What is Economics

STD – 5

Shk Adnan Shk Hunaid Zakir

 Chapter - 1
Basic economics ideas and
resource allocation
 Economics is a study of how
society provides for itself by making
the most efficient use of scarce
resources so that both private and
social welfare may be improved.
 Economics provides a framework
for studying how individuals,
households, firms, governments
and global organizations behave
and take a wide range of decisions.
 Economics is a social
science concerned with the
production, distribution and
consumption of goods and
services.
Economics is a social science
 It adopts a scientific framework but is
particularly concerned with studying
the behavior of humans as
consumers, in business or in taking
decisions about the economy as a
whole.
 Behaviour of
consumers
 The more consumer demands the more supply
increases.
 The more supply increases the more rate goes high.
 The more rate goes high the more market changes
– stock market , currency value, Quality ,
competition etc.
 The more rate goes high the more taxation is
added................and so on….
 Economics is the study of how individuals have
to decide how to allocate their scarce resources
in the most efficient way – Microeconomics.
 Economics explains us how to keep the rate of
change of prices (inflation) under control and
how to increase total demand in the economy to
increase the number of jobs that are available –
Macroeconomics.
 The road of economics
explanation
 PROBLEM

 ANALYSIS

 OUTCOME

 EVALUATION
 Economist forecasts
 Forecasts of economic growth are widely used by economists for all

sorts of reasons related to economic policy and business well-being.

 For example:
- The average price of tourism in Mauritius.
- The income of tourists.
- The price of substitute destinations and the price of complements

such as air travel.

- A range of non-price factors that might determine whether tourists

are attracted to Mauritius.

 Basic economic ideas and
resource allocation
 PROBLEM:
- Resources – Inputs available for the production of goods and

services.
- Wants : needs that are not always realized.
- Scarcity: a situation in which wants and needs are in excess of

the resources available.

- Choice: underpins the concept that resources are scare so

choices have to be made by consumers, firms and

governments.
 Four Scarce resources
 1. LAND : Buildup area – farm or factory

Place for mineral deposits.

Climate

2. LABOUR : Human resource

Salary

3. CAPITAL: Money

Man made aid to production

4. ENTREPRENEUR: Group of people taking risk to invest and

produce goods – may be individual or a firm or a corporate. –
M.D/CEO/SALES/ACCOUNTING DEPT/MANAGER S.
 Production and
consumption
 Production: Production is the process of creating goods and
services in an economy.
 Consumption : Consumption is the process by which
consumers satisfy their wants, depending on consumer
surplus.
 Unlimited wants: Basic needs that must be satisfied if we
are to stay alive. These include – food, shelter and clothing.
But there are less essential wants that include television sets,
cars, trips to the cinema and so on – It might be luxury for one
individual by may be considered an essential for others.
Impact of demonetization since
2001-2017 on India’s crime rate
 Population of India

http://www.worldometers.info/world-population/india-population/
Goods and Services Tax (GST) is an indirect tax (or
consumption tax) levied in India on the supply of goods and services.
GST is levied at every step in the production process, but is refunded
to all parties in the chain of production other than the final consumer.
Goods and services are divided into five tax slabs for collection of tax
- 0%, 5%, 12%,18% and 28%. There is a special rate of 0.25% on
rough precious and semi-precious stones and 3% on gold. 28% GST
applies on few items like aerated drinks, luxury cars and tobacco
products. Pre-GST, the tax rate for most goods was about 26.5%,
Post-GST, most goods are expected to be in the 18% tax range.
The tax came into effect from July 1, 2017 through the
implementation of
One Hundred and First Amendment of the Constitution of India by
the Indian government. The tax replaced existing multiple cascading
taxes levied by the central and state governments.
The tax rates, rules and regulations are governed by the GST Council
which comprises finance ministers of centre and all the states. GST
simplified indirect taxes with one tax and is therefore expected to
dramatically reshape the the country's 2.4 trillion dollar economy
 GST goods and services
tax
 Indirect tax
 Included in the product you purchased.
 Tax on Tax : Production – export/import –

sales – purchasing
 Positive and normative
statements
 Positive statements are based on actual
evidence for example
- A fall in supply of petrol will lead to an increase
in its price..
- An increase in tourist numbers in the Maldives
will create more employment…
- An increase in taxation on cars will result in
fewer cars being sold…
 Positive and normative
statements
 Normative statements are based on value
judgment of what should happen.
- ….and this should be beneficial for the
environment.
- ….and therefore that government of the Republic
of Maldives should do everything it can to help
promote this industry.
- ….and this should reduce traffic congestion.
 Ceteris paribus

 Other things equal or other

things are unchanged
 The time dimension
 The short run – It is possible to change only some inputs
– like labour can be increased or decreased to change
output.
 The long run – It is possible for all factors of production
or resources to change- like improving the quality and
quantity by building a new factory to increase its outputs.
 The very long run – It is possible of key inputs to change
– like technology, government regulations and social
considerations.
 Chapter - 3
Factors of production
 Factors of production
 1. LAND : Buildup area – farm or factory

Place for mineral deposits.

Climate

2. LABOUR : Human resource

Salary

3. CAPITAL: Money

Man made aid to production

4. ENTREPRENEUR: Group of people taking risk to invest and

produce goods – may be individual or a firm or a corporate. –
M.D/CEO/SALES/ACCOUNTING DEPT/MANAGER S.
Human capital and physical
capital
 Physical capital – Machinery, buildings and
infrastructure.
 Human capital – The Importance of the
quality of labor as a factor of production
 Specialization and
exchange
 Specialization refers to a situation where
individuals and firms, regions and nations
concentrate on producing one or some goods and
services rather than others.
- Benefits of specialization: It becomes necessary to
exchange or trade goods and services.
- Individuals concentrated on what they were best at,
and give their full potential to produce
good quality product.
 Specialization
 Disadvantages of specialization:
- No one is self sufficient.
- If the product is no longer in use than
unemployment can result.
 The division of Labour
 The concentration of large numbers of
workers within very large production units
allowed the process of production to be
broken down into a series of tasks. This is
called the division of labour.
The role of the
entrepreneur
Organize
Take risks
Creative and innovate.
 Chapter - 4
Resource allocation in different
economic systems
 Economic structure
 Market economy: Where most decisions are

taken through market forces.

 Command or planned economy : Where

resource allocation decisions are taken by a

central body.
 Mixed economy: where market forces and

government, private sectors are involved in

resource allocation decisions.

 Resource allocation in different
economic systems and issues
Economic structure
 Primary sector – This consists of agriculture, fishing and
activities such as mining and oil extraction.
example: National Aluminum company limited (NALCO)
mining of Aluminum and bauxite / Hindustan Zinc limited
mining of Zinc and Lead.
 Secondary sector – This term is used to describe the wide
range of manufacturing activities that are found in an
economy such as food processing ,textiles and clothing, iron
and steel production, vehicle manufacturing and electronics.
example: Tata iron and steel corporation,
 Opportunity cost
 Opportunity cost : The cost expressed in
terms of the best alternative that is forgone.
 Basic criteria Production
 What to produce
 How to produce
 how much to produce
 For whom to produce
 The Margin
 Decision making by individuals, firms and
governments is based on choices at the
margin – Profit margin – ‫يقوم علّي بكذا‬
◦ It effects in the production possibilities.
 Four economic structures
 Tertiary sector – This is the service sector and covers a

range of diverse activities such as retailing, transport,

logistics, banking, insurance and education.

example : Reserve bank of India (RBI)

 Quaternary sector – A relatively new term to denote

the knowledge based part of the economy, especially the

provision of information such as computing and IT.

example: Videsh sanchar nigam limited (VSNL)

 The planned economy
 The allocation of resources.
 The determination of production targets for all
sectors of economy.
 The distribution of income and the determination
of wages.
 The ownership of most productive resources and
property.
 Planning the long term growth of the economy.
 Production possibility
curves
 Production possibilities :
How many goods and services an economy is
capable of producing is determined by the
quantity and quality of resources available to
it.
 Reallocation of resources and shift in
production possibility curve.
•
Social enterprise
A business with mainly social objectives that reinvests most of its profits into benefiting

society rather than maximizing returns to owners.

•Social entrepreneurs are individuals or groups of people or organizations that provide time

and solutions to alleviate the society’s myriad problems and long standing issues that

remain unresolved by the institutional and government sector. As in other countries, India

too, social entrepreneurs are a growing phenomenon bringing positive change to several

social areas ranging from education to healthcare, renewable energy, waste management, e-

learning and e-business, housing and slum development, water and sanitation, violence

against women, other issues related to women, children and the elderly etc.

•Examples – SAIFEE FOUNDATION (Early foundation of Dawat Hadiyah)

Baba Amte enterprises, Sewa enterprises, Jayashree industries.

-They directly produce goods or provide services.

-They have social aims .

-They need to make a surplus to survive.

 Money : its functions and
characteristics
 Means of payment
 Near money : Non cash assets that can be
quickly turned into cash. Ex: saving accounts,
foreign currencies, bonds.
 Liquidity : the extent to which there is an
adequate supply of assests that can be turned
into cash- Ex: Gold
 Liabilities : debt obligations.
 Chap – 6 :Classification of
goods and services
 Private goods: Consumed by someone and not
available to anyone else.
◦ Excludability: Once a private good has been purchased by one
person it cannot be consumed by others.
◦ Rivalry: when we purchase food, clothes or a textbook then this
means that will reduces availability by others.
 Classification of goods and
services
 Public goods :
◦ Non-excludable: When we allow one consumer it is
impossible to stop all other consumers from
benefitting from the good. – ex: local river water, air
we breath, wild fruit and berries or animals hunted for
their meat.
◦ Non-rivalry: As more consume, the benefit to those
consumers who are already consuming is not
diminished. Ex: Lighthouse
 Quasi-public goods

 Goods which lie between public goods and

private goods.
◦ Ex : Sandy seaside beach.
Merit goods, demerit goods and
information failure
 Merit good: One that has positive side
effects when consumed. – Rice, wheat,
meat, education.
 Demerit good: One that has adverse side
effects when consumed. – junk food.
Merit goods, demerit goods and
information failure
 Information failure : Consumers do not perceive
how good or bad a particular product is for
them, either they do not have the right
information or they simply lack some relevant
information.
 So society needs to make a value judgment for
all goods – what to consume and not to
consume.
 Chapter -7
Demand and supply curves
 DEMAND
◦ The quantity of a product that consumers are willing
and able to buy at different prices.
◦- Quantity
◦ - Product
◦ - Purchasers
◦ - willing to buy
◦ - Able to buy
◦ - Per period of time
Factors influencing demand
 Income:
◦ Normal goods –An increase in the ability to pay usually
leads to an increase in demand-Goods and services that are
characterized by this relationship are called normal goods.
◦ Inferior goods – Some products with less being purchased
as income rises are called inferior goods.
◦ Substitutes - Price and availability of products does not
match and need to satisfy the same want or need by
substitutes.
 Supply
◦ The quantities of a product that suppliers are willing
and able to sell at various prices per period of time.
◦ - Quantity
◦ - Product
◦ - suppliers
◦ - Able to sell
◦ - Per period of time
Factors influencing supply
◦ Costs
◦ Size and nature of the industry
◦ Change in price of other products
◦ Government policy
◦ Other factors – ex. Weather conditions.
Cross Elasticity of Demand

◦ Is a numerical measure of the responsiveness of the

quality demanded for one product following a
change in the price of another related product.
Example – Laptops and computers when laptops are
having more demand than computer rates will fall
down.
XED = % change in quantity demanded of product A

% change in the price of product B

Price Elasticity of Demand

◦ Price variations in a market, the impact of

changing prices on consumer expenditure, sales
revenue and government indirect tax receipts.
◦ Example:
 price of tickets to watch a major sporting event.
 Regular price and peak time price.
 Equilibrium

◦ The term equilibrium refers to a situation of

balance where at least under present
circumstances there is no tendency for change to
occur.
◦ Equilibrium price – price where demand and
supply are equal where the market clears.
Shifts in the market demand
curve
Shifts in the market supply
curve
 The workings of the price
mechanism
 Prices act as a signal to both producers and
consumers.
 If consumers do not buy a particular product because
it is not liked or it is too expensive, then this message
is transmitted back to producers – Their reaction
should be one of improving product, reducing its price
or both if they wish to stay in business.
 There are valid reasons why governments find it
necessary to intervene in the natural workings of the
market mechanism. This is invariably because the best
allocation of resources is not being achieved when the
market mechanism is left free to operate on its own.
 Consumer surplus
 Consumer surplus is an economic
measure of consumer benefit. It is
calculated by analysing the difference
between what consumers are willing and
able to pay for a good or service relative to
its market price, or what they actually do
spend on the good or service.
 Producer surplus
 Thedifference between the price
a producer is willing to accept
and what is actually paid.
◦Example of Air fares
Chapter 8/9
Price elasticity, income
elasticity and cross
elasticity of demand.
Price elasticity of supply.
 PRICE ELASTICITY OF
DEMAND
Meaning of Elasticity of Demand:
Demand extends or contracts respectively with
a fall or rise in price. This quality of demand by
virtue of which it changes (increases or
decreases) when price changes (decreases or
increases) is called Elasticity of Demand.
PRICE ELASTICITY OF
DEMAND
Elasticity means sensitiveness or responsiveness of
demand to the change in price.
This change, sensitiveness or responsiveness, may be
small or great. Take the case of salt. Even a big fall in
its price may not induce an appreciable ex appreciable
extension in its demand. On the other hand, a slight
fall in the price of oranges may cause a considerable
extension in their demand. That is why we say that the
demand in the former case is ‘inelastic’ and in the
latter case it is ‘elastic’.
 PRICE ELASTICITY OF
DEMAND
Types of Elasticity:
Distinction may be made between Price
Elasticity, Income Elasticity and Cross Elasticity.

Price Elasticity is the

responsiveness of demand to
change in price. (PED)
PRICE ELASTICITY OF
DEMAND
Types of Elasticity:

Income elasticity means a

change in demand in response to
a change in the consumer’s
income. (YED)
 PRICE ELASTICITY OF
DEMAND
Types of Elasticity:

Cross elasticity means a change

in the demand for a commodity
owing to change in the price of
another commodity.(XED)
Price elasticity of supply
 Ifthe supply is lot more when
the price is high, it's elastic,
and if supply is not much
more, even the price is high
it's inelastic.
Factors influencing price
elasticity of supply
 Availability
of stocks.
 The time period.
 Productive capacity.
 National Budget of 2018-
19
 Agriculture and Rural economy
 Education, Health and social protection
 Medium, small and micro enterprises and
employment.
 Employment Generation
 Infrastructure and Financial Sector Development.
 Air transport
 Finance.
 Digital economy
 Defence
 Disinvestment
 Fiscal Management
 Chap-3
Government microeconomic intervention
◦ Government intervention is due to market failure.
◦ Market fails when it does not make the best use of
scarce resources.
◦ Legal and other methods are used to control the
prices, quality and quantity of goods and
services.
 For example-excessive levels of pollution are prohibited
by regulations that apply to the manufacture of vehicles
and the production of chemicals.
 Chap-3
Government microeconomic intervention
Maximum and Minimum price controls –
◦ Government enforce maximum prices for : MRP
 Staple foodstuffs, such as bread, rice and cooking oil.
 Rents in certain types of housing
 Services provided by utilities, such as water, gas and
electricity.
 Transport fares especially where a subsidy is being paid.
 Chap-3
Government microeconomic intervention
TAXES – direct and indirect
◦ Main purpose of intervention is to raise finance for
government spending – on public goods, merit
goods, administration, welfare benefits and
subsidies.
◦ Taxes are also used to reduce inequalities in the
distribution of income.
 Chap-3
Government microeconomic intervention
TAXES – direct and indirect
◦ Canons of taxation (criteria of good tax)
 Equitable – those who can afford, should pay more.
 Economic- the revenue should be greater that the
costs of collection.
 Transparent – tax payers should know exactly what
they are paying.
 Convenient – it should be easy to pay.
https://www.suratmunicipal.gov.in/
 Chap-3
Government microeconomic intervention
Direct taxes
◦ Income tax – tax on personal income
◦ Corporation/corporate tax – tax on companies
 These are so-called because they are paid directly to the
government by tax payers, either as individuals or companies from
their incomes.
- Income tax up to Rs. 2,50,000
- from Rs. 2,50,000 – Rs. 5,00,000 10% (Rs. 5,00,000 – Rs.
2,50,000)Rs. 25,000 Income from Rs.
- 5,00,000 – 10,00,000 - 20% (Rs. 8,00,000 – Rs. 5,00,000)Rs.
60,000Income more than Rs. 10,00,00030%nil
- Corporate tax – 25% on companies income (domestic companies)
-
 Chap-3
Government microeconomic intervention

Indirect taxes
◦ VAT – Value added tax
◦ sale tax
◦ GST
◦ Excise duties-good produced within the country.
 Chap-3
Government microeconomic intervention
Other taxation (25 types of tax in India)
◦ Custom duty/Octroi (On goods)- bringing goods from outside.
◦ Professional tax
◦ Municipal tax / property tax/ house tax
◦ Stamp duty/registration fee/transfer fee
◦ Education tax
◦ Dividend tax
◦ Water tax
◦ Toll tax
◦ Wealth tax
◦ Gift tax
 Chap-3
Government microeconomic intervention
Subsidies
◦ Direct payments made by governments to the
producers of goods and services.
 To keep down the market prices of essential goods.
 To encourage greater consumption of merit goods.
 To raise producer’s income –especially FARMERS.
 To provide an opportunity for exporters to sell more
goods.
 Chap-3
Government microeconomic intervention
Transfer payments
◦ Their function is to provide a more equitable distribution
of income to certain members of community.
◦ The main recipients are:
 Old age pensions
 Unemployment benefits
 Housing allowances
 Food coupons
 Child benefits.
 Chap-3
Government microeconomic intervention

Direct provision of goods and services

◦ Government provides certain important services
free of charge to the user. Such as
Health care
Education
- developed and developing countries provides
these services but ratios are different.
 Chap-3
Government microeconomic intervention
Nationalisation and privatisation
◦ Nationalisation is the process by which
governments take a private business into public
ownership.
◦ Many countries in the world have nationalised
their railways, airlines, mining, electricity and
water industries as well as, more recently, banks
and financial services.
 Chap-3
Government microeconomic intervention
Nationalisation and privatisation
◦ Nationalisation-
 It makes sense for certain strategic services and activities to
be in the hands of the public sector.ex: Railways,bus
services , airports, electrical and water supplies.
 Any profits made will be returned to the business and
reinvested for the benefits of the public.
 Employees feel a sense of ownership and work hard to
ensure financial viability.
 Nationalised industries will be more likely to provide loss
making services for social reasons.
 Chap-3
Government microeconomic intervention

Nationalisation
 Bank of Baroda, union bank of India, bank of
Maharashtra, state bank of India,
 Eastern Coalfields,
 Hindustan Aeronautics.
 Hindustan Petroleum
 United India Insurance company.
 Chap-3
Government microeconomic intervention

Privatisation
◦ Privatisation refers to a change in ownership of an
activity from the public sector to the private
sector.
 Chap-3
Government microeconomic intervention
Privatisation
 A deliberate commitment to reduce government
involvement in the economy.
 To widen share ownership among the population and
among the employees of the privatised companies.
 Benefits for consumers in the form of lower prices, wider
choice and a better quality product or service.
 Privatised companies can be successful in raising
capital, lowering prices and cutting out waste; they are
more efficient than state-owned operations.
 Chap-3
Government microeconomic intervention
Privatisation
 Reliance Industries Limited.
 Tata Group
 Infosys Technologies Ltd.
 Wipro Limited.
 ITC Limited.
 ICICI Bank Limited
 Impact of enterprise on Individuals
and community
Industrial Revolution
‫ا‬ee‫ ن‬industrial revolution ‫ال ثثهال‬ee‫•تيس س‬
‫دالؤ‬e‫ا ب‬e‫ م‬economy ‫ا ني‬e‫ه دني‬e‫بب ج‬e‫س‬
‫ني‬e‫ا بهي ككه‬e‫ار م‬e‫ا ويثث‬e‫نين ن‬e‫و مؤم‬e‫ ت‬، ‫و‬e‫ْاي‬
‫س حالل‬ee‫ه اهنس‬ee‫ كيم ك‬، ‫ئي ؛‬ee‫ة ته‬ee‫برك‬
، ‫س ؛‬e‫ه بتاوس‬e‫ا ولي الل‬e‫ارة كرت‬e‫ي تج‬e‫س‬
‫ا‬ee‫ار م‬ee‫و ويثث‬ee‫ا ت‬ee‫ان م‬ee‫ا زم‬ee‫س ْاج ن‬ee‫انس‬
‫ ؛‬competition ‫ككهني‬
 ‫‪Impact of enterprise on‬‬
‫‪Individuals and community‬‬
‫‪Industrial Revolution‬‬
‫•مؤم‪e‬نين به‪e‬ائيو واسطس‪e‬س فرم‪e‬ايو مكك‪e‬ر مؤمن‪e‬ات بهن‪e‬و‬
‫نس‪e‬س بهي رغب‪e‬ة بت‪e‬اوي ك‪e‬ه ‪ ":‬مؤمن‪e‬ات بهن‪e‬و ن‪e‬ا واسطس‪e‬س‬
‫بهي تج‪e‬اويز م‪e‬رتب ته‪e‬ائي … مؤم‪e‬نين نس‪e‬س الزم ؛ ك‪e‬ه ي‪e‬ه‬
‫مث‪e‬ل ني تج‪e‬اويز ‪ home-industry‬ني ش‪e‬اكلة ث‪e‬ثر مؤمن‪e‬ات‬
‫واسطس‪ee‬س كرس‪ee‬س ت‪ee‬ا ك‪ee‬ه مؤمن‪ee‬ات ن‪ee‬يي فائ‪ee‬دة ملت‪ee‬و‬
‫رهسس‪.‬هجي ْاثث فرماوس‪ee‬س ؛ ك‪ee‬ه ‪ ":‬س‪ee‬روس ه‪ee‬وئي‬
‫اهما بهي روزي ملسس مككر ويثثار ني مثثل نهيطط"‪“.‬‬
‫• ككرححس‪ee‬س ‪ small scale industry‬ه‪ee‬وئي ليكن‬
‫ثثوت‪ee‬انو ه‪ee‬وئي‪....‬اي‪ee‬ك دن ‪Large scale industry‬‬
‫تهاسسس‪( .‬مفهوم البيان)‬
 Economics
STD – 6

Shk Adnan Shk Hunaid Zakir

 Chap-4
Macroeconomy
Macroeconomy
 Macroeconomics is a branch

of economics dealing with the

performance, structure, behaviour,
and decision-making of
an economy as a whole. This includes
regional, national, and global
economies.
 Chap-4
Macroeconomy
Macroeconomy
 In macroeconomics, a variety of
economy-wide phenomena is thoroughly
examined such as inflation, price levels,
rate of growth, national income, gross
domestic product (GDP) and changes in
unemployment.
 Chap-4
Macroeconomy

 An economy’s output of products is

made by producers in the country.
Some of these will be in the private
sector and some will be in the public
sector.
 Chap-4
Macroeconomy
 Aggregate demand : The total spending on
an economy’s goods and services at a
given price level in a given time period.
1. Consumption
2. Investment
3. Government spending
4. Net exports
 Chap-4
Macroeconomy
 Aggregate Supply : The total output
(real GDP) that producers in an
economy are willing and able to
supply at a given price level in a
given time period.
 Chap-4
Macroeconomy
 Interaction of aggregate demand and
aggregate supply
 When the level of output and the price
level are determined where aggregate
demand is equal to aggregate supply.
 Macroeconomic equilibrium – AD =
AS
 Inflation
 Types
 Creeping inflation – 2/3 %
 Galloping inflation – 8/10 %
 hyperinflation inflation – 50% or above
 Suppressed inflation – controlled by

government by fiscal policy or monetary

policy.
 Inflation
 Cases of inflation
◦ Demand pull – supply inflation
◦ Cost –push inflation
◦ Monetary inflation
 Inflation
 Results of inflation
◦ No jobs
◦ No consumer
◦ No production
Deflation
More inflation results
deflation
 Deflation
1. Decreasing of price level of any
product
2. Fall in the inflation rate.
Consequences of Deflation
 Less demand
 Price will decrease
 Then production will stop
 Then unemployment will increase
 Then expenditure will be less
 How to control Deflation
 Demand – monetary supply by easy loans.
 Fiscal measures – government starts new

projects.
 Increasing consumption and decreasing

saving. Saving will decrease if there is less

interest rates.
 Reduction of tax.
 Increasing of subsidies on products.
 Balance of Payments
 Current
 Capital
 Financial
Definition and Measurement of
exchange rates
 Trade weighted exchange rate – The price of
one currency against a basket of currencies.
 Real effective exchange rate – a currency’s
value in terms of its real purchasing power.
 Depreciation : a decrease in the international
price of a currency caused by market forces
 Devaluation: a decision by the government to
lower the international price of the currency
The terms of trade
Free trade
Protectionism
 Chapter 5

GOVERNMENT MACRO
INTERVENTION
The aims of macroeconomic policy
 Full employment
 Low and stable inflation
 Balance of payments equilibrium
 Steady and sustained economic growth
 Avoidance of exchange rate fluctuations
 Sustainable economic development
 Types of Policy
Fiscal policy
The use of taxation and government
spending to manage aggregate demand in
order to achieve the government’s
macroeconomic aims.
 Types of Policy
 Monetary policy
The use of interest rates, direct control of the
money supply and the exchange rate to
influence aggregate demand.
 Types of Policy
 Supply side policy
Measure designed to increase aggregate supply
- improving the workings of product
- Reducing government intervention
- Cutting corporation tax
- Cutting income tax
- reducing welfare payments
- increasing spending on education and
training.
- Provision of government subsidies.
Policies to correct balance of
payments disequilibrium
 Policy approaches
◦ Expenditure switching policies
◦ Expenditure dampening policies
Policies to correct balance of
payments disequilibrium
 Policy approaches
◦ Expenditure switching policies
 An action taken by government to persuade
purchasers of goods and services both at home and
abroad to buy more of that country’s goods and
services and less of the goods and services of other
countries – to rise in the demand for the country’s
currency on the market.
 Buy domestic products not foreign products.
 MAKE IN INDIA
 https://www.brookings.edu/opinions/for-
modis-india-a-new-trade-policy-2/
Policies to correct balance of
payments disequilibrium
 Policy approaches
◦ Expenditure dampening policies
 An action taken by a government to reduce the total
level of spending in an economy.
 2 effects of this policy
 Reduction in spending, which will mean that there will be
fewer purchases of goods and services.
 The domestic producers will find that their domestic
market is “dampened”. As a result they may try to make
up for the decrease in domestic sales with an increase in
sales abroad – which results in fall in imports and rise in
exports.
Policies to correct demand-pull
inflation
 Income tax rates may be increased.
 Government may cut their own spending –

beneficial for those countries where small

proportion of the population pay income
tax.
 Implementation of monetary and fiscal

policies – like increasing interest rates.

 Basic economic ideas
and resource allocation
Chapter 6
(Std 6)
  Productive efficiency
 This occurs when firms produce at the

lowest possible cost by making best use of

resources.
  Allocative efficiency
 This occurs when firms produce the

combination of goods and services that are

most wanted by consumers, without any
waste.
 The price that they are wiling to pay reflects

their preferences and the benefits they

derive from consumption.
  Dynamic efficiency
 Dynamic efficiency is a form of productive

efficiency that benefits a firm over time.

 Resources are reallocated in such a way

that output increases relative to the

increase in resources.
  Market failure
 Information failure
 Abuse of monopoly power in the market
 The provision of merit and demerit goods
 The provision of public and quasi-public

goods.
 Externalities

 Where the actions of producers or

consumers give rise to side effects on third

parties who are not involved in the actions.

 Negative and positive externalities

 Use of cost–benefits
analysis in decision making
 It is a widely practised

technique that is used to aid

decision making.
 Summary
 Efficient resource allocation and its
importance in microeconomic concept.
 Productive and allocative efficiency.
 Reasons for market failure.
 Positive and negative externalities.
 Private cost, external costs and social costs.
 Cost benefit analysis.