Dr. Payal Jain - Business Eco. B.com Hon. 1 Yr NEP Unit 1,2,3 - Notes

B.
Com Hons 1st year Business Economics
Unit 1
Business Economics
Kautilya
Kautilya (4th century B.C.), also known as Vishnugupta and Chanakya, is traditionally known as
the author of the Arthashastra, the celebrated ancient Indian work on polity, and as the counselor
of Chandragupta Maurya, the founder of the Maurya empire.
The Arthashastra:
Whatever the nature of accounts of Kautilya's life, it is certain that Kautilya was a historical
figure and that he was responsible for the compilation of a work on polity, a work that has
exerted a profound influence on the development of political ideas in traditional India.
The Arthashastra was believed to have been lost and was known only through references to it
and quotations from it in subsequent works on law and polity in Sanskrit. It was discovered and
published in the 1920s and immediately provoked extensive discussion on the nature of its
contents and their implications for understanding the traditional Indian polity.
The Arthashastra is not a work on political philosophy, which it treats only incidentally, but a
manual of instruction on the administration of a state and ways to meet challenges to it. Kautilya
is a thoroughgoing political realist and often gives the impression of being amoral. He views the
state as a seven-limbed organism which grows in war and whose purpose is to destroy its
enemies and extend the territory under its control by all means, including aggression against and
subversion of its opponents.
The work treats of the many departments of governmental administration and pays special
attention to war, preparation for it, and its triumphant execution. The bureaucracy, as envisioned
by Kautilya, must be all-pervasive, efficient, and honest. The king is the central point of this vast
and sprawling bureaucratic structure, and Kautilya's exhortation to him is to be on guard at all
times. Kautilya's Arthashastra is often compared to Machiavelli's Prince, with which it shares
many common philosophical and practical views. In its spirit of realpolitik and machtpolitik it
reveals an altogether surprising aspect of the Indian civilization.
Concept
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Assistant Professor- Dr. Payal Jain
B.Com Hons 1st year Business Economics
Macroeconomics (Greek makro‘big’) describes and explains economic processes that concern
aggregates.An aggregate is a multitude of economic subjects that share some common features.
In other words, it analyze the main determinates of economic development, various stages and
process of economic growth. Macroeconomics is the study of the behaviorof the whole
(aggregate) economies or economic systems instead of the behavior of individuals, individual
firms, or markets (which is the domain of Microeconomics). Macroeconomics is concerned
primarily with the forecasting of national income, through the analysis of major economic factors
that show predictable patterns and trends, and of their influence on one another. These factors
include level of employment/unemployment, gross national product (GNP), balance of payments
position, and prices (deflation or inflation).
Thus, macroeconomics is the study of the behavior of the overall economy. Thus
macroeconomics focuses on broad-based indicators of national economic performance, like GDP
output, balance of trade, and employment levels. Macroeconomics can be contrasted against
microeconomics, which is the study of the economic behavior of the individual firm and
consumer.
Macro Economics: It is the branch of economics which is concerned with the large aggregates.
When we are analyzing the problems of the economy as a whole, it is called Macro Economics.
Macro economics is concerned with aggregates and averages of the entire economy, such as
national income, consumption employment, aggregate output, savings and investments, general
level of prices, aggregate demand and aggregate supply etc. in Macro Economics, we analyze
how these aggregates of the economy as a whole are determined and what are the causes of
fluctuations in them.
Macroeconomics
 It is the study of economics involving phenomena that affects an entire economy,
 About inflation, unemployment, price levels, economic growth
 The relationship between all of these.
 Macroeconomics looks at the big picture - it analyzes the entire economy.
Macroeconomic models and their forecasts are used by governments to assist in the development
and evaluation of economic policy.
Some Definations
 Shapiro:‘Macro Economics deals with the functioning of the economy as a whole.’
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 K.E.Boulding: Macro Economics deals not with individual quantities but with the
aggregate of these quantities with national income, price levels, and national outputs.
The concepts of Macroeconomics are:
Macroeconomics as a Study of Determination of Income and Employment:
The subject matter of microeconomics consists in explaining the determination of relative prices
of products and factors and the allocation of resources based upon them. On the other hand, the
subject matter of macroeconomic analysis is to explain what determines the level of national
income and employment, and what causes fluctuations in the level of national income, output
and employment.
Further, it also explains the growth of national income over a long period of time. In other words,
macroeconomics examines the determination of the level, fluctuations (cycles) and trends
(growth) in the overall economic activity (i.e., national income, output and employment).
There were no doubt pre-Keynesian theories of business cycles and the general price level which
were “macro” in nature but it was late Lord J. M. Keynes who laid great stress on macro-
economic analysis and put forward a general theory of income and employment in his
revolutionary book, “A General Theory of Employment, Interest and Money” published in 1936.
Keynes’s theory made a genuine break from the classical economics and produced such a
fundamental and drastic change in economic thinking that his macro-economic analysis has
earned the names “Keynesian Revolution” and “New Economics”.
Keynes in his analysis made a frontal attack on the classical “Say s Law of Markets” which was
the basis of full-employment assumption of classical economics and challenged the classical
dictum that involuntary unemployment could not prevail in a free private enterprise economy.
He showed how the equilibrium level of national income and employment was determined by
aggregate demand and aggregate supply and further that this equilibrium level of income and
employment may well be established at a far less than full employment level in a free private
enterprise economy and thereby causing involuntary unemployment of labour on the one hand
and excess productive capacity {i.e., under-utilization of the existing capital) on the other.
His macro-economic model reveals how consumption function, investment function, liquidity
preference function, conceived in aggregative terms, interact to determine national income,
employment, interest and the general price level.
Therefore, before showing how a level of income and employment is determined, we have to
study the determinants of consumption function and investment function. The analysis of con-
sumption function and investment function are the important subjects of macroeconomic theory.
It is the total consumption demand and total investment demand taken together that constitute the
level of aggregate demand which is the crucial determinant of the level of income and
employment in the country.
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Macroeconomics and General Level of Prices:
Besides studying how a level of income and employment is determined in the economy, mac-
roeconomics also concerns itself with showing how the general level of prices is determined.
Keynes made a significant improvement over the Quantity Theory of Money by showing that the
increase in the supply of money does not always bring about rise in prices. Important topic in this
field is to explain the causes of inflation.
Keynes, who before the Second World War showed that involuntary unemployment and
depression were due to deficiency of aggregate demand, during the war period when prices rose
very high he explained in a booklet entitled “How to Pay for War” that just as unemployment
and depression were caused by deficiency of aggregate demand, inflation was due to excessive
aggregate demand.
Since Keynes’s theory of inflation has been further developed and many types of inflation
depending upon various causes have been pointed out. The problem of inflation is a serious
problem faced these days, both by the developed and developing countries of the world. Theory
of inflation is an important subject of macroeconomics.
Macroeconomics and Theory of Economic Growth:
Another distinct and more important branch of macroeconomics that has been developed recently
is the theory of economic growth, or what is briefly called growth economics. The problem of
growth is a long-run problem and Keynes did not deal with it. It was Harrod and Domar who
extended the Keynesian analysis to the long-run problem of growth with stability.
They pointed out the dual role of investment— one of income generating, which Keynes
considered, and the second of increasing capacity which Keynes ignored because of his pre-
occupation with the short run. In view of the fact that an investment adds to the productive
capacity (i.e., capital stock), then if growth with stability (i.e. without secular stagnation or
secular inflation) is to be achieved, income or demand must be increasing at a rate sufficient
enough to ensure the full utilisation of the increasing capacity. Thus, macroeconomic models of
Harrod and Domar have revealed the rate of growth of income that must take place if steady
growth of the economy is to be achieved.
These days’ growth economics has been further developed and extended a good deal. Though a
general growth theory applies to both the developed and developing economies, special theories
which explain the causes of under-development and poverty in developing countries and which
also suggest strategies for initiating and accelerating growth in them have been propounded.
These special growth theories relating to developing countries are generally known as
Economics of Development.
Nature of Macro Economics
Macro Economics is:
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 Variable in its units: National Income, Total Production, Total Employment etc.
 Related to the whole economy—its policies help to affect of the whole economy.
 Aggregate quantitatives—Micro economics only studies individual firms or households

whereas Macro economics studies the aggregates eg. total employment or the price level
in a national economy.
 Inter-dependence—Since it is the study of aggregates, the quantitative are inter-related,

so a change in any one of them will have an effect over the others. Eg. if one country
increases its investment then there will be an increase in the national income resulting
an increase in total employment, consumption etc.
 Comparative study—Macro analysis is a comparative study of national income, national

savings, national investment etc.
 Income Theory - Macro is also called Income theory because it determines the national
income, its reasons for being high or low, also studies employment of a country and the
factors determining it. It is concerned with the problems of unemployment, economic
fluctuations, inflation or deflation, international trade and economic growth.
 In the monetary sphere - It studies the effect of the total quantity of money on the
general price level.
 In international trade-- the problems of balance of payments and foreign aid fall within
the purview of macroeconomic analysis
 Tools of Macro economics are -Fiscal policy, monetary policy, income policy.
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 functioning of the
“elephant” of economic experience, rather than working of articulation or dimensions of the
individual parts.
Importance of Macro Economics
(1) To Understand the Working of the Economy: To understand main economic problems
which are related to the behavior of total income, output, employment and the general price level
in the economy. For instance, one may not agree on the best method of measuring different
prices, but the general price level is helpful in understanding the nature of the economy.
(2) In Economic Policies: Modern governments, of the underdeveloped economies, are

confronted with many national problems like-- overpopulation, inflation, balance of payments,
general underproduction, etc. Macroeconomic study is the solution of these complex economic
problems.
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(i) In General Unemployment: Unemployment is caused by deficiency of effective demand. In
order to eliminate it, effective demand should be raised by increasing total investment, total
output, total income and total consumption .Macroeconomic studies the causes, effects and
remedies of general unemployment.
(ii) In National Income: The study of macroeconomics is very important for evaluating the
overall performance of the economy in terms of national income. Necessary to analyze the
causes of general overproduction and general unemployment.
(iii) 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.
(iv) In Monetary Problems: It is in terms of macroeconomics that monetary problems can be

analyzed and understood properly.eg. Changes in the value of money, inflation or deflation etc.
(v) In Business Cycles: The importance of Macroeconomics o lies in analyzing the causes of
economic fluctuations and in providing remedies.
Limitations of Macro Economics
(1) Fallacy of Composition: what is true of individuals is not necessarily true of the economy
as a whole. Eg. if an individual depositor withdraws his money from the bank there is no
problem. But if all depositors do this simultaneously, the banking system will be adversely
affected.
(2) To Regard the Aggregates as Homogeneous:The main defect in macro analysis is that it
regards the aggregates as homogeneous (same) without caring about their internal
composition and structure. Eg.wages in all occupations are different in relative structure ;for
instance, wages of nurses increase but of typists fall, the average may remain unchanged.
(3) Aggregate Variables may not be Important Necessarily: The national income of a country
is the total of all individual incomes. A rise in national income does not mean that individual
incomes have risen. Increase in the incomes of a few rich people in the country has little
significance from the point of view of the community.
(4) Indiscriminate Use of Macroeconomics Misleading: An indiscriminate and uncritical use

of macroeconomics in analyzing the problems of the real world can often be misleading.
Eg.measures aimed at controlling general prices cannot be applied with much advantage for
controlling prices of individual products.
(5) Statistical and Conceptual Difficulties: The measurement of macroeconomic concepts

involves a number of statistical and conceptual difficulties. If individual units are almost similar,
aggregation does not present much difficulty. But if microeconomic variables relate to dissimilar
individual units, their aggregation may be wrong and dangerous.
Difference between Micro and Macroeconomics
Microeconomics is the study of economic actions of individuals and small groups of individuals.
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It includes particular households, particular firms, particular industries, particular commodities
and individual prices.Macroeconomics is also derived from the Greek word makros which
means large. It deals with aggregates of these quantities, with the price levels, not with individual
output but with the national output.
The objective of microeconomics on demand side is to maximize utility whereas on the supply
side is to minimize profits at minimum cost. On the other hand, the main objectives of
macroeconomics are full employment, price stability, economic growth and favorable balance of
payments. The balance-of-payments accounts of a country record the payments and receipts of
the residents of the country in their transactions with residents of other countries.
The basis of microeconomics is the price mechanism; with the help of demand and supply
forces; to determine the equilibrium price in the market. On the other hand, the basis of
macroeconomics is national income, output and employment which are determined by aggregate
demand and aggregate supply.
Microeconomics is based on different assumptions concerned with rational behaviour of

individuals. The phrase ceteris paribus is used to explain the economic laws. Ceteris paribus
means ‘other factors remaining constant’On the other hand, macroeconomics bases its
assumptions on the aggregate volume of output of an economy; with its resources are employed,
with the size of the national income and with the general price level.
Microeconomics helps to explain the equilibrium conditions of an individual, a firm, an industry

and a factor. On the other hand, macroeconomics is based on general equilibrium analysis ; an
extensive study of economic variables, their interrelations and interdependences to understand
the economic system as a whole.
Comparison Chart
BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON
Meaning The branch of economics that The branch of economics that

studies the behavior of an studies the behavior of the
individual consumer, firm, whole economy, (both national
family is known as and international) is known as
Microeconomics. Macroeconomics.
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BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON
Deals with Individual economic variables Aggregate economic variables
Business Applied to operational or Environment and external issues

Application internal issues
Scope Covers various issues like Covers various issues like,

demand, supply, product national income, general price
pricing, factor pricing, level, distribution, employment,
production, consumption, money etc.
economic welfare, etc.
Importance Helpful in determining the Maintains stability in the

prices of a product along with general price level and resolves
the prices of factors of the major problems of the
production (land, labor, economy like inflation,
capital, entrepreneur etc.) deflation, reflation,
within the economy. unemployment and poverty as a
whole.
Limitations It is based on unrealistic It has been analyzed that

assumptions, i.e. In 'Fallacy of Composition'
microeconomics it is assumed involves, which sometimes
that there is a full doesn't proves true because it is
employment in the society possible that what is true for
which is not at all possible. aggregate may not be true for
individuals too.
They both depend on each other.
 When aggregate demand rises during a period of prosperity, the demand for individual
products also rises.
 If this increase in demand is due to a reduction in the rate of interest, the demand for
different types of capital goods will go up.
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 This will lead to an increase in the demand for the particular types of labor needed for the
capital goods industry.
 If the supply of such labor is less elastic, its wage rate will rise.
 The rise in wage rate is made possible by increase in profits as a consequence of
increased demand for capital goods.
 Thus, a macroeconomic change brings about changes in the demands for particular
goods, in the wage rates of particular industries, in the profits of particular firms and
industries, and in the employment position of different groups of workers.(thus in
microeconomic variables)
Similarly
 The overall size of income, output, employment, costs, etc. in the economy affects the
composition of individual incomes, outputs, employment, and costs of individual firms
and industries.
 On the other hand, macroeconomic theory is also dependent on microeconomic analysis.
 The total is made up of the parts. National income is the sum of the incomes of
individuals, households, firms and industries.
 Total savings, total investment and total consumption are the result of the saving,
investment and consumption decisions of individual industries, firms, households and
persons.
 The general price level is the average of all prices of individual goods and services.
 The total level of output, income and employment in the economy also depends upon
income distribution.
 If there is unequal distribution of income so that income is concentrated in the hands of a
few rich, it will tend to reduce the demand for consumer goods.
 Profits, investment and output will decline, unemployment will spread and ultimately the
economy will be faced with depression.
Unit -2
What is demand?
Demand simply means a consumer’s desire to buy goods and services without any hesitation and
pay the price for it. In simple words, demand is the number of goods that the customers are ready
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and willing to buy at several prices during a given time frame. Preferences and choices are the
basics of demand, and can be described in terms of the cost, benefits, profit, and other variables.
The amount of goods that the customers pick, modestly relies on the cost of the commodity, the
cost of other commodities, the customer’s earnings, and his or her tastes and proclivity. The
amount of a commodity that a customer is ready to purchase, is able to manage and afford at
provided prices of goods, and customer’s tastes and preferences are known as demand for the
commodity.
Definition of demand
Demand refers to the willingness and ability of consumers to purchase a given quantity of a good
or service at a given point in time or over a period in time.
In economics, demand is formally defined as ‘effective’ demand meaning that it is a consumer

want or a need supported by an ability to pay – namely a budget derived from disposable income.
Income provides individuals with a purchasing power which they excercise in a market through
effective demand.
Determinants of Demand
There are many determinants of demand, but the top five determinants of demand are as
follows:
Product cost: Demand of the product changes as per the change in the price of the commodity.
People deciding to buy a product remain constant only if all the factors related to it remain
unchanged.
The income of the consumers: When the income increases, the number of goods demanded also
increases. Likewise, if the income decreases, the demand also decreases.
Costs of related goods and services: For a complimentary product, an increase in the cost of
one commodity will decrease the demand for a complimentary product. Example: An increase in
the rate of bread will decrease the demand for butter. Similarly, an increase in the rate of one
commodity will generate the demand for a substitute product to increase. Example: Increase in
the cost of tea will raise the demand for coffee and therefore, decrease the demand for tea.
Consumer expectation: High expectation of income or expectation in the increase in price of a

good also leads to an increase in demand. Similarly, low expectation of income or low pricing of
goods will decrease the demand.
Buyers in the market: If the number of buyers for a commodity are more or less, then there will
be a shift in demand.
Types of Demand
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Few important different types of demand are as follows:
1. Price demand: It refers to various types of quantities of goods or services that a

customer will buy at a quoted price and given time, considering the other things remain
constant.
2. Income demand: It refers to various types of quantities of goods or services that a

customer will buy at different stages of income, considering the other things remain
constant.
3. Cross demand: This means that the product’s demand does not depend on its own cost
but depends on the cost of the other related commodities.
4. Direct demand: When goods or services satisfy an individual’s wants directly, it is

known as direct demand.
5. Derived demand or Indirect demand: The goods or services demanded or needed for

manufacturing the goods and satisfying the consumer indirectly is known as derived
demand.
6. Joint demand: To produce a product there are many things that are related to each other,
for example, to produce bread, we need services like an oven, fuel, flour mill, and more.
So, the demand for other additional things to produce a product is known as joint
demand.
7. Composite demand: A composite demand can be described when goods and services are
utilised for more than one cause. Example: Coal
The Law of Demand

The law of demand is interpreted as ‘the quantity demanded of a product comes down if the price
of the product goes up, keeping other factors constant.’ In other words, if the cost of the product
increases, then the aggregate quantity demanded decreases. This is because the opportunity cost
of the customers increases that leads the customers to go for any other substitute or they may not
purchase it. The law of demand and its exceptions are really inquisitive concepts.
Consumer proclivity theory assists us in comprehending the combination of two commodities
that a customer will purchase based on the market prices of the commodities and subject to a
customer’s budget restriction. The amount of a commodity that a customer actually purchases is
the interesting part. This is best elucidated in microeconomics utilizing the demand function.
Definition of 'Law Of Demand'
Definition: The law of demand states that other factors being constant (cetris peribus), price and
quantity demand of any good and service are inversely related to each other. When the price of a
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product increases, the demand for the same product will fall.
Description: Law of demand explains consumer choice behavior when the price changes. In the
market, assuming other factors affecting demand being constant, when the price of a good rises,
it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This
happens because a consumer hesitates to spend more for the good with the fear of going out of
cash.
The above diagram shows the demand curve which is downward sloping. Clearly when the price
of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3
to Q2 and then to Q3 and vice versa.
Examples
In simple language, we can say that when the price of a good rises, people buy less of that good.
When the price falls, people buy more of it, with other things remaining the same. The main
reason economists believe so strongly in the law of demand is that it is so believable, even to
people who don't study economics. The law of demand is ingrained in our way of thinking about
everyday things. Let's see if a few examples help reinforce this.
When the price of an apple goes from $0.95 to $0.75, the quantity demanded will go up. Many
people who weren't willing to buy apples at $0.95 are now willing to purchase them at $0.75.
Elasticity of Demand and its Types
Elasticity is a concept in economics that talks about the effect of change in one economic
variable on the other.
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Elasticity of Demand, on the other hand, specifically measures the effect of change in an
economic variable on the quantity demanded of a product. There are several factors that affect
the quantity demanded for a product such as the income levels of people, price of the product,
price of other products in the segment, and various others.
Elasticity of Demand
Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded

of a product in response to a change in any of the market variables, like price, income
etc. It measures the shift in demand when other economic factors change.
In other words, the elasticity of demand is the percentage change in quantity demanded
divided by the percentage change in another economic variable.
The demand for a commodity is affected by different economic variables:
1. Price of the commodity

2. Price of related commodities
3. Income level of consumers
4. Types of Elasticity of Demand
On the basis of different factors affecting the quantity demanded for a product, elasticity of
demand is categorized into mainly three categories: Price Elasticity of Demand (PED), Cross
Elasticity of Demand (XED), and Income Elasticity of Demand (YED).
1. Price Elasticity of Demand (PED)
Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity
demanded for a product. For example, when there is a rise in the prices of ceiling fans, the
quantity demanded goes down.
This measure of responsiveness of quantity demanded when there is a change in price is termed
as the Price Elasticity of Demand (PED).
The mathematical formula given to calculate the Price Elasticity of Demand is:
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PED = % Change in Quantity Demanded % / Change in Price
The result obtained from this formula determines the intensity of the effect of price change on
the quantity demanded for a commodity.
2. Income Elasticity of Demand (YED)
The income levels of consumers play an important role in the quantity demanded for a product.
This can be understood by looking at the difference in goods sold in the rural markets versus the
goods sold in metro cities.
The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity
demanded for a certain good to a change in real income (the income earned by an individual after
accounting for inflation) of the consumers who buy this good, keeping all other things constant.
The formula given to calculate the Income Elasticity of Demand is given as:
YED = % Change in Quantity Demanded% / Change in Income
The result obtained from this formula helps to determine whether a good is a necessity good or a
luxury good.
3. Cross Elasticity of Demand (XED)
In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded
for a product does not only depend on itself but rather, there is an effect even when prices of
other goods change.
Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the
sensitiveness of quantity demanded of one good (X) when there is a change in the price of
another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand.
The formula given to calculate the Cross Elasticity of Demand is given as:
XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another
Good (Y))
The result obtained for a substitute good would always come out to be positive as whenever there
is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be
negative for a complementary good.
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These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a
change in the price of the good, income of consumers buying the good, and the price of another
good.
Apart from these three types, there are other types of Elasticity of Demand which are:
5 other types of Elasticity of Demand
The effect of change in economic variables is not always the same on the quantity demanded for
a product.
The demand for a product can be elastic, inelastic, or unitary, depending on the rate of change in
the demand with respect to the change in the price of a product.
On the basis of the amount of fluctuation shown in the quantity demanded of a good, it is termed
as ‘elastic’, ‘inelastic’, and ‘unitary’.
An elastic demand is one that shows a larger fluctuation in the quantity demanded of a product,
in response to even a little change in another economic variable. For example, if there is a hike of
$0.5 in the price of a cup of coffee, there are very high chances of a steep decline in the quantity
demanded.
 An inelastic demand is one that shows a very little fluctuation in the quantity demanded
with respect to a change in another economic variable. An example of this can be petrol
or diesel.
Unitary elasticity is one in which the fluctuation in one variable and quantity demanded is
equal.
We can further classify these elastic and inelastic types of demand into five categories.
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Demand Curves
1. Perfectly Elastic Demand
When there is a sharp rise or fall due to a change in the price of the commodity, it is said to be
perfectly elastic demand.
In perfectly elastic demand, even a small rise in price can result in a fall in demand of the good
to zero, whereas a small decline in the price can increase the demand to infinity.
However, perfectly elastic demand is a total theoretical concept and doesn’t find a real
application, unless the market is perfectly competitive and the product is homogenous.
The degree of elasticity of demand helps to define the slope and shape of the demand curve.
Therefore, we can determine the elasticity of demand by looking at the slope of the demand
curve.
A Flatter curve will represent a higher elastic demand. Thus, the slope of the demand curve for a
perfectly elastic demand is horizontal.
2. Perfectly Inelastic Demand
A perfectly inelastic demand is the one in which there is no change measured against a price
change.
Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical concept and
doesn’t find a practical application. However, the demand for necessity goods can be the closest
example of perfectly inelastic demand.
The numerical value obtained from the PED formula comes out as zero for a perfectly inelastic
demand.
The demand curve for a perfectly inelastic demand is a vertical line i.e. the slope of the curve is
zero.
3. Relatively Elastic Demand
Relatively elastic demand refers to the demand when the proportionate change in the demand is
greater than the proportionate change in the price of the good. The numerical value of relatively
elastic demand ranges between one to infinity.
In relatively elastic demand, if the price of a good increases by 25% then the demand for the
product will necessarily fall by more than 25%.
Unlike the aforementioned types of demand, relatively elastic demand has a practical application
as many goods respond in the same manner when there is a price change.
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The demand curve of relatively elastic demand is gradually sloping.
Demand Curves
4. Relatively Inelastic Demand
In a relatively inelastic demand, the proportionate change in the quantity demanded for a
product is always less than the proportionate change in the price.
For example, if the price of a good goes down by 10%, the proportionate change in its demand
will not go beyond 9.9..%, if it reaches 10% then it would be called unitary elastic demand.
The numerical value of relatively inelastic demand always comes out as less than 1 and the
demand curve is rapidly sloping for such type of demand.
5. Unitary Elastic Demand
When the proportionate change in the quantity demanded for a product is equal to the
proportionate change in the price of the commodity, it is said to be unitary elastic demand.
The numerical value for unitary elastic demand is equal to 1. The demand curve for unitary
elastic demand is represented as a rectangular hyperbola.
Important of price elasticity of demand!
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Price elasticity of demand is a very important concept. Its importance can be realized from the
following points:
1. International trade:
In order to fix prices of the goods to be exported, it is important to have knowledge about the
elasticity’s of demand for such goods.
A country may fix higher prices for the products with inelastic demand. However, if demand for
such goods in the importing country is elastic, then the exporting country will have to fix lower
prices.
2. Formulation of Government Policies:
The concept of price elasticity of demand is important for formulating government policies,
especially the taxation policy. Government can impose higher taxes on goods with inelastic
demand, whereas, low rates of taxes are imposed on commodities with elastic demand.
3. Factor Pricing:
Price elasticity of demand helps in determining price to be paid to the factors of production.
Share of each factor in the national product is determined in proportion to its demand in the
productive activity. If demand for a particular factor is inelastic as compared to the other factors,
then it will attract more rewards.
4. Decisions of Monopolist:
A monopolist considers the nature of demand while fixing price of his product. If demand for the
product is elastic, then he will fix low price. However, if demand is inelastic, then he is in a
position to fix a high price.
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UNIT -3
Factors of Production
Factors of production refer to the different elements that are used in

producing goods and services. Factors of production are inputs into the
productive process. The four main factors of production are:
Land
It refers to all natural resources. All natural resources either on the surface of
the earth or below the surface of the earth or above the surface of the earth is
Land.
One uses the land to produces goods. It is the primary and natural factor of
production. All gifts of nature such as rivers, oceans, land, climate, mountains,
mines, forests etc. are land.
The payment for land is rent.
Characteristics of Land as a Factor of Production
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 The land is a free gift of nature.
 The land has no cost of production.
 It is immobile.
 The land is fixed and limited in supply.
Types of Land
1. Residential
2. Commercial
3. Recreation
4. Cultivation
5. Extraction
6. Uninhabitable
Labor
All human effort that assists in production is labour. This effort can be mental
or physical. It is a human factor of production. It is the worker who applies
their efforts, abilities, and skills to produce.
The payment for labour is the wage.
Characteristic
 It is a human factor.
 One cannot store labour.
 No two types of labour are the same.
Types of Labor
1. Unskilled
2. Semi-skilled
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3. Skilled
4. Professional
Capital
Capital refers to all manmade resources used in the production process. It is a

produced factor of production. It includes factories, machinery, tools,
equipment, raw materials, wealth etc.
The payment for capital is interest.
Characteristics
 Capital is a manmade factor of production.
 It is mobile.
 It is a passive factor of production.
Types of Capital
1. Fixed
2. Working
3. Venture
Entrepreneur
An entrepreneur is a person who brings other factors of production in one

place. He uses them for the production process. He is the person who decides
 What to produce
 Where to produce
 How to produce
A person who takes these decisions along with the associated risk is an
entrepreneur.
The payment for land is profit.
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Characteristics
 He has imagination.
 He has great administrative power.
 An entrepreneur must be a man of action.
 An entrepreneur must have the ability to organize.
 He should be a knowledgeable person.
 He must have a professional approach.
Other potential factors of production
5. Knowledge – human capital – the skills and ability of workers. For

example, a doctor who spent 15 years studying medicine is more
productive than non-skilled workers.
6. State of technology – some schools of economics consider the state of

technological development to be a factor of production. It will influence
the effectiveness of capital investment.
7. Social capital – the coherence of society. Is there trust and working legal
systems which enable entrepreneurs to have greater faith in setting up a
business
8. Cultural heritage – if there is a strong tradition of investment and

business, it is easier to replicate past business models.
Examples of factors of production
Land – raw materials
 Oil
 Coal
 Fish
 Agricultural produce – fruit, vegetables, meat
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 Commercial real estate – land to build factories
Labour (human resources)
 Workers – full time, part-time, temporary, permanent
 Management
Capital (man-made resources)
 Machines
 Tractors, spades
 Computers, Phone
 Office block
 Factory, Assembly line
 Public infrastructure – communication and roads needed to transport

goods across the country.
Entrepreneurs (individuals who bring factors of production together
 Self-employed
 People who start up businesses – Anita Roddick, Bill Gates, Richard

Branson
 Finance – Entrepreneurs needs access to money – either savings or

loans from banks to get started.
Characteristics of Entrepreneurship
While there can be as many characteristics of entrepreneurship as there are people in this world
with opinions, there are some characteristics that are considered indispensable or necessary in an
entrepreneur. These are listed here as follows.
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Ability to take Risks
This is the first and foremost trait of entrepreneurship. Starting any business involves a
considerable amount of risk of failure. Therefore, the courage and capacity to take the said risk
are essential for an entrepreneur.
Innovation
In a world, where almost everything has been done, innovation is a priceless gift to
have. Innovation basically means generating a new idea with which you can start a business and
achieve a substantial amount of profits. Innovation can be in the form of a product, i.e., launching
a product that no one is selling in the market. It can also be in the form of process, i.e., doing the
same work in a more efficient and economical way.
An easy example of product innovation could be the launching of touch screen cell phones when
the world was still using a keypad on cell phones.
Process innovation can be seen in capital-intensive industries that have to replace manual labour
with machines, therefore, increasing their production and reducing their costs.
Another type of innovation can be the one concerned with usage. For examples, cell phones are
now used for various functions such as viewing, creating and editing various files and documents,
thus, eliminating the need for computers to a large extent.
Visionary
Every entrepreneur needs to be a visionary. Without a vision for the future of his venture, he or
she would just be working aimlessly without reaching any point of success.
Leadership
An entrepreneur has a vision. However, it takes a lot of resources to turn that vision into reality.
One of these resources are the people that the entrepreneur hires to perform various functions like
production, supplying, accounting, etc.
A single person cannot perform all the tasks and therefore it is important to bring some more
people to do it. This also makes leadership very important as a leader provides the required
direction to the efforts of the employees. Without proper leadership, everyone would be working
independently without achieving the desired results.
Open Minded
A good entrepreneur realizes that every situation can be a business opportunity. Thus can be
utilized for the benefit of the organization. For example, Paytm realized the significance
of demonetization and recognized that the need for online transactions was more than ever during
this time and so it utilized and grew massively during this period.
Confident and Well Informed
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An entrepreneur needs to be confident about his ideas and skills. This confidence also inspires the
confidence of the people working for him as well as the other stakeholders involved in his
business.
Efficiency of labour
Efficiency of labour implies the quality and quantity of goods and services which can be produced
within a given time and under certain conditions. Therefore, it can be defined as under:
"By efficiency of labour is meant the ability of labour by virtue of which it is productive." - J. K.
Mehta
"By efficiency of labour we mean the amount of work which a labourer can do within a given
time." - Dr. Saxena
Factors influencing the efficiency of labour
Factors influencing the efficiency of labour:

(1) General factors: Racial characteristics; Climate conditions
(2) Specific factors: General and technical education; Personal qualities and
character; Experience; Machinery and equipment; Factory environment; Duration
of work; Proper and prompt wages; Efficiency of employer; Social and political
conditions.
The factors are: 1. Personal Qualities of Labourers 2. Working

Conditions 3. Conditions of the Country 4. Organisational and Managerial
Ability 5. Other Factors.
1. Personal Qualities of Labourers:
The efficiency of a worker is influenced by qualities which he acquires or

possesses.
The important of them are as follows:
(i) Racial Qualities:
It has been seen that every person inherits certain qualities from the race to which
he belongs.
For example:
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The people of Northern India, especially the Jats, the Rajputs and the Punjabi’s and
the Dogras are considered mere hardly and strong in comparison to those of
Bengal. Hence, the efficiency of the former is higher than that of the later.
(ii) Hereditary Qualities:
A child inherits the skill of his father by birth. He will be more efficient if he enters
the trade of his father.
For example:
Swiss people are considered to be more efficient watchmakers than others because
they have been making watches from generations.
(iii) Moral Qualities:
Man is a moral animal. In man not only self-alertness is present but all moral
alertness and self-morality is present. Moral qualities increase the efficiency of the
worker. An honest, sincere and good character worker is liked by the management
and this quality helps in increasing the efficiency.
(iv) Individual Qualities:
If a worker is mentally alert, possesses good physique, is intelligent, sober, honest

and resourceful and is responsible, he will be more efficient than others.
(v) General Education and Intelligence:
There are certain qualities which a worker acquires by education, general and
technical. Among these attributes may be mentioned honestly intelligence,
perseverance, judgment, health and strength of the body, resourcefulness, sense of
responsibility, etc. Efficiency of labour depends also on these qualities. An honest
intelligent and hard-working person will be more efficient in his work than one
who lacks these qualities.
(vi) Standard of Living:
A worker having high standard of living is more efficient than a worker having low
standard of living. Good nourishing food, suitable clothing, ventilated and
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comfortable home with healthy surroundings tend to increase the efficiency of the
workers.
(vii) Organisation among the labourers:
Good and proper organisation of labour inside the factory will improve labour
efficiency. A good and well organised trade union can also improve labour
efficiency through its fraternal functions.
2. Working Conditions:
The conditions under which the worker works also influence his efficiency.
The factors which affect his working conditions are as under:
(i) Factory Environment and Place of Work:
If the factory is neat and well ventilated and the surroundings are sanitary and
attractive and there is sufficient space for movement between machines and
provision for fresh water, refreshment and rest between work, their efficiency will
be higher.
(ii) Working Hours:
It must be remembered that small working hours with tea and lunch break, rest and
recreation always help increase the efficiency of labour. It has been proved that
long hours mean low efficiency.
(iii) Rate of Wages:
Efficiency of worker depends to a great extent on wages which he receives. A

worker who receives sufficiently high wages will ensure an adequate standard of
living will have high efficiency. A low-paid worker will always grumbles and is
unable to put his heart into the job. Consequently, his efficiency will be low.
(iv) Regularity of Wages:
Regular payment of wages on a due date fixed increases efficiency of labour

because workers adjust their budgets accordingly, otherwise they are put to much
more inconvenience when wage payment is irregular and they are not able to
devote themselves whole heartedly to their work which reduces their efficiency.
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(v) Methods and System of Wage Payment:
If a worker is paid wages according to the work which he is doing, this increases
efficiency of the worker. These days economists have recommended for ‘incentive
methods of wage payment’.
(vi) Nature of Machines:
The more advanced the machines are in a factory, the more efficient are the
workers therein. A labourer, however, skilled and intelligent he may be, will
produce relatively little if the machines on which he works are outmoded.
(vii) Prospects of Promotion:
If the worker knows that he will be suitably rewarded and promoted to a

higher grade when he will produce more, then he will work diligently and his
efficiency will increase. On the other-hand, the trade in which such incentives
do not exist, the efficiency of labour will be low.
3. Conditions of the Country:
Efficiency of labour is also dependent on the social, political and economic

conditions of the country.
Important factors are:
(i) Climatic Conditions:
The climate of a place also determines the efficiency of labour in a country.

Workers who live and work under hot climate becomes tired soon both
physically and mentally. As a result their efficiency declines. On the other-
hand workers living and working in cold and temperate regions are more
alert and hence their efficiency is high.
(ii) Social Conditions:
If the society to which the workers belong is backward and is based on caste
and creed relationships, workers will not work in co-operation with workers
belonging to other castes. This labour efficiency will be definitely low.
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Similarly workers who are fatalists are seldom hard-working by nature and
hence their efficiency is also low.
(iii) Political Conditions:
Political conditions also affect the efficiency of labour. If the government of

the country in which the worker lives is strong enough to preserve peace at
home and provide security from foreign aggression, his efficiency will be high
as against that worker who leads a life of insecurity in a country full of
internal disturbances and constant threat of war from abroad.
(iv) Cultural and Religious Traditions:
The cultural and religious traditions of a country also affects the efficiency of
a labourer, less educated people or illiterate people always fear with religion
and they don’t want to take such steps which may affect their normal
efficiency.
(v) Social Security:
If a worker is to give his best, he must have reasonable assurance that in the
event of injury, sickness, unemployment, disablement or death in service, he
or his dependents must be compensated suitably. If such provision is available
this will definitely increase the efficiency.
(vi) Form of Economic System:
Form of economic system in a country also affects the efficiency of labour. A

labourer of an under-developed country will get less wages or salary in
comparison to a developed country.
4.Organisational and Managerial Ability:
Organisational and Managerial ability of the manager working in an

organisation also affects the efficiency of the worker:
(i) Efficient Management:
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Efficient management of the organisation affects the efficiency of labour. The
worker will start working efficiently. In inefficient management efficiency of
worker will decrease and working capacity will reduce.
(ii) Proper Relationship between Employer and Employee:
Efficiency of labour also depends upon the employer-employee relations. If

the relations between the two are friendly and cardinal, efficiency of labour
will be high. But the relationship between the employer and employees itself
dependents upon the behaviour of the employer towards the employees and
that of trade unions towards the employer.
(iii) Sympathetic Attitude of the Management:
If the management possesses a sympathetic attitude towards the workers, the

workers will give their best. On the other hand, a trade union which adopts
militant attitude towards the employer, will lower labour efficiency.
5. Other Factors:
There are other factors also which affects the efficiency of labour and their
considerations has been considered important.
They are:
(i) Labour Policy of the Government:
Labour policy of the government also affects the efficiency of a labourer. If

the policy of the government is favourable towards labourer, it will create
confidence in labourer and their efficiency will improve. If policy is
unfavorable the labourer may feel disappointed.
(ii) Trade Unions:
If trade union is well organised the workers will have upper hand and they
will get more wages and their standard of living will improve.
(iii) Sense of Patriotism:
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Country in which workers are loyal to the country and have sense of
patriotism the efficiency of workers will automatically go up. Love for the
country encouraged them to do more efficiently.
Importance of efficiency of labour
Importance of efficiency of labour:

The concept of efficiency of labour is extremely important in economics. There are
several reasons for this.
(1) Determinant of the Standard of Living
(2) Determinant of the Rate of Economic Growth
(3) Better Maintenance of the Capital Stock
(4) Better Upbringing of the Children
(5) Increased Profits
(6) Lower Level of Product Price
Causes of low efficiency of labour in India
Causes of low efficiency of labour in India:

(1) Hot and Enervating Climate
(2) Low Wages
(3) Inadequacy of Machinery, Equipments and Raw Materials
(4) Uncongenial Factory Environment
(5) Worker's Habit and Socio-religious Factors
(6) Migratory Character
(7) Education and Training
(8) Inefficient Management
Suggestions for improving the efficiency of Indian workers
Following are some suggestions, which will definitely help in improving the
efficiency of workers.
(1) The payment of wages should be fair and prompt.
(2) A part of profit, earned by the concern, must be paid to workers as an incentive.
(3) Working conditions in the factories should be improved.
(4) The total period of work per day should not be more than eight hours.
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(5) Social security network should be built up to protect the workers.
(6) Benefits like housing facilities, medical aid, group insurance, etc. should be
provided to the workers.
Factors of Production – Capital
For any business to start and function the first requirement is money. This is the
capital of the firm. It forms the basis of the company and all other factors of
production are bought with the capital. Capital consists of all types of wealth, even
the free gifts of nature.
Capital as a Factor of Production
We can define capital as the productive part of a firm’s wealth. Wealth is the sum
of all money, goods, human values, etc that can be useful in the production of
further wealth. But capital is the part of this wealth that is currently in productive
use. Resources lying idle are wealth but not capital.
So capital is known as the man-made means of production. Hence capital will

include every man-made goods that are used in the production process. This
differentiates both land and labour from capital since both of these are not man-
made. So machinery, tools, plant, instruments, factories, transport vehicles, etc are
all forms of capital itself.
Features of Capital
 Capital is a passive factor of production. It needs labour to be productive.
 Capital is variable in nature. It increases and decreases according to the

needs of the firm
 Among all the other factors of production, capital is the most mobile.
Transportation of capital is an easy activity
 Also capital is destructible in nature. It’s not permanent like land. For
example, a machine will wear and tear and may even completely break down
with time.
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Capital Formation
Capital formation essentially means investment. It involves an increase in the production of

capital goods in a country. These goods include machines, factories, power supply units, railways,
roadways, etc. The need for capital formation arises not only out of replacement or renovation but
also to increase the production capacity of an economy. Let us take a look at the stages of capital
formation.
1] Increase in Real Savings
With an increase in income, there is an increase in savings. So higher income generally means
higher savings. This is true for individuals as well as an economy as a whole. A richer country has
more capacity to save and increase its wealth than a relatively poorer country.
But only the ability to save is not enough. There should be a willingness to save. A person with
one eye on the future will save more and create wealth. The government also encourages savings
for its citizens. They provide tax benefits and exemptions on saving schemes. For an economy
both individual savings and government savings are important.
2] Mobilization of Savings
Only saving does not lead to capital formation. These savings have to be mobilized. The
banks, financial institution, etc collect these savings and offer them to prospective investors. So
such institutions and financial products should be available to the public. And they should also be
attractive in terms of returns. The state will play an important role in the mobilization of savings
as well.
3] Investment
The final step of capital formation. Here the real savings get converted to actual investment. The
entrepreneurs will properly utilize these savings to generate more income and more wealth and
the cycle will continue.
Factors of Production – Organization (Enterprise)
Organization (Enterprise): Organization of Enterprises means to plan a business,

to start it and run it. It means to bring the factors i.e. land, labour and capital
together to undertake a business or production process.
Organization implies not only running the business but also shouldering the loss, if
any. The man who undertakes all this work is called as organizer or Entrepreneur.
Importance of Organization (Enterprise): Now a day, organization is very

important as Production process has become too much complicated one. A small
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happening in the country or abroad influences the business. The organization if
done properly the production process will not hamper. Hence proper planning and
execution of business is necessary. In view of this the job of organizer becomes
very important. Therefore whole time devotion of organizer is required for
successful business. The other factors land is possessed by land owner, capital is
possessed by capitalist and labourer is only ready to offer. They lay scattered hence
these three needs to he combined and It is the job of organizer. Thus, organization
would absent perhaps there would not be any production.
Functions of organizer (Entrepreneur): The following are the function of organizer.
1) Initiation: Taking the review of situation and availability of resources organizer

initiates a business or production. Here planning of business is undertaken.
2) Organization: Organizer now combines the land, labour and capital resources
and starts the business or production.
3) Direction and supervision: During the course of production proper direction and
timely supervision is required. Thus, organize executes the business in a proper
way.
4) Control: Organizer is keeping watch on changing situation. Because of changes
in situation in respect of marketing, Govt. decision, etc. will hamper the business.
Therefore control is also important.
5) Risk taking: Risk means uncertainty. It may be physical or market risk. The
business can not be always in profit. Sometimes losses are required to accept. Risk
taking is therefore becomes an important function of an organizer.
6) Innovation: A successful organizer is always innovative. He can introduce new

method or commodity in the production process or in business.
Types of Business Organization:
1) Individual Enterprise: Business owned and run by single person.
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2) Partnership: Business is owned and run by more than one but few persons. The
number are too less and it is possible to know each other and combined action can
be taken easily.
3) Joint-stock companies: The owner members are large size and numerous. They
do not know each other and hence the management of the business is done by few
people i.e. Board of Directors e.g. Reliance company. It is always profit motive.
4) Co-operative Enterprise: The business is run on co-operative principles.

Members may be numerous but Board of Director is elected body which runs the
business e.g. co-operative sugar factory.
5) Public Enterprise: The business is owned by Govt. Therefore Govt. decisions

determine the success of business. Largely they are run, keeping in view the
service motive e.g. Railway, HP and Bharat Gas etc.
Theories of Population
The theories are: 1. The Malthusian Theory of Population 2. The Optimum
Theory of Population 3. The Theory of Demographic Transition.
Population: Theory # 1. The Malthusian Theory of Population:
Thomas Robert Malthus enunciated his views about population in his famous
book, Essay on the Principle of Population as it affects the Future Improvement of
Society, published in 1798. Malthus revolted against the prevailing optimism
shared by his father and Godwin that a perfect state could be attained if human
restraints could be removed.
Malthus objection was that the pressure of increasing population on the food
supply would destroy perfection and there would be misery in the world. Malthus
was severely criticised for his pessimistic views which led him to travel on the
continent of Europe to gather data in support of his thesis.
He incorporated his researches in the second edition of his Essay published in
1803. The Malthusian theory explains the relationship between the growth in food
supply and in population. It states that population increases faster than food supply
and if unchecked leads to vice or misery.
The Malthusian doctrine is stated as follows:
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(1) There is a natural sex instinct in human beings to increase at a fast rate. As a
result, population increases in geometrical progression and if unchecked doubles
itself every 25 years. Thus starting from 1, population in successive periods of 25
years will be 1, 2, 4, 8, 16, 32, 64, 128, 256 (after 200 years).
(2) On the other hand, the food supply increases in a slow arithmetical progression
due to the operation of the law of diminishing returns based on the supposition that
the supply of land is constant. Thus the food supply in successive similar periods
will be 1, 2, 3, 4, 5, 6, 7, 8, and 9 (after 200 years).
(3) Since population increases in geometrical progression and the food supply in
arithmetical progression, population tends to outrun food supply. Thus an
imbalance is created which leads to over-population. This is depicted in Figure 1.
The food supply in arithmetical progression is measured on the horizontal axis and
the population in geometrical progression on the vertical axis. The curve M is the
Malthusian population curve which shows the relation between population growth
and increase in food supply. It rises upward swiftly.
(4) To control over-population resulting from the imbalance between population
and food supply, Malthus suggested preventive checks and positive checks. The
preventive checks are applied by a man to control the birth rate. They are foresight,
late marriage, celibacy, moral restraint, etc.
If people fail to check growth of population by the adoption of preventive checks,
positive checks operate in the form of vice, misery, famine, war, disease,
pestilence, floods and other natural calamities which
tend to reduce population and thereby bring a balance with food supply.
According to Malthus, preventive checks are always in operation in a civilized
society, for positive checks are crude. Malthus appealed to his countrymen to adopt
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preventive checks in order to avoid vice or misery resulting from the positive
checks.
Malthus doctrine is illustrated below.
Criticisms of the Malthusian Doctrine:

The Malthusian theory of population has been widely discussed and criticised
during the 19th and early 20th century.
Some of the criticisms are as follows:
(1) Mathematical Form of the Theory Wrong:
The mathematical formulation of Malthus’ doctrine that food supply increases in
arithmetical progression and population increases in geometrical progression in 25
years have not been proved empirically. Rather, the food supply has increased
more than in the arithmetical progression while population growth has not been in
geometrical progression so as to double the population in 25 years. But this
criticism is beside the point because Malthus used his mathematical formulation to
make his principle clear in the first edition of his Essay and deleted it in its second
edition.
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(2) Failed to foresee the Opening up of New Areas:
Malthus had a narrow vision and was particularly influenced by local conditions in
England. He failed to foresee the opening up of new areas of Australia, the United
States and Argentina where extensive farming of virgin lands led to increased
production of food.
As a result, countries like England on the continent of Europe have been provided
with abundant supplies of cheap food. This has been made possible with rapid
improvements in the means of transport, a factor almost overlooked by Malthus.
No country need fear starvation and misery if it does not produce sufficient for its
increasing population these days.
(3) Applied a Static Economic Law to a Period of Time:
The Malthusian notion that the food supply increases in arithmetical progression is
based on a static economic law at any one time, i.e. the law of diminishing returns.
Malthus could not foresee the unprecedented increase in scientific knowledge and
agricultural inventions over a period of time which has stayed the law of
diminishing returns. Consequently, the food supply has increased much faster than
in arithmetical progression. Malthus has been proved wrong not only in the
advanced countries but also in developing countries like India with the ‘green
revolution’.
(4) Neglected the Manpower Aspect in Population:
One of the principal weaknesses of Malthus’ thought has been that he neglected the
manpower aspect in population growth. He was a pessimist and dreaded every
increase in population. He forgot, according to Cannan, that “a baby comes to the
world not only with a mouth and a stomach, but also with a pair of hands.”
This implies that an increase in population means an increase in manpower which
may tend to increase not only agricultural but also industrial production and thus
makes the country rich by an equitable distribution of wealth and income. As
rightly pointed out by Seligman “The problem of population is not merely one of
mere size but of efficient production and equitable distribution.” Thus the increase
in population may be necessary.
(5) Population not related to Food Supply but to Total Wealth:
The Malthusian theory rests on a weak relationship between population and food
supply. In fact, the right relationship is between population and total wealth of the
country. This is the basis of the optimum theory of population. The argument is
that if a country is rich materially and even if it does not produce enough food for
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its population, it can feed the people well by importing food stuffs in exchange for
its products or money.
The classic example is of Great Britain which imports almost all its food
requirements from Holland, Denmark, Belgium and Argentina because it
concentrates more on the production of wealth rather than on food products. Thus
the very basis of the Malthusian doctrine has been proved wrong.
(6) Increase in Population the Result of declining Death Rate:
The Malthusian theory is one sided. It takes the increase in population as the result
of a rising birth rate, whereas population has grown considerably the world over
due to a decline in death rate. Malthus could not foresee the marvellous
advancements in the field of medical sciences which have controlled fatal diseases
and made human life longer. This has been particularly so in underdeveloped
countries like India where the Malthusian theory is said operate.
Its Applicability:
Despite these weaknesses, the Malthusian doctrine contains much truth. The
Malthusian doctrine may not be applicable to the Western Europe and England but
its principal tools have become the part and parcel of the people of these countries.
If these lands do not face the problems of over-population and misery, it is all due
to the bogey and pessimism of Malthusianism.
In fact, the people of Europe were made wiser by Malthus who forewarned them of
the evils of over-population and they started adopting measurers toward it off. The
very fact that people use preventive checks, like late marriage and various
contraceptives and birth control measures on an extensive scale proves the vitality
of the Malthusian law.
Even famous economists like Marshall and Pigou and sociologists like Darwin
were influenced by this principle when they incorporated it in their theories. And
Keynes, initially overawed by the Malthusian fears of over-population, later wrote
about “Some Economic Consequences of Declining Population.” Is it not the fear
of Malthusianism which has created the problem of declining population in
France?
The Malthusian doctrine may not be applicable now to its place of origin, but its
influence spreads over two-third of this universe. Excluding Japan, the whole of
Asia, Africa and South America come under its purview. India is one of the first
countries to adopt family planning on state level to control population. Positive
39
checks like floods, wars, droughts, diseases, etc. operate. The birth and death rates
are high. The growth rate of population is about 2 per cent per annum.
The real aim of population policy is, however, not to avoid starvation but to
eliminate poverty so as to raise output per head in an accelerated manner. Thus the
Malthusian theory is fully applicable to underdeveloped countries like India.
Walker was right when he wrote: “The Malthusian theory is applicable to all
communities without any consideration of colour and place. Malthusianism
has stood un-shattered, impregnable amid all the controversy that has raged
around it.”
Theory # 2. The Optimum Theory of Population:

The optimum theory of population was propounded by Edwin Cannan in his book
Wealth published in 1924 and popularized by Robbins, Dalton and Carr-Saunders.
Unlike the Malthusian theory, the optimum theory does not establish relationship
between population growth and food supply. Rather, it is concerned with the
relation between the size of population and production of wealth.
The Malthusian theory is a general theory which studies the population problem of
a country in keeping with its economic conditions. Thus the optimum theory is
more realistic than the Malthusian theory of population.
Definitions:
But what is optimum population? The optimum population is the ideal population
which combined with the other available resources or means of production of the
country will yield the maximum returns or income per head.
The concept of optimum population has been defined differently by Robbins, Carr-
Saunders and Dalton. Robbins defines it as “the population which just makes the
maximum returns possible is the optimum population or the best possible
population.” Carr-Saunders defines it as “that population which produces
maximum economic welfare”. To Dalton, “Optimum population is that which
gives the maximum income per head.” If we were to examine these views, we find
that Dalton’s view is more scientific and realistic which we follow.
Assumptions:
This theory is based on the following assumptions:
1. The natural resources of a country are given at a point of time but they change
over time.
2. There is no change in techniques of production.
40
3. The stock of capital remains constant.
4. The habits and tastes of the people do not change.
5. The ratio of working population to total population remains constant even with
the growth of population.
6. Working hours of labour do not change.
7. Modes of business organisation are constant.
The Theory:
Given these assumptions, the optimum population is that ideal size of population
which provides the maximum income per head. Any rise or diminution in the size
of the population above or below the optimum level will diminish income per
head.
Given the stock of natural resources, the technique of production and the stock of
capital in a country, there is a definite size of population corresponding to the
highest per capita income. Other things being equal, any deviation from this
optimum-sized population will lead to a reduction in the per capita income.
If the increase in population is followed by the increase in per capita income, the
country is under-populated and it can afford to increase its population till it reaches
the optimum level. On the contrary, if the increase in population leads to
diminution in per capita income, the country is over- populated and needs a decline
in population till the per capita income is maximised. This is illustrated in Figure 2.
In the figure, OB population is measured along the horizontal axis and per capita
income on the vertical axis. In the beginning, there is under-population and per
capita income increases with population growth. The per capita income is BA
population which is less than the maximum per capita income level NM. The ON
41
size of population represents the optimum level where per capita income NM is the
maximum.
If there is a continuous increase in population from ON to OD then the law of
diminishing returns applies to production. As a result, the per capita production is
lowered and the per capita income also declines to DC due to increase in
population. Thus ND represents over-population. This is the static version of the
theory. But the optimum level is not a fixed point.
It changes with a change in any of the factors assumed to be given. For instance, if
there are improvements in the methods and techniques of production, the output
per head will rise and the optimum point will shift upward.
What the optimum point for the country is today, may not be tomorrow if the stock
of natural resources increases and the optimum point will be higher than before.
Thus the optimum is not a fixed but a movable point.
According to Cannan, “At any given time, increase of labour up to a certain
point is attended by increasing proportionate returns and beyond that point
further increase of о labour is attended by diminishing proportionate
returns.” The per capita income is the highest at the point where the average
product of labour starts falling. This point of maximum returns is the point of
optimum population.
This is illustrated in Figure3. The size of population is measured on the horizontal

axis 2 and the average product of labour on the vertical axis. AP is the average
product of labour or income per head curve. Up to OP level, increases in
population lead to a rise in the average product of labour and per capita income.
42
Beyond OP, the average product of labour and per capita income falls. Hence when
population is OP, the per capita income is the highest at point L. Thus, OP is the
optimum level of population. To the left of OP, the country is under-populated and
beyond OP, it is over-populated.
However, OP is not a fixed point. If due to inventions there are improvements in
the techniques of production, the average product of labour might increase and
push the level of per capita income upward so that the optimum point rises. This is
shown in the figure where the AP1 curve represents the higher average product of
labour and point L shows the maximum per capita income at the new optimum
level of population OP1.
Dalton’s Formula:
Dalton has deduced over-population and under-population which result in the
deviation from the optimum level of population in the form of a formula. The
deviation from the optimum, he calls maladjustment. Maladjustment (M) is a
function of two variables, the optimum level of population О and the actual level
of population A.
The maladjustment is M = A-0/0
When M is positive, the country is over-populated, and if it is negative, the country
is under-populated. When M is zero, the country possesses optimum population.
Since it is not possible to measure O, this formula is only of academic interest.
Its Superiority Over the Malthusian Theory:
The optimum theory of population is superior to the Malthusian theory on the
following grounds:
(1) The Malthusian law is a general study of the population problem because it is
applicable to all countries irrespective of their economic conditions. The optimum
theory is superior to the Malthusian theory because it studies the population
problem in relation to the economic conditions of a particular country.
(2) Malthus had a narrow vision. He related the growth of population to food
supply. Cannan, on the other hand, had a much wider outlook. He related the
problem of population to the total production of the country, both industrial and
agricultural.
(3) The Malthusian theory is a static concept which applies to a period of time. The
optimum theory is a dynamic one because over a period of time the per capita
income may rise with the expansion in output due to improvements in knowledge,
43
skill, capital equipment and other elements in production. This may raise the
optimum level of population. Thus, the optimum theory is more realistic.
(4) The Malthusian doctrine is simply theoretical and is devoid of all practical
considerations. It regards all increases in population bad, for they bring untold
miseries to the people. Malthus wrote, “The table of nature is laid for a limited
number of guests and those who come uninvited must starve.” On the other hand
the optimum theory is very practical because it regards an increase in population
not only desirable but also necessary for the maximum utilisation of the country’s
natural resources.
(5) The Malthusian theory of population is based on the unrealistic assumption of
the niggardliness of nature. This belief arises from the operation of the law of
diminishing returns in agriculture. But the optimum theory takes a realistic view
when according to this, the law of diminishing returns does not operate in
agriculture immediately but after the optimum point is reached. In other words,
first the law of increasing returns operates up to the optimum point and the law of
diminishing returns after it.
(6) Malthus was so much obsessed by the fear of over-population that he ignored a
fundamental fact that a newly born child ‘comes not only with a mouth and a
stomach but also with a pair of hands’ The optimum population theory allays all
such fears of the Malthusians by stressing the fact that increasing population
increases the labour force which helps raise the optimum expansion of the
country’s natural resources.
So long as the actual population is less than the optimum, the increase in
population is safe and good. It is only when the actual population exceeds the
optimum that the increase in population needs control. Thus unlike the Malthusian
theory which necessitates the use of preventive checks all the time for fear of the
country being over-populated, the optimum theory is free from all such taboos and
is silent about any type of checks to control population.
(7) Malthus was essentially a pessimist who portrayed a gloomy picture about the
future of mankind which was full of misery, vice, floods, droughts, famines and
other natural calamities. The optimum theory is superior to the Malthusian theory
because it does not suffer from any pessimism; rather it adopts an optimist and
realistic attitude towards the problem of population when it relates population to
the wealth of the country.
It’s Criticisms:
44
Despite the superiority of the optimum theory over the Malthusian theory of
population, it has serious weaknesses.
(1) No Evidence of Optimum Level:
The first weakness of the optimum theory is that it is difficult to say whether there
is anything like an optimum population. There is no evidence about g the optimum
population level in any country.
(2) Impossible To Measure Optimum Level:
It is impossible to measure the optimum level quantitatively. As pointed out by 2
Prof. Bye, it is “impossible to calculate it with any semblance of m exactness for
any country at any time.”
(3) Optimum Level Vague:
Optimum population implies a £ qualitative as well as a quantitative ideal
population for the country. The qualitative ideal implies not only physique,
knowledge and intelligence, but also the best age composition of population. These
variables are subject to change and are related to an environment. Thus the
optimum level of population is vague.
(4) Correct Measurement of Per Capita Income not Possible:
Another difficulty pertains to the measurement of per capita income in the country.
It is not an easy task to measure changes in the per capita income. The data on per
capita income are often inaccurate, misleading and unreliable which make the
concept of optimum as one of doubtful validity.
(5) Neglects the Distributional Aspect of increase in Per Capita Income.:
Even if it is assumed that per capita income can be measured, it is not certain that
the increase in population accompanied by the increase in per capita income would
bring prosperity to the country. Rather, the increase in per capita income and
population might prove harmful to the economy if the increase in per capita
income has been the result of concentration of income in the hands of a few rich.
Thus the optimum theory of population neglects the distributional aspect of
increase in the per capita income.
Conclusion:
It may be concluded on the basis of above points that this theory is of no practical
use. As pointed out by Prof. Hicks, it is “a notion of extremely little practical
interest.” Prof. Beveridge regards it “as a speculative construction of little
importance for actual situation and not entitled to a place in the corpus of
theoretical economics.”
45
Population: Theory # 3. The Theory of Demographic Transition:
The theory of demographic transition is based on the actual population trends of
advanced countries of the world. According to this theory, every country passes
through three different stages of population growth. In the first stage, the birth rate
and the death rate are high and the growth rate of population is low. In the second
stage, the birth rate remains stable but the death rate falls rapidly.
As a result, the growth rate of population increases very swiftly. In the last stage,
the birth rate starts falling and tends to equal the death rate. The growth rate of
population is very slow. These three stages are explained in the Figure 5.
In the figure, the time for different stages is taken on the horizontal axis and annual
birth and death rates per thousand on the vertical axis. In the first stage, before the
19th century, birth rates in Western Europe were 35 per thousand and death rates
fluctuated around 30 per thousand. Thus the growth rate of population was about 5
per thousand.
In the second stage, death rates began to decline gradually from 30 per thousand to
20 per thousand from the middle of the 19th century to the end of the century. In
the third stage beginning with the 20th century, birth rates began to decline from
20 per thousand and have continued for about a century now, nearing 15 per
thousand. Death rates also continued to decline but seem to have stabilized
between 10 to 55 per thousand in Western Europe.
46
First Stage:
In this stage, the country is backward and is characterised by high birth and death
rates with the result that the growth rate of population is low. People mostly live in
rural areas and their main occupation is agriculture which is in a state of
backwardness. There are a few simple, light and small consumer goods industries.
The tertiary sector consisting of transport, commerce, banking and insurance is
underdeveloped. All these factors are responsible for low incomes and poverty of
the masses. Large family is regarded as a necessity to augment the low family
income. Children are an asset to the society and parents.
There being mass illiteracy, the society is not expected to educate them and thus
burden itself. The existence of the joint family system provides employment to all
children in keeping with their ages. Thus a child becomes an earning member even
at the age 5 when he becomes a helping hand to his parents in domestic affairs.
More children in a family are also regarded as an insurance against old age by the
parents.
People being illiterate, ignorant, and superstitious and fatalist are averse to any
methods of birth control. Children are regarded as God-given and preordained.
Being childless is regarded as a curse and the parents are looked down upon by the
society. All these economic and social factors are responsible for a high birth rate
in the country.
Along with high birth rate, the death rate is also high due to non-nutritional food
with a low caloric value, and lack of medical facilities and of any sense of
cleanliness. People live in dirty and unhealthy surroundings in ill-ventilated small
houses. As a result, they are, disease-ridden and the absence of proper medical care
results in large deaths.
The mortality rate is the highest among the children and the next among women of
childbearing age. Thus unhygienic conditions, poor diet and the lack of medical
facilities are the reasons for a high mortality rate in this stage. This stage continued
in Western Europe approximately up to 1840.
Second Stage:
In the second stage, the economy enters the phase of economic growth.
Agricultural and industrial productivity increases and the means of transport
develop. There is greater mobility of labour. Education expands. Incomes increase.
People get more and better quality food products. Medical and health facilities are
47
expanded. Modern drugs are used by the people. All these factors bring down the
death rate. But the birth rate is almost stable.
People do not have any inclination to reduce the birth of children because with
economic growth employment opportunities increase and children are able to add
more to the family income. With improvements in the standard of living and the
dietary habits of the people, the life expectancy also increases.
People do not make any efforts to control the size of family because of the
presence of religious dogmas and social taboos towards family planning. Of all the
factors in economic growth, it is difficult to break with the past social institutions,
customs and beliefs. As a result of these factors, the birth rate remains at the
previous high level.
Third Stage:
In this stage, the fertility rate declines and tends to equal the death rate so that the
growth rate of population declines. As growth gains momentum and people cross
the subsistence level of income, their standard of living rises.
The leading growth sectors expand and lead to an expansion in output in other
sectors through technical transformations. Education expands and permeates the
entire society. Popular education leads to popular enlightenment and opens the way
to knowledge. It creates self-discipline, power to think rationally and to probe into
the future. People discard old customs, dogmas and beliefs and develop
individualistic spirit and break with the joint family.
Men and women prefer to marry late. The desire to have more children to
supplement parental income declines. People readily adopt family planning
devices. They prefer to go in for a baby car rather than a baby. Moreover,
increased specialisation following rising income levels and the consequent social
and economic mobility make it costly and inconvenient to rear a large number of
children.
All this tends to reduce the birth rate which along with an already low death rate
brings a decline in the growth rate of population. The advanced countries of the
world are passing through this last stage and the population is increasing at a slow
pace in them.
Conclusion:
The theory of demographic transition is the most acceptable theory of population
growth. It neither lays emphasis on food supply like the Malthusian theory, nor
does it develop a pessimistic outlook towards population growth.
48
It is also superior to the optimum theory which lays an exclusive emphasis on the
increase in per capita income for the growth of population and neglects the other
factors which influence it. The demographic transition theory is superior to all the
theories of population because it is based on the actual population growth trends of
the developed countries of Europe.
Almost all the European countries of the world have passed through the first two
stages of this theory and are now in the final stage. Not only this, this theory is
equally applicable to the developing countries of the world.
Very backward countries in some of the African states are still in the first stage
whereas all the other developing countries of the world are in the transitional stage
two it is on the basis of this theory that economists have developed economic-
demographic models so that underdeveloped countries should enter the final stage
and attain the stage of self-sustained growth. Thus this theory has universal
applicability.
49
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B.

Com Hons 1st year Business Economics

 Shapiro:‘Macro Economics deals with the functioning of the economy as a whole.’

The concepts of Macroeconomics are:

Macroeconomics as a Study of Determination of Income and Employment:

Macroeconomics and Theory of Economic Growth:

Nature of Macro Economics

Macro Economics is:

 Aggregate quantitatives—Micro economics only studies individual firms or households

 Inter-dependence—Since it is the study of aggregates, the quantitative are inter-related,

 Comparative study—Macro analysis is a comparative study of national income, national

Importance of Macro Economics

(2) In Economic Policies: Modern governments, of the underdeveloped economies, are

(iii) In Economic Growth: The economics of growth is also a study in macroeconomics. It is

(iv) In Monetary Problems: It is in terms of macroeconomics that monetary problems can be

Limitations of Macro Economics

(4) Indiscriminate Use of Macroeconomics Misleading: An indiscriminate and uncritical use

(5) Statistical and Conceptual Difficulties: The measurement of macroeconomic concepts

Microeconomics is based on different assumptions concerned with rational behaviour of

Microeconomics helps to explain the equilibrium conditions of an individual, a firm, an industry

Meaning The branch of economics that The branch of economics that

Deals with Individual economic variables Aggregate economic variables

Business Applied to operational or Environment and external issues

Scope Covers various issues like Covers various issues like,

Importance Helpful in determining the Maintains stability in the

Limitations It is based on unrealistic It has been analyzed that

They both depend on each other.

In economics, demand is formally defined as ‘effective’ demand meaning that it is a consumer

Consumer expectation: High expectation of income or expectation in the increase in price of a

1. Price demand: It refers to various types of quantities of goods or services that a

2. Income demand: It refers to various types of quantities of goods or services that a

4. Direct demand: When goods or services satisfy an individual’s wants directly, it is

5. Derived demand or Indirect demand: The goods or services demanded or needed for

The Law of Demand

Definition of 'Law Of Demand'

Elasticity of Demand and its Types

Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded

The demand for a commodity is affected by different economic variables:

1. Price of the commodity

1. Price Elasticity of Demand (PED)

PED = % Change in Quantity Demanded % / Change in Price

2. Income Elasticity of Demand (YED)

YED = % Change in Quantity Demanded% / Change in Income

3. Cross Elasticity of Demand (XED)

5 other types of Elasticity of Demand

1. Perfectly Elastic Demand

2. Perfectly Inelastic Demand

3. Relatively Elastic Demand

4. Relatively Inelastic Demand

5. Unitary Elastic Demand

Important of price elasticity of demand!

2. Formulation of Government Policies:

Factors of production refer to the different elements that are used in

The payment for land is rent.

Characteristics of Land as a Factor of Production

 The land has no cost of production.

 The land is fixed and limited in supply.

The payment for labour is the wage.

 One cannot store labour.