TyroCity: Economics 12 Notes

Types of money

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

There are different types of money. In the ancient time, the goods of primary importance were used as money in different societies. Money made up of metal, clay, baked leather, hard rocks etc were used but the different types of money can be classified into mainly 4 types. They are

Commodity money The different types of goods durable in nature were commodity money used in ancient times. In the ancient India cow was used as money, in the seashore side fishing hooks and the shells were used as money. Among the hunting commodities, the bows and arrows were used as money. These types of commodity money lacked uniformity and were not usable in all societies. They had more or less importance in different communities. There was difficulty in store measurement of value and transfer from one place to another place.
Metallic money Money made up of metals is called metallic money. It was introduced to overcome the problems in the use of commodity money. The coins were supposed minted in the temple of Goddess Juno. That's why the coins were known as money. There are two types of metallic money. They are:
- Standard metallic money: It is metallic money made up of pure and superior metals like gold and silver. This type of metallic money has the face value just equal to the intrinsic value. The value inscribed in the coins is called face value of money. The value of metal used to mint the coin is called intrinsic value.
- Token money: It is metallic money made up of impure and inferior metals. This type of metallic money has the face value greater than the intrinsic value. Since, the prices of metals change with the time; the standard metallic money is not proper type of money. Moreover, there is need of large quantity of superior and pure metals to mint the large amount of coins. The metallic money is uniform and durable in nature. It is difficult to carry in large amount,. There Is also problem of scarcity of metals to mint the coins.
Paper money It is made up of paper. It is legally tendered. It is issued by monetary authority or central bank of the nation against the reserve of gold. The value of gold kept reserve may be equal to or less than the amount of money issued. It is main type of legally tendered money used in every country. It is lighter less costly to print and safe type of money. But if it is lost, theft or caught fire then owner of the money suffers loss. However, it is easy to carry. There are two types of paper money. They are
- Representative paper money: It is the paper money issued against the reserve of gold equal to the paper money issued. It represents gold kept as security of money issued. It is convertible to gold at any time. It is also called convertible paper money.
- Flat paper money: It is the paper money issued against the reserve of gold of value less than the amount paper money issued. It is not convertible to gold at any time. It is also called non-convertible paper money The face value of paper money is far greater than intrinsic value. Its intrinsic value is infinitely small.
Bank money: It is short term credit instruments issued by banks. They can be cheques, travel cheques, bills of exchange, letter of credit, promissory notes, overdrafts, debit/credit/ATM cards and so on. They are issued for 1 or less than 1 year. They are called liquid assets. They are discounted within one year, before the time of maturation. Most of the bank money are usable only if there are electronic devices.

Others:Besides the 4 types of money there were money made up of baked clay, leather, plastic and so on used in ancient time.

Joint Stock Company

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

Joint stock companies first came into being in the 18th century in Britain, and were mainly concerned with foreign trade. Initially, the organizational form was viewed with suspicion, it being supposed that it encouraged managerial efficiency and corruption. A corporation, chartered by the state in which it is headquartered is considered by law to be unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors (BOD) to oversee the major policies and decisions. The company has a life of its own and does not dissolve when ownership changes.
A company is a voluntary association, an incorporated association, an artificial person created by law, having a common seal and perpetual succession. Shareholders are owners of the company but management lies in the hands of BOD. Company means a company registered under an act.

According to H.L Haney: “A joint company is a voluntary association of individual for profit, having its capital divided into transferable shares the ownership of which is the condition of membership.”

Characteristics of Joint Stock Company

Compulsory incorporation:
A company is a voluntary association of persons formed and incorporated under the existing Corrine law. Only when it gets certificate of incorporation it comes into existence as a body corporate.

Artificial person:
A company is an artificial person created by law. It is created by legal process and not by natural birth. Even though it has no natural personality, it has legal personality. Therefore, it can enter into contracts, sue and can be sued, own property, appoint employees and borrow money like any other natural person.

Common seal:
Since a company is an artificial person having no physical features like a natural person, it cannot sign. Hence every company by law must have a common seal in which its name is engraved. The common seal can serve as its signature. The common seal is fixed on all important documents and contracts which is witnessed by signature of two directors and countersigned by secretary where ever required. The common seal is kept under the custody of directors.

Perpetual succession:
Since every company has separate existence from its members, directors and employees, their death, insolvency or insanity will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Limited liability:
Usually the liability of members of a company is limited to the extent of uncalled or unpaid shares held by them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned liability.

Share capital:
The capital required by the company is raised by the issue of its shares. The share is a document that acknowledges the ownership of the company. The members who hold the share of a company can transfer its ownership to any other person, without the company’s permission.

Separation of ownership and capital:
In company organization the ownership and management are separate. The shareholders who are the owners do not take active part in the everyday affairs of the company. Instead they elect their representative known as directors, who with the help of managers and employees manage the company. Thus, there is division of labor and specialization.

Legal entity:
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Merits of joint stock company

Large capital:
A company can collect huge capital for the business through shares and debentures, public deposits, loans etc. Due to huge capital the company can conduct business on a large scale.

Continuity and stability:
Death, insolvency or insanity of any member of the company will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Professional management:
The Company appoints experienced, competent and expert to manage the business. Their services lead to managerial and administrative efficiency and accuracy.

Economies of scale:
A company operates on a high scale and so it enjoys economies in production, distribution, management and financing.

Bargaining power:
Compared to other forms of organization, a joint stock company is a strong power in buying as well as in selling of goods because of its large scale production.

Legal status: Efficiency of labor :
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Transferability of shares:
Shares of Joint Stock Company, especially public companies, are freely transferable. A member who wants to sell his shares can easily do so in the stock market. This encourages the public and other to invest in shares.

Employment:
Joint Stock Company provides employment to a large number of people directly and indirectly. This leads to higher national income for the country and higher living standard of living for the people.

Government revenue:
Joint Stock Companies provide revenue to the government in the form of taxes charged directly and indirectly.

Research and development:
Joint Stock Companies undertakes R&D continuously thus bringing about new and improved products which benefits people.

Economic development:
Because of Joint Stock Companies there is all round development of trade, commerce and industry. The society in general gains the benefit of the industrial development. Large capital, government revenue, economic development etc. are the advantages of Joint Stock Companies.

Demerit of Joint Stock Company

Difficult formation:
Formation of Joint Stock Company is an expensive and time consuming process as a number of legal formalities have to be undertaken in order to register the company.

Lacks flexibility:
The working of a Joint Stock Company is less flexible s compared to other organizations. For very small thing they either have to follow a detailed procedure or obtain sanctions from various authorities. This results in lack of flexibility.

No business secrecy:
This form of organization lacks business secrecy because it is compulsory for the company to publish accounts and other records

Excessive government regulation:
The Company is a subject to excessive government control. It has to follow the numerous provision of the companies act. This makes working difficult.

Delay in decision:
The Joint Stock Company is completely not free to take all decisions and to implement the decisions. Due to excessive government control and democratic set up all decisions are taken in meetings and some decisions require shareholder’s approval. All this leads to delay in decisions.

Lack of contact with customer:
A company can’t be in a position to maintain intimate contacts with customers. It 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 due to large scale operation.

Lack of contact with employees:
The top management may not have contact with their employees. This may cause friction and disputes amongst the management and the employees with may affect the worker’s and employee’s morale.

Conflict of interest:
Many persons are the owners of Joint Stock Company. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.

Not suitable for all type of business:
This type of organization is not suitable for business where personalized services are required.

Exploitation of shareholders:
Sometimes the BOD may misappropriate the fund and mislead the shareholders by window dress report. The directors may even manipulate the trading on the stock exchange. Thus shareholders can be exploited by corrupt directors.

World trade organization (WTO)

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

The World Trade Organization (WTO) is an international, multilateral organization which deals with the global rules of trade between nations. It is the policeman of global trade. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. Headquarter of WTO is located in Geneva, Switzerland. It was established in 1 January 1995. The first concept initiation was done by Uruguay Round negotiations (1986-94). Till the data of 2 March 2013 there are 159 countries as a member in WTO. It has estimated budget of 197 million Swiss francs for 2013. There are 640 secretarial staff. The director general of WTO is Pascal Lamy (Director-General)

Objectives:

Administering WTO trade agreement
Raising standard of living and incomes
Promoting full employment,
Expanding production and trade
Optimum utilization of world’s resources
Forum for trade negotiations
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for developing countries
Cooperation with other international organizations

Principles:

Trading system should be discrimination free in the sense that a country cannot favor another country or discriminate against foreign product or services.
A trading system should be more free and there should be little trade barriers.
A trading system should be predictable where foreign companies and governments can be sure that trade barriers would not be raised and markets will main open.
A trading system should be more competitive.
A trading system should be more accommodating for less developed counties giving them more time to adjust, greater flexibility and more privileges

Negative income elasticity of demand

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

If there is negative relationship between income and demand in this case income elasticity is negative. In this case, inferior goods income elasticity is negative.

We can explain it by the given figure:

On the above figure, x and y axis represent demand for inferior goods and income respectively. When income is OI then quantity demand is OQ and when income decreases from I to Io then quantity demand increases from Q to Q1.

Movement Along Supply Curve

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

Movement along supply curve can be defined as graphical representation of change in supply for a commodity brought by change in its own price other things remaining constant. If price changes supply too changes. The change in supply is graphically shown by movement from a point to another point of same supply curve.

Rightward movement:
It is the graphical representation of expansion in supply brought by rise in price, other things remaining constant. If price rises, the firm gets more revenue per unit. To earn more profit it supplies more. The effect of rise in price in supply is called expansion in supply. It is shown by movement from a point in left side to another point in right side of same supply curve.

Leftward movement:
It is the graphical representation of contraction in supply brought by fall in price, other things remaining constant. If price falls, the firm gets less revenue per unit so it supplies less. The effect of fall in price in supply is called contraction in supply. It is shown by movement from a point in right side to another point in left side of same supply curve.

Shift in demand curve:
It can be defined as diagrammatic representation of change in supply brought by change in any other factor determining supply other than price. If any one of the factors changes, supply too changes at all possible prices. To show the change in supply, we need o construct another supply curve

Rightward shift: It is graphical representation of increase in supply brought by change in any other determinant other than price. To show rightward shift or increase in supply, we construct another supply curve on the right side of initial supply curve
Causes of rightward shift:

Fall in interest rate, wage rate and rent
Fall in prices of raw materials
Advancement in technology, skill and knowledge development among workers
Decrease in corporate and indirect taxes
Increase in availability of resources

Leftward shift:
It is graphical representation of decrease in supply brought by change in any other determinant other than price. To show leftward shift or decrease in supply, we construct another supply curve on the left side of initial supply curve

Causes of leftward shift:

Rise in interest rate, wage rate and rent
Rise in prices of raw materials
Destruction in technology, skill and knowledge development among workers
Increase in corporate and indirect taxes
Decrease in availability of resources

Law of Demand

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

The law of demand states that the demand is inversely related to price other things remaining constant (ceteris paribus). It means if price raises demand contracts or decreases and if price diminishes demand expands or increases. The law of demand operates only if factors determining demand other than prices are constant. It means prices of complementary goods, substitutes, income, taste of consumer, population, advertisement etc should be constant.

Law of demand can be explained with the help of demand schedule and demand curve as following

Price( in Rs)	Demand(per week)
10	400
15	300
20	200

Let the initial price Rs 10 per kg and demand be 400 kg per week. If the prices raise to Rs 15 the consumer s reduce their demand. In above table demand is at 300 kg/week when price is Rs 15. If the price further raises to Rs 20 the demand further decreases to 200kg/week. It shows that demand changes inversely to the change in price when other things remain constant. If we represent the table in figure then we obtain a downward sloped demand curve as shown below

In the above figure the demand curve is downward sloped. It shows that demand decreases with rise in price and increases with fall in price.

Assumptions

Price of related goods is constant
Income and taste of consumers are constant
Size of population is constant
There is no change in taxes and advertisement, money supply and government expenditure.

Limitation/ exception to law of demand

Goods of prestige: Demand for goods of prestige like gold, demand may not decrease even there is rise in price. They are purchased and consumed because of their heavy prices.
Goods of hobbies: The law of demand does not hold in case of goods of hobbies like collection, ticket collection, and collection of historical and archaeological materials and so on. The things are collected even paying more and more amount
Goods of addiction: in case of goods and addiction like alcohol, tobacco, drugs etc the demand does not decrease even there is increase in price. Instead of operation of law of demand consumers purchase more units even if there is rise in price.
Giffen goods: Demand for Giffen goods increase even there is rise in price and vice versa. The law of demand isn’t applicable to them. The goods which are both basic and inferior are Giffen goods.
Goods of tradition: The goods consumed according to tradition, culture and religion have usually demand not inversely related to price. For example, during dashain the Nepalese people purchase more goods to celebrate the festival even if prices are increased.
Future expected price: If the consumers expect fall in price in near future, they do not purchase more right now even if there is fall in price currently and vice versa.
Future availability: If the consumers have fear of shortage of commodity in near future, they purchase more and keep the stock even if price has been higher. But if they expect greater availability of goods in the near future, they purchase less quantity even price has been decreased.
Change in taste and preference: If the consumers have the fear of the goods out of fashion in near future, they demand less even if prices are decreased.
Irrationality: Law of demand does not operate in case of irrational consumers. The unscrupulous consumers spend the money not according to satisfaction from the goods.

Why does demand law operate?

Why does demand curve slopes downward?

Why does demand vary inversely with price?

Diminishing marginal utility: According to Gossen, of a consumer goes on consuming more units of same commodity without time gap, marginal utility diminishes. It means 2nd unit gives less utility or satisfaction than 1st unit, 3rd gives less than 2nd and so on. Therefore, the consumer demands more only if prices are reduced.
Real income effect: if price falls real income increases even if the money is constant. Therefore, consumers demand more. If the price rises, real income falls even if money income is constant. Therefore, consumers demand less.
Substitution effect: if a commodity becomes cheaper the commodity is substituted for other substituting goods. If the commodity becomes expensive, it is substituted by other substitutes.
No. of uses: If the price falls, the commodity is used for least important purposes too. That’s why demand increases. If price rises, the commodity is used only for important purposes. That’s why demand decreases.
No. of consumers: If price falls, the consumers who were unable to purchase the commodity because of high price, will also be able to consume the commodity. That’s why demand increases and vice versa.

Positive cross elasticity of substitute goods

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

Cross elasticity of demand is positive because when the price of one commodity i.e. x commodity increases demand for another commodity i.e. y also increases. We can express by the help of given figure.

On the above figure, in initial stage price of x commodity is OP and demand for y commodity is OQ. When price of x is increased from p to P1 then quantity demand for y commodity increases from Q to Q1.

Concept of production

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

1. Total production (TP):
Total production refers to total quantity of output produced by using both fixed and variable factors of production but in short run production is only the function of variable factor.
TP = F(Ql)
Where,
TP = total production
F = functional relationship
Ql = quantity of labor

2. Average production (AP):
Average production of a factor which is obtained by dividing the total production, by number of input used in production or it is the per unit output produced by factors used.

Where,
APL = average product of labor
APC = average product of capital
TP = total product
L = no. of labors
C = capital

3. Marginal production (MP):
Marginal production of an input is the change in TP due to change in an additional unit of input in production. Mathematically it is expressed as

Where,
MPL = marginal production of labor
∆TP = change in total product
∆L = change in no. of labor

Weighted price index

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

The price index constructed by giving different weights to different commodities is called weighted price index. Weights are given on the basis of regularity in consumption and the amount spent and the number of consumers. The commodities consumed by all or majority of consumers spending large amount of income is given more weights and vive versa. The average price is calculated dividing the sum of weighted price by sum of weights.

weighted average price = sum of weighted prices / sum of weights
The major methods of weighted price index are fisher’s method, Laspeyre’s method, Pasche’s method etc. Weighted price index is calculated under

We can explain it with the help of table as following

commodities	Weight (W)	Price in 2011 (P1)	P1*W	Price in 2012 (P2)	P2*W
Rice	10	Rs 35	Rs 350	Rs 40	Rs 400
Pulses	4	Rs 80	Rs 320	Rs 95	Rs 380
Clothes	3	Rs 250	Rs 750	Rs 275	Rs. 825
Vegetables	5	Rs 50	Rs 250	Rs 70	Rs 350
Firewood	2	Rs 100	Rs 200	Rs 150	Rs 300
total	24	Rs 515	Rs 1870	Rs 630	Rs 2255
Average			77.92		93.96
Price index			100		120.58

In the above table, we have taken only 5 commodities. Sum of the weighted prices of the base year 2011 is Rs 1870. The sum of weighted price of 2012 is Rs 2255. If we divide these sums of weighted prices by the sum of weights we obtain average price of the year2011 as Rs 77.92 and of the year 2012 Rs 93.95. Indexing price level of base year as 100 we can obtain the price index of the year 2012 as 1220.58. There is said to be rise in price level by 20.58%.

Price index number

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

Price index number is the relative price level of current year to price level of base year. The price index is constructed in order to know the relative price levels of different years. It gives the change in value of money in percentage. To construct price index we rake the price level of one of the past year as base price level. The year is called base year. The price level of base year is indexed as 100. Then the price index of the current year is calculated using the formula:

Average price is known a general price level. It is average prices of goods and services transacted in the base year and current year. To calculate average price the commodities may be given equal or more and less weights. The price index is constructed giving equal weights to all commodities is called simple price index. The price index constructed by giving different weights to different commodities is called weighted price index.

Free trade

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

The international trade without governmental intervention is called free trade. In this case, the government doesn’t restrict export and import through any types of tariff and non tariff barrier there is free movement if products from one country to another country. Each country can promote export only if it produces qualitative goods with little cost. For it, there should be improvement in technology, exploration of new resources, development of human resources, and improvement in qualities and so on. Most of developed nations advocate in favor of free trade.

Arguments in favor of free trade

Technical know-how:
If there is free trade each country can import technical equipments, plants, machines, tools and manpower from other nations. The consumption or use of these capital goods and human resource can increase in technical know how.

Specialization:
Every country can take more benefit specializing in the production of goods which can be produced using local resources, technology and human resource. International specialization leads to proper allocation of world’s resources and leads to production of goods under very favorable conditions.

Varieties of products:
In the domestic market, large number of goods and services can be supplied even it all required commodities are not produced within a country. There is free import and this is possible.

Wide market:
The domestic products can have wide market even in the foreign countries.

Large scale production:
Since, each domestic product can be sold even in foreign market, there is large scale production. It is helpful to raise the income level and employment level too. There also arises completion among the local and foreign markets. It helps in production of qualitative products too.

Compensation of lack of resources:
If there is free trade lack of some resources can be compensated by the resources available in the country. The resources are imported either with manpower or exchanging with resources available in the country.

High employment level:
Free trade helps the country to create employment opportunities. Each product is produces not only to fulfill domestic demand but also to fulfill the demand in foreign market. Therefore, there in increase in production and so there is requirement of increment in labor in field of insurance, trade, industry, transportation and so on.

Capital formation:
For the capital formation the investment is required. For the investment, investible fund is required. The investible fund comes from income generation by export.

Good diplomatic relationship:
The countries involved in international trade give and take products and services benefiting each other. They will have good diplomatic relationship.

Diversification and modernization:
The free trade helps the country to diversify the industries and to modernize the way of life. The varieties of goods for luxury, efficiency, high productivity etc are imported from different countries and the life made more luxurious, well facilitated and efficient.

Arguments against free trade

Import dependency:
If there is free trade, the countries that are less developed cannot compete with the developed countries. There is increase in import but not in export. The domestic market will be under the control of foreign industries.

Colonization:
The country import dependent in nature has the fear of being colonized. It is because foreign industries take the control of domestic market firstly and then control of domestic resources and government.

Dumping:
The developed nations may sell their cheap and wasted goods to the less developed countries and prices are usually high.

National Identity:
Every county has its own socio-cultural and linguistic values. The people have their own identity but if there is free trade there may be import of the products against such socio-cultural values. Moreover, the goods injurious to health and society may also be important.

Infant industries argument:
There may be industries just established. If there is free trade such infant industries cannot compete with the foreign industries. The foreign products are qualitative advanced and less costly than domestic products.

Dispute:
The countries involved in international trade may have dispute due to unequal benefits from the trade to them. The disputes may take them the war.

Balance of payment argument:
If the country cannot export more even there is free trade and if there is increase only in import. There is outflow of money in large amount than inflow of money. The balance of payment of the country becomes unfavorable.

Employment argument:
The import dependent country cannot give employment opportunities to the people. There is high unemployment if the country fails to compete with other countries in international trade.

Improper use of resources:
If there is free trade the resources may be used to produce only the goods demanded in the foreign countries. It may bring exhaustion.

Concepts of Utility

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

Total Utility (T.U): Total utility is the summation of utility derived from the consumption of different unities of same commodity. In other word, it refers to the total sum of marginal utility derived from the consumption of different units of same commodity. Mathematically it is expressed as: T.U = F (Qx) Where, T.U = total utility of x commodity F = fundamental relationship Qx = quantity of x commodity
Average Utility (A.U): Average utility is obtained by dividing the total utility by number of commodities consumed. In other words average utility is the per unit utility. Mathematically, it is expressed as follows: A.Ux = T.Ux / Qx Where, A.Ux = average utility of x commodity T.Ux = total utility of x commodity Qx = quantity of x commodity
Marginal Utility (M.U): The utility derived from the consumption of additional unit of commodity is known as marginal utility. In other words, the change in total utility due to the change in consumption of commodity is known as marginal utility. Mathematically it can be expressed as: M.Ux = ∆T.Ux / ∆Qx Where, M.Ux = marginal utility of x commodity ∆T.Ux = change in total utility of x commodity ∆Qx = change in consumption of x commodity