TyroCity: Economics 12 Notes

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.

Concept of short run cost

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

Short run is short period where producer uses variable factors as well as fixed for production. So the expenditure made for the variable factors and fixed factors consists short run cost. So, in short run

TC = TFC + TVC

where,
TC = total cost
TFC = total fixed cost
TVC = total variable cost

Meaning of Bank

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

The bank is an institute which deals with money and credit. It accepts deposits from the public, next the fund available to those who needs it and helps in remittance of money from one place to other. A modern bank performs variety of function so it is difficult to define a bank in a single word. So, bank is defined by different economist differently. In the words of Walter Leaf, “A bank is a person or corporation who is always ready to receive money in deposits to be returned against the cheques of their depositors.”

Growther defined bank as, “An institution which collets money from those who have it, out of their income and lend this money out of those who require it.”

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.

Application of Law of diminishing return especially in agriculture

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

Role of nature:
Nature plays vital role than man in agriculture. Natural factors like rainfall, landslide, sunlight, etc. are uncertain so marginal productivity off labor and capital starts to fall after a certain point.

Land as fixed factor:
In an economy the supply of land is fixed so production can be changed only by changing the proportion of labor and capital in relation to land. Due to the excess burden of these factor marginal productivity of land starts to decline.

Less scope of division of labor:
There is limited scope of division of labor in agriculture sector than industrial sector. Inadequate scope of labor which means low productivity. As additional units of labor capital are applied without any extension of division of labor invites law of diminishing return to scale.

Less supervision:
Cultivated areas are spread far and wide. It is physically very difficult to exercise adequate supervision. It causes diminishing returns.

Less use of machines:
There is less possibility to use machines in agriculture in comparison to industry. Due to inadequate use of machines in agriculture, output tends to diminish.

Differences in fertility of land:
Some lands are more fertile and sore are less fertile. As the demand for agricultural output increases, less and less fertile land also comes under cultivation. It also leads to diminishing return.

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.

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.

Supply

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

Supply can be defined as the quantity that a firm would offer for sale at a certain price during a certain time period. It means to express supply of a commodity, we should specify quantity the firm wants to offer for sale, price at which and time period during which the quantity is to be offered for sale. Supply can be defined as the desire for money backed up by ability to produce and willingness to offer for sale.

Supply is dependent upon different factors like prices of raw materials, wage rate, interest rate, expected profit margin, taxes and so on. But supply is basically written as function of price s=f(p).

Value of money

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

The value of money is defines as the quantity of goods and services that can be purchased with the amount of money. It is given by the ratio of amount of money and general price level.

Mathematically,
value of money = amount of money / price level

The value of re 1 is the inverse of general price level.

Mathematically,

value of re. 1 = 1 / p

Value of money is inversely related to price level. If price level rises, the value of money decreases and vice versa

If P ↑, value of money ↓
If P ↓, value of money ↑

The relationship between value of money and price level can be explained with the help of table and figure a following

Price level (P)	Value of re. 1 ( 1/P)
Rs 10	0.1
Rs 20	0.05
Rs 30	0.033

In the above table when price level is increased from Rs 10 to Rs 20, 30 value of re 1 is decreased from 0.1 units to 0.05 and 0.033 unit respectively. It shows the inverse relationship between value of money and price level. It we represent the value of money with respect to price level we obtain a monotonically downward sloped curve as shown below:

In the above figure, the convex curve shows the relationship between value of money and price level. It is downward sloped which shoes that value of Rs1 decreases with every increase in price level.

Demand curve

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

The demand curve can be defined as locus of quantities of a commodity demanded at different possible prices. Each point of demand curve gives a certain quantity demanded at a price. It is derived with the help of a demand schedule. The demand curve is the graphical representation of relationship between demand and price, other things remaining constant.

There are two types of demand curve:

1. Individual demand curve : It is defined as the locus of quantities that a single consumer would purchase at different possible prices. It is downward sloped. It moves from left to right downward. It shows how an individual consumer adjusts his/her demand to the change in price. We can obtain the derivation of individual curve as following:

Let a consumer named “A” wants to purchase the following quantities of a commodity at different possible prices as shown in the table below.

PRICE PER LITER	DEMAND FOR A WEEK
Rs 10	30 liters
Rs 15	20 liters
Rs 20	10 liters

In the above table, the individual demand schedule of consumer A is 30, 20 and 10 liters per week at a price Rs 10, Rs 15, Rs 20 respectively. The table is the list of quantities the consumer A want to purchase at different possible prices. It is called individual demand schedule of consumer A. if we represent the quantities with respect to the pries we obtain downward sloped curve. The curve is individual curve of consumer A.

In the above figure, dd’ is the individual demand curve of consumer A. it is downward sloped. It shows the consumer “A” wants to purchase more quantity at lower price and less quantity at higher price.

2. Market demand curve : It is defined as the locus of quantities that the total consumer would purchase at different possible prices. It is a horizontal summation of individual demand curves. It is obtained representation the market demand with respect to price. The market demand at a certain price is the sum of individual demands. Since, every consumer wants to purchase more quantity at lower price and less quantity at higher price, the market demand too is inversely related to the price. That’s why like individual demand curves, market demand curve too is downward sloped.

we can derive market demand curve with the help of individual demand schedules and individual demand curves as following

Price	Demand A	Demand B	Demand C	Market demand M=A+B+C
Rs 10	5	6	3	14
Rs 15	3	5	2	10
Rs 20	1	4	1	6

In the above table, when price is Rs 10 the consumers A, B and C have demanded 5,6 and 3 units respectively. Here, we have assumed that there are only 3 consumers of the commodity. If we sum up these quantities, we obtain market demand as 14 units at price Rs 10. If price rises to Rs 15, the consumers reduce their demand to 3, 5 and 2 units respectively. If we sum up these quantities, we obtain market demand as 10 units at price Rs 15. Similarly, summing up the quantities 1, 4 and 1 unit at price of Rs 20 that consumers want to purchase, we can obtain the market demand 6 units. If we represent the 14, 10 and 6 units the consumer want to purchase at prices Rs 10, 15 and 20, we obtain market demand curve as shown in the figure.

In the figure above, Dm represents the market demand curve. It is downward sloped. It is obtained by summing up the individual demand curve Da, Db and Dc horizontally.

Economics XII

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

Unit 1: Market Economy, Demand, Supply, Equilibrium of Demand Supply

Market Economy

Demand

Supply

Equilibrium

Equilibrium

Unit 2: Elasticity of Demand

General

Economics XII: Meaning

Types of elasticity of demand

Unit 3: Theory of Consumers Behavior

Topics

Unit 4: Factors of Production

Topics

Unit 5: Theory of Production

Topics

Unit 6: Revenue and Cost Curves

Revenue

Cost

Unit 7: Theory of Price and Output Determination

Unit 8: Theory of Factor Pricing

Topics

Unit 9: Money

Topics

Unit 10: Banking

Topics

Unit 11: Government Finance

Unit 12: International Trade

Topics

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%.