor.
25. What is Iso-cost line?
26. What are the conditions for producer’s equilibrium?
27. What are the reasons for upward sloping supply curve?

Part-C  Answer the following questions in one paragraph.

28. What are the characteristics of land?

29. What are the factors governing elasticity of supply?
30. What are the functions of Entrepreneur?
31. State and explain the elasticity of supply.
32. Bring out the Relationship among Total, Average and Marginal Products.
33. Illustrate the concept of Producer’s Equilibrium.
34. State the Cobb-Douglas Production Function.

Production Analysis 78
Part-D  Answer the following questions in about a page

35. Examine the Law of Variable Proportions with the help of a diagram.

36. List out the properties of iso-quants with the help of diagrams.

37. Elucidate the Laws of Returns to Scale. Illustrate.

38. Explain the internal and external economies of scale.

ACTIVITY
1. Visit a market and write a report on the factors that influence
the quantity of supply of a commodity of your locality.
2. Visit a factory and show how the four factors of production are
effectively employed to produce the product in your locality.

References

1. Irvin B. Tucker – Microeconomics for Today - 2004 Thomson/South-Western

2. A. Koutsoyiannis – Modern Microeconomics - (2008) Macmillan Press Ltd
3. Hal R. Varian – Microeconomic Analysis - (2010) W.W. Norton & Company
4. Shashi kumar – Micro Economics (2004) - Anmol Publication Pvt Ltd
5. Ben S.Bernake – Principles of Micro Economics (2001) - MC Graw Hill Education
6. M.L.Seth – Micro Economics (2012) - Lakshmi Narain Agarwal Publication
7. M.L. Jhingan – Modern Micro Economics (Fourth Edition) (2012) - Virnda
Publication Pvt Ltd
8. Ryan C. Amacher – Principles of Micro Economics (1980) - South-Western Pub.Co
http://careercart.blogspot.in/2012/11/managerial-economics-production.html

Production Analysis 79
 CHAPTER

4 Cost and Revenue

Analysis

“The big hurdle is going out and raising the revenue ”

–Tyler Cowen

Learning Objectives

1  o identify the cost involved in the production of any commodity or service

T
and to present the ways in which it is utilized, combining with revenue in the
calculation of profit of the firm; and

2 To point out how revenue is realized at the sale of the goods and services
produced at the various types of market.

4.1 its supply behaviour in the market, it is

necessary to understand the cost and
Introduction
revenue concepts .

Cost and revenue analysis refers to

4.2
examining the cost of production and
sales revenue of a production unit or firm Cost Analysis
under various conditions. The objective of
a firm is to earn profit, and not to make Cost refers to the total expenses incurred
loss. However, a firm’s profit or loss is in the production of a commodity. Cost
primarily determined by its costs and analysis refers to the study of behaviour of
revenue. In simple terms, profit / loss is cost in relation to one or more production
defined as the difference between the total criteria, namely size of output, scale of
revenue and the total cost i.e., Profit (or) production, prices of factors and other
Loss = Total Revenue - Total Cost. As costs economic variables. The  functional
and revenue are very important to decide relationship between cost and output is
the production behaviour of a firm and expressed as ‘Cost Function’.

Cost and Revenue Analysis 80

 A Cost Function may be written as
4.3.3 Explicit Cost
C = f (Q) (Paid out cost)
Eg. TC = Q3–18Q2 + 91Q + 12 Payment made to
where, C=Cost and Q=Quantity of output. others for the purchase
Cost functions are derived functions because of factors of production
they are derived from Production Functions. is known as Explicit
We shall discuss the basic cost concepts and costs. It refers to the
their behaviour below. actual expenditures of
the firm to purchase
or hire the inputs the firm needs. Explicit
4.3
cost includes, i)  wages, ii) payment for
Cost Concepts raw material, iii) rent for the building, iv)
interest for capital invested, v) expenditure
on transport and advertisement vi) other
4.3.1  Money Cost expenses like license fee, depreciation and
Production cost expressed in money terms insurance charges, etc. It is also called
is called as money cost. In other words, it Accounting Cost or Out of Pocket Cost or
is the total money expenses incurred by a Money Cost.
firm in producing a commodity. Money
cost includes the expenditures such as cost
4.3.4  Implicit Cost
of raw materials, payment of wages and
salaries, payment of rent, interest on capital, Payment made to the use of resources
expenses on fuel and power, expenses on that the firm already owns, is known as
transportation and other types of production Implicit Cost. In simple terms, Implicit
related costs. These costs are considered as Cost refers to the imputed cost of a firm’s
out of pocket expenses. Money costs are self-owned and self-employed resources.
also called as Prime Cost or Direct Cost A firm or producer may use his own land,
or Nominal Cost or Accounting Cost or building, machinery, car and other factors
Explicit Cost or Out of Pocket Cost, suiting in the process of production. These costs
to context. are not recorded under normal accounting
practices as no cash payment takes place.
However, the value of the own services are
4.3.2  Real Cost  imputed and considered for preparing the
Real cost refers to the payment made to profit and loss accounts. Implicit Cost is
compensate the efforts and sacrifices of all also called as Imputed Cost or Book Cost.
factor owners for their services in production.
It includes the efforts and sacrifices of 4.3.5  Economic Cost
landlords in the use of land, capitalists to save
It refers to all payments made to the resources
and invest, and workers in foregoing leisure.
owned and purchased or hired by the firm
Adam Smith regarded pains and sacrifices of
in order to ensure their regular supply to the
labour as real cost of production.
Cost and Revenue Analysis 81
process of production. It is the summation because, they are unalterable, unrecoverable,
of explicit and implicit costs. Economic Cost and if once invested it should be treated as
is relevant to calculate the normal profit and drowned or disappeared. For  example, if
thereby the economic profit of a firm. a firm purchases a specialized equipment
designed for a special plant, the expenditure
Economic Cost = Implicit Cost + on this equipment is a sunk cost, because it
Explicit Cost has no alternative use and its opportunity
Cost is zero. Sunk cost is also called as
‘Retrospective Cost’.
4.3.6  Social Cost
4.3.9  Floating Cost
It refers to the total cost borne by the society
due to the production of a commodity. It refers to all expenses that are directly
Alfred Marshall defined the term social associated with business activities but not
cost to represent the efforts and sacrifices with asset creation. It does not include the
undergone by the various members of the purchase of raw material as it is part of
society in producing a commodity. Social current assets. It includes payments like
Cost is the cost that is not borne by the wages to workers, transportation charges,
firm, but incurred by others in the society. fee for power and administration. Floating
For example, large business firms cause cost is necessary to run the day-to-day
air pollution, water pollution and other business of a firm.
damages in a particular area which involve
cost to the society. These costs are treated as 4.3.10  Prime Cost
social cost. It is also called as External Cost.
All costs that vary with output, together
with the cost of administration are known
4.3.7  Opportunity Cost as Prime Cost. In short, Prime cost =
It refers to the cost of next best alternative Variable costs + Costs of Administration.
use. In other words, it is the value of the
next best alternative foregone. For example, 4.3.11  Fixed Cost
a farmer can cultivate both paddy and
Fixed Cost does not change with the change
sugarcane in a farm land. If he cultivates
in the quantity of output. In other words,
paddy, the opportunity cost of paddy
expenses on fixed factors remain unchanged
output is the amount of sugarcane output
irrespective of the level of output, whether
given up. Opportunity Cost is also called
the output is increased or decreased or
as ‘Alternative Cost’ or ‘Transfer Cost’.
even it becomes zero. For example, rent of
the factory, watchman’s wages, permanent
4.3.8  Sunk Cost
worker’s salary, payments for minimum
A cost incurred in the past and cannot be equipments and machines insurance
recovered in future is called as Sunk Cost. premium, deposit for power, license fee, etc
This is historical but irrelevant for future fixed cost is also called as ‘Supplementary
business decisions. It is called as sunk Cost’ or ‘Overhead Cost’.

Cost and Revenue Analysis 82

 Y 9

Cost
Cost
4
1000 TFC 3
2

0 Output X

Diagram 4.1
4.3.12  Variable Cost
These costs vary with the level of output. For instance if TC = Q3 –18Q2 + 91Q +12,
Examples of variable costs are: wages of the fixed cost here is 12. That means, if
temporary workers, cost of raw materials, Q isY zero, the Total cost will be 12, hence
fuel cost, electricity charges, etc. Variable fixed
10 cost.
cost is also called as Prime Cost, Special 8
It could be observed that TFC does not
Cost, or Direct Cost. 6
change with output. Even when the output
Price

4
is zero, the fixed cost is ₹.1000. TFC is
2
4.4 a horizontal straight line, ARparallel to
0
X axis. 1 2 3 4 5 6 7 8 9 10 X
Short run Cost Curves -2
-4
MR

-6
4.4.2  Total Variable Cost (TVC)
-8
4.4.1  Total Fixed Cost (TFC) All payments Diagram
to the variable
4.13 factors of
production is called as Total Variable Cost.
Table 4.1 Total Fixed Cost Hypothetical TVC is shown in table-4.2
Output Total Fixed and Diagram 4.2
(in unit) Cost (in ₹)
0 1000
1 1000 Table 4.2 Total Variable Cost
2 1000 Output Total Variable Cost
3 1000 (in unit) (in ₹)
4 1000 0 0
5 1000 1 200
2 300
All payments for the fixed factors of 3 400
production are known as Total Fixed Cost. 4 600
A hypothetical TFC is shown in table 4.1 5 900
and diagram 4.1

Cost and Revenue Analysis 83

 Y
TC

TVC
Table
19004.3 Total Cost Curves
Y
Output1600 Total Total Total Cost
900 (in unit)1400Fixed Variable (TC)

Cost
1300 Cost Cost TFC+TVC
1200 TVC
600
(TFC) (TVC) (in ₹)
1000 TFC
Cost

900 (in ₹) (in ₹)

400 0 600 1000 0 1000
TFC 300 1 400 1000 200 1200
200
2 300200
1000 300 1300
3 1000 400 1400
0 1 2 3 4 5 X 0 1 2 3 4 5 X
4 1000 600 1600
X Output
5 1000 Output
900 1900
Diagram 4.2 Diagram 4.3

Y
TC
In the diagram the TVC is zero when 1900
TVC
nothing
Y is produced. As output increases
1600
TVC
900 Yalso increases. TVC curve Y
C/R TC
Cost

1400
slopes upwarde>|1|from left to right. For 1300 1

Average fixed cost

1200 J
instance in TC =e=1Q 3 – 18Q 2 + 91Q TVC
Total Revenue & Total Cost

75
TR
Price

600 1000 TFC

+12, variable cost, TVC = Q3 – 18Q2
Cost

900 45
e<|1| H
+40091Q B
AR=D 600
300 0 M Q
0 MR 400 1 5
Profit

200 9 X
X X 300 N
Y 30
200 28 Total Production
4.4.3  Total Cost Curves 22
Revenue (TR)

0 1
Total Cost means the sum total
2 X of all 3 4 5 012 1 2 3 4 5 X
0 M
payments madeOutput
in the production.
TR It is also -2 1 Output
5 9 X
Total

TP
called as Total Cost 4.2
Diagram of Production. Total Diagram 4.3
cost is the summation of Total Fixed Cost Diagram 4.15
0 X
Quantity(Q)
(TFC) and Total Variable Cost (TVC). It is It is to be noted that
written symbolically as 4.14
Diagram
a) The TC curve is obtained by adding
TC = TFC + TVC. For example, TFCC/Rand TVC curves vertically.
Y
when the total fixed cost is ₹ 1000 and Y TC

e>|1| b) TFC curve remains parallel to x axis,

the total variable cost is ₹ 200 then the J
Total Revenue & Total Cost

indicating
75
a straight line. TR
Total cost is = ₹ 1200 (₹ 1000 + ₹ 200).
Price

e=1
c) TVC
45 starts fromHthe origin and moves
If TFC = 12 ande<|1|
upwards,B as no variable cost is incurred
TVC = Q – 18Q 3 2 AR=D
+ 91Q
0
at zero
0
1
M
output. 5 Q
MR
Profit

9 X
X
Y TC = 12 + Q3 – 18Q2 + 91Q d) When
30
28 TFC and TVC
Totalare added, TC
Production
N
22
Revenue (TR)

starts
12
from TFC and moves upwards.
0 M
TR -2 1 5 9 X
Total

Cost and Revenue Analysis 84 TP

Diagram 4.15
 e) TC curve lies above the TFC curve It is to be noted that
f) TVC and TC curves are the same a. AFC declines as output increases, as
shapes but beginning point is different. fixed cost remains constant
b. AFC curve is a downward sloping

4.4.4 Average Fixed Cost throughout its length, never touching

(AFC) X and Y axis. It is asymptotic to both
the axes.
It refers to the fixed cost per unit of output. It
c. The shape of the AFC curve is a
is obtained by dividing the total fixed cost by
rectangular hyperbola.
the quantity of output. AFC = TFC / Q where,
AFC denotes average fixed cost, TFC denotes
total fixed cost and Q denotes quantity of 4.4.5 Average Variable Cost
output. For example, if TFC is 1000 and the (AVC)
quantity of output is 10, the AFC is ₹ 100, Table 4.5 Average Variable Cost
obtained by dividing ₹ 1000 by 10. AFC is Q TVC AVC
shown in table 4.4 and diagram 4.4.

Table 4.4 Average Fixed Cost

(in
unit) UNIT-4(in ₹) TVC/Q
(in ₹)
0 0 0/0 = 0
Q TFC AFC 1 200 200/1 = 200
2 300 300/2 = 150
(in unit) (in ₹) TFC/Q
3 400 400/3 = 133
(in ₹) 4 600 600/4 = 150

UNIT-4
0 1000 1000/0 = ∞ 5 900 900/5 = 180
1 1000 1000/1 = 1000
Y2 1000 1000/2 = 500
Y Y
3 1000 1000/3 = 333
4 1000 1000/4 = 250 120
Average Variable Cost

1000
Average fixed cost

5 1000 1000/5 = 200 AVC

Average Cost
TC 200
65
150
500 Y
Y Y
46
40
100 38
333
1200
Average Variable Cost

250
200 1000 AFC 50
Average fixed cost

TVC
AVC
Average Cost

TFC 0 1 2 3 4 5 X 200
0 A
Quantity produced 150
1 2 3 4 5 X
650
500 Quantity 466
400
380
333 Diagram 4.4 100 Diagram 4.5
250
200 AFC 50
0 1 2 3 4 5 0 1 2
5 X
X
It refers
0 to the total variable cost per unit
Quantity produced 1 2 3 4 5 X
of output. It Quantity
is obtained by dividing total
Diagram 4.4 variable cost (TVC)
Diagram 4.5 by the quantity of D

Cost and Revenue Analysis 85

 output (Q). AVC = TVC / Q where, AVC
denotes
Y Average Variable cost, TVC Y Y
denotes total variable cost and Q denotes 1200
ATC
Average Variable Cost

quantity of output. For example, When the

TVC is ₹ 300 and the quantity AVCproduced is

Average Cost

Marginal Cost
200
2, the AVC is ₹ 150, (AVC = 300/2 = 150) A C
650
AVC150is shown in table 4.5 and Diagram 4.5. 466
3
400 B
If TVC
100
= Q3 – 18Q2 + 91Q 380 2
C AVC 50
= Q –18Q + 91 2
1
X It is to be noted that 0 1 2 3 4 5 X
0
1 2 3 4 5X Output
a) AVC declines initially and then
Quantity
increases with the increase
Diagram 4.5 of output. Diagram 4.6
b) AVC declines up to a point and moves
upwards steeply, due to the law of 1600/4 = 400) If ATC is Q3 – 18Q2
returns. + 91Q +12, then AC = Q2 – 18Q +91
c) AVC curve is a U-shaped curve.
+ 12/Q
2. ByATC is derived by adding together
Average Fixed Cost (AFC) and
4.4.6 Average Total Cost (ATC)
Average Variable Cost (AVC) at
or Average Cost (AC)
each level of output. ATC = AFC
It refers to the total cost per unit of output. + AVC. For example, when Q= 2,
It can be obtained in two ways. TFC = 1000, TVC=300; AFC=500;
1. By dividing the firm’s total cost (TC) AVC=150;ATC=650. ATC or AC
by the quantity of output (Q). ATC = is shown in table 4.6 and Diagram
TC / Q. For example, if TC is ₹ 1600 4.6
and quantity of output is Q=4, the It should be noted that
Average Total Cost is ₹ 400. (ATC =

Table 4.6 Average Total Cost or Average Cost

Q TFC TVC TC ATC AFC AVC ATC
(in (in ₹) (in ₹) (in ₹) (TC/Q) (in ₹) (in ₹) (AFC
unit) TFC (in ₹) +AVC)
+TVC (in ₹)
0 1000 0 1000 1000 /0= ∞ 0 0 0+0=0
1 1000 200 1200 1200 /1= 1200 1000 200 1000+200 =1200
2 1000 300 1300 1300 /2= 650 500 150 500 + 150= 650
3 1000 400 1400 1400 /3= 466 333 133 333 + 133= 466
4 1000 600 1600 1600 /4= 400 250 150 250 + 150= 400
5 1000 900 1900 1900 /5= 380 200 180 200 + 180= 380

Cost and Revenue Analysis 86

 a) ATC curve is also a ‘U’ shaped curve. by producing one extra unit of output.
b) Initially the ATC declines, reaches a Marginal cost is important for deciding
minimum when the plant is operated whether any additional output can be
optimally, and rises beyond the produced or not. MC = ∆TC / ∆Q where
optimum output. MC denotes Marginal Cost, ∆TC denotes
change in total cost and ∆Q denotes change
c) The ‘U’ shape of the AC reflects the
in total quantity. For example, a firm
law of the variable proportions.
produces 4 units of output and the Total
cost is ₹ 1600. When the firm produces
4.4.7  Marginal Cost (MC)
one more unit (4 +1 = 5 units) of output
at the total cost of ₹ 1900, the marginal
Table 4.7 Marginal Cost cost is ₹ 300.
Q TC MC MC = ₹ 1900 – ₹ 1600 = ₹ 300.
(in unit) (in ₹) (in ₹)
0 1000 -- The other method of estimating MC is :
1 1200 1200 - 1000 = 200 MCn=TCn –TCn-1
2 1300 1300 - 1200 = 100
where, ‘MC’ denotes Marginal Cost,
3 1400 1400 - 1300 = 100
‘TC n’ denotes Total cost of ‘n’th item,
4 1600 1600 - 1400 = 200
TCn-1 denotes Total Cost of ‘n-1’ th item.
5 1900 1900- 1600 = 300
For example,
when TC4 = ₹.1600, TC(4-1)=₹1400
It is the cost of the last single unit
and then MC= ₹200, (MC=1600-1400)
produced. It is defined as the change in
total costs resulting from producing one MC schedule is shown in Table 4.7
extra unit of output. In other words, it and MC Curve is shown in diagram 4.7.
is the addition made to the total cost It is to be noted that
a) MC falls at first due to more efficient
use of variable
Y factors.
Y
b) MC curve increases after the lowest
ATC 1200
point and it slopes upward.
MC
c) MC cure AC
900 is a U-shaped curve.
Marginal Cost

d) The slope of TC is MC. MC

Cost

300 If TC = Q650
3
–18Q2 + 91Q +12
450
200 MC = 3Q300
2
– 36Q +91
200
100
X
0 0 1 2 3 4 5 X
1 2 3 4 5 X
Quantity Output
Diagram 4.7 Diagram 4.8

Cost and Revenue Analysis 87

 LAC is given in diagram 4.9.
4.4.8 The relationship
Y
Y
between Average Cost SAC1 SAC2
SAC3
1200
MC and Marginal cost
LAC
AC Cost
900
There is a unique relationship between

Average cost
MC
the AC and MC curves as shown in
Cost
650
450
300
200

Y 0 1 2 3 4 5 K x
1 2 3 4 5
X Y ME
Quantity
X Output Output SAC3
SAC1 SAC2
Diagram 4.7 1200 Diagram 4.8 Diagram 4.9
LAC
AC
900 Long run average cost (LAC) is equal

Average cost
MC to long run total costs divided by the level
Cost

650 of output.
450
300 LAC = LTC/Q
L 200 where, LAC denotes Long-Run Average Cost,
0 1 2 3 4 5 X
K
LTC denotes Long-run Total Cost andx
X Output Output
Q denotes the quantity of output.
Diagram 4.8 Diagram 4.9
The LAC curve is derived from short-
run average cost curves. It is the locus of points
diagram 4.8.
denoting the least cost curve of producing
1. When AC is falling, MC lies the corresponding output. The LAC curve is
below AC. called as ‘Plant Curve’ or ‘Boat shape Curve’ or
2. When AC becomes constant, MC ‘Planning Curve’ or ‘Envelop Curve’.
also becomes equal to it.
3. When AC starts increasing, MC lies A significant recent development in
above the AC. cost theory is that the long-run average
4. MC curve always cuts AC at its cost curve is L- shaped rather than
minimum point from below. U-shaped. The L-shape of the long-run
average cost curve implies that in the
4.5 beginning when output is expanded
through increase in plant size and
Y Long Run Cost Curve:
Y
SAC3
associated variable factors, cost per unit
SAC1
falls rapidly due to economies of scale.
SAC2
1200
LAC
AC Cost Y
In the long run all factors of production
900
Average cost

MC
become variable. The existing size of the
Economies of scale
Cost

Total Revenue

650
450 30
firm can be increased in the case of long
300 Economies of scale
exhausted
25
20
200 15
run. There are neither fixed inputsK nor
AC (Q)
Minimum 10
x efficiency of scale 5
0 1 2 3 4 5 X
X fixed costs
Output in the long run. Output MES Q 0 1 2 3 4
Quantity
Diagram 4.8 Diagram 4.9
Diagram 4.
Cost and Revenue Analysis 88
 4.6 Table 4.8
Total Revenue - Constant Price
Revenue Analysis
Quantity Price Total Revenue
sold (Q) (P) (TR)
The amount of money that a producer
1 5 5
receives in exchange for the sale of
2 5 10
goods is known as revenue. In short,
revenue means sales revenue. It is the 3 5 15
amount received by a firm from the sale 4 5 20
of a given quantity of a commodity at
5 5 25
the prevailing price in the market. For
example, if a firm sells 10 books at the 6 5 30
price of ₹100 each, the total revenue will
be ₹1000.
TR=P × Q
4.6.1  Revenue Concepts

The three basic revenue concepts are: Total where,

Revenue, Average Revenue and Marginal TR denotes Total Revenue,
Revenue. P denotes Price and
a) Total Revenue: Q denotes Quantity sold.
Total revenue is the amount of income For example, a cell-phone company sold 100
received by the firm from the sale of its cell-phones at the price of ₹ 500 each. TR is
products. It is obtained by multiplying the ₹ 50,000. (TR= 500 × 100 = 50,000).
price of the commodity by the number of
When price is constant, the behaviour of
units sold.
TR is shown in table 4.8 and diagram 4.10,
assuming P=5. When P = 5; TR = PQ

When price is declining with increase

Y
in quantity sold. (Eg. Imperfect
TR Competition on the goods market) the
Total Revenue

30 behaviour
30 of TR is shown in table 4.9 and
Total Revenue

28
25 24
20 diagram
18 4.11. TR can be obtained from
(Q) 15 10
10 Demand fuction: If Q = 11–P, TR
5 0 1 2 3 4 5 6 7 8 9 10 X
Q 0 1 2 3 4 5 6 x Output
Quantity
Diagram 4.10 When P = 1, Q = 10Diagram 4.11

Cost and Revenue Analysis 89

 Table 4.9 Revenue is ₹6. (AR= 30/5 =6) It is to be
Total Revenue - Price declining noted that AR is equal to Price.
Quantity Price Total Revenue AR=TR/Q = PQ/Q=P
sold (Q) (P) (TR)
1 10 10 c) Marginal Revenue
2 9 18 Marginal revenue (MR) is the addition to
3 8 24 the total revenue by the sale of an additional
4 7 28 unit of a commodity. MR can be found out
5 6 30 by dividing change in total revenue by the
6 5 30 change in quantity sold out. MR = ∆TR /
∆Q where MR denotes Marginal Revenue,
7 4 28
∆TR denotes change in Total Revenue and
8 3 24
∆Q denotes change in total quantity.
9 2 18
10 1 10 The other method of estimating
MR is:

Y MR=TRn –TRn-1 (or) TRn+1 – TRn

30 where, MR Y denotes Marginal Revenue,
Total Revenue

28
24
18
TRn denotes total revenue of nth item, TRn-1
AR /MR
denotes Total Revenue of n-1th item and
Price

10 5
TR
TRn+1 denotes Total Revenue of n+1 item.
th
0 1 2 3 4 5 6 7 8 9 10 X

Output
If TR0= PQ
1 2MR3 = ∆TR/∆Q
4 5 6 = P,
X
Output
Diagram 4.11 which is equal to AR.
Diagram 4.12

TR = PQ = 1 × 10 = 10 4.6.2 Relationship between
When P = 3, Q = 8, TR = 24 AR and MR Curves

When P = 10, Q = 1, TR = 10 If a firm is able to sell additional units at the

same price then AR and MR will be constant
b) Average Revenue
and equal. If the firm is able to sell additional
Average revenue is the revenue per unit units only by reducing the price, then both
of the commodity sold. It is calculated by AR and MR will fall and be different .
dividing the Total Revenue(TR) by the
number of units sold (Q) Constant AR and MR
AR = TR /Q; if TR = PQ, AR = PQ/Q = P (at Fixed Price)
AR denotes Average Revenue, TR denotes When price remains constant or
Total Revenue and Q denotes Quantity of fixed, the MR will be also constant and will
unit sold. coincide with AR. Under perfect competition
For example, if the Total Revenue as the price is uniform and fixed, AR is equal
from the sale of 5 units is ₹30, the Average to MR and their shape will be a straight

Cost and Revenue Analysis 90

 line horizontal to X axis. The AR and MR Y
Schedule under constant price is given in 10
Table 4.10 and in the diagram 4.12 8
6
Table 4.10

Price
4
TR, AR, MR - Constant price
2
Quantity Price Total Average Marginal AR
0
Sold (P) Revenue Revenue Revenue 1 2 3 4 5 6 7 8 9 10 X
-2
(Q) (TR) (AR) (MR) -4

MR
₹ ₹ ₹ ₹
-6
1 5 5 5 5 -8
2 5 10 5 5 Diagram 4.13
3 5 15 5 5
4 5 20 5 5
5 5 25 5 5 Table 4.11
6 5 30 5 5 AR, TR, MR at declining price
Price (P)/
Quantity Total Marginal
Y Average
Sold Revenue Revenue
Revenue
AR /MR (TR) (MR)
(Q) (AR)
Price

5 ₹ ₹
TR ₹
X
1 10 10 -
0 1 2 3 4 5 6 X
Output 2 9 18 8
Diagram 4.12 3 8 24 6
4 7 28 4
Declining AR and MR (at 5 6 30 2
Declining Price) 6 5 30 0
When a firm sells large quantities at lower 7 4 28 -2
prices both AR and MR will fall but the 8 3 24 -4
fall in MR will be more steeper than the 9 2 18 -6
fall in the AR. 10 1 10 -8

It is to be noted that MR will be

lower than AR. Both AR and MR will be
4.6.3 Relationship among TR,
sloping downwards straight from left to
AR and MR Curves:
right. The MR curve divides the distance
between AR Curve and Y axis into two When marginal revenue is positive,
equal parts. The decline in AR need not total revenue rises, when MR is zero the
be a straight line or linear. If the prices total revenue becomes maximum. When
are declining with the increase in quantity marginal revenue becomes negative total
sold, the AR can be non-linear, taking a revenue starts falling. When AR and MR
shape of concave or convex to the origin both are falling, then MR falls at a faster
rate than AR.

Cost and Revenue Analysis 91

 Y
4.6.4 
TR, AR, MR and Y
10 Elasticity of Demand e>|1|
8

Price
The6 relationship among AR, MR and e=1

elasticity of demand (e) is stated as follows. e<|1|

Price

4
2 e = AR/AR – MRAR AR=D
0 0 MR
The relationship
1 2 3 4 between
5 6 7 the
8 9 AR10 curve
X Y
X
-2
and MR curve depends upon the elasticity

Revenue (TR)
-4
MR

of AR
-6
curve (AR = DD = Price).
When price elasticity of demand is
a. -8 TR

Total
Diagram
greater than 4.13 is positive and
one, MR
TR is increasing.
0 X
b. When price elasticity of demand is less Quantity(Q)
than one, MR is negative and TR is Diagram 4.14
decreasing.
c. When price elasticity of demand is
equal to one, MR is equal to zero and At the output range of
TR is maximum and constant. 5 to 6 units, the price
It is to be noted that, the output range of 1 elasticity of demand is
to 5 units, the price elasticity of demand is equal to one. Hence, TR
greater than one according to total outlay is maximum and MR
method. Hence, TR is increasing and MR equals to zero.
is positive. At the output range of 6 units to 10
units, the price elasticity of demand is less
Table 4.12 TR, AR, MR & Elasticity than unity. Hence, TR is decreasing and
MR is negative.
Quan- Price TR AR MR Elasticity
tity (Q) (P)
1 10 10 10 10 4.7
2 9 18 9 8 Conclusion
3 8 24 8 6 e>1
4 7 28 7 4 This Chapter has analysed the behaviour of
5 6 30 6 2 Cost Curves and revenue curves under two
6 5 30 5 0 e=1 situations and the relationship among price
7 4 28 4 -2 elasticity of demand , TR, AR and MR.
8 3 24 3 -4
9 2 18 2 -6 e<1
10 1 10 1 -8
11 0 0 0 -10

Cost and Revenue Analysis 92

GLOSSARY Marginal The additional cost
Cost incurred for producing
Cost It refers to expenses one more unit of
incurred on production output.

Revenue It refers to sales revenue Average Cost per unit of output

Cost produced. It is obtained
Explicit Cost It refers to out of pocket by dividing total cost by
expenses or money cost output.
or accounting costs. They
are the payments made to Average Variable Cost per unit
others. Variable of output, obtained by
Cost dividing total variable
Implicit The cost imputed for the cost by output.
Cost resources provided by the Average Fixed cost per unit of
owner. Fixed Cost output, obtained by
dividing total fixed cost
Fixed Costs The costs that remain by output.
constant at all levels of
Average Average revenue refers
output. They do not vary
Revenue to revenue per unit of
with output.
output sold. It is obtained
Variable The cost that varies with by dividing the total
Cost the level of output. revenue by quantity sold.
Marginal The additional revenue
Total Cost The sum of total fixed Revenue obtained by selling one
cost and total variable more unit of output.
costs.

Cost and Revenue Analysis 93

 ICT CORNER
Cost and Revenue Analysis ANALYSIS: REVENUE ANALYSIS

This activity for Revenue

Analysis helps in analysis of
Total Revenue Under different
conditions.

Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Revenue Analysis”
• In the Right side of the work sheet two data are given. 1.Total Revenue
for the quantity when Price is constant and 2. Total Revenue for
the quantity when Price is reduced when the quantity is increased.
Analyse the graph drawn on the Left side for constant price. It is a
straight-line graph.
• Now click on the check box , “Show Total Revenue when price is
declining with increase in quantity”. You can see a curve graph.
Now analyse the data values and Graph in each Data and compare
what is given in the text book lesson. You can get similar data from
internet and type in the columns and see the change in graph.

Step1 Step2 Step3 Step4

Pictures are indicatives only*

URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code

Cost and Revenue Analysis 94

 MODEL QUESTIONS

Part-A  Multiple Choice 6. The costs of self–owned resources are

Questions termed as ________ cost.

1. Cost refers to ________ a. real

a. price b. explicit
b. value c. money
c. fixed cost d. implicit
d. cost of production 7. The cost that remains constant at all
2. Cost functions are also known as levels of output is _______ cost.
_______________ function. a. fixed
a. production
b. variable
b. investment
c. real
c. demand
d. social
d. consumption
8. Identify the formula of estimating
3.
Money cost is also known as average variable cost.
____________ cost.
a. TC/Q
a. explicit
b. TVC/Q
b. implicit
c. TFC/Q
c. social
d. real d. TAC/Q
9. The cost incurred by producing one
4. Explicit cost plus implicit cost denote
more unit of output is______cost.
___________ cost.
a. variable
a. social
b. economic b. fixed

c. money c. marginal
d. fixed d. total

5. Explicit costs are termed as 10. The cost that varies with the level of
output is termed as _______ cost.
a. out of pocket expenses
a. money
b. real cost
b. variable cost
c. social cost
c. total cost
d. sunk cost
d. fixed cost
Cost and Revenue Analysis 95
 11. Wage is an example for ________ 16. Revenue received from the sale of
cost of the production. products is known as _______ revenue.
a. fixed a. profit
b. variable b. total revenue
c. marginal c. average
d. opportunity d. marginal

12. The cost per unit of output is denoted 17. Revenue received from the sale of
by _________ cost. additional unit is termed as ________
a. average revenue.

b. marginal a. profit

c. variable b. average

d. total c. marginal
d. total
13. Identify the formula of estimating
average cost. 18. Marginal revenue is the addition made
a. AVC/Q to the

b. TC/Q a. total sales

c. TVC/Q b. total revenue

d. AFC/Q c. total production

d. total cost
14. Find total cost where TFC=I00 and
TVC = 125. 19. When price remains constant, AR will
a. 125 be ________ MR.

b. 175 a. equal to

c. 225 b. greater than

d. 325 c. less than

d. not related to
15. Long-run average cost curve is also
called as __________ curve. 20. A book seller sold 40 books with the
a. demand price of ₹10 each. The total revenue of
the seller is ₹___________.
b. planning
a. 100
c. production
b. 200
d. sales
c. 300
d. 400

Cost and Revenue Analysis 96

Part- A  Answers

1 2 3 4 5 6 7 8 9 10
d a a b a d a b c b
11 12 13 14 15 16 17 18 19 20
b a b c b b c b a d

Part-B 
Answer the following questions in one or
two sentences.

21. Define cost. 25. Explicit Cost - Define.

22. Define cost function. 26. Give the definition for ‘Real Cost’.

23. What do you mean by fixed cost? 27. What is meant by Sunk cost?

24. Define Revenue.

Part-C  Answer the following questions in one paragraph.

28. Distinguish between fixed cost and 32. State the relationship between AC and
variable cost. MC.

29. State the differences between money 33. Write a short note on Marginal
cost and real cost. Revenue.

30. Distinguish between explicit cost and 34. Discuss the Long run cost curves with
implicit cost. suitable diagram.

31. Define opportunity cost and provide

an example.

Part-D  Answer the following questions in about a page

35. If total cost = 10+Q3, find out AC, 37. Bring out the relationship between AR
AVC, TFC, AFC when Q=5. and MR curves under various price
conditions.
36. Discuss the short run cost curves with
suitable diagram.

Cost and Revenue Analysis 97

 ACTIVITY
Visit a small business firm and identify the various items of
expenditure incurred by the firm. Classify the items under fixed
cost and variable cost. Estimate Total Fixed Cost, Total Variable
Cost, Total Cost and Average Fixed Cost, Average Variable Cost
and Average Total Cost.

References

1. Principles of Microeconomics, 7th Edition (Mankiw’s Principles of Economics)

by N. Gregory Mankiw
2. Microeconomics: Principles, Problems, & Policies (McGraw-Hill Series in
Economics) by Campbell McConell, Stanley Brue, and Sean Flynn
3. M.L.Seth – Micro Economics (2012) - Lakshmi Narain Agarwal Publication
4. M.L. Jhingan – Modern Micro Economics (Fourth Edition) (2012) - Virnda
Publication Pvt Ltd
5. Ryan C. Amacher – Principles of Micro Economics (1980) - South-Western Pub.Co
http://wikieducator.org/Introduction_to_Cost_Concepts

Cost and Revenue Analysis 98

 CHAPTER

5 MARKET STRUCTURE
AND PRICING

“Marketing is not the art of finding clever ways to dispose of

what you make. It is the art of creating genuine customer value”.
Oligopoly
– Philip Kotler

Learning Objectives

1 To understand the characteristics of markets and how the price and output are
determined under the several types of markets; and,

2 To study the nature of the profit obtained by a firm under different types of
markets

5.1
Introduction

Every commodity or service that is

exchanged has two sides: the supply side
and the demand side. The supply side
contains information on the number Market
of sellers, the nature and the quantum
of the product produced and brought
to the market for sale. The demand
side contains information on the 5.2
number of buyers entering the market Meaning of Market
for buying the product. Hence the Perfect Competition Oligopo
-Independent supplier
study of market and market structure -On line ticket auctions control supply and
In thefarming
-Truck ordinary sense, the word ‘market’demand for the produ
forms an important feature of micro -Examples include air
refers to a physical place, where commodities
-Salt automotive and banki
economics. -Gravel
companies
and services are bought and sold.
-Garage Sales
-On line sales in general
MARKET STRUCTURE AND PRICING 99
 In Economics, the term ‘market’ iv. International market arises when
refers to a system of exchange between products and services are sold and
the buyers and the sellers of a commodity. bought at the world level. For example,
Besides direct exchanges, there are petrol, gold etc.
exchanges that are carried out through
correspondence, telephones, online, 5.3.2  On the basis of Time:
email etc. A market has the following Alfred Marshall classifies market on the
characteristic features: basis of time. The ‘time’ here refers to the
1. Buyers and sellers of a commodity or nature of the factors, such as fixed factors
a service and variable factors, used in the production
2. A commodity to be bought and sold process, and how the supply of the products
meets with varying demand situations in
3. Price agreeable to buyer and seller
the determination of price of the products.
4. Direct or indirect exchange.
i. Very short period market or Market
Period
5.3
It occurs when with the available time,
Classification of Markets the quantum supplied of a product
cannot be increased (or decreased).
Market is of various kinds. They are Here, the supply curve is vertical; it is
classified: inelastic. In this market, the demand
force is more active than the supply
5.3.1 On the basis of Area: force in the determination of the price.
For example, given an inelastic supply
The market is classified not only on its
for food, an increase in its demand, as
geographical spread, but also on the nature
for example, during a flood situation,
of the goods exchanged.
raises the price of food.
i. Local market arises when products or
ii. Short period market
services are sold and bought in the place
of their production. In such markets, the It occurs when the quantum supplied of a
products exchanged are mostly perishable product can be increased (or decreased)
and semi-durable in nature: For example, to some extent. Here, the supply curve is
Vegetable, fruits etc. a little more elastic. In this period, some
factors continue to be fixed and they
ii. Provincial market arises when
work a little more intensively to meet an
products or services are sold and
increased demand.
bought in a restricted circle. For
example, provincial newspaper. iii. Long period market

iii. National market arises when products and It occurs when the quantum supplied
services are sold and bought throughout of a product can be increased (or
a country. For example, Nation-wide decreased) to a larger extent. Here
market for tea, coffee, cement, electrical the supply curve is very much elastic.
goods, some printed books etc. Thus, to meet an increase in demand,

MARKET STRUCTURE AND PRICING 100

 the quantum of all the factors Firm and Industry
becomes variable. There are no
Firm: A firm refers to a single production
fixed factors here. Therefore, there
unit in an industry, producing a large or a
is a possibility for larger changes
small quantum of a commodity or service,
in supply. The price of the product
and selling it at a price in the market. Its
cannot be as high as in the case of
main objective is to earn a profit. There
short run.
may be other objectives as described by
iv. Very long period market (or a managerial and behavioral theories of the
Secular Period Market) firm.
It occurs when the entire economy Industry: An industry refers to a group
undergoes a drastic change. Newer of firms producing the same product or
technologies are introduced and service in an economy. For example, a
most modern products are produced. group of firms producing cement is called
Several newer methods of production a cement industry.
are adopted in the production
process, with improvements taking
place in technology. For example, 5.4
the entry of pen-drive has driven Equilibrium Conditions for
out compact disc (CD); as CD a Firm
has replaced floppies which once
replaced tape cassettes. Equilibrium of the firm means that the
firm reaches the maximum profit. Now,
5.3.3 
On the Basis of Quantity there are two approaches (TC = TR) for
of the Commodity calculating the maximum profits
i. Whole-sale market is for bulk selling i. Total curve approach; and, ii.
and buying of goods (Clothing, Marginal curve approach (MC = MR)
Grocery etc.). The price is likely to
be low compared to retail market. Y
5.4.1  Total curve approach
ii. Retail market is for selling or buying
of commodities in small quantities
(Clothing, Vegetable etc). Y TC
10
9
TC/ TR & Profit

8
AR, MR & MC

E Q
5.3.4 On the Basis of 75
TR 7
Competition 45
N
i. Perfect competition market P
ii. Imperfect competition market which
0 1 2 3 4 5 6 7 8 9
comprises monopoly market, X
Output o
monopolistic competition market,
duopoly market, oligopoly market etc. Diagram 5.1

MARKET STRUCTURE AND PRICING 101

 In the TC-TR Approach, profit is obtained advantageous for the producer to
by a firm, through the difference between continue his production.
the TC and the TR. Equilibrium is obtained Again, he will not be in equilibrium
at the point where maximum difference beyond 5 units of Q, when his MC >
between the TC and TR occurs. This TC- MR, implying that the seller incurs loss.
TR method is not generally adopted in the
Therefore, he is said to be in equilibrium,
calculation of maximum profit. Hence to
i.e., at the point of maximum profit
calculate profit / loss, economists resort to
when his MC is equal to MR. Hence,
the MC=MR approach. Shaded area denotes
MC = MR is the first condition for the
profit. Profit is maximum when Q = 5
equilibrium. (Note: This is a necessary
condition but not a sufficient condition).
5.4.2 Marginal curve 2. MC cuts MR curve from below
Approach (Sufficient conditions)
In this approach, the following two A firm under perfect competition faces
conditions are to be verified to obtain a horizontal price line. (It is also the AR
equilibrium of a firm. curve and the MR curve). A firm under
imperfect competition focuses declining
price line. The MC is U-shaped and it
Y
cuts MR at two points, both from above
MC
(i.e., at point A) and also from below (i.e.,
A B at point B), as shown in the diagram.
TC
10 Industry Firm 1
9 AR = MR Only at point B, the equilibrium
Price/ Revenue/cost

Price/ Revenue/cost
Price/Revenue/cost
8 is S fulfilled. Y Thus for
AR, MR & MC

condition
D MC
7 AC
TR equilibrium E under all market
E 1
10 L 10 Profit L
situations the two conditions 8 viz., MC
B
= MR; and
S MCDcuts MR from below.
o 50 o 50

X Output
Market Structure Output
o 1 2 3 4 5 Normal profit Abnormal=2 x 50=100
Q X
Output
Diagram 5.2 Market Diagram 5.3

Perfect competion Imperfect competion

1. MC = MR
Look at the following hypothetical Monopoly
situation. A rational seller will not Monopolistic
be in equilibrium at output level Competionion
1, though MC=MR at that point, Oligopoly
since continuing production, his Bilateral
profit increases. When he produces Monopoly
Duopoly
an output beyond 1 unit till he
reaches 5 units, his MC < MR. It is
MARKET STRUCTURE AND PRICING 102
 Market
5.5 The term, ‘large number of sellers’ implies
Perfect Competition: that share of each individual seller is a very,
very small quantum of a product. This
means that he has no power to fix the price
Perfect Competition Oligopoly
of the product. Market
Like the buyer,System
the seller also
-Independent suppliers
-On line ticket auctions only a price-taker
control supply and and not a price-maker.
demand for the products
-Truck farming
b. Homogeneous Product and Uniform Price
-Examples include airlines,
-Salt automotive and banking
companies
-Gravel The product sold and bought is
-Garage Sales homogeneous in nature, in the sense
-On line sales in general that the units of the product are perfectly
substitutable. All the units of the product
are identical (ie) of the same size, shape,
colour, quality etc. Therefore, a uniform
price prevails in the market.
It is an ideal but imaginary market. 100%
perfect competition cannot be seen. Perfect c. Free Entry and Exit
Monopolistic Competition- Examples
Competition market is that type of market In the short run, it is possible for the
in which the number of buyers and sellers very efficient producer, producing the
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is very large, all are engaged in buying and product at a very low cost, to earn super
selling a homogenous product at uniform normal profits. Attracted by such a
price without any artificial restrictions profit, new firms enter into the industry.
and possessing perfect knowledge of the When large number of firms enter, the
market at a time. supply (in comparison to demand)
According to Joan Robinson, would increase, resulting in lower price.
“Perfect competition prevails when the An inefficient producer, who is unable
demand for the output of each producer is to bring down the cost incurs loss.
perfectly elastic”. Disturbed by the loss, the existing
loss-incurring firms quit the market. If
5.5.1 Features of the Perfect it happens, supply will then decrease,
Competition: price will go up. Existing firms could
earn more profit.
a. Large Number of Buyers and Sellers
d. Absence of Transport Cost
‘A large number of buyers’ implies
that each individual buyer buys a very, The prevalence of the uniform price is also
very small quantum of a product as due to the absence of the transport cost.
compared to that found in the market. e. Perfect Mobility of Factors of Production
This means that he (he includes she
The prevalence of the uniform price is also
also) has no power to fix the price of
due to the perfect mobility of the factors of
the product. He is only a price-taker
production. As they enjoy perfect freedom
and not a price-maker.
to move from one place to another and

MARKET STRUCTURE AND PRICING 103

 FINAL
from one occupation to another, the price 100 = 10P; 100/10 = P Qd = demand
gets adjusted. P = 10 P = Price
f. Perfect Knowledge of the Market Qd = 100-5(10) Qs = Supply
All buyers and sellers have a thorough 100-50 = 50
knowledge of the quality of the
Qs = 5(10)=50
product, prevailing price etc.
Therefore 50 = 50
g. No Government Intervention
There is no government regulation
on supply of raw materials, and in the This diagram consists of three panels. The
determination of price etc. equilibrium of an industry is explained
in the first panel. The demand and sup-
5.5.2 Perfect Competition: ply forces of all the firms interact and the
Firm’s Equilibrium in price is fixed as ₹10. The equilibrium of an

unit 5
the Short Run industry is obtained at 50 units of output.

In the short run, at least a few factors In the second part of the diagram,
of production are fixed. The firms under AC curve is lower than the price line. The
Perfect Competition take the price equilibrium condition is achieved where
(10) from the industry and start MC=MR. Its equilibrium quantity sold
adjusting their quantities produced. For is 50. With the prevailing price, ₹10 it
example Qd= 100 – 5P and Qs=5P. experiences super normal profit. AC = ₹8,
At equilibrium Qd=Qs. Therefore 100-5P=5P AR = ₹10.

Price & Output Determination-Perfect Competition during

MC
Short Run Y

Price/ AR/ MR/AC/MC

Industry Firm 1 Firm 2
= MR
Price/ Revenue/cost

Y
Price/ Revenue/cost
Price/Revenue/cost

D S Y Y MC
MC
AC AC
E E1 12 R
10 L 10 Profit L 10 Loss
L (AR=MR) 8
8
B E2
S D
o 50 o 50 o 50 x
Output Output Output o
Normal profit Abnormal=2 x 50=100 Loss=2 x 50=100
Q X
Diagram 5.3

SS – market supply DD – market demand

AR – Average Revenue AC – Average Cost
MR – Marginal Revenue MC – Marginal Cost

MARKET STRUCTURE AND PRICING 104

 Its total revenue is 50X10=500. Its Y LMC
total cost is 50X8=400. Therefore, its total

Price/ AR/ MR/AC/MC

profit
Firm 1 is 500-400=100. Firm 2 LAC

Price/ Revenue/cost
Price/Revenue/cost

MCIn the third

Y part of the
Y MC diagram,
AC AC E
firm’s
E1 cost curve 12is aboveR the price line.
10 Profit L Loss
10condition 8 L (AR=MR)
8 The equilibrium Lis(AR=MR)
achieved
B E2
at point where MR=MC. Its quantity
o sold
50 is 50. With the o prevailing
50 price, it
x
experiences
Output loss. (AC>AR) Output o 500 x
Abnormal=2Its
x 50=100 Loss=2
total revenue x 50=100
is 50X10=500. Its Quantity
total 5.3
Diagram cost is 50X12=600. Therefore, its Diagram 5.4
total loss is 600-500=100.
As profit prevails in the market, also known as planning curve. First, the
new firms will enter the industry, thus firms will earn only normal profit.
increasing the supply of the product. This
Secondly, all the firms in the market
means a decline in the price of the product
are in equilibrium. This means that there
and increase the cost of production. Thus,
should neither be a tendency for the new
the abnormal profit will be wiped out;
firms to enter into the industry nor for any of
loss will be incurred.
the existing firms to exit from the industry.
When loss prevails in the market,
the existing loss making firms will exit the
industry, thus decreasing the supply of the
product. This means a rise in the price of
the product and reduction in the cost of
production. So the loss will vanish; Profit
will emerge. Consequent upon the entry
and exit of new firms into the industry,
firms always earn ‘normal profit’ in the
long run as shown in diagram.

5.5.3 Perfect Competition:
Firm’s Equilibrium in
the Long Run (Normal Long run supply curve is explained
Profit) to determine the long run price after an
increase in demand. The effect of the
In the long run, all the factors are increase in demand in the short run is
variable. explained by the movement from point ‘a’
The LAC curve is an envelope to point ‘b’. The price increases from ₹8 to
curve as it contains a few average cost ₹13, and the quantity increases from 600
curves. It  is a flatter U shaped one. It is to 800 units. Economic profit of a firm is

MARKET STRUCTURE AND PRICING 105

 positive. Therefore, new firms enter the 5.6
market. In the long run new firms entry
Imperfect Competition
will continue until the price drops to ₹11
and the quantity is 1,200 units. The new
long run equilibrium is shown by point ‘c’,
where the new demand curve intersects
supply curve. At this price level (₹11) and
quantity (1,200 units). Due to diminishing
returns, it is very difficult to increase Joan Robinson
output in the short tun, as a result the price 1903-1983
will increase to cover these higher cost of
production. New firms will enter into the
market. The price gradually drops to the
n point (₹11) at whichMarket
Oligopoly each firm
Systemmakes zero
-Independent suppliers
economic profit.
control supply and
demand for the products
-Examples include airlines,
A firm under perfect competition
automotive and banking
companies Edward Chamberlin
even in the long run is a price – taker, 1899 -1967
not a price – maker. It takes the price of
the product from the industry. And it
superimposes its cost curves on the revenue
curves.

ion- Examples Long run equilibrium of the firm is The concept of imperfect competition
illustrated in the diagram. Under perfect was propounded in 1933 in England by
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competition, long run equilibrium is only Joan Robinson and in America by E.H.
at minimum point of LAC. At point E, Chamberlin.
LMC = MR = AR = LAC.
It is an important market category
In the above diagram (5.4), average where the individual firms exercise their
cost is equal to average revenue. The control over the price.
Indian Railways
equilibrium of the firm finally rests at
Definition: Imperfect competition is a
point E where price is 8 and output is 500.
competitive market situation where there
(Numbers are hypothetical) At this point,
are many sellers, but they are selling
the profit of the firm is only normal. Thus
heterogeneous (dissimilar) goods as
condition for long run equilibrium of the
opposed to the perfect competitive market
firm is:
scenario. As the name suggests, competitive
Price = AR=MR = Minimum AC markets are imperfect in nature.
At the equilibrium point, the SAC>LAC. Description: Imperfect competition is the
Hence, long run equilibrium price is lower real world competition. Today some of
than short run equilibrium price; long run the industries and sellers follow it to earn
equilibrium quantity is larger than short surplus profits. In this market scenario,
run equilibrium quantity.

MARKET STRUCTURE AND PRICING 106

 the seller enjoys the luxury of influencing form of market where there is a single seller
Joan Robinson
the price in order to earn more profits.
1903-1983
selling a particular commodity for which
there are no close substitutes.
If a seller is selling a non-identical good in the
market, then he can raise the prices and earn
profits. High profits attract other sellers to
poly Market System
5.7.1  Features of Monopoly
iers
enter the market and sellers, who are incurring
ducts 1. There is a single producer / seller of
airlines,
losses, can very easily exit the market.
Edward Chamberlin
nking
a product;
1899 -1967
2. The product of a monopolist is
5.7 unique and has no close substitute;
Monopoly 3. There is strict barrier for entry of
any new firm;
4. The monopolist is a price-maker;
5. The monopolist earns maximum
profit/ abnormal profit.

Indian Railways 5.7.2 Sources of Monopoly

Power
1. Natural Monopoly:
Ownership of the natural raw
materials [Eg.Gold mines (Africa),
Meaning: Coal mines, Nickel (Canada) etc.]

The word monopoly has been derived 2. State Monopoly:

from the combination of two Greek words Single supplier of some special
i.e., ‘Mono’ and ‘Poly’. Mono refers to a services (Eg.Railways in India)
single and “poly” to seller. 3. Legal Monopoly:
In this way, monopoly refers to A monopoly firm can get its monopoly
a market situation in which there is power by getting patent rights, trade
only one seller of a commodity. Hence, mark from the government.
there is no scope for competition. (Still
some economists observe that there 5.7.3 Price & Output
will always be potential threat to the Determination Under
monopolists). Monopoly
A monopoly is a one firm-industry.
Definition
Therefore, a firm under monopoly faces a
Monopoly is a market structure downward sloping demand curve (or AR
characterized by a single seller, selling the curve). Since, under monopoly AR falls,
unique product with the restriction for a
new firm to enter the market. Monopoly is a
MARKET STRUCTURE AND PRICING 107
 5.7.4 Price
Y
Discrimination
Y SMC
MC
under monopoly
AC A  discriminating monopoly  is a single
Q SAC
Q P
23 entity that charges different prices for

AR, AC, MR & MC

PROFIT R
differentS consumers. Higher price will be
14 charged for price inelasticE consumers and
Price

12.6 D/AR
T vice versa D/AR

MR Types of Price Discrimination

MR
There are three types of price discrimination.
0 3 x 0
M
Quantity (i) Personal – Different prices xare
Quantity
Diagram 5.6 charged for different individuals (for
Diagram 5.7
example, the railways give tickets
at concessional rate to the ‘senior
as more units of output are sold, the MR citizens’ for the same journey).
lies below the AR curve (MR<AR).
(ii) Geographical - Different prices are
The monopolist will continue to charged at different places for the
sell his product as long as his MR>MC. same product (for example, a book
He attains equilibrium at the sold within India at a price is sold in
level of output when its MC is equal to a foreign country at lower price). On
MR. Beyond this point, the producer their basis, China drops its goods in
will experience loss and hence will stop selling. Indian market. As a result, watch and
toys industries closed down their
From this diagram, till he sells
business.
3 units output, MR is equal to MC. The
(iii) On the basis of Use - Different prices
monopoly firm will be in equilibrium at
the level of output where MR is equal to are charged according to the use
MC. The price is 23. of a product (for example, lower
rates are charged by Tamil Nadu
To checkup how much profit the Electricity Board for domestic
monopolist is making at the equilibrium uses of electricity and higher rates
output, the average revenue curves and the are charged for commercial and
average cost curves are used. At equilibrium industrial uses).
level of output, (3) is the average revenue is
23 and the average cost is 12.67, therefore
(23-12.67 = 10.33) is the profit per unit. 5.7.5 Degrees of Price
Total profit = (Average Revenue – Average Discrimination
Cost) X Total output Price discrimination has become
= (23 – 12.67) × 3 widespread in almost all monopoly
markets. According to A.C.Pigou, there
= 10.33 × 3 = 30.99 are three degrees of price discrimination.

MARKET STRUCTURE AND PRICING 108

(i) First degree price discrimination
5.7.6 Dumping
A monopolist charges the maximum
price that a buyer is willing to Dumping refers to practice of the
pay. This is called as perfect price monopolist charging higher price for his
discrimination. This price wipes out product in the local market and lower
the entire consumer’s surplus. This is price in the foreign market. Through
maximum exploitation of consumers. dumping, a country expands its command
Joan Robinson named it as “Perfect over other countries for its product.
Discriminating Monopoly” This is also called as ‘International Price
Discrimination”.
(ii) Second degree price discrimination
For example, India’s electronic market
Under this degree, buyers are charged
is flooded with the China’s products.
prices in such a way that a part of
their consumer’s surplus is taken
away by the sellers. This is called as 5.8
imperfect price discrimination. Joan Monopolistic Competition
Robinson named it as “Imperfect
Discriminating Monopoly”. Under Monopolistic competition refers to a
this degree, buyers are divided into market situation where there are many
different groups and a different firms selling a differentiated product.
price is charged for each group. For There is competition which is keen,
example, in cinema theatres, prices though not perfect, among many firms
are charged for same film show making very similar products. No firm
from viewers of different classes. In can have any perceptible influence on the
a theatre the difference between the price-output policies of the other sellers
first row of first class and the last nor can it be influenced much by their
row in the second class is smaller actions. Thus monopolistic competition
as compared to the differences in refers to competition among a large
charges. number of sellers producing close but not
perfect substitutes for each other.
(iii) Third degree price discrimination
The monopolist splits the entire market
into a few sub-market and charges 5.8.1 Features of monopolistic
different price in each sub-market. competition
The groups are divided on the basis
of age, sex and location. For example, The important features of monopolistic
railways charge lower fares from competition are :
senior citizens. Students get discounts 1. There are large number of buyers
in museums, and exhibitions. and many sellers.

MARKET STRUCTURE AND PRICING 109

 (3) The demand curve (the average
Monopolistic Competition- Examples
revenue curve) is fairly elastic.

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Under monopolistic competition, different
firms produce different varieties of the
product and sell them at different prices.
Each firm under monopolistic competition
seeks to achieve equilibrium as regards
1. Price and output, 2. Product adjustment
2. Firms under monopolistic and 3. selling cost adjustment.
competition are price makers. They
Short-run equilibrium:
set their own prices.
How does a monopolistically competitive
3. Firms produce differentiated
firm achieve price-output level
products. It is the key element of
equilibrium? The profit maximisation is
monopolistic competition.
achieved when MC=MR.
4. There is a free entry and exit of firms.
‘OM’ is the equilibrium output. ‘OP’
5. Firms compete with each other by is the equilibrium price. The total revenue
incurring selling cost or expenditure is ‘OMQP’. And the total cost is ‘OMRS’.
on sales promotion of their products. Therefore, total profit is ‘PQRS’. This is super
6. Non – price competition is an essential normal profit under short-run.
part of monopolistic competition. But under differing revenue and
7. A firm can follow an independent cost conditions, the monopolistically
price policy. competitive firms may incur loss.
As shown in the diagram, the AR and MR
5.8.2 Price and Output curves are fairly elastic. The equilibrium
Determination under
Monopolistic Competition
Y Y SMC
The firm under monopolistic
MC competition
AC
achieves its equilibrium when it’s MC = Q SAC
Q P
MR,23and when its MC curve cuts its MR
AR, AC, MR & MC

PROFIT R
curve from below. If MC is less than MR, S

the 14
sellers will find it profitable to expand E
Price

12.6 D/AR D/AR

their output. T

Under monopolistic competition

MR
MR
(1) The demand curve is downwards
sloping.
0 3 x 0 M x
Quantity Quantity
(2) There are close substitutes.
Diagram 5.6 Diagram 5.7

MARKET STRUCTURE AND PRICING 110

 situation occurs at point ‘E’, where MC =
MR and MC cuts MR from below. Y AC
MC
The equilibrium output is OM and
L

AR, AC, MR & MC

the equilibrium price is OP. K
Profit
P Q
The total revenue of the firm is
E
‘OMQP’ and the total cost of the firm is D/AR
‘OMLK’ and thus the total loss is ‘PQLK’.
This firm incurs loss in the short run.
MR

0 M F x
Y Y AC
MC AC Quantity MC
Diagram 5.9
K L
C substitutesK are available. Hence,
L the firms
AR, AC, MR & MC

AR, AC, MR & MC

P will earn only normal profit.
PROFIT
P
Q
In the diagram equilibrium is achieved
E E D/AR
D/AR at point ‘E’. The equilibrium output is ‘OM’
and the equilibrium price is ‘OP’. The average
revenue at the equilibrium output is ‘MQ’ and
MR the average cost is also ‘MQ’. Thus, in the
MR long

0 run under monopolistic competition, there is

M x
equilibrium0 when AR=ACMand MC=MR.F It
x
Quantity
means that a firm earnsQuantity
normal profit. AR is
Diagram 5.8 tangent to the Long RunDiagram 5.9Cost (LAC)
Average
curve at point ‘Q’.

Long-Run Equilibrium of the

Firm and the Group Equilibrium
The only one condition : MC = MR.
In the short run a firm under for equilibrium in the
monopolistic competition may earn super short run
normal profit or incur loss. But in the The two conditions : MC = MR
long run, the entry of the new firms in the for equilibrium in the and
industry will wipe out the super normal long run AC = AR.
profit earned by the existing firms. The
entry of new firms and exit of loss making
firms will result in normal profit for the
5.8.3 Wastes of Monopolistic
firms in the industry.
Competition
In the long run AR curve is Generally there are five kinds of wastages
more elastic or flatter, because plenty of under monopolistic competition.

MARKET STRUCTURE AND PRICING 111

1. Idle Capacity: Unutilized capacity is 5. Inefficient Firms: Under monopolistic
the difference between the optimum competition, inefficient firms charge
output that can be produced and the prices higher than their marginal cost.
actual output produced by the firm. Such type of inefficient firms should be
In the long run, a monopolistic firm kept out of the industry. But, the buyers’
produces delibrately output which preference for such products mostly
is less than the optimum output due to emotions, enables the inefficient
that is the output corresponding to firms to continue to exist. Efficient
the minimum average cost. This is firms cannot drive out the inefficient
done so mainly to create artificial firms because sometimes the Efficient
scarcity and raise price. This leads firms may not be able to spend money
to excess capacity which is actually on attractive advertisement to lure
a waste in monopolistic competition. the buyers. In reality, the consumers
In  diagram 5.9, MF quantity of are mostly emotional rather than
output refers to unused capacity. If rational, as stated by Richard Theiler,
OF is produced, the society will get the Nobel prize winner for the year
2017.Rational decisions are made by
larger quantity with lower price.
mind; emotional decisions are made
2. Unemployment: Under monopolistic by heart.
competition, the firms produce less
than optimum output. As a result,
5.9
the productive capacity is not used
to the fullest extent. This will lead to Duopoly
unemployment of human resources also.
Duopoly is a special case of the theory of
3. Advertisement: There is a lot of wastes
oligopoly in which there are only two sellers.
in competitive  advertisements under
Both the sellers are completely independent
monopolistic competition. The wasteful
and no agreement exists between them. Even
and competitive advertisements lead
though they are independent, a change in the
to high cost to consumers. It is also
price and output of one will affect the other,
claimed that advertisements cheat the
and may set a chain of reactions. A seller may,
consumers by giving false, information
about the product. Monopsony
4. Too Many Varieties of Goods: Monopsony is a market structure in
Introducing too many varieties  of a which there is only one buyer of a good
good is another waste of monopolistic or service. If there is only one customer
competition. The goods differ in size, for a certain good, that customer has
shape, style and colour. A reasonable monopsony power in the market for
number of varieties would be sufficient. that good. Monopsony is analogous to
Cost per unit can also be reduced, monopoly, but monopsony has market
if only a few varieties are produced power on the demand side rather than
in larger quantity instead of larger on the supply side.
varieties with small quantity.
MARKET STRUCTURE AND PRICING 112
 Perfect Competition Oligopoly Market System
Bilateral Monopoly: -Independent suppliers
-On line ticket auctions control supply and
Bilateral
-Truckmonopoly
farming refers to a market demand for the products
-Examples include airlines,
-Salt in which a single producer
situation automotive and banking
companies
-Gravel
(monopolist) of a product faces a single
-Garage Sales
buyer
-On(monopsonist) of that product.
line sales in general

5.10.1 Features of
however, assume that his rival is unaffected Oligopoly
by what he does, in that case he takes only his
own direct influence Competition-
on the price. Examples 1. Few large firms
Monopolistic
Very few big firms own the major control
of the whole market by producing major
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5.9.1 Characteristics of
portion of the market demand.
Duopoly
2. Interdependence among firms
1. Each seller is fully aware of his rival’s
The price and quality decisions of a
motive and actions.
particular firm are dependent on the
2. Both sellers may collude (they agree price and quality decisions of the rival
on all matters regarding the sale of firms.
the commodity).
3. Group behaviuor
3. They may enter into cut-throat
The firms under oligopoly realise the
competition.
importance of mutual co-operation.
4. There is no product differentiation.
4. Advertisement cost
5. They fix the price for their product with
The oligopolist could raise sales
a view to maximising their profit.
either by advertising or improving
5.10 the quality of the product.
5. Nature of product
Oligopoly
Perfect oligopoly means homogeneous
products and imperfect oligopoly
Oligopoly is a market situation in which
deals with heterogeneous products.
there are a few firms selling homogeneous or
differentiated products. Examples are oil and 6. Price rigidity
gas. It is difficult to pinpoint the number of It implies that prices are difficult to
firms in ‘competition among the few.’ With be changed. The oligopolistic firms
only a few firms in the market, the action of do not change their prices due to the
one firm is likely to affect the others. fear of rivals’ reaction.

MARKET STRUCTURE AND PRICING 113

5.11
Comparison among the Features of Various Markets

S Features Perfect Monopoly Monopolistic

No Competition Competition

Number of
1 Innumerable Only One Large
Producers/Sellers

Unique
Nature of the Homogeneous Differentiated Product
2 (No close
Product Perfect Substitute (close substitutes)
substitute)
Some control
3 Control over Price Price-Taker Price-Maker depending on branded
loyalty

Barriers to
4 Entry / Exit Free Free
entry

Abnormal profit /
Abnormal profit in
loss in short-run, Monopoly
5 Profit short-run, Normal
Normal profit in Profit
profit in long run
long-run

6 Market Knowledge Complete Complete Partial

Parallel to X axis Fairly Flat

7 AR Curves Steep (highly inelastic)
Perfectly elastic More elastic

Less
compared
8 Quantity Very large Substantial
to perfect
competition

9 Price Uniform and low High Moderate and varied

10 Market power Nil Absolute Limited

MARKET STRUCTURE AND PRICING 114

5.12
Conclusion

Different forms and characteristics of different Marginal cost Addition made to total
markets have been studied in this chapter costs already incurred by producing one
Market, in general is divided into perfect more unit of the commodity.
market and imperfect market. Imperfect
market consists of Monopoly, Monopolistic Marginal revenue Addition made to total
Competition, Duopoly, Monopsony etc. In revenue already incurred by selling one
the long-run, firms earn normal profit. Under more unit of the commodity.
imperfect market, the sellers would manage
to reap larger profits depending upon the
Monopolist A single-seller who controls
degree of monopoly power.
entire or major part of output, which has
no close substitutes.
Glossary
Equilibrium A situation or a state at
Price-maker The power in the firm to set
which a firm seeks to rest.
the price for goods in the market.

Equilibrium Price The price at which

Price-taker The feature of a firm to accept
the quantity demanded of a good equals
the price fixed in the industry.
quantity supplied.

Firm A single organization which employs

factors of production to produce goods
and sells.

Long run The period of time during which

all factors of production are variable.

MARKET STRUCTURE AND PRICING 115

 ICT CORNER
MARKET EQUILIBRIUM

Lets study of Equilibrium

for Quantity on Demand and
Quantity Supplied.

Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
In this several work sheets for Economics are given, Open the
worksheet named “Market Equilibrium”
• There are two equations 1. Quantity on Demand (QD) and 2.
Quantity Supplied (QS). Both the equations are drawn in the graph
as straight line. Observe both the lines intersect at a point E.
• That intersection point is called ‘Market Equilibrium’. At that point
both QD and QS are Equal. Thus, Market equilibrium is obtained
when Demand and Supply are equal. Now you change the Supply
function by moving the slider “b”. Observe the Equilibrium changes
as the supply changes. Now Analyse the Market structure required.

Step1 Step2 Step3 Step4

Pictures are indicatives only*

URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code

MARKET STRUCTURE AND PRICING 116

 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. In which of the following is not a type 6. Profit of a firm is obtained when

of market structure Price will be very ……………..
high? a. TR < TC
a. Perfect competition b. TR - MC
b. Monopoly c. TR > TC
c. Duopoly d. TR = TC
d. Oligopoly
7. Another name of price is……………..
2. Equilibrium condition of a firm is...... a. Average Revenue
a. MC = MR b. MC > MR b. Marginal Revenue
c. MC < MR d. MR = Price c. Total Revenue
3. Which of the following is a feature of d. Average Cost
monopolistic competition?
8. In which type of market, AR and MR
a. One seller are equal …..
b. Few sellers a. Duopoly
c. Product differentiation b. Perfect competition
d. No entry c. Monopolistic competition
4. A firm under monopoly can earn d. Oligopoly
…………. in the short run.
9. In monopoly, MR curve lies below
a. Normal profit
………….
b. Loss
a. TR
c. Super normal profit
d. More loss b. MC
c. AR
5. There is no excess capacity under
………………… d. AC
a. Monopoly 10. Perfect competition assumes …………
b. Monopolistic competition a. Luxury goods
c. Oligopoly b. Producer goods
d. Perfect competition c. Differentiated goods
d. Homogeneous goods

MARKET STRUCTURE AND PRICING 117

 11. Group equilibrium is analysed in 16. The average revenue curve under
……. monopolistic competition will be……
a. Monopolistic competition a. Perfectly inelastic
b. Monopoly b. Perfectly elastic
c. Duopoly c. Relatively elastic
d. Pure competition d. Unitary elastic

12. In monopolistic competition, the 17. Under perfect competition, the shape
essential feature is ..… of demand curve of a firm is...............
a. Same product a. Vertical
b. selling cost b. Horizontal
c. Single seller c. Negatively sloped
d. Single buyer d. Positively sloped

13. Monopolistic competition is a form of 18. In which market form, does absence
.……. of competition prevail?
a. Oligopoly a. Perfect competition
b. Duopoly b. Monopoly
c. Imperfect competition c. Duopoly
d. Monopoly d. Oligopoly

14. Price leadership is the attribute of 19. Which of the following involves
………… maximum exploitation of consumers?
a. Perfect competition a. Perfect competition
b. Monopoly b. Monopoly
c. Oligopoly c. Monopolistic competition
d. Monopolistic competition d. Oligopoly

15. Price discrimination will always lead 20. An example of selling cost is …
to…………. a. Raw material cost
a. Increase in output b. Transport cost
b. Increase in profit c. Advertisement cost
c. Different prices d. Purchasing cost
d. b and c

MARKET STRUCTURE AND PRICING 118

Part-A  Answers

1 2 3 4 5 6 7 8 9 10
a a c c d c a b c d
11 12 13 14 15 16 17 18 19 20
a b c c d c b b b c

Part-B 
Answer the following questions in one or
two sentences.

21. Define Market.

22. Who is price-taker?
23. Point out the essential features of pure competition.
24. What is selling cost?
25. Draw demand curve of a firm for the following:
a) Perfect Competition b) Monopoly
26. Mention any two types of price discrimination
27. Define “Excess capacity”.

Part-C  Answer the following questions in one paragraph.

28. What are the features of a market?

29. Specify the nature of entry of competitors in perfect competition and monopoly.

30. Describe the degrees of price discrimination.

31. State the meaning of selling cost with an example.
32. Mention the similarities between perfect competition and monopolistic competition.
33. Differentiate between ‘firm’ and ‘industry’.
34. State the features of duopoly.
Part-D  Answer the following questions in about a page

35. Bring out the features of perfect competition.

36. How price and output are determined under the perfect competition?

37. Describe the features oligopoly.

38. Illustrate price and output determination under Monopoly.

39. Explain price and output determined under monopolistic competition with help of
diagram.
MARKET STRUCTURE AND PRICING 119
 ACTIVITY-1
Divide the class into five groups. Assign each group a market structure;
for first group perfect competition, second group monopoly,
third group oligopoly, forth group duopoly and for fifth group
monopolistic competition. Now each student is to identify a business
or organization or seller that operate in that market structure. Ask
each student to prepare a brief description of the following.
1. Name of the market structure
2. Business name
3. Industry
4. Identify the conditions of market structure
5. What are prices of a particular product, whether same price or
different price?.
6. Is there non-price competition?

ACTIVITY-2
Find out the number of firms in Tamil Nadu or India which are
producing/selling TV and Mobile phones.

References

1. Roger Leroy Miller “ Economics today The Micro view “ , Addition Wesley , 15th
edition, 2010 .
2. Irvin B. Tucker, “ Economics for Today “, South Western Cengage learning, 6th
edition, 2010.
3. K.K. Dewett, M.H. Navalur, “ Modern Economic Theory “ , S. Chand, 23rd edition, 2010.
4. H.L. Ahuja, “ Principles of Micro Economics “, Publisher S. Chand , 22nd edition, 2016.
5. Sankaran, “ Micro Economics “,
6. Micro Economics (Principles, Applications and tools) by-Arthur O’ Sullivan,
Steven Sheffrin, Stephen Perez, Pearson

Websites

1. www.economicsconcepts.com
2. www.microeconomicsnotes.com
3. www.economicsdiscussion.net

MARKET STRUCTURE AND PRICING 120

 CH A P TER

6 Distribution
Analysis

“Distribution accounts for the sharing of wealth produced by a

community among the agents or owners of the factors which have been
active in its production”
–Chapman

Learning Objectives

1 To acquire knowledge about distribution of income among the factors of

production.

2 To enable the students to understand the theories of rent, wages, interest and
profit.

6.1 6.2
Introduction Meaning of Distribution

The factors of production viz., Land, Distribution means division of income

Labour, Capital and Entrepreneur or among the four factors of production in
Organization are involved in production. terms of rent to landlords, wage to labourer,
The theory of functional distribution interest to capital and profit to entrepreneurs.
deals with how the relative prices of these
factors of production are determined. The
theory of factor prices is popularly known
as the theory of distribution. Interesting
aspect here is in the fact that large number
of ideas has emerged and various factors
have been identified the economists,
contributing to the development of
Economics Science.

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 6.3 also known as “General
Theory of Distribution”
Kinds of Distribution of or “National Dividend
Income Theory of Distribution”.

Assumptions
Personal Distribution
This theory is based on the following
Personal Distribution is the distribution assumptions:
of national income among the individuals.
1. All the factors of production are
homogenous.
2. Factors of production can be
substituted for each other.
3. There is perfect competition both in
the factor market and product market.
4. There is perfect mobility of factors
of production.
5. There is full employment of factors.
6. This theory is applicable only in the
long-run.
7. The entrepreneurs aim at profit
Functional Distribution
maximization.
Functional Distribution means the 8. There is no government intervention
distribution of income among the four in fixing the price of a factor.
factors of production namely land, labour,
9. There is no technological change.
capital and organisation for their services
in production process. Explanation of the Theory
According to the Marginal Productivity
6.4 Theory of Distribution, the price or the
reward for any factor of production is
Marginal Productivity
equal to the marginal productivity of that
Theory of Distribution
factor. In short, each factor is rewarded
according to its marginal productivity.
Introduction
Marginal Productivity Theory of Marginal Product
distribution was developed by Clark, The Marginal product of a factor of
Wickseed and Walras. This theory production means the addition made
explains how the prices of various factors to the total product by employment of
of production are determined. This an additional unit of that factor. The
theory explains how rent, wages, interest Marginal Product may be expressed as
and profit are determined. This theory is MPP, VMP and MRP.
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 1. Marginal Physical Product (MPP) the point, the marginal revenue product
The Marginal Physical Product of a is less than the price of the factor. Hence,
factor is the increment in the total employer will suffer loss when he uses more
product obtained by the employment of the factor. Therefore, the conclusion is
of an additional unit of that factor. that the employer will adjust the price of
the factor of production so as to equalize
2. Value of Marginal Product (VMP)
the marginal revenue product of that factor.
The Value of Marginal Product is
obtained by multiplying the Marginal In short, the Marginal Productivity
Physical Product of the factor by the Theory of Distribution states that
price of product. a) The price of a factor of production
Symbolically depends upon its productivity.
b) The price of a factor is determined by
VMP = MPP x Price and will be equal to marginal revenue
product of that factor.
3. Marginal Revenue Product (MRP)
c) Under certain conditions, the price of a
The Marginal Revenue Product of a
factor will be equal to both the average
factor is the increment in the total
and marginal products of that factor.
revenue which is obtained by the
employment of an additional unit of
The Marginal Productivity Theory
that factor.
of Distribution can be represented
MRP = MPP x MR diagrammatically as follows:

Statement of the Theory Marginal Productivity under

An employer employs a factor of Perfect Competition
production because it is productive. So, Y
the price he wants to pay for the factor Y
Factor Price and Revenue

Q
depends upon its productivity. The greater P
MFC = AFC

Factor Price and Revenue

the productivity of a factor, the higher P

Product
will be its reward. If the price of a factor
Product

ARP
of production is less than its marginal
revenue product, the employer will use MRP S
more of this factor, because his profit will
be increased.
O N X
O
When more of a factor is employed, Factor Units
its marginal revenue product diminishes. Diagram 6.1
But the employer will gain by using
additional units of the factor until the
marginal revenue product of the factor The diagram 6.1 refers to the factor pricing
is equal to its price. The employer’s profit under perfect competition in the factor
will be maximum at this point. Beyond market. X axis represents factor units
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 and Y axis represents the factor price and In diagram 6.2 the factor pricing under
revenue product. MRP is the Marginal imperfect competition is represented. AFC
Revenue Product Curve and ARP is the is Average Factor Cost curve. It represents
Average Revenue Product curve. AFC is the price paid to the factors. It increases
the Average Factor Cost curve and MFC as the number of factors demanded by the
is the Marginal Factor Cost curve. AFC is employer increases. As AFC rises, MFC
horizontal under perfect competition and lies above AFC. It represents the marginal
MFC coincides with it. cost paid to the factors. At the point Q,
When there is perfect competition in MFC = MRP, where the employer attains
the factor market, the firm is in equilibrium his maximum profit and so he stops
(i.e., earning maximum profits) only when employment of the factors at the point.
But the average cost paid is NRSO and the

final
MFC = MRP. Hence, in the diagram, the firm
reaches equilibrium at point Q by employing average revenue obtained is NQ or OP.
ON units of factors and paying OP price (NQ) Total revenue obtained is NQPO. Therefore,
where MFC = MRP. At the point Q, MRP = exploitation per unit of factor is RQ. But the
ARP. The price paid to the factor (NQ) is also total number of factors is ON. Thus, the total
equal to marginal revenue product (NQ) exploitation of factor by the employer is RQ
and average revenue product (NQ). This X SR = “PQRS” (shaded area). Thus, under
means that there is no exploitation of factors imperfect competition, factor is exploited at
under perfect competition. Beyond the point the equilibrium position.

UNIT 6
Q, no employer will employ factors, because
Criticism
after that point, the price paid to the factor
is more than marginal revenue product and This theory is subject to a few criticisms
average revenue product. 1. In reality, the factors of production
are not homogenous.
Marginal Productivity Theory 2. In practice, factors cannot be
under Imperfect Competition substituted for each other.
3. This theory is applicable only in the
long–run. It cannot be applied in the Y
Y MFC short-run.
Y
40 Economic Rent
Yield Per Acre (in Bags)

C = AFC
Rate of Interest
Q
6.5
Factor Price and Revenue

AFC
P 30
Rent R’
Product

No Rent
ARP 20
Land
S 10 R
MRP R ARP 6.5.1 Meaning
MRP Rent is the price or reward given for the
0 A B C X
X
O N
use of landVarious
or house or a
Grades of Landmachine to 0
X
Factor Units the owner. But, in Economics, “Rent” or De
Diagram 6.2 “Economic Rent” refers
Diagram 6.3 to that part of

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 payment made by a tenant to his landlords 1. Land differs in fertility.
for the use of land only. 2. The law of diminishing returns
operates in agriculture.
3. Rent depends upon fertility and
location of land.
4. Theory assumes perfect competition.
5. It is based on the assumption of long
period.
6. There is existence of marginal land
or no-rent land.
6.5.2 Ricardian Theory of 7. Land has certain “original and
Rent indestructible powers”.
8. Land is used for cultivation only.
9. Most fertile lands are cultivated first.

Statement of the Theory with

Illustration
Assume that some people go to a newly
discovered island and settle down there.
There are three grades of land, namely
A, B and C in that island. ‘A’ being most
fertile, ‘B’ less fertile and ‘C’ the least
David Ricardo
fertile. They will first cultivate all the most
fertile land (A grade) available. Since the
The Classical Theory of Rent is called
land is abundant and idle, there is no need
“Ricardian Theory of Rent”. David Ricardo
to pay rent as long as such best lands are
explained the theory of rent thus:
freely available. Given a certain amount of
labour and capital, the yield per acre on ‘A’
Assumptions grade land is 40 bags of paddy.
Ricardian theory of rent assumes the Suppose another group of people
following: goes and settles down in the same island
after some time. Hence the demand for
“Rent is that portion of the produce agricultural produce will increase. The
of the earth which is paid to the most fertile lands [A grade] alone cannot
landlord for the use of the original produce all the food grains that are needed
and indestructible powers of the on account of the operation of the law of
soil”. diminishing returns. So the less fertile
lands [B grade] will have to be brought
David Ricardo
under cultivation in order to meet the

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 Y
growing
Y
population. For the same amount
MFC
labour and capital employed in ‘A’ grade Y
land, the yield perQ acre on ‘B’ grade land 40 Economic Rent

Yield Per Acre (in Bags)

C = AFC

Rate of Interest
Factor Price and Revenue

AFC
is 30 bags
P of paddy. The surplus of 10 30
R’
Product

bags [40-30] per acre appears on ‘A’ grade No Rent

ARP 20
land. This is “Economic Rent” of ‘A’ grade Land
R
RP land. S R ARP
10

Suppose yet another MRP group of

0 A B C X
X people goes and settles down in the same 0
O N X Various Grades of Land
island. So the least fertile land (C grade) Dem
Factor Units
will have to be brought under cultivation.
Diagram 6.2 Diagram 6.3
For the same amount of labour and capital,
the yield per acre on ‘C’ grade land is 20
bags of paddy. This surplus of ‘A’ grade
land is now raised to 20 bags [40-20], and
Diagrammatic Explanation
it is the “Economic Rent” of ‘A’ grade land.
The surplus of ‘B’ grade land is 10 bags In diagram 6.3, X axis represents various
[30-20]. This is the economic rent of ‘B’ grades of land and Y axis represents
grade land. yield per acre (in bags). OA, AB and BC
are the ‘A’ grade, ‘B’ grade and ‘C’ grade
In the above illustration in ‘C’
lands respectively. The application of
grade land, cost of production is just equal
equal amount of labour and capital on
to the price of its produce and therefore
each of them gives a yield represented
does not yield any rent (20 - 20). Hence,
by the rectangles standing just above the
‘C’ grade land is called “no-rent land or
respective bases. The ‘C’ grade land is the
marginal land”. Therefore, No-Rent Land
“no–rent land” ‘A’ and ‘B’ grade lands are
or Marginal Land is the land in which cost
“intra 
– marginal lands”. The economic
of production is just equal to the price of
rent yielded by ‘A’ and ‘B’ grade lands is
its produce. The land which yields rent is
equal to the shaded area of their respective
called “intra –marginal land”. Therefore, rent
rectangles.
indicates the differential advantage of the
superior land over the marginal land.
Criticisms

Table 6.1 Ricardian Theory Following are the limitations of Ricardian

of Rent theory of rent.
1. The order of cultivation from
Grades Production Surplus (i.e.,
most fertile to least fertile lands is
of Lands (in bags) Rent in bags)
historically wrong.
A 40 40-20=20
2. This theory assumes that, rent does
B 30 30-20= 10
not enter into price. But in reality,
C 20 20-20= 0 rent enters into price.

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 6.5.3 Quasi-Rent “Quasi-Rent is the income derived
from machines and other appliances
made by man”.

-Alfred Marshall

6.5.4 The Modern Theory

of Rent / Demand &
Supply Theory of Rent
Marshall introduced the concept of Quasi The classical economists’ thought that
rent. Factors other than land say plant land as a factor of production was different
and machinery are fixed in supply during from other factors of production. But
short period. They earn surplus income modern economists thought that all
when demand rises. It is purely temporary the factors of production are alike and
as it disappears in long run due to increase there is no basic difference between
in supply. The quasi-rent is a surplus that them. Hence, a special theory was rent,
a producer receives in the short period developed by Ricardo is not necessary.
over variable costs from the sale of output. Therefore, economists like Joan
Robinson and Boulding have contributed
Distinction between “Rent” their ideas for the determination of rent,
and “Quasi-Rent” which is known as the “Modern Theory
of Rent”.
Sl. No. Rent Quasi-Rent
1. Rent accrues Quasi-Rent
to land accrues to “The essence of the conception of
manmade rent is the conception of surplus
appliances. earned by a particular part of a factor
2. The supply of The supply of production over and above the
land is fixed of manmade minimum earnings that is necessary
forever. appliances is to induce it to do work”
fixed for a short - Joan Robinson
period only.
3. It enters into It does not Rent is the difference between the actual
price enter into price. earnings of a factor of production and its
transfer earning.

QR= Total Revenue – Total Rent = Actual earning –

Variable Cost Transfer earning.

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 The minimum payment that has to be 2. Real Wages
made to a particular factor of production Real wages are the wages paid in
to retain it in its present use is known as terms of goods and services. Hence,
transfer earnings. real wages are the purchasing power
of money wages.
6.6 3. Piece Wages
Wages Wages that are paid on the basis of
quantum of work done.
4. Time Wages
Wages that are paid on the basis of
the amount of time that the worker
works.

6.7
Theories of Wages

Wages are a payment for the services of 6.7.1 

Subsistence Theory of
labour, whether intellectual or physical. Wages
Wage may be paid daily, weekly, fortnightly, Subsistence theory is one of the oldest
monthly or yearly and partly at the end of theories of wages. It was first explained by
the year in the form of bonus. Physiocrats, a group of French economists
and restated by Ricardo.

6.6.1. Meaning According to this theory, wage

must be equal to the subsistence level of
Wage is the price paid to the labourer for the labourer and his family. Subsistence
the services rendered . means the minimum amount of food,
clothing and shelter which workers and
“A sum of money paid under contract their family require for existence.
by an employer to a worker for the If workers are paid higher wages
services rendered”. than the subsistence level, the workers
-Benham would be better off and they will have large
families. Hence, the population would
increase. When the population increases,
6.6.2  Kinds of Wages the supply of labourer would increase and
therefore, wages will come down.
Wages are divided into four types:
On the other hand, if wages are lower
1. Nominal Wages or Money Wages. than the subsistence level, there would be
Nominal wages are referred to the a reduction in population and thereby the
wages paid in terms of money. supply of labour falls and wages increase
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 to the subsistence level. So this theory is
6.7.3 Wage Fund Theory of
closely associated with Malthusian Theory of
Wages
Population. This theory holds that the wages
of workers would not be above or below the This theory was first
subsistence level of the labourer and his family. propounded by Adam
Smith. But the credit
Criticism goes to J.S.Mill who
1. Role of trade unions in collective perfected this theory
bargainings was not found. According to Mill
2. It does not explain the differences in “every employer will keep
wages in different occupations. a given amount of capital
for payment to the workers”. It is a known as
3. The assumption that population would
“Wage Fund”. It is fixed and constant. Wages
increase with a rise in wage rate is not
depend directly upon the fund and inversely
correct. Poor families (and countries)
with number of labourers employed. The
have more Children than rich
average wage of a worker can be calculated
families (countries).Actually, as wage
by using the formula.
rate increases, people can afford to
downsize their family size for adopting
costly family planning procedures; Total Wage
while poor people cannot do so. Fund
Average wage per worker =
Number of
6.7.2 Standard of Living Workers
Theory of Wages
The Standard of Living Theory of Wages If the number of workers increases, the
developed by Torrance is an improved wage per worker would fall and vice
and refined version of the Subsistence versa.
Theory of Wage. According to this theory,
wage is equal to the standard of living of Criticism
the workers. If standard of living is high,
1. It does not explain the difference in
wages will be high and vice versa.
wages in different occupations.
Standard of living wage means the
2. It ignores the role of trade unions.
amount necessary to maintain the labourer in
the standard of life to which he is accustomed. 3. Actually the capitalists will take away
a large sum before making payment of
Criticism wages.

1. According to this theory, the standard

of living determines wages. But in actual 6.7.4 Residual Claimant
practice, wages determine the standard Theory of Wage
of living. This theory was propounded by the
American economist F.A.Walkar in 1875,
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 in his book Political Economy. According
Capital
to this theory, wage is the residual portion All man - made things that help
after paying the remuneration of all the produce goods.
other three factors, namely, land, capital
and organization. Money is invested to buy things
such as building, machiney...

Criticisms
The reward for capital investment
1. This theory does not explain the role is interest.
of trade unions can secure higher
wage for workers.
2. Demand side of labour in the
determination of wages needs to be 6.8.1 Meaning
considered.
Interest is the reward paid by the borrower
to the lender for the use of capital.
6.7.5 Marginal Productivity
Theory of Wage
“Interest is the price paid for the use
The application of general theory of of capital in any market”
distribution to wage fixation is the -ALFRED MARSHALL
marginal productivity theory of wages.
According to this theory, wages are
determined by the marginal productivity
of labour and equal to it at the point of 6.8.2  Kinds of Interest
equilibrium. Gross Interest
Under perfect competition wage is Gross interest is the total interest amount
paid equal to marginal product of labour received by creditors from debtors.
(wage = MPL) But in real world where
Gross Interest = (Net Interest) + (reward
there is imperfect competition, there is
for inconvenience) + (insurance against
exploitation of labour and wage is less
risk of non-repayment) + (payment for
than MPL.
service of debt management)

6.8 Net Interest

Interest Net Interest is only a part of the gross
interest. It is the payment for use of capital
Generally speaking, interest is a payment only. A good example for net interest
made by a borrower to the lender for the is the interest payable for Government
money borrowed. Securities.

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 Criticism
6.9  Theories of Interest According to this theory, saving involves
suffering. But savings may not always
involve suffering to some rich people.
Rich people have money for which they do
not get interest. Hoarding of money is to
quench the thirst for liquidity.

6.9.2 Agio Theory of Interest/

The Psychological
Theory of Interest/Time
Preference Theory
This theory was propounded by John Rae
6.9.1 Abstinence Theory or in 1834. But credit goes to Bohm Bawerk an
Waiting Theory Austrian School economist who has given
final shape to the theory. The American
This theory was propounded by N.W.Senior.
economist Irving Fisher modified and gave
To him, interest is the reward for abstaining
a new theory viz Time Preference theory.
from the immediate consumption of wealth.
According to Senior, capital is the result of According to this theory, people
saving. But saving involves “abstinence” prefer present goods rather than future
or “sacrifice”. It is possible to save only if goods. Because the present goods are more
one abstains from present consumption. certain than future goods, just “as a bird in
Such abstinence from present consumption the hand is worth two in the bush”. There
involves some suffering. Hence, it is are many countries where no one knows
necessary to reward the saver (capitalist) what will happen next day.ASEAN crisis of
to compensate for the sacrifice he has 1996 and American crisis of 2007-08 were
to undergo by abstaining from present not predicted even for economists, including
consumption. Therefore, interest is the Nobel Laureats. So, when people save they
reward or compensation paid to the saver have to postpone their present enjoyment or
(capitalist) for his “abstinence” or “sacrifice”. satisfaction. If one postpones one’s present
satisfaction, one has to be paid an “Agio”
Marshall accepted the Abstinence
or “Premium”. This premium is “interest”.
Theory of interest. But he used the word
People prefer present consumption than
‘waiting’ instead of “abstinence”. Saving
future consumption due to the risk increasing
implies waiting. According to him, interest
and uncertainties of the present world.
is the reward for waiting. Saving involves
waiting. But people do not like to wait. So,
in order to make them wait and in turn to 6.9.3 Loanable Funds Theory/
save, we have to pay them some reward. The Neo Classical Theory
Therefore, interest is the reward paid to the The Loanable Funds Theory, also known
saver (capitalist) for his “waiting”. as the “Neo–Classical Theory”, was
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 developed by Swedish economists like 1. Savings planned by individuals
Wicksell, Bertil Ohlin, Viner, Gunnar are called “ex-ante savings”. E.g.
Myrdal and others. LIC premium, EMI payment etc.
According to this theory, interest is 2. The unplanned savings are called,
the price paid for the use of loanable funds. “ex-post savings”. Savings is left
The rate of interest is determined by the out after spending are ex post
equilibrium between demand for and supply saving.
of loanable funds in the credit market. 2. Bank Credit (BC)
The bank credit is another source of
Demand for Loanable Funds
loanable funds. Commercial banks
The demand for loanable funds depends create credit and supply loanable
upon the following: funds to the investors.
1. Demand for Investment (I) 3. Dishoarding (DH)
The most important factor responsible Dishoarding means bringing out
for the loanable funds is the demand the hoarded money into use and
for investment. Bulk of the demand thus it constitutes a source of supply
for loanable funds comes from of loanable funds. In India,after
business firms which borrow money 1991,Public sector undertakings
for purchasing capital goods. are being sold to private people to
2. Demand for Consumption (C) mobilize more funds.This is also
called disinvestment.
The demand for loanable funds comes
from individuals who borrow money 4. Disinvestment(DI)
for consumption purposes also. Disinvestment is the opposite of
3. Demand for Hoarding (H) investment. In other words disinvestment
means not providing sufficient funds for
The next demand for loanable funds
depreciation of equipment. It gives rise
comes from hoarders. Demand for
to the supply of loanable funds.
hoarding money arises because of
people’s preference for liquidity, idle All the four sources of supply of
cash balances and so on. The demand loanable funds vary directly with the
for C, I and H varies inversely with interest rate.
interest rate.

Supply of Loanable Funds Classical theory of Interest

The supply of loanable funds depends The equilibrium interest rate,

upon the following four sources: according to classical theory, is
determined by the intersection of
1. Savings (S)
demand and supply curves, Demand
Loanable funds come from savings. for money refers to investment. Supply
According to this theory, savings of money refers to savings S=I.
may be of two types, namely,
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 Equilibrium funds; this is obtained by the summation of
the demand for investment curve I, demand
The rate of interest is determined by the
curve for consumption demand or dissaving
equilibrium between the total demand for
curve and curve for demand for hoarding
and the total supply of loanable funds.
curve H. The LD and LS curves, intersect
each other at the point “E” the equilibrium
Supply of and Demand for point. At this point, OR rate of interest and
Loanable Funds OM is the amount of loanable funds.
Supply of = Savings + Criticism
loanable funds Bank Credit +
Dishoarding + 1. Many factors have been included
Disinvestment in this theory.Still ther are many
= S + BC + DH + DI more factors.Two such factors are
1)Asymmetric Information and 2)
Demand for = Investment + Moral Hazard.In practice larger
loanable funds Consumption + firms, due to their political powers,
Hoarding
are able to get huge bank credit
=I+C+H at lower interest rates.But due to
NPAs, (Non-Performing Assets)
M2
Y smallYfirms and depositors lose their
L1
interest income. The loanable funds
DH DI S BC L
theory is “indeterminate”’ unless
Rate of Interest

Rate of Interest

LS the income level is already known.

E’
R’ (This Ican
1
be studiedE1in 12th standard
No Rent
Land E
Economics Book) E
I P
R
2. It is very difficult to combine real
1

I P
H C factors like savings and investment
LD
X with monetary factors like bank
d 0 M’ M X 0
credit and liquidityM2
preference. X
Demand for Loanable Funds and Demand for Money and
Supply of Loanable Funds Supply of Money
Diagram 6.4 6.9.4 Keynes’ Diagram
Liquidity6.5
Preference Theory of
In Diagram 6.4, X axis represents the Interest or The Monetary
demand for and supply of loanable funds Theory of Interest
and Y axis represents the rate of interest. The Keynes propounded the
LS curve represents the total supply curve Liquidity Preference
of loanable funds. This is obtained by the Theory of Interest in
summation of the Saving Curve (S), Bank his famous book, “The
credit curve (BC), Dishoarding curve (DH) General Theory of
and Disinvestment curve (DI). The LD curve Employment, Interest
represents the total demand for loanable and Money” in 1936. J.M. Keynes

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 According to Keynes, interest is purely a The amount saved under this motive
monetary phenomenon because the rate depends on the level of income. Mt
of interest is calculated in terms of money. and Y are positively associated. (Say
To him, “interest is the reward for parting Mt = 0.125Y; that means if income
with liquidity for a specified period of is ₹  1000, demand for transaction
time”. motive is ₹ 125)

Meaning of Liquidity Mt = f (y)

Preference
2. The Precautionary Motive
Liquidity preference means the preference
The precautionary motive relates to
of the people to hold wealth in the form
the desire of the people to hold cash
of liquid cash rather than in other non-
to meet unexpected or unforeseen
liquid assets like bonds, securities, bills of
expenditures such as sickness,
exchange, land, building, gold etc.
accidents, fire and theft. The amount
saved for this motive also depends
“Liquidity Preference is the preference on the level of income. (Say Mp =
to have an amount of cash rather than 0.125Y; it means if income is ₹ 1000,
of claims against others”. demand for Mp is ₹ 125)
- Meyer
Mp = f (y)

Motives of Demand for Money 3. The Speculative Motive

According to Keynes, there are three The speculative motive relates to the
desire of the people to hold cash in
order to take advantage of market
movements regarding the future
changes in the price of bonds and
securities in the capital market.
The amount saved for this motive
depends on the rate of interest. Ms
= f (i). There is inverse relation
between liquidity preference and
rate of interest (Say Ms = 450-100i).

motives for liquidity preference. They are: Determination of Rate of

1. The Transaction Motive Interest
The transaction motive relates to the According to Keynes, the rate of interest
desire of the people to hold cash for is determined by the demand for money
the current transactions (or day–to- and the supply of money. The demand
day expenses). for money is liquidity preference. In fact,
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 liquidity preference for speculative motive Y
M2 M3 M2 M4
Y
determines rate of interest. The supply of
L1 L
money is L
determined by the policies of
I3 E3
the Government and the Central Bank
Rate of Interest

Rate of Interest
of a country. The total supply of money
E1
I1 of coins, currency
consists notes and bank
deposits
I
(Say M = E200). I2 E2
P1
E4
P I4
P
Equilibrium between Demand
and 0Supply of Money
M2 X 0 M3 M2 M4 X
The equilibrium
Demandbetween liquidity
for Money and preference Demand for Money and
Supply of Money
and demand for money determine the Supply of Money
Diagram
rate of interest. 6.5
In short-run, the supply of Diagram 6.6
money is assumed to be constant (₹ 200).
LP is the liquidity preference Curve =0.125Y+0.125Y+(450-100i). Total
(demand curve). M2 M2 shows the supply supply of money=₹ -200. Mt and Mp are
curve of money to satisfy speculative influenced by Y. Hence for the sake of
motive. Both curves intersect at the easy understanding, Ms alone can be
point E, which is the equilibrium point. considered Demand for money=supply
Hence, the rate of interest is T. If liquidity of money at equilibrium point:450-
preference increases from LP to L1P1 the 100i=200;450-200=100i;250=100i;
supply of money remains constant, the i=250/100=2.5.This is equilibrium interest
rate of interest would increase from OI In reality, interest rate is also influenced
to OI1. Numerical examples given above by national income and commodity sector
can also be used for better understanding. equilibrium.However, they are not included
Total demand for money=Mt+Mp+Ms here for making the understanding easier.
Suppose LP remains constant. If the supply
Y
M2 of money Yis OM2, the M3 interest
M2 isMOI2 and if the
4
L1 supply of moneyLis reduced from OM2 to OM3,
L the interestI would increase
E3
from OI2 to OI3. If the
3
supply of money is increased from OM2 to OM4,
Rate of Interest

Rate of Interest

LS
E1 the interest would decrease from OI2 to OI4.
I1

I E2
E
I P1 Criticism
2

E4
P
1. ThisI4 theory does not explain the P
LD existence of different interest rates
X 0 M2 X prevailing
0 inM3the market
M2 M4at the sameX
nd Demand for Money and time. Demand for Money and
Supply of Money Supply of Money
2. It explains interest rate only in the
Diagram 6.5 Diagram 6.6
short-run.
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 6.10 Here cost implies explicit costs only
(Normally economic cost, social cost and
Profit
environmental cost are not considered
by the Accountants in India).
The entrepreneur coordinates all the other
b. Net Profit or Pure Profit or Economic
three factors (land, labour and capital) of
profit or True profit
production. Entrepreneur is rewarded for
his services in the form of profit. Net or pure or economic or true profit
is the residual left with entrepreneur
after deducting from Gross profit the
6.10.1  Meaning of Profit
remuneration for the self-owned factors of
Profit is a return to the entrepreneur for the production, which are called implicit cost.
use of his entrepreneurial ability. It is the
net income of the organizer. In other words, Net Profit = Gross Profit-
profit is the amount left with the entrepreneur Implicit costs
after he has payments made for all the other c. Normal Profit
factors (land, labour and capital) used by
It refers to the minimum expected
him in the production process. However,
return to stay in business.
there are other versions also.
d. Super Normal Profit
Super normal profits are over and
6.10.2  Kinds of Profit
above the normal profit.
I. Monopoly Profit: Profit earned by
the firm because of its monopoly Super Normal = Actual profit-
control. Profit Normal profit
II. Windfall Profit: Some times, profit
arises due to changes in price level. 6.11
Profit is due to unforeseen factors.
Theories of Profit
III. Profit as functional reward: Just
like rent, wage and interest, profit is
earned by the entrepreneur for his
entrepreneurial function.

6.10.3.  Concepts of Profit

a. Gross Profit
Gross Profit is the surplus which accrues
to a firm when it subtracts its Total
Expenditure from its Total Revenue.

Gross Profit = Total Revenue-

Total cost

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 Schumpeter, an entrepreneur is not only
6.11.1 Dynamic Theory of
an undertaker of a business, but also an
Profit
innovator in the process of production. To
This theory was him, profit is the reward for “innovation”.
propounded by the Innovation means invention put into
American economist commercial practice.
J.B.Clark in 1900. To him,
According to Schumpeter, an
profit is the difference
innovation may consist of the following:
between price and cost
of production of the 1. Introduction of a new product.
commodity. Hence, profit 2. Introduction of a new method of
is the reward for dynamic production.
changes in society. Further he points out 3. Opening up of a new market.
that, profit cannot arise in a static society.
4. Discovery of new raw materials
Static society is one where everything is
stationary or stagnant and there is no change 5. Reorganization of an industry / firm.
at all. Therefore, there is no role for an
entrepreneur in a static society. The price of When any one of these innovations is
the commodities in a static society would be introduced by an entrepreneur, it leads to
equal to their cost of production. So, there reduction in the cost of production and thereby
would be no profit for the entrepreneur. brings profit to an entrepreneur. To obtain
The entrepreneur only gets wages for profit continuously, the innovator needs to
management and interest on his capital. innovate continuously. The real innovators do
so. Imitative entrepreneurs cannot innovate.
At present several changes are
taking place in a dynamic society. Changes
are permanent. According to Clark, the 6.11.3 Risk Bearing Theory of
following five main changes are taking Profit
place in a dynamic society.
Risk bearing theory of profit was
1. Population is increasing propounded by the American economist
2. Volume of Capital is increasing. F.B.Hawley in 1907. According to him,
3. Methods of production are improving. profit is the reward for “risk taking”
in business. Risk taking is an essential
4. Forms of industrial organization are
function of the entrepreneur and is the
changing.
basis of profit. It is a well known fact that
5. The wants of consumer are multiplying. every business involves some risks.
Since the entrepreneur undertakes
the risks, he receives profits. If the
6.11.2 Innovation Theory of entrepreneur does not receive the reward,
Profit he will not be prepared to undertake the
Innovation theory of profit was risks. Thus, higher the risks, the greater
propounded by Joesph. A.Schumpeter. To are the profit.
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 Every entrepreneur produces incalculatable or not measurable or non-
goods in anticipation of demand. If his insurable).
anticipation of demand is correct, then According to Knight, profit does
there will be profit and if it is incorrect, not arise on account of risk taking,
there will be loss. It is the profit that because the entrepreneur can guard
induces the entrepreneurs to undertake himself against a risk by taking a suitable
such risks. insurance policy. But uncertain events
cannot be guarded against in that way.
When an entrepreneur takes himself the
6.11.4 Uncertainty Bearing
burden of facing an uncertain event, he
Theory of Profit
secures remuneration. That remuneration
Uncertainty theory was propounded is “profit”.
by the American economist Frank
H.Knight. To him, profit is the reward for
“uncertainty bearing”. He distinguishes
between “insurable” and “non-insurable” 6.12
risks. Conclusion

Insurable Risks In this chapter, the determination of

Certain risks are measurable or how the prices of various factors of
calculatable. Some of the examples of these production (namely land, labour, capital,
risks are the risk of fire, theft and natural and organization) has been discussed.
disasters. Hence, they are insurable. Such In short, all the theories are related to
risks are compensated by the Insurance factor pricing of factors of production.
Companies. However,it needs to be understood that
no theory can completely comprehend
every thing.The reality will always be
Non-Insurable Risks
more complicated than what the theories
There are some risks which are could predict or perceive.Theories are
immeasurable or incalculatable. The only guide lines,they cannot predict with
probability of their occurrence cannot 100% perfection.However,the scientific
be anticipated because of the presence studies attempt to enhance the degree of
of uncertainty in them. Some of the perfection.
examples of these risks are competition,
market condition, technology change and
GLOSSARY
public policy. No Insurance Company can
undertake these risks. Hence, they are non- 1. Distribution – Distribution of
insurable. The term “risks” covers the first wealth among agents or the owners
type of events (measurables - insurable) of the factors of production.
and the term “uncertainty” covers the 2. Rent – Rent is reward for the use of
second type of events (unforeseeable or land.

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 3. Wages – Wages are the reward for labour. 8. Money wage – Money wage is the
4. Interest – Interest is the price paid remuneration received by a labourer
for the use of capital. in terms of money.
5. Profit – Profit is the reward for 9. Real wage – Real wage is the
organisation or entrepreneurship. purchasing power of the money
wages in terms of goods and
6. Quasi-Rent – Quasi-Rent is the
services.
surplus earned by man-made
appliances and instruments of 10. Loanable fund – Loanable fund is
production in the short-period. that part of capital meant for loan.
7. Transfer earnings – Transfer earnings 11. Innovation – Invention put into
refer to minimum payment payable to commercial practice.
a factor to retain it in its present use.

MODEL QUESTIONS

PART – A

1. In Economics, distribution of income 3. Rent is the reward for the use of

is among the a. capital
a. factors of production b. labour
b. individual c. land
c. firms d. organization
d. traders
4.
The concept of ‘Quasi-Rent’ is
2. Theory of distribution is popularly associated with
known as, a. Ricardo
a. Theory of product-pricing b. Keynes
b. Theory of factor-pricing c. Walker
c. Theory of wages d. Marshall
d. Theory of Interest

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 5. The Classical Theory of Rent was c. interest
propounded by d. profit
a. Ricardo
11.
Keynesian Theory of interest is
b. Keynes popularly known as
c. Marshall a. Abstinence Theory
d. Walker b. Liquidity Preference Theory
6. ‘Original and indestructible powers of c. Loanable Funds Theory
the soil’ is the term used by
d. Agio Theory
a. J.S.Mill
12.
According to the Loanable Funds
b. Walker Theory, supply of loanable funds is
c. Clark equal to
d. Ricardo a. S + BC + DH + DI
b. I + DS + DH + BM
7. The reward for labour is
c. S + DS + BM + DI
a. rent
d. S + BM + DH + DS
b. wage
c. profit 13. The concept of meeting unexpected
expenditure according to Keynes is
d. interest
a. Transaction motive
8. Money wages are also known as
b. Precautionary motive
a. real wages
c. Speculative motive
b. nominal wages
d. Personal motive
c. original wages
14. The distribution of income or wealth
d. transfer wages
of a country among the individuals are
9.
Residual Claimant Theory is a. functional distribution
propounded by b. personal distribution
a. Keynes c. goods distribution
b. Walker d. services distribution
c. Hawley
15. Profit is the reward for
d. Knight
a. land
10. The reward given for the use of capital b. organization
a. rent c. capital
b. wage d. labour

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 16. Innovation Theory of profit was given by c. Walker
a. Hawley d. J.S.Mill
b. Schumpeter 19. Abstinence Theory of Interest was
c. Keynes propounded by
d. Knight a. Alfred Marshall
17. Quasi-rent arises in b. N.W Senior

a. Man-made appliances c. Bohm-Bawerk

b. Homemade items d. Knut Wicksell

c. Imported items 20. Loanable Funds Theory of Interest is

d. None of these called as
a. Classical Theory
18. “Wages as a sum of money are paid under
contract by an employer to a worker for b. Modern Theory
services rendered” –Who said this? c. Traditional Theory
a. Benham d. Neo-Classical Theory
b. Marshall

Part- A  Answers

1 2 3 4 5 6 7 8 9 10
a b c d a d b b b c
11 12 13 14 15 16 17 18 19 20
b a b b b b a a b d

PART – B Answer the following questions in one or two

sentences.

21. What is meant by distribution? 25. What do you mean by interest?

22. Mention the types of distribution. 26. What is profit?
23. Define ‘Rent’. 27.
State the meaning of liquidity
preference.
24. Distinguish between real and money
wages.

Part-C  Answer the Following Questions in a Paragraph

28. What are the motives of demand for 29. List out the kinds of wages.
money?
30. Distinguish between rent and quasi-rent.

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 31. Briefly explain the Subsistence Theory 33.
Describe briefly the Innovation
of Wages. Theory of Profit.

32. State the Dynamic Theory of Profit. 34. Write a note on Risk-bearing Theory
of Profit.

PART – D Answer the Following Questions in One Page

35. Explain the Marginal Productivity 37. Elucidate the Loanable Funds Theory
Theory of Distribution. of Interest.

36. Illustrate the Ricardian Theory of 38. Explain the Keynesian Theory of
Rent. Interest.

ACTIVITY
Visit any manufacturing unit (factory) and collect information
about factors of production (land, labour, capital and organisation)
and compare their remunerations.
Students may be asked to meet the stakeholders in the
factory.
„„ Entrepreneur.
„„ Manager or Managing Director.
„„ Employees.

References

1. Dewett, K.M. and Navalur, M.H. (2016), “Modern Economic Theory”, S. Chand
and Company Pvt. Ltd., New Delhi.
2. Jhingan, M.L. ( ), Micro Economic Theory,
3. Ahuja, H.L. (2016), “Principle of Microeconomics”, S.Chand and Company Pvt.
Ltd., New Delhi.
4. Karl, E. Case, Raw C. Fair and Sharon Oster (2014), “Principle of Economics”,
Pearson, Darling Kindersley (India), Pvt. Ltd., New Delhi, Douglas C.
5. Alfred W. Stonier and Hague (2008), “A Text Book of Economic Theory”,
Pearson, Dorling Kindersley (India), Pvt Ltd., New Delhi.

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 CH A P TER

7 Indian Economy

“India will be a global player in the digital economy”

–Sunder Pichai, CEO Google

Learning Objectives

1 To understand the current status of the Indian Economy in terms of features,

Natural resources, infrastructure facilities and so on.

2  o understand the contributions of major Indian Economic

T
Thinkers.

7.1 Quality of Life Index (PQLI) and Gross

National Happiness Index (GNHI).
Meaning of Growth and
Development
Gross National Happiness Index
(GNHI)
A country’s economic growth is usually
measured by National Income, indicated The term “Gross National Happiness”
by Gross Domestic Product (GDP). was coined by the fourth king of
The GDP is the total monetary value of Bhutan, Jigme Singye Wangchuck, in
the goods and services produced by that 1972. It is an indicator of progress,
country over a specific period of time, which measures sustainable develop­
usually one year. ment, environmental conservation
promotion of culture and good
The level economic development
governance.
is indicated not just by GDP, but by an
increase in citizens’ quality of life or
well-being. The quality of life is being On the basis of the level of economic
assessed by several indices such as Human development, nations are classified as
Development Index (HDI), Physical developed and developing economies.

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 Developed economies are those countries
which are industrialised, utilise their Features of a Developed Economy
resources efficiently and have high per capita 1) High National Income
income. The USA, Canada, U.K, France, and 2) High Per Capita Income
Japan are some of the developed economies.
3) High Standard of Living
Developed economies are also termed as
Advanced Countries. On the other hand, 4) Full Employment of Resources
countries which have not fully utilized their 5) Dominance of Industrial Sector
resources like land, mines, workers, etc., 6) High Level of Technology
and have low per capita income are termed
7) High Industrialisation
as under developed economies. Examples of
underdeveloped countries are Sub Saharan 8) High ConsumptionLevel
Africa, BanglaDesh, Myanmar, Pakistan, 9) High Level of Urbanisation
Indonesia etc.They are also termed as Under 10) Smooth Economic Growth
developed Countries or Backward Nations
11) Social Equity, Gender Equality
or Third World Nations.
and Low Levels of Poverty
12) Political Stability and Good
7.2 Governance
Indian Economy
The diametrically opposite features
GDP Growth Rate
of Indian Economy are discussed below in
Top 10 countries by GDP (normal) 2016
Source : IMF (Outlook October 2016 )
detail.
20000
18000
16000
14000
7.3
12000
Features of Indian
Billion dollar

10000
8000 Economy
6000
4000
2000
7.3.1 Strengths of Indian
Economy
m

da
an
te

ce
n
na

a
do

ly

il
pa

na
sta

az
di
an

Ita
i
Ch

ng
Ja

Ca
Br
Fr
Ge
d

In
Ki
ite

d
Un

ite
Un

Diagram 7.1
1. India has a mixed economy
Indian economy is the Seventh largest
economy of the world. Being one of Indian economy is a typical example
the top listed countries. In terms of of mixed economy. This means both
industrialization and economic growth, private and public sectors co-exist and
India holds a robust position with an function smoothly. On one side, some
average growth rate of 7% (approximately). of the fundamental and heavy industrial
Even though the rate of growth has units are being operated under the public
been sustainable and comparatively stable, sector,while, due to the liberalization of
there are still signs of backwardness. the economy, the private sector has gained

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 importance. This makes it a perfect model Emerging as a top economic giant
for public – private partnership. among the world economy, India bags
2. A
 griculture plays the seventh position in terms of nominal
the key role Gross Domestic Product (GDP) and third
in terms of Purchasing Power Parity (PPP).
Agriculture being the maximum pursued As a result of rapid economic growth
occupation in India, it plays an important Indian economy has a place among the
role in its economy as well. Around G20 countries.
60% of the people in India depend
upon agriculture for their livelihood.
5. Fast Growing Economy
In fact, about 17% of our GDP today is
contributed by the agricultural sector. India’s economy is well known for high
Green revolution, ever green revolution and sustained growth. It has emerged as
and inventions in bio technology have the world’s fastest growing economy in
made agriculture self sufficient and the year 2016-17 with the growth rate of
also surplus production. The export 7.1% in GDP next to People’s Republic of
of agricultural products such as fruits, China.
vegetables, spices, vegetable oils, tobacco,
animal skin, etc. also add to forex earning 6. Fast growing Service Sector
through international trading.

3. An emerging market
China 738.5
India has emerged as vibrant economy India 462.1

sustaining stable GDP growth rate even United States 286.9

in the midst of global downtrend. This Brazil 139.1

Indonesia
has attracted significant foreign capital
132.7

Japan 118.4
through FDI and FII.India has a high
potential for prospective growth. This also
Diagram 7.2
makes it an emerging market for the world.
The service sector, contributes a lion’s share
4. Emerging Economy of the GDP in India. There has been a high
rise growth in the technical sectors like
WORLD NATION IN G-20 Information Technology, BPO etc. These
1. Argentina 11. Italy sectors have contributed to the growth
2. Australia 12. Japan
of the economy. These emerging service
3. Brazil 13. Mexico
sectors have helped the country go global
4. Canada 14. Russia
and helped in spreading its branches around
5. China 15. Saudi Arabia
6. European Union
the world.
16. South Africa
7. France 17. South Korea
8. Germany 18. Turkey 7. Large Domestic consumption
9. India 19. United Kingdom
With the faster growth rate in the economy
10. Indonesia 20. United States
the standard of living has improved a lot.
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 This in turn has resulted in rapid increase The human capital of India is young. This
in domestic consumption in the country. means that India is a pride owner of the
The standard of living has considerably maximum percentage of youth. The young
improved and life style has changed. population is not only motivated but
skilled and trained enough to maximize
the growth. Thus human capital plays
8. Rapid growth of Urban areas
a key role in maximizing the growth
Urbanization is a key ingredient of the prospects in the country. Also, this has
growth of any economy. There has been a invited foreign investments to the country
rapid growth of urban areas in India after and outsourcing opportunities too.
independence. Improved connectivity in
transport and communication, education
and health have speeded up the pace of 7.3.2 Weakness of Indian
urbanization. Economy
1. Large Population
9. Stable macro economy
India stands second in terms of size of
The Indian economy has been projected population next to China and our country
and considered as one of the most stable is likely to overtake china in near future.
economies of the world. The current Population growth rate of India is very
year’s Economic survey represents the high and this is always a hurdle to growth
Indian economy to be a “heaven of rate. The population growth rate in India
macroeconomic stability, resilience and is as high as 1.7 per 1000.The annual
optimism. According to the Economic addition of population equals the total
Survey for the year 2014-15, 8%-plus population of Australia.
GDP growth rate has been predicted, with
actual growth turning out to be a little 2. Inequality and poverty
less (7.6%). This is a clear indication of a
There exists a huge economic disparity in
stable macroeconomic growth.
the Indian economy. The proportion of
income and assets owned by top 10% of
10. Demographic dividend Indians goes on increasing. This has led to
an increase in the poverty level in the society
232 million Armenia and still a higher percentage of individuals
Youth population of India is nearly equal the total
population of 18 West Asian countries in 2011
Azerbaijan
Bahrain are living Below Poverty Line (BPL). As a
Cyprus
Georgia result of unequal distribution of the rich
Iraq
Israel becomes richer and poor becomes poorer.
Jordan
Kuwait
Youth Lebanon
3. I
 ncreasing Prices of
West Asian
Population countries Oman
Qatar
= Saudi Arabia Essential Goods
State of Palestine
Syrian Arab Republic
Turkey Even though there has been a constant
United Arab Emirates
Yemen growth in the GDP and growth

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 opportunities in the Indian economy, „„Sex-ratio
there have been steady increase in the „„Life-expectancy at birth
prices of essential goods. The continuous
„„Literacy ratio
rise in prices erades the purchasing power
and adversely affects the poor people, a. Size of Population
whose income is not protected.
Table 7.1 Population Growth
4. Weak Infrastructure Census Population Average annual
Even though there has been a gradual Year (in crores) growth rate
improvement in the infrastructural 1901 23.84 -
development in the past few decades, there 1911 25.21 0.56
is still a scarcity of the basic infrastructure
1921 25.13 -0.03
like power, transport, storage etc.
1931 27.90 1.04
5. I
 nadequate Employment 1941 31.87 1.33
generation 1951 36.11 1.25
With growing youth population, there 1961 43.92 1.96
is a huge need of the employment 1971 54.81 2.20
opportunities. The growth in production 1981 68.33 2.22
is not accompanied by creation of job.
1991 84.33 2.16
The Indian economy is characterized by
‘jobless growth’. 2001 102.70 1.97
2011 121.02 1.66
6. Outdated technology (Source: Registrar General of India)

The level of technology in agriculture and

Over a period of 100 years, India has
small scale industries is still outdated and
quadrupled its population size. In terms
obsolete.
of, size of population, India ranks 2nd
in the world after China. India has only
about 2.4% of the world’s geographical
7.3.3 Demographic trends in
area and contributes less than 1.2% of the
India
world’s income, but accommodates about
Scientific study of the characteristics of 17.5% of the world’s population. In other
population is known as Demography. The words, every 6th person in the world is an
various aspects of demographic trends in Indian. Infact, the combined population of
India are: just two states namely, Uttar Pradesh and
„„Size of population Maharashtra is more than the population
of United States of America, the third most
„„Rate of growth
populous country of the world. Some of
„„Birth and death rates the states in India have larger population
„„Density of population than many countries in the world.
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 The negative growth during has declined from 27.4 in 1951 to 7.1 in 2011.
1911-21 was due to rapid and frequent However, from the data it is clear that the fall
occurrence of epidemics like cholera, in birth rates is less than that of death rates.
plague and influenza and also famines. Kerala has the lowest birth rate (14.7)
The year 1921 is known as the ‘Year of and Uttar Pradesh has the highest birth rate
Great Divide’ for India’s population as (29.5). West Bengal has the lowest death
population starts increasing. rate (6.3) and Orissa (9.2) has the highest.
During 1951, population growth Among States, Bihar has the highest decadal
rate has come down from 1.33% to 1.25%. (2001-11) growth rate of population, while
Hence it is known as ‘Year of Small divide’. Kerala has the lowest growth rate. The four
In 1961, population of India states Bihar, Madhya Pradesh, Rajasthan
started increasing at the rate of 1.96% and Uttar Pradesh called BIMARU states
i.e, 2%. Hence 1961 is known as ‘Year of have very high population.
Population Explosion’. In the year 2001,
the Population of India crossed one billion c. Density of population
(100 crore) mark. It refers to the average number of persons
The 2011 census reveals growth of residing per square kilometre. It represents
youth population which is described as the man- land ratio. As the total land area
‘demographic transition’. remains the same, an increase in population
causes density of population to rise.
b. Birth rate and death rate
Density of population
Crude Birth rate: It refers to the number
Total population
of births per thousand of population. =
Land area of the region
Crude Death rate: It refers to the number
of deaths per thousand of population. Table 7.3 Density of population
Crude birth and death rates of India Year Density of population
during various years. (No. of persons per sq. km)
Table 7.2 1951 117
Birth rate and death rate 2001 325
Year C.B.R C.D.R. 2011 382
1951 39.9 27.4 (Source: Registrar General of India)

2001 25.4 8.4 Just before Independence, the density of

2011 21.8 7.11 population was less than 100. But after
(Source: Registrar General of India) independence, it has increased rapidly
from 117 in 1951 to 325 in 2001. According
Birth rate was 39.9 in 1951; it fell to 21.8 in to 2011 census, the present Density of
2011. Although the birth rate has declined, the population is 382. Thus, the pressure of
decline is not so remarkable. The death rate population on land has been rising. Kerala,
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 West Bengal, Bihar and Uttar Pradesh have expectancy is high when death rate is low
density higher than the India’s average and / or instances of early death are low.
density. Bihar is the most densely populated
state in the country with 1,102 persons Table 7.5  Life Expectancy
living per sq.km followed by West Bengal Year Male Female Overall
with 880. Arunachal Pradesh has low
density of population of only 17 persons. 1951 32.5 31.7 32.1
1991 58.6 59.0 58.7
d. Sex ratio 2001 61.6 63.3 62.5
It refers to the number of females per 2011 62.6 64.2 63.5
1,000 males. It is an important indicator (Source: Registrar General of India)
to measure the extent of prevailing equity
between males and females at a given During 1901 – 11, life expectancy was
point of time. just 23 years. It increased to 63.5 years
in 2011. A considerable fall in death rate
Table 7.4 Sex Ratio is responsible for improvement in the
Census year Sex ratio life expectancy at birth. However the life
(Number of females per expectancy in India is very low compared
1000 males) to that of developed countries.
1951 946
f. Literacy ratio
2001 933
It refers to the number of literates as a
2011 940 percentage of the total population. In
(Source: Registrar General of India) 1951, only one-fourth of the males and
one-twelfth of the females were literates.
In India, the sex ratio is more favourable to Thus, on an average, only one-sixth of the
males than to females. In Kerala, the adult people of the country were literates. In
sex ratio is 1084 as in 2011. The recent 2011, 82% of males and 65.5% of females
census (2011) shows that there has been a were literates giving an overall literacy
marginal increase in sex ratio. Haryana has rate of 74.04% (2011). When compared
the lowest sex ratio of 877 (2011) among to other developed countries and even Sri
other states, while Kerala provides better Lanka this rate is very low.
status to women as compared to other
States with 1084 females per 1000 males Table 7.6 Literacy ratio
Census Literate Males Females
e. Life expectancy at birth
year persons
It refers to the mean expectation of life at 1951 18.3 27.2 8.9
birth. Life expectancy has improved over
2001 64.8 75.3 53.7
the years. Life expectancy is low when
death rate is high and / or instances of early 2011 74.04 82.1 65.5
death are high. On the other hand, life (Source: Registrar General of India)

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 Kerala has the highest literacy ratio (94%), According to Agricultural Census,
Mizoram (91.3%),followed by Goa (88.7%), the area operated by large holdings (10
Himachal Pradesh (82.8%), Maharastra hectares and above) has declined and area
(82.3%),Sikkim (81.4%), and Tamil Nadu operated under marginal holdings (less
(80.1%). Bihar has the lowest literacy ratio than one hectare) has increased. This
(61.8%) in 2011. indicates that land is being fragmented
and become ineconomic.
7.4
Natural Resources
7.4.2  Forest Resources

Any stock or reserve that can be drawn India’s forest cover in 2007 is 69.09 million
from nature is a Natural Resource. The hectare which constitutes 21.02 per cent of the
major natural resources are - land, forest, total geographical area. Of this, 8.35 million
water, mineral and energy. India is rich hectare is very dense forest, 31.90 million
in natural resources, but majority of the hectare is moderately dense forest and the rest
Indians are poor. Nature has provided 28.84 million hectare is open forest.
with diverse climate, several rivers for
irrigation and power generation, rich 7.4.3 Important Mineral
minerals, rich forest and diverse soil. Resources
a. Iron-Ore
Types of Natural resources India possesses high quality iron-ore in
(a) Renewable Resources: Resources
abundance. The total reserves of iron-ore
that can be regenerated in a in the country are about 14.630 million
given span of time. E.g. forests, tonnes of haematite and 10,619 million
wildlife, wind, biomass, tidal, tonnes of magnetite. Hematite iron is
hydro energies etc. mainly found in Chattisgarh, Jharkhand,
Odisha, Goa and Karnataka.The major
(b) Non-Renewable Resources:
deposit of magnetite iron is available at
Resources that cannot be
western coast of Karnataka. Some deposits
regenerated. E.g. Fossil fuels-
of iron ore are also found in Kerala, Tamil
coal, petroleum, minerals, etc.
Nadu and Andhra Pradesh.

b. Coal and Lignite

7.4.1  Land Resources
Coal is the largest available mineral
In terms of area India ranks seventh in resource. India ranks third in the world
the world with a total area of 32.8 lakh after China and USA in coal production.
sq. km. It accounts for 2.42% of total area The main centres of coal in India are the
of the world. In absolute terms India is West Bengal, Bihar, Madhya Pradesh,
really a big country. However, land- man Maharashtra,Odisha and Andhra Pradesh.
ratio is not favourable because of the huge Bulk of the coal production comes from
population size. Bengal-Jharkhand coalfields.
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 c. Bauxite Kimberlile fields have been discovered in
Raipur and Pastar districts of Chattisgarh,
Bauxite is a main source of metal
Nuapada and Bargarh districts of Odisha,
like aluminium. Major reserves are
Narayanpet – Maddur Krishna areas of
concentrated in the East Coast bauxite
Andhra Pradesh and Raichur-Gulbarga
deposits of Odisha and Andhra Pradesh.
districts of Karnataka.
d. Mica
Mica is a heat resisting mineral which 7.5
is also a bad conductor of electricity. It
Infrastructure
is used in electrical equipments as an
insulator. India stands first in sheet mica
production and contributes 60% of mica Infrastructural development means the
trade in the world. The important mica development of many support facilities.
bearing pegmatite is found in Andhra These facilities may be divided into (a)
Pradesh, Jharkhand, Bihar and Rajasthan. economic infrastructure and (b) social
infrastructure. Economic infrastructure
includes - transport, communication,
e. Crude Oil
energy, irrigation, monetary and financial
Oil is being explored in India at many places institutions. Social infrastructure includes
of Assam and Gujarat. Digboi, Badarpur, - education, training and research, health,
Naharkatia, Kasimpur, Palliaria, Rudrapur, housing and civic amenities.
Shivsagar, Mourn (All in Assam) and Hay
of Khambhat, Ankaleshwar and Kalol (All
in Gujarat) are the important places of oil 7.6
exploration in India.
Economic
f. Gold Infrastructure
India possesses only a limited gold reserve.
There are only three main gold mine Economic infrastructure is the support
regions—Kolar Goldfield, Kolar district system which helps in facilitating
and Hutti Goldfield in Raichur district production and distribution. For instance,
(both in Karnataka) and Ramgiri Goldfield railways, trucks, posts and telegraph
in Anantpur district (Andhra Pradesh). offices, ports, canals, power plants, banks,
insurance companies etc. are all economic
g. Diamond infrastructure of an economy. They help
As per UNECE (United Nations Economic in the production of goods and services.
Commission for Europe)the total reserves
of diamond is estimated at around 4582,
thousand carats which are mostly available 7.6.1  Transport
in Panna(Madhya Pradesh),Rammallakota For the sustained economic growth of a
of Kurnur district of Andhra Pradesh and country, a well-connected and efficient
also in the Basin of Krishna River.The new
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 transport system is needed. India has
7.6.2 Energy
a good network of rail, road, coastal
shipping, and air transport. The total Electrical energy is one of the necessary
length of roads in India being over 30 components of our life. Nowadays, without
lakh km, India has one of the largest electricity, we cannot survive in this
road networks in the world. In terms of world of technology. The energy sources
railroads, India has a broad network of are classified under two heads based on
railroad lines, the largest in Asia and the the availability of the raw materials used,
fourth largest in the world. The total rail while generating energy.
route length is about 63,000 km and of
this 13,000 km is electrified. The major 1. Non-renewable energy sources
Indian ports including Calcutta, Mumbai, 2. Renewable energy sources
Chennai, Vishakhapatnam and Goa
handle about 90% of sea- borne trade and 1. Non-renewable energy sources
are visited by cargo carriers and passenger As the name suggests, the sources
liners from all parts of the world. A of energy which cannot be renewed
comprehensive network of air routes or re-used are called non-renewable
connects the major cities and towns of energy sources. Basically these are
the country. The domestic air services are the energy sources which will get
being looked after by Indian Airlines and exhausted over a period of time.
private airlines. The international airport Some of the examples of this kind of
service is looked after by Air India. resources are coal, oil, gas etc.
2. Renewable energy sources

Indian Railways Provide Wi-Fi These are the kind of energy source
Facility First in India is Bangalore which can be renewed or reused again
Railway Station and again. These kinds of materials
do not exhaust or literally speaking
these are available in abundant or
infinite quantity. Example for this
Air India and Indian Airlines were kind include
merged on August 27, 2007 to from Solar energy
1.
National Aviation Company of India
2. Wind energy
Ltd. (NACIL)
3. Tidal energy
4. Geothermal energy

The National Harbour board was 5. Biomass energy

set up in1950 to advise the Central Sometimes renewable sources are also
and State Governments on the called non-conventional sources of energy
management and development of since, these kinds of materials or these
ports, particularly minor ports ways of energy production were not used
earlier or conventionally.
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 7.7 The education system in India
consists of primarily six levels:
Social Infrastructure
„„Nursery Class
Social infrastructure refers to those „„Primary Class
structures which are improving the quality „„Secondary Level
of manpower and contribute indirectly „„Higher Secondary Level
towards the growth of an economy.
„„Graduation
These structures are outside the system
of production and distribution. The „„Post-Graduation
development of these social structures
help in increasing the efficiency and c. Education Institutions in India:
productivity of manpower. For example, Education in India follows the 10+2
schools, colleges, hospitals and other pattern. For higher education, there
civic amenities. It is a fact that one of are various State run as well as private
the reasons for the low productivity of institutions and universities providing
Indian workers is the lack of development a variety of courses and subjects. The
of social infrastructure. The status and accreditation of the universities is decided
developments in the social infrastructure under the University Grants Commission
in India are discussed below. Act. The Education Department consists of
various schools, colleges and universities
7.7.1 Education imparting education on fair means for all
sections of the society. The budget share of
a. Education in India the education sector is around 3% of GDP,
Imparting education on an organized of this largest proportion goes for school
basis dates back to the days of ‘Gurukul’ education. However, per pupil expenditure
in India. Since then the Indian education is the lowest for school students.
system has flourished and developed with
the growing needs of the economy. The 7.7.2 Health
Ministry of Human Resource Development
a. Health in India
(MHRD) in India formulates education
policy in India and also undertakes Health in India is a state government
education programs. responsibility. The Central Council Of
Health and Welfare formulates the various
b. Education system in India health care projects and health department
Education in India until 1976 was the reform policies. The administration of
responsibility of the State governments. health industry in India as well as the
It was then brought under concurrent technical needs of the health sector are the
list (both Centre and State). The Centre responsibility of the Ministry Of Health
is represented by the Ministry of Human And Welfare.
Resource Development decides the India’s Health care in India has many
education budget. forms. These are the ayurvedic medicine
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 practice, unani or galenic herbal care, support of life. Since rain provides food,
homeopathy, allopathy, yoga, and many it forms the basis for stable economic life.
more. Each different healthcare form has Agriculture which is the most fundamental
its own treatment system and practice economic activity depends on rain,”It is rain
patterns. The medical practicing in India that both ruins and aids the ruined to rise”.
needs a proper licensing from the Ministry
of Health. All medical systems are now a. Factors of Production
under one ministry viz AYUSH.
Thiruvalluvar has made many passing
references about the factors of production
b. Health Care Services in India: viz., Land, Labour, Capital, Organisation,
The health care services in India are mainly Time, Technology etc. He says, “Unfailing
the responsibility of the Ministry of Health. harvest, competent body of men, group of
State wise, health status is better in Kerala men, whose wealth knows no diminution, are
as compared to other States. Compared to the components of an economy”.(Kural 61)
other developed countries, India’s health
status is not satisfactory. India’s health b. Agriculture
status is poor compared to Sri Lanka.
According to Thiruvalluvar, agriculture is the
most fundamental economic activity. They
7.8 are the axle-pin of the world, for on their
prosperity revolves prosperity of other sectors
Contributions of Indian of the economy, “The ploughmen alone”, he
Economic Thinkers says “live as the freemen of the soil; the rest
are mere slaves that follow on their toil”(Kural
7.8.1 Thiruvalluvar 1032). Valluvar believes that agriculture is
superior to all other occupation.
The economic ideas of
Thiruvalluvar are found
c. Public Finance
in his immortal work,
Thirukkural, a book Thiruvalluvar has elaborately explained
of ethics. Even though Public Finance under the headings Public
scholars differ widely Revenue, Financial Administration and
over the estimation of the Public expenditure. He has stated these
period of Thiruvalluvar, it is generally believed as 1) Creation of revenue, 2) Collection
that, he belongs to the Sangam age in Tamil of revenue, 3) Management of revenue
Nadu around third century A.D. Thiruvalluvar’s 4) Public expenditure
work is marked by pragmatic idealism.
A large part of Valluvar’s economic d. Public Expenditure
ideas are found in the second part of Valluvar has recommended a balanced budget.
Thirukkural, the porutpal. It deals with “ It is not a great misfortune for a state if its
wealth. Thiruvalluvar is a fundamental revenues are limited, provided the expenditure
thinker. He believes that rains are the basic is kept within bounds.” He has given certain

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 guidelines for a budgetary policy. “Budget for a 3) good crop 4) prosperity and happiness
surplus, if possible, balances the budget at other and 5) full security for the people.
times, but never budget for a deficit.” Valluvar
advocates the following main items of public 7.8.2  Mahatma Gandhi
expenditure: 1) Defence 2) Public Works and
3) Social Services. Gandhian Economics is
based on ethical foundations.
e. External Assistance In 1921, Gandhi wrote,
“Economics that hurts the
Valluvar was against seeking external
moral well-being of an
assistance. According to Kural No. 739,
individual or a nation is immoral, and
countries taking external assistance are not
therefore, sinful.” Again in 1924, he repeated
to be considered as countries at all. In other
the same belief: “that economy is untrue
words, he advocated a self-sufficient economy.
which ignores or disregards moral values”.

f. Poverty and Begging Salient Features of Gandhian

Valluvar consideres freedom from hunger Economic Thought
as one of the fundamental freedoms 1. Village Republics: To Gandhi, India
that should be enjoyed by every citizen. lives in villages. He was interested
According to him ‘poverty’ is the root in developing the villages as self-
cause of all other evils which would lead to sufficient units. He opposed extensive
ever-lasting sufferings. It is to be noted that use of machinery, urbanization and
the number of people living below poverty industrialization.
line, begging, sleeping on the roadsides and 2. On Machinery: Gandhi described
rag picking in India has been increasing. machinery as ‘Great sin’. He said that
“Books could be written to demonstrate
g. Wealth its evils… it is necessary to realize that
Valluvar has regarded wealth as only a machinery is bad. Instead of welcoming
means and not an end. He said, “Acquire machinery as a boon, we should look upon
a great fortune by noble and honorable it as an evil. It would ultimately cease.
means.” He condemned hoarding and 3. Industrialism: Gandhi considered
described hoarded wealth as profitless industrialism as a curse on mankind. He
richness. To him industry is real wealth thought industrialism depended entirely
and labour is the greatest resource. on a country’s capacity to exploit.
4. Decentralization: He advocated
h. Welfare State a decentralized economy, i.e.,
Thiruvalluvar is for a welfare state. In a welfare production at a large number of
state there will be no poverty illiteracy, places on a small scale or production
disease and industry. The important elements in the people’s homes.
of a welfare state are 1) perfect health of the 5. Village Sarvodaya: According to
people without disease 2) abundant wealth, Gandhi, “Real India was to be found in
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 villages and not in towns or cities.” So
7.8.3  Jawaharlal Nehru
he suggested the development of self-
sufficient, self-dependent villages. Jawaharlal Nehru,
6. Bread Labour: Gandhi realized one of the chief
the dignity of human labour. He builders of Modern
believed that God created man to eat India, was the first
his bread by the sweat of his brow. Prime Minister of
Bread labour or body labour was the Independent India and he was there in
expression that Gandhi used to mean that post till his death in 1964. He was a
manual labour. great patriot, thinker and statesman. His
7. The Doctrine of Trusteeship: views on economics and social problems
Trusteeship provides a means of are found in the innumerable speeches he
transforming the present capitalist made and in the books he wrote.
order of society into an egalitarian
a. Democracy and Secularism
one. It gives no quarter to capitalism.
However, now India experiences both Jawaharlal Nehru was a firm believer in
casino capitalism and crony capitalism democracy. He believed in free speech
8. On the Food Problem: Gandhi was civil liberty,adult franchise and the Rule
against any sort of food controls. He of Law and Parliamentary democracy.
thought such controls only created Secularism, is another signal contribution
artificial scarcity. Once India was of Nehru to India. In our country,
begging for food grain, but India tops there are many religions - Hinduism,
the world with very large production Islam, Christianity, Buddhism, Jainism,
of foodgrains, fruits, vegetables, Zoroastrianism, Sikhism and so on.
milk, egg,meat etc., But there is no domination by religious
majority. Secularism means equal respect
9. On Population: Gandhi opposed for all religions.
the method of population control
through contraceptives. He was, b. Planning
however, in favour of birth control
Jawaharlal Nehru was responsible for the
through Brahmacharya or self-
introduction of planning in our country. To
control. He considered self-control
Jawaharlal Nehru, the Plan was essentially
as a sovereign remedy to the problem
an integrated approach for development.
of over-population.
Initiating the debate on the Second Plan
10. On Prohibition: Gandhi advocated in the Lok Sabha in May 1956, Nehru
cent per cent prohibition. He regarded spoke on the theme of planning. He said,
the use of liquor as a disease rather “the essence of planning is to find the best
than a vice. He felt that it was better for way to utilize all resources of manpower, of
India to be poor than to have thousands money and so on.” Planning for Nehru was
of drunkards. But now many states essentially linked up with industrialization
depend on revenue from liquor sales. and eventual self-reliance for the country’s

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 economic growth on a self- accelerating M.Sc  degree in 1921. And his thesis“
growth. Nehru carried through this basic The  Problem of the Rupee” was accepted
strategy of planned development. Nehru’s for the award of the D.Sc degree by the
contribution to the advancement of science, London School of Economics in 1923. It is
research, technology and industrial a miracle that RBI was conceptualized as
development cannot be forgotten. It was per the guidelines presented by Ambedkar
during his period, many IITs and Research in his book, “The Problem of the Rupee;Its
Institutions were established. He always origin and its solution”. The main economic
insited on “scientific temper”. ideas of Ambedkar may be studied under
four broad headings:
c. Democratic Socialism 1. Financial Economics
Socialism is another contribution of Nehru Much of the work done by Ambedkar
to India. He put the country on the road during his stay abroad mostly
towards a socialistic pattern of society. But during the period 1913-1923, was
Nehru’s socialism is democratic socialism. in the field of Finance Economics.
Ambedkar divided the evolution of
7.8.4  B. R. Ambedkar provisional finance into three stages:
(i). Budget by Assignment (1871-72
B. R. Ambedkar (1891- to 1876-77); (ii) Budget by Assigned
1956) was a versatile Revenue (1877-78 to 1881-82); and
personality. He was (iii) Budget by Shared Revenues
the architect of the (1882-83 to 1920-1921).
Indian Constitution, 2. Agricultural Economics
a custodian of social In 1918, Ambedkar published a paper
justice and a champion “Small Holding in India and their
of socialism and state Remedies”. Citing Adam Smith’s ‘Wealth
planning. Ambedkar’s of Nations”, he made a fine distinction
writings included between “Consolidation of Holdings”
“Ancient Indian Commerce” (a thesis and “Enlargement of Holdings”.
submitted to the Columbia University for the
3. Economics of Caste
award of the Master of Arts Degree in 1915),
‘National Dividend of India: A Historical Ambedkar believed that caste was an
and Analytical Study (a thesis for which he obstacle to social mobility. It resulted
was awarded Ph.D). His thesis was published in social stratification. He was of
as ‘The Evolution of Provincial Finance the firm view that individuals must
in British India: A Study of the Provincial be free to change their occupations.
Decentralization of Imperial Finance”. Moreover, the caste system caused
social tensions. The caste system
Ambedkar’s thesis on “Provincial
has resulted in the absence of social
Decentralization of Imperial Finance
democracy in India as distinct from
in British India” was accepted for the
political democracy.

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 4. Economics of Socialism development, competition and efficiency
Ambedkar was a socialist. He was in free-market economies. Gandhi and
a champion of state socialism. He Kumarappa envisioned an economy focused
advocated the nationalization of all on satisfying human needs and challenges
key industries and suggested state while rooting out socio-economic conflict,
ownership of land and collective unemployment, poverty and deprivation.
farming. He was for state monopoly Kumarappa worked as a Professor
of insurance business. Not only that, of economics at the Gujarat Vidyapith in
he advocated compulsory insurance Ahmedabad, while serving as the editor of
for every citizen. Young India during the Salt Satyagraha. He
There is no doubt that Ambedkar was founded the All India Village Industries
a great economist. But his academic Association in 1935; and was imprisoned
work as an economist was eclipsed for more than a year during the Quit India
by his greater contributions in the movement. He wrote during his imprisonment,
field of law and politics. Above all he Economy of Permanence: The Practice and
was a great social reformer. Precepts of Jesus (1945) and Christianity: Its
Economy and Way of Life (1945).
7.8.5  J. C. Kumarappa Several of Gandhi’s followers
developed a theory of environmentalism.
Joseph Chelladurai
Kumarappa took the lead in a number of
Kumarappa was born
relevant books in the 1930s and 1940s.
on 4 January 1892
Historian Ramachandra Guha calls
in Tanjavur, Tamil
Kumarappa, “The Green Gandhian,”
Nadu. A pioneer of
portraying him as the founder of modern
rural economic development theories,
environmentalism in India.
Kumarappa is credited for developing
economic theories based on Gandhism – Kumarappa worked for the Planning
a school of economic thought he coined Commission of India and the Indian National
“Gandhian Economics”. Congress to develop national policies for
agriculture and rural development. He also
Gandhian Economics travelled to China, Eastern Europe and
J.C.Kumarappa strongly supported Japan on diplomatic assignments and to
Gandhi’s notion of village industries and study their rural economic systems.
promoted Village Industries Associations.
Kumarappa worked to combine Christian
7.8.6  V.K.R.V. Rao
and Gandhian values of “trusteeship”, non-
violence and a focus on human dignity According to P.R. Brahmananda, “ the great
and development in place of materialism trinity of pre- independent and post independent
as the basis of his economic theories. Indian economists consisted of D.R.Gadgill,
While rejecting socialism’s emphasis on C.N.Vakil and V.K.RV. Rao. These scholars
class war and force in implementation, were imbibed with a missionary zeal and
he also rejected the emphasis on material analyzed the Indian economic problems with
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 a view to designing and international attack on world poverty,
propagating economic not only through his contributions to
policies/programmes the question of international aid and
and plans to India’s improved flows of external resources,
national advantage.” but also through his activities in the
V.K.R.V: Rao was a field of food aid.
prolific writer. 3. Support for Socialism
V.K.R.V: Rao was deeply interested During the early phases of planning
in three large themes. They were: in India, Rao supported the case of a
National Income,
i. socialist India, where the state would
Food, nutrition and the distribution
ii. control the commanding heights of
of good; and the economy and the public sector
would play a dominant role in
Employment
iii. and occupational
economic development.
distributions.
1. National Income Methodology 4. Rao’s Views on Industrialization

As an applied economist, Rao’s name In his pamphlet “What is wrong with

is remembered for his pioneering Indian Economic Life?’ (1938), Rao
work on the enumeration of national gave the following reasons for low
income of India. Rao was a pupil per capita income and low levels of
of J.M. Keynes and he worked with per capita nutrition in India.
Colin Clark. H.W Singer considered Uneconomic holdings with sub-
i.
V.K.R.V Rao as “ the best equipped divisions and fragmentation;
of all Keynes’ pupils. He attempted Low levels of water availability for crops;
ii.
(i) to develop the national income Excess population pressure on
iii.
concepts suited to India and agriculture due to the absence of a
developing countries generally; (ii) large industrial sector;
to analyze the concepts of investment,
Absence of capital;
iv.
saving and the multipliers in an
underdeveloped economy; and (iii) Absence of autonomy in currency
v.
to study the compatibility of the policy, and in general in monetary
national incomes of industrialized matters encouraging holding of gold.
and underdeveloped countries. 5. Village Clusters
Rao’s paper on “Full Employment
Rao felt that rural communities had
and Economic Development” was
to be given a viable base.Therefore
one of the earliest contributions in
he suggested that a cluster of
the field of development towards
villages should form a unit for rural
employment.
development, so that both social
2. International Food Aid and economic interactions between
Rao was influential in creating villages could develop, and they
ideas and shaping policy in the could effectively generate and fashion
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 their own development with a more and drew attention to the incidence of
meaningful participation by people. absolute and relative deprivation.
6. Investment, Income and Multiplier 2. Poverty and Inequality
Rao’s examination of the “interrelation Sen has carried out massive work
between investment, income and on poverty and inequality in
multiplier in an under developed India. Sen’s major point has been
economy” (1952) was his major that the distribution of income/
contribution to macroeconomic consumption among the persons
theory. As a thinker, teacher, below the poverty line is to be taken
economic adviser and direct policy into account.
maker, V.K.R.V. Rao followed the 3. The Concept of Capability
footsteps of his great teacher, John
The concept of capabilities developed
Maynard Keynes.
by Sen has been cited as a better
7. Institution Builder index of wellbeing than commodities
He founded three national level or utilities. Capability, as defined
research institutes namely Delhi by Sen, is the ability to transform
School of Economics, Institute of Rawlsian primary goods to the
Economic Growth (both at Delhi) achievement of wellbeing.
and Institute for Social and Economic 4. Entitlement
Change (Bangalore)
Sen has included the concept of
entitlement items like nutrition,
food, medical and health care,
7.8.7 Amartya Kumar Sen
employment, security of food
The Nobel citation supply in times of famine etc. He
refers to Sen’s considered famine as arising out of
contributions to the failure of establishing a system of
social choice theory, entitlements.
development 5. Choice of Technique
economics, study on poverty and famines Sen’s ‘Choice of Technique ‘ was a
and concept of entitlements and capability research work where he argued that in
development (1998). a labour surplus economy, generation
1. Poverty and Famines of employment cannot be increased
Sen's Poverty and Famines: An Essay at the initial stage by the adaptation
on Entitlement and Deprivation” of capital- intensive technique.
(1981) is both a theoretical and an   Conclusively, Amartyasen, more
applied work. In the book, several than just an economist, is an ethical
famines have been studied in the philosopher. He is a lover of freedom
working of a general theoretical and a humanist. He has focused on the
framework from an original angle. He poor, viewing them not as objects of
examined various meanings of poverty pity requiring charitable hand–outs,
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 but as disempowered folk needing
empowerment, education,health, Per Capita Average national
nutrition, gender equality,safety net Income income per head
in times of distress; all are needed to of population. It is
empower people. obtained by dividing
the National Income by
population size.
7.9
Conclusion
Natural Goods and services
Resources provided by the nature.
This lesson mainly focused on some of
In other words, any
the aspects of the Indian Economy and
stock or reserve that
its resources, infrastructure facilities
can be drawn from
and energy, It also discussed the
nature.
principles of Indian Economic thinkers
to motivate the students to read good
books on Economics Written by the great Renewable Resources that can be
economists. Resources regenerated in a given
span of time.
Glossary
Non- Resources that are
Economic Transformation of an Renewable exhaustive and cannot
Growth economy from a state of Resources be regenerated
under development to
a state of development Deforestation Clearing of forests,
which is measured trees and thereby forest
by Gross Domestic land is converted to a
Product (GDP). non-forest use.
Economic An improvement in
Development citizens quality of Energy Crisis Situation in which
life and well being energy resources are
of a country which less than the demand
is measured by per and there is shortage of
capita income along energy.
with several other
development indicators.
Doctrine of Doners who act as
Gross Total monetary value
Trusteeship the trustees of their
Domestic of the goods and
property or business.
Product services produced by
that country over a
specific period of time,
normally a year.
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 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. The main gold mine region in 6. The weakness of Indian Economy is

Karnataka is ……….. …….
a. Kolar a. Economic disparities
b. Ramgiri b. Mixed economy
c. Anantpur c. Urbanisation
d. Cochin d. Adequate employment
2.
Economic growth of a country opportunities
is measured by national income
7. A scientific study of the characteristics
indicated by …..
of population is ….
a. GNP b. GDP
a. Topography
c. NNP d. Per capita income
b. Demography
3. Which one of the following is a
c. Geography
developed nations ?
d. Philosophy
a. Mexico
b. Ghana 8. The year 1961is known as …..
c. France a. Year of small divide
d. Sri Lanka b. Year of Population Explosion

4. The position of Indian Economy c. Year of Urbanisation

among the other strongest economies d. Year of Great Divide
in the world is ..
9. In which year the population of India
a. Fourth
crossed one billion mark ?
b. Seventh
a. 2000 b. 2001
c. Fifth
c. 2005 d. 1991
d. Tenth
10. The number of deaths per thousand
5. Mixed economy means …… population is called as …
a. Private sectors and banks a. Crude Death Rate
b. Co-existence of Public and Private b. Crude Birth Rate
sectors
c. Crude Infant Rate
c. Public sectors and banks
d. Maternal Mortality Rate
d. Public sectors only

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 11. The number of births per thousand 16. Ambedkar the problem studied by in
population is called as the context of Indian Economy is …….
a. Crude death rate a. Small land holdings and their
b. Mortality rate remedies

c. Morbidity rate b. Problem of Indian Currency

d. Crude Birth Rate c. Economics of socialism

d. All of them
12. Density of population =
a. Land area / Total Population 17. Gandhian Economics is based on the
Principle
b. Land area / Employment
a. Socialistic idea
c. Total Population / Land area of the
region b. Ethical foundation

d. Total Population / Employment c. Gopala Krishna Gokhale

d. Dadabhai Naoroji
13.
Who introduced the National
Development Council in India? 18. V.K.R.V Rao was a student of
a. Ambedkar a. J.M. Keynes
b. Jawaharlal Nehru b. Colin Clark
c. Radhakrishanan c. Adam smith
d. V.K.R.V. Rao d. Alfred Marshal

14. Who among the following propagated 19. Amartya Kumara Sen received the
Gandhian Ecomomic thinkings. Nobel prize in Economics in the year
a. Jawaharlar Nehru a. 1998
b. VKRV Rao b. 2000
c. JC Kumarappa c. 2008
d. A.K.Sen d. 2010

15. The advocate of democratic socialism 20. Thiruvalluvar economic ideas mainly
was dealt with
a. Jawaharlal Nehru a. Wealth
b. P.C. Mahalanobis b. Poverty is the curse in the society
c. Dr. Rajendra Prasad c. Agriculture
d. Indira Gandhi d. All of them

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 Part- A - Answers

1 2 3 4 5 6 7 8 9 10
a b c b b a b b b a
11 12 13 14 15 16 17 18 19 20
d c b c a b b a a d

Part-B 
Answer the following questions in one or two sentences.

21. Write the meaning of Economic 25. Give the meaning of non-renewable
Growth. energy.

22. State any two features of developed 26. Give a short note on Sen’s ‘Choice of
economy. Technique’.

23. Write the short note on natural 27. List out the reasons for low per capita
resources. income as given by V.K.R.V. Rao.

24. Point out any one feature of Indian

Economy.

Part-C  Answer the following questions in one paragraph.

28. Define Economic Development. 32. Write the V.K.R.V.Rao’s contribution

on multiplier concept.
29. State Ambedkar’s Economic ideas on
agricultural economics. 33.
Write a short note on Welfare
Economics given by Amartya Sen.
30.
Write a short note on village
sarvodhaya. 34. Explain Social infrastructure.

31. Write the strategy of Jawaharlal Nehru

in India’s planning.

Part-D  Answer the following questions in about a page

35. Explain the strong features of Indian 37. Bring out Jawharlal Nehru’s contribution
economy to the idea of economic development.

36. Write the importance of mineral 38. Write a brief note on the Gandhian
resources in India. economic ideas.

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 ACTIVITY
1. Visit a village nearby you and find out the number households
living without basic facilities

References

Indian
1. Ramesh
Economy
Singh-by
- Indian
RameshEconomy
Singh 5th edition - McGraw Hill Publication
Indian
Gaurav
2.  Economy
datt &-Datt
Aswani
& Sundharam
Mahajan - Datt & Sundharam Indian Economy 72nd edition
- S.Chand
India’s Publication
Reforms: How They Produced Inclusive GrowthBy Jagdish Bhagwati; Arvind
Panagariya
3. Jagdish Bhagwati; Arvind Panagariya - India’s Reforms: How They Produced
Inclusive
Reforms Growth Transformation in IndiaBy Jagdish Bhagwati; Arvind Panagariya
and Economic
4. Jagdish
India: Bhagwati;GiantBy
The Emerging Arvind Arvind
Panagariya - Reforms and Economic Transformation in
Panagariya
India
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
5. Arvind Panagariya - India: The Emerging Giant
developing-economy/18987
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
developing-economy/18987

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 CH A P TER

8 Indian Economy Before

and After Independence

Freedom is never dear at any price. It is the breath of life.

What would a man not pay for living?
–Tyler Cowen

Learning Objectives

1 To understand the experience of India during

British Rule

2 To analyse the efforts taken by the Government of India after Independence,

8.1 important economic activities. India had

the bitter experience of colonialism.
Introduction

This chapter discusses the major events

8.2
that took place in India before and after
Independence. India was a colony for Indian Economy during
long. Colonialism refers to a system of the British Period
political and social relations between two
countries, of which one is the ruler and the Indian’s sea route trade to Europe started
other is its colony. The ruling country not only after the arrival of Vasco da Gama in
only has political control over the colony, Calicut, India on May 20, 1498.  The
but it also determines the economic Portuguese had traded in Goa as early as
policies of the subjugated country. Thus, 1510. In 1601 the East India Company was
the people living in a colony cannot chartered, and the English began their first
take independent decisions in respect of inroads into the Indian Ocean.   In 1614
utilisation of the country’s resources and Sir Thomas Roe was successful in getting

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 permission from  Jahangir  for setting up establishing monopoly trade in the
factories and slowly moved all parts of goods with India and the East India’s.
India.   „„During this period, India had been
considered as the best hunting ground
for capital by the East Indian company
to develop industrial capitalism in
Britain.
„„When Bengal and South India came
under political shake of the East
India company in 1750s and 1760s,
the objective of monopoly trade was
fulfilled.
„„The company administration succeeded
in generating huge surpluses which
were repatriated to England, and the
Hundred years after Battle of Plassey, the Indian leaders linked this problem of
rule of the East India Company finally did land revenue with that of the drain.
come to an end. In 1858, British Parliament
„„Above all, the officers of the company
passed a law through which the power
were unscrupulous and corrupt.
for governance of India was transferred
from the East India Company (EIC) to
the British crown.  Even the transfer of 8.2.2 Period of Industrial
power from the East India Company to Capital
the British Crown did not materially alter „„The period of Industrial capital was
the situation. from 1813 to 1858.
Britain had exploited India over „„During this period, India had become
a period of two centuries of its colonial a market for British textiles.
rule. On the basis of the form of colonial
„„India’s raw materials were exported
exploitation, economic historians have
to England at low price and imported
divided the whole period into three phases:
finished textile commodities to India
namely the period of merchant capital, the
at high price. In this way, Indians were
period of industrial capital, the period of
exploited.
finance capital.
„„India’s traditional handicrafts were
thrown out of gear.
8.2.1 Period of Merchant
Capital 8.2.3 Period of Finance
„„The period of merchant capital was Capital
from 1757 to 1813. „„The third phase was the period of
„„The only aim of the East India finance capital starting from the
Company was to earn profit by closing years of the 19th century and
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 continuing till independence. During „„Through discriminatory tariff policy,
this period, finance imperialism the British Government purposefully
began to entrench itself through the destroyed the handicrafts.
managing agency firms, export – „„With the disappearance of nawabs and
import firms, exchange banks and kings, There was no one to protect
some export of capital. Indian handicrafts.
„„Britain decided to make massive „„Indian handicraft products could not
investments in various fields (rail, compete with machine-made products.
road, postal system irrigation,
„„The introduction of railways in India
European banking system, and a
increased the domestic market for the
limited field of education etc) in India
British goods.
by plundering Indian capital.
„„Railway construction policy of the
British led to unimaginable as well 8.3
as uneconomic. The poor Indian
The Land Tenure
taxpayers had been compelled to
Systems in India
finance for the construction of railways.
The political power was handed over
to the British Government by the East Land Tenure refers to the system of land
India Company in 1858. ownership and management.The features
that distinguish a land tenure system from
the others relate to the following:

(a) Who owns the land ;

(b) Who cultivates the land;

(c) 
Who is responsible for paying the
land revenue to the government.

Based on these questions, three different

types of land tenure existed in India before
Independence. They were Zamindari system,
Mahalwari system and Ryotwari system.

8.3.1 Zamindari System or
8.2.4 Decline of Indian the Land lord-Tenant
Handicrafts System
„„The Indian handicrafts products had This system was created by the British East
a worldwide market. Indian exports India Company, when in 1793, LordCornwallis
consisted chiefly of hand weaved introduced ‘Permanent Settlement Act’.
cotton and silk fabrics, calicoes, Under this system the landlords or the
artistic wares, wood carving etc. Zamindars were declared as the owners of
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 the land and they were responsible to pay the (a) Industrial growth during the 19th
land revenue to the government. The share century
of the government in total rent collected was During the 19th century, British investors
fixed at 10/11th, the balance going to the started to pioneer industrial enterprises in
Zamindars as remuneration. India as they had experiences of running
industries at home. British enterprises also
8.3.2 Mahalwari System or received maximum state support. Although
Communal System of the Britishers initiated industrialisation
Farming process in the 19th century, they were
primarily interested in making profit and
After introduction of this system, it was
not in accelerating the economic growth
later extended to Madhya Pradesh and
in India. At the end of 19th century,
Punjab. The ownership of the land was
there were about 36 jute mills, 194 cotton
maintained by the collective body usually
mills and a good number of plantation
the villagers which served as a unit of
industries. The production of coal had
management. They distributed land
risen to over 6 million tonnes per annum.
among the peasants and collected revenue
from them and pay it to the state.
(b) Industrial progress during the 20th
century
8.3.3 Ryotwari System or During the first part of 20th century,
the Owner-Cultivator Swadeshi movement stimulated the
System industrialisation process in India. The
This system was initially introduced existing industries and new industries
in Tamil Nadu and later extended to had maintained a slow but steady growth
Maharashtra,Gujarat, Assam, Coorg, East till the outbreak of the First World War
Punjab and Madhya Pradesh. Under this in 1914.By this time more than 70 cotton
system the ownership rights of use and mills and 30 jute mills were set up. Coal
control of land were held by the tiller himself. production was doubled. The foundation
There was the direct relationship between of iron and steel industry was laid. Railway
owners and tillers. This system was the least network was extended.
oppressive system before Independence. During the period 1924-39, various
major industries like iron and steel, cotton
textiles, jute, matches, sugar, paper and
8.4 pulp industry etc. were brought under
Process of Industrial protection scheme. This led to rapid
Transition and Colonial expansion of protected industries in India.
Capitalism These protected industries captured the
entire Indian market and eliminated
This process of industrial transition in foreign competition totally.
India during the British period can be Thus in the early part, British rule
broadly classified into two as given below: tried to transform the Indian economy as
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 the producer of industrial raw materials
and tried to capture Indian market for 8.6
their industrial finished goods and thus Important Industrial
started exploiting Indian economy in a Policies Prior to 1991
different way. Later on, British capitalists
gradually developed various industries India is the Asia’s third largest economy.
like, jute, tea, coffee, cotton and textiles, The 70 years of Independence have
paper and paper pulp, sugar etc, in India brought a remarkable change in the socio
for locational advantages and exploited – economic landscape of India.
Indian labourers extensively.

8.5 Industrial Policy

Problems of British of India
Rule
1948, 1956, 1977, 1980, 1990 & 1991

1. The British rule stunted the growth

of Indian enterprise.
2. The economic policies of British
Economic development of a country
checked and retarded capital
particularly depends on the process
formation in India.
of industrialisation. At the time of
3. The drain of wealth financed capital Independence, India inherited a weak
development in Britain. and shallow industrial base. Therefore
4. Indian agricultural sector became during the post–Independence period,
stagnant and deteriorated even when the Government of India took special
a large section of Indian population emphasis on the development of a solid
was dependent on agriculture for industrial base. The Industrial Policy
subsistence. Resolutions of 1948 and 1956 clearly
5. The British rule in India led the stated the need for developing both small
collapse of handicraft industries scale industries and large scale industries.
without making any significant
contribution to development of any 8.6.1 Industrial Policy
modern industrial base. Resolutions 1948
6. Some efforts by the colonial British The Government of India recognized
regime in developing the plantations, the significant contribution of
mines, jute mills, banking and industrialization. Therefore the
shipping, mainly promoted a system Government of India declared its first
of capitalist firms that were managed Industrial Policy on 6th April 1948. The
by foreigners. These profit motives main importance of this policy was that
led to further drain of resources from it ushered in India the system of mixed
India. economy.
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 1. Industries were classified into
four groups such as public sector
(strategic industries), public–cum
–private Sector (key industries),
controlled private sector, private and
co-operative sectors.
production in the large scale sector by
2. This policy endeavoured to protect
differential taxation or by direct subsidies.
cottage and small scale industries.
3. This industrial policy emphasized
3. The central and state governments
the necessity of reducing the regional
had a virtual monopoly in rail roads
disparities in levels of development.
and exclusive rights to develop
minerals, iron ore etc. 4. The Government recognized the need
for foreign capital for progressive
4. The Government encouraged the
Indianisation of foreign concerns.
significance of foreign capital for
industrialization but the government
decided that the control should 8.7
remain with Indian hands.
Green Revolution

8.6.2 Industrial Policy
The term Green Revolution refers to the
Resolution 1956
technological breakthrough in agricultural
1. The Industrial Policy of 1956 sought practices. During 1960’s the traditional
to give a dominant role to public agricultural practices were gradually
sector. At the same time, it assured a
fair treatment to the private sector.
2. The Government would support and
encourage cottage and small scale
enterprises by restricting volume of

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 replaced by modern technology and (v) Green Revolution had positive
agricultural practices in India. Initially the effect on development of industries,
new technology was tried in 1960-61 as a which manufactured agricultural
pilot project in seven districts. It was called tools like tractors, engines,
as the High Yielding Varieties Programme threshers and pumping sets.
(HYVP). (vi) Green Revolution had brought
prosperity to rural people.
Achievement of Green Increased production had generated
Revolution employment opportunities for rural
(i) The major achievement of the masses. Due to this, their standard
new strategy was to boost the of living had increased.
production of major cereals (vii) Due to multiple cropping and more
viz., wheat and rice. India was use of chemical fertilizers, the
depending on the US for the food demand for labour increased.
grain. The US by using Public Law (viii) Financial resources were provided
480 (PL480) exported wheat to by banks and co-operative societies.
India. Indians were waiting for the These banks provided loans to
ships to sip their food. On the other farmers on easy terms.
hand, India has lots of minerals.
The US could strategically exploit
Indian mineral resources at The New Agricultural strategy
cheapest price for manufacturing was also called by various names.
missiles and weapons, which gave Modern agricultural technology,
job opportunity for larger US seed – fertilizer – water technology,
youth and largely contributed to or simply green revolution.
US GDP. But now India is food
surplus, exporting food grains to Weaknesses of Green
the European countries. Revolution
(ii) The Green revolution was confined
(i) Indian Agriculture was still a gamble
only to High Yielding Varieties
of the monsoons.
(HYV) cereals, mainly rice, wheat,
maize and jowar. (ii) This strategy needed heavy investment
in seeds, fertilizers, pesticides and
(iii) This Strategy was also directed
water.
to increase the production of
commercial crops or cash crops such (iii) The income gap between large,
as sugarcane, cotton, jute, oilseeds marginal and small farmers had
and potatoes. increased. Gap between irrigated and
rain fed areas had widened.
(iv) Per hectare productivity of all crops
had increased due to better seeds. (iv) Except in Punjab, and to some extent in
Haryana, farm mechanization had created

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 widespread unemployment among „„Contribution of private sector to
agricultural labourers in the rural areas. market the usage of GM foods.
(v) Larger chemical use and inorganic „„Government can play a key role in
materials reduced the soil fertility expediting irrigation schemes and
and spoiled human health. Now managing water resources.
organic farming is encouraged. „„Linking of rivers to transfer surplus
water to deficient areas.
Second Green Revolution
The Government of India had implemented 8.8
‘Second Green revolution’ to achieve higher
Large Scale Industries
agricultural growth. The target of Second
Green Revolution was to increase 400
million tonnes of food grain production The term “Large scale industries” refers
as against about 214 million tonnes in to those industries which require huge
2006-07. This is to be achieved by 2020. infrastructure, man-power and have influx
In agricultural sector, the growth rate of of capital assets. The term ‘large scale
5% to 6% has to be maintained over next industries’ is a generic one including various
15 years. There may be changes in these types of industries in its purview. All the
statistics. heavy industries of India like the iron and
steel industry, textile industry, automobile
Requirements of Second Green manufacturing industry fall under the large
revolution: scale industrial arena. However in recent
„„Introduction of Genetically Modified years due to the IT boom and the huge
(GM) seeds which double the per amount of revenue generated by it, the IT
acreage production. industry can also be included within the
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 jurisdiction of the large scale industrial Burnpur (WB) Acquired from
sector. Indian economy is heavily dependent private sector in
on these large industries for its economic 1976
growth, generation of foreign currency and
for providing job opportunities to millions
Vishakhapattnam Russia
(AP)
of Indians. The following are the major large
scale industries in India. Salem (Tamil Nadu) Government of
India (No external
assistance)
Vijai Nagar Government of
(Karnataka) India
Bhadrawati Nationalisation of
(Karnataka) Vishveshvarayya
Iron and Steel
Ltd(owned by
Centre and State
government)

zz All these are managed by SAIL (at

1. Iron and steel industry
present all important steel plants
zz First steel industry at Kulti, Near except TISCO, are under public sector)
Jharia, West Bengal - Bengal iron
zz Steel Authority of India Ltd
works company in 1870.
(SAIL) was established in 1974
zz First large scale steal plant TISCO and was made responsible for the
at Jamshedpur in 1907 followed by development of the steel industry.
TISCO at Burnpur in 1919. Both
zz Presently India is the eighth largest
belonged to private sector.
steel producing country in the
zz The first public sector unit was world.
“Vishveshvaraya Iron and Steel
2. Jute industry
works” at Bhadrawati.
zz Jute industry is an important industry
Public sector steel plants for a country like India, because not
only it earns foreign exchange but
Location Assistance also provides substantial employment
opportunities in agriculture and
Rourkela (Odissa) Germany
industrial sectors.
Bhilai (MP) Russia zz Its first modernised industrial unit
was established at Reshra in West
Durgapur (WB) UK
Bengal in 1855.
Bokaro (Jharkhand) Russia zz The jute industry in the country is
traditionally export oriented. India
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 ranks number one in the raw jute zz The paper industry in India is
and jute goods production and ranked among the 15 top global
number two in export of jute goods paper industries.
in the world.
7. Silk industry
3. Cotton and textile industry zz India is the second-largest(first
being China) country in the world
zz Oldest industry of India, and
in producing natural silk. At
employs largest number of workers.
present, India produces about 16%
zz It is the largest organised and broad- silk of the world.
based industry which accounts for
zz India enjoys the distinction of being
4% of GDP, 20% of manufacturing
the only country producing all the
value-added and one third of total
five known commercial varieties of
export earnings.
silk viz Mulberry, Tropical Tussar,
zz The first Indian modernised cotton Oak Tussar, Eri and Muga.
cloth mill was established in 1818
at Fort Gloaster near Calcutta. But 8. Petroleum and natural gas
this mill was not successful. The zz First successful Oilwell was dug in
second mill named “Mumbai’s India in 1889 at Digboi, Assam.
Spinning and Weaving Co.” was zz At present a number of regions with
established in 1854 at Bombay by oil reserves have been identified and
KGN Daber. oil is being extracted in these regions

4. Sugar industry zz For exploration purpose,  Oil

and Natural Gas Commission
zz Sugar industry is the second largest (ONGC) was established in 1956 at
industry among agriculture-based Dehradun, Uttarakhand
industries in India.
zz India is now the largest producer
8.9
and consumer of sugar in the world.
Maharashtra contributes over one Small Scale
third of the Indian total sugar output, Industries
followed closely by Uttar Pradesh.
Small scale industries play an important
5. Fertiliser industry role for the development of Indian
zz India is the third largest producer economy in many ways. About 60 to
of nitrogenous fertilisers in the 70 percent of the total innovations
world. in India comes from the SSIs. Many
of the big businesses today were all
6. Paper industry
started small and then nurtured into big
zz The first mechanised paper mill businesses. The role of SSIs in economic
was set up in 1812 at Serampur in development of the country is briefly
West Bengal. explained in forthcoming paragraphs.
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 zz They help in improving the
standard of living of people
residing in suburban and rural
areas in India.
zz The entrepreneurial talent is tapped
in different regions and the income
is also distributed instead of being
concentrated in the hands of a few
individuals or business families.

Role of SSIs in Economic 3. Help in Mobilization of Local

Development Resources
zz SSIs help to mobilize and utilize
1. Provide Employment
local resources like small savings,
zz SSIs use labour intensive techniques. entrepreneurial talent etc., of
Hence, they provide employment the entrepreneurs, which might
opportunities to a large number otherwise remain idle and unutilized.
of people. Thus, they reduce the
zz They pave way for promoting
unemployment problem to a great
traditional family skills and
extent.
handicrafts. There is a great demand
zz SSIs provide employment to for handicraft goods in developed
artisans, technically qualified countries.
persons and professionals, people
zz They help to improve the growth
engaged in traditional arts, people
of local entrepreneurs and self-
in villages and unorganized sectors.
employed professionals in small
zz The employment-capital ratio is towns and villages in India.
high for the SSIs.
4. Pave for Optimisation of Capital
2. Bring Balanced Regional
zz SSIs require less capital per unit of
Development
output. They provide quick return
zz SSIs promote decentralized
on investment due to shorter
development of industries as most of
gestation period. The payback
the SSIs are set up in backward and
period is quite short in SSIs.
rural areas.
zz SSIs function as a stabilizing force
zz They remove regional disparities by by providing high output-capital
industrializing rural and backward ratio as well as high employment-
areas and bring balanced regional capital ratio.
development.
zz They encourage the people living
zz They help to reduce the problems in rural areas and small towns to
of congestion, slums, sanitation and mobilize savings and channelize
pollution in cities. They are mostly them into industrial activities.
found in outside city limits.

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 5. Promote Exports zz SSIs help to increase the per capita
zz SSIs do not require sophisticated income of India in various ways.
machinery. Hence, import the zz They facilitate development of
machines from abroad is not backward areas and weaker sections
necessary. On the other hand, there is of the society.
a great demand for goods produced zz SSIs are adept in distributing
by SSIs.Thus they reduce the pressure national income in more efficient
on the country’s balance of payments. and equitable manner among the
However, in the recent past large various participants of the society.
scale industries are able to borrow
large funds with low interest rate and
spend large sums on advertisements. 8.10
Hence SSSs are gradually vanishing.
Micro, Small and
zz SSIs earn valuable foreign exchange MediumEnterprises
through exports from India. (MSMEs)
6. Complement Large Scale Industries
zz SSIs play a complementary role to As on now, the following monetary limits
large scale sector and support the have been used for defining different
large scale industries. kinds of industrial service units. However,
these limits are subject to changes over
zz SSIs provide parts, components,
time.
accessories to large scale industries
and meet the requirements of large
scale industries through setting up Manufacturing Enterprises
units near the large scale units.
a. Micro Manufacturing Enterprises:
zz SSIs serve as ancillaries to large The investment in plant and machinery
scale units. does not exceed ₹25 lakhs.
7. Meet Consumer Demands b. Small Manufacturing Enterprises:
zz SSIs produce wide range of products The investment in plant and machinery
required by consumers in India. is more than twenty five lakh rupees
zz Hence, they serves as an anti- but does not exceed ₹5 crores.
inflationary force by providing c. Medium Manufacturing Enterprises:
goods of daily use. The investment in plant and machinery
8. Develop Entrepreneurship is more than ₹5 crores but not exceeding
₹10 crores.
zz SSIs help to develop a class of
entrepreneurs in the society. They help
the job seekers to become job givers. Service Enterprises
zz They promote self-employment and a. Micro Service Enterprises: The
spirit of self-reliance in the society. investment in equipment does not
exceed ₹10 lakhs.

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 b. Small Service Industries: The Bank etc. However, the government keeps
investment in equipment is more reducing the stake in PSU banks as and
than ₹10 lakhs but does not exceed when they sell shares. So, to that extent they
₹2 crores. can also become minority shareholders in
c. Medium Service Enterprises: The these banks. This is in accordance with the
investment in equipment is more privatization policy.
than ₹2 crores but does not exceed
₹5 crores. Private Sector Banks
In these banks, most of the equity is
owned by private bodies, corporations,
8.11 institutions or individuals rather
Public Sector and than government. These banks are
Private sector managed and controlled by private
banks promoters. 
Of the total banking industry in India,
Public Sector Banks public sector banks constitute 72.9% share
Public sector bank is a bank in which the while the rest is covered by private players.
government holds a major portion of the In terms of the number of banks, there are
shares. Say for example, SBI is public sector 27 public sector banks and 22 private sector
bank, the government holding in this banks.As part of its differentiated banking
bank is 58.60%. Similarly PNB is a public regime, RBI, the apex banking body,
sector bank, the government holds a stake has given license to Payments Bank and
of 58.87%. Usually, in public sector banks, Small Finance Banks (SFBs). This is an
government holdings are more than 50 attempt to boost the government’s Financial
percent. Public sector banks are classified Inclusion drive. (But, there may be other
into two categories: 1. Nationalised Banks problems).
2. State Bank and its Associates. As a result, Airtel Payments Bank
In case of nationalized banks, the and Paytm Payments Bank Limited have
government controls and regulates the come up. How far these banks would help
functioning of the banking entity.Some the poor people is not known.
examples are SBI, PNB, BOB, OBC,Allahabad

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 8.12 Objectives of Nationalisation

Nationalisation The Government of India nationalized the

of Banks commercial banks to achieve the following
objectives.
After Independence, the Government 1. The main objective of nationalisation
of India adopted planned economic was to attain social welfare. Sectors
development. For this purpose, Five Year such as agriculture, small and village
Plans came into existence since 1951. industries were in need of funds
The main objective of the economic for their expansion and further
planning aimed at social welfare. Before economic development.
Independence commercial banks were 2. Nationalisation of banks helped to
in the private sector. These commercial curb private monopolies in order to
banks failed in helping the Government ensure a smooth supply of credit to
to achieve social objectives of planning. socially desirable sections.
Therefore, the government decided
3. In India, nearly 70% of population
to nationalize 14 major commercial
lived in rural areas. Therefore it was
banks on 19 July 1969. In 1980, again
needed to encourage the banking habit
the government took over another
among the rural population.
6 commercial banks.

Nationalization

1969 14 banks with deposits above ₹. 50 crores were Nationalized.

1980 6 banks with deposits above ₹. 200 crores were Nationalized
19 July 1969 15 April 1980
1. Allahabad Bank 1. Andhra Bank
2. Bank of Baroda 2. Corporation Bank
3. Bank of Maharashtra 3. New Bank of India
4. Canara Bank 4. Oriental Bank of Commerce
5. Central Bank of India 5. Punjab & Sindh Bank
6. Dena Bank 6. Vijaya Bank
7. Indian Bank
8. Indian Overseas Bank
9. Punjab National Bank
10. Syndicate Bank
11. Union Bank
12. United Bank of India
13. UCO Bank
14. Bank of India

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 4. Nationalisation of banks was required „„Its main focus was on the agricultural
to reduce the regional imbalances development of the country.
where the banking facilities were not „„This plan was successful and achieved
available. the GDP growth rate of 3.6% (more
5. Before Independence, the numbers than its target)
of banks were certainly inadequate.
After nationalization, new bank Second Five Year Plan
branches were opened in both rural (1956-1961)
and urban areas. „„It was based on the P.C. Mahalanobis
6. Banks created credit facilities mainly Model.
to the agriculture sector and its allied „„Its main focus was on the industrial
activities after nationalization. development of the country.
„„This plan was successful and achieved
After New Economic Policy 1991, the
the growth rate of 4.1%
Indian banking industry has been facing
the new horizons of competitions,
Third Five Year Plan
efficiency and productivity. With all these
(1961-1966)
developments people in villages and slums
depend largely on local money lenders for „„This plan was called ‘GadgilYojana’ also.
their credit need. This is unfortunate. „„The main target of this plan was to
make the economy independent and
to reach self propelled position or take
8.13 off.
Performance of India’s „„Due to Indo -China war, this plan could
Five Year Plans not achieve its growth target of 5.6%

Economic planning is the process in which Plan Holiday (1966-1969)

the limited natural resources are used
„„The main reason behind the plan
skillfully so as to achieve the desired goals.
holiday was the Indo-Pakistan war &
The concept of economic planning in India
failure of third plan.
or five year plan is derived from Russia
(then USSR). India has launched 12 five „„During this period, annual plans were
year plans so far. Twelfth five year plan was made and equal priority was given to
the last one. The government of India has agriculture, its allied sectors and the
decided to stop the launching of five year industry sector.
plans and it was replaced by NITI Aayog.
Fourth Five Year Plan
First Five Year Plan (1969-1974)
(1951-1956) „„There are two main objectives of this
„„It was based on the Harrod-Domar plan i.e. growth with stability and
Model. progressive achievement of self reliance.

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 „„This plan failed and could achieve „„For the first time, due to the pressure
growth rate of 3.3% only, against the from private sector the private sector
target of 5.7%. got the priority over public sector.
„„Its growth target was 5.0% but it
Fifth Five Year Plan achieved 6.0%.
(1974-1979)
Annual Plans
„„In this plan top priority was given to
agriculture, next came industry and Eighth five year Plan could not take place
mines. due to volatile political situation at the
„„Overall this plan was successful, centre. So two annual programmes are
which achieved the growth rate of formed in 1990-91& 1991-92.
4.8% against the target of 4.4%.
Eighth Five Year Plan
„„The draft of this plan was prepared
(1992-1997)
and launched by D.P. Dhar. This plan
was terminated in 1978. „„In this plan the top priority was
given to development of the human
Rolling Plan resources i.e. employment, education
and public health.
This plan was started with an annual plan
„„During this plan, New Economic
for 1978-79 and as a continuation of the
Policy of India was introduced.
terminated fifth year plan.
„„This plan was successful and got
annual growth rate of 6.8% against the
Sixth Five Year Plan target of 5.6%.
(1980-1985)
„„The basic objective of this plan was Ninth Five Year Plan
poverty eradication and technological (1997-2002)
self reliance. Poverty eradication „„The main focus of this plan was
(GARIBI-HATAO) was the motto. “growth with justice and equity”.
„„It was based on investment yojana. „„This plan failed to achieve the growth
„„Its growth target was 5.2% but it target of 7% and Indian economy grew
achieved 5.7%. only at the rate of 5.6%.

Seventh Five Year Plan Tenth Five Year Plan

(1985-1990) (2002-2007)

„„Objectives of this plan included the „„This plan aimed to double the per capita
establishment of the self sufficient income of India in the next 10 years.
economy and opportunities for „„It aimed to reduce the poverty ratio to
productive employment. 15% by 2012.

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 „„Its growth target was 8.0% but it
Government of India. It includes the
achieved only 7.2%.
matters of national and international
importance on the economic front,
Eleventh Five Year Plan
dissemination of best practices from
(2007-2012)
within the country and from other
„„Its main theme was “faster and more nations, the infusion of new policy ideas
inclusive growth”. and specific issue-based support. In
„„Its growth rate target was 8.1% but it order to understand the achievements
achieved only 7.9% of the NITI Aayog, researches need to
be done then and there.
Twelfth Five Year Plan
(2012-2017)
„„Its main theme is “Faster, More 8.14
Inclusive and Sustainable Growth”. Development
„„Its growth rate target is 8%. Indicators

Here it can be concluded that since the 8.14.1 Human Development

Indian Independence the five year plans Index (HDI)
of India played a very prominent role in United Nations Development Programme
the economic development of the country. has been publishing Human Development
These plans had guided the Government Report annually since 1990. HDI helped
as to how it should utilise scarce resources the government to the real uplifting of
so that maximum benefits can be gained. standard of living of the people.
It is worthy to mention here that Indian
Government adopted the concept of five
year plans from Russia. Human Development Index (HDI)
HDI was developed by the Pakistani
Economist Mahbub ul Haq and the
NITI Aayog Indian Economist Amartya Kumar
The Planning Commission has been Sen in 1990 and was published by
replaced by the NITI Aayog on the United Nations Development
1st January, 2015. NITI (National Programme (UNDP). It is constructed
Institution for Transforming India) based on Life Expectancy Index,
Aayog will monitor, coordinate and Education Index and GDP Per Capita.
ensure implementation of the accepted
sustainable development goals. NITI HDI is based on the following three
Aayog serves as a knowledge hub and indicators
monitors progress in the implementation
of policies and programmes of the 1. Longevity is measured by life
expectancy at birth,

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 2. Educational attainments, Development bracket. The other nations
3. Standard of living, measured by real such as Bangladesh, Bhutan, Pakistan, Kenya,
GDP per capita (PPP$). Myanmar and Nepal attained the medium
human development. The HDR 2016 stated
Before calculating HDI, the fixed
that regional disparities in education, health
minimum and maximum values of each
and living standards within India has caused
indicator are chosen.
India’s downfall to 27 % on HDI score. India’s
The performance in each dimension HDI rank value in 2015 stood at 0.624, which
is expressed as a value between 0 and 1 by had increased from 0.580 in 2010. India’s
applying the following formula rank in 2014 was 131.
Dimension Index = (Actual value
– Minimum value) / (Maximum value -
Top three countries of HDI
Minimum value)
Norway (0.949)
According to Planning Commission’s
Australia (0.939)
National Human Development Report 2011,
Switzerland (0.939)
HDI has improved significantly between
1980 and 2011. That is, The HDI went up
from 0.302 in 1981 to 0.472 score in 2011. Biswajeet Guha has stated that
As per latest Human Development the calculation of HDI neglected many
Report (2016) by the United Nations important aspects of human development.
Development Programme (UNDP), India has He has created four indices of HDI as HDI1,
been ranked 131st out of 188 countries. Out of HDI2, HDI3, and HDI4. HDI1 is based on
188 countries, India lies in Medium Human UNDP methodology as given in Human

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 Development Report. He has enlarged happened during British Rule. They
the scope of HDI by adding three more eradicated systems like ‘sati’, introduced
dimensions such as quality of life, poverty railway services, English language and
eradication, and urbanization. education, infrastructure and basic
Various countries including principle of capitalist economy. After
India are continuously making efforts to Independence, the Government of India
improve and enlarge the scope of available formulated many policies with the help
statistical information. of Five year plans to achieve the growth
target in various sectors. Among the
other things, the major challenges that
8.14.2 Physical Quality of Life still continue are: poor health standard,
Index (PQLI) female foeticide, declining child sex
ratio, open defecation, social & economic
Morris D Morris developed the Physical
inequalities, increasing slumming, urban
Quality of Life Index (PQLI). The PQLI is a
congestion and declining qualities of
measure to calculate the quality of life (well
basic environmental resources namely
being of a country). For this, he included
air, land and water
three indicators such as life expectancy, infant
mortality rate and literacy rate. A scale of each
indicator ranges from the number 1 to 100.
Number 1 represents the worst Glossary
performance by any country. 100 is the best „„Zamindari: The owner of the land
performance. For example, in case of life who pays the land revenue to the
expectancy, the upper limit of 100. This was Government.
assigned to 77 years which was achieved by
„„Mahalwari: The collective body
Sweden in 1973. The lower limit of 1 was
usually the villagers which serve as a
assigned to 28 years which was achieved by
unit of management.
Guinea-Bissau in 1960.
„„Ryotwari: The ownership rights of
The main difference between the use and control of land were held by
two is the inclusion of income in HDI the tiller himself.
and exclusion of income from PQLI. HDI
„„Green Revolution: The renovation of
represents both physical and financial
agricultural practices through modern
attributes of development and PQLI has
technology.
only the physical aspects of life.
„„Public Sector Banks: A bank in which
the government holds a major portion
8.15 of the shares.
Conclusion „„Private Sector Banks: Most of
the equity is owned by private
To conclude, the British were more bodies, corporations, institutions
focused on the money from Indians than and individuals rather than
good governance. Some positive things government.
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 „„Nationalisation: The process of education and per capita income
transforming private assets ownership indicators.
into government ownership. „„Physical Quality of Life Index: It is a
„„Human Development Index: It is a measure to calculate the quality of life
composite statistic of life expectancy, (well being of a country).

MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. The arrival of  Vasco da Gama  in 4. Ryotwari system was initially

introduced in
Calicut, India
a. Kerala
a. 1498
b. Bengal
b. 1948 c. Tamil Nadu
c. 1689 d. Maharastra
d. 1849 5. First World War started in the year
a. 1914
2. In 1614 Sir Thomas Roe was successful
b. 1814
in getting permission from 
c. 1941
a. Akbar
d. 1841
b. Shajakan
6. When did the Government of India
c. Jahangir declared its first Industrial Policy ?

d. Noorjakhan a. 1956
b. 1991
3. The power for governance of India
c. 1948
was transferred from the East India
d. 2000
Company (EIC) to the British crown in
7. The objective of the Industrial Policy
a. 1758 1956 was ……..
b. 1858 a. Develop heavy industries

c. 1958 b. Develop agricultural sector only

c. Develop private sector only
d. 1658
d. Develop cottage industries only

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 8. The industry which was de-reserved 13. In the first five year plan, The top
in 1993 ? priority was given to ……. Sector.
a. Railways a. Service
b. Mining of copper and zinc b. Industrial
c. Atomic energy c. Agriculture
d. Atomic minerals d. Bank

9. The father of Green Revolution in 14. Tenth Five year plan period was…….
India was ………… a. 1992-1997
a. M.S. Swaminathan b. 2002-2007
b. Gandhi c. 2007-2012
c. Visweswaraiah d. 1997-2002
d. N.R. Viswanathan 15. According to HDR (2016), India
ranked …… out of 188 countries.
10. How many commercial banks were
nationalised in 1969 ? a. 130 b. 131

a. 10 c. 135 d. 145

b. 12 16. Annual Plans formed in the year

c. 14 ……….

d. 16 a. 1989-1991
b. 1990-1992
11. The main objective of nationalisation
of banks was ……. c. 2000-2001
d. 1981-1983
a. Private social welfare
b. Social welfare 17. The Oldest large scale industry in
India
c. To earn
a. cotton b. jute
d. Industries monopoly
c. steel d. cement
12. The Planning Commission was setup
18. Human development index (HDI) was
in the year …..
developed by
a. 1950
a. Jawaharlal Nehru
b. 1955
b. M.K. Gandhi
c. 1960
c. Amartiya Sen
d. 1952
d. Tagore

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 19. The main theme of the Twelth Five 20.
The PQLI was developed by
Year Plan …………….
a. faster and more inclusive growth a. Planning Commission
b. growth with social Justice b. Nehru
c. socialistic pattern of society c. Morris
d. faster, more inclusive and D Morrisd.Biswajeet
sustainable growth

Part-A  Answers

1 2 3 4 5 6 7 8 9 10
a c b c a c a b a c
11 12 13 14 15 16 17 18 19 20
b a c b b b a c d c

Part-B 
Answer the following questions in one or two
sentences.

21. What are the Phases of colonial 24. List out the weaknesses on Green
exploitation of India? Revolution.

22. Name out the different types of 25. What are the objectives of Tenth five
land tenure existed in India before year plan ?
Independence.
26. What is the difference between HDI
23. State the features that distinguish a and PQLI ?
land tenure system from other system.
27. Mention the indicators which are used
to calculate HDI.

Part-C  Answer the following questions in one paragraph.

28. Explain about the Period of Merchant 31. State the reasons for nationalization of
Capital. commercial banks.

29. The Handicrafts declined in India in 32. Write any three objectives of Industrial
British Period. Why? Policy 1991.

30. Elucidate the different types of land 33. Give a note on Twelfth Five Year Plan.
tenure system in colonial India.
34. What is PQLI ?

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 Part-D  Answer the following questions in about a page

35. Discuss about the Indian economy 37.

Explain the objectives of
during British Period. nationalization of commercial banks.

36. Explain the role of SSIs in economic 38. Describe the performance of 12th five
developmet? year plan in India.

ACTIVITY
1. To know the value of freedom, students can collect pictures
of places like Jalian Walapak, Meerut, Thandi and photos of
freedom fighters.
2. Display the demonstration effect of present Indians in culture,
dressing and life style to emphasize the Swadhesi.

References

1. Gaurav Datt and Ashwani Mahajan, ‘Datt&Sundharam Indian Economy’ S. Chand

& Company Pvt. Ltd. 68th Revised Edition, 2013.
2. JagdishBhagwati; Arvind Panagariya - Reforms and Economic Transformation
in India

Websites

www.gatewayforindia.com/history/eastindiacompanybefore1857
www.threecolonialportcitiesinindia/geographicalreviewvol.78.issue.1 pg:32-47.-
M.Kosambi, 1978.
www.planningcommission.nic.in
https://www.scribd.com/doc/18643336/characteristics-of-indian-economy-pre-
colonial-and-colonial
https://en.wikipedia.org/wiki/Economy_of_India

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 CH A P TER

9 Development
Experiences in India

“Reform, Perform, Transform”

Learning Objective

1 To understand the reforms introduced in the recent years.

9.1
Introduction
twin problems of rampant poverty and
At the time of Independence in 1947, widespread unemployment, both resulting
India was a typically backward economy. in low standard of living.
Owing to poor technological and The year 1991 is an important landmark in
scientific capabilities, industrialization the economic history of post-independent
was limited and lop-sided. Agricultural India. The country went through a severe
sector exhibited features of feudal and economic crisis in the form of serious Balance
semi-feudal institutions, resulting into of Payments problem. Indian economy
low productivity. Means of transport and responded to the crisis by introducing a set
communications were underdeveloped. of policies known as Structural Reforms.
Educational and health facilities were These policies were aimed at correcting the
grossly inadequate and social security weaknesses and rigidities in the various
measures were virtually non-existent. sectors of the economy such as Industry,
In brief, the country suffered from the Trade, Fiscal and Agriculture.

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 9.2
Meaning of Liberalization,
• Expansion of • Cut throat
Privatization and Market Competition

Globalization (LPG) • Development of

Infrastructure
• Rise in
Monopoly

• Higher Living • Discourage

Standards Domestic Firms

• International • Increase in
Cooperation Inequalities

to Foreign Direct Investment (FDI) and

IMPACTS
Foreign Portfolio Investment (FPI) are
OF
LIBERALISATION some of the measures towards globalization.

9.3
Arguments infavour of
LPG
The triple pillars of New Economic Policy
are Liberalization, Privatization and a. Liberalization was necessitated
Globalization (LPG) because various licensing policies were
Liberalization: Liberalization refers to said to be deterring the growth of the
removal or relaxation of governmental economy.
restrictions in all stages in industry. b. Privatization was necessitated because
Delicensing, decontrol, deregulation, of the belief that the private sector was
subsidies (incentives) and greater role for not given enough opportunities to
financial institutions are the various facets earn more money.
of liberalization.
c. Globalization was necessitated
Privatization: Privatization means
because today a developed country
transfer of ownership and management of
can grow without the help of the under
enterprises from public sector to private
developed countries. Natural and
sector. Denationalization, disinvestment
human resources of the developing
and opening exclusive public sector
countries are exploited by the
enterprises to private sector are the
developed countries and the developing
gateways to privatization.
economies are used as market for
Globalization: Globalization refers to the finished goods of the developed
the integration of the domestic (Indian) countries. The surplus capital of the
economy with the rest of the world. Import developed countries are invested in
liberalization through reduction of tariff backward economies. Obsolute and
and non-tariff barriers, opening the doors outdated technologies of the developed

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 countries can be easily sold to poor 3. The pattern of consumption started
under developed countries. Ultimately, improving (or deteriorating).
the rich countries can grow further at 4. Infrastructure facilities such as
the cost of developing economies. express highways, metro rails, flyovers
and airports started expanding
9.4 (but the local people were thrown
away).
Arguments against LPG
The benefits of this growth in some sectors
a. Liberalization measures, when have not reached the marginalized sections
effectively enforced, favour an of the community. Moreover, the process
unrestricted entry of foreign of development has generated serious
companies in the domestic economy. social, economic, political, demographic
Such an entry prevents the growth of and ecological issues and challenges.
the local manufacturers. Development brings benefits, but which
b. Privatization measures favour the section gets this benefit depends on socio-
continuance of the monopoly power. economic structure of the society.
Only the powerful people can sustain in Despite all these initiatives in the
business markets. Social justice cannot Indian economy, a large section of the
be easily established and maintained. people of India continue to face basic
As a result, the disparities tend to widen economic problems such as poverty,
among people and among regions. unemployment, discrimination, social
c. As globalization measures tend to exclusion, deprivation, poor healthcare,
integrate all economies of the world rising inflation, agricultural stagnation,
and bringing them all under one food insecurity and labour migration.
umbrella; they pave the way for However, for these problems, Government
redistribution of economic power at policies alone cannot be blamed. As
the world level. Only the already well- new institutional economists suggest,
developed countries are favoured in the values, believes, norms etc. of the
this process and the welfare of the less- individuals also matter.
developed countries will be neglected.
The economic crisis of the developed
countries are easily spread to the
developing economies through trade. Disinvestment
The following are the major changes Disinvestment means selling of
after 1991: government securities of Public
Sector Undertakings (PSUs) to other
1. Foreign exchange reserves started
PSUs or private sectors or banks.
rising.
This process has not been fully
2. There was a rapid industrialization. implemented.

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 9.5 industrial policy itself and de-regulated
the industrial sector substantially. The
Relative Position of on primary objectives of the industrial policy
Indian Economy were to promote major industries from
the clutches of bureaucrats, to abolish
(This discussion is suitable for a particular restrictions on foreign direct investment,
period only, there may be changes to liberate the indigenous enterprise from
afterwards) the restrictions of MRTP Act, to maintain
a sustained growth in productivity
and employment and also to achieve
international competitiveness.

7.4
7.1
Important Initiatives by
7.1 7.0 7.0 7.0
5.6 6.4 the Government towards
3.0
3.3 3.2 Industrial Policy
2.6

The policy has brought changes in the

following aspects of industrial regulation:
1. Industrial delicensing
„„According to International Monetary 2. Dereservation of the industrial sector
Fund, World Economic Outlook 3. Public sector policy (dereservation
(Ocoter-2016), GDP (nominal) of and reform of PSEs)
India in 2016 at current prices was
4. Abolition of MRTP Act
$2,251 billion. India contributed 2.99%
of total world’s GDP in exchange rate 5. Foreign investment policy and
basis. India shared 17.5 percent of the foreign technology policy.
total world population and 2.4 percent
of the world surface area. India was Before 1991 After 1991
now 7th largest economy of the world
Industrial
in 2016. Deregulation
„„India was at 3rd position after China Industrial Licensin
all commodities g for Licensing restricted to
alcohol, drugs etc.,
and Japan among Asian countries. y,railway
Private sector not Only defense,energ
India shared 8.50% of total Asia’s GDP in many industriesallowed for public sector-la
rge scale
estment
privatization, disinv
(nominal) in 2016. Controls on pri
and distributionce fixation Market allowed to
determine prices

9.6
Industrial Sector Reforms

The Prime Minister of India announced 1. Industrial delicensing policy:  the

the new industrial policy on July 24, 1991. most important objective of the new
The new policy radically liberalized the industrial policy of 1991 was the
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 end of the industrial licensing or the 5. Foreign investment policy: Another
license raj or red tapism. Under the major feature of the economic reform
industrial licensing policies, private was red carpet welcome to foreign
sector firms had to secure licenses to investment and foreign technology.
start an industry. This measure has enhanced the
2. Dereservation of the industrial industrial competition and improved
sector Previously, the public sector business environment in the country.
was given reservation especially in Foreign investment including FDI
the capital goods and key industries. and FPI were allowed. In 1991, the
Under industrial deregulation, most government announced a specified
of the industrial sectors were opened list of high-technology and high-
to the private sector as well. Under investment priority industries
the new industrial policy, only three wherein automatic permission was
sectors viz., atomic energy, mining granted for foreign direct investment
and railways will continue as reserved (FDI) upto 51 percent foreign equity.
for public sector. All other sectors The limit was raised to 74 percent
have been opened for private sector and subsequently to 100 percent for
participation. many of these industries. Moreover,
many new industries have been
3. Reforms related to the Public sector
added to the list over the years.
enterprises:  Reforms in the public
sector were aimed at enhancing Foreign Investment Promotion Board
efficiency and competitiveness of the (FIPB) has been set up to negotiate
sector. The government identified with international firms and approve
strategic and priority areas for the foreign direct investment in select
public sector to concentrate. Loss areas.
making PSUs were sold to the private
sector. 9.7
4. Abolition of MRTP Act:  The Impact of LPG on
New Industrial Policy of 1991 Agricultural Sector
has abolished the Monopoly and Reforms
Restrictive Trade Practices Act
1969. In 2010, the Competition Since the inception of economic reforms,
Commission has emerged as the Indian economy has achieved a remarkable
watchdog in monitoring competitive rate of growth in industry and service sector.
practices in the economy. However, this growth process bypassed
The policy caused big changes the agricultural sector, which showed
including emergence of a strong sharp deceleration in the growth rate (3.62
and competitive private sector and a percent during 1984/85 – 1995/96 to 1.97
sizable number of foreign companies percent in 1995/96 – 2004/05). The sector
in India. has recorded wide variations in yield and

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 productivity and there was a shift towards about 25% to 30% of production. Besides,
cash crop cultivation. Moreover, agricultural quality of a sizable quantity of produce
indebtedness pushed several farming also deteriorates by the time it reaches the
households into poverty and some of them consumer. Most of the problems relating to
resorted to extreme measures like suicides. the marketing of fruits and vegetables can
be traced to their perishability. Perishability
9.7.1 Crop Insurance is responsible for high marketing costs,
market gluts, price fluctuations and other
Agriculture in India is highly prone
similar problems. In order to overcome this
to risks like droughts and floods. It is
constraint, the Government of India and
necessary to protect the farmers from
the Ministry of Agriculture promulgated
natural calamities and ensure their
an order known as “Cold Storage Order,
credit eligibility for the next season. For
1964” under Section 3 of the Essential
this purpose, the Government of India
Commodities Act, 1955. However, the cold
introduced many agricultural schemes
storage facility is still very poor and highly
throughout the country.
inadequate.

9.7.3 Post Harvest measures

The annual value of harvest and post-
harvest losses of major agricultural
produce at national level was of the
order of ₹92,651 crores, calculated using
production data of 2012-13 at 2014 and
wholesale prices, estimated by the Indian
Council of Agricultural Research (ICAR).

The Pradhan Mantri Fasal Bima Yojana

(Prime Minister’s Crop Insurance Scheme) Table 9.1  Food Items Waste (%)
was launched on 18 February 2016. Crops Cumulative
It envisages a uniform premium of wastages (%)
only 2 percent to be paid byfarmers forKharif Cereals 5-6
crops and 1.5 percent for Rabi crops. The Pulses 6–8
premium for (annual) commercial and Oil seeds 3-10
horticultural crops will be 5 percent. Fruits &Vegetables 5-16
Milk 1
Fisheries (in land) 5
9.7.2 Cold Storage
Fisheries (Marine) 10
India is the largest producer of fruits and Meat 3
second largest producer of vegetables in the Poultry 7
world. In spite of that per capita availability Source: Ministry of Food Processing
of fruits and vegetables is quite low because Industries, GoI, 2016
of post harvest losses which account for
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 Further, the GoI extended support to arrest
post harvest losses of horticulture and
non-horticulture produce and to provide
integrated cold chain and preservation
infrastructure facilities from the farm gate
to the consumer or from the production
site to the market since 2008-09. However,
the improvement is not visible because it
is not substantial.
Kisan Credit Card Scheme
9.7.4 A
 gricultural Produce
A Kisan Credit Card (KCC) is a credit
Market Committee
delivery mechanism that is aimed at
enabling farmers to have quick and Agricultural Produce Market Committee
timely access to affordable credit. It was (APMC) is a statutory body constituted by state
launched in 1998 by the Reserve Bank government in order to trade in agricultural or
of India and NABARD. The scheme horticultural or livestock products.
aims to reduce farmer's dependence on
the informal banking sector for credit Functions of APMC
– which can be very expensive and
Functions of APMC are:
suck them into a debt spiral. The card is
offered by cooperative banks, regional 1. To promote public private partnership
rural banks and public sector banks. in the ambit of agricultural markets.
Based on a review of the working of 2. To provide market led extension
the KCC, the government has advised services to farmer.
banks to convert the KCC into a smart 3. To bring transparency in  pricing
card cum debit card. system and transactions taking place
in market in a transparent manner.
4. To ensure payments to the farmers
In order to reduce wastage of agricultural
for the sale of agricultural produce
produce and minimize post-harvest losses,
on the same day.
the Ministry of Food Processing Industries
(MOFPI) has implemented various 5. To promote agricultural activities.
components of Central Sector Schemes, 6. To display data on arrivals and rates
namely: of agricultural produce from time to
time- in the market prevailing.
Mega Food Parks; Integrated Cold
Chain; Value Addition Preservation
Infrastructure; Modernization of 9.7.5 A
 grarian Crisis after
Slaughter house Reforms
Scheme for Quality Assurance; Codex a) High input Costs:The biggest input for
Standards; Research and Development farmers is seeds. Before liberalisation,
and Other promotional activities. farmers across the country had access
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 to seeds from state government 9.8
institutions. The institutions produced
own seeds and were responsible for their Trade Reforms:
quality and price. With liberalization,
India’s seed market was opened upto „„Trade Policy Reforms: The main
global agribusinesses. Also, following features of the new trade policy as it
the deregulation many state government has evolved over the years since 1991
institutions were closed down in 2003. are as follows:
These hit farmers doubly hard: seed zzFree imports and exports: Prior
prices shot up, and fake seeds made an to 1991, in India imports were
appearance in a big way. regulated. From 1992, imports
b) Cutback in agricultural subsidies: were regulated by a limited
Farmers were encouraged to shift from negative list. For instance, the
growing a mixture of traditional crops trade policy of 1 April 1992 freed
to export oriented ‘cash crops’ like chill, imports of almost all intermediate
cotton and tobacco. Liberalisation and capital goods. Only 71 items
policies reduced the subsides on remained restricted. This would
pesticide, fertilizer and electricity. affect the domestic industries.
As a result prices have increased by zzRationalization of tariff structure
300%. However, the prices of and removal of quantitative
agricultural goods have not increased restrictions: The Chelliah
to that extent. Committee’s Report had suggested
c) Reduction of import duties: With drastic reduction in import duties.
a view to open India’s markets, the It had suggested a peak rate of 50
liberalization reforms also withdrew percent. As a first step towards a
tariffs and duties on imports. By 2001, gradual reduction in the tariffs, the
India completely removed restrictions 1991-92 budget had reduced the
on imports of almost 1,500 items peak rate of import duty from more
including food. As a result, cheap than 300 percent to 150 percent.
imports flooded the market, pushing The process of lowering the
prices of crops like cotton and pepper customs tariffs was carried further
down. in successive budgets. This also
affected the domestic industries.
d) Paucity of credit facilities: After 1991
the lending pattern of commercial banks,
9.8.1 Export and Import Policy
including nationalised bank drastically
changed. As a result, loan was not The Government of India, Ministry of
easily avilable and adequate. This has Commerce and Industry announced New
forced the farmers to rely on Foreign Trade Policy on 1st April 2015 for
moneylenders who charge exorbitant the period of 2015-2020.
rate of interest.

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 Salient Features of “EXIM As part of the economic reforms,
POLICY (2015-2020)” the system of taking over land by the
government for commercial and industrial
The new EXIM policy has been formulated
purposes was introduced in the country.
focusing on increasing in exports scenario,
As per the Special Economic Zones Act of
boosting production and supporting the
2005, the government has so far notified
concepts like Make in India and Digital India.
about 400 such zones in the country. Since
„„Reduce export obligations by 25% and the SEZ deprives the farmers of their land
give boost to domestic manufacturing and livelihood, it is harmful to agriculture.
supporting the “Make in India” In order to promote export and industrial
concept. growth in line with globalisation the SEZ
„„As a step to Digital India concept, was introduced in many countries.
online procedure to upload digitally
signed document by CA/CS/Cost
Accountant are developed and further
mobile app for filing tax, stamp duty
has been developed.
„„Repeated submission of physical
copies of documents available on
Exporter Importer Profile is not
required.
„„Export obligation period for export
items related to defence, military
store, aerospace and nuclear energy to
be 24 months.
„„EXIM Policy 2015-2020 is expected
to double the share of India in World India was one of the first in Asia to recognize
Trade from present level of 3% by the effectiveness of the Export Processing
the year 2020. This appears to be too Zone (EPZ) model in promoting exports,
ambitions. with Asia’s first EPZ set up in Kandla in
1965. The broad range of SEZ covers free
trade zones, export processing zones,
9.8.2 Special Economic Zones
industrial parks, economic and technology
With a view to overcome the shortcomings development zones, high-tech zones,
experienced on account of the multiplicity science and innovation parks, free ports,
of controls and clearances, absence enterprise zones, and others.
of world-class infrastructure, and an
unstable fiscal regime and with a view to Major Objectives of SEZs
attract larger foreign investments in India,
the Special Economic Zones (SEZs) Policy 1. To enhance foreign investment,
was announced in April 2000. especially to attract foreign direct

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 investment (FDI) and thereby consumption. Some of the important policy
increasing GDP. initiatives introduced for correcting the
2. To increase shares in Global Export fiscal imbalance were: reduction in fertilizer
(International Business). subsidy, abolition of subsidy on sugar and
disinvestment of a part of the government’s
3. To generate additional economic
equity holdings in select public sector
activity.
undertakings. Gradually expenditures on
4. To create employment opportunities. welfare measures were reduced; tasks on
5. To develop infrastructure facilities. corporate sectors were reduced; and tasks on
6. To exchange technology in the global poor people were increased.
market.
9.9.1 Goods and Services Tax
Main Characteristics of SEZ (GST)
a. Geographically demarked area with Goods and Services Tax (GST) is defined
physical security as the tax levied when a consumer buys
b. Administrated by single body/ a good or service. It is proposed to be a
authority comprehensive indirect tax levied on
manufacture, sale and consumption of
c. Streamlined procedures
goods as well as services. GST aims to
d. Having separate custom area replace all indirect taxes levied on goods
e. Governed by more liberal economic and services by the Indian Central and
laws. State governments. GST would eliminatie
f. Greater freedom to the firms located in the cascading effect of taxes on the
SEZs. As a result, they need not respect production and distribution of goods and
the Government’s rules and regulations. services. It is also a “one-point tax” Unlike
The social and environmental impacts VAT which was a multipoint tax.
were disastrous. The Goods and Service Tax Act was
passed in the Parliament on 29th March 2017.
The Act came into effect on 1st July 2017.The
9.9 motto is one nation, one market, one tax.
Fiscal Reforms  
Current GST Rates in India
A key element in the stabilization effort
was to restore fiscal discipline. It means
reduction of fiscal deficit to the extent
of just 3% of GDP, as suggested by Fund
Bank Policies. In this way, the budget aimed
at containing government expenditure
and augmenting revenues; reversing the
downtrend in the share of direct taxes to
total tax revenues and curbing conspicuous
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 Advantages of GST and elimination of administrative
constraints.
„„Removing cascading tax effect
d. Liberalisation of bank branch licensing
„„Single point tax
policy in order to rationalize the
„„Higher threshold for registration existing branch network.
„„Composition scheme for small e. Banks were given freedom to relocate
business branches and open specialized
„„Online simpler procedure under GST branches
„„Defined treatment for e-ecommerce f. Guidelines for opening new private
„„Increased efficiency in logistics sector banks.
„„Regulating the unorganized sector g. New accounting norms regarding
classification of assets and provisions of
bad debt were introduced in tune with
9.10
the Narasimham Committee Report.
Monetary and Financial
Sector Reforms
9.11
Monetary reforms aimed at doing Conclusion
away with interest rate distortions and
rationalizing the structure of lending rates. There is no doubt that the Indian economy
recorded ample achievements in some
The new policy tried in many ways
sectors after new economic policy. If the size
to make the banking system more efficient.
of an economy provides the first impression
Some of the measures undertaken were:
of a country’s political and economic
a. Reserve Requirements: Reduction strength, then India has indeed grown since
in statutory liquidity ratio (SLR) and 1991. In dollar terms, India’s GDP crossed
the cash reserve ratio (CRR) were the $2-trillion mark in 2015-16. Currently,
recommended by the Narasimham the country is ranked ninth in the world
Committee Report, 1991. It was in terms of nominal GDP. Once India was
proposed to cut down the SLR from 38.5 rebuked for its “Hindu rate of growth”, a
percent to 25 percent within a time span term used by Rajkrishna to refer to low rate
of three years. Similarly, it was proposed of economic growth. The GDP growth rate of
that the CRR be brought down to 3 to India is very much appreciated. This growth
5% over a period of four years. is also due to changes in accounting system.
b. Interest Rate Liberalisation: Earlier, That is why the increased GDP growth rate
RBI controlled (i) the interest rates has failed to alleviate the miseries of the
payable on deposits, (ii) the interest common people and to reduce the socio,
rates which could be charged for bank economic and environmental imbalances.
loans. The basic problems of unemployment,
c. Greater competition among public poverty,ill-health and inequalities remain
sector, private sector and foreign banks unsolved.

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 Glossary Foreign Direct An investment in a
Liberalization Liberalization refers Investment business by an investor
to the relaxation of the from another country.
government restriction Foreign It comprises Foreign
usually in the area of Private Direct Investment
social and economic Investment and Foreign Portfolio
policies. Investment.
Privatization It refers to the Cold storage A storage of
participation of private agricultural
entities in businesses and commodities in a cold
services and transfer of place for preservation.
ownership from public SEZ It is an area in which
sector to private sector business and trade laws
as well. are different from rest
Globalization Globalization stands of the country mainly
for the consolidation of aiming at increasing
the various economies trade, investment and
of the world. job creation.
SLR Statutory Liquidity
Disinvestment The action of a
Ratio refers to the
government selling
amount that the
or liquidating public
commercial banks
asset.
require to maintain
Industrial Abolishing in the form of cash or
delicensing government control gold or government
by removing the approved securities
earlier restriction and before providing credit
licenses. to the customers.

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 MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. Which of the following is the way of 6. Foreign investment includes__________

Privatisation? a. FDI only
a. Disinvestment b. FPI and FFI
b. Denationalization c. FDI and FPI
c. Franchising d. FDI and FFI
d. All the above
7. The Special Economic Zones policy
2. Countries today are to be _____ for was announced in ___________
their growth. a. April 2000
a. Dependent b. July 1990
b. Interdependent c. April 1980
c. Free trade d. July 1970
d. Capitalist
8.
Agricultural Produce Market
3.
The Arguments against LPG is Committee is a ___________
_________ a. Advisory body
a. Economic growth b. Statutory body
b. More investment c. Both a and b
c. Disparities among people and d. non of these above
regions
9.
Goods and Services Tax is
d. Modernization
_______________
4. Expansion of FDI ____________ a. a multi point tax
a. Foreign Private Investment b. having cascading effects
b. Foreign Portfolio c. like Value Added Tax
c. Foreign Direct Investment d. a single point tax with no
d. Forex Private Investment cascading effects.
5. India is the largest producer of 10. The New Foreign Trade Policy was
___________in the world. announced in the year_____________
a. fruits a. 2000
b. gold b. 2002
c. petrol c. 2010
d. diesel d. 2015
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 11.
Financial Sector reforms mainly 16. The Raja Chelliah Committee on
related to _______________ Trade Policy Reforms suggested the
a. Insurance Sector peak rate on import duties at

b. Banking Sector a. 25%

c. Both a and b b. 50%

d. Transport Sector c. 60%

d. 100%
12. The Goods and Services Tax Act came
in to effect on ________ 17. The first ever SEZ in India was set
a. 1st July 2017 up at

b. 1st July 2016 a. Mumbai

c. 1st January 2017 b. Chennai

d. 1st January 2016 c. Kandla

d. Cochin
13. The new economic policy is concerned
with the following 18. ‘The Hindu Rate of Growth’ coined by
a. foreign investment Raj Krishna refers to

b. foreign technology a. low rate of economic growth

c. foreign trade b. high proportion of Hindu

population
d. all the above
c. Stable GDP
14. The recommendation of Narashimham
d. none
Committee Report was submitted in
the year________ 19. The highest rate of tax under GST is
a. 1990 ___________ (as on July1, 2017)

b. 1991 a. 18%

c. 1995 b. 24%

d. 2000 c. 28%
d. 32%
15. The farmers have access to credit
under Kisan credit card scheme 20. The transfer of ownership from public
through the following except sector to private sector is known as
a. co-operative banks _____.

b. RRBs a. Globalization

c. Public secstor banks b. Liberalization

d. all the above c. Privatization

d. Nationalization
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 Part-A  Answers

1 2 3 4 5 6 7 8 9 10
d b c c a c a b d d
11 12 13 14 15 16 17 18 19 20
c a d b d b c a c c

Part-B  A
 nswer the following questions in one or two
sentences.

21.
Why was structural reform 25.
Write three policy initiative
implemented in Indian Economy? introduced in 1991 – 92 to correct the
fiscal imbalance.
22. State the reasons for implementing
LPG. 26. State the meaning of Special Economic
Zones.
23. State the meaning of Privatization.
27. State the various components of
24. Define disinvestment
Central government schemes under
post - harvest measures.

Part-C  Answer the following questions in one paragraph.

28. How do you justify the merits of 31. Give short note on Cold storage.
Privatisation?
32. Mention the functions of APMC.
29. What are the measures taken towards
33. List out the features of new trade
Globalization?
policy.
30. Write a note on Foreign investment
34. What is GST? Write its advantages.
policy?

Part-D  Answer the following questions in about a page

35. Discuss the important initiatives taken 37. Describe the salient features of EXIM
by the Government of India towards policy (2015 – 2020)
Industrial Policy.

36.
Explain the objectives and
characteristics of SEZs.

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 ACTIVITY
1. Collect various bills from the neighbouring store and find out
the Nature of Product sold and GST rate

References

1. Ramesh Singh - Indian Economy 5th edition - McGraw Hill Publication

2. Gaurav datt & Aswani Mahajan - Datt & Sundharam Indian Economy 72nd edition
- S.Chand Publication
3. 
Jagdish Bhagwati; Arvind Panagariya - India’s Reforms: How They Produced
Inclusive Growth
4. Jagdish Bhagwati; Arvind Panagariya - Reforms and Economic Transformation in
India
5. Arvind Panagariya - India: The Emerging Giant
https://www.jagranjosh.com/general-knowledge/new-economic-policy-of-1991-
objectives-features-and-impacts-1448348633-1

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 CHAPTER

10 Rural Economy

‘India Lives in Villages’ – Mahatma Gandhi

Learning Objectives

1 To understand the features of rural economy and to highlight the need to

develop rural areas, and

2 To bring into the light the problems of rural villages and to familiarise the
initiatives undertaken.

10.1
Introduction

Rural Economics deals with the application

of economic principles in understanding
and developing rural areas. In general,
rural areas are geographical areas located
outside towns and cities. According to the
Census of India, the basic unit for rural
areas is the revenue village. Rural economy
refers to villages, and rural community
refers to people living in villages. Rural productivity, lower prices of agricultural
areas have problems like backwardness of products, surplus labour force, larger
agriculture, low income , low employment population, high level of migration and
opportunities, poverty, low infrastructural high dependency on natural resources and
development, low illiteracy, low labour nature. According to the 2011 Population

Rural Economics 205

Census, there are 6,40,867 villages in India 5. Employment: There exists
and 68.84 percent of the 121crore total unemployment, seasonal unemployment
population live in rural areas. and underemployment in rural areas.
Unemployment refers to the situation
10.2 of people with willingness and ability
to work but is not getting employed.
Features of Rural Economy
Underemployment also called disguised
unemployment is the situation of people
Main characteristics of rural economy are: employed in excess, over and above the
1. Village is an Institution: The requirement. Disguised unemployment
Village is a primary institution and is a situation Where people work but
it satisfies almost all the needs of the no increase in production. Both the
rural community. The rural people situations are common in rural areas.
have a feeling of belongingness and a 6. Poverty: Poverty is a condition
sense of unity towards each other. where the basic needs of the people
2. Dependence on Agriculture: The like food, clothing and shelter are not
rural economy depends much on being met. According to the 2011-12
nature and agricultural activities. estimates, About 22 crores of people
Agriculture and allied activities are in rural areas are poor and live below
the main occupation in rural areas. the poverty line.
3. Life of Rural People: Lifestyles 7. Indebtedness: People in rural
in villages are very simple. Public areas are highly indebted owing to
services like education, housing, poverty and underemployment, lack
health and sanitation, transport and of farm and non-farm employment
communication, banking, roads and opportunities, low wage employment,
markets are limited and unavailable. seasonality in production, poor
Rural people rely much on faith, marketing network etc. A famous
superstitions and traditional cultural British writer Sir Malcolm Darling
practices. The standards of living (1925) stated that ‘An Indian farmer
of majority of rural people are poor is born in debt, lives in debt, dies
and pitiable. In terms of methods of in debt and bequeaths debt’. Since
production, social organization and formal loan facilities are not available
political mobilization, rural sector to the villagers, they depend on local
is extremely backward and weak. In money lenders who, like a parasite,
recent years, the incidence of alcohol squeeze the villagers. Hence the
drinking has gone up. villagers commit suicide frequently.
4. Population Density: Population 8. Rural Income: The income of the
density, measured by number of rural people is constrained as the
persons living per sq. km is very low rural economy is not sufficiently
and houses are scattered in the entire vibrant to provide them with jobs
villages. or self – employment opportunities.

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 Large proportion of labourers and 10.3
skilled persons are underemployed
Meaning of Rural
and the scope for increasing their
Development
income is limited.
9. Dependency: Rural households are
Rural Development is defined as an overall
largely dependent on social grants and
improvement in the economies and social
remittances from family members
well being of villagers and the institutional
working in urban areas and cities.
and physical environments in which they
10. Dualism: Dualism means the live. According to the World Bank, ‘Rural
co-existence of two exteremely Development is a strategy designed to
different features like developed improve the economic and social life of a
and underdeveloped, organised specific group of people - rural poor’. In short,
and unorganised, traditional and rural development is a process of improving
modern, regulated and unregulated, the rural areas, rural people and rural living.
poor and rich, skilled and unskilled
and similar contradicting situations
in a region. These characteristics are 10.4
very common in rural areas.
Need for Rural
11. Inequality: The distributions of Development
income, wealth and assets are highly
skewed among rural people. There are
Rural development is very urgent in
number of historical, social, economic
the context of the overall growth and
and political reasons behind the
development of Indian economy due to
existence of inequality. Landlords
the following reasons.
and landowners dominate the rural
activities. Land, livestock and other 1. A major share of population lives in
assets are owned by a few people. rural areas, and their development
and contributions are very much
12. Migration: Rural people are forced to
supportive for the nation building
migrate from villages to urban areas
activities. India cannot be developed
in order to seek gainful employment
by retaining rural as backward.
for their livelihood. This character
of the development gives rise to the 2. The rural economy supports the urban
formation of cities. Enmity and Lack sectors by way of supplying drinking
of basic amenities in rural areas also water, milk, food and raw materials.
push the people to migrate to urban Hence, the backwardness of the rural
areas. This is called’ double poisoning’ sector would be a major impediment
by Schumacher, one side villages to the overall progress of the economy.
are empty, on the other side towns 3. Improvements in education, health and
are congested. His book ‘’ Small is sanitation in villages can help avoid
Beautiful “describes the dangers of many urban problems namely, begging,
the present kind of development. rack picking and road side slumming.
Rural Economics 207
4. Development of agriculture and of illiteracy, lack of technical knowhow,
allied activities are necessary for low level of confidence, dependence
providing gainful employment in on sentiments and beliefs etc.
rural areas and improving overall 2. Agriculture Related Problems:
food production. The problems related to agriculture
5. The evils of brain-drain and rural- include 1.Lack of expected awareness,
urban migration can be reduced if knowledge, skill and attitude,
rural areas are developed. 2.Unavailability of inputs, 3.Poor
6. In order to better utilise the unused marketing facility, 4.Insufficient
and under-utilised resources, there is extension staff and services,
a need to develop the rural economy. 5.Multidimensional tasks to extension
7. Rural development should minimise personnel, 6.Small size of land holding,
the gap between rural and urban 7.Sub-division and fragmentation
areas in terms of the provision of of landholdings, 8.Absence of
infrastructural facilities. It was infrastructure to work and stay in rural
called as PURA by former President areas, 9.Primitive technology and low
Abdul Kalam. adoption of modern technologies
8. In order to improve the nation’s
10. Reduced public investment and
status in the global arena in terms of absence of role for farmers in fixing
the economic indicators like Human the prices for their own products..
Development Index (HDI), Women 3. Infrastructural Related Problems:
Empowerment Index (WEI), Gender Poor infrastructure facilities like, water,
Disparity Index (GDI), Physical electricity, transport, educational
Quality of Life Index (PQLI) and institutions, communication, health,
Gross National Happiness Index employment, storage facility, banking
(GNHI) rural economy should be and insurance are found in rural areas.
given due attention. 4. Economics related Problems: The
economic problems related to rural
areas are: inability to adopt high
10.5 cost technology, high cost of inputs,
Problems of Rural Economy

Rural areas are facing number of problems Agriculture

Related
Problems
relating to, 1) People, 2) Agriculture, 3) People
Related Infrastructural

Infrastructure, 4) Economy, 5) Society and Problems Related

Problems

Culture, 6) Leadership and 7) Administration. Problems of

Rural
The problems of rural economy are Administrative
Problems
Economy
Economics
discussed below. related
Problems

1. People Related Problems: The Leadership

Social
Related
problems related to individuals Problems & Cultural
Problems

and their standard of living consist

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 under privileged rural industries, low 10.6
income, indebtedness and existence of
inequality in land holdings and assets. Rural Poverty
In fertile areas, a few absentee landlords
own large area and they do not evince Rural poverty refers to the existence of
greater Interest in improving the poverty in rural areas. Poverty in India has
performance of agriculture. been defined as the situation in which an
individual fails to earn sufficient income
5. Social and Cultural Problems: Caste
to buy the basic minimum of subsistence.
system makes villages almost rigid.
Poverty line is a hypothetical line based
Dominant Caste in village holds all
on income or consumption levels that
land holdings so they will be the
divides the population as people below
superior class too. Both class and caste
poverty line and above poverty line. On
exploitation will be at their peaks.
the basis of recommended nutritional
Poverty, mal – nourishment, illiteracy,
intake, persons consuming less than
child marriages and many more
2,400 calories per day in rural areas
can be seen in Indian villages. Inter
are treated as they are under rural
caste/ Religion marriage will leads to
poverty.
assassination in rural areas. Child
marriage leads to lots of unethical As per the Planning Commission
issues. Female feticide leads to gender estimates, the percentage of people living
related issues in rural areas. below poverty in rural areas was 54.10
6. Leadership Related Problems: The which accounted for 33.80 per cent
specific leadership related problems during 2009-10. Poverty is deepest among
found in rural areas are: Leadership members of scheduled castes and tribes
among the hands of inactive and in the rural areas. In 2005 these groups
incompetent people, self-interest accounted for 80 per cent of rural poor,
of leaders, biased political will, although their share in the total rural
less bargaining power and negation population is much smaller. In 2015, more
skills and dominance of political leaders. than 80 crores of India’s people lived in
villages. One quarter of village population
7. Administrative Problems: The rural
(22  crores people) list below the poverty
administrative problems consist
line. India is the home to 22 per cent of the
of political interference, lack of
world’s poor. It is needless to state that the
motivation and interest, low wages
country has been successful in reducing
in villages, improper utilization of
the proportion of poor people, in spite of
budget, and absence of monitoring
increasing of population.
and implementation of rural
development programme.
10.6.1 Causes for Rural
Rural poverty, rural unemployment, rural
Poverty
industries, micro finance, rural heath and
sanitation and rural infrastructures are the issues Various factors responsible for rural
that are considered for detailed discussion. poverty are highlighted below:

Rural Economics 209

1. The distribution of land is highly Therefore, poor are not in a position
skewed in rural areas. Therefore, to get employed and to come out
majority of rural people work as hired from the poverty in villages.
labour to support their families. 9. Social Evils: Social evils prevalent
2. Lack of Non-farm Employment: in the society like custom, beliefs etc.
Non-farm employment opportunities increase unproductive expenditure.
do not match the increasing labour
force. The excess supply of labour 10.6.2 Remedial Measures to
in rural areas reduces the wages and Rural Poverty
increases the incidence of poverty.
Since rural unemployment and rural
3. Lack of Public Sector Investment: The poverty are interrelated, creation of
root cause of rural poverty in our country employment opportunities would support
is lack of public sector investment on elimination of poverty. Poverty alleviation
human resource development. schemes and programmes have been
4. Inflation: Steady increase in prices implemented, modified, consolidated,
affects the purchasing power of the expanded and improved over time. However,
rural poor leading to rural poverty. unemployment, begging, rag picking and
5. Low Productivity: Low productivity slumming continues. Unless employment
of rural labour and farm activities is a is given to all the people, poverty cannot be
cause as well as the effect of poverty. eliminated. Who will bell the cat?
6. Unequal Benefit of Growth: Major
Poverty Eradication Schemes
gains of economic development are
enjoyed by the urban rich people Schemes Year of
leading to concentration of wealth. Due launch
to defective economic structure and 20 Point Programme 1975
policies, gains of growth are not reaching Integrated Rural development 1978
the poor and the contributions of poor Programme(IRDP)
people are not accounted properly. Training Rural Youths for Self- 1979
7. Low Rate of Economic Growth: Employment (TRYSEM)
The rate of growth of India is always Food for Work Programme 1977
below the target and it has benefited (FWP)
the rich. The poor are always denied National Rural Employment 1980
of the benefits of the achieved growth Programme (NREP)
and development of the country.
Rural Landless 1983
8. More Emphasis on Large Industries: Employment Guarantee
Huge investment in large industries Programme(RLEGP)
catering to the needs of middle and Jawahar Rozgar Yojana(JRY) 1989
upper classes in urban areas are
Mahatma Gandhi National Rural 2006
made in India. Such industries are
Employment Guarantee Scheme
capital-intensive and do not generate
(MGNREGS)
more employment opportunities.
Rural Economics 210
 Development Schemes India are categorised into three classes:
(i) Open Unemployment (ii) Concealed
Pradhan Mantri Adarsh Gram 2010
Unemployment or Under employment
Sadak Yojana (PMAGSY)
and (iii) Seasonal Unemployment. In
Bharat Nirman Yojana 2005 Open Unemployment, unemployed
Indira Awas Yojana 1985 persons are identified as they remain
Jawaharlal Nehru National Urban 2005 without work. This type of unemployment
Renewal Mission (JNNURM) is found among agricultural labourers,
Rajiv Awas Yojan (RAY) 2009 rural artisans and literate persons. In
National Rural Health Mission 2005 Concealed Unemployment, it is difficult
to identify who are under employed; for
National Rural Livelihood 2011
many are employed below their productive
Mission
capacity and even if they are withdrawn
National Food Security Scheme 2013
from work the output will not diminish.
It is also called Disguised Unemployment
10.7 or Under employment. This type of
unemployment is found among small and
Rural Unemployment marginal farmers, livestock rearers and
rural artisans. This kind of unemployment
Unemployment is a situation in which a situation is more serious in villages than in
person is actively searching for employment urban areas. Disguised unemployment in
but unable to find work at the prevailing rural India is 25 per cent to 30 per cent. In
wage rate. It is a tragic waste of manpower Seasonal Unemployment, employment
and under utilisation of human resources. occurs only on a particular season
As long as there is unemployment, social supported by natural circumstances
problems cannot be stopped; and, economy and the remaining period of a year the
cannot achieve development. rural people are unemployed or partially
employed. In seasons like ploughing,
Peter Diamond, sowing, weeding and harvesting there is
Dale Mortensen and scarcity of labour and in the rest of the
Christopher Pissarides year there is unemployment. It is pathetic
shared 2010 Economics to note that a farmer who cultivates one
Nobel prize for jobs study.Their model, crop in a year usually goes without a job
called DMP model, helps us understand for almost 5 to 7 months and ultimately
how regulation and economic policies affect commit suicide.
unemployment, job vacancies and wages.
According to the Agricultural
As on 4 th October 2016, rural Labour Enquiry Committee Report,
unemployment was 7.8 per cent which is “the extent of under employment is on
less than urban unemployment (10.1 per the average, 82 days of unemployment
cent) and all India unemployment rate in a year for 84 per cent of agricultural
(8,5 per cent). Rural unemployment in labours.”

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 5. Capital-Intensive Technology: The
10.7.1 Causes for Rural expanding private industrial sector
Unemployment is largely found in urban areas and
Causes for rural unemployment in India not creating additional employment
are discussed below: opportunities due to the application
of capital intensive technologies.
1. Absence of skill development
Government must establish firms to
and employment generation:
absorb surplus labour power.
Lack of Government initiatives to
give required training and then to 6. Defective System of Education: The
generate employment opportunities. present system of education has also
aggravated the rural unemployment
2. Seasonal Nature of Agriculture:
problem.Large number of degree-
Agricultural operations are seasonal
producing institutions has come
in nature and depend much on nature
in the recent years. Students also
and rainfall. Therefore, the demand
want to get degrees only, not any
for labour becomes negligible
skill. Degrees should be awarded
during off-season. So, non-farm
only on the basis of skills acquired.
employment opportunities must be
The unemployed youth should get
created.
sufficient facilities to update their
3. Lack of Subsidiary Occupation: skills.
Rural people are not able to start
subsidiary occupations such as
10.7.2 Remedies for Rural
poultry, rope making, piggery etc. due
Unemployment
to shortages of funds for investment
and lack of proper marketing In order to reduce rural unemployment
arrangements. This restricts the in the country there is a need to take
employment opportunity and rural integrated and coordinated efforts from
family incomes. Government must various levels. A few remedial measures
arrange funds for these people. are listed below:
However, as now they pay huge 1. Subsidiary Occupation: To reduce
interest to the local money lenders, the seasonal unemployment rural
for they are unable to get loans from people should be encouraged to
formal sources. adopt subsidiary occupations.
4. Mechanization of Agriculture: The Loans should be granted and proper
landlords are the principal source arrangements should be made for
of employment to the farm labour. marketing their products.
Mechanization of agricultural 2. Rural Works Programme: Rural
operations like ploughing, irrigation, Works Programme such as
harvesting, threshing etc. reduces construction and maintenance of
employment opportunities for the roads, digging of drains, canals, etc
farm labour. should be planned during off-season

Rural Economics 212

 to provide gainful employment to 1. These industries are carried out by
the unemployed. artisans in their own homes at their
3. Irrigation Facilities: Since rainfall is own risk and for their own benefit.
uncertain irrigation facilities should Artisans may combine this work
be expanded to enable the farmers with another regular job.
to adopt multiple cropping. The 2. No or little outside labour is
increased cropping intensity creates employed. Normally, the members of
additional demand for labour. the household provide the necessary
4. Rural Industrialization: To provide labour.
employment new industries should 3. These industries are generally
be set up in rural areas. This will open hereditary and traditional in
new fields of employment and also character.
change the attitude of rural people 4. No or little power is used.
towards work. For this, government
5. These industries usually serve the
has to do something. Private sector
local market and generally work on
would not take up this responsibility.
the orders placed by other industries.
5. Technical Education: Employment
Examples of cottage industries are mat,
oriented courses should be
coir and basket making industries. The
introduced in schools and colleges to
principal cottage industries of India are
enable the litrate youth to start their
hand-loom weaving (cotton, silk, jute,
own units.
etc.) pottery, washing soap making, conch
shell, handmade paper, horn button,
10.8 mother-of-pearl button, cutlery, lock and
Rural Industries key making industries.

Village Industries: Village industries are

Rural industries embrace all industries
traditional in nature and depend on local
which are run by rural people in rural areas.
raw-material. They cater to the needs
These industries are based primarily on the
of local population. Examples of village
utilization of locally available raw materials,
industries are gur and khandsari, cane and
skills and small amount of capital. The rural
bamboo basket, shoe making, pottery and
industries can be broadly classified into
leather tanning. These are almost similar
a) cottage industries, b) village industries,
to the cottage industries.
c) small industries, d) tiny industries and
e) agro-based industries. Small Scale Industries (SSIs): Most small
scale industries are located near urban
Cottage Industries: Cottage industries
centres. They produce goods for local as
are generally associated with agriculture
well as foreign markets. Examples of such
and provide both part-time and full-time
small scale industries are manufacture
jobs in rural areas.
of sports goods, soaps, electric fans, foot
The important characteristics of wear, sewing machines and handloom
this type of industries are as follows: weaving.
Rural Economics 213
SSIs are also known as Micro, Small &
Medium Enterprises (MSMEs). They are
defined and categorized by the Micro,
Small & Medium Enterprises Development
Act, 2006. The Act categorizes different
scale of industries on the basis of
investment in plant and machinery in case
of manufacturing industries and on the
basis of investment in equipment in case
of service sector industries.
The farmers borrow loan for various
purposes like agricultural operations,
supporting the family in the lean season or
purchase of equipments in the recent years,
expenses on celebrations, liquor consumption
and medicines go on increasing without any
limit. Due to lower income, the villagers are
unable to repay the loans or pay the pending
interest on the principal amount.

Agro-based Industries: These industries

are based on the processing of agricultural According to the Government of
produce. Agro-based industries may India’s Socio Economic and Caste
be organised on a cottage-scale, small- Census (SECC), 2015, around 73
scale and large-scale. These industries per cent of households in India are
tend to develop household settlements rural. Of these, 18.5 per cent are
around them as they employ more labour scheduled caste households and 11
on a regular basis. Examples are textile, per cent belong to the scheduled tribe
sugar, paper, vegetable oil, tea and coffee category.
industries.

The data of the National Sample Survey

10.9
Organisation (NSSO, 2002-03) reveals
Rural Indebtedness that only about 30 per cent of the poor
borrowers get credit from the formal
Rural indebtedness refers to the situation banks. According to the All India Debt
of the rural people unable to repay the loan and Investment Survey (AIDIS) 2002, the
accumulated over a period. Existence of share of institutional credit has declined
the rural indebtedness indicates the weak from 66.3 per cent in 1991 to 57.1 percent
financial infrastructure of our country, in 2002, with a corresponding increase
in reaching the needy farmers, landless in informal channels of credit (RBI,
people and the agricultural labourers. 2006).
Rural Economics 214
 leads to perpetuate indebtedness of
10.9.1 Features of Rural
the farmer.
Indebtedness
Nearly three fourth of rural families in the
10.9.3 Measures to Remove
country are in debt. The amount of debt
Rural Indebtedness
is heavier in the case of small farmers.
Cultivators are more indebted than the Several remedial measures have been
non-cultivators. Most of the debts taken introduced to reduce rural indebtedness.
are short term and of unproductive nature. It includes regulation of money lenders,
The proportion of debts having higher development of rural banks, Regional Rural
rates of interest is relatively high. Most Banks (RRBs), Micro Finance, formation
of the villagers are indebted to private of Self Help Groups (SHGs), Primary
agencies particularly money lenders. Cooperative Banks and Land Development
Banks, Crop Loan Schemes, Lead Bank
Schemes, Micro Units Development
10.9.2 Causes for Rural and Refinance Agency Bank (MUDRA),
Indebtedness promotion of subsidiary occupation, off
The causes for rural indebtedness may be farm employment opportunities, skill
summarized as below: development programmes and so on.
However, the interest rate charged plus
1. Poverty of Farmers: The vicious transaction cost for poor people and Self-
circle of poverty forces the farmers to Help Groups are much higher as compared
borrow for consumption, cultivation to that for rich people. For instance,
and celebrations. Thus, poverty, debt education loan is costlier than car loans.
and high rates of interest hold the
farmer in the grip of money lenders.
Regional Rural Banks (RRBs)
2. Failure of Monsoon: Frequent Regional Rural Banks came into existence
failure of monsoon is a curse to the based on the recommendation made by a
farmers and they have to suffer due working group on rural banks appointed by
to the failure of nature. Therefore, the Government of India in 1975. RRBs are
farmers find it difficult to identify recommended with a view to developing
good years to repay their debts. rural economy by providing credit and
3. Litigation: Due to land disputes other facilities particularly to the small and
litigation in the court compels them marginal farmers, agricultural labourers,
to borrow heavily. Being uneducated artisans and small entrepreneurs. RRBs
and ignorant, they are caught in the are set up by the joint efforts of the Centre
litigation process and dry away their and State Governments and commercial
savings and resources. banks. At present, there are 64 Regional
4. Money Lenders and High Rate of Rural Banks in India. The RRBs confine
Interest: The rate of interest charged their lending’s only to the weaker sections
by the local money lenders is very and their lending rates are at par with the
high and the compounding of interest prevailing rate of cooperative societies.
Rural Economics 215
Micro Finance
In 2009-10, the number of new SHGs
Micro finance, also known as micro credit, having credit-linked with banks
is a financial service that offers loans, was 1.59 million and a bank loan of
savings and insurance to entrepreneurs ₹14,453 Crores was disbursed to these
and small business owners who do not SHGs. Further, the number of SHGs
have access to traditional sources of which maintained savings accounts
capital, like banks or investors. The goal of with banks at the end of March 2010
micro financing is to provide individuals was 6.95 million.
with money to invest in themselves or
their business. Microfinance is available
through micro finance institutions, which they lend small amounts to their members
range from small nonprofit organizations for interest. Based on their performance,
to larger banks. In India, Non Government they are linked with the bank for further
Organizations (NGOs) play a pivotal role in assistance under SHG Bank Linked
the development of micro finance service. Programme (SBLP) started in 1992. It is a
Microfinance industry in India have grown holistic programme of micro-enterprises
vastly in the last two decades. In 2009, the covering all aspects of self-employment,
total number of micro finance institutions organization of the rural poor into
in India was around 150 (Tripathi, 2014). self Help groups and their capacity
building, planning of activity clusters,
Self-Help Groups (SHGs) infrastructure build up, technology, credit
and marketing.
The main objective of this programme is to
bring the beneficiaries above the poverty
line by providing income generating
assets to them through bank credit and
government subsidy. NABARD estimates

Under NABARD SHG Linkage

Self Help Groups are informal Programme, SHGs can borrow
voluntary association of poor people, from credit from bank on showing their
the similar socio-economic background, successful track record of regular
up to 20 women (average size is 14). They repayments of their borrowers. It
come together for the purpose of solving has been successful in the states like
their common problems through self-help Andhra Pradesh, Tamil Nadu, Kerala
and mutual help. The SHG promotes small and Karnataka during 2005-06. These
savings among its members. They save States received approximately 60 per
small amounts ₹10 to ₹50 a month. The cent of SHG linkage credit (Taruna
savings are kept with a bank. After saving and Yadav, 2016).
regularly for a minimum of 6 months,

Rural Economics 216

that there are 2.2 million SHGs in India,
representing 33 million members that
have taken loans from banks under
its linkage program to date. The SHG
Banking Linkage Programme since its
beginning has been predominant in
certain states, showing spatial preferences
especially for the southern regions like
Andhra Pradesh, Tamil Nadu, Kerala
and Karnataka. These SHGs have helped
* Micro Units Development and Refinance Agency
the Banks to accumulate more funds. * Regulate and Refinance and
Actually the banks charge higher interest Microfinance Institutions

for the SHGs than car owners.

The principal objectives of the
Major Features of SHGs are MUDRA Bank are the following

1. SHG is generally an economically 1. Regulate the lender and the borrower

homogeneous group formed through of microfinance and bring stability
a process of self-selection based upon to the microfinance system .
the affinity of its members. 2. Extend finance and credit support to
Microfinance Institutions (MFI) and
2. Most SHGs are women’s groups with
agencies that lend money to small
membership ranging between 10 and
businesses, retailers, self-help groups
20.
and individuals.
3. SHGs have well-defined rules and
3. Register all MFIs and introduce a
by-laws, hold regular meetings and
system of performance rating and
maintain records and savings and
accreditation for the first time.
credit discipline.
4. Offer a Credit Guarantee scheme for
4. SHGs are self-managed institutions
providing guarantees to loans being
characterized by participatory and
offered to micro businesses.
collective decision making.
5. Introduce appropriate technologies
to assist in the process of efficient
Micro Units Development
lending, borrowing and monitoring
and Refinance Agency
of distributed capital.
Bank (MUDRA Bank)
It is a  public sector  financial institution
10.10
which provides loans at low rates to micro-
finance institutions and non-banking Rural Health, Nutrition and
financial institutions which then provide Sanitation
credit to Micro, Small and Medium
Enterprises (MSMEs). It was launched on Health is an important component for
8th April 2015. ensuring better quality of life. Large
Rural Economics 217
masses of the Indian poor continue to especially the vulnerable groups. NRHM
fight hopeless and constantly losing the seeks to provide equitable, affordable and
battle for survival and health. Indian quality health care to the rural population,
rural people are suffering with various especially the vulnerable groups.
epidemics such as small pox, cholera, NRHM focuses on Reproductive,
malaria, typhoid, dengue, chicken guniya, Maternal, Newborn, Child Health and
etc. This is mainly due to lack of medical Adolescent (RMNCH+A) Services.
facilities, deep ignorance and poverty. The emphasis here is on strategies for
Indian Constitution clearly lays down improving maternal and child health
that “States shall regard the rising of the through a continuum of care and the life
level of nutrition and standard of living cycle approach.
of its people and improvement of public
health as among its primary duties”.
To meet this constitutional directive. 10.11
Several programmes for nutrition have
Rural Infrastructure
been implemented. These include
Supplementary Feeding Programmes
including Mid Term Meal Programme, Rural Housing
Nutrition Education through Printed House is one of the basic needs of every
Media and Television and Compulsory family. Provision of better housing facilities
Fortification of Common Salt with Iodine. increases the productivity of labour. The
Still in terms of health standard, Sri Lanka housing problem is getting aggravated due to
is better than India, and in india, Kerala is rapid adoptation of nuclear families. Housing
better than Tamil Nadu. does not mean provision of house alone but
also proper water supply, good sanitation,
proper disposal of sewage etc. The problem
National Rural Health Mission of housing can be tackled by the development
The National Rural Health Mission of low cost technology in house construction,
(NRHM) was launched on 12th April provision of adequate housing finance and
2005, to provide accessible, affordable and provision of land sites to landless workers in
quality health care to the rural population, rural areas.
Rural Economics 218
 As per the NSSO data, 38 per cent of the farmers to bring their produce to the
the households lived in with one room while urban markets and to have access to distant
another 36 per cent lived with two rooms. markets and other services.

Rural Market Rural Electrification

Road Market refers to the infrastructure Rural Electrification refers to providing
created to buy and sell the products electrical power to rural areas. The main
produced in rural areas and also to aims of rural electrification are to provide
purchase the needed products and farm electricity to agricultural operations and
inputs produced in urban and other to enhance agricultural productivity, to
regions. The rural marketing is still increase cropped area, to promote rural
defective as farmers lack bargaining industries and to lighting the villages. In
power, long chain of middlemen, lack order to improve this facility the supply of
of organisation, insufficient storage electricity is almost free for agricultural
facilities, poor transport facilities, absence purpose in many states and the electricity
of grading, inadequate information and tariff charged in rural areas is kept very
poor marketing arrangements. low. In India 99.25% of villages were
electrified at the end of March 2017. As
on 31.03.2017, 100 percent electrification
Rural roads in India constitute 26.50
was achieved in villages of 20 States/UTs
lakh kms, of which 13.5 percent of
namely, Chandigarh, Delhi, Haryana,
the roads are surfaced.
Himachal Pradesh, Punjab, Rajasthan,
Daman & Diu, D & N Haveli, Goa, Gujarat,
Maharashtra, Andhra Pradesh, Kerala,
India’s road network is one of the Lakshadweep, Puducherry, Tamil Nadu,
world’s largest. The road length of Telangana, Andaman & Nicobar Island,
India increased from about 4 lakh Sikkim and Tripura.
kms in 1950-51 to 34 lakh kms at The factors hindering the progress
present (2018). of rural electrification in India are:
1. Lack of Funds: The generation and
Rural Roads transmission of power involves huge
expenditure and the fund allocation
Road transport is an important constituent
is low.
of the transport system. Rural roads
constitute the very life line of rural economy. 2. Inter-state Disputes: As there are
A well-constructed road network in rural inter-state disputes in managing power
area would bring several benefits including projects, power distribution is affected.
the linking of remote villages with urban 3. Uneven Terrain: As rural topography
centres, reduction in cost of transportation is uneven without proper connection,
of agricultural inputs and promotion of developing new lines are costlier and
marketing for rural produces. It helps difficult.

Rural Economics 219

4. High Transmission Loss: Transmission 3. Coordinated and integrated
loss in power distribution is almost 25 programmes for solving the
per cent in rural areas. present problems and to achieve
5. Power Theft: Unauthorized use and sustainable development need to be
diversion of power are evil practices designed.
adopted by affluent people that hinders 4. Persons and leaders with an
the rural electrification process. understanding of reality of rural
problems and with the required
10.12 foresight vision should be consulted
Requirements for Rural while designing development
Development programmes.

10.13
Slater Villages: Gilbert Slater, the first Conclusion
professor of economics at Madras
University, published his book, Crucial steps to strengthening the rural
Some South Indian Villages, in 1918 economy are already being taken through
following a survey of some villages various policies.  These steps include
like Vadamalaipuram (Ramnad), investments in areas ranging from health,
Gangaikondan (Tirunelveli), information technology, education,
Palakkuurichi (Tanjore) and Dusi infrastructure and small business. The
(North Arcot) in Tamil Nadu by his Administration is committed to building
students. It was subsequently done by on these unprecedented measures in the
different groups of researchers in the months and years to come. PURA (Provision
1930s, 1950s, 1960s, and two of the of Urban facilities for Rural Areas) needs
villages only in the early 21st century. to be given due emphasis, without which
The resurveys became an important Indian villages cannot prosper.
historical record. They provided a
baseline for several later revisits to Glossary
his villages, and have inspired many
successors. Much of our knowledge Rural Economics Application of
of rural change depends on Economic Principles
these studies. in rural areas.
Population Number of persons
Density living per sq.km
or per sq. mile.
1. Efforts need to be made to raise farm Unemployment Situation of people
and non-farm rural real incomes. with willingness
2. Investment in basic infra-structure and ability to work
and social services need to be but not getting
increased. employed.

Rural Economics 220

Open Unemployed persons Poverty Condition where
Unemployment are identified as they the basic needs
remain without of the people like
work. food, clothing and
Seasonal Employment occurs shelter are not
Unemployment only in a particular being met.
season and workers Dualism Co-existence of
remain unemployed in two extremely
the remaining period different features.
of a year. Rural Pro cess of
Under Situation where Development improving the rural
employment people employed areas, rural people
in excess over and rural living.
and above the Rural Providing
requirements. Electrification electrical power to
rural areas.

MODEL QUESTIONS

Part - A  Choose the Best Answer

1. Which is considered as the basic unit 3. Identify the feature of rural economy.
for rural areas? a. Dependence on agriculture
a. Panchayat b. High population density
b. Village c. Low level of population
c. Town d. Low level of inequality
d. Municipality
4.
What percentage of the total
2. Which feature is identified with rural population live in rural area, as per
areas? 2011 censes?
a. Low population density a. 40
b. High population density b. 50
c. Low natural resources c. 60
d. Low human resources d. 70

1.  Rural Economics 221

 5. How do you term people employed in 10. Indicate the cause for rural poverty.
excess over and above the requirements? a. Lack of non-farm employment
a. Unemployment b. High employment
b. Underemployment or c. Low inflation rate
Disguised Unemployment
d. High investment.
c. Full employment
10. Indicate the cause for rural poverty.
d. Self-employment
a. Lack of non-farm employment
6. What is the term used to denote the
b. High employment
coexistence of two different features
in an economy? c. Low inflation rate

a. Technology d. High investment.

b. Dependency 11. What is the other name for concealed

unemployment?
c. Dualism
a. Open
d. Inequality
b. Disguised
7. The process of improving the rural
c. Seasonal
areas, rural people and rural living is
defined as d. Rural

a. Rural economy 12. How do you term the employment

occurring only on a particular season?
b. Rural economics
a. Open
c. Rural employment
b. Disguised
d. Rural development
c. Seasonal
8.
Identify the agriculture related d. Rural
problem of rural economy.
13. Identify an example for rural industries?
a. Poor communication
a. Sugar factory
b. Small size of landholding
b. Mat making industry
c. Rural poverty
c. Cement industry
d. Poor banking network
d. Paper industry
9. The recommended nutritional intake 14. How much share of rural families in
per person in rural areas. India is in debt?
a. 2100 calories a. Half
b. 2100 calories b. One fourth
c. 2300 calories c. Two third
d. 2400 calories d. Three fourth
1.  Rural Economics 222
 15.
Identify the cause for rural 18. Identify the year in which National
indebtedness in India. Rural Health Mission was launched.
a. Poverty a. 2000 b. 2005
b. High population c. 2010 d. 2015
c. High productivity 19. Identify the advantages of rural roads.
d. Full employment a. Rural marketing
16. In which year, Regional Rural Banks b. Rural employment
came into existence? c. Rural development
a. 1965 b. 1970 d. All the above
c. 1975 d. 1980
20. “ An Indian farmer is born in debt, lives
17. Identify the year of launch of MUDRA in debt, dies in debt and bequeaths
Bank? debt”-who said this?
a. 1995 b. 2000 a. Adam Smith
c. 2010 d. 2015 b. Gandhi
c. Amartya Sen
d. Sir Malcolm Darling

Answers  Part - A

1 2 3 4 5 6 7 8 9 10
b a a c b c d b d a
11 12 13 14 15 16 17 18 19 20
b c b d a c d b d d

Part - B  Answer the following questions in one or two sentences

21. Define Rural Economy. 26. Define Cottage Industry.

22.
What do you mean by Rural 27. What do you mean by Micro Finance?
Development?
28. State any two causes of housing
23. Rural Poverty – Define. problem in rural areas.

24. Define Open Unemployment. 29. Define Rural Electrification.

25.
What is meant by Disguised 30. State any two factors hindering Rural
Unemployment? Electrification in India.

1.  Rural Economics 223

Part - C  A
 nswer the following questions in about a paragraph
each

31.
State the importance of Rural 34. What are the remedial measures for
Development. Rural Unemployment?

32.
Explain the causes for Rural 35. Write a note on Regional Rural Banks.
Backwardness.
36. Mention the features of SHGs.
33. Enumerate the remedial measures to
37. List out the objectives of MUDRA
Rural Poverty.
Bank.

Part - D  Answer for each question in about a page

38. ‘The features of Rural Economy are 40.

Analyse the causes for Rural
peculiar’- Argue. Indebtedness.

39.
Discuss the problems of Rural
Economy.

ACTIVITY

1. Take a case of a village where you or nearby you live. Collect

the basic information such as, geographical area, boundary
areas, population, number of houses, area under cultivation,
major crops cultivated, type of infrastructure etc., with the
collected information, prepare a report about the village.

References

1. Annual Report, Ministry of Rural Development, GOI.

2. Rural Economics by Patel KV, A C Shah and LD’Mello, Himalaya
Publishing House, Bombay.
3. Rural Economics by Grewal PS, Kalyani Publishers, New Delhi.
4. Rural Economics by Dhingara IC, Sultan Chand & sons, New Delhi.
5. Agricultural Economics and Rural Development by Tyagi BP, Jai
Prakash Nath & Co., Meerut.
Integrated Rural Development by Ramasamy AS, Oxford & IBH
6. 
Publishing Co Pvt Ltd, New Delhi.

Rural Economics 224

 CH A P TER

11 Tamil Nadu Economy

“If the nature of the work is properly appreciated and applied, it

will stand in the same relation to the higher facilities as food is to the
physical body”
–J.C.Kumarappa

Learning Objectives

1 To understand the resource position of Tamil Nadu

economy

2 To analyse the performance of Tamil Nadu economy in relation to other

states.

of contribution to GDP, third highest in

11.1
terms of per capita income, investment,
Introduction Foreign Direct Investment (FDI) and
industrial output. It has been ranked as
The economic and social development the most economically free state by the
of states in India are not uniform. Wide Economic Freedom.
regional disparities exist. The western region
and southern regions are better off than the In the social and health sector also Tamil
other regions. Tamil Nadu is geographically Nadu’s performance is better than many
eleventh largest and population wise third other states and better than national
largest. Tamil Nadu fares well with many average in terms of health, higher
achievements. It stands to second in terms education, IMR and MMR.

Tamil Nadu Economy 225

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 NAGAPATTINAM
}

Tamil Nadu Economy 226

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 11.2 11.3
Highlights of Tamil Nadu Performance of Tamil Nadu
Economy Economy

„„Growth of SGDP in Tamil Nadu has Some of the States like Gujarat and
been among the fastest in India since Maharashtra seem to perform well in some
2005. of the economic indicators. Kerala tops in
„„Poverty reduction in Tamil Nadu has literacy, IMR and MMR. In recent years Tamil
been faster than that in many other Nadu’s performance is outstanding and far
States. ahead of all other states in the spheres of health,
higher education, growth of MSMEs, poverty
„„Tamil Nadu contains a smaller
alleviation and employment generation.
proportion of India’s poor population.
„„Tamil Nadu is the second largest
contributor to India’s GDP. Tamil Nadu is placed third in health
„„Tamil Nadu ranks 3rd in Human index
Development Index (source: UNDP- The Tamil Nadu state has come third
2015) after Kerala and Punjab in a health
„„Tamil Nadu ranks 3rd in terms of index report. The neo natal mortality
invested capital (₹2.92 lakh crore) and rate is 14 lower than that of many other
value of total industrial output (₹6.19 states and that the under 5 mortality has
lakh crore). dropped from 21 in 2014 to 20 in 2015
„„Tamil Nadu ranks first among the - Healthy States, Progressive India
states in terms of number of factories Report, (2018) –NITI AAYOG
with 17% share and industrial workers
(16% share) of the country.
The reasons for the relative success
„„Tamil Nadu is placed third in health
of Tamil Nadu lie in extending social
index as per the NITI AAYOG report.
policies to cover most of the population.
„„Tamil Nadu has a highest Gross For instance the Public Distribution
Enrolment Ratio in higher education. System, midday meals and public health
„„Tamil Nadu has the largest number of infrastructure have near universal coverage.
engineering colleges
„„Tamil Nadu has emerged as a major 11.4
hub for renewable energy.
Natural Resource
„„Tamil Nadu has highest credit Deposit
Ratio in commercial and Cooperative
banks. 11.4.1  Water Resources
„„Has highest ranks first on investment
Tamil Nadu is not endowed with rich
proposals filed by MSMEs.
natural resources compared to other

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 States. It accounts for three per cent of
water sources, four per cent of land area
against six per cent of population.

North East monsoon is the major source of with Thermal power plants, Fertilizer and
rainfall followed by South West monsoon. Carbonisation plants. Magnesite mining
There are 17 river basins in Tamil Nadu. is at Salem from which mining of Bauxite
The main rivers are Palar, Cheyyar, ores are carried out at Yercaud and this
Ponnaiyar, Cauvery, Bhavani, Vaigai, region is also rich in Iron Ore at Kanjamalai.
Chittar, Tamiraparani, Vellar, Noyyal Molybdenum is found in Karadikuttam in
Siruvani, Gundar, Vaipar, Valparai etc. Madurai district.
Wells are the largest source of irrigation
in Tamil Nadu (56%). Table 11.2 Mineral Resources
Mineral Reserve National
Table 11.1 Water Resources (Tonnes) Share
Source of Numbers Lignite 30,275,000 87%
Irrigation Vermiculite 2,000,000 66%
Reservoirs 81 Garnet 23,000,000 42%
Canals 2239 Zircon 8,000,000 38%
Tanks 41262 Graphite 2,000,000 33%
Tube Wells 3,20,707 Ilmenite 98,000,000 28%
Open Wells 14,92,359 Rutile 5,000,000 27%
Source: Tamil Nadu Government Season & Monazite 2,000,000 25%
Crop Report 2012-13
Magnesite 73,000,000 17%
(Source: Department. of Geology and
11.4.2  Mineral Resources Mining)
Tamil Nadu has a few mining projects based
11.5
on Titanium, Lignite, Magnesite, Graphite,
Limestone, Granite and Bauxite. The first one 11.5.Population
is the Neyveli Lignite Corporation that has
led development of large industrial complex Tamil Nadu stands sixth in population
around Neyveli in Cuddalore district with 7.21 crore against India’s 121 crore as
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 per 2011 census. However, Tamil Nadu’s 995 which is far better compared to most
population is higher than that of several of the States and all India level. Tamil Nadu
countries according to UN Report. stands third next only to Kerala state and
Puduchery Union Territory in sex ratio.
Table 11.3 Population
Table 11.4 H
 ealth and Social
State / Country Population Indicators
(in Crore)
Sl. Indicator Tamil India
Tamil Nadu 7.2 No Nadu
U.K. 6.5
1 IMR 17 34
France 6.5
2 MMR 79 159
Italy 5.9
3 Life Expectancy
South Africa 5.6
Total 70.6 67.9
Spain 4.7
Male 68.6 66.4
Sri Lanka 2.1 Female 72.7 69.6
(Source: Projections published by the United
Nations in the 2017 Revision of World
4 Literacy Rate
Population Prospects.) Total 80.33 % 74.04 %
Male 86.81 % 82.14 %
11.5.1 Density Female 73.86 % 65.46 %
The density of population which measures 5 Sex Ratio 995 940
population per sq.km is 555 in 2011
against 480 in 2001. Tamil Nadu ranks 12th
in density among the Indian States and
11.5.4 Infant Mortality Rate
382 is the national average.
(mortality before
completing 1 year)
11.5.2 Urbanisation
Tamil Nadu is well ahead of national
Tamil Nadu is one of the most urbanized average and other states in IMR. According
state with 48.4% of urban population to NITI AAYOG, the IMR is 17 (per
against 31.5% for India as a whole. 1000) for Tamil Nadu which is just half of
The State accounts for 9.61% of total national average of 34 as on 2016.
urbanites in India against 6% share of
total population.
11.5.5 Maternal Mortality
11.5.3 
Sex ratio (Number of Rate (MMR) (Mother’s
female per 1000 males) death at the time of
delivery per 1 lakh)
Balanced sex ratio implies improvement in
quality of life of female population. The sex Tamil Nadu has a good record of
ratio in Tamil Nadu is nearing balance with controlling MMR, ranking third with

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 79 (Kerala 61, Maharashtra 67) against Table 11.5 Gross State
national average of 159 again half of the Domestic Product
national average [NITI AAYOG].
State / Country GSDP /GDP
(Billion)
11.5.6 Life Expectancy at Tamil Nadu-GSDP $ 207.8
birth
Iraq-GDP $ 171
The average period that a person may New Zealand-GDP $ 184
expect to live is called life expectancy.
Sri Lanka-GDP $ 81
However, life expectancy in India still falls
short of most developed and developing (Source: IMF Outlook, April 2017)
nations.

11.5.7 Literacy 11.6.1  Sectoral Contribution

The literacy rate of Tamil Nadu is Is higher
than in many States

11.6
 ross State Domestic
G
Product (GSDP)

Just like GDP, the Gross State Domestic

Product refers to the total money value
of all the goods and services produced
annually in the State.
Tamil Nadu is the second largest The tertiary sector (service sector) is
economy in India with a GSDP of $ the major contributor to Tamil Nadu’s
207.8 billion in 2016-17 according to the GSDP at 63.70%. The secondary sector
Directorate of Economics and Statistics, (Industry) contribution is gradually on
Tamil Nadu. The GSDP of Tamil Nadu is the rise and now it is 28.5%. Agriculture
equal to the GDP of Kuwait on nominal occupies a prominent position in
term and GDP of UAE on PPP terms. occupation but its contribution to GSDP
The GSDP of Tamil Nadu is far higher is declining and now it is just 7.76%. This
compared to many countries as shown means that the tertiary and secondary
below. This is mainly due to population sectors have grown faster, the agricultural
effect. Per capita GSDP would be better for sector has grown slow. Agriculture
intercountry or interstate comparisons. sector provides employment and food to
Tamil Nadu may go below if per capita larger proportion of Indians and Tamils.
GSDP is considered for comparison. But, the same sector is growing slowly

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 Table 11.6 Per capita income
means it is not good. With this trend
sustainable development may not be State / Country Per capita Income
possible. (in USD)
Tamil Nadu 2200
11.6.2  Per capita Income India 1670
The Per capita GSDP of Tamil Nadu also Nigeria 2175
($ 2,200) which is higher than that of Nicaragua 2151
many other States in India. Per capita Pakistan 1443
GSDP of Tamil Nadu is nearly 1.75 times Bangladesh 1358
higher than the national average, as per Zimbabwe 1029
2018 data. In term of ₹ the per capita Nepal 729
income in Tamil Nadu was ₹ 1,03,600 in (Source: World Bank National Accounts data, and
2010-11 and it has increased to ₹1,88,492 OECD National Accounts data files. -https://data.
in 2017-18 as per the Budjet figures 2018. worldbank.org/indicator/NY.GDP.PCAP.CD)

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 The Per capita income of Tamil Nadu crops is 27.1%. Among the food crops
among the southern States is given below: paddy takes a major share. Among the
non-food crops, groundnut and coconut
Table 11.7  Per capita take a major share.
Income (2015-16) Net sown area has been gradually
State PI (₹) declining; and, rural land, labour and
capital are moving towards urban projects.
Tamil Nadu 1,57,116
As a result, villages are emptied and cities
Kerala 1,55,516 are over-crowded and congested, leading
Karnataka 1,46,416 to spatially unbalanced bulging.
Telangana 1,58,360
Andhra Pradesh 1,37,000 11.7.1  Foodgrain Production
(Source: Reserve Bank of India, New Delhi.
February 2017.)

11.7
Agriculture

Tamil Nadu, with seven agro climatic zones

and varied soil types is better suited for
the production of fruits, vegetables, spices,
plantation crops, flowers and medicinal Rice production dominates among food
plants. The State is the largest producer of grain production with 79.49 lakh tones on
loose flowers and the third largest producer 2014-15 followed by millets at 40.79 lakh
of fruits. Tamil Nadu has historically been tons. There is significant jump in pulses
an agricultural State. At present, Tamil Nadu production from 3.59 lakhs ton in 2011-
is the India’s second biggest producer of rice, 12 to 7.67 lakh ton in 2014-15. There
next only to West Bengal. The state is one may be changes in these statistics. Hence
of the major producers of turmeric. It is updation is unavoidable.
also the leading producer of Kambu, Corn,
Groundnut, Oil seeds and Sugarcane. It 11.7.2 Productivity Position
ranks first in production of plantation crops, of Tamil Nadu and
banana and coconut, second in rubber and India
cashew nut, third in pepper and fourth in
The Government of Tamil Nadu lays
sugarcane.
emphasis on agricultural production and
The gross cropped area under productivity. As a result, Tamil Nadu
all crops was 58.97 lakh hectares in the tops in productivity, in food crops as
year 2013-14. The area under food crops well as non-food crops, among the States
account for 72.9% and that of non-food in India.

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 Table 11.8  Productivity 11.8
Position of Tamil Nadu
Industry
Crop Position of Tamil Nadu
at National Level Chennai is sometimes referred to as
Maize 1 the Health Capital of India or the Banking
Kambu 1 Capital of India, having attracted
Groundnut 1 investments from International Finance
Total Oilseeds 1 Corporationsand the  World Bank. It is
Cotton 1 also called as Detroit of Asia.
Coconut 2 Tamil Nadu has a network of
Rice 2 about 110 industrial parks/estates that
Sugarcane 3 offer developed plots with supporting
Sunflower 3 infrastructure.  Also, the Government
Jowar 3 is promoting other industrial parks
like Rubber Park, Apparel Park,
Coarse cereals 4
Floriculture Park, TICEL Park for
Total Pulses 8
Biotechnology, Siruseri IT Park and Agro
Source: Tamil Nadu Agriculture Department
Export Zones.
Policy Note 2017-18)
The heavy engineering
Tamil Nadu ranks first in maize, manufacturing companies are centered
kambu, groundnut, oil seeds and cotton; around the suburbs of Chennai. Chennai
second in rice and coconut, third in boasts of global car manufacturing giants
sugarcane, sunflower and jowar. as well as home grown companies.

INDUSTRY CLUSTERS IN TAMIL NADU

RANIPET : Leather

AMBUR : Leather
VANIYAMBADI : Leather
SALEM : Powerlooms, Home textiles, Steel, Sago

SANKAGIRI : Lorry fleet operators

TIRUCHENGODE: Borewell drilling services

NAMAKKAL : Transportation, Poultry
KARUR : Coach-building, Powerlooms
ERODE : Powerlooms, Turmeric
COIMBATORE : Spinning mills, Engineering industries
TIRUPUR : Knitwear, Readymade garments

RAJAPALAYAM : Surgical cotton products

SIVAKASI : Safety matches, Fireworks, Printing

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 Karur is known for its bus body mill capacity is in Tamil Nadu. The western
building which contributes 80% of part of Tamil Nadu comprising Coimbatore,
South Indian bus body building.  TNPL Tirupur, Erode, Dindigul and Karur has the
is the Asia›s largest ecofriendly paper majority of spinning mills manufacturing
mill.  Salem  is called as steel city and has cotton/polyester/blended yarn and silk
many sago producing units and mineral yarn used by garment units in Tamil Nadu,
wealth.  Sivakasi  is the leader in printing, Maharastra etc. Yarn is also exported to
fireworks, safety matches production China, Bangladesh etc.  Tirupur  known as
in India. It contributes to 80% of India’s “Knitting City” is the exporter of garments
total safety matches production and 90% worth USD 3 Billion.  Karur  is the major
of India’s total fireworks production. home for textile manufacturing (Curtain
Thoothukudi is the gateway of Tamil cloth, bed linens, kitchen linens, toilet
Nadu. It is a major chemical producer linens, table linens, wall hangings etc.) and
next only to Chennai. export hub in India. Erode is the main cloth
market in South India for both retail and
wholesale ready-mades.
11.8.1 Textiles

11.8.2 Leather
Tamil Nadu accounts for 30 per cent of
leather exports and about 70 per cent of
leather production in the country. Hundreds
of leather and tannery industries are located
around Vellore, Dindigul and Erode. Every
year the State hosts the India International
Leather Fair in Chennai.

11.8.3 Electronics
Tamil Nadu is the largest textile hub of Chennai has emerged as EMS Hub of India.
India. Tamil Nadu is known as the “Yarn Many multi  – national companies  have
Bowl” of the country accounting for 41% chosen Chennai as their South Asian
of India’s cotton yarn production. The manufacturing hub.
textile industry plays a significant role in
the Indian economy by providing direct
employment to an estimated 35 million 11.8.4 Automotives
people, and thereby contributing 4% of Chennai  nicknamed as “The  Detroit of
GDP and 35% of gross export earnings. Asia”is home to a large number of auto
The textile sector contributes to 14% of component industries. Tamil Nadu has
the manufacturing sector. From spinning 28% share each in automotive and auto
to garment manufacturing, entire textile components industries, 19% in the trucks
production chain facilities are in Tamil segment and 18% each in passenger cars
Nadu. About half of India’s total spinning and two wheelers.
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 The town of  Sivakasi  is a leader in the
11.8.5  Cement Industry
areas of printing, fireworks, and safety
Tamil Nadu ranks third in cement production matches. It was fondly called as “Little
in India (First Andhra Pradesh, Second Japan” by Jawaharlal Nehru. It contributes
Rajasthan). Among 10 largest cement to 80% of India’s fireworks production.
companies in India as on 2018, Ramco Cement Sivakasi provides over 60% of India’s total
and India Cement find prominent place. And offset printing solutions.
also Tamil Nadu stands second in number of
cement plants with 21 units against 35 units in
11.8.7  Other Industries
Andhra Pradesh.
One of the global electrical equipment
public sector companies viz BHEL has
11.8.6  Fire works
manufacturing plants at Tiruchirappalli and
Ranipet. The Tamil Nadu State Government
owns the Tamil Nadu Newsprint and
Papers (TNPL), the world’s biggest bagasse-
based paper mill in Karur. Tamil Nadu
is a leading producer of cement in India
and with manufacturing units located at
Ariyalur, Virudhunagar, Coimbatore and
Tirunelveli. The region around Salem is
rich in mineral ores. The country’s largest
steel public sector undertaking, SAIL has a
steel plant in Salem.

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 Coimbatore is also referred to as “the 11.9
pump City” as it supplies two thirds of India’s
Energy
requirements of motors and pumps. The city
is one of the largest exporters of jewellery, wet
grinders and auto components and the term Tamil Nadu tops in power generation
“Coimbatore Wet Grinder” has been given among the southern States as seen in
a Geographical indication following table.

Thoothukudi is known as Installed capacity of power utilities

“Gateway of Tamil Nadu”. Thoothukudi in States in southern region
is the major chemical producer in the
state. It produces the 70 per cent of the Table 11.11 Energy
total salt production in the State and 30 State Units Ranks
per cent in the country. Tamil Nadu 26,865 MW I
Karnataka 18,641 MW II
11.8.8 MSMEs Andhra Pradesh 17,289 MW III
The Micro, Small and Medium Enterprises Telungana 12,691 MW IV
are defined under the MSMED Act 2006. The Kerala 4,141 MW V
enterprises are classified as Manufacturing 79,627 MW
and Service enterprises based on the (Source: Central Electricity Authority, Ministry
investment in plant and machinery and of Power, Government of India. Retrieved
equipment (excluding land and building) the Jan.2017.)
classification of Micro, Small and Medium
Enterprises is given in Table- 11.11. Tamil Nadu is in the forefront of
all other Indian States in installed
Tamil Nadu accounts for 15.07% capacity. Muppandal wind farm is
Micro, Small and Medium Enterprises a  renewable energy source, supplying
(MSMEs) in the country( the highest the villagers with electricity for work.
among all States) with 6.89 lakhs registered Wind farms were built in Nagercoil and
MSMEs. Producing over 8000 varieties of Tuticorin apart from already existing
product for a total investment of more than ones around Coimbatore, Pollachi,
₹32,000 crore. Dharapuram  and  Udumalaipettai. These
MSMEs produce a wide variety areas generate about half of India’s
of products in almost all sectors. The 2,000 megawatts of wind energy or two
prominent among them are the engineering, percent of the total power output of India.
electrical, chemicals, plastics, steel paper,
matches, textiles, hosiery and garments
11.9.1 Nuclear Energy
sector. Around 15.61 lakh entrepreneurs
have registered, providing employment The  Kalpakkam  Nuclear Power Plant and
opportunities to about 99.7 lakhs persons the  Koodankulam Nuclear Power Plant
with total investment of ₹1,68,331 crore.

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 Table 11.13 Thermal Power
Source Million Units %
Thermal 13304 49.52
Hydel 2203 8.20
Nuclear 986 3.67
Others (Wind, 10372 38.61
Solar)
Total 26865 100.00
are the major nuclear energy plants for the (Source: Central Electricity Authority, Ministry
energy grid. of Power, Government of India. Retrieved 15
Jan.2017.)

Table 11.12 Nuclear Energy 11.9.3 Hydel Energy

Units Existing Installed There are about 20 hydro electric units

Capacity (2018) in Tamil Nadu. The prominent units are
Hundah, Mettur, Periyar, Maravakandy,
Kudankulam 1834 MW (2 x 917)
Parson Valley etc.
Kalpakkam 470 MW (2 x 235)
11.9.4 Solar Energy
Tamil Nadu tops in solar power generation
in India as seen in following table.
Southern Tamil Nadu is considered
as one of the most suitable regions in

Table 11.14 Solar Energy

Ranking States Total capacity

(MW) 2017
1 Tamil 1590.97
Nadu
11.9.2  Thermal Power
2 Rajasthan 1317.64
In Tamil Nadu the share of thermal power
3 Gujarat 1159.76
in total energy sources is very high and
the thermal power plants are at Athippattu 4 Telangana 1073.41
(North Chennai) Ennore, Mettur, Neyveli 5 Andhra 979.65
and Thoothukudi. Pradesh
The generation of power under (Source :Data from MNRE)
various sources is given below.
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 the country for developing solar power Credit Deposit Ratio of 119.15% in the
projects. country whereas this ratio is 77.5% at the
national level.
11.9.5 Wind Energy
11.10.2 Education
Tamil Nadu has the highest installed wind
energy capacity in India. The State has very a. School Education
high quality of off shore wind energy potential Tamil Nadu is grouped among high Net
off the Tirunelveli coast and southern Enrolement Ratio (NER) States. According
Thoothukudi and Rameswaram coast. to NITI Aayog 2015-16 NER at primary
level in Tamil Nadu is 89.24% which is
11.10 higher than that of Kerala (79.94%) and
national average 74.74%. The all India
SERVICES average is 43% and the world average is
59%.
Banking, insurance, energy, transport and
Table 11.15 Tamil Nadu’s
communication fall under tertiary sector
primary education statistics
i.e., services. 2016-17

11.10.1 Banking Number Primary 35,414

of schools Middle 9,708
In Tamil Nadu, Nationalised banks account
for 52% with 5,337 branches, Private High and Higher 12,911
Commercial Banks 30% (3,060) branches, Secondary
State Bank of India and its associates 13%
(Source: Tamil Nadu State portal, State interim
(1,364), Regional Rural Banks 5% (537)
Budget 2016-17)
branches and the remaining 22 foreign
bank branches. Gross Enrolment Ratio is 118.8%
Total deposits of the banks in Tamil for primary level(class 1-5); 112.3% for
Nadu registered an year-on year increase upper primary level (class 6-8), 62.7% for
of 14.32% by March 2017 and touched secondary level (class 9-10), 49.26% at
₹6,65,068.59 crores. Total credit of the Higher Secondary level (class 11-12). This
banks in Tamil Nadu registered a year-on has been possible mainly due to the supply
year increase of 13.50% by March 2017 and of free food, cloth, foot-wear, scholarship,
touched ₹6,95,500.31 crores. The share of laptop etc.
Priority Sector Advances stands at 45.54% b. Higher Education
as against the national average of 40%.
The percentage of Agricultural advances In Gross Enrolment Ratio under higher
to total advances as at the end of March education (Tertiary level) Tamil Nadu
2017 works out to 19.81% as against the continues to be at the top level well ahead
national average of 18%. Banks in Tamil of other states. The GER is 46.9% in
Nadu have maintained one of the highest Tamil Nadu which is far higher against
national average and all other States This
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 higher GER is thanks to the distribution 24.8%. Both Karnataka & Kerala together
of free food,cloth, footwear, laptop and accounted for more than 60% of the total
scholarship. educational loan amount by Private Banks.

Table 11.16  Gross 11.10.4 Health

Enrolment Rate %
Tamil Nadu has a three – tier health
State 2016-17 infrastructure comprising hospitals,
Tamil Nadu 46.9 primary health centres, health units,
community health centres and sub-
Maharashtra 30.2
centres. As of March 2015, the State had
Uttar Pradesh 24.9
34 district hospitals, 229 sub-divisional
Odisha 21.0 hospitals, 1,254 primary health centres,
Bihar 14.4 7,555 Sub-centres and 313 community
All India 25.2 health centres.

(Source: All India Survey on Higher Education

(AISHE) released by the Ministry of Human
11.10.5 Communication
Resource Development- January 2018) Maharashtra has the highest number of
internet subscribers in the country at
Tamil Nadu has 59 Universities, 29.47 million, followed by States like Tamil
40 Medical colleges, 517 Engineering Nadu, Andhra Pradesh and Karnataka.
colleges, 2,260 Arts and Science
According to government data,
colleges, 447 Polytechnics and 20 dental
India had a total of 342.65 million internet
colleges. Tamil Nadu produces nearly
subscribers at the end of March, 2016.
four lakh engineering and polytechnic
Tamil Nadu had 28.01 million subscribers,
students every year, the highest in the
while its neighbours Andhra Pradesh and
country.
Karnataka had 24.87 million and 22.63
million, respectively.
11.10.3  Educational Loans
As far as educational loans disbursed by 11.10.6 Transport
Public Sector Banks under priority sector Tamil Nadu has a well established
are concerned, 20.8% of the total amount transportation system that connects all
was disbursed in Tamil Nadu between parts of the State. This is partly responsible
2013-14 and 2015-16. Andhra Pradesh for the investment in the State. Tamil Nadu
was second with 11.2% of the total loan is served by an extensive road network in
amount followed by Maharashtra (10.2%). terms of its spread and quality, providing
Of the total amount of educational links between urban centres, agricultural
loans disbursed by Private Banks during market-places and rural habitations in the
the same period, Kerala accounted for countryside. However, there is scope for
37.8% followed by Tamil Nadu with improvement.

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 a. Road c. Air
There are 28 national highways in the Tamil Nadu has four major international
State, covering a total distance of airports. Chennai International Airport
5,036 km. The State has a total road length is currently the third largest airport in
of 167,000  km, of which 60,628  km are India after Mumbai and Delhi. Other
maintained by Highways Department.  It international airports in Tamil Nadu include
ranks second in India with a share of over Coimbatore International Airport, Madurai
20% in total road projects under operation International Airport and Tiruchirapalli
in the public-private partnership (PPP) International Airport. It also has domestic
model. airports at Tuticorin, Salem, and Madurai.
which connect several parts of the country.
Increased industrial activity has given rise
b. Rail
to an increase in passenger traffic as well as
freight movement which has been growing
at over 18 per cent per year.

d. Ports

Tamil Nadu has a well-developed rail network

as part of Southern Railway, Headquartered
at Chennai. The present  Southern Railway Tamil Nadu has three major ports; one
network extends over a large area of India’s each at Chennai, Ennore, and Tuticorin,
Southern Peninsula, covering the States of as well as one intermediate port in
Tamil Nadu, Kerala, Puducherry, minor Nagapattinam, and 23 minor ports. The
portions of Karnataka and Andhra Pradesh. ports are currently capable of handling
Tamil Nadu has a total railway track length over 73 million metric tonnes of cargo
of 6,693 km and there are690 railway stations annually (24 per cent share of India).
in the State. The system connects it with most All the minor ports are managed by the
major cities in India. Main rail junctions Tamil Nadu Maritime Board, Chennai
in the State include Chennai, Coimbatore, Port. This is an artificial harbour and the
Erode, Madurai, Salem, Tiruchirapalli and second principal port in  the country for
Tirunelveli. Chennai has a well-established handling containers. It is currently being
Suburban Railway network, a Mass Rapid upgraded to have a dedicated terminal for
Transport System and is currently developing cars capable of handling 4,00,000 vehicles.
a Metro system, with its first underground Ennore Port was recently converted from
stretch operational since May 2017. an intermediate port to a major port and
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 handles all the coal and ore traffic in Tamil and foreign tourists. Tourism in Tamil
Nadu. Nadu is promoted by Tamil Nadu Tourism
Development Corporation (TTDC), a
Government of Tamil Nadu undertaking.
11.11
The State currently ranks the highest
Tourism among Indian States with about 25 crore
arrivals (in 2013). The annual growth
Tamil Nadu has since ancient past been rate of this industry stood at 16 per cent.
a hub for  tourism. In recent years, the Approximately 28 lakh foreign and 11
state has emerged as one of the leading crore domestic tourists visit the State.
tourist destinations for both domestic

11.12 22nd with unemployment rate of 42

Unemployment and per 1000. There are different kinds of
Poverty unemployment with different economic
implications. All those aspects need
National average of unemployment to be studied to fully understand the
rate stands at 50 andTamil Nadu ranks employment situation.

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 Tamil Nadu is one of India’s richest
states Since 1994, the state has seen a
steady decline in poverty. Today, Tamil
Nadu has lower levels of poverty than

Percentage
most other States in the country. After
2005, Tamil Nadu was among India’s
fastest growing states, with growth being
driven mainly by services.

Year

34 33 32
Percentage

32
29

21 20 19
17 17
12 12

BH OD AS MP UP KA WB NL MH GJ MG TN

States

11.13 three ranks in health index, education,

development of MSMEs. It has a good record
Conclusion
of poverty alleviation and employment
generation. However, India in general and
The Tamil Nadu economy which is Tamil Nadu in particular need to work
not rich in natural resources has good more to eliminate female foeticide, reduce
record of agricultural growth, industrial the population living in slums, sleeping
progress, infrastructural development and on roadsides, beggers and rag pickers.
good record of robust growth of service Development is meaningless as long as the
sector especially banking, education, above eyesore continues.
transport and tourism. It occupies top

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 Appendix-I
Population Growth in Tami Nadu: At a Glance (2011 Census)
•  Total Population 72138958
• Male 36158871
• Female 35980087
•  Crude birth rate (per thousand) 15.7
•  Crude death rate (per thousand) 7.4
•  Growth Rate (per thousand) 8.3
•  Districts with Highest Population (Chennai, Kancheepuram, Vellore and
Thiruvallur)
•  Districts with Lowest Population (Perambalur, The Nilgiris, Ariyalur and
Theni)
•  Population Density (per sq km): 555 (2011), 480 (2001)
•  Maximum Density Chennai (26903);
Kanyakumari (1106)
•  Minimum Density The Nilgiris (288);
Thiruchirappalli (602)
•  Sex Ratio (per 1000 males) 995 females (2011)
987 females (2001)
•  District with Highest Sex Ratio The Nilgiris (1041 females)
Thanjavur (1031 females)
Nagapattinam (1025 females)
•  District with Lowest Sex Ratio Theni (900 females)
Dharmapuri (946 females)
•  Child Sex Ratio (0-6 age group) 946 female children (2011)
942 female children (2001)
•  District with Highest Child Sex Ratio The Nilgiris (985), Kanyakumari (964)
•  District with Lowest Child Sex Ratio Cuddalore (896); Ariyalur (897)
•  Literacy Rate 80.33% (2011)
73.45% (2001)
•  Male Literacy 86.81% (2011)
82.33% (2001)
•  Female Literacy 73.86% (2011)
64.55% (2001)
•  District with Highest Literacy Kanyakumari (92.14%); Chennai 90.33%)
•  District with Lowest Literacy Dharmapuri(64.71%; Ariyalur (71.99%)

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 Glossary C-D Ratio - Ratio of Bank advances to
deposits
Per capita Income - In come per head
(GSDP / Population) Bio-diesel - Extraction of oil from plants
like jatropha
GSDP - Money value of all goods and
services produced annually in the MSMEs - Micro, Small and Medium
State Enterprises
Neo natal Mortality - Death of kids soon Micro Enterprise - Enterprise with a
after delivery capital investment, not exceeding 25
lakhs (These may change)
Infant Mortality Rate - Death of children
before completing one year after birth. Small Enterprise - Unit with investment
on plant and machinery above 25 lakhs
Child Mortality Rate - Death of child
but below 10 cr. (These may change)
before the age of five

MODEL QUESTIONS

Part-A  Multiple Choice Questions

1. In health index, Tamil Nadu is ahead of 4. The main source of irrigation in Tamil
a) Kerala Nadu is

b) Punjab a) river
b) tank
c) Gujarat
c) well
d) all the above
d) canals
2. In sex ratio, Tamil Nadu ranks
5.
Knitted garment production is
a) first concentrated in
b) second a) Coimbatore
c) third b) Tiruppur

d) fourth c) Erode
d) Karur
3. Tamil Nadu is rich in
6. Which of the following is wrongly
a) Forest resource matched?
b) human resource a) Gateway of Tamil Nadu –
c) mineral resource Thoothukudi
d) all the above b) Home textile city - Erode
c) Steel city - Salem
d) Pump city - Coimbatore
8.  Tamil Nadu Economy 244

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 7. Which of the following cities does not 12. Which district in TN has the highest
have international airport? sex ratio?
a) Madurai a) Nagapattinam
b) Tiruchirappalli b) Nilgiris
c) Paramakudi c) Tiruchirappalli
d) Coimbatore d) Thanjavur

8. TN tops in the production of the 13. Which district has the lowest child sex
following crops except ratio?
a) Banana a) Madurai
b) Coconut b) Theni
c) plantation crops c) Ariyalur
d) cardamom d) Cuddalore

9. Largest area of land is used in the 14. Which Union Territory has the highest
cultivation of sex ratio?
a) Paddy a) Chandigarh
b) sugarcane b) Pondicherry
c) Groundnut c) Lakshadeep
d) Coconut d) Andaman Nicobar

10. In literacy rate, TN ranks 15. The largest contribution to GSDP in

a) second Tamil Nadu comes from

b) fourth a) agriculture

c) sixth b) industry

d) eighth c) mining
d) services
11. In investment proposals filed by
MSMEs, TN ranks 16. In human development index, TN is
a) I ranked

b) II a) Second

c) III b) fourth

d) IV c) sixth
d) seventh

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 17. SPIC is located in 19. In India’s total cement production,
a) Chennai Tamil Nadu ranks

b) Madurai a) third

c) Tuticorin b) fourth

d) Pudukkottai c) first
d) second
18. The TICEL park is
a) Rubber Park 20. The Headquarters of Southern Railway
is at
b) Textile park
a) Tiruchirappalli
c) Food park
b) Chennai
d) Bio park
c) Madurai
d) Coimbatore.

Answers  Part-A

1 2 3 4 5 6 7 8 9 10
c c b c b b c d a d
11 12 13 14 15 16 17 18 19 20
a b c b d d c d a b

Part-B 
Answer the following questions in one or two
sentences.

21. State any two districts with favourable 24. What are major ports in Tamil Nadu?
sex ratio. Indicate the ratios.
25. What is heritage tourism?
22. Define GSDP.
26. What are the nuclear power plants in
23. Mention any four food crops which Tamil Nadu?
are favourable to Tamil Nadu.
27. Define Micro industry

Part-C  Answer the following questions in one paragraph.

28. Write a note on mineral resources in 31. Compare productivity of any two food
Tamil Nadu. crops between Tamil Nadu and India.

29. Explain GSDP in Tamil Nadu. 32. Explain the prospect for development
of tourism.
30.
Describe development of textile
industry in Tamil Nadu.
Tamil Nadu Economy 246

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 33. What are the renewable sources of 34. Describe the performance of Tamil
power in Tamil Nadu? Nadu economy in health.

Part-D  Answer the following questions in about a page

35. Describe the qualitative aspects of 37. Explain the public transport system in
population. Tamil Nadu.

36. Explain the various sources of energy

in Tamil Nadu.

ACTIVITY

1. Visit your near by village and make a spot study about crops
production, source of irrigation and living condition of farmers.

References

1. A. G. Leonard - Tamil Nadu Economy – 2006, Laxmi Publications

2. V. Rajalakshmi - Tamil Nadu Economy – 1 Jun 2002, BPI (India) PVT Ltd
https://www.ibef.org/states/tamil-nadu.aspx
https://www.quora.com/Can-Tamil-Nadu-become-the-biggest-economy-in-India
https://www.indiatoday.in › India
statisticstimes.com/economy/economy-of-tamil-nadu.php

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 CH A P TER

12 Mathematical Methods
for Economics

“The master economist must possess a rare combination of gifts. He

must be mathematician, historian, statesman, philosopher to some degree”
- J.M.Keynes

Learning Objectives

1 To understand why mathematics is required for

economics,

2  o learn the knowledge of mathematical methods, as a facility for self-expression

T
not only in descriptive economics, but also in quantitative economics.

12.1 policy making. Hence, the mathematical

methods would help economists to use
Introduction
the quantitative variables in a better way
and to obtain accurate results.
Economic analysis is a systematic
The lengthy and descriptive
approach to (a) determine the optimum
economic contents can be clearly set in
use of scarce resources and (b)choose
simple notation in mathematical models for
available alternatives and select the
clear and easy understanding. For example,
best alternative to achieve a particular
the number of pens demanded in a given
objective. Mathematical methods are
time period in a Higher Secondary School
helpful for achieving the objectives of the
is 200 when price is zero. This decreases
economic analysis.
by 10 for every ₹1 rise in the price of pen.
It is expressed mathematically as
12.1.1 Why Study Q = 200 - 10 P, here Q is the
Mathematics? quantity demanded and P is the price.
The subject Economics deals with many Thus large information can be expressed
quantitative variables and functions, in and communicated with simple functions
consumption, production, distribution and and equations.
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 12.1.2 Mathematics in 12.2
Economics
Functions
Sir William Petty
declared that he wanted
to reduce political and 12.2.1  Definition
economic matters in A function is a mathematical relationship
terms of number, weight in which the values of a dependent
and measure. He was the variable are determined by the values of
first one to use Sir William Petty one or more independent variables.
mathematics in 1623-1687 Functions with a single
economics. The first independent variable are called Simple
known writer to apply mathematical method Univariate functions. There is a one to one
to economic problems was Giovanni Ceva correspondence. Functions,with more
(1711), an Italian. than one independent variable, are called
Multivariate functions. The independent
12.1.3 Uses of Mathematical variable is often designated by X. The
Methods in Economics dependent variable is often designated
1. Mathematical Methods help to by Y. For example, Y is function of X
present the economic problems in a which means Y depends on X or the value
more precise form. of Y is determined by the value of X.
Mathematically one can write Y = f(X).
2. Mathematical Methods help to
explain economic concepts.
3. Mathematical Methods help to 12.2.2  Linear Equation
use a large number of variables in A statement of relationship between two
economic analyses. quantities is called an equation. In an equation,
4. Mathematical Methods help to if the largest power of the independent
quantify the impact or effect of any variable is one, then it is called as Linear
economic activity implemented by Equation. Such equations when graphed give
Government or anybody. There are straight lines. For example Y = 100-10X.
of course many other uses.
For a straight line, there are two
Think and Do variables namely X and Y. X is called
independent variable and Y is called
„„Who is the father of
dependent variable.
Economics? Did he use
any of the mathematical When ‘X’ value increases by one
tools in his contributions? unit, then the corresponding change in
If yes, list out. the ‘Y’ value is called as the slope of the
„„Find out the mathematical line. Slope of the line is obtained by the
tools, which are used by you formula,
in your daily routine life. m = slope (marginal change)

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 Y2 − Y1 Change inY 2(Y-2) = -10(x-2)
m= , 2Y-4 = -10x +20
X2 − X1 Change in X .
2Y = -10x+24
Where (X 1, Y 1) and (X 2, Y 2) are two Y = -5x +12
arbitrary points
-5 is slope, denoted by m
Slope or Gradient of the line 12 is Y intercept, or constant denoted by c
represents the ratio of the changes in This is of the form Y = mX + c
vertical and horizontal lines.
Y = 12-5X when X = 0; Y = 12

The formula for constructing a straight When Y = 0; X = 12/5 = 2.4

line is (This line looks likes demand line in micro
economics )
(Y - Y1) = m(X - X1)
12
If the two points are (0, 0) and (X, Y) then
the formula is Y = mX 10
Y=12-5X
8

Example 12.1 6
Price

4
Find the equation of a straight line which
passes through two points (2, 2) and (4, -8) 2

which are (X1, Y1) and (X2, Y2) respectively.

0 2 4 6 8 10 12
Note: For drawing a straight line, at least 2.4 Quantity demanded
two points are required. Many straight Diagram 12.1
lines can pass through a single point.
12.2.3 Application in
Solution Economics

Here X1 = 2,  Y1 = 2 By applying the above method, the demand

and supply functions are obtained.
X2= 4,  Y2 = -8
Demand Function: Qd = f (Px) where Qd
Formula for construction of straight line
stands for Quantity demand of a commodity
Y - Y1 X - X1 and Px is the price of that commodity.
=
Y2 - Y1 X 2 - X 1 Supply Function: Qs = f (Px) where ‘Qs’
stands for Quantity supplied of a commodity
Applying the values
and Px is the price of that commodity.
Y -2 X -2 In the example 12.1 the equation Y
=
-8 - 2 4 - 2 = -5X + 12 has been obtained. It is a linear
Y -2 X -2 function. Since slope is negative here, this
=
-10 2 function could be a demand function.
Mathematical Methods for Economics 250

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 Demand Line Supply Line
YY YY
YY
33 88 (20,7)
(20,7) 1010
77 (10,6)
(10,6)
(2,2)
(2,2) 66 (0,5) 7.5
7.5
22 (0,5)
55

Price
Price
Price

55

Price
Price

44

Price
11 33
22 2.5
2.5
(12,0)
(12,0) 11
00
22 44 66 88 1010 1212 XX
00 55 1010 1515 2020 xx 00
QuantityDemanded
Quantity Demanded
QuantitySupplied
Quantity Supplied
Diagram12.2
Diagram 12.2 Diagram12.3
12.3
Diagram
Price-quantity relationship is negative in supply function can be obtained from the
demand function. Qd = 12-5 X � or Qd = statement that supply increases 10 units
12-5 P . If P = 2, Qd = 2. for each one rupee rise in price, that is
YY
When P assumes 0, only 12 alone (10, 6) & (20, 7).
remains in the equation. This is called
Intercept or Constant, = 0 and Qd = 12.
if surplus
Consumer’s
Consumer’s Psurplus When p = 5, supply is zero. When p = 6,
In Marshallian supply is 10 and so on. When p is less than
,P ) analysis,money
Price
Price

(X0,P
BB (X 0 0)0
P0
P0
terms measured in Y-axis and physical 5, say 4, supply is -10, which is possible
Demand
units are measured in X-axis.
Demand curve
Accordingly,
curve
in mathematics. But it is meaningless
price is measured in Y-axis and quantity in Economics. Normally supply curve
demanded is measured in X-axis originates from zero, noting that when
0 0 price is zero, supply is also zero.
XX0 0 xx
Demand
Demand
Example: 12.2 Diagram
Diagram12.8
12.8
Find the supply function of a commodity The equation of the straight line
such that the quantity supplied is zero, joining two data points (10, 6) and (20, 7)
when the price is ₹5 (or below) and the is given as
supply (quantity) increases continuously The equation of the straight line is
at the constant rate of 10 units for each
Y - Y1 X - X1
one rupee rise when the price is above ₹5. =
Y2 - Y1 X 2 - X 1

Solution: substituting the values of (x1, y1) (x2, y2)

To construct the linear supply function by (10, 6) , (20, 7) respectively,
atleast two points are needed. First data
point of supply function is obtained from Y - 6 X - 10
=
the statement that the quantity supplied is 7 - 6 20 - 10
zero, when the price is ₹5, that is (0, 5). Y - 6 X - 10
=
The second and third data points of 1 10

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 Demand = Supply
(These are hypothetical examples)

Price
100-10P = 50 + 10 P
100-50 = 20P
50 = 20P
Quantity demanded
50
=P
20
Diagram 12.4 P = 2.5
When P = 2.5, Demand = 100-10 (2.5)
X - 10 = 75
Then Y -6 =
10
When P = 2.5, Supply = 50 +10 (2.5)
10(Y - 6) = X - 10 = 75
10Y - 60 = X - 10
Example: 12.3
10Y - 60 + 10 = X
Find the equilibrium price and quantity
10Y - 50 = X
by using the following demand and
-X = -10Y + 50
supply functions Qd = 100-5P and
Multiplying both sides by minus (-), we get Qs = 5P respectively.

X = -50 + 10Y Y

10
Considering X as quantity supplied and Y
as price (P) 7.5 D
S
Then X = 10P - 50 (or) 5
Price

X = -50 + 10 P E
2.5
If Price = 0; Q = -50
If Q = 0; P = 5 0 25 50 75 100 x
Note: The coefficient of ‘P’ is - in demand Demand/Supply

function. Diagram 12.5

The coefficient of ‘P’ is + in supply Solution:

function.
Equilibrium is attained when,
Qs = Q d
12.2.4 Equilibrium
5 P = 100 - 5 P
The point of intersection of demand line and
10P = 100
supply line is known as equilibrium. The
P = 10
point of equilibrium is obtained by using
When P = 10
the method of solving a set of equations.
One can obtain the values of two unknowns In supply function
with two equations. At equilibrium point, Qs = 5 P = 5 x 10 = 50
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 In demand function, Find the linear demand function and its
Qd = 100 - 5 P = 100 - 5(10) = 50 slope.

Hence at Solution:
P = 10, Qd = 50, Qs = 50. Equation of demand function joining two
Quantity demanded is equal to supply at data points (100, 1) and (50, 2) are (x1, y1)
50 units when price is ₹10 and (x2, y2) respectively.

Example: 12.4
Y
The market demand curve is given by D = 4
50 - 5P. Find the maximum price beyond
3
which nobody will buy the commodity.

Price
Y 2

20
S
1
15
E
Price

10 0 50 100 150 200 X

Quantity Demanded
5 Diagram 12.7
D

0 x Y - Y1 X - X1
25 50 75 100
=
Quantity Demanded Y2 - Y1 X 2 - X 1
Diagram 12.6 Y - 1 X - 100
=
2 - 1 50 - 100
Solution:
Y - 1 X - 100
=
Given 1 -50
Qd = 50 - 5P -50 (Y - 1) = 1 (X - 100)
5P = 50 - Qd -50Y + 50 = X - 100
-50Y + 50 + 100 = X
5P = 50 when Qd is zero.
-50Y + 150 = X
50
P= X = 150 - 50Y
5
Hence the demand function is
P = 10 When P = 10, Demand is 0
Hence P = 10, which is the maximum Qd = 150 – 50P and Slope m = – 50
price beyond which nobody will demand
the commodity. Think and Do for
Water Management in
Example: 12.5 your area
The demand for milk is given by Try to find the demand function
for water in your street and the
Price (Y) 1 2 3
daily total demand for water in
Demand (X) 100 50 0 litre for all purposes.

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 12.3 a11 a12 a13
Matrices a21 a22 a23 is a determinant of the
a31 a32 a33
12.3.1 Matrices matrix A denoted by A .

‘Matrix’ is a singular while ‘matrices’ is The value of the determinant is expressed

a plural form. Matrix is a rectangular as a single number.
array of numbers systematically arranged Calculation of the value of
in rows and columns within brackets. determinant for a 2 x 2 matrix is shown
In a matrix, if the number of rows and below
columns are equal, it is called a square
matrix.
a1 b1
If A = then A = a1b2 − a2b1
a2 b2
12.3.2 Determinants
Calculation of determinant value for a
3 x 3 matrix is shown below
For every square matrix, there exists
a determinant. This determinant is an a1 b1 c1
arrangement of same elements of the b c2 a c2 a b2
a2 b2 c2 = a1 2 − b1 2 + c1 2
corresponding matrix into rows and b3 c3 a3 c3 a3 b3
a3 b3 c3
columns by enclosing vertical lines.
For example, = a1(b2c3-b3c2)-b1(a2c3-a3c2)+c1(a2b3-a3b2)

Example: 12.6
1 3 5
  Find the value of the determinant for the
 6 2 4  is a square matrix of order
7 8 9 3 4
  matrix A=  
3 x 3,then 10 −2 

1 3 5 Solution:
6 2 4 is a determinant. 3 4
Given matrix A =   then, the
7 8 9 10 −2 
Determinant
 2 3
  is a square matrix of order 2 x 2, then 3 4
5 7 A= = 3 ( −2 ) − 10(4)
10 −2
2 3
is a determinant. = - 6 - 40 = - 46 is the value of the
5 7
determinant.
 a11 a12 a13 
 
In general, if A =  a21 a22 a23  is a matrix Example: 12.7
a
 31 a32 a33  Find the value of the determinant of the
then, matrix

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 3 4 7 a11 a12 a13
  where, ∆ = a21 a22 a23
A = 2 1 3
7 2 1 a31 a32 a33
 
b1 a12 a13 a11 b1 a13
Solution: ∆ x = b2 a22 a23 , ∆ y = a21 b2 a23 ,
Determinant of the given matrix is, b3 a32 a33 a31 b3 a33
a11 a12 b1
3 4 7
1 3 2 3 2 1 ∆z = a21 a22 b2
A = 2 1 3 =3 −4 +7
2 1 7 1 7 2 a31 a32 b3
7 2 1
= 3 (1 - 6) -4 (2 - 21) Key Note
+ 7 (4 - 7)

= 3 (-5) -4 (-19) + 7 (-3) If the determinant ∆ = 0 , then

solution does not exist.
= -15 +76 -21

A = 40

The value of determinant is 40. Example: 12.8

Find the value of x and y in the equations
12.3.3  Cramer’s Rule by using Cramer’s rule. x + 3y = 1 and
3x - 2y = 14
Cramer’s rule
Solution:
provides the solution
of a system of linear Given equations are
equations with ‘n’ x + 3y = 1
variables and ‘n’ 3x - 2y = 14
equations. It helps Then the equations in the matrix form :
to arrive at a unique 1 3  x   1 
G. CRAMER
solution of a system    =  
(1704-1752)  3 −2   y  14 
of linear equations
with as many equations as unknowns. 1 3
Calculating ∆, ∆=
3 −2
If the given equations are
= -2 -9
a11x + a12 y + a13 z = b1
= - 11
a21x + a22 y + a23 z = b2 ∆ ≠ 0, Hence solution exists.
a31x + a32 y + a33 z = b3 1 3
∆x = = −2 − 42 = -44
then 14 −2

∆x ∆y ∆z 1 1
x= , y= , z= ∆y = = 14 − 3 = 11
∆ ∆ ∆ 3 14

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 ∆x −44 ∆y 11 Solution:
Hence x = = =4, y= = = −1
∆ −11 ∆ −11 The matrix form of the given equation is
∴ x = 4 and y = −1 written as

7 1 1 x1 0
Answer checking:
10 2 1 x2 8
Substituting in equation the values of x 6 3 2 x3 7
and y,
4 + 3(-1) = 1, 7 −1 −1
∆ = 10 −2 +1
3(4) – 2(-1)= 14
6 3 −2

Example: 12.9 = 7(4-3)-(-1)(-20-6)+(-1)(30+12)

Find the solution of the system of equations. = 7(1) + 1(-26) - 1(42)
5x1 + 3x2 = 30 = 7 -26 - 42 = -61
6x1 - 2x2 = 8 0 −1 −1
Δx1 = = 8 −2 1
Solution:
7 3 −2
The coefficient and the constant terms are
given below for the equations = 0(4-3)-(-1)(-16-7) + (-1)(24 + 14)
= 0 + 1(- 23)-1(38)
5 3
∆= = −10 − 18 = −28 = -23 - 38 = -61
6 −2
30 3 7 0 −1
∆x1 = = −60 − 24 = −84
8 −2 Δx2 = = 10 8 1
5 30 6 7 −2
∆x2 = = +40 − 180 = −140
6 8 = 7(-16-7)-0(-20-6)+(-1)(70-48)
∆x1 −84
∴ x1 = = =3 = 7(-23) + 0 - 1(22)
∆ −28
∆x −140 = -161-22 = -183
x2 = 2 = =5
∆ −28
7 −1 0
∴� x1 = 3, x2 = 5 Δx3 = = 10 −2 8
6 3 7
Example: 12.10
= 7(-14-24) - (-1)(70-48) + 0(30 + 12)
Find the solution of the system of equation
= 7(-38) + 1(22) + 0
7x1 - x2 - x3 = 0
= -266 + 22 = -244
10x1 - 2x2 + x3 = 8
∆x1 −61
6x1 + 3x2 - 2x3 = 7 x1 = = =1
∆ −61

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 ∆x2 −183 To find ∆y
x2 = = =3
∆ −61 2 32 1
∆x −244
x3 = 3 = =4 ∆y = 4 52 2
∆ −61
2 60 3

12.3.4  Application in Economics ∆y = 2(156 − 120) − 32(12 − 4) + 1(240 − 104)

= 2(36) − 32(8) + 1(136)
Example 12.11 = 72 − 256 + 136 = −48
Mr.Anbu, purchased 2 pens, 3 pencils and
To find∆z
1 note book. Mr.Barakath , purchased
2 3 32
4 pens, 3 pencils and 2 notebooks.
Mr.Charles purchased 2 pens, 5 pencils ∆z = 4 3 52
and 3 notebooks. They spent ₹32, ₹52 and 2 5 60
₹60 respectively. Find the price of a pen, a
pencil and a note book. ∆z = 2(180 − 260) − 3(240 − 104) + 32(20 − 6)
= 2(−80) − 3(136) + 32 (14)
Solution:
= −1600 − 408 + 448 = −120
Let x be the price of a pen, y be the price of −60
a pencil and z be the price of a notebook, x= = 5 (Pr ice of a pen)
−12
In equations: −48
y= = 4 (Pr ice of a pencil )
2x + 3y + 1z = 32, −12
−120
4x + 3y + 2z = 52, z= = 10 (Pr ice of anotebook )
−12
2x + 5y +3z = 60
In matrix form Answer checking
 2 3 1  x  32  2(5)+3(4)+1(10)=32
    
 4 3 2  y   52  4(5)+3(4)+2(10)=52
 2 5 3  z  60 
  2(5)+5(4)+3(10)=60
  2(9  10 )  3(12  4 )  1(20  6)
 2(1)  3(8 )  1(14 ) Think and Do
 2  24  14  12 Fathima, purchased 6 pens and
To find ∆x 5 Pencils spending ₹49, Rani
purchased 3 Pens and 4 pencils
32 3 1
spending ₹32. What is the price
∆x = 52 3 2
of a pen and pencil?
60 5 3
6 5   x1   49 
3 4   x  = 32 
x 32(9 10) 3(156 120) 1(260 180)   2  
32( 1) 3(36) 1(80) Solution : Price of a pen = ₹4
32 108 80 60 Price of a pencil = ₹5
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 12.4 1
Key Note
DIFFERENTIAL CALCULUS
If the power of any non-zero real
number is zero, it's value is 1
12.4.1 Meaning x 0 = 1 when x ≠ 0

The fundamental operation of calculus

is differentiation. Derivative is used to Example: 12.12
express the rate of change in any function. dy
Derivative means a change in the If Y = 4, then find
dx
dependent variable with respect to small
Solution:
change (closer to zero) in independent
variable. Y = 4, here 4 is a constant.Differentiation
of constant function is zero.
Let the function be,
dy d ( 4 )
So, = =0
y = f(x) dx dx

Differentiating y with respect to x is, Example: 12.13

d ( y) df ( x ) Find the slope of the function y = 6x3 for
=
dx dx any value of x.

Solution:
12.4.2 Some Standard Forms Given y = 6x3
of Differentiation dy
Slope =
dx
(Constant, addition and subtraction
only) dy
= 6 ( 3) x3−1 = 18x2 for any value of x.
dx
d(c)
1. = 0 where C is a constant. Example: 12.14
dx
What is the slope of the function y = 5x4
(Read differentiation of ‘C’ with when x = 10?
respect to ‘x’ is)
Solution:
n
d(x )
2. = nx n−1 Given function y = 5x4
dx
dy
Slope = �
d(x ) dx
3. = 1x1−1 = 1x 0 = 1 dy
dx = 5 ( 4 ) x 4−1
dx
d (u + v) du dv = 20x3
4. = +
dx dx dx When x = 10, then slope = 20 (10)3
d (u − v) du dv = 20,000,
5. = −
dx dx dx Therefore Slope is 20,000.

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 Example: 12.15
12.4.4  Marginal concepts
Differentiate the function Y = 3x2 + 16x3
with respect to x. Marginal concept is concerned with
variations of Y (on the margin of X), that is, it
Solution: is the variation corresponding in Y to a very
small variation in X. (X is the independent
Y = 3x2 + 16x3 variable and Y is the dependent variable)
Differentiating,
dy 12.4.5  Marginal Product
= 3 ( 2 ) x 2−1 + 16 ( 3) x3−1
dx
Marginal product of a factor of production
= 6 x1 + 48 x 2 refers to addition to total product due to
dy the use of an additional unit of a factor.
= 6 x + 48 x 2
dx
MP = d(TP)/dQ = ∆TP/∆Q
Example: 12.16

dy 12.4.6  Marginal Cost

If Y = 2x3 -6x, then find
dx
Solution: Marginal cost is an addition to the total
cost caused by producing one more unit of
Y = 2x3 -6x output. In symbols:
Differentiate ‘y’ with respect to x,
d(TC) Δ(TC)
dy MC = or MC =
= 2 ( 3) x3−1 − 6 (1) x1−1 dQ ΔQ
dx
= 6 x2 − 6 x0 Where, ∆TC represents a change in total
dy cost and ∆Q represents a small change
= 6x2 − 6
dx in output or quantity. (in economics one
worker, one output etc are assumed to be
12.4.3 Application of very small units)
Differential Calculus
Example: 12.17
The relation between two or more
Given the total cost function, TC = 15 + 3Q2
variables can be expressed by means
+ 7Q3, drive the marginal cost function.
of a function. Continuous functions
alone are differentiable. For instance, Solution:
the differential calculus is applicable for
finding the following: TC = 15 + 3Q2 + 7Q3
(1) The rate of change in demand with
MC =
d (15 )
+
(
d 3Q 2 ) + d ( 7Q )
3

respect to price (in micro economics)

dQ dQ dQ
(2) The rate of change in income with = 0+3(2)Q2-1 + 7(3)Q3-1
respect to the investment. (in
macroeconomics) . MC = 6Q +21Q2
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 d (TC )
12.4.7  Marginal Revenue MC (Q) = = 3Q3-1 - 18(2)Q2-1
dQ
Marginal Revenue is the revenue
+ 91(1)Q1-1+0
earned by selling an additional unit of
the product. In other words, Marginal = 3Q2 - 36Q1 + 91Q0 + 0
Revenue is an addition made to the total MC (Q) = 3Q2 - 36Q + 91   (∴Q0 = 1)
revenue by selling one more unit of the When Q = 3
good. MC(Q) = 3(32)-36(3)+91
d (TR ) ∆TR = 3(9)-108+91
MR = or =� = 27-108+91
dQ ∆Q
=118-108
Where ∆TR stands for change in the total =10
revenue, and ∆Q stands for change in output. To find AVC

Example: 12.18 Given TC(Q)= Q3 - 18Q2 + 91Q + 10

We know TVC (Q) = Q3 - 18Q2
Given TR = 50Q - 4Q2,find marginal
+ 91Q (∴constant value is fixed cost)
revenue when Q = 3.
AVC(Q)=TVC(Q)/Q
Solution:
AVC(Q) = Q2 – 18Q + 91
TR = 50Q - 4Q2 When Q = 3
MR = d(TR)/dQ AVC(Q) = 32–18(3)+9
MR = 50(1)Q1-1 - 4(2)Q2-1 =9–54+91
=100–54 = 46
= 50(1)Q0 - 8 Q1
Q 3 − 18Q 2 + 91Q
= 50(1) - 8Q  (∴Q = 1,Q =Q)
0 1 ∴AVC(Q) =
Q
MR = 50 - 8Q =Q2 -18Q +91
When Q = 3 Note : Fixed cost= 10
10
Average fixed cost = .
MR = 50 -8(3) =26 Q
Example: 12.19 Q 3 − 18Q 2 + 91Q + 10
Average cost =
A producer has the total cost function Q
TC (Q) = Q3 - 18Q2 + 91Q + 10 where costs
are given in rupees. Find the marginal 10
= Q 2 − 18Q + 91 +
cost (MC) and the average variable cost Q
(AVC), when Q =3. So Average cost = AVC + AFC

Solution: AC = AVC + AFC

Given TC(Q) = Q3 - 18Q2 + 91Q + 10, To TC

AC =
find MC differentiate the function with Q
respect to Q.
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 Example: 12.20
12.4.8  Elasticity of Demand
A manufacturer estimates that, when units
of a commodity are produced each month Elasticity of Demand is the ratio of
the total costs will be TC(Q) = 128 + 60Q the proportionate change in quantity
+ 8Q2 Find the marginal cost, average cost, demanded to the proportionate change in
fixed cost, variable cost, average fixed cost price. In mathematical terms,
and average variable cost. P dx
ed = ( ) ( )
x dp
Solution: In demand function Q = a–bP
Given that TC(Q) = 128 + 60Q + 8Q2 ed = (dQ/dP)(P/Q)
We know TC = Fixed cost + variable Example 12.21
cost 100
If the demand function is x = ,find ed
P
d (TC ) with respect to price at the point where P = 2
MC (Q) =
dQ
Note
= 0 + 60(1)Q1-1 + 8(2)Q2-1
By taking supply function, the
= 0 + 60Q0 + 16Q1(Since, Q0=1) elasticity of supply can be calculated
MC = 60 + 16Q
TC
AverageCost
� =
Q Solution:
128 + 60Q + 8Q 2 Given
=
Q 100
x= = 100 P −1
P
128
AC = + 60 + 8Q dx
Q ∴ = 100(−1)P-1-1
dp
Constant value is known as fixed cost
= 100(−1)P-2

Fixed cost = 128 = -100(P-2)

−100
FC = 128 =
P2
128
Average Fixed cost = At P=2,
Q
128 dx -100 100
AFC = = = -25 and=x = 50
Q dp 4 2
Substituting the values in formula
Average Variable cost =60 + 8Q (total
variable cost divided by Q) Pdx  2   −100  −200
ed = =   = = −1
xdp  50   4  200
∴� AVC = 60 + 8Q ed = -1
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 12.5 b. The differential symbol ‘dx’ is written
by the side of the function to be
Integral Calculus integrated.
c. ∫f ( x ) dx = F(x)+C, C is the integral constant
12.5.1 Integration
∫f ( x ) dx
means, integration of f(x) with
Differential calculus measures the rate of respect to x.
change of functions. In Economics it is
also necessary to reverse the process of 12.5.3 Basic Rule of Integration
differentiation and find the function F(x)
x (n+1)
whose rate of change has been given. This (i) Power Rule ∫x dx = n
+C
is called integration. The function F(x) is n +1
termed an integral or anti- derivative of ∫
(ii) k dx = kx + c, where k is a constant
the function f(x).
(iii) ∫a.xn dx = a∫xn dx
The integral of a function f(x) is
expressed mathematically as Example 12.22

∫ 4 x dx = 4 ∫ x dx
3 3

∫f ( x ) dx = F ( x ) + C
x 3+1
Here the left hand side of the equation is =4 +c
3 +1
read “the integral of f(x) with respect to x4
x” The symbol ∫ is an integral sign, f(x) is =4 +c
4
integrand, C is the constant of integration, 4
= x +c
and F(x)+c is an indefinite integral. It is
so called because, as a function of x, which Example12.23
is here unspecified, it can assume many
∫ (x + x − 1)dx = ∫ x 2dx + ∫ xdx − ∫ dx
2
values.

x 2+1 x1+1
= + −x +c
12.5.2  Meaning 2 +1 1+1

If the differential coefficient of F (x) with x3 x2

= + −x +c
respect to x is f(x), then an integral of f(x) 3 2
with respect to x is F(x). It is a reverse Example 12.24
process of differentiation. In symbols:
∫ 5dx = 5x + c
d  F ( x ) 
If  = f ( x ) , then∫ f ( x ) dx = F ( x ) + C Example12.25
dx
x1+1
Following points need to be remembered: ∫ 4 xdx = 4 1 + 1 + c
a. ∫ is used to denote the process of x2
=4 +c
integration. In fact, this symbol is an 2
elongated ‘S’ denoting sum. = 2x 2 + c
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 12.5.4 Application of TC = ∫ y � dx + c
fin
Integration = (23 16 x 3x 2 )dx c ,
Example 12.26 where c is a constant

Let the marginal cost function of a firm = ∫ 23dx + ∫16 xdx − ∫3x 2 dx+c
be 100-10x+0.1x2 where x is the output. x2 x3
= 23x+16 3 c
Obtain the total cost function of the firm 2 3
under the assumption that its fixed cost TC = 23x + 8x2 - x3 + c
is ₹500. c = 40 given
Solution ∴TC = 23x+8x2-x3 + 40
TC
MC = 100 - 10x + 0.1 x2 Average cost function =
x
40
TC = 100 10x 0.1x 2 d x = 23 + 8x - x2 +
x
Y
x2 x3 Y
= 100x-10 + 0.1 + c 3 8
2 3 12.5.5  Consumer’s Surplus
7
x3 This2 (2,2)was
theory developed by the Alfred 6
= 100x-5 x + + c
2
(0,5)
30 Marshall. The demand function P(x) 5

Price
Price

Fixed cost is given as ₹500 reveals the relationship between the 4

1 3
quantities that the people would buy at
x3 2
∴TC = 100 x − 5x 2 + + 500 given price. It can be expressed as(12,0)
30 1

x3
0
2 4 P 6= f (x)
8 10 12 X
= − 5x 2 + 100 x + 500 0
30 Consumer Quantity
surplusDemanded
is the difference
between the price one is willing to pay and
Example 12.27 the price that Diagram 12.2paid.
is actually

The marginal cost function for producing It is represented in the following

x units is y = 23 + 16x - 3x2 and the total diagram.
cost for producing zero unit is ₹40. Obtain
Y
the total cost function and the average
cost function.
Consumer’s surplus
Solution:
Price

B (X0,P0)
Given the marginal cost function y = 23 + P0
16x - 3x2 ; c = 40 Demand curve
₹40 is the fixed cost.
We know that 0 X0 x
Demand
Total Cost function = ∫ (Marginal cost
Diagram 12.8
function) dx+c
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 Mathematically, the consumer’s surplus Example 12.29
(CS) can be defined as Given the demand function Pd = 25 - Q2
CS = (Area under the demand and the supply function Ps = 2Q + 1.
curve from x = 0 to x = x0) - (Area of the Assuming pure competition, find (a)
rectangle OX0BP0) consumers surplus and (b) producers surplus.
x0
(Pd = Demand price; Ps = Supply price)
CS = [ p x dx]-x0p0
0 Solution:
Example:12.28 For market equilibrium, Pd = Ps
If the demand function is P = 35 - 2x - x2 25-Q2 = 2Q+1
and the demand x0 is 3, what will be the 0 = -25 + Q2 + 2Q+1
consumer’s surplus?
0 = -24 + Q2 + 2Q
Solution Q2 + 2Q - 24 = 0
Given demand function, Q2 + 6Q - 4Q - 24 = 0
P = 35 - 2x - x2 Q(Q + 6) -4(Q + 6) = 0
for x = 3
(Q + 6)(Q- 4) = 0
P = 35 - 2(3) -32
So, Q = 4 or Q = -6. Since Q cannot be
= 35 - 6 - 9
equal to -6,
P = 20 Q=4
Therefore,
When Q=4, Pd =25 -42=9;
CS = (Area of the curve below the
demand curve from 0 to 3) - Area of the Ps =2(4) + 1=9
rectangle (20 x 3 = 60) 4

3
Consumers’ surplus =  ( 25 - Q 2 )dQ -
CS =  (35-2x-x2)dx-(20×3) (9 X 4) 0

0
3 4
 x2 x3   Q3 
= 35x − 2 −  -60 = 25Q -  − 36
 2 3 0  3 0
32 33
= 35(3) -2( ) - -60 =[ (25)(4) -
1
(4)3 ] -(0) -36
2 3 3
= 105 -9 -9 - 60
64
= 27 Units. = [100 - ] - (0) -36 = 42.67
3
Producers’ surplus PS
12.5.6  Producer’s surplus 4
(PS) = (9×4) -  ( 2Q+1)dQ
xo
PS = Po xo -
0
òo
g (x )d x
4
= 36 - (Q2 +Q)
0

= 36 - (16 + 4) = 16
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 Think and Do S.No Information Technologies
„„Find your change in 5 Transmission Internet,
mark by additional hour Teleconference,
of study in any of your Video
subject conferencing,
„„Find your consumption Mobile
of petrol for an additional Technology, Radio
unit of kilometer travelled 6 Exchange E mail, Cell phone
„„Ask your parents about
The evaluation of ICT has five phases.
their spending with
They are evolution in
respect to every additional
unit of wage or salary or (a) Computer
income
(b) PC
(c) Microprocessor

12.6 (d) Internet and

Information and (e) Wireless links

Communication In Economics, the uses of mathematical
Technology (ICT) and statistical tools need the support
of ICT for data compiling, editing,
Information and Communication manipulating and presenting the results.
Technology (ICT) is the infrastructure In general, SPSS and Excel packages are
that enables computing faster and often used by researchers in economics.
accurate. The following table gives an idea Such Software is designed to do certain
of range of technologies that fall under the user tasks.Word processor, spread
category of ICT. sheet and web browser are some of the
examples which are frequently used while
S.No Information Technologies undertaking analysis in the study of
1 Creation Personal economics.
Computers, Digital
Camera, Scanner, 12.6.1  MS Word
Smart Phone
MS word is a word processor, which helps
2 Processing Calculator, PC, to create, edit, print and save documents
Smart Phone for future retrieval and reference.
3 Storage CD, DVD, Pen
Drive, Microchip, The features of word
Cloud processor are
4 Display PC, TV, Projector, a) Document can be created, copied,
Smart Phone edited and formatted.
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 b) Words and sentences can be inserted,
12.6.2  Microsoft Office Excel
changed or deleted.
c) Formatting can be applied. It is used in data analysis by using
formula. A spread sheet is a large sheet
d) Margins and page size can be adjusted.
of paper which contains rows and
f) Spell check can be availed. columns. The intersection of rows and
g) Multiple documents – files can be columns is termed as ‘cell’. MS Excel
merged. 2007 version supports up to 1 million
rows and 16 thousand columns per
How to open a word work sheet.
Document?
One can open MSWord from various Start
options.
You can start excel from various
Click start → All program → MS options.
word or Double click the MS word icon
from the desktop. „„Click Start → Program → Micro Soft
Excel.
Uses of Menu „„Double Click the MS Excel Icon from
the Desk top.
Home menu → It is used to change the
fonts, font size, change
the text color and apply Work Sheet
text style bold, italic, A worksheet is a table like document
underline etc. containing rows and columns with data
Insert → It is used to insert page and formula. There are four kinds of
numbers, charts, tables, calculation operators. They are arithmetic,
shapes, word art forms, comparison, text concatenation (link
equations, symbols and together) and reference. MS Excel helps to
pictures. do data analysis and data presentation in
the form of graphs, diagrams, area chart,
Page Layout → It is used to change the
line chart etc.
margin size, split the
text into more columns,
background colour of a
page. 12.6.3  Microsoft Power Point
Reference → Insert table of authors, It is a software used to perform computer
endnote, footnote based presentation.
Review → Spell check, Grammar, Steps involved in making
Translate. presentation:
View → Print layout, full screen Click Start Menu
(i)
reading, document view (ii) Click Program

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 (iii) Select Microsoft Power point –
Click. CONCLUSION 

(iv) New Power Point file will open, and This chapter provide the knowledge of
then type the title and subtitle if necessity of mathematics in economics
wanted. by explaining the application of linear
algebra, calculus and Information
A new slide can be inserted by ‘click’
(v)
Communication and Technology.
on icon ‘new slide’ or using short
Specifically the knowledge of functions,
key ‘Ctrl + M’
matrices , differential calculus, Integral
(vi) We can type the content, insert the calculus ,MS word, MS Excel and Power
table, pictures, movies, sounds, Point Presentation are depicted with
etc., with the content. suitable applications. The activities are
(vii) 
Tab ‘Design’ helps to design the also added for students to learn it reality
slides (can select common design for about the use of mathematical methods  in
all slides or separate slide for each economics. 
slide)
(viii) Click icon slide show, one can run
FORMULAE
slide show either starting from
the first slide or starting from the 1. m= y2-y1/x2-x1 for Slope
current slide. 2. (y-y1) = m (x-x1 ) for straight Line
The power point presentation (PPT) 3. A = a 1(b 2c 3 – b 3c 2) – a 2(b 1c 3-
facilitates the key points to be kept in b 3 c 1 )+a 3 (b 1 c 2 -b 2 c 1 ) for 3x3
memory and understand the particular matrices
topic. Recently, the smart class room
4. Differentiation of constant is
teaching uses the PPT to deliver the
zero
information in an effective way to enhance
the quality of teaching. 5. Differentiation of xn is nx(n-1)
6. ed = Marginal function / Average
function
Think and Do
−P dx
7. ed =
„„Make a Document with x dp
MS word on “Incredible
x n+1
India”. 8. Integration of x is +Cn
n +1
„„Prepare an Excel Sheet for
 x0 
your daily pocket expenses 9. CS=  ∫ f ( x )dx  − x o po
for each category/item in  0 
last month 10. PS = x 0p 0 – integration of
„„Prepare and present a supply function within limit
“Power Point” for “Day x0

= xo po - ∫ g ( x ) dx
out with your parents” 0

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 ICT CORNER
Drawing Graphs for the Data Collected

Graphs using EXCEL for

the given data is given

Steps:
• C ollection of data of Child population (0-6 years) from 1961 to 2011 in Rural and Urban areas in India.
Let us draw the graph for the data.
• Open Microsoft Excel workbook, Type the X-axis data in the First column and then type respective
data in consecutive columns.
• Now select all the typed data, After selecting the data Click “Insert” to get Charts. select scatter type to
get scroll down menu.
• S elect “Scatter with Smooth Lines and Markers” you will get the required graph as shown here.
• By selecting 3 icons on the right side to edit “chart elements” Particularly Check on the boxes Axis
Titles and Chart Title.
• Type x-axis and y-Axis, followed by Chart Title. Click “Legend” to change the position
• Now right click on the graph (a) to copy the graph and Then paste in a word page (or)Select move chart
to move In other excel page, Menu willappear to place it in new sheet.
• Now If you want to change the graph type as bar chart or any other type,click on the graph to select and
then click on any type of graph given in the top menu

Step1 Step2 Step3 Step4

Step5 Step6 Step7 Step8

Pictures are indicatives only*

URL:
https://youtu.be/Xn7Sd5Uu42A
(or) scan the QR Code

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 ICT CORNER
Consumer’s and Producer’s Surplus

Lets use Integration to find

Consumer’s and Producer’s
Surplus

Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear, Open the worksheet named
“Consumer’s and Producer’s Surplus Ex:12.29”
• Without integration we cannot find the Area under the curve. For Higher studies atleast you should
know what is Integration and why it is needed.
• In the worksheet Green colour is the Demand Curve and Blue colour is the Supply curve. They intersect
at Point A (4,9). In which x axis value 4 is the demand price. If you integrate the Demand curve
between 0 and 4 we get the area as shown. Click “Show Area Integral1” integrating the demand price
between 0 and 4.
• If you click on “Show Area of Rectangle” you can see the area of the rectangle which is obtained by
Multiplying the length 4 and Breadth 9 (Point A(4,9))
• If you subtract: the area under the curve PD -Area of the rectangle you
get the Consumer’s Surplus.
• Click on “Show Area Integral 2” you see Blue colour area which is
obtained by Integrating Supply Price line between 0 and 4. Subtract:
Area of the rectangle – Area under the line PS you get The Producer’s
Surplus. You can change PS line by moving the sliders ‘m’ and ‘c’. you
can see the changes in Consumer’s Surplus and Producer’s Surplus.

Step1 Step2 Step3 Step4

Pictures are indicatives only*

URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code

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 MODEL QUESTIONS

Part-A  Multiple Choice 5. A statement of equality between two

Questions quantities is called

1.
Mathematical Economics is the a. Inequality
integration of b. Equality
a. Mathematics and Economics c. Equations
b. Economics and Statistics d. Functions
c. Economics and Equations 6. An incremental change in dependent
d. Graphs and Economics variable with respect to change in
independent variable is known as
2. The construction of demand line or
supply line is the result of using a. Slope b. Intercept

a. Matrices c. Variant d. Constant

b. Calculus 7. (y - y1) = m(x - x1) gives the

c. Algebra a. Slope
d. Analytical Geometry b. Straight line

3. The first person used the mathematics c. Constant

in Economics is d. Curve
a. Sir William Petty 8. Suppose D = 50 - 5P. When D is zero
b. Giovanni Ceva then
c. Adam Smith a. P is 10 b. P is 20
d. Irving Fisher c. P is 5 d. P is -10

4. Function with single independent 9. Suppose D = 150 - 50P. Then, the

variable is known as slope is
a. Multivariate Function a. -5 b. 50
b. Bivariate Function c. 5 d. -50
c Univariate Function 10. Suppose determinant of a matrix 0,
d. Polynomial Function then the solution
a. Exists
b. Does not exist
c. is infinity
d. is zero

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 11. State of rest is a point termed as 16. The elasticity of demand is the ratio of
a. Equilibrium a. Marginal demand function and
b. Non-Equilibrium Revenue function

c. Minimum Point b. Marginal demand function to

Average demand function
d. Maximum Point
c. Fixed and variable revenues
1 2. Differentiation of constant term
d. Marginal Demand function and
gives
Total demand function
a. one
17. If x+y = 5 and x-y= 3 then, Value
b. zero of x
c. infinity a. 4
d. non-infinity b. 3
13. Differentiation of xn is c. 16
a. nx(n-1) d. 8
b. n x (n+1) 18. Integration is the reverse process of
c. zero a. Difference
d. one b. Mixing
14. Fixed Cost is the -----------term in cost c. Amalgamation
function represented in mathematical
d. Differentiation
form.
a. Middle 19. Data processing is done by

b. Price a. PC alone

c. Quantity b. Calculator alone

d. Constant c. Both PC and Calculator

d. Pen drive
15. The first differentiation of Total
Revenue function gives 20. The command Ctrl + M is applied for
a. Average Revenue a. Saving
b. Profit b. Copying
c. Marginal Revenue c. getting new slide
d. Zero d. deleting a slide

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 Part-A  Answers

1 2 3 4 5 6 7 8 9 10
a d b c c a b a d b
11 12 13 14 15 16 17 18 19 20
a b a d c b a d c c

Part – B  Answer the following questions in one or two

sentences:

21. If 62 = 34 + 4x what is x? (Answer :x is 7) 25. Suppose the price p and quantity q

of a commodity are related by the
22. Given the demand function q = 150 −
equation q = 30 - 4p - p2 find (i) ed at
3p, derive a function for MR.
p = 2 (ii) MR
23. Find the average cost function where
26. What is the formula for elasticity
TC = 60 + 10x +15x2
of supply if you know the supply
24. The demand function is given by x = function?
20 - 2p - p2 where p and x are the price
27. What are the Main menus of MS
and the quantity respectively. Find the
Word?
elasticity of demand for p = 2.5.

Part – C  Answer the following questions in one paragraph:

28. Illustrate the uses of Mathematical x1 - x2 + x3 = 2:  x1 + x2- x3 = 0 : 

Methodsm in Economics. -x1- x2 - x3 = -6

29. Solve for x quantity demanded if 16x − 32. If a firm faces the total cost function
4 = 68 + 7x. (Ans: x is 8 ) TC = 5+ x2 where x is output, what is
TC when x is 10?
30. A firm has the revenue function R =
600q - 0.03q2 and the cost function 33. If TC = 2.5q3− 13q2+ 50q + 12 derive
is C = 150q + 60,000, where q is the the MC function and AC function.
number of units produced. Find AR,
34. What are the steps involved in
AC, MR and MC. (Answersa:AR = 600
executing a MS Excel Sheet?
- 0.03q ; MR = 600 - 0.06 q; AC = 150
+ (60000/q) )

31. Solve the following linear equations

by using Cramer’s rule.

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 Part – D  Answer the following questions in about a page:

35. A Research scholar researching the independent variables should be

market for fresh cow milk assumes positive or negative.)
that Qt= f(Pt, Y,A,N, Pc) where Qt
36. Calculate the elasticity of demand
is the quantity of milk demanded,
for the demand schedule by using
Pt is the price of fresh cow milk, Y
differential calculus method P = 60 −
is average household income, A is
0.2Q where price is (i) zero, (ii) ₹20,
advertising expenditure on processed
(iii) ₹40.
pocket milk, N is population and Pc is
the price of processed pocket milk . 37. The demand and supply functions
(a) What does Qt= f (Pt, Y,A,N, Pc) are p d=1600 - x2 and ps = 2x2 + 400
mean in words? respectively. Find the consumer’s
surplus and producer’s surplus at
(b) Identify the independent
equilibrium point.
variables.
(c) Make up a specific form for this 38. What are the ideas of information and
function. (Use your knowledge communication technology used in
of Economics to deduce whether economics?
the coefficients of the different

ACTIVITY
1. The petrol consumption of your car is 16 Kilometers per litre.
Let x be the distance you travel in Kilometers and p the price
per litre of petrol in Rupees. Write expressions for demand for
Petrol.

2. Make up your own demand function and then derive the

corresponding MRfunction and find the output level which
corresponds to zero marginal revenue.

3. Use an Excel spreadsheet to calculate values for Quantity of

demand at various prices for the function Q = 100−10P then
plot these values on a graph.

4. Open MS-Word and put the title as PRESENT AND ABSENT

OF STUDENTS and insert the table and collect the data for all
classes of your school and find the class of highest absentees in
a month. Justify with reason for the absentees in a paragraph
by using MS Word.

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 References

1. Chiang A.C. and K. Wainwright, Fundamental Methods of Mathematical

Economics,Tata McGraw-Hill Education; Fourth edition (2013).
2. Dowling E.T, Introduction to Mathematical Economics, 2nd Edition,
Schaum‘sOutline Series, McGraw-Hill, New York, 2003(ETD).
3. Henderson, J. M. and R.E. Quandt (1980), Microeconomic Theory:
A Mathematical Approach, McGraw Hill, New Delhi.
4. James Bradfield, Jeffrey Baldani, An Introduction to Mathematical Economics,
Cengage Learning India Pvt Ltd (2008)
5. Koutsoyiannis.A Modern Microeconomics, Palgrave Macmillan; 2nd Revised
edition (2003)
6. Mike Rosser, Basic Mathematics for Economists, Second Edition, Routledge
Taylor& Francis London 2003.
7. Mehta and Maddani, Mathematics for Economics, Sultan Chand and Sons
9th editions 2008
https.pdfdrive.net/fundamental methods of mathematical economics.
https.researchgate.net/mathematical economics

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 GLOSSARY

Accelerator முடுக்கி
Advertising elasticity of demand விளம்பரத் தேவை நெகிழ்ச்சி
Alternative uses மாற்று வழிகள்
Annual plan ஓராண்டுத் திட்டம்
Art கலை
Assumption அனுமானம்
Average cost சராசரி செலவு
Average product சராசரி உற்பத்தி
Barter பண்டமாற்று
Behavioural Economics ப�ோக்கு சார் ப�ொருளியல்
Business வணிகம்
Capability செயலாற்றல்
Capital மூலதனம் (K)
Cardinal Utility Analysis இயல்பெண் பயன்பாட்டு ஆய்வு
Cash Reserve Ratio (CRR) ர�ொக்க இருப்பு வீதம்
Characteristics குணாதிசயங்கள்
Child sex Ratio 6 வயதுக்கு கீழே உள்ள 1000 ஆண் குழந்தைகளுக்கு எத்தனை
பெண்கள் இருக்கிறார்கள் என்பது குழந்தைகளின் பாலின விகிதம்
Classical த�ொன்மை
Coefficient கெழு
Colonial capitalism காலனி ஆதிக்க முதலாளித்துவம்
Concealed unemployment,
Disguised unemployment மறைமுக ேவலையின்மை
Concentration ெசறிவு
Constant Returns to Scale மாறா விகித அளவு
Consumer நுகர்பவர்
Consumer’s Surplus நுகர்வோர் உபரி / நுகர்வோர் எச்சம்
Consumption நுகர்வு (C)
Contraction of demand விலை அதிகரிப்பால் நிகழ்வு தேவைச்சுருக்கம்
Criticism திறனாய்வு
Crop insurance பயிர் காப்பீடு
Cross elasticity of demand குறுக்கு தேவை நெகிழ்ச்சி
Crude Birth rate 1000 நபர்களுக்கு பிறந்த குழந்தைகளின் எண்ணிக்கை
Crude Death Rate 1000 நபர்களுக்கு இறந்தவர்களின் எண்ணிக்கை
Data /Statistics /information புள்ளி விவரங்கள்
Decentralization பரவலாக்கப்படல்
Decrease in demand தேவை குறைதல்
Deductive Method பகுத்தாய்வு முறை
Definition வரையறை / இலக்கணம்
Delicensing உரிமம் விலக்கல்
Demand தேவை
Democracy குடியாட்சி

275
Demographic dividend மக்கள் த�ொகையின் அனுகூலம்
Demonstration effect பகட்டு விளைவு
Density of population ம�ொத்த மக்கள் த�ொகையை நிலத்தின் அளவால் வகுக்கக் கிடைப்பது
Determinants நிர்ணயிப்பவைகள்
Determinant அணிக்கோவை
Development Economics மேம்பாட்டுப் ப�ொருளியல்
Development மேம்பாடு
Differential calculus வகை நுண்கணிதம்
Diminishing Returns to Scale குறைந்து செல் விகித அளவு
Diseconomies of Scale சிக்கனமின்மைகள்
Disinvestment ப�ொதுத்துறைச் ச�ொத்துக்களை விற்பது
Dismal Science இருண்ட அறிவியல்
Distribution பகிர்வு
Division of labour வேலைப்பகுப்பு
Domain சார்பகம்
Dualism இரு வேறுபட்ட குணங்கள் காணப்படுவது. எ.கா. மாட்டு வண்டியும்,
SUV மகிழ் உந்து வண்டியும்
Duopoly இருவர் முற்றுரிமை (இரண்டு விற்பனையாளர்கள் மட்டும்)
Dynamic இயங்கு / இயக்கம்
Economics ப�ொருளியியல்
Economies of scale ப�ொருளாதாரச் சிக்கனங்கள்
Economy ப�ொருளாதாரம்
Elasticity of demand தேவை நெகிழ்வு /தேவை நெகிழ்ச்சி
Elasticity of Supply அளிப்பு நெகிழ்வு
Empowerment வலிமை பெறுதல்
Enterprise நிறுவனம்
Entrepreneurship த�ொழில் முயலும்தன்மை
Entrepreneur த�ொழில் முயல்வோர்
Environmental Economics சுற்றுச்சூழல் ப�ொருளியல்
Equal- Marginal utility சம-இறுதி நிலைப் பயன்பாடு
Equation சமன்பாடு
Equilibrium சமநிலை
Ethical அறநெறி சார்ந்த
Exchange பரிமாற்றம்
Expansion of demand விலை குறைவால் நிகழ்ந்த தேவை விரிவு
Explicit cost வெளிப்படையான செலவு
Export promotion zone ஏற்றுமதி ஊக்குவிப்பு மண்டலம்
Export ஏற்றுமதி (X)
External Diseconomies புறச்சிக்கனமின்மைகள்
External Economies of Scale ப�ொருளாதார புறச்சிக்கனங்கள்
Factors of Production உற்பத்திக் காரணிகள்
Factors காரணிகள்
Facts உண்மைகள், எண்களிலாலான விவரங்கள்
Famine பஞ்சம்
Features சிறப்பம்சங்கள்
Finance Capital நிதி மூலதனம்
Financial Economics நிதிப் ப�ொருளியல்
Fiscal reforms அரசுநிதிச் சீர்திருத்தங்கள்

276
Fixed cost மாறாச் செலவு
Floating cost மிதக்கும் செலவு
Foreign Capital வெளிநாட்டு மூலதனம்
உடன்பாடில்லா வேலையின்மை (கிடைக்கின்ற வேலையில்
Frictional unemployment திருப்தியடையாமல் வேறு ஒரு நல்ல வேலை கிட்டும் வரை
வேலையின்றி இருப்பது.)
Gender equality பாலினச் சமத்துவம்
General equilibrium ப�ொதுச்சமநிலை
Globalization உலகமயமாக்குதல்
Goods / Products/ Commodities / things பண்டங்கள் /சரக்குகள்/ப�ொருட்கள்
Goods and Services Tax(GST) பண்டங்கள் மற்றும் பணிகள் வரி (அல்லது) சரக்கு மற்றும் சேவை வரி
Gross sown Area ம�ொத்த விதைக்கப்பட்ட நிலப்பரப்பு, ஒரு ஏக்கர் நிலத்தில் இரண்டு
ப�ோகம் பயிரிட்டால் அது இரண்டு ஏக்கராக்க் கணக்கிடப்படும்
Government Spending அரசுச் செலவு அரசுச் செலவு (G)
Green revolution பசுமைப்புரட்சி
Gross National Happiness Index ம�ொத்த நாட்டு மகிழ்ச்சிக் குறியீடு
Gross state domestic Product ம�ொத்த மாநில உள்நாட்டு உற்பத்தி
Growth வளர்ச்சி
Health Economics உடல் நலப் ப�ொருளியல்
Human Development Index மனித வள மேம்பாட்டுக் குறியீடு
Human welfare மனித நலம்
Hypothesis கருதுக�ோள்
Imitation ப�ோலி செய்தல்
Imperfect competition நிறைகுறைப் ப�ோட்டி
Implicit cost மறைமுகச் செலவு
Import இறக்குமதி (M)
Income elasticity of demand வருமானத் தேவை நெகிழ்ச்சி
Income வருமானம்
Increase in demand தேவை கூடுதல்
Increasing Returns to Scale வளர்ந்து செல்விகித அளவு
Index குறியீடு
Indicators குறிகாட்டிகள்
Indifference curve சம ந�ோக்கு வளைக�ோடு
Indifference Map சம ந�ோக்கு வரைபடம்
Indifference schedule சம ந�ோக்கு அட்டவணை
Inductive Method விதிவருமுறை, த�ொகுத்தாய்வு முறை
Industrialization த�ொழில் மயமாதல்
Industrial Policy resolution த�ொழிற்கொள்கை தீர்மானம்
Infant Mortality Rate (IMR) சிசு இறப்பு விகிதம் (1000 குழந்தைகளில் ஒரு வயதை முடிக்கும்
முன்புஇறக்கும் குழந்தைகளின் விகிதம்)
Innovation புத்தாக்கம், புதியன புனைதல்
Integral calculus த�ொகை நுண்கணிதம்
Interest rate வட்டிவீதம் (i)
Internal Economies of Scale அகப் ப�ொருளாதாரச் சிக்கனங்கள்
Investment முதலீடு
Invisible hand புலனாகா உந்துசக்தி
Involuntary unemployment வேலைக்குத் தயாராக இருந்தும் வேலை கிடைக்காத நிலை
Iso- quants சம அளவு உற்பத்திக் க�ோடுகள்
Labour உழைப்பு

277
Land Tenure நில உடைமை முறை
Land use pattern நிலத்தை பயன்படுத்தும் விதம்
Law of variable proportions மாறும் விகித விளைவு விதி
Laws of Returns to Scale விகித அளவு விளைவு விதி
Liberalization தாராள மயமாக்குதல்
Life Expectancy at Birth வாழ்நாள் எதிர்பார்ப்பு காலம்
Linear Equation நேர்க்கோட்டுச் சமன்பாடு
Liquidity preference நீர்மை விருப்பம்
Literacy Ratio ம�ொத்த மக்கள் த�ொகையில் எழுதப்படிக்க தெரிந்தவர்களின் விகிதம்
Long – run நீண்ட காலம்
Macro – Economics பேரினப் ப�ொருளியல் / பேரியல் ப�ொருளியில்
Mahalwari system குழு உரிமை முறை (இதில் கிராமக் குழுக்கள் நிலத்தை நிர்வாகம்
செய்து நிலத் தீர்வையை அரசுக்கு செலுத்தவேண்டும்)
Management மேலாண்மை
Marginal cost இறுதிநிலைச் செலவு
Marginal product இறுதிநிலை உற்பத்தி
Marginal Rate of substitution இறுதி நிலை பதிலீட்டு வீதம்
Marginal Rate of Technical Substitution இறுதிநிலை த�ொழில்நுட்பப் பதிலீட்டு வீதம்
Marginal utility இறுதி நிலைப் பயன்பாடு
Market அங்காடி / சந்தை
Material wealth பருப்பொருட் செல்வம்
Maternal Mortality Rate (MMR) மகப்பேறு இறப்பு விகிதம் (ஒரு லட்சம் தாய்மார்களில்
மகப்பேறுவின்போது இறக்கின்ற பெண்களின் எண்ணிக்கை)
Matrix / Matrices அணி / அணிகள்
Merchant Capital வணிக மூலதனம்
Micro, small and medium Enterprises குறு, சிறு மற்றும் நடுத்தர நிறுவனங்கள்
Micro-Economics நுண் ப�ொருளியியல் / நுண்ணினப் ப�ொருளியியல்/
Migration குடி பெயர்தல் / புலம் பெயர்தல்
Modern age நவீனயுகம்
Monetary Reforms பணச் சீர்திருத்தங்கள்
Money Cost பணச் செலவு
Monopolistic competition முற்றுரிமைப் ப�ோட்டி (ஒரு ப�ொருளை சிறிது வேறுபாடு செய்து
பலர் விற்பார்கள்)
Monopoly முற்றுரிமை (ஒரே ஒரு விற்பனையாளர்)
Morbidity Rate உடல் நலமின்மை விகிதம்
MRTP ACT முற்றுரிமை வணிகக் கட்டுப்பாட்டுச் சட்டம் ( Monopoly and
Restrictive Trade Practies ACT )
Multiplier பெருக்கி
National Income தேசிய வருமானம் (y)
Nationalization நாட்டுடைமையாக்குதல்
Need உயிர்பிழைக்க அடிப்படைத் தேவைகள்
Neo – classical புதிய மரபு வழி
Net sown Area நிகர விதைக்கப்பட்ட நிலம் பரப்பு, இது ம�ொத்தம் விதைக்கப்பட்ட
நிலப்பரப்புக்குச் சம்மாகவ�ோ குறைவாகவ�ோ இருக்கும்
NITI Aayog இந்தியாவை மாற்றுவதற்கான தேசிய அளவிலான நிலையத்திற்கான
திட்டம்
Nominal income/Money income பெயரளவு வருமானம்/பணவருமானம்
Non renewable Energy sources புதுப்பிக்க இயலாத சக்தி வளங்கள்
Normative Science நெறியுரை அறிவியல்

278
Oligopoly சில்லோர் முற்றுரிமை
Opportunity cost வாய்ப்புச் செலவு
Organisation அமைப்பு
Particular / partial equilibrium தனிச் சமநிலை / பகுதிச் சமநிலை
Per capita income தலைவீத வருமானம் (ம�ொத்த தேசிய வருமானத்தை ம�ொத்த மக்கள்
த�ொகையால் வகுக்க கிடைப்பது)
Perfect Competition நிறைவுப் ப�ோட்டி
Physical quality of life index வாழ்க்கைத் தரக் குறியீடு
Plan Holiday திட்ட விடுமுறை (1966 முதல் மூன்று ஆண்டுகளுக்கு ஐந்தாண்டுத்
திட்டங்கள் செயல்படுத்த இயலவில்லை)
Point of inflexion / point of inflection மாறும் விகிதம் மாறுகின்ற புள்ளி
Political Economy அரசியல் ப�ொருளாதாரம்
Positive Science இயல்புரை அறிவியல்
Poverty வறுமை
Price determination விலை நிர்ணயம் /விலை தீர்மானம்
Price discrimination விலைப்பேதம்
Price Elasticity of demand விலைத்தேவை நெகிழ்ச்சி
Price line விலைக்கோடு
Prime cost முதன்மைச் செலவு
Privatization தனியார் மயமாக்குதல்
Producer’s Equilibrium உற்பத்தியாளர் சமநிலை
Producer’s Surplus உற்பத்தியாளர் உபரி /உற்பத்தியாளர் எச்சம்
Production Possibility curve உற்பத்தி வாய்ப்பு வளைக�ோடு
Production Possibility Frontier உற்பத்தி வாய்ப்பு எல்லைக்கோடு
Production Possibility Schedule உற்பத்தி வாய்ப்பு பட்டியல்
Production உற்பத்தி
Public Economics ப�ொதுப் ப�ொருளியல்
Public Finance ப�ொது நிதி
Public sector enterprises ப�ொதுத்துறை நிறுவனங்கள்
Quasi – rent ப�ோலி வாரம்
Quotation மேற்கோள்
Rational பகுத்துணரவல்ல
Real Cost உண்மைச் செலவு
Real income உண்மை வருமானம் (பணவருமானத்தின்வாங்கும் சக்தி)
Rectangular Hyperbola செவ்வக அதிபர வளைவு
Redeemable Energy புதுப்பிக்க கூடிய சக்தி வளங்கள்
Regional development வட்டார மேம்பாடு
Rent வாரம்
Repo rate Repurchase Rate மைய வங்கியிடமிருந்து பிற வங்கிகள் பெறும் குறுகிய கால
கடனுக்கான வட்டி வீதம் (RR>RRR)
Reserve Requirements ஒதுக்கீட்டு விகித அளவுகள் (வங்கிகள் வைத்திருக்க வேண்டிய
வைப்புகள்)
Resources வளங்கள்
Revenue வருவாய்
Reverse Repo Rate (RRR) வங்கிகள் மைய வங்கியிடம் வைத்திருக்கும் குறுகிய கால
வைப்புகளுக்கு மைய வங்கி க�ொடுக்கின்ற வட்டி வீதம் (RR>RRR)
Risk bearing இடர் தாங்குதல்
Risk இடர்

279
Rolling Plan சுழல் திட்டம் (1978 - 79 ஆம் ஆண்டு மட்டும் இத்திட்டம்
நடைமுறையில் இருந்தது)
Ryotwari system உழுபவர் உரிமை முறை (இதில் நிலத்தை உழுபவரே நிலச்
ச�ொந்தக்காரராக இருப்பார்)
Savings சேமிப்பு (S)
Scale அளவுக�ோல்
Scarcity பற்றாக்குறை ; அளிப்பு <தேவை
Scope எல்லை
Secularism மதச்சார்பின்மை
Self – Help Groups சுய உதவிக் குழுக்கள் (ப�ொதுவாக 10 முதல் 20 பெண்களைக்
க�ொண்டவை)
Services பணிகள் / சேவைகள்
Sex ratio பாலின விகிதம் ( 1000 ஆண்களுக்கு எத்தனை பெண்கள் என்பது)
Shift in demand curve தேவை வளைக�ோடு இடப்பெயர்வு
Short –run குறுகிய காலம்
Skewed distribution சமமற்ற பரவல்
Slope சாய்வு
Social Cost சமூகச் செலவு
Social Infrastructure சமூகக் கட்டமைப்பு எ.கா. கல்வி மற்றும் மருத்துவ நிறுவனங்கள்
Social justice சமூக நீதி
Special Economic Zone சிறப்புப் ப�ொருளாதார மண்டலம்
Static equilibrium நிலையான சமநிலை
Statutory Liquidity Ratio(SLR) சட்ட ரீதியான நீர்மை வீதம்
Structural unemployment அமைப்பு சார் வேலையின்மை
Sunk cost அமிழ்த்தப்பட்ட செலவு, மீண்டும் திரும்பப் பெற முடியாத செலவு
Super Multiplier மிைகப் பெருக்கி
Supply அளிப்பு
Tangible த�ொட்டுச் செல்லும் / த�ொட்டுணரச் கூடிய
Tax வரி (T)
Theories க�ோட்பாடுகள்
Total cost ம�ொத்தச் செலவு
Total product ம�ொத்த உற்பத்தி
Trade /international trade வணிபம்
Uncertainty நிலையின்மை
Urbanisation நகர் மயமாதல்
Utility பயன்பாடு
Util அலகு
Values மதிப்பீடுகள் / விழுமியங்கள்
Value மதிப்பு
Variable cost மாறும் செலவு
Variable மாறி
Voluntary unemployment வேலை கிடைத்தும் வேலைக்கச் செல்லாமல் இருப்பது
Wants விருப்பங்கள்
Y intercept y அச்சை வெட்டும் இடம்

Zamindari system நிலக்கிழார் முறை (இதில் நிலக்கிழார் நிலத் தீர்வையை வசூலித்து

அரசுக்கு செலுத்தவேண்டும்)

280
 Economics – XI
List of Authors and Reviewers

Reviewers
Dr. George V. Kallarackal
Dr. L.Venkatachalam
Former HOD, Economics Department
Professor, Madras Institute of Developmental Studies,
CMS College, Kottayam, Kerala
Chennai

Domain Experts
Dr. S. Iyyam Pillai Dr. A.G.Leonard SJ
Former Professor, Dept. of Economics Former Professor, Dept. of Economics
Bharathidasan University, Trichy Loyola College, Chennai

Subject Coordinator
J. Sornalatha
Post Graduate Assistant, Government Muslim Hr. Sec School.
Chennai-600002

Authors
Dr. J. Socrates Dr. K. Sadasivam
Head, Department of Economics Assistant Professor, School of Economics
Manonmaniam Sundaranar University Madurai Kamaraj University, Madurai-625 021
Tirunelveli
Dr. R. Bernadshaw
Dr. M. Chitra Former Professor, Dept. of Economics,
Assistant Professor, School of Economics NMSSVN College, Nagamalai, Madurai
Madurai Kamaraj University, Madurai
Dr. R. Albert Christopher Dhas
Dr. B.P. Chandramohan Associate Professor, Dept. of Economics
Associate Professor, Dept. of Economics, The American College, Madurai
Presidency College, Chennai
Dr. R.Vaheedha Banu
Dr. S. Theenathayalan Assistant Professor
Head, Department of Economics MSS WAKF Board College, Madurai
The Madura College, Madurai
Stephen Elangovan
K. Karnan Post Graduate Assistant
Post Graduate Assistant TVS Matric Higher Secondary School
Government Girls Higher Secondary School Madurai
Thirumangalam, Madurai
B. Shunmugam
K. Alamarselvan Post Graduate Assistant
Post Graduate Assistant Natarajan Dhamayanthi Higher Secondary School,
Government Boys Higher Secondary School, Bhuvanagiri, Cuddalore Nagapattinam
S. Bhuvana
Post Graduate Assistant
SRBAKD Dharma Raja Girls Higher Secondary School, Rajapalayam

Content Readers
Dr. A. Paramasivan Dr. A. Mariyappan
Professor of Economics, The MDT Hindu College, Tirunelveli Assistant Professor, Loyola College, Chennai

ICT Coordinator
D. Vasuraj
Art and Design Team BT Assistant, Pums, Kosapur, Puzhal Block,
Thiruvallur DT
Illustration S. Ganesh
R. Yuvaraj BT Assistant, Pums School, Kilariyam,
Gokulakrishnan Koradacherry Block, Thiruvallur DT

Art Teachers,
Government of Tamil Nadu. QR Code Management Team
Students R. Jaganathan
Government College of Fine Arts, Chennai & Kumbakonam. S.G.T. (SPOC), PUMS Ganesapuram - Polur, Thiruvannamalai Dist.
Layout N. Jagan
Udaya Info B.T. Asst., GBHSS Uthiramerur, Kanchipuram Dist.

In-House QC J.F. Paul Edwin Roy

Gopu Rasuvel B.T. Asst., PUMS Rakkipatti, Salem Dist.
Jerald Wilson
Tamilkumaran
This book has been printed on 80 GSM
Wrapper Design Elegant Maplitho paper.
Kathir Arumugam
Printed by offset at:
Co-ordination
Ramesh Munisamy
Typist
G. Anitha

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 NOTES

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