Introductory Economics

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New Delhi · Bangalore · Chennai · Cochin · Guwahati · Hyderabad

Jalandhar · Kolkata · Lucknow · Mumbai · Ranchi

PUBLISHING FOR ONE WORLD Visit us at www.newagepublishers.com

NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS

Copyright © 2006, New Age International (P) Ltd., Publishers

Published by New Age International (P) Ltd., Publishers

All rights reserved.

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xerography, or any other means, or incorporated into any information retrieval

system, electronic or mechanical, without the written permission of the publisher.

All inquiries should be emailed to [email protected]

ISBN (13) : 978-81-224-2247-4

PUBLISHING FOR ONE WORLD

NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS

4835/24, Ansari Road, Daryaganj, New Delhi - 110002

Visit us at www.newagepublishers.com

Dedicated to my mother Dedicated to my mother

Lakshmi R. Dutta Lakshmi R. Dutta

(v)

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PREFACE

I have immense pleasure to bring out the present book which is basically designed to cover

complete syllabus of Economics for Higher Secondary second year examination (Class XII) as

introduced by the Nagaland Board of Secondary Education from the session 2004–2005. The

book will also be useful for the students appearing in class XII examination under CBSE.

The introduction of new syllabus has created vacuum in respect of suitable books exactly

in conformity to NBSE syllabus. As such the present book has been written particularly

keeping in mind the problems faced by students studying economics as a paper under NBSE.

The book will equally serve the purpose of students opting either Arts or Commerce stream.

The book is written in a very simple language understanding that it is meant for beginners.

The book contains two Parts-A and B. Part-A analysis Microeconomics and Part-B deals with

Macroeconomics. The new syllabus containing microeconomics and macroeconomics with

eleven units in total have been suitably divided into twenty seven chapters. Unit-5 and

unit-11 in the contents are meant for CBSE students only. At the end of the book, selected

basic economic terms have been included under the heading ‘Elementary Economic Terms’.

These are the terms most commonly and frequently used in economics and also in real life.

The underlying idea is to provide a student general understanding of economics as a subject

more clearly and analytically. Past years examination question papers of the NBSE from 1995

onwards have also been incorporated.

I am thankful to my wife Mili Dutta for constant inspiration and my lovely daughter

Sneha who has given me much time to work on it smoothly. I am also thankful to my

colleagues who have directly or indirectly lent their helping hands. I am very much grateful

to Mr. Saumya Gupta (Managing Director), Mr. V.R. Damodaran (Production Editor) and Saba

Khan (Development Editor) of M/s New Age International (P) Limited, New Delhi for taking

prompt and sincere initiative for publishing the book in a right time.

I would always invite critical views and suggestions for improvement of the book from

both students and fellow teachers.

SUBHENDU DUTTA

Department of Economics,

Public College of Commerce,

Dimapur: Nagaland

Email:[email protected]

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CONTENTS

PART A

INTRODUCTORY MICROECONOMICS

UNIT-1

1. INTRODUCTION TO MICROECONOMICS 3

What economics is all about? Wealth definition; Welfare definition, Scarcity

definition, Subject matter of economics, Positive and normative economics;

Questions for review.

2. PROBLEMS OF AN ECONOMY 11

Central problems of an economy, Production possibility curve, Uses of

production possibility curve, Opportunity cost; Questions for review.

UNIT-2

3. CONSUMER BEHAVIOUR 16

Consumer’s equilibrium—utility maximization, Utility, Total utility, Marginal

utility, Law of diminishing marginal utility; Questions for review.

4. DEMAND AND LAW OF DEMAND 21

Meaning of demand, Market demand, Determinants of demand, Demand

schedule and demand curve, Law of demand, Assumptions of the law, Why

does the law of demand operate? Exceptions to the law of demand, Movement

along and shifts in demand curve; Questions for review.

5. ELASTICITY OF DEMAND 32

Meaning of price elasticity of demand, Kinds of price elasticity of demand,

Measurement of price elasticity of demand—percentage, total expenditure/

outlay, arc method, geometrical method and revenue method. Income elasticity

of demand, Cross elasticity of demand, Determinants of price elasticity of

demand; Questions for review.

UNIT-3

6. THEORY OF PRODUCTION 41

Meaning of production, Meaning of production function, Returns to a factor

and returns to scale, Law of variable proportions, Law of diminishing returns,

Assumptions of law, Returns to scale; Questions for review.

7. SUPPLY AND ITS DETERMINANTS 47

Meaning of supply, Supply schedule, Supply curve, Market supply, Law of

supply, Determinants of supply, Supply function, Movement along and shifts

in supply curve; Questions for review.

8. CONCEPTS OF COST 54

Cost of production, Real cost and nominal cost, Explicit and Implicit costs,

Opportunity Alternative Transfer cost, Private, External and Social costs,

Economic costs, Short run costs and long run costs; Fixed and variable costs;

Total fixed cost, Total variable cost, Average cost, Average fixed cost, Average

variable cost, and Marginal costs; Relationship between average cost and

marginal cost; Questions for review.

9. CONCEPTS OF REVENUE 63

Meaning of revenue, Total, Average and Marginal revenue, Relationship

between average and marginal revenue; Questions for review.

UNIT-4

10. FORMS OF MARKET AND PRICE DETERMINATION 67

Meaning of market, Forms of market, Perfect competition, Price and output

determination under perfect competition, Monopoly, Monopolistic competition,

Oligopoly, Duopoly; Questions for review.

UNIT-5

11. FACTOR PRICE DETERMINATION 74

Demand for a factor, Supply of a factor, Determination of price of a factor

under perfect competition, Marginal productivity theory; Questions for review.

12. FACTOR PRICES, COMPARATIVE ADVANTAGE AND

INTERNATIONAL TRADE 81

Internal and International trade, Absolute factor price difference, Relative

factor price difference, The classical theory of international trade—Theory of

absolute advantage–Adam Smith, Theory of comparative advantage–David

Ricardo, Theory of opportunity cost, Modern theory of international trade–

Heckscher and Ohlin, Terms of trade; Questions for review.

PART B

INTRODUCTORY MACROECONOMICS

UNIT-6

13. INTRODUCTION TO MACROECONOMICS 91

Macroeconomics—meaning, Distinction between micro and macroeconomics;

Questions for review.

UNIT-7

14. NATIONAL INCOME AND RELATED AGGREGATES 94

Meaning of national income, National income at current and constant prices,

Circular flow of income, Concepts of GDP, GNP, NDP, NNP (at market price

and factor cost), Private income, Personal income and Personal disposal

income, National disposal income (gross and net). Income from Domestic

product accruing to Private Sector, Transfer payments—Current transfer

payments and Capital transfer payments, Relationship among important

national income aggregates; Questions for review. Appendix.

15. MEASUREMENT OF NATIONAL INCOME—VALUE ADDED METHOD 107

Measurement of national income—value added method, Steps to estimate

national income by value added/product method, Precautions in the estimation

of national income by product method, Difficulties of the product method;

Questions for review.

16. MEASUREMENT OF NATIONAL INCOME—INCOME METHOD 110

Precautions in the estimation of national income by income method, Difficulties

of the income method; Questions for review.

17. MEASUREMENT OF NATIONAL INCOME—EXPENDITURE METHOD 113

Components of final expenditure, Precautions in the estimation of national

income by expenditure method; Questions for review.

UNIT-8

18. AGGREGATE DEMAND AND AGGREGATE SUPPLY 115

Meaning of aggregate demand, Meaning of aggregate supply; Questions for

review.

19. DETERMINATION OF INCOME AND EMPLOYMENT 118

Classical theory of employment, Say’s Law of Markets, Assumptions of Say’s

Law, Full employment and involuntary unemployment, Determination of

income and employment; Questions for review.

20. CONSUMPTION FUNCTION 129

Propensity to consume or psychological law of consumption, Average and

marginal propensity to consume and save; Propensity to save/saving function,

Relationship between APC and MPC, Implication and Importance of

Psychological Law of Consumptions, Factors influencing consumption function,

Questions for review.

21. CONCEPT OF MULTIPLIER 135

Meaning of investment multiplier and its working; Assumptions of multiplier;

Importance of Multiplier; Leakages in the Working of Multiplier; Questions

for review.

22. EXCESS AND DEFICIENT DEMAND 140

Meaning of excess demand, Impact of excess demand in the economy, Meaning

of deficient demand, Impact of deficient demand in the economy, Causes of

excess and deficient demand, Measures to correct excess and deficient demand,

Availability of credit, Foreign trade policy; Questions for review.

UNIT-9

23. MONEY—MEANING AND FUNCTIONS 146

Barter system, Meaning of money, Functions of money, Supply of money,

Components of money; Questions for review.

24. BANKING 154

Commercial banks—meaning and functions. Central bank—meaning and

functions; Questions for review.

UNIT-10

25. GOVERNMENT BUDGET—MEANING AND COMPONENTS 160

Meaning of budget, Components of budget, Revenue budget, Capital budget,

Objectives of budget; Balanced budget, Surplus budget and deficit budget,

Types of deficit; Questions for review.

UNIT-11

26. FOREIGN EXCHANGE RATE—MEANING AND DETERMINATION 167

Demand for foreign exchange, Supply of foreign exchange, Spot and forward

foreign exchange transaction, Exchange rate systems—Floating exchange

rates, Pegged or rigidly fixed exchange rates, Managed flexibility—adjustable

peg system, Crawling or trotting or gliding parity, System of clean float and

dirty float, Band system; Questions for review.

27. BALANCE OF PAYMENTS ACCOUNT—MEANING

AND COMPONENTS 173

Goods account, Services account, Unilateral transfers account, Long-term

capital account, Short-term capital account, International liquidity account,

Balance of trade, Balance of payments on current account, Balance of payments

on capital account, Basic balance, Overall balance of payments, Accounting

balance of payments, Autonomous and accommodating transactions, Deficit

and surplus balance of payments. Questions for review.

APPENDICES 179

I. Solved Questions From NBSE Exam. Papers 179

II. Solved Numerical Problems 200

III. NBSE Question Papers (1995–2005) 215

IV. How to Pass Exam in better way! 228

V. Elementary Economic Terms 233

APPENDICES 234

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