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BA LLB Paper Code: 207 Subject: Economics-I UNIT-I: Introduction to Economics a. Definition, Methodology, Scope of Economics b. Basic Concepts and Precepts: Economic Problems, Economic Agents, Economic Organizations, Marginalism, Time Value of Money, Opportunity Cost c. Forms of Economic Analysis: Micro vs. Macro, Partial vs. General, Static vs. Dynamic, Positive vs. Normative, Short run vs. Long run d. Relation between Economics and Law: Economic Offences and Economic Legislations UNIT-II: Demand, Supply, Production Analysis and Cost a. Theory of Demand and Supply, Price Determination of a Commodity, Shift of Demand and Supply, Concept of Elasticity b. Concepts of Production: Total Product, Average Product, Marginal Product, Returns to Factor, Returns to Scale c. Costs and Revenue Concepts UNIT-III: Market Structure, Theory of Determination of Factor Prices a. Classification of Markets: Pure and Perfect Competitions, Monopolistic and Imperfect Competition, Monopoly, Duopoly and Oligopoly, Cartels b. Dumping: Meaning, Types, Importance and Impact of Dumping c. Wage determination, Rent, Interest and Profits UNIT-IV: Theory of Money, Banking and Financial Institutions a. Concept of Money: Functions of Money, Impact of Money; Inflation and Deflation b. Supply of and Demand for Money c. Central Banking: Functions, Credit Control through Monetary Policy
d. Commercial Banking: Functions, Organization and Operations (Credit Creation) e. Non-Banking Financial Institutions: Meaning and Role f. Money Markets and Capital Markets: Meaning and Instruments UNIT-I Definition: Microeconomics (from Greek prefix mikro- meaning "small" and economics) is a branch of economics that studies the behavior of individual households and firms in making decisions on the allocation of limited resources. Typically, it applies to markets where goods or services are bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services. This is in contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment." Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'micro foundations'—i.e. based upon basic assumptions about micro-level behavior. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system. Wealth Definition:
material requisites of well being”. On examining the Marshall’s definition, we find that he has put emphasis on the following four points: (a) Economics is not only the study of wealth but also the study of human beings. Wealth is required for promoting human welfare. (b) Economics deals with ordinary men who are influenced by all natural instincts such as love, affection and fellow feelings and not merely motivated by the desire of acquiring maximum wealth for its own sake. Wealth in itself is meaningless unless it is utilized for obtaining material things of life. (c) Economics is a social science. It does not study isolated individuals but all individuals living in a society. Its aim is to contribute solutions to many social problems. (d) Economics only studies ‘material requisites of well being’. That is, it studies the causes of material gain or welfare. It ignores non-material aspects of human life. This definition has also been criticized on the ground that it only confines its study to the material welfare. Non-material aspects of human life are not taken into consideration. Further, as Robbins said the science of economics studies several activities, that hardly promotes welfare. Scarcity Definition: Lionel Robbins challenged the traditional view of the nature of economic science. His book, “Nature and Significance of Economic Science”, published in 1932 gave a new idea of thinking about what economics is. He called all the earlier definitions as classificatory and unscientific. According to him, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” This definition focused its attention on a particular aspect of human behaviour, that is, behavior associated with the utilization of scarce resources to achieve unlimited ends (wants). Robbins definition, thus, laid emphasis on the following points:
- ‘Ends’ are the wants, which every human being desires to satisfy. Want is an effective desire for a thing, which can be satisfied by making an effort for obtaining it. We have unlimited wants and as one want gets satisfied another arises. For instance, one may have the desire to buy a car or a flat. Once the car or the flat is purchased, the person wishes to buy a more spacious and designable car and the list of his wants does not stop here but goes on one after another. As human wants are unlimited, we have to make a choice between the most urgent want and less urgent wants. Thus the problem of choice arises. That is why economics is also called as a science of choice. If wants had been limited, they would have been satisfied and there would have been no economic problem. (b) ‘Means ’or resources are limited. Means are required to be used for the satisfaction of various wants. For instance, money is an important means to satisfy many of our wants. As stated, means are scarce (short in supply in relation to demand) and as such these are to be used optimally. In other words, scarce or limited means/resources are to be economized. We should not make waste of the limited resources but utilize them very judiciously to get the maximum satisfaction. (c) Robbins also said that, the scarce means have alternative uses. It means that a commodity or resource can be put to different uses. Hence, the demand in the aggregate for that commodity or resource is almost insatiable. For instance, if we have a hundred rupee note, we can use it either to purchase a book or a fashionable clothe. We may use it in other unlimited ways as we like. Let us now turn our attention to the definitions put forward by modern economists. J.M.Keynes defined economics as the study of the management of scarce resources and of the determination of income and employment in the economy. Thus his study centered on the causes of economic fluctuations to see how economic stability could be established. According to F. Benham, economics is, “a study of the factors affecting the size, distribution and stability of a country’s national income.” Recently, economic growth and development has taken an important place in
of assumptions should be made in terms of which a hypothesis may be formulated. (3) Formulating Hypothesis: The next step is to formulate a hypothesis on the basis of logical reasoning whereby conclusions are drawn from the propositions. This is done in two ways: First, through logical deduction. If and because relationships (p) and (q) all exist, then this necessarily implies that relationship (r) exists as well. Mathematics is mostly used in these methods of logical deduction. (4) Testing and Verifying the Hypothesis: The final step in the deductive method is to test and verify the hypothesis. For this purpose, economists now use statistical and econometric methods. Verification consists in confirming whether the hypothesis is in agreement with facts. A hypothesis is true or not can be verified by observation and experiment. Since economics is concerned with human behaviour, there are problems in making observation and testing a hypothesis. For example, the hypothesis that firms always attempt to maximise profits, rests upon the observation that some firms do behave in this way. This premise is based on a priori knowledge which will continue to be accepted so long as conclusions deduced from it are consistent with the facts. So the hypothesis stands verified. If the hypothesis is not confirmed, it can be argued that the hypothesis was correct but the results are contradictory due to special circumstances. The Inductive Method: Induction “is the process of reasoning from a part to the whole, from particulars to generals or from the individual to the universal.” Bacon described it as “an ascending process” in which facts are collected, arranged and then general conclusions are drawn. The inductive method was employed in economics by the German Historical School which sought to develop economics wholly from historical research. The historical or inductive method expects the economist to be primarily an economic historian who should first collect material, draw generalizations, and verify the conclusions by applying them to subsequent events. For this,
it uses statistical methods. The Engel’s Law of Family Expenditure and the Malthusian Theory of Population have been derived from inductive reasoning. Scope: Scope means the sphere of study. We have to consider what economics studies and what lies beyond it. The scope of economics will be brought out by discussing the following. a) Subject – matter of economics. b) Economics is a social science c) Whether Economics is a science or an art? d) If Economics is science, whether it is positive science or a normative science? a) Subject – matter of economics: Economics studies man’s life and work, not the whele of it, but only one aspect of it. It does not study how a person is born, how he grows up and dies, how human body is made up and functions, all these are concerned with biological sciences, Similarly Economics is also not concerned with how a person thinks and the human organizations being these are a matter of psychology and political science. Economics only tells us how a man utilizes his limited resources for the satisfaction of his unlimited wants, a man has limited amount of money and time, but his wants are unlimited. He must so spend the money and time he has that he derives maximum satisfaction. This is the subject matter of Economics. Economic Activity: It we look around, we see the farmer tilling his field, a worker is working in factory, a Doctor attending the patients, a teacher teaching his students and so on. They are all engaged in what is called “Economic Activity”. They earn money and purchase goods. Neither money nor goods is an end in itself. They are needed for the satisfaction of human wants and to promote human welfare. To fulfill the wants a man is taking efforts. Efforts lead to satisfaction. Thus wants- Efforts Satisfaction sums up the subject matter of economics. b) Economics is a social Science: In primitive society, the connection between wants efforts and
while Arts group includes History, civics, sociology Languages etc. Whether Economics is a science or an art? Let us first understand what is terms ‘science’ and ‘arts’ really means. A science is a systematized body of knowledge. A branch of knowledge becomes systematized when relevant facts hove been collected and analyzed in a manner that we can trace the effects back to their and project cases forward to their effects. In other words laws have been discovered explaining facts, it becomes a science, In Economics also many laws and principles have been discovered and hence it is treated as a science. An art lays down formulae to guide people who want to achieve a certain aim. In this angle also Economics guides the people to achieve aims, e.g. aim like removal poverty, more production etc. Thus Economics is an art also. In short Economics is both science as well as art also. d) Economics whether positive or normative science: A positive science explains ''why" and "wherefore" of things. i.e. causes and effects and normative science on the other hand rightness or wrongness of the things. In view of this, Economics is both a positive and. normative science. It not only tells us why certain things happen, it also says whether it is right or wrong the thing to happen. For example, in the world few people are very rich while the masses are very poor. Economics should and can explain not only the causes of this unequal distribution of wealth, but it should also say whether this is good or bad. It might well say that wealth ought to be fairly distributed. Further it should suggest the methods of doing it. Economic Problems: Economic problem is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited. Limited resources Resources are limited in two essential ways:
Limited in physical quantity, as in the case of land, which has a finite quantity.
Limited in use, as in the case of labour and machinery, which can only be used for one purpose at any one time. Opportunity cost: Choice and opportunity cost are two fundamental concepts in economics. Given that resources are limited, producers and consumers have to make choices between competing alternatives. All economic decisions involve making choices. Individuals must choose how best to use their skill and effort, firms must choose how best to use their workers and machinery, and governments must choose how best to use taxpayer's money. In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. Economic Agents: A person, company, or organization that has an influence on the economy by producing, buying, or selling: The proper functioning of market economy is influenced mostly by the state interaction with the economic agent. Economists like to refer to the people they study as economic agents. Economic agents come in two basic varieties, producers and consumers, and we study their behavior in the Theory of the Firm and the Theory of the Consumer Economic Organizations: The three major international economic organizations are the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO). The WTO emerged out of the General Agreement on Tariffs and Trade (GATT) in 1995; it is an arrangement across countries that serves as a forum for negotiations on trading rules as well as a mechanism for dispute
tackling "new issues," such as gender and ethnicity (including treatment of minorities). Both the Bank and the IMF have been criticized by many in light of the Asian financial crises of 1997 and
Marginalism: One of the methodological principles of bourgeois political economy, based on the use of the analysis of marginal values in research on economic laws and categories. Marginal analysis in economic theory was introduced in the middle of the 19th century by A. Cournot of France and J. von Thuenen and H. Gossen of Germany. Marginalism became widespread in the last quarter of the 19th century, when bourgeois political economists initiated an intensive search for new forms and methods of theoretical analysis and of capitalist apologetics. Marginalism was used after about 1880 by the basic schools in bourgeois political economy, such as the Austrian school and the mathematical school. A thorough substantiation of marginalism was developed by J. B. Clark. Marginalism views economics as the interaction of individual economies. In marginalism the study of the laws of economic functioning is based on the analysis of the economic behavior of the decision-maker during the production process and in the market. In this analysis quantitative methods can be used. Mathematical analysis is particularly useful in studying the functional connection between factors (for example, the dependence of demand for merchandise on the price, the prices of other goods, and the income of the consumer; the effect of various ratios of input of labor and capital on productivity). It is equally useful in deriving marginal functions (marginal utility, demand elasticity, the marginal productivity of the factors of production). The specific mathematical approach for marginal analysis was developed by the economists of the mathematical school. The shift from free competition to all-powerful monopolies, and also the growing rate of state monopoly regulation of the economy, placed before the bourgeois economists a number of
practical tasks that could not be implemented by a strict reliance on the subjectivistic understanding of economic processes. Among the tasks were determining the use of economic mathematical models, analyzing and forecasting market trends, computing the coefficients of the elasticity of demand, and optimalizing production inputs. The characteristic feature of contemporary marginalists is the departure (although inconsistent) from the orthodox subjectivist interpretation of the economic categories and the enhancement, especially in the works of econometrists, of the role of formal-logical and empiric analysis. Thus, several bourgeois economists and econometrists (H. Schultz, C. Cobb, and P. Douglas) were able to develop mathematical methods of research into some problems of the economy, particularly forecasting and analyzing demand and optimalizing production inputs. A number of provisions and findings of the marginal-school economists had a definite influence on the development of a number of fields of applied mathematics, including theory of games, linear programming, and operations research. The basic marginalistic conceptions, such as marginal utility, marginal rate of replacement, marginal productivity, and marginal capital efficiency, are used in the contemporary bourgeois theories of demand, the firm, prices, and market equilibrium. Time Value of Money: The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. A time value of money calculation is a calculation that solves for one of several variables in a financial problem. In a typical case, the variables might be: a balance (the real or nominal value of a debt or a financial asset in terms of monetary units), a periodic rate of interest, the number of periods, and a series of cash flows. (In the case of a debt, cash flows are payments against principal and interest; in the case of a financial asset, these are contributions to or withdrawals from the
Basis: Positive Normative
- Expresses What is : What ought to be
- Based on Cause & effect of facts : Ethics
- Deal with Actual or realistic situation : Idealistic situation
- Value judgment Are not given : Are given Partial vs. General: Microeconomic models are usually classified as partial and general equilibrium models. As a layman, I understand that partial equilibrium focuses attention on a few economic variables to find the equilibrium, while general eq. models capture a larger interaction. Static vs. Dynamic: Microeconomic models are usually classified as partial and general equilibrium models. As a layman, I understand that partial equilibrium focuses attention on a few economic variables to find the equilibrium, while general eq. models capture a larger interaction. Short run vs. Long run: In microeconomics, the long run is the conceptual time period in which there are no fixed factors of production, so that there are no constraints preventing changing the output level by changing the capital stock or by entering or leaving an industry. The long run contrasts with the short run, in which some factors are variable and others are fixed, constraining entry or exit from an industry. In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust. Economic offences: Economic and financial offences cover fraud, forgery and counterfeiting, offences against the legislation governing cheques (in particular forgery or use of stolen cheques), forgery or use of credit cards, undeclared employment, offences against companies (such as misuse of company assets).
- The process through which statutes are enacted by a legislative body that is established and empowered to do so.
- A particular bill or other piece of legislation The legislation changed how we run our business as we must do our best to foresee possible governmental and regulation changes Relation between Economics and Law: Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. Positive law and economics Positive law and economics uses economic analysis to predict the effects of various legal rules. So, for example, a positive economic analysis of tort law would predict the effects of a strict liability rule as opposed to the effects of a negligence rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the common law of torts, in terms of their economic efficiency. Normative law and economics Normative law and economics goes one step further and makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is efficiency, in particular, allocative efficiency. A common concept of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it could not be changed so as to make one person better off without making another person worse off. A weaker conception of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by some parties compensating others as to offset their loss
(i) Size and Composition of Population (ii) Distribution of Income and Wealth (iii) Economic Fluctuations Law of Demand: The law of demand states that, other things being equal, the demand for good increases with a decrease in price and decreases in demand with a increase in price. The term other things being equal implies the prices of related goods, income of the consumers, their tastes and preferences etc. remain constant. Demand Schedule: A Demand schedule is a list of the different quantities of a commodity which consumes purchase at different period of time. It expresses the relation between different quantities of the commodity demanded at different prices. (i) Individual Demand Schedule: It is defined as the different quantities of a given commodity which a consumer will buy at all possible prices. (ii) Market Demand Schedule: Market demand schedule is defined as the quantities of a given commodity which all consumers will buy at all possible prices at a given moment of time. Demand Curve is simply a graphic representation of demand schedule. It expresses the relationship between different quantities demanded at different possible prices of the given commodity. Individual Demand Curve: The graphic representation of Individual Demand is known is Individual Demand Curve. Market Demand Curve: The graphic representation of market demand schedule is known as Market Demand Curve .Thus market demand curve is the one that represents total quantities of a commodity demanded by all the consumers in the market at different prices. It is the horizontal summation of the individual demand curves.
Demand Curve slopes downwards: Reasons are:- (i) Law of Diminishing Marginal Utility: The law of demand is based on the law of diminishing marginal utility which states that as the consumer purchases more and more units of a commodity, the satisfaction derived by him from each successive unit goes on decreasing. Hence at a lesser price, he would purchase more. Being a rational human beings the consumer always tries to maximize his satisfaction and does so equalizing the marginal utility of a commodity with its price i.e. Mux = px. It means that now the consumer will buy additional units only when the price falls (ii) New Consumers: When the price of a commodity falls many consumers who could not begin to purchase the commodity e.g. suppose when price of a certain good ‘x’ was Rs. 50 market demand was 60 units now when the price falls to Rs. 40, new consumers enter the market and the overall market demand rises to 80 units. (iii) Several Use of Commodity: There are many commodities which can be put to several uses e.g. coal, electricity etc. When the prices of such commodities go up, they will be used for important purpose only and their demand will be limited. On the other hand, when their price fall they are used for varied purpose and as a result their demand extends. Such inverse relation between demand and price makes the demand curve slope downwards. (iv) Income Effect : When price of a commodity changes, the real income of a consumer also undergoes a changes. Hence real income means the consumer’s purchasing power. As the price of a commodity falls the real income of a consumer goes up and he purchases more units of a commodity eg. Suppose a consumer buys units wheat at a price Rs. 40/kg now, when the price falls to Rs. 30/kg. His purchasing power or the real income increase which induces him to buy more units of wheat. (v) Substitution Effect : As the price of a commodity falls the consumer wants to substitute this
