Economics World

 Demand Function... We know that demand for any goods and services is affected by various factors which are called determinants of demand. It means there is technical relationship between demand for a commodity and its various determining factors which is defined as demand function. It is expressed as follows: Qdx= F(Px, You, Py, CT, Wc, To, F, A... etc.) Where, Qdx= quantity demanded for a commodity ‘x'. F= functional relation Px= price of ‘x' Py = price of related commodities Y = income of consumers Ct= custom and tradition Wc = weather and climatic condition Tp = taste and preference of consumers F = fashion A = advertisement    Out of various determinants, price of the commodity is considered as main determinant of demand, so in short, demand is the function of price. Therefore, Qdx = F(Px), if other factors remaining the same.

 Law of Demand... It is one of the most well-known and most applied theory in microeconomics. It is the basis of consumption, production, exchange and distribution of goods and services. It was first introduced and developed by Alfred Marshall in his book “Principles of Economics” published in 1890 AD. It is based on functional relationship between price and quantity demanded for a particular commodity i.e Qdx=F(Px).      According to this law, when price of a commodity decreases, quantity demanded for the commodity increases and vice versa, if other factors remaining the same. It means there is inverse relationship between price and quantity demanded for a particular commodity. According to Alfred Marshall, “The amount demanded increases with a fall in price and decreases with a rise in price, other things being equal . “ Assumptions of Law of Demand : The law of demand is based on several assumptions which may or may not be true in real life. Some of them are as ...

 Shift in Production Possibility Curve... The shift of production possibility curve upward and downward due to various reasons is called shift in production possibility curve. It’s of two types:- A. Upward shift in PPC : The shift in PPC from its initial position to upward is called upward shift in PPC. It’s due to the following reasons: 1. Increase in capital : Capital is the major factor of production. If the stock of capital increases, the economy will be able to increase the production of both commodities and PPC will shift upward. 2. Increase in labour force : It is an another important factor of production. If there is increase in labour force and their efficiency output can be increased and PPC will shift upward to the right. 3. Technological development : When the economy makes progress in the development of technology, the economy will be able to produce more of both goods with the given and fixed amount of resources and the PPC will shift upward to the right. B. ...

 PPC- Transformation Curve...  PPC is also called transformation curve because it shows the nature of transformation of one commodity into other with the shift of resources from one use to others. Production with given resources and technology are being fully utilized and employed. The combination of two commodities produced can lie anywhere on the PPC but inside and outside it as shown in the following figure:     In the above figure, point ‘H' lies below the PPC is inefficient because the available resources and technology aren’t fully utilized. Similarly point ‘G' lie above the PPC is unattainable due to limited stocks of resources and technology.

 Production Possibility Curve... It is an economic tool to solve the problem of scarcity and choice. Production possibility curve is the graphical representation of alternative production possibilities facing on economy. As the total productive resources of the economy are limited, it has to decide about the goods to be produced and their quantities on the basis of priorities and preferences of the society. Increase in production of one commodity requires a reduction of production of other commodity.    Let us suppose that the economy produce only two commodities i.e consumer goods and capital goods. In these two commodities also, there are various production possibilities that the economy can produce with its limited resources and technology. A curve which shows these production possibilities is called production possibility curve. Out of various production possibilities, the economy can choose anyone production possibility. A curve which shows this choice is called p...

 Determinants of Demand... The quantity demanded for any particular commodity either increases or decreases with the passes of time due to change in several factors which are called determinants of demand. Major determinants of demand are explained below: 1 . Price of commodity : Other things being equal, the demand of a commodity is inversely related to its price. It implies that a fall in the price of a commodity leads to an increase in the purchasing power of the consumer and then increases the demand for a commodity and vice versa. Suppose, a consumer has Rs.40 and he spends his entire income on consumption of X goods. Then, When, Px= Rs.4, Dx= 10 kg                 Px= Rs.2, Dx= 20 kg                 Px= Rs.8, Dx= 5 kg 2. Price of related goods                           C omplementary goods : Complementary goods are those good...

 Definition of Demand... In common language, demand is same as desire. But in economics, demand means effective desire which is supported by ability to pay and willingness to pay for goods and services. For example: if a poor person wanted to have an iPhone, it’s just his/her desire because he/she doesn’t have ability to pay for iPhone. Similarly, if a rich person wanted to buy an iPhone , it may be a demand because he/she has ability to pay for iPhone. To have a complete definition of demand, the price per unit of a commodity and the period of time in which quantity is being demanded should be clearly stated. Therefore, demand means desire, ability to pay and willingness to pay for goods and services at certain price during a certain period of time. According to Benham, “The demand for anything at a given price is the amount of it, which will be bought per unit for time at that price”. Thus demand for a commodity is defined as a schedule which shows various amounts of that com...

  Market Economy... The economic system on which every economic decisions are made on the basis of price mechanism is called market economy or free market economy. Various process of consumption, production, exchange and distribution are determined through pricing process. Private sectors are free to carry out their economic activities. The government neither support nor interfere the economic activities in the market. The government is only responsible to maintain peace and security, law and order & creates favourable environment to carry out economic activities in the country. The economy of US, UK, Australia, Japan etc are the examples of free market economy. Following are the major features of Market Economy: 1. Private property : The fundamental feature of capitalism is the all the productive resources or means of production are owned by private individuals. Private property constitutes the essence of capitalism. 2. Freedom of enterprise: There is freedom of enterpris...

Meaning and Types of goods with examples. The things which are used to satisfy human wants are called goods. In other words, all commodities having utility are called goods. For example: building machinery, television, car, book, pen etc. The ownership of goods can be transferred from one person to another. Goods can satisfy human wants and they have physical existence i.e material in nature. Goods can be stored for tomorrow and they can be touched and seen.       Following are the types of goods: 1. Normal goods: Those goods which were consumed by large number of consumers are called normal goods. In other words, those goods whose demand increases along with the increase in income of people and vice versa are called normal goods. For example: vehicles, building furniture, TV, books etc. 2. Inferior goods : Those goods which have low quality are called inferior goods. In other words, those goods whose demand decreases along with increase in income of people and vice ...

 Meaning of Opportunity cost...  • The opportunity cost of any economic resources is defined as the value of next best commodity which could have been produced by the use of the same resources that can be used to produce many things. For example, a plot of land can be used to produce wheat, rice, maize etc ; mechanical engineers can use it in the production of vehicles, textiles, hydroelectricity etc. But when a factor service is used to produce one good, it can’t be used to produce another. For example, when we use a plot of land to produce wheat, we sacrifice other products that could be produced. Thus the opportunity cost of producing goods isn’t any other alternative goods that would be produced with the same resources; rather, it’s the next best alternative goods that could be produced with the same resources. In other words, the opportunity cost of any goods is the amount of the next best alternative goods that is given up to produce these goods. 

Meaning of allocation of resources The most important function of economic system is allocation of resources. Most of the economic resources are limited and therefore every country most develop a system for allocating the available resources.      In free market economy (capitalism), private sector has a key role in the allocation of resources. Every economic decisions are made by private sector on the basis of price mechanism. The government has no any role in making economic decisions.      In centrally planned economy (socialism), allocation of resources is determined by Central Planning Authority on the basic of state priorities. The government operates all the economic activities. The government solves basic economic problems in a planned manner. There is no any role of private sector.      In mixed economy, both the government and the private sectors are involved in the allocation of resources. The basic economic problems are solved ...

 Scarcity...  We know that human wants are unlimited but human capacity to satisfy these wants is limited. In other words, scarcity is the fact of life. Goods and services have to be produced to satisfy human wants. Productive resources are necessary for this purpose. But the supply of productive resources are limited in relation to their demand. This is known as scarcity. The goods and services should be distributed among the people due to scarcity.          In common language, scarcity means not found in sufficient quantity. But in economics, scarcity refers to the limitations of product regarding the given demand. It's a relative term but not a absolute term. A goods is scarce because it possesses utility, it commands value and it is transferable from one person to another. For example: generally air is not scarce but air in cylinder is being scarce because we have to pay certain amount for this. In fact, all economic goods and services are scarce. ...

 Sole Trading Business...  It's the oldest form of business organization. An organization which is established by a single person by investing required amount of capital is called sole trading business enterprise. In this form, a single individual is solely responsible for providing the capital, for bearing the risks and for the overall management and control of the enterprise. It is a one-man show, owned, financed and operated by one man.          According to Prof. Haney, " The individual proprietor is a form of business organization at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure "        Features/characteristics of sole trading business enterprise: 1 . Single ownership: The sole trading concern is established and managed by a single person. The sole trader individually invests and earns the profit .  2. Single management and control : In ...

 Organization- factor of production...  In common language, an institution or enterprise which is specialized to carry out specific work is called organization. But in economics, organization may be defined as a collective body of active human resources established for the scientific utilization of various factors of production in the line of production of goods and services. Business firms and industries of any nature and scale are the examples of organization.            Like land, labour and capital, organization is also separate factor of production. Organization gathers other three scattered factors of production in one place for production of goods and services. Without organization, production isn't possible. It utilizes other factors of production like land, labour and capital.        Following are the features of organization:  1. Definite structure: Organization is a group of people but it has definite structure....

 Capital - Factor of production...  In common language, capital refers money. But in economics, all the man made goods and services which are used to produce other goods and services are called capital. It's a produced means of factors of production. Money is also a capital but idle cash can't be considered as capital. Examples of capital: building, furnitures, vehicles, raw materials, machineries etc.         Following are the features/characteristics of capital:  1. Man-made factor : It's a man-made factor of production. It's a result of savings. It is saved by postponing the present wants in favour of the future.  2. Mobile factor : Of all the factors of production, capital is the most mobile. It can easily be transferred from one place to another.  3. Elastic factor : Capital is an elastic factor because it can be managed according to our need. It can be whether increased or decreased decreased according to our needs and necessity....

 Labour- factor of production...  In common sense, work performed by people only physically is called labour. It means only manual work comes under the category of labour. But in economics, every type of activities performed by people either physically or mentally is called labour. For example: work performed by teachers, doctors, pilot, engineers, carpenters etc.          Following are the features/characteristics of the labour:  1. Active factor of production : Other factors of production depend upon labour for their productivity so it's an active factor. Because other factors are brought into the production process only by the labour.  2. Perishable factor : Labour is more perishable than other factors of production. It can neither be restored not postponed nor accumulated for the next day. Today's labour must be rendered today otherwise it will be perish.  3. Mobile factor of production: Labour is a mobile factor of production. It c...

 Land- Factor of production...  In common language, land means the surface of the earth which is covered by soil. But in economics, land refers all the free gift of nature including the surface of the earth. It means all the things which are found under and above the surface of the earth comes under the category of land. For example: air, water, sunlight, vegetation, mineral deposits, mountains, rivers etc.                Following are the features or characteristics of Land: 1. Free gift of nature: Land is a free gift of nature. It is given to us free of cost by the nature.  2. Inelastic supply: Land is limited in supply. We can't increase the supply of it.  3. Basic factor of production: Land is the most common and necessary factor of production because without land it's impossible to use other factors of production and to produce goods and services. So it's a basic factor.  4. Passive factor of production: Land is ...

  Factors of Production....  Producer produces goods and services by using several other goods and services which are called factors of production. In other words, the goods and services which are used to produce further goods and services are called factors of production. They are also called inputs of production or agents of production. There are so many factors of production but economists divide them into four groups i.e land, labour, capital and organization. 

Macroeconomics...  The term 'macro' seems to have derived from Greek word 'makros' meaning large. So macroeconomics is concerned with the economic activities as a whole. It studies the situation and performance of aggregate and sub aggregate variables of the whole economy like national income, general price level, total employment, total investment, inflation, deflation etc. Therefore, it's also called aggregate economics. It analyzes and establishes functional relationship between these aggregates and sub aggregates variables. It has the objective of studying policies, principles and problems relating full employment and growth of resources. According to K. E Boulding "Macroeconomics deals not with individual quantities but with aggregate 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 national output".      It tries to explain how country's...

 Microeconomics...  The term'micro' seems to have derived from Greek word 'mikros' meaning small. So microeconomics deals with the analysis of individual economic units and small group of individual economic units and their interaction with individual economic variables. For example: individual consumer, business firms, industries, price of a commodity, output of individual firm and so on. It studies how the different units carry out their economic activities, how they attain the level of maximum satisfaction and how they reached the point of equilibrium. It has the objective of studying principles, policies and problems relating optimum allocation of limited resources. According to K. E Boulding, "Microeconomics is the study of particular firms, particular households, individual price, wages, incomes and particular commodities".          It tries to explain how an individual consumer distributes his/her disposable income between or among the goods and...

  Positive Economics...   A positive science is that which studies the facts as they are but not as they ought to be. It means it only explains what is or what will be. It studies the things as they happen in reality. It only explains the situations and conditions but not comment what is right and what's wrong. It's totally neutral between wants. It studies causes and effect relationship between economic variables. According to classical economists, economics is a positive science. According to them, it was non of the function of economists to comment the rightness or wrongness of economic situation. It's simply concerned with the problem of resources in relation to unlimited wants. For example: the manufacture and sale of cigarette may be injurious to health. So it's morally unjustifiable but economists have no right to pass the judgements on this because it satisfies human wants and involved in economic activities.           Like classical econo...

Subject matter of economics..   Various economists defined economics in various ways. So it's very difficult to define the subject matter of economics. However, economics is always concerned with the economic activities of human beings. Therefore, subject matter of economics is economic circle which consists of three variables i.e wants, efforts and satisfaction, it's represented in the following figure:                         According to classical economists, the subject matter of economics is wealth. According to Marshall, the subject matter is study of social man in respect to material welfare. And according to Robbins, the subject matter of economics is the scarcity and choice.            According to classical view, the process of wants, efforts and satisfaction is divided into five sections of study.  1. Consumption: Consumption means destruction of utility to satisfy human wants...

 Marshall defined economics as a science of material welfare. It emphasized on human welfare through the attainment and use of the material requisites of well-being. On the other hand, Robbins's definition of economics as a science of scarcity and choice emphasized on maximum satisfaction while satisfying unlimited wants through limited means which have alternative uses. From intensive analysis of these two definitions, we find the following similarities and dis-similarities:- Similarities.....  1. Study of human efforts : Both Marshall and Robbins considered economics as the study of human behavior or efforts for the material welfare of human beings or maximum satisfaction of human beings.  2 . Study of rational man: Both definitions are based on the assumption of rational man. The function of attaining and using material things for welfare of human beings in Marshall's definition and maximizing satisfaction through the scarce resources in Robbins's definition can be ach...

 Economics is a dynamic and social science. Various economists defined it in their own way in different period of time. Each definition has its own importance and features. So we can't criticize them relatively. Although Adam Smith's wealth definition criticised dismal science, it had played an important role in prosperity of various countries of Europe and America. Later, Alfred Marshall redefined economics as a science of material welfare. He claimed that wealth is for the benefit of mankind and mankind is not for the wealth. In 1932 AD, modern economics professor Robbins defined economics as a science of scarcity and choice. Robbins's definition is regarded as logical, scientific and superior than other definitions of economics due to following reasons:- 1. Scientific definition : Robbins's definition is more scientific than earlier definitions. It doesn't classify human activities into material- non material, economic- non economic, social- non social and so on....

 Robbins's Definition....  After criticizing Marshall's definition in his book "An Essay on the Nature and significance of Economic Science" published in 1932 AD. Professor Robbins gave his own views about economics. According to him, "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. " This definition is called modern definition, scientific and logical definition. It's regarded as superior than other definitions. This definition was supported by various modern economists like Barbara Wotton, Paul Samuelson, J. M Keynes, Mahabub Ul Haq etc.  Following are the major features of this definition:- 1. Unlimited ends:  The word 'ends' of this definition refers human wants which are unlimited. We can't satisfy all the wants at a time. When we satisfy single want, other wants immediately crop up. In this way, human wants go on increasing endlessly. Not only human wants ...

 Marshall's Definition of economics The wealth definition given by Adam Smith and his followers have been too much criticized by various economists in several grounds. In this regard, Alfred Marshall, a British economist and the leader of neoclassical economists tried to enlarge the scope of economics by shifting the emphasis from wealth to mankind. He wrote a book on the subject named "Principles of Economics" published in 1890 AD. According to him, 'economics is the study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisition of well being. It's on the one side a study of wealth and on the other and most important side a part to a study of man'. This definition was supported by various neo-classical economists like A. C Pigou, Irving Fisher, Edwin Canon etc.  Features and characteristics of material welfare definition....  ...

 Adam Smith's definition of Economics...  Adam Smith, founder of modern economics and the leader of classical economists developed economics as a separate social science. So he is regarded as a father of Modern Economics. He wrote a book on the subject named " An Enquiry into the Nature and Causes of the Wealth of the Nations " which was published in 1776AD. This book is regarded as the holy book of economics and popularly know as'The Wealth of Nations'. The name of the book is itself sufficient to understand what economics is and the subject matter does it cover.                    According to him, economics is the study of the nature and causes of the wealth of the nation and it is concerned with production and increase of nation's wealth. The term wealth means sufficient money resources. This definition was supported by various classical economists like J. B. Say, J. S. Mill, F. A Walker, David Ricardo, Thomas Robert Mathus...