TyroCity: Economics 12 Notes

Land

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

In economics, land is not mere surface of the earth. It means all things obtained free of cost from the nature. The substances available above, below and on the surface of the earth free of cost from nature are land. They can be sunlight, air, soil. Rocks, sands forest, wind etc. land is not the production made my use of labor, it is limited and fixed in supply. It differs from place to place and its composition can’t be changed. It is immobile and a passive factor of production. It can not be transferable and can’t be created and destroyed.

Features of land

Free gift of nature
It is free gift of nature. It is not produced by human effort and all the substances on the surface, above or below earth is land.

Differs from place to place
Land is different in its composition from place to place. Some places are full of minerals, waters and fertile soil whereas someplace isn’t. Some are usable for manufacture, tourism and adventure and some aren’t.

Multiple uses
The land has multiple uses. It can be put for production, manufacture, trade, recreation, agriculture and so on.

Passive
Mere land doesn’t yield production. There must be use of labor.

Immobile
Land is immobile. However, to some extent its components are transferable.

Limited supply
Land is limited and fixed in supply. It can neither be created nor destroyed. However, their forms are changeable

Income Elasticity of demand

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

It refers to the percentage change in quantity demand due to the certain percentage change in income of consumers when other things remaining the same.

Mathematically, it can be expressed as:

Where,
ey = income elastic of demand
∆Q = change in quantity demand (i.e. Q2 – Q1)
∆y = change in income
y = initial income
Q = initial quantity demand

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

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).

Perfect Competition Market

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

Meaning:
The perfect competition is the structure of market in which there are large no. of buyers and sellers. They produce or sell homogenous product. In this market, firm is price taker and market is price maker because price of commodity is determined on the basis of market demand and supply. So, the price of particular commodity remains same everywhere in an economy.

Characteristics / Assumptions of perfect competition market:

Large no. of sellers and buyers:
In this market there is assumed large no. of buiyers and sellers. A buyer and seller in the very small part and seller cannot influence in the market price.

Products homogeneity:
The products produced in the industry are supposed to be homogeneous. Different units of a commodity are similar in content, quality, price, smell, packaging, etc.

Free entry and exit of firm:
There is no barrier on entry of a new firm to the industry and there in no any restriction on exit of firm from the industry.

Profit maximization:
In this market, all firm wants to maximize its profit.

No government regulation:
Government doesn’t influence in this market. There is no licensing system, no tax and subsidy. Government has no role in this type of market.

Perfect mobility of factors of production:
There is assumed that factor of production are free to move from one place to other, one industry to other and one occupation into another.

Perfect knowledge:
It assumes that under perfect competition market buyers and sellers are aware about prevailing market prices. They are also aware of future market condition.

Price and Output determination under perfect competition market:

In the perfect competition market there is large no. of buyers and sellers. Price is determined by market forces and industry. It means market price is determined on the basis of market demand and market supply. The price determined by market/industry is accepted by all the firms. They just adjust their output according to the equilibrium position of firms. The process of price and output determination is explained by the help of given figures.

On the given figure, first of all price and output determination of industry is shown. In the first figure, demand and supply curves are interested at point E. That point determines the equilibrium price of industry i.e. OP and equilibrium price of output of industry i.e. OQ. Suppose, when the price increases from P to P2 then demand is P2K and supply is P2L, it means there is excess supply of goods. So, price tends to decline at OP. On the other hand, when price decreases from P to P1 there is excess demand equal to area MN. It tends to increase price OP so that equilibrium price of market price is OP. The market price is accelerated by all the firms but they are capable to adjust their output according to the equilibrium price of a firm. So, in short run, firm may obtain super normal profit or normal profit or loss.

The firm A, by producing equilibrium output i.e. OQ1 at OP price, the firm has been obtaining super normal profit. Firm B, by producing OQ2 output at OP has been obtaining normal profit. The firm C, by producing OQ3 output at OP price has been obtaining loss. But in the long run, every firm always obtains only the normal profit.

Derivation of TR, AR and MR curves under the perfect competition market

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

Derivation of TR, AR and MR curves under the perfect competition market:

Under the perfect competition market there are large no. of buyers and sellers. Producers are homogeneous. Market price is determined by market forces i.e. demand and supply. So, any individual consumer and seller can’t influence in the market price. Price of any particular commodity remains constant everywhere in an economy. On the basis of this concept, by the help of given table we can derive TR, AR and MR curves.

Output Sold (Q)	Price (P)	TR = P × Q	AR = TR / Q	MR = ∆TR / ∆Q
1	10	10	10	10
2	10	20	10	10
3	10	30	10	10
4	10	40	10	10
5	10	50	10	10

On the above table, when output sold increases at equal rate, price remains constant. We calculate average, total and marginal revenue accordingly using formula. After calculation, we can observe that TR increases at the equal rate but AR and MR remains constant during the production period.

On the basis of given table, we can derive figure as:

On the above figure, output sold is on x-axis and TR, AR, MR is on y-axis. With the increase in sale output increases at constant rate so TR slope is positively sloped but AR abs MR are equal with price with any quantity of output sold so that both are coincided with each other and parallel to x-axis.

Change in Optimum Population

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

The optimum population, however, is not fixed, for over a period of time. Conditions are liable to change. If it were possible to increase the supply of other factors with increase in population, the optimum might be raised. Optimum population is relative to resources and technology. So if there is increase in capital stock or natural resources or level of technology. There will be an upward shift in the average and marginal product curves. The per capita output will increase. This means that the level of optimum population too will increase. This has been represented in figure below:

As shown in figure, with given resources and technology, the per capita output curve is AP. Here optimum population is and maximum output per capita is NF. When capital and natural resource increase or there is improvement in technology, the per capita output curve shifts upward in the form AP, Now the optimum population is N, and maximum output per capita is N,F,. Here both level of optimum population and maximum output per capita is higher than before. Likewise, further increase in resources and technology will shift the per capita output curve upward in the form of AP2. Now the level of optimum population and maximum per capita output are N2 and N2 F2 respectively which are higher than before.

Dalton has given a formula to measure the extent to which the actual population of a country deviates from the optimum population. The extent of deviation is called maladjustment

M = Maladjustment
A= Actual population
O = Optimum population

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

Supply of capital

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

Supply of capital
It is the amount available for investment. It is called savings. It is the amount left after consumption. It is the monetary value of products left after consumption. It is directly related to interest rate if interest rate is high, the people save more to earn more interest and vice versa.
Symbolically,

In the above table, when interest rate is increased from 4% to 6% and 8% supply of capital ( savings) increases from Rs 6 billions to Rs 8 billions and Rs 10 billions respectively. If we represent savings with respect to interest rate, we obtain an upwardly sloped curve.

The equilibrium interest rate is given by the point of intersection of investment and savings curves. In the above figures, it is given by point E. However, the actual interest rate may be above or below the equilibrium interest rate. If it is above the level of equilibrium, saving exceeds investment. The excess supply of capital brings the interest rate down to equilibrium level. If it is below the level of equilibrium, investment exceeds savings. The excess demand for capital brigs the interest rate up to equilibrium level. It means sooner or later, the actual interest rate comes to the equilibrium level even it is above or below than it at any instant.

Criticisms

Money is not veil and is not just a medium of exchange. It is asset too. More or less money has effect on investment, production, employment level etc.
Money is not demanded or borrowed only for investment but also for speculation and precaution
This theory is based upon diminishing marginal productivity of capital but there may be increase in marginal productivity of capital due to advancement in technology, improvement in human resource etc.
Both demand for capital and supply of capital are not only determined by interest rate but also upon level of income
Supply of capital comes not only from saving but also from dishoarding, depreciation fund etc.
Saving and investment are not independent of each other. They are affected by each other.

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.

Long Run Cost

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

Long run is long time period where a producer can change the level of output by changing all kind of factors of production. So, expenditure made to purchase all kind of factors of production in long term is called long run cost.

Profit

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

Generally, profit is the difference between revenue and cost of production. Revenue is amount obtained from sale. Mathematically,
Profit= total revenue-total cost
Or, Ω= R-C
If R> C then, Ω >0 i.e. profit
If R<C then, Ω < 0 i.e. loss
If R=C then, Ω = 0 i.e. break even point
Cost of production means the total amount paid to inputs used in the production. It includes wage paid to labor, interest paid to capital, rent paid to land, cost of raw materials, fuels, energies and so on. Both revenue and cost depends upon quantity produced and sold.
There are two types of cost. They are

Explicit cost:
The cost of inputs hired or purchased is called explicit cost. It includes wages of labor hired, interest of money borrowed and invested, rent of land and building hired, cost of raw materials, fuels, energies purchased etc. These amounts are not income of the investors. These are cost to them. If we subtract explicit cost from revenue we obtain gross profit.

Implicit cost:
It is the cost of inputs owned by investors themselves which are used in the production. It includes the wage or salary of investors themselves, rent of land and building of investor themselves, interest of money of investors. If we subtract both explicit cost and implicit cost from the revenue we obtain net profit.
Types of profit:
There are 2 types of profit. They are;

Gross profit
Excess revenue over the explicit cost of production is called gross profit. It is the difference between total revenue obtained from sale and explicit cost. Mathematically,
Gross profit = Total revenue – Explicit cost

Net profit
Excess revenue over all types of cost of production is called net profit. It is the difference between total revenue obtained from sale and the sum of explicit cost and implicit cost. Mathematically,
Net profit= Total revenue – (explicit cost +implicit cost)
Gross profit includes cost of inputs owned by entrepreneur too but net profit doesn’t include it, that’s why, net profit is always less than gross profit. If not a single input used is owned by entrepreneur, the gross profit and net profit are equal. In this case, implicit cost is equal to 0.

Causes of profit

Effective combination of other inputs
The organization brings other inputs like land, capital etc. together and combines for production, for it, organization should obtain profit as its remuneration.
Innovation:
Organization brings innovation in type and quality of products, management and technology. For it to the organization should earn profit.
Bargaining power
Every organization has bargaining power due to more or less control in the market, resources, and special skills and so on. For it too organization should earn profit.
Risk involved in business
There is always risk involved in business due to different reasons. For taking risk too, the organization should earn profit as compensation.
Uncertainty
Some economists consider that organization should earn profit for bearing uncertainty due to unforeseeable or non-insurable risk.