TyroCity: Economics 12 Notes

Concept of money market

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

Money market refers to the transaction of short term/run credit instrument. These instruments are highly liquid, easily marketable with little chance of loss. The maturity period of these instruments are less than one year. The examples of instruments are treasury bill, bill of exchange, promissory note.

The main function of money market is to make available working capital to the business sector and short term loan to the government.

According to World Bank, a market in which short term securities such as treasury bills, certificates of deposits and commercial bills are traded.

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.

Unitary elastic demand

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

If percentage change in price commodity is equal to percentage change in quantity demand then it is known as unitary elastic demand. We can explain it by the given figure.

In the above figure, when price is OP then demand is OQ. When the price decreases by 10% price becomes Po. At that time quantity demand increases by 10% and demand becomes Qo.

Role of Bank

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

Capital formation:
Capital formation is one of the essential parts of economic development. There is the lack of capital formation in most of the developing countries like Nepal. So, bank collects ideal money from the people and invest that shaving on the productive sector. That causes capital formation as well as development of the nation.

Encourages Innovation:
Banking system encourages entrepreneurial innovation because due to development of banking system bank can provide requested amount of loan to the entrepreneur at the reasonable rate of interest in which there is the increment of participation of private sector.

Monetization of money:
Establishment of bank and their branches in remote and rural area helps to increase banking habit of people. People keep their excess income in bank and withdraw the money at the time of need. It helps government to implement the fiscal and monetary policies.

Monetization – use of money

Fiscal policy – budgetary, tax, expenditure policy

Monetary – rate of interest

Influence the economic activity:
Bank can influence economic activities by changing the rate of interest. If bank charges low rate on loan then there is more demand of fund for investment. As a result, economic activities increases and vice-versa.

Facilities of monetary and fiscal policy:
Effective banking system is necessary for effective implementation of fiscal and monetary policy of nation. The instruments of fiscal and monetary policy such as regulation of credit, interest rate, tax, etc are properly used only if banking system of the country is sound.

Raising deposits and financing loans:
Bank by offering attractive rate of interest can increase the saving and deposits then after collected money can be provided to the investors at the reasonable rate of interest.

Remittance of money:
The bank remits the money to its customers from one place to the other place without any risk. It helps to promote the economic activities inside the country.

Deflation

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

It is defined as persistent fall in price level. During deflation the goods and services become less and less expensive in average, as value of money increases with decrease in price level. The deflation can be defined as the persistent rise in value of money too. Deflation is long term fall in price level. The temporal fall in price level is not said to be deflation. Fall in price level should be for more years to be deflation. The deflation is caused by less aggregate demand than aggregate supply. During deflation, the goods and services demanded in the country are less than goods and services supplied. If aggregate demand is less than aggregate supply due to any reason, the price level falls the process continuously takes place till the aggregate demand remains less than aggregate supply.

Causes of deflation

decrease in income level
decrease in population
decrease in remittance
decrease in propensity to consume
decrease in government expenditure
decrease in export and decrease in import
Demonstration effect and modernization
Rise of internal debt and foreign borrowing
decrease in prices of raw materials, fuels and energies
decrease in wage rate, interest rate and rate of rent
decrease in profit margin desired by firm
introduction of technology and increase in resources available

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.

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.

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

Role of international trade

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

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.

Consumer satisfaction and benefits:
Consumers of a country can enjoy the consumption of goods and services produced in foreign markets, which may be cheaper than the national products and which may not be produced in their own country.

Relief and help in economic crisis:
In times of inflation, disasters, scarcity, famine, depression, a country can solve the problems through imports too.

Qualitative production:
There arises completion among the local and foreign markets. It helps in production of qualitative products.

Agricultural and industrial development:
Countries which lack of raw materials and other products can easily acquire them through imports. This helps in industrial development. Agriculture sector also can be developed through import of fertilizers, pesticides and improved seeds.

Employment:
International trade helps the country to create employment opportunities. There in increase in production and so there is requirement of increment in labor in field of insurance, trade, industry, transportation and so on.

Exchange of culture:
Cultural exchange takes place between countries development when they enter into mutual trading.

Others:
It enhances the domestic competitiveness and also takes advantage of international trade technology. It helps in Increase sales and profits and Extend sales potential of the existing products. It maintains cost competitiveness in your domestic market and enhances potential for expansion of your business. It helps in gaining a global market share and reduction dependence on existing markets. It also stabilizes seasonal market fluctuations.

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.

Economics XII: Meaning of Cost

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

While producing the commodities, producer uses several factors of production. So, payment paid to the factors of production according to their contribution in production process is known as cost.

Mathematically, C = F (X, T, CF)

where,
C = cost
F = functional relationship
X = price of variable factor
T = technology
CF = fixed capital

Concept of fixed cost:
Fixed cost are those cost which are incurred on fixed factors of production such as capital equipment, plant, building, land, salary of permanent staff, etc. Fixed costs don’t change with the level of output in the short run. It remains same even at zero level of output.

Concept of variable cost:
Variable costs are those cost which are incurred on variable factors of production. Variable cost changes with the change in level of output in the short run. For example the expenditure made on raw materials, wages and salaries of casual (temporary) workers, running expenses like charges of water supply, electricity, tax is variable cost. Variable cost is zero if there is no production of output.

Zero income elasticity of demand

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

If there is no any change in quantity of demand due to certain percentage change in income then it is known as zero income elasticity of demand.

We can explain it on the basis of following figure:

On the above figure, in initial stage price is OI and quantity of demand is OQ, when income increase to I1 and decreases to Io, there is no any change in quantity of demand.