TyroCity: Economics Notes

Economics XI Questions

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Meaning

Meaning of Government Finance

Meaning of Government Finance

TyroCity.com — Sun, 18 Aug 2013 05:41:42 +0000

Government finance is the deliberate manipulation of revenues and expenditures of the government. It is the financial plan of the government. The government uses the different types of revenues and expenditures as fiscal tools to achieve different objectives. The main objectives are high economic growth, price stability, favorable balance of trade and payment, equitable distribution of income and wealth, proper allocation of resources, balanced and stable economic growth and so on. The government should avoid inflation and deflation, recession or depression. Improper use of resources, price fluctuation, high inequality and so on. For all these things revenues and expenditures are increased and decreased as per the situation of the country.

Government finance has two sides, they are

Government revenues
Government expenditures

In government revenues, the money received by the government in the form of royalties, taxes, escheats, penalties, fines, cess etc are included. In the government expenditure we include development expenditure, administrative expenditures, diplomatic expenditure, difference expenditure, payments of public debts and interest and miscellaneous expenditure. They are used as fiscal tools to solve different economic problems.

Marginal Cost (MC)

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Marginal Cost (MC):
It refers to the change in total cost due to change in additional unit of output produced.
MC = ∆TC / ∆Q
where,
MC = marginal cost
∆TC = change in total cost
∆Q = change in quantity of output produced

On the basis of above concepts we can derive AFC, AVC, and MC curves by the help of given table.

Output Produced	TFC	TVC	TC	AFC	AVC	AC	MC
0	70	0	70	-	-	-	70
1	70	30	100	70	30	100	30
2	70	40	110	35	20	55	10
3	70	45	115	23.33	15	38.33	5
4	70	55	125	17.5	13.75	31.25	10
5	70	75	145	14	15	29	20
6	70	125	195	11.66	20.83	32.5	50

On the given figure, output is measured on x-axis and average cost, MC, AVC, AFC are measured on y-axis. With the increment of output production AFC tends to decline sharply. As a result, AFC curve is downward sloping. It takes the shape of rectangular hyperbola.

With the increment of output production, initially AVC declines then reaches to the minimum point and starts to increase because of the operation. So, AVC curve is U-shaped.

In initial, AC also declines sharply reaches to the minimum point then starts to increase. So, AC curve is also U-shaped.

Initially, MC declines sharply reaches to the minimum point then start to increase. As a result, MC curve is also U-shaped. MC always cuts to the minimum point AVC and AC.

Meaning of Demand

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Meaning of demand

Desire backed up by ability and willingness to pay
Quantity of a commodity that a consumer want to purchase at a certain price during a certain time period.

Mere desire is not sufficient for demand. The consumer must have ability to pay and willingness to pay for fulfillment of desire. For demand all desire, ability and willingness to pay are required. In absence of one or more of them demand doesn’t arise.

To express demand the following things must be specified

Quantity
Price
Time duration
Ability to pay
Desire
Willingness to pay

Example

If a beggar has the desire of a big apartment then that is not demand ( no ability to pay)
A man with salary of Rs 25000 a month, wants to buy vegetable of Rs. 35 for a week then that is called demand ( all price, time, ability, willingness and desire)

Differences between demand and desire

Serial no	Demand	Desire
1	It is the desire or want backed up by ability and willingness to pay.	It is simply human want
2	It is limited	It is unlimited
3	It is always for the things available in the market	It may be for intangible and imaginary things too
4	It has a market value	It may or may not have market value
5	Ability and willingness to pay is mandatory.	Ability and willingness to pay are not mandatory.
6	It is expressed with reference to price and time duration	It is not expressed with time and price duration.

Wage

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Wage

The amount of money paid to employees per unit of time for mental or physical services provided by them is called wage. The unit of time may be a year, month, day, or hour. The wage may be paid as per the contract between employer and employee. It may be in any form like salary, wage bonus, commission, allowances, royalty, fee etc. Wage is the factor income of labor. The persons who obtain wage are called laborers. The laborer is paid wage because of following reasons

In doing works, there is physical or mental exertion. Against this exertion the workers must be compensated.
To do work the workers must have physical ad mental strength. For strength, they have spent money on food, education, skills and so on.
The workers need refreshment and rest to regain the working strength for which they should be compensated.
The workers have sacrificed leisure to do work. To compensate against it too, they must be paid wage.

There are two concepts of wage which are:
Money wage:
The amount of money paid to employees per unit of time for mental or physical services provided by them is called money wage. The unit of time may be a year, month, day, or hour. The wage may be paid as per the contract between employer and employee. It may be in any form like salary, wage bonus, commission, allowances, royalty, fee etc. it depends upon nature of work, time required, the qualities necessary to perform the work and so on.
Real wage:
The physical quantity goods that can be purchased with the expenditure of money wage is called real wage. It is given by the ration of money wage and price level.

Real wage is directly related to money wage but inversely related to price level. If W is increased being P constant, real wage increases and vice versa. If P rises remaining W constant real wage decreases and vice versa

It can be explained with the help of table and figure as following

Money wage (W)	Price level (P)	Real wage (1/P)
Rs 20000	Rs 100	200 units
Rs 20000	Rs 200	100 units
Rs 20000	Rs 300	66.67 units

In the above table, the real wage is decreased from 200 units to 100 and 66.67 units when money wage is constant at Rs 20000 and price level is increased from Rs 100 to Rs 200 and Rs 300 respectively. It shows the inverse relationship between real wage and price level. If we represent the real wage with respect to price level, we obtain a monotonically downward sloped convex curve as shown below:

In the above figure, the convex curve represents relationship between real wage and price level. It shows if price level raises real wage decreases and so on.

Definition of money

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Money is defined in different ways. It was firstly introduced just as a medium of exchange. The term money is derived from Latin word “Moneta” referred to goddess Juno. The coins were minted in the temple of Goddess Juno. That’s why the coins were known as money. Traditional definition of money is the medium of exchange and measurement of value. According to it, anything which is used as medium of exchange and measurement of value is called money. It is the functional definition of money. These functions are primary functions of money. However, money is used as not only medium of exchange but also as the medium of store of value, transfer of values, deferred payment, disbursement of credit, redistribution of income and wealth, reallocation of resources etc.

Income elasticity of demand greater than one

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

If the percentage change in quantity demand is greater than the percentage change in income is known as income elasticity of demand greater than one.
For example, change in demand by 10% due to change in income by 5%.

We can explain it by the help of given figure:

On the above figure x and y-axis measures quantity demand and income respectively. DD is demand curve. In initial stage, income and demand is OI and OQ. When income is increased from I to I1 by 5% then demand is increased from Q to Q1 by 10%. This case is known is income elasticity of demand greater than one.

Types of Demand

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. Price demand : Demand primarily dependent upon price is called price demand. This demand is sensitive or responsive to the change in price. In case of normal goods, demand increases with fall in price and vice versa. But in case of giffen goods demand increases even there is rise in price.

2. Cross demand : Demand primarily dependent upon prices of related goods is called cross demand. The complementary goods and substitutes are called related goods. In case of complementary goods like pen and ink demand for good is inversely related to the prices of other goods but the case in substituting goods are just opposite. Demand for substituting goods is directly related to prices.

3. Income demand: Demand primarily dependent upon income is called income demand. This demand is sensitive or responsive to the change in income. In case of normal goods, demand increases with rise in income and vice versa. But in case of giffen goods demand decreases when there is increase income.

4. Direct demand : Demand for goods and services made by final consumers to satisfy their wants or needs is called direct demand. For example guest of hotels make the demand for food.

5. Derived demand : Demand for goods and services made according to direct demand is called derived demand. For example demand made by hotels for vegetable, groceries is called derived demand.

6. Joint demand : Demand made for two or more goods and services to satisfy single need or want is called joint demand. For example, tea sugar are demand together to satisfy a single need. The complementary goods are jointly demanded.

7. Composite demand : Demand for a single commodity made in order to use for different purposes is called composite demand. In this case, commodity is one but the number of uses is multiple. For example, the electricity is used for lighting, heating, transportation for the use of different electrical device.

Protectionism

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The doctrine of international trade with governmental intervention is called protectionism. According to it, the government must protect the national interest with tariff a non tariff barriers. Domestic consumer, industries and domestic socio-cultural values should be protected or preserved by the government through taxes, subsidies, and other different types of direct and indirect policy measures. The government may prohibit the export to make available in sufficient quantities in domestic market. Ti may promote export to earn money from the rest of the world. For it, it may impose taxes, less heavily or exempt or provide subsidies from the export. However on the import it imposes custom duty heavily and so on. Most of the less developed countries advocate in favor of protectionism.

Argument in favor of protectionism

Import independency:
If their protectionism, the countries that are less developed can compete with the developed countries. There is increase in export too. The domestic market will not be under the control of foreign industries.

No fear of colonization:
The countries that are import independent in nature, have no fear of being colonized. It is because foreign industries will not take the control of domestic market firstly, and then they will not control on domestic resources and government.

No dumping:
The developed nations will not be able to sell their cheap and wasted goods to the less developed countries and prices will be usually low.

National Identity:
Every county has its own socio-cultural and linguistic values. The people have their own identity and if there is protectionism, there will not be import of the products against such socio-cultural values and goods that are injurious to health and society.

Infant industries:
There may be industries just established. If there is protectionism, such infant industries will be able to compete with the foreign industries.

Less dispute:
The countries involved in protectionism, will have less dispute because they will have equal benefits from the trade to them.

Balance of payment:
The country can export more when there is protectionism and if there is decrease only in import. There is inflow of money in large amount than outflow of money. The balance of payment of the country becomes favorable.

Employment:
The import independent country can give employment opportunities to the people. There is high employment if the country can compete with other countries in international trade.

Proper use of resources:
If there is protectionism, the resources will used to produce the goods demanded in the domestic market. It may bring proper use of resources.

Argument against protectionism

No technical know-how:
If there exists protectionism then there exists many barriers and each country can’t easily import technical equipments, plants, machines, tools and manpower from other nations. It brings problems in consumption or use of these capital goods and human resource can thus limits in technical know how.

Lack of specialization:
Countries must use only those products which can be produced using local resources, technology and human resource. They can’t more benefit of specializing in the production of goods which can be produced using international resources, technology and human resource. No International specialization leads to improper allocation of world’s resources and leads to lesser production of goods under unfavorable conditions.

Lack of Varieties of products:
In the domestic market, large number of goods and services can’t be supplied and all required commodities cannot be produced within a single country because of lack of required resources in limited area. 4. Wide market: The domestic products can have wide market even in the foreign countries.

Small scale productions:
Since, domestic product cannot be sold in foreign market without any barrier, there is small scale production. It thus creates difficulty in raising the income level and employment level too. There is no completion among the local and foreign markets.

No compensation for lack of resources:
If there is protectionism then there arises lack of some resources which cannot be compensated by the resources available in the country. The resources cannot be easily imported either with manpower or exchanging with resources available in the country.

Low employment level:
Protectionism doesn’t help the country to create employment opportunities. Each product is produces only to fulfill domestic demand not to fulfill the demand in foreign market. Therefore, there is decrease in production and so there is lesser requirement of increment in labor in field of insurance, trade, industry, transportation and so on.

Less capital formation:
For the capital formation the investment is required. For the investment, investible fund is required. But the investible fund doesn’t easily come from export due to many barriers.

Not good diplomatic relationship:
The countries involved in protectionism do not give and take products and services benefitting each other. They will not have good diplomatic relationship.

No diversification and modernization:
The varieties of goods for luxury, efficiency, high productivity etc cannot be imported from different countries and the life is not made more luxurious, well facilitated and efficient.

South Asian free trade agreement

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The agreement on south Asian free trade area (SAFTA) was signed by all the member states of SAARC during the 12th SAARC summit held in Islamabad on 4-6th January. As a result, SAFTA came into force from 1st January, 2006. SAFTA is a motivation for the commitment to strengthen intra SAARC economic cooperation to maximize the realization of the region’s potential for trade and development for the benefit of their people, in spirit of mutual accommodation, with full respect for the principle of sovereign equality, independence and territorial integrity of all states.

Objectives:

To promote and enhance mutual trade and economic cooperation among contacting states
To eliminate barriers to trade in and to facilitate the cross border movement of goods between the territories of contracting states
To promote conditions of fair competition in the free trade area and ensuring equitable benefits to all contracting states, taking into account their respective levels a pattern if economic development
To create effective mechanism for the implementation and application for joint administration, resolution of disputes
To establish a framework for further regional cooperation to expand and enhance the mutual benefits

Relatively elastic demand

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

If the percentage change in quantity demand is greater than the percentage change in price is known as relatively elastic demand. For example 10% change in demand due to 5% change in demand; we can explain it by following figure

On the above figure, when price is OP then quantity demand for that commodity is OQ. When prices become P1 by increasing by 5% then quantity demand decreases from Q to Q1 by 10% and when price decreases by 5% to Po then quantity demand increases from Q to Qo by 10%.

Subsistence theory of wage

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Subsistence theory of wage

The subsistence theory of wage is also known as “iron law” of wage. It was so named by physiocrats like Lassalle, a German economist and Quesnay, a member of school of economists and developed by David Ricardo. The theory of population, expounded by Malthus was also based on this “iron law”. According to this theory, wages tend to remain at the subsistence level. Wages paid to workers is just sufficient to fulfill their basic needs. Workers don’t have surplus income. If wages rises above this level, this leads to an increase in the population because the increased prosperity of workers will encourage the workers to marry sooner and increase population. This will increase labor supply. The increased competition among workers for employment causes wages to fall again to the subsistence level. Likewise, if the wages fall below the subsistence level, there will be fewer wages and no prosperity. People will have less interest in marriage. Fewer children are born. This will reduce the supply of labor. The competition for employment is reduced and wages tend to rise to the subsistence level. Finally, the wages remain at the subsistence level. The French School of economists, as the physiocrats, looked upon this theory of wages as a natural law. Quesnay had said, “Wages are fixed and reduced to the lowest level by the extreme competition of the workers“.

Criticisms

Ignores the demand side of labor:
This theory is one-sided. It explains the wages from the supply side only. It completely ignored the demand for labor. But if a rise in wages leads to an increase in population, the larger supply of labor may be balanced by an increase in the demand for labor.
No direct relationship between wage level and population:
According to this theory, population increase if the workers are paid above the subsistence level but empirical evidences show the decrease in population or its rater of growth in developed nations even if there is increase in wage level. People spend money on education, family planning, skill development too.
Ignores trade unions:
This theory has ignored trade unions through which the workers make the collective bargaining for their benefits.
Not flexible wage level:
Wages of all workers is at the subsistence level and is not flexible towards up and down. However, wages can differ from occupation to occupation and from place to place.
Exploitative:
There is tendency toward exploitation in this theory. Because, according to the theory wages must be equal to the subsistence level, and-not for comforts and luxuries.