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Economics

Posted by Safayetur Rahman Sayem on September 18, 2012 at 9:05 AM

What do you understand by Economics?

 

The word ‘Economics’ is derived from Greek word ‘Oikonomia’ meaning of management of household or money matter.

 

1. Economics is the study of how people and society end up choosing with or without money to employ scarce production resource.

 

It analyzes the costs and benefits of improving patterns of resource allocation.

 

 

According to Aristotle, “Economics is an art of house management and management of national wealth.

Classical definition: According to Adam Smith, “Economics is a science which deals with the nature and causes of the resources of nations”.

Neo-classical definition: According to Alfred Marshall, “Economics is the study of mankind in the ordinary business of life.”

Complete definition: According to Lionel Robbins, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

.

 

Economics does not study a single individual but it studies the economic problems of a people living in a society. Economics is the way of national thinking.

 

 

Basic themes of economics:

 

1. Economic wants

2. Economic scarcity

3. Economic satisfaction.

4. Economic choices.

5. Economic organization.

6. Specialization.

7. Exchange.

8. Economic development.

 

 

 

 

 

MICRO AND MACRO ECONOMICS

 

 

Micro economics:

The term ‘micro’ was first used in economics by Ranger Frisch in 1933. The word “micro’ is derived from Greek word, ‘mikros’ meaning small or a million parts.

Microeconomics is the study of the economic actions of individuals such as individual consumer, individual firms and small aggregates or well-defined groups of individuals such as various industries and markets.

According to K.E. Boulding, microeconomics includes “the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities.”

 

In the words of professor Gardner Ackley, “microeconomics deals with the division of total output among industries, products and firms and the allocation of the resources among competing groups.

 

According to Maurice Dobb, microeconomics is infecting a microscopic study of the economy. It is like looking at the economy through a microscope to find out the working of markets for individual commodities and the behavior of individual consumers and producers.

 

Ackley further points out, “price and value theory, the theory of the household, the firm and the industry, most production and welfare theory are of the microeconomic variety.

 

Importance of microeconomics:

Microeconomics is an important method of economic analysis which regarded as “a necessary part of ones apparatus of thought.” It has both theoretical and practical importance.

1) To understand the working of the economy:

Microeconomics is of utmost importance in understanding the working of a free enterprise economy. In such economy there is no agency to plan and co-ordinate the working of the economic system. The planning authority in a centrally planned economy cannot ensure an efficient working of the economy in the absence of a free enterprise economy.

2) To provide tools for economic policies:

Microeconomics provides the analytical tools for evaluating the economic policies of the state. Price or market mechanism is the tool which helps us in this respect.

3) Helpful in the efficient employment of resources:

Microeconomics deals with the economizing of scarce resources with efficiency. Microeconomics is used by the government in the efficient employment of resources and achieving growth with stability.

4) Help to business executives:

Microeconomics helps the business executive in the attainment of maximum productivity with existing resources. It is with its help that he is able to know the consumer demand and calculate the costs of his product.

5) Helpful in understanding the problems of taxation:

Microeconomics also helps in understanding some of the taxation and international trade. It is used to explain the welfare implications of a tax. Microeconomic analysis also studies the distributions of the incidence of a commodity tax between sellers and consumers.

6) Helpful in international trade:

In the field of international trade, it is used to explain the gains from international trade, balance of payments, disequilibrium and the determination of the foreign exchange rate. It is thus relative elasticity’s of demand for each other products that determine the gains from international trade.

7) To examine the conditions of economic welfare:

Microeconomics can be used to examine the conditions of economic welfare. Microeconomics helps in suggesting ways and means of eliminating wastages in order to bring maximum social welfare.

8) The basis for prediction:

Microeconomics theory can be used as the basis for prediction. This does not mean that it will enable us to predict the future. Microeconomics theory will enable us to make conditional predictions here.

9) Conservation and use of models for actual economic phenomena:

Microeconomics constructs and uses simple models for understanding of the actual economic phenomena. Microeconomics models help not only to describe the actual economic situation, but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events.

Limitations of Microeconomics:

1. It is based on the unrealistic assumption of the full employment in the economy. Full employment is not the rule but an exception in the real world. Thus microeconomics is an unrealistic method of economic analysis.

2. Again, microeconomics is based on the assumption of laissez-faire. But the policy of laissez-faire is no longer practiced. This makes the study unrealistic.

3. Microeconomics is concerned with the study of parts and neglects the whole. Thus the study of microeconomics presents an imprecise picture of the economy.

4. Further, microeconomics is not only inadequate but also misleading in analyzing several economic problems. The character and behavior of aggregates can not be obtained simply by generalizing from character and behavior of the individual components.

 

Macroeconomics:

Macroeconomics is derived from the Greek word “makros”, meaning “large”. Macroeconomics is the study of aggregates or averages covering the entire economy, such as total employment, national income, national output, total investment, total consumption, total savings, aggregate supply, aggregate demand and general price level, wage level and cost structure.

In other words, it is aggregative economics which examines the interrelations among the various aggregates, their determination and causes of fluctuation in them.

 

According to professor Ackley, macroeconomics deals with economic affairs “in the large”, it concerns the overall dimensions of economic life. It looks at the total size and shape and fluctuating of the “elephant” of economic experience, rather than working of articulation of dimensions of the individual parts. It studies the character of the forest, independently of the trees which compose it.

 

Macroeconomics is also known as the theory of income and employment, or simply income analysis. It is concerned with the problems of unemployment, economic fluctuations, inflation or deflation, international trade and economic growth.

 

Macroeconomics studies the factors that retard growth and those which bring the economy on the path of economic development.

 

Importance of Macroeconomics:

As a method of economic analysis macroeconomics is of much theoretical and practical importance.

1. To understand the working of the economy:

The study of macroeconomics variables is indispensable for understanding the working of the economy. These variables are statistically measurable, thereby facilitating the possibilities of analyzing the effects on the functioning of the economy.

2. In economic policies:

Macroeconomics is extremely useful from the point of view of economic policy. Working with macroeconomic concepts is a bare necessity in order to contribute to the solutions of the great problems of our times.

3. In general unemployment:

Macroeconomics has special significance in studying the causes, effects, and remedies of general unemployment.

4. In national income:

The study of macroeconomics is very important for evaluating the overall performance of the economy in terms of national income.

5. In economic growth:

The economics of growth is also a study in macroeconomics. It is on the basis of macroeconomics that the resources and capabilities of an economy are evaluated.

6. In monetary problems:

It is in terms of macroeconomics that monetary problems can be analyzed and understood properly.

7. In business cycles:

Further macroeconomics as an approach to economic problems started after the great depression. Thus its importance lies in analyzing the causes of economic fluctuations and in providing remedies.

8. For understanding the behavior of individual units:

For understanding the behavior of individual units the study of macroeconomics is imperative. The study of individual units is not possible without macroeconomics.

 

 

Limitations of macroeconomics:

There are certain limitations of macroeconomics. These are as follows :

1. Fallacy of com

 

 

Scope / Application / Importance of Economics in forestry:

 

The knowledge of economics is important in forestry in the following points:

1. Forest economics deals with selling, buying, owning, taxing and managing the forest land.

2. Used for the production of water, wildlife, timber and some other products and with growing, protecting, harvesting and marketing products.

3. To estimate and analyses the problems of demand and supply of natural resources.

4. Helps a forester to lay more emphasis on planning and development.

5. Helps to explain and predict the future economic trends.

6. Forest land as a capital.

7. Sustainable management and exploitation of the forest resources.

8. Economic management of human resources.

9. Capital budgeting and resource allocation.

10. Value addition in forest products.

11. Trade and marketing of forest resources.

12. Forest based industries.

13. Forest planning and project.

14. Forest labour and problems.

15. To understand and to apply the basic principles of economics to the production of all goods and services which forests are able to yield.

 

Comment on whether Economics is a science or not?

 

We have to firstly discuss the pre-requisites for a subject to be a science:

 

 It should be a systematic study of particular department of the universe.

 It should be based on observation and if possible on experiment.

 Its aim should be to discover general laws regarding the phenomena within its scope.

 

Now, we can go to verify if economics satisfy any or all of these pre-requisites.

 Economics is the systematic study of the economics activities of men. It includes allocating scarce resources, selecting proper way of distribution and consuming those resources efficiently.

 Economics is based on observation. Experiment in its true sense is not possible in economics, because it deals with human behaviour having individual and quite different tastes and habits.

 The aim of economics is to find general truths regarding the general behaviour of men.

 

So, we can say that economics is a science.

 

 

Explain with examples economic wants, scarcity, choices and specialization:

 

Economic wants: Human wants in the broadest sense cover may areas beyond the reach of economic satisfaction. Somethings are desire to get is known as wants. We have non but want to get it which impression create in our mind is said as wants. There is no boundary of want. Want may very time to time, place to place. There are two types of wants.

These are:

1. Non-material wants.

2. Material wants.

 

Non-material want: Courage, love, wisdom etc.

Material want: Motor cycle, cars, television etc.

 

 

Economic scarcity: Scarcity is not an absolute concept but refers to everything for which someones desire must go unfulfilled.

The term scarcity is used in economic in a relative sense. It describes the rate of requirements in relation to supply of a particular commodity. If demand of a commodity is more than the supply than it is called scarce goods. Literally, we describe a commodity which is of less quantity as scarce goods. But in economics, not quantity. But demand in relation to supply of a commodity determines whether it is scarce or not. A commodity exists in small quantity but if nobody has any use of it we will not define it as scarce goods in economic sense.

Scarcity is the main problem of economy of human life. The wants of man are unlimited but the commodities are limited which fulfill human needs.

 

E.g: There may be huge stock of goods like paddy, wheat, timber etc. but yet they are called scarce goods because their demand is even larger than supply.

: Membership of golf club.

: Pure drinking water.

 

Economic choice: The second theme of economics is choice. Choice and scarcity go together. All scarce goods have various alternative uses. These alternative uses have varying importance, some are more urgent and some are less. So, people have to choose the most urgent commodity and get the respective commodity by putting the scarce commodity in to the use.

 

Economic choice depends on:

i. What shall we produce?

ii. How shall production be conducted?

iii. What is the raw material?

iv. For whom, shall we produce?

All the resources are limited but maximum utilization of limited resources by economic choice.

 

Specialization:

The vast majority of consumers produce virtually none of the goods and services they consume and conversely, consume little or nothing of what they produce. Specialization permits individuals to take advantage of existing differences in their abilities, and skills. Specialization is desirable on a regional and inter-national basis. Farmers can produce sustaintially more than they needed to survive. The other people are also producing specialized goods and services other than food. They also produce more than their needs. So, they trade excess to obtain what else they required. This allocation of different jobs to different people is defined as “specialization of labour” by the economics. This specialization proved to be more efficient than simple self-sufficiency for various reasons such as:

 

 Specialization allows each person to do the work which he can do relatively best, leaving everything else to be done by the others.

 A person who concentrates on one actively becomes better at it than could a jack of all trades.

 

 

Exchange:

Previously, producers and consumers used to exchange their own goods and services with those of other, which was known as ‘barter’. But barter is costly in time and can not satisfy either the producer on the consumer fully.

If a farmer has paddy and has a want of an axe, he has to find out someone who wishes to exchange an axe for paddy. Thus, successful barter transaction requires, “doubly coincidence of wants.”

The currency system can eliminate this problem of barter. In this system, the farmer has merely to fins someone who wants to paddy. The farmer takes money in exchange of paddy and can exchange money for an axe. The currency of one country is acceptable within the boundary of that country only. So, international trade occurs and the exchange of currency of one nation to that of the others is being possible.

 

Economic organization:

i. Function: Production, Control, Production management.

ii. Consumption: Consumer satisfaction.

iii. Distribution: Proper distribution of consumers.

iv. Exchange: Salesman Money Selling.

 

Economic development:

 

 Is a organized effort.

 All round growth.

 To reduce the economic scarcity.

 To satisfy more of the limitless wants of humanity.

 

Stages of E.D:

i. Self sufficiency.

ii. Division of labour.

iii. Specialization ( e.g. Forester, Environmentalist).

iv. Diversification ( e.g. Boshundhara group).

 

Distinguish between microeconomics and macroeconomics?

Distinction between micro and macro economics:

 

Microeconomics Macroeconomics

Microeconomics is the analysis of the small individual units of the economy Macroeconomics is the analysis of the large individual units of the economy

Microeconomics deals with the study of particular firms, particular households, individual price, wages, income, individual industries, and particular commodities. Macroeconomics deals with the aggregates of these quantities not with individual incomes, but with national income, not with individual prices, but with price level, not with individual output, but with the national output.

It cannot give an idea of the functioning of the economy as a whole. It is the useful in understanding the function of the complicated economic system.

It assumes full employment which is a phenomena’s at any rate in the capitalist world. It is therefore, unrealistic assumption. It overlooks individual differences. For instance, the general price level may be stable, but the price of the food grain may have gone.

It is related with individual welfare. It ignores individual welfare.

Microeconomics uses aggregates relating to individual household firms and industries. Macroeconomics uses aggregates which relate them to the economy wide total.

 

 

 

 

Forest economics:

Forest economics deals with the scarce resources with distribution, consumption, nature of resources and optimum production of forest resources. It helps to maximum utilization of forest lands or increases forest areas and forest based industries.

 

Forest economics pertains to be application of the principles and practices of economics to forestry, particularly as related to economic development for the welfare of human beings. This is a complex subject requiring the knowledge of both economics and forestry.

 

Forest economics deals with those economic problems involved in owning, buying, selling taxing and managing forest land, whether it is used for producing water, wild-life, wood, or some other products. It is also concerned with the economic problems of growing, protecting, harvesting, and marketing the products of that land.

 

Resources:

Resources are those goods and services which have the utility to fulfill the human needs.

 

A thing that already exist and which can be used as a raw material for the production of some commodity is called as resources.

 

Resource economics:

Resource economics is the study of management of resources to help satisfy human wants, it embraces the ethics of environmental stability essential for peoples, sustained weal.

 

Forest resources:

 

Forest resources are the products from forest lands that have great value to human beings.

 

Types of resources:

Resources could be of the following three types-

 

a. Natural resources

b. Human resources

c. Cultural resources

 

The natural resources are broadly classified as-

 

i. Non-renewable or stock resources and

ii. Renewable resources or flow resources.

 

The two economically discernible types of flow resources are:

 

a. Flow not significantly affected by human action, viz. solar and other cosmic radiation, tides, winds etc.

b. Flow significantly affected by human action; these are subdivided-

i. Reversibility of a decrease in flow not characterized by a critical zone, e.g. precipitation, site capacity.

ii. Reversibility of a decrease in flow characterized by a critical zone, e.g. forest, wildlife, scenic resources, storage capacity of a ground-water basins etc.

iii.

 

 

Natural resources:

The natural resources are broadly classified as:

 

1. Non-renewable or stock resources:

The non-renewable or stock resources do not decrease significantly in course of time without use. Their quantity is lowered through varying rates of leakage and use rate. With the passage of time, as the resource level goes down, its cost starts rising and its use rate tends to become zero. Man tries to meet his demand for stock resources, whenever possible through recycling and/or substitution.

2. Renewable or flow resources:

Resources are defined as renewable or flow resources if different units become available for use in different intervals. These successively available quantities constitute the flow.

 

Critical zone:

 

Critical zone means a more or less clearly defined range of rates below which a decrease in flow cannot be reversed economically under presently foreseeable conditions. Generally, such irreversibility is not only economic but also technological.

 

Forest is a renewable or flow resource in which the flow is significantly affected by human action, and the reversibility of a decrease in flow is characterized by a critical zone. Forest resources are the products from forest lands that have great value to human beings. Economics of forestry devolves on the management of forest resources, their regeneration, protection, conservation and discreet harvesting constituent with judicious utilization, conversion, distribution and consumption.

 

The decrease in the flow of animal and plant life becomes technologically irreversible if the rate of flow once reaches zero – that is, if the breeding stock is destroyed, e.g. java rhinoceros, wild buffalo, swamp deer and hog deer from the reserved forests of Sundarbans in Bangladesh. A wildlife species may lose its renewability and may eventually become extinct because of over exploitation, decrease, predation or other factors, or if its habitat is destroyed or polluted or drastically impaired.

 

Major criteria of forest economics to differentiate from other economics:

Three characteristics/criteria are:

• Long period of time for timber growing.

• Flora and fauna are the same time both capital plants and consumer goods.

• Non-measurability of forest services by existing markets.

 

 

Forest economics in aid of forestry decisions (class):

 

Forest economics is necessary for these reasons:

 

 For proper utilization of forest.

 What to produce?

 Appropriate management.

 How to equilibrium of demand and supply of forest goods and services?

 To know proper marketing system of forest goods or services and how to maintain it?

 How to maximize the forest resources and evaluate?

 For wide distribution of forest goods and service.

 Assumption about input and output of forest.

 To know properly maintain the ecological balance.

 To know about specific land use, wise consumption, cost-benefits analysis, create good marketing system, decisions for priority, make suitable planning etc.

 

Forest economics in aid of forestry decisions:

 

a. Knowledge of forest economics enables professional foresters to appraise and analyze the problems of demand and supply of natural resources.

b. It helps to explain and predict the future economic trends.

c. Economics of forestry helps a forester to make better recommendations and judgments in forestry events.

d. It deals to realization of the necessity of integrating and coordinating forestry plans with other sectoral plans of the economy.

e. It creates forestry production and distribution model.

f. It leads to build up a framework to analyze the field problems.

g. Forest economics provides guidance to the government on resource administration.

h. This helps us to understand better the resources allocation problems. The production possibility curve illustrates three concepts: scarcity, choice and opportunity cost.

i. The value-added concept applies intimately to forestry and makes it eminently clear that forest, being important tools for economic growth and economic development.

j. Economics helps to critically evaluate the available alternatives through meaningful social-benefit-cost analysis and aids the decision-maker in choosing an alternative.

k. An understanding of economic growth and development is helpful to the foresters; it shows how forestry should be practiced for rural and tribal development.

l. It provides guidance to the government to understand and compute the contribution of forestry sector to the gross national product (GNP) which is the indicator of economic growth.

m. Forestry is mainly a social service. Forest economics helps to evolve new criteria for assessment of various aspects of forestry’s role, to provide factors at present beyond the scope of traditional benefit-cost analysis.

 

 

Limitations of forest resource economics economics:

 

a. Can not accurately calculate the cost and benefits which we input and derived directly or indirectly from forests.

b. It can not properly evaluate the forest resources.

c. It can not give proper idea about production, consumption and marketing system.

d. Inherent problem for research.

e. Need more skill person.

f. Financial problem on long term research.

g. Economics variables determined by data cannot be increased uniformly.

h. The difficulty in economic forecasting arises from the uncertainty of forecasting accurately.

i. The multiform reality cannot be reproduced completing in the model.

j. The values of practically all the variables are strongly influenced by the government policies, price controls and inflations.

k. The selection of variables considered by economic theory tends frequently to obliterate relevant relations, especially between variables dependent on time factor.

l. Existing economic theory is not always suitable for practical simplification and approximation.

 

Externalities:

These are the events essentially linked with a process over which man has no control. These may be positive or negative.

1. Positive externalities:

These are the beneficial events linked with a process, e.g. fresh air and a felling of relief provided by the forests.

2. Negative externalities:

These are the harmful events linked with a process, e.g. increasing air pollution by the industries.

 

Financial cost analysis : It’s includes tangible factors.

Economic cost analysis : It’s includes tangible and intangible factors.

 

Basic forest goods are:

 

Timber, Fire wood, Fodder, Honey, Fruits, Bamboo,

Cane, Patipata, Golpata, Khair, Wax, Gum, Resin, etc.

 

 

 

 

 

 

 

 

 

 

THEORY OF CONSUMER BEHAVIOUR

 

 

What do you understand by utility?

Utility is the power or property of a commodity to satisfy human desires. The wants satisfying property of a commodity is ‘subjective’ not objective. Utility denotes to satisfaction.

 

According to professor Mayer’s “Utility is the quality or capacity of a goods which enables to satisfy human wants”. Utility of a commodity varies from person to person depending on the urgency or intensity of their respective needs.

 

For example: Traffics solve our transportation problems food solve the satisfaction of hunger. So we can say traffics, food, etc. have different types of utility. A commodity may have frivolous, injurious or even pernicious, but if it satisfies an economic want it possesses utility such as economic want it possesses utility such as poison, cigarettes etc.

 

There are two types of utility:

1. Total utility.

2. Marginal utility.

 

 

Cardinal utility: Some classical and neo-classical economists believed that utility is measurable and cardinally quantifiable. This belief gave rise to the concept of cardinal utility.

It implies that utility can be assigned a cardinal number like 1, 2, 3 etc. Neo-classical economists build up their theory of consumption on this very assumption, that is, utility is cardinally measurable.

 

Ordinal utility: The modern economists have employed the concept of ordinal utility for analysing consumer’s behavior. The concept of ordinal utility is based on the fact that it may not be possible for the consumers to express utility of a commodity in absolute terms.

It is the utility which is measured in principle not practice.

For example: A consumer consumes three commodities X, Y, and Z may not be able to express their utility in cardinal number as 8, 4, 2 respectively. But he can easily express his order of preference for these commodities as he prefers X to Y and Y to Z.

i.e. in terms of utility: X > Y > Z.

 

 

Total utility: Total utility means the total amount of satisfaction getting by a consumer from successive units of a commodity.

In other words, the overall satisfaction that a consumer receives from consuming a specific quantity of a commodity per unit of time is called total utility. Total utility is the sum of marginal utility.

For example: Total utility of two apples is 35 (2o+15). Total utility of 4 apples is (20+15+10+5).

 

TU = MU1 + MU2 + . . . . . . . . . . . .+ MUn.

[ Here, MU = Marginal utility ]

 

Marginal utility: Marginal utility may be defined in a number of ways. It is defined as the utility derived from the marginal unit consumed. It may also be defined as the addition to the total utility resulting from consumption of one additional unit.

Marginal utility thus refers to the change in the total utility obtained from the consumption of a commodity, as a result of change in consumption by one unit. It may be expressed as, ΔTU

MU =

ΔC

Where, TU = Total utility.

C = Total consumption.

ΔC = 1.

Another way of expressing marginal utility (MU) when number of units consumed is ‘n’ is as follows:

MU of nth unit = TUn – TUn-1.

 

Marginal utility may be defined as changes in total utility as a result of changes of corresponding unit.

 

Difference between Cardinal and Ordinal Approaches.

 

Cardinal Utility Approach Ordinal Utility Approach

1. Also called the neo-classical approach. Also known as indifference curve analysis.

2. Adopted by the classical and neo-classical economists. Adopted by the modern economists.

3. According to this approach utility is measurable and cardinally quantitiable. Ordinalist maintain that utility is phycological phenomenon which is inherently immeasurable.

4. It implies that utility can be assigned a cardinal number like 1, 2, 3 etc. According to this approach it is possible for the consumer to rank the various goods and services in the order of their preference as 1st , 2nt , 3rd .

 

 

 

 

Mention the unit of utility?

The Marshallian demand analysis assumes that utility is measurable & additive. It is expressed as a quantity measured, in hypothetical units which are called “utils”. If a consumer imagines that one mango have 8 utils & an apple 4 utils. It implies that the utility of one mango is twice that the utility of one mango is twice that of an apple.

 

 

The law of diminishing marginal utility:

The law of diminishing marginal utility is also known as the hypothesis of diminishing marginal utility. The law of diminishing marginal utility states the relationship between the change in quality and the change in marginal utility.

The state that as “the quantity consumed of a commodity increases per unit of time, the marginal utility derived from each successive unit decreases,( consumption of all other commodities remaining the same.)

In other words, as a person consumes more and more of a commodity per unit of time, keeping consumption of all other commodities constant the utility which he derives from the successive units of consumption goes on diminishing.

 

 

The law can be explained with the following table:

 

Units of apple TU (in utils) MU (in utils)

0 0 0

1 4 4

2 7 3

3 9 2

4 10 1

5 10 0

 

The above table indicates that the amount of a commodity consumed increases, the total utility increases but the marginal utility decreases. When our hypothetical consumer takes the first apple, he derives maximum satisfaction in terms of 4 utils. As he consume 2nd, 3rd, 4th units of apple. He derives less and less satisfaction 3, 2, and 1 respectively. With the consumption of 5th apple he reaches the saturation point because the satisfaction derived from that unit is zero.

 

 

10

Sp TU

 

 

 

 

 

1 MU

0

1 6

 

 

Fig: TU and MU curve.

 

 

Assumptions of law of diminishing marginal utility:

The law of diminishing marginal utility holds goods only under certain given conditions. These conditions are often referred to as the assumptions of the law.

First, the unit of the consumer’s goods must be standard, e.g. a cup of tea, a bottle of cold drinks, a pair of shoes or trousers etc.

Second, consumer’s taste or preference must remain the same during the period of consumption.

Third, there must be continuity in consumption and where break in continuity is necessary, the time interval between the consumption of two units must be appropriately short.

Fourth, the mental condition of the consumer remains normal during the period of consumption of a commodity.

Fifth, all units of the commodity are homogeneous.

Third consumers should have perfect knowledge on goods and services.

Consumer’s equilibrium:

A consumer reaches equilibrium position, when he maximizes his total utility given his income and prices of commodities he consumes. Let us describe the assumptions which economists have made in explaining the determination of consumer’s equilibrium.

 

Assumptions:

1. Rationality: It is assumed that the consumer is a rational being in the sense that he satisfied his wants in the order of their preference.

2. Limited money income: The consumer has a limited money income to spend on the goods and cervices he chooses to consume. Limitedness, of income, along with utility maximization objective make the choice between ends inevitable.

3. Maximization of satisfaction: Every rational consumer intends to maximize his satisfaction from his given money income.

4. Utility cardinally measurable: The cardinalists have assumed that utility is cardinaly measurable, i.e. it can be measured in absolute terms. The most convenient measure of utility is money.

5. Diminishing marginal utility: Following the law of diminishing marginal utility it is assumed that the utility gained from the successive units of a commodity consumed decreases as a consumer consumes larger quantity of it.

6. Constant utility of money: The utility of each unit of money, which is used by the cardinalists as the measure of utility, remains constant whatever the level of consumer’s income.

7. Utility is additive: Another properly of cardinal utility is that it is additive. Cardinalists maintained that utility is not only cardinally measurable but also utility derived from various goods and services.

 

 

 

 

 

 

MECHANICS OF DEMAND AND SUPPLY

 

 

 

Demand:

Demand is the total quantity of any commodity demanded by a group of individuals within a given time.

There are three pre-requisites for a demand to exist-

 

 The want/need for a commodity/services

 The willingness to spend for the commodity/services

 The ability to purchase that commodity/services

Law of demand:

It expresses an inverse relation between price and demand. The law of demand states that quantity of a product demanded per unit of time increases when its prices fall, and decreases when its price increases, if other factors remain constant.

Other factor remain constant implies that income of consumers, price of the substitute and complementary goods, consumer taste and preference and number of consumers remain unchanged.

 

The law of demand is based on some important assumptions, such as,

 

 There is no change in taste and preference of the consumers in a given time.

 The income of the consumer remains constant.

 There is no change in customs.

 There should not have any substitute of the commodity.

 The commodity should be homogenous in a given time.

 There is no change of the prices of the product.

 The habits of the consumer should remain unchanged.

 

Demand schedule:

Demand schedule is the list of changes in prices of a commodity with the changes in demand of that commodity.

In other word, Demand schedule is a tabular representation of different commodities at different prices.

It shows a negative relationship between the price and demand.

 

Table: demand schedule for tea

Price of cup of tea No of cup of tea demanded per consumer per day

07 02

06 03

05 04

04 05

 

 

Demand curve:

The demand curve is a graphical representation of demand schedule which shows the negative relationship between the price and quantity demanded of a commodity.

A demand curve is a locus of points showing various alternative price-quantity combinations.

 

 

 

 

7

demand curve

 

4

0 2 3 4 5

Quantity

 

Figure: Demand curve

 

Market demand:

 

The market demand is the sum of the individual consumer’s demands for a homogenous commodity, per time unit and at a given price, other factors remaining the same.

 

For example:

There are three consumers (A, B, C) of a commodity X, and their individual demand at its different prices is given below-

 

Table: Price and quantity demanded

 

Price of commodity

X Quantity of X demanded by (A,B,C) Market demand

A B C

10 05 01 00 06

08 07 02 00 09

06 10 04 01 15

04 14 06 02 22

02 20 10 04 34

 

Hypothetical demand schedule and hypothetical demand curve for firewood:

 

Price of firewood per mounds in taka Quantity of firewood in mounds Remark

96.00 50,000 Byers plans when average income is Tk. 5000 per year and price of gas is Tk. 20 per cylinder

80.00 75,000

64.00 100,000

48.00 125,000

32.00 150,000

 

 

 

 

 

 

Demand curve of fire wood

 

 

 

 

 

 

 

0 5 10 15 20 25 30

Quantity of fire wood, unit 10000 mounds

 

Factors affecting the shifting of demand

 

Important factors Shifting of demand

1. increase in income Increase in demand

2. decrease in income Decrease in demand

3. Increase in the price of the substitute goods. Increase in the demand of the given commodity

4. Decrease in the price of the substitute goods. Decrease in the demand of the given commodity

5. Increase in the price of the complementary goods Decrease in the demand of the given products

6. Decrease in the price of the complementary products. Increase in the demand of the given products.

7. Positive changes in the habit, taste towards products. Increase in the demand of the given products.

8. Negative changes in habit, taste towards products. Decrease in the demand of the given products.

9. Increase in the advertisement of the product. Increase in the demand of the given products.

10. Decrease in the advertisement of the product. Decrease in the demand of the given product.

11. Future increase in the price (forecasted). Increase in demand of the given products.

12. Decrease in future price. Decrease in demand of the given products.

 

Demand function and factors affecting demand –

Demand function is the mathematical or technical relationship between the quantity demanded and the factors of demand or a relationship between a dependent variable and an independent variable.

If the quantity for good x is Qdx, then,

Qdx = f (Px), ceteris paribus.

Where, Px is the price of x and ceteris paribus means other than remain constant.

Here, other thing refers to the factors of demand.

The factors of demand are,

 

 Price of the good (Px)

 Average income (Y)

 Population (Popu)

 Price of substitute goods (Ps)

 Price of complementary goods (Pc)

 Taste and preference (T)

 

If the factors change, the Qdx will also be changed. Thus the relationship between quantities demanded (Qdx) and factors affecting demand can be written as,

Qdx = f (Px, Y, Popu, Ps, Pc, T etc.)

 

 

SUPPLY

 

Supply:

Supply is the quantity of goods and services that offered by seller for sale at a given price over a period of time.

On the other hand, it is the quantity of goods or services that the producers are willing and able to sale during a certain period and under a given se t of conditions. Such conditions (factors) are-

 

 Price of goods or services

 Price of related goods

 Current condition of technology

 Price of raw materials

 Number of sellers

 Weather condition

 Communication system

 Social condition

 Political situation

 Level of input prices.

Law of supply:

The law of supply states that “when price of a commodity increases, quantity supply of that commodity increases; when the price of a commodity decreases, the quantity supply of that commodity also decreases, if other thongs remain constant.”

Supply schedule:

Supply schedule is a tabulated representation of quantity supplied at various prices. It is the mathematical or numerical representation of supply curve.

Table: supply schedule

Price (Tk.) Quantity supplied

20 08

15 06

10 04

05 02

Supply curve:

The graphical representation of price and quantity.

The quantity supplied of a commodity is called supply curve. A supply schedule can be represented in the form of a curve called supply curve.

 

It represents a positive relationship between the price and quantity supplied of a commodity. It has an upward slope from left to right.

 

 

 

 

 

 

 

 

 

p Schedule curve

 

o

 

n

m

 

0 2 4 6 8

Quantity

 

Figure: supply curve.

 

 

Shift in supply curve:

Supply curve shift upwards when the same price less is offered for sale or the same quantity is offered at higher price.

Supply curve shift downwards when the same price more is offered for sale or the same quantity is offered at lower price.

 

 

Here, Q N

MN= Supply curve before change S

PQ= When same price less is offered

for sale (upwards shift)

RS= When same price more is k

offered for sale ( dw shift) P

M

R

0 2 4 6 8

Quantity

Figure: Shift in supply curve

 

 

Market supply:

The market supply is the sum of the individual sellers supply for a homogenous commodity, per time unit and at a given price, other factors remaining the same.

 

For example:

There are three sellers (A, B, C) of a commodity X, and their individual supply at its different prices is given below-

 

 

Table: Price and quantity supply

 

 

Price of commodity

X Quantity of X supplied by (A,B,C) Market supply

A B C

02 05 01 00 06

04 07 02 00 09

06 10 04 01 15

08 14 06 02 22

10 20 10 04 34

 

Hypothetical supply schedule and hypothetical supply curve for firewood-

Price of firewood in Tk. Per maund Quantity of firewood in maunds Remark

100 80,000 Sellers plan when stumpage price is Tk. 14 per maund & wage rate is Tk. 30/= per day.

90 70,000

80 60,000

70 50,000

60 40,000

 

 

 

 

 

supply curve of fire wood

 

 

 

 

 

 

 

0

Quantity of fire wood, unit 10000 mounds

 

Supply functions and factors affecting supply

Mathematically, the supply function could be expressed as,

Sx = F (PR, T, Po, E, Ns, U)

Or, Sx = F (PR, ceteris paribus)

Where, Sx is the supply function, PR is the price of x and ceteris paribus means other things remain constant.

Here, other things refer to the factors of supply. The factors of supply are-

 

 The price of resources used to produce it (PR)

 The technology used to produce it (T)

 The price of other goods which might be produced with the same resources (Po).

 Price expectations (E).

 The number of sellers of the commodity (Ns).

 Other unknown factors (u).

This package of factors has been referred to as market circumstances.

Obviously, supply will change when any of the determinants of supply changes, a change in supply means a change or shift in the entire supply schedule or curve.

 

 

MARKET EQUILIBRIUM

 

Equilibrium/Market Equilibrium:

Market equilibrium refers to the market condition which one achieved to purchase. In economics, it occurs when the quantity of commodity demanded in the market per unit of time equal to the quantity of the commodity supplied to the market over the same period of time.

Geometrically equilibrium occurred at the inter section of the commodities of market demand curve and market supply curve.

 

 

 

market surplus supply curve

market equilibrium

 

market shortage demand curve

0

Quantity

 

Figure: market equilibrium

When price is less then demand will more but supply less. When price is more demand will less but supply more. Due to these reasons market shortage and market surplus occur.

 

 

 

 

ELASTICITY

 

Elasticity:

The term “elasticity” refers to the measure of extent of relationship between two related variables. Elasticity can be defined as the percentage change in the dependent variable to the percentage change in the independent variable.

 

So elasticity, e =

= =

 

Kinds of elasticity:

Some of the most common types of elasticity’s and their definitions are given below

 

3. a. Price elasticity of demand:

Price elasticity of demand is a measure of the sensitivity of the quantity demanded to changes in price of the product.

 

EPD =

= = =

 

1. b. Price elasticity of supply:

Price elasticity of supply is a measure of the sensitivity of quantity supplied to changes in the price of the product.

 

EPS =

= = =

 

4. Income elasticity of demand:

Income elasticity is a measure of the sensitivity of quantity demanded to change in income.

 

EI =

 

= = =

 

 

Elasticity of income with respect to consumption:

It is defined as the measure of sensitivity of quantity consumed to the change in income.

 

E =

= =

(Where QC denotes quantity consumed)

 

 

In each case, certain paribus assumption should be vigorously maintained.

 

5. Cross elasticity of demand:

Cross elasticity is a measure of the sensitivity of quantity of a product x, to change in the price of the product y.

 

EYx =

= =

 

In each case, numerator is the dependent variable.

 

Nature of demands curves and elasticity’s:

Limit of elasticity 0

ep= 0, perfectly inelastic, no change in demand, e.g. Salt.

ep<1, inelastic

ep=1, Unit elastic

ep >1, Elastic

ep= ∞, Perfectly elastic

 

 

 

 

 

 

ep= 0 ep=1 ep= ∞,

 

 

quantity quantity quantity

 

 

Figure: Elasticity of demand curve.

 

 

THEORY OF PRODUCTION

 

 

 

Production factors in an economy/subdivision/trinity of resources:

 

Production:

In economics, the term ‘production’ means a process by which a commodity are converted or transformed into a different usable commodity. In other words, production means transforming inputs (labour, machines, raw materials) into a output.

Production is sometimes defined as the creation of utility or the creation of want-satisfying goods and services. Production essentially means transformation of one set of goods into another.

 

 

Productive resources required to produce a given product are called factors of Factors of production:

productions. Components by which combination of one another and finally produce something and give utility.

 

a. Land

b. Capital

c. Labor and

d. Organization

 

Each of these constituents’ contributes severally to the production services.

 

Land:

All sorts of natural resources which can combine produce and create some utility.

Land is a purely natural resource and includes properties of soil and water ways and cover all material and forces such as rivers, mines, wind, light, heat, gravitation, etc.

 

Capital:

All sorts of property resource which can transfer one place to another and by which combine produced something and create proper utility.

Capital refers to services provided by machinery, buildings, tools and production implements which are the means to produce other goods.

 

Labor:

Labor includes both physical and mental contributions.

 

Organization:

Organization refers to the entrepreneur(capitalist) who controls, organized and manages the policy of a firm and undertake all risk.

 

 

 

 

 

 

Production process:

A set of inputs or factors of production will combine in which quantity or property produced is called production process.

 

Short run production:

Some factors remain constant for a certain period of time.

The short run refers to a period of time in which the supply of certain inputs (plant, building, machine etc.) is fixed or inelastic. In the short run therefore, production of a commodity can be increased by increasing the use of variable inputs, like labor and raw materials. Short run does not refer to any fixed time of period.

The concept of production is known as the “law of variable proportion”.

 

Long run production:

All factors of production are changeable.

The long run refers to a period of time in which the supply of all the inputs is elastic but not long enough to permit a change in technology.

That is, in the long run, the availability of even fixed variables increases. Therefore in the long-run production of a commodity can be increasing by employing more of both variables and fixed inputs.

Lon-run production theory discussed on the law

1. Law of variable proportion

2. Law of return to scale

 

Law of returns to variable proportions:

The laws explain the relationship between variable inputs and the output in the short term.

The law of variable proportion state that, “As the quantity of variable inputs is increased by equal doses, keeping the quantity of other inputs remain constant, total product will increase, but after a certain point at a diminishing rate.”

Three aspects of law:

1. Increasing at increasing rate ( Law of total diminishing returns)

2. Increasing at decreasing rate (Law of diminishing marginal returns)

3. Decreasing at decreasing rate (Law of diminishing average returns

 

Table: TP, MP, AP schedule

No of worker Total production Marginal production Average production Stages

01 10 10 10.00

I

02 24 14 12.00

03 40 16 13.33

04

54 14 13.50

II

05 66 12 13.20

06 76 10 12.66

07 82 06 11.71

08

82 00 10.25

III

09 76 -06 8.44

10 66 -10 6.60

 

 

 

 

 

 

III stage

 

II stage

I stage TPC

 

 

 

APC

 

 

0 capital

MPC

Figure: Stages of law of variable proportion

 

Iso-quant:

The term ‘iso-quant’ has been derived from Latin word ‘iso’ meaning ‘equal’ and ‘quant’ meaning ‘quantity.’

 

Combination Capital Labour TP

A 09 20 100

B 07 25 100

C 05 30 100

D 02 50 100

 

Iso-quant curve:

An iso-quant curve is a locus of point representing the various combinations of two inputs capital and labour yielding the same output.

 

 

 

 

A

B

C

D

100

0

Labour

 

Figure: Iso-quant curve

 

 

Iso-quant map:

When more than one iso-quant curves are shown in a same graph is called iso-quant map.

In long-run production system output change every time.

 

 

 

 

 

A

B

C

D

100

0

Labour

Figure: Iso-quant map

 

 

Characters of Iso-quant curve:

1. Oval shaped and convex to the origin.

2. Iso-quant curves can not intersect or be tangent each other.

3. Downwards to the right. (negative slope)

4. Upper iso-quant curve shows more budget or production than the lower.

5. Even it does not intersect to the axis.

 

Iso-cost:

Same cost for various combinations of two variables (e.g. labor and capital).

Iso-cost-curve:

It is a downward slope which means same cost combination of two variables on every point of the curve.

 

 

 

 

 

Iso-cost curve

0

Figure: Iso-cost curve

 

 

Least cost combination:

The combination of that point at which Iso-cost curve is tangent to Iso-quant curve is known as least cost combination.

 

 

 

 

LCC

P

Iso-cost curve

0

Q

Figure: least cost combination curve

 

Expansion path:

When the tangent points of iso-cost curves to the iso-quant curves are added then the line is known as expansion path.

In other words, Addition of the least cost combination points is known as expansion path.

 

 

 

 

Expansion path

 

LCCP Iso-quant curve

 

Iso-cost curve

 

0

 

Figure: Expansion path.

 

 

 

 

 

 

 

Explicit cost:

The explicit cost refers to cost which are directly to pay by a producer in a production system. E.g. salary of l

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