TyroCity: Economics 12 Notes

Criticism of Consumers’ Surplus

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

Criticism of Consumers’ Surplus:

1. Title of consumers surplus is wrong: In consumer surplus we study the utility or surplus received while purchasing the commodity. Therefore, according to Prof. Boulding it should be named as Buyer’s surplus instead of consumers’ surplus.

2. Imaginary concept: According to critics, it is an imaginary concept because a person can only imagine that he/she is getting more satisfaction than the payment has made. In reality nobody is ready to pay than the actual price.

3. Utility can’t be measured in numbers: Utility derived from the consumption of commodity can’t be expressed in terms of number.

4. Potential price may be less than actual price: If the potential price is less than actual price at that time, there is no possibility of consumer surplus. This is because there is no guarantee that there will always be surplus.

5. Constant marginal utility of money: In consumer surplus, marginal utility of money is constant but practically the utility of money depends on the volume of money.

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.

Determinants of supply

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

Price: Supply is directly proportional to price. If price rises, supply increases and vice versa. It is because the firm can make more profit selling at higher price than at lower price

Prices of inputs: Supply is inversely related to the prices of inputs. Inputs are land, labor, capital and raw materials. Their prices are wage rate, rent rate, interest rate etc. if the prices of inputs rise then the cost of production also increases then the firm supplies less than before and vice versa.

Level of technology: Supply is positively related to the level of technology. If there is advancement in technology, the firm can produce and more at the same price but if there is destruction of technology due to any cause then supply decreases.

Resources available: Supply is positively related to resources available. If there is appropriate availability of resources, then the firm can produce and supply more quantity at the same price. But if there is depletion of resources supply decreases.

Expected profit margin: If there is more profit margins to the firm, the firm supplies more and vice versa but if the firm expects more profit in the near future, currently it supplies less and vice versa.

Taxes : Supply is inversely related to taxes. If there is high tax rate, there is less supply but if the government imposes less tax, supply increases (subsidies to increase supply).

Cross elasticity of demand

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

It refers the percentage change in quantity demand of one commodity i.e. x due to certain change in price of another commodity i.e. y when other things remains the same.

Mathematically,

where,
exy = cross elasticity of demand
∆Qx = change in quantity demand for x commodity
∆Py = change in price of y commodity
Py = initial price of y commodity
Qx = initial quantity demand for x commodity

Economics XII: Meaning of Revenue

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

Income earned by the firm or industry by selling the produced output in the market is known as revenue.

According to prof. Dooly, “The revenue of a firm is its sell receipts or money receipts from the sale of products.”

Labor division

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

Labor division

It is defined as assignment of different works to different workers in such a way so that the productivity or efficiency can be increased. It is the process of placing of right persons to right jobs. It is always made according to the nature of works and the qualities required and qualities the workers have. The works are different in nature. To perform different works, different qualities are required. Some are mental works whereas some are physical works. Labor division is made vertically and horizontally. The division of labor form MD to the workers is vertical labor division and division of labor between departments or sections or in different places is horizontal labor division.

Advantages of labor division:

It helps in the best selection of employed because each person gets the job over which he or she is best suited.
It helps in increasing production because work is divided into smaller parts
It helps in invention because when the same job is done by same man again and again then he/she can find better and quicker ways of doing it.
It helps in saving great time because a worker doesn’t have to waste time in moving from one part to another part of work.
It helps in saving of learning time because a worker has to do only a part of the work and s/he can learn that easily
Production becomes less expensive
It helps in increases cooperation and discipline amongst workers.
It facilitates greater mobility of labor. If the labor is depressed or there is strike in a factory the workers can easily go to another factory.
It helps in increasing efficiency of workers.

Disadvantages of labor division

It increases monotony amongst the workers.
It increases the dependence of worker. The worker becomes a link in a chain of various processes.
It reduces responsibility. No one can be held responsible for overall manufacturing defects because a worker is concerned with only a part of the job.
It results in many losses; loss of efficiency, loss of personality and mental development.
When the worker gets to do only a part of the job then s/he knows only that much and becomes an expert. S/he finds it hard to get job on other places.
There is no direct relationship between workers and the employers and there are large numbers of employees. This gives rise to conflict in return strikes may occur.

Income elasticity of demand equal to one

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

If the percentage change in quantity demand is equal to percentage change in income is known as income elasticity of demand equal to one. We can explain on the basis of the given figure:

On the above figure, initial income is OI and quantity demand is OQ. When income is increased from I to I1 by 10% then the quantity demand is also increased from Q to Q1 by 10%.

Comparative cost theory of international trade

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

This theory is developed by a classical economist David Ricardo. According to this theory, the international trade between two countries is possible only if each of them has absolute or comparative cost advantage in the production of at least one commodity. This theory is based upon following assumption:

There are only two countries and two commodities
There is no governmental intervention in export and import
Only labor is factor of production. Quantity of labor used gives cost of production
There is perfect mobility of labor within the country but not between the countries
There is no cost of transportation between the countries
The law of constant returns to scale operates in production.
The units of labor are homogeneous
The units of each commodity in both countries are homogeneous

According to comparative cost advantage theory of international trade, each country exports the commodity in which it has cost advantage and imports the commodity in which it has cost disadvantage. This theory can be explained as following:

A. Comparative cost advantage

If a country can produce both commodities with less cost than another country but in different ratio, the country is said to have comparative cost advantage.

Country	Labor required to produce clothe	Labor required to produce shoe
Nepal	10	4
India	20	12
ratio	10/20=0.5	4/12=0.33

In the above table, the cost of production of clothe in Nepal is only 50% of cost of production of clothe in India. In case of shoes, the cost of production is only 1/3rd of cost in India. It shows that Nepal can produce both commodities with fewer cots than India. But in order to take advantage, it produces only shoes land let India produce clothe for it. Nepal produces shoes and exports to India. India produces clothe and exports to Nepal. If they do so, both of them can take benefits.

B. Absolute cost advantage:

If a country can produce a commodity with less cost but has to bear more cost in the production of another commodity than another country then the country is said to have absolute cost advantage. In this case, both of the countries produce and export the commodities in which they have absolute cost advantage.

Country	Labor required to produce clothe	Labor required to produce shoe
Nepal	10	8
India	20	4
ratio	10/20=0.5	8/4=2

In the above table, the cost of production of clothe in Nepal is less than in India. But cost of production of shoes is less in India than in Nepal. In this case, Nepal is said to have absolute cost advantage in production of clothe but absolute cost disadvantage in production of shoes. India is said to have absolute cost advantage in production of shoes but absolute cost disadvantage in production of clothe. Therefore, Nepal produces only clothe and exports to India. India produces only shoes and exports to Nepal. Doing it, both the countries can take benefit.

C. No cost advantage:

If a country can produce both commodities with less cost than another country but in equal ratio, the country is said to have no cost advantage.

Country	Labor required to produce clothe	Labor required to produce shoe
Nepal	10	4
India	20	8
ratio	10/20=0.5	4/8=0.5

In the above table, Nepal is shown able to produce both commodities with less cost than India in equal ratio. It means Nepal has no cost advantage. It is loss to the Nepal to import any commodity form India. That’s why it decides to produce both goods for itself. Therefore, India too produces both goods for itself. Hew is no trade between them.

Criticisms

This theory is not applicable if there are more than two countries and more than two commodities
In every country there is more or less government intervention in international trade
There is cost of transportation from one country to another country
The units of labor are not homogeneous and the workers are paid more or less in different countries
There may be increasing or decreasing returns to scale
Labor is not perfectly mobile within the country too. In the modern era, there is mobility of labor from one country to another
The commodities produced in the different countries differ in quality, taste, size, quantity etc.

Importance of concept of Consumers’ Surplus

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

Importance of concept of Consumers’ Surplus:

1. Determination of monopoly price: This concept is useful to determine the price of commodity. Monopoly producer should observe the psychology of consumer while determining the price of product. When they feel that consumers are ready to pay more they raise the price of goods and maximize their profit.

2. Public finance: This concept is helpful to formulate the tax policy which is known as public finance. The best tax policy is that which maximize the public revenue with the least sacrifice. For that government impose high tax on such commodity where consumer enjoys much surplus.

3. To make cost benefit analysis: This concept is useful in the field of cost benefit analysis which is very useful tool in the field of research and developing work. Consumer surplus is measured in terms of benefit and cost of a particular good. Similarly to choose a project it is necessary that benefit or surplus must be greater than cost.

4. Comparison of economic condition: We can compare the economic condition of nation by the help of concept of consumer surplus. In developed nation commodity are available at cheaper rate so consumer can enjoy higher surplus but in underdeveloped nations commodities are available at higher price where consumer enjoy low surplus. So, higher consumer surplus is identified as developed nation and vice-versa.

5. International trade: This concept is best for international trade. Goods which have large consumer surplus is imported than domestic production should be imported. The goods that have large consumer surplus in domestic production than import should not be imported.

Difference between fixed and variable cost

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

S.No.	Fixed cost	Variable cost
i.	Those cost which are included on fixed factors of production is called fixed cost.	Those cost which are included on variable factors of production is called variable cost.
ii.	Fixed factors of production are capital equipment, machines, plant, building salary of permanent staff, etc.	Variable factors of production are expenses on raw materials, wages and salary for casual workers, running expenses, etc.
iii.	Fixed costs do not change with the level of output in short run.	Variable cost changes with the changes in output in short run.
iv.	It remains same even at zero level of output.	Variable cost is zero only if there is no production of output.
v.	It remains constant.	It changes at different level of production.

Malthusian theory of population

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

According to Malthus, population increases at geometric rte whereas means of life increase at arithmetic rate. The geometric growth rate means the progression in the series, 2,4,8,16,32 and so on. It is increase in population at an exponential or increasing rater. The arithmetic growth means the progression like in the series 2,4,6,8,10,12,14 and so on. It means the means of life increases at constant rate. According to Malthus, it is because of operation of law of diminishing return. As population grows faster than means of life, the human beings have to suffer scarcity of means of life. The population becomes too explosively large in comparison to the means of life. Ultimately nature brings natural disaster to control the population. The disasters reduce the population. After disasters, population grows again at geometric rate. It becomes again explosively large and there is deficiency of means of life. After growth of population, the disasters and population growth occur alternatively one after another and recurrently. According to Malthus, population becomes double after 25 years. Human beings can do a little to control the population. He has referred to some measures like

Abstinence from sex
Late marriage
Celibacy

He couldn’t refer family planning and prostitution as the effective measures to control population because these were against the social and religious values in that time. His theory can be explained with the help of table and figure as following:

TIME	POPULATION	MEANS OF LIFE ( IN TONS)
1	2000	2000
2	4000	4000
3	8000	6000
4	16000	8000
5	32000	10000

In the above table population grows in geometric rate from 2000 to 4000, 8000, 16000 and 32000 in 2nd, 3rd, 4th and 5th year respectively. But means of life in increased at arithmetic rate from 2000 tons to 4000, 6000, 8000, 0000 tons respectively. If we represent the population and means of life with respect to time we obtain exponential curve and a straight line upwardly sloped.

In the above figure, the upper curve represents the population. It is exponential in shape. It shows that the population grows geometrically. The lower curve represents means of life. It is liner in shape. It shows that means of life increases arithmetically.

Main propositions of Malthusian theory of population

Population grows in geometric rate like in the series 2,4,8,16,32 and so on. It takes 25 years to double the population. Population growth is a natural phenomenon
Means of life grows in arithmetic rate. The arithmetic growth means the progression like in the series 2,4,6,8,10,12,14 and so on. It means the means of life increases at constant rate. According to Malthus, it is because of operation of law of diminishing return.
There are two types of checks: positive checks: When the population becomes too explosively large in comparison to the means of life, nature brings natural disaster to control the population. The disasters reduce the population. And preventive checks : Abstinence from sex, Late marriage, Celibacy
Positive checks are inevitable.

Criticisms of Malthusian theory

It is pessimistic theory. According to it, natural disasters are inevitable.
Population growth is always not problematic
The population may increase or decrease with time. In many countries it is increased but not in geometric rate. In some countries, population decreases too.
It ignores the change in social, cultural, and political values. It also avoids modern family planning techniques
Technological advancement, exploration of new resources etc can bring increase in return of production too.
The preventive checks are difficult to adopt.

Partnership firm

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

Partnership is a form of business organization which as evolved to overcome the shortcomings of sole proprietor. As the size of business expands, one person is unable to provide the necessary capital and managerial skills. Therefore, two or more than two persons form a partnership to carry on business by pooling their financial resources and managerial skills. Thus, partnership is an extension of sole trading concern.

Characteristics of partnership firm

Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.

Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.

Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.

Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.

Association of two or more persons
It must be two or more person to enter into contract. Association of two or more persons can only create partnership. In association of two or more persons, maximum and minimum number of persons is not mentioned.

Agreement
It is set up by agreement between partners. It must be written and legal agreement so that it will reduce dispute.

Merits of partnership firm

Easy to start and dissolve
A partnership firm can be setup easily and quickly. There are not much legal formalities and expenditures are involved in the establishment of a partnership. Similarly, a partnership firm can be closed down very easily and quickly.

Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.

Higher innovation
Many partners use their own ideas and innovation capacity. So there is unlimited managerial ability.

Reduction of work load
Partners mustn’t work more to earn more profit. Higher profit generation is important. So, there is no dull and monotonous work.

In case of monotony, health problem to any partner then other partners can help and reduce absenteeism.

Better decision
There is specialization in decision taking. So there can be less chances of taking wrong decisions.

Harmonization of different ability
There are many partners in this firm and many partners have different skills, knowledge and capacity.

Credit facility
In this liability of partners becomes unlimited. It will help to arrange more capital. And that’s why it has more credit. It improves more financial function.

Close supervision
There is effective management and effective supervision. They look the business themselves.

Flexible
There can be change in management, capital and production. This change can be made by mutual agreement of partners.

Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.

Demerits of partnership firm

No Business secrets
The partner can keep the secrets to himself but these secrets can be known to competitors or others when there is conflict among the partners.

Uncertain existence
Death of any partner can sometime cause death of entire firm. Dishonesty, conflict and lack of resource also can collapse the firm.

No Personal contact
A partner can’t be in a position to maintain intimate contacts with his customers and employees. He cannot be able enter to the requirements of each and every customer. Then there is no close personal touch which decreases the competitive strength of the business.

Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.

Delay in decisions
The partnership firm is completely not free to take all decisions and to implement the. The partners need to consult or seek others approval. Delay in decisions reduces the efficiency of business.

Danger of conflict
Many persons are the owners of partnership firm. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.

Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.

Limited resources
There is low investment, may be higher than in sole trading but not sufficient for large scale production resulting in limited areas of operation.