Economics notes for class 11th Arts and Science

chapter 1
Basic concepts in economics micro and macro economics

Meaning of Economics-The origin of the term economics lies in the Greek word,'Oikonomia'
which means management of the household.
Economics is referred to as 'Queen of
Social Sciences' by Paul Samuelson. Economics deals with the economic aspect of human
behaviour.
Classical economist Adam Smith contributed in the development of the subject so he also
regarded as the "Father of Economics",
Economics is further divided into many sub subjects but the major one is microeconomics
and macroeconomics.
In 1933 Sir Ragnar frisch coined the term Microeconomics which derived from the Greek
word "Mikros",which means small and Macroeconomics which derived from the Greek word
"Makros",which means large.
Definitions of Economics
1. Wealth oriented definition of economics -According to Adam Smith "Economics is a
science of wealth."
Key-points of Adam Smith's definition :
1) Laissez faire i.e. non-intervention of the
government.
2) Capital and wealth accumulation
3) Nature's law in economic affairs.
4) Division of labour as an aspect of growth
theory.
2. Welfare oriented definition of economics According to Neoclassical economist
Prof. Alfred Marshall "Economics is a study of mankind in the ordinary business of life. It
examines that part of individual and social action which is closely connected with the
attainment and use of material requisite of well being."
Key-points of Marshall's definition :
1) Study of an ordinary man.
2) Economics is a behavioural science.
3) Study of material welfare.
4) Economics is not simply a study of wealth.
3. Scarcity oriented definition of economics According to LionelRobbins "Economics is a
science which studies human behaviour as a relationship between ends and scarce means
which have alternative uses."
Key-points of Robbins' definition :
1) Wants (ends) are unlimited.
2) Means are comparatively limited.
3) Wants are gradable on the basis of priority.
4) Means have alternative uses.
4.Arthashastra
According to Kautitlya "Arthashastra implies the science of acquiring and managing wealth.
Essentially, Arthashastra is a treatise
on Political Economy in its broadest sense.
Key-points based on Kautilya's views :
 1) Crucial role of the state or government.
2) Focus on creation of wealth as the means to ensure welfare of the state.
3) Need for efficient administrative machinery
for good governance.
4) Compilation of political ideas in Arthashastra
Basic concepts of economics
1.Detail study of Microeconomics
Basic Economic Concepts
"Microeconomics is the study of particular firme, particular households,individual prices,
wager, income, individual industries and particular commodities."
-Prof. K.E BOULDING
The following are the features of Micro Economics:

(1) MICROSCOPIC APPROACH

Micro Economice takes a microscopic view of the economy to understand the econovale
behaviour of the individual units. It analyses how the consumer and producer. ・are
performing their functions in relation to an economy. It studies the various parts of the
economy individually but not the economy as
a whole

(2) STUDY OF INDIVIDUAL UNITS

Micro Econquies is a study of micro variables. It studies units like a household,firms,
consumers, etc. The economists pickup a small unit and undertake detailed observations (In
short, it is an examination of tree and not the forest)

(3) CALLED AS PRICE THEORY

Land, labour capital and entrepreneurs are all factors of production and contribute to the
process of production for this contribution, they get rewards in the farm of rent, wages,
interest and profits respectively. Micro Economics deals with determination of such rewards
le factor prices Moreover, its also concerned with determination of price of goods. Hence, it
is also called "Price theory'. Price theory provides guidance to the consumer regarding how
to use his money in the best way to get maximum satisfaction. It provides guidance to the
producer to fix price in such a way so that he can earn maximum profit.
(4) Slicing Method:
Micro economics divides the entire economy into various small units and each unit is
analysed in detail. This is known as slicing method.
Example: A loaf of bread cut into slices for consumption. Similarly, the economy sliced into
small units like study of individual income, study of individual price, etc.

(5) Use of Marginalism Principle:

Micro economics makes use of the marginalism principle for the purpose of analysis.
'Marginal' means a change brought about in total by an additional unit. The concept of
Marginalism is important in all the areas of microeconomics.
Example: Marginal Utility, Marginal Cost, Marginal Productivity, etc.

(6) Analysis of Market Structure:

Micro economics studies different market structures i.e. perfect competition, monopoly,
monopolistic competition, oligopoly, etc. It also describes how the prices, quantities and
equilibriums are determined in different markets.

(7) Limited Scope:

The scope of micro economics is limited as compared to macro economics. Its scope
includes product pricing, factor pricing and theory of welfare. It does not deal with the
national problems like unemployment, inflation, poverty, balance of payments, population,
trade cycle, etc.

(6) Based on Certain Assumptions: Micro economics is based on various unrealistic

assumptions like laissez-faire policy, pure capitalism, full employment, perfect competition,
etc. Most of the micro economic theories are based on the 'Ceteris Paribus' assumption i.e.
'other things being constant'.

(7) Partial Equilibrium:Micro economic analysis is a partial equilibrium as it deals with the
equilibrium of an individual consumer, individual producer, individual firm, individual industry,
etc. Its analysis separates an individual unit from other forces.
Example: The effect of the rise in GST from 5% to 12% on shoes or garments affects
individuals separately.

Importance of significance of microeconomics

(1) Price Determination:

Micro economics explains how the prices of consumer goods and factors of production are
determined in the commodity markets and the factor markets respectively. It is also useful for
determining the price policy of public enterprises.

(2) Useful to Government:

Micro economic theories are useful to the government in framing economic policies such as
taxation policy, public expenditure policy, price policy etc. These policies help the
government to attain its goals of efficient allocation of resources and promoting economic
welfare of the society. It is also useful in explaining the effects of public expenditure, public
borrowings, etc.

(3) Business Decisions:

Micro economics serves as a guide for the business community. It helps businessmen to
take decisions regarding costs, estimation of demand, production, price policy, etc. It helps
the firms to take investment decision and formulate future policies.

(4) Basis of Welfare Economics/Allocation of Resources:

It explains how the resources are allocated and utilised in optimum manner to produce
maximum output and achieve maximum welfare of the society.

(5) Economic Model Building:

Micro economics builds simple economic models which help in understanding complex
economic situations. It has made valuable contribution to the science of economics by
developing various terms, concepts, terminologies, tools of economic analysis, etc.
(6) Foreign Trade:
Gains from international trade, causes of disequilibrium in the balance payment, effects of
devaluation, factor determining the foreign exchange rate, elasticity of demand for exports
and imports, tariffs and quotas, etc. are explained under the theories of micro economics.
(7)Free Market Economy:
Study of microeconomics is very important in understanding the working of a free
enterprise/ market economy. In such a economy, economic decisions like what to produce?
How to produce? How much to produce? etc are taken by individual without centralised
planning.

The scope of Micro Economics basically deals with the following theories:
(1) Theory of Product Pricing:
This theory explains how the relative price of an individual commodity is determined by the
market forces of demand and supply. Micro economics is concerned with the theory of
product pricing with its two constituents i.e. theory of demand and theory of production and
cost.

(2) Theory of Factor Pricing:

Micro economics deals with the theory of factor pricing. It means micro economic helps in
determining the rewards of factors of production such as rent for land, wage for labour,
interest for capital and profit for entrepreneurs.

(3) Theory of Economic Welfare:

Micro economics is the study of economic welfare i.e. how to maximise the welfare o the
society through efficient allocation of resources. It studies how the resources ar allocated for
the production of a particular commodity and service and how efficiently they are distributed.
Economic efficiency involves three efficiencies:

(a) Efficiency in Production:

Producing the maximum level of output of goods and services from the given number of
resources is called efficiency in production.
(b) Efficiency in Consumption:
Efficiency in consumption refers to the distribution of produced goods and services among
the people for consumption in such a way that it gives maximum level of satisfaction to the
society.
(c) Overall Economic Efficiency:
Efficiency in the direction of production or overall economic efficiency means production of
those goods which are most desired by the people.

2.Wants- in Economics wants denotes a feeling of' lack of satisfaction'

Characteristics of wants
● wants are unlimited
● wants are recurring in nature
● wants differ with age
● wants differ with gender
● wants differ due to preferences
● wants differ with Seasons
 ● wants differ due to culture
Classification of wants
1. Economics and non economic activities
2. Individual wants and collective wants
3. Necessities,Comfort and luxuries wants
3.Goods and services
Anything that satisfies human want is termed as Goods similarly it has material existing. Non
material economic activity which satisfice human want is known as Services
Types of Goods
Normal goods- goods that exhibit negative relation with price is known as normal goods
Inferior goods-those goods which demand decreases with decrease in price is known as
inferior goods
Superior goods-Goods which demand increases with increase in price are known as
prestigious goods.
Giffen goods are special quality inferior goods.
Economic activity done with the purpose of monetary gain and not in a tangible form is
known as services.
(3) UTILITY
The want satisfying power of a commodity is called 'utility.' Utility is the capacity of a good to
satisfy human wants. The following are the types of utility:

TYPES OF UTILITY

1. Place Utility-When a change in place of a commodity increases its utility, it is called place
utility. Place utility is created when goods are transferred from place of production to place of
consumption. For e.g. The utility of Alphonso mangoes increases when they are transferred
from mango farms to other parts of the country. The utility of mobile phones increases when
they are distributed from manufacturing plants to mobile stores.

2. Service Utility-Service utility is created when any service is provided by any person to
another person or group of people. For e.g. A professor taking lectures in a coaching class.
An advocate giving legal advice to his clients.

3. Time utility-When utility of a commodity increases by storing it and making it available

during the time of need, it is called time utility. For e.g. the utility of a textbook will increase if
it is launched exactly when the college reopens as there is need for book. The utility of
crackers will increase if they are distributed during the period of Diwali.

4. Form utility - Form utility is created by changing the form or shape of goods. The process
of manufacturing or processing creates form utility. For e.g. when wood is changed to
furniture. Its utility increases. When tea leaves are processed to tea powder, its utility
increases.

5. Knowledge utility-The utility of a product increases when the user or buyer gains
knowledge about such a product. This utility is called knowledge utility. Advertisement,
demonstrations, user manuals etc. Help the user or buyer to acquire knowledge about the
product. For e.g. the utility of a washing machine will increase when the user knows about its
operation. The utility of a computer game will increase when the player knows all its control
keys.

6. Possession utility-Possession utility is created when the legal ownership and possession
is transferred from one person to another (generally seller to buyer). For e.g. The cakes in
the Monginis cake shop have utility. However, the utility will increase when you place your
order for the cake, pay the price and take possession of it. The utility of a house will increase
once the ownership is transferred from the seller to the buyer.
Concepts of utility
There are two concepts of utility
Total utility and Marginal utility
1.Total utility- Total utility is the sum of total of the utility derived by a consumer by
consuming or acquiring all possible units of a commodity at a point of time
2. Marginal utility - Marginal utility is the addition made to the total utility from an additional
unit of commodity consumed at a point of time. It is a last unit consumed by the consumer.

TU = U₁+U₂+ Us +...........+ Un
MU= TUn - TU (n-1)

FEATURES OF UTILITY

1. It is the basis of demand - A commodity will only be demanded if it gives utility. If a

commodity does not give any utility, it may not be demanded. For e.g. An arts student will
not demand a calculator as it has no utility for him. A student pursuing commerce will
demand it.

2. Ethical or moral significance is not considered-The concept of utility does not consider
whether the commodity satisfies a good want or a bad want. A commodity can have utility
even if it satisfies a bad or unethical want. Utility does not consider any moral or ethical
factors. In short, it is ethically neutral. For e.g. A gun has utility for a soldier as well as a
terrorist.

3. It is also different from usefulness - Usefulness is the benefit that is derived by consuming
a commodity whereas utility is the want satisfying power of a commodity. A commodity
having utility need not be useful. For e.g. Alcohol has utility to a drunkard but it is not useful
as it harms their health. Hookahs have utility for customers of a hookah bar but it is not
useful as it harms their health.

4. The measurement of utility is not possible - Utility is a psychological concept. Therefore,

measurement of utility is not possible in numbers. For e.g. It cannot be said that Good Day
biscuit has 5 utility and Dark Fantasy biscuit has 10 utility. However, utility can be measured
in relative terms. For e.g. the utility of food is higher for a person who is hungry and lower for
a person who is not hungry.

5. Utility is a subjective concept-Subjectivity means changing from one person to another. A

product may give utility to one person but the same product may not give as much utility to
another. Therefore, utility is a subjective concept as the utility of a commodity differs from
person to person on account of differences in tastes, preferences, habits, surroundings, age,
occupations etc.

6. It is a relative concept - Utility of a commodity changes from time to time and place to
place. For e.g. Aquaguard water purifier has more utility in the rainy season compared to
other seasons because the risk of water-borne diseases is high. A room freshener has more
utility in the bathroom as compared to the drawing room.

7. It is even different from pleasure - A commodity may have utility but it is not necessary
that its consumption will give pleasure to the consumer. For e.g. A textbook has utility for a
student but he may not derive pleasure from reading it.

8. Satisfaction and utility are different - Utility is the want satisfying power of a commodity,
i.e. utility is considered before consumption. Satisfaction is the end result of consumption.
Satisfaction is the happiness derived by the consumer after consuming the commodity.
9.Utility depends on the intensity of the want-The utility of a commodity depends on the
intensity of the want. If the want is intense, and the commodity satisfies the want,then the
utility of the commodity is higher for example the utility of notes in higher when exams are
closer as the want for notes is intense.The utility of the fan is intense when the weather is
warm outside as the want for the fan's breeze is high.
VALUE
Value has two approaches in Economics that is value in use and value in exchange
Value -in - use refers to the utility of the commodity in day to day life. Commodities like
water,air highly essential for human life does these commodities are high value in use but as
this commodities are available at a large scale so they have low value in exchange
Value in exchange refers to the worth of commodity Express in terms of price commodities
like gold diamond are not very essential for human life does these commodities have less
value will use but as these commodities are available on a small small scale or scarce they
have high value in exchange
Paradox of value or Diamond water Paradox - water has high TU or value in use. This is
because it is highly useful in life but since it is available in abundance its price or value in
exchange or MU is low or zero. At the same time the price of diamond or its value in
exchange is very high because its MU is very high due to its relative scarcity. When the MU
is high the people are preferred to pay high price for it and vice-versa, so diamonds are
costly. TU gives an idea of total satisfaction of a good.

*Explain the features of wealth.

Ans. Wealth refers to "anything which has market value and can be exchanged for money."
To be regarded as 'wealth', a commodity must possess the following characteristics
(a) Utility:
Want satisfying power of a commodity is called utility. In other words, the power of a
commodity to satisfy human wants is called utility.
For instance - furniture, refrigerator, etc. Similarly, a rotten egg has no utility. Therefore, it
cannot be wealth.
(b) Scarcity:
A commodity must be scarce to be included in wealth. In other words it must be limited in
supply in relation to demand.
For instance - all economic goods are considered as wealth as price is paid for them due to
scarcity.
(c) Transferability:
A commodity should be transferable from person to person as well as place to place.
If the good is material or tangible, then only it is possible to transfer it from place to place.
For instance - furniture, cars and so on.
(d) Externality:
A commodity is regarded as wealth only if it has externality. In other words, a good can be
transferred only if it is external to the human body.
For instance, a bag, chair, etc. Any internal quality such as singing, dancing cannot be
regarded as wealth, because it cannot be transferred.
ECONOMIC ACTIVITY

Economic activity is the activity of making, providing, purchasing, or selling goods or

services. Any action that involves producing, distributing, or consuming products or services

is an economic activity. Economic activities can be classified into four types as

Production,Distribution, Exchange and Consumption.

PRODUCTION

Production is creation of utility. The activities which are carried out just for the sake of
activity, or for the sake of charity, hobby or in general, where there is no monetary exchange,
are considered unproductive in economics. There are four factors of production.

FACTORS OF PRODUCTION

CLASSIFICATION

The resources which contribute to the production of a commodity are called factors of
production or agents of production. Economists have classifies these factors of production
into four major categories. They are,

1. Land

2. Labour

3. Capital

4. Enterprise or entrepreneur
LAND

MEANING

In the ordinary language, land refers to the surface of the earth or soil. But in Economics,
Land refers to all the natural resources found on, above and under the surface of the earth,
which are free gifts of nature, and which helps in producing goods and services.
Natural resources which are found on the surface of the earth include fertility of the soil, the
mountains, forests and water resources like the rivers and seas. Natural resources found
above the surface of the earth include rainfall, wind, sunshine, climatic conditions, light and
heat etc. Natural resources which lie under the surface of the earth minerals, ores, oils and
also those that lie beneath the oceans and the seas.

CHARACTERISTIC/ FEATURES

1. It is a free gift of nature and a primary factor - Land refers to all natural resources found
on, above and below the surface of the earth. It refers to all natural resources that are free
gifts of nature. Land is an original, natural or primary factor of production, endowed by
nature. Nothing can be produced without land or without natural resources.

2. Land is inelastic in supply - The total area of land available to the society as a whole is
fixed. Man cannot increase the supply of land. The fertility of land can be improved by
modern techniques but the supply of land is perfectly inelastic.

3. Land involves no cost of production - Since land is a free gift of nature, there is no cost of
production involved in the supply of land. An individual using somebody's land pays rent. But
the society as a whole has not incurred any cost for producing land and has no social cost.
Hence, the supply price of land is zero. 4. Land differs in fertility - Land differs in fertility and
quality due to the differences in climate, location etc. Hence the productivity of land also
varies from place to place. Land is a heterogenous factor. Hence, land can be graded.

5. Land is the least mobile factor of production - Land is geographically immobile because
land of one region cannot be shifted to another region. Due to this reason, the price of land
rises in towns and cities. Land is mobile occupationally because the same land can be used
to produce various crops or it can be used for various purposes.

6. Land is permanent - Land is indestructible. The fertility of land may be destroyed by

atomic energy, but land remains and it is not perishable. It can recover its powers after a
period of time.

7. Land is a passive factor - Land is a passive factor of production unlike labour which is an
active factor. Land by itself does not produce goods. Land becomes productive only when
labour and capital work upon it.
8. Land gives diminishing returns - The returns from land are subject to the law of
diminishing returns. As more and more units of labour and capital are added to the same
piece of land, the total output increases but at a diminishing rate.
9. Derived demand - The demand for land is derived from the demand for the product it
produces.
10.Locational value - The value of land depends on its location. Lands in urban areas fetch
higher prices than lands in rural areas.

LABOUR

MEANING
Labour is a human factor in the process of production. Labour in economics refers to any
human effort which is mental or manual, which is paid for and which is directly aimed at
production. Labour implies any type of work whether physical or mental, skilled or unskilled,
undertaken by a person such as a factory worker, doctor or engineer to earn income by
creating utilities or adding values.

CHARACTERISTIC FEATURES

1. Labour is a human factor - Labour is a living factor which has likes, dislikes, feelings, etc.
Labour is both a producer as well as a consumer. It is not only a means of production but
also an end of production. Labour is provided by human beings who participate in productive
activity for earning their livelihood.

2. Labour is an active factor-Labour has to work on land and capital to make them
productive. Hence, while land and capital are passive factors of production, labour is an
active factor of production.

3. Labour is inseparable from labourer - Labour cannot be separated from the labourer as he
has to be physically present at the place of work. In case of land and capital, the factors can
be separated from its owners. Labourer sells his services and not himself to the employer.

4. Labour is a perishable factor of production - Labour cannot be stored for future use like
land or capital. If a day's labour is lost, it cannot be recovered. Unemployment is a waste of
manpower. Since labour is not storable, an individual worker has weak bargaining power.
Hence in the absence of trade unions, workers are exploited by paying low wages.

5. Labour is a heterogenous factor of production - Skill and efficiency differ from person to
person. Hence wages also differ. The productive efficiency of labour depends on a number
of factors like physique, education, intelligence, working conditions, wage rate, etc.

6. Labour is imperfectly mobile - Labour does not move with ease from one place to
another or from one occupation to another due to several factors like social
and environment, age bar, housing and transport problems, religion and transport problems,
etc.

7. Supply of labour is inelastic - Supply of labour is not very much responsive to demand.
The supply of labour depends not only on wages but also on other factors like working
conditions, perks, etc. The supply of labour cannot be quickly increased or decreased to
make changes in demand. For e.g. It would take time to educate a person as a doctor. The
supply of labour changes slowly.

8. Cost of labour cannot be exactly determined - The cost of producing labour cannot be
exactly determined as in the case of land or capital. Cost of labour can be roughly expressed
in terms of expenses incurred for rearing children, education, training, etc.

9. Labour has sociological characteristics - The employment of labour involves social

security and welfare measures like provident fund, gratuity, medical relief, pension, accident
insurance, job security, promotion, etc. An employer has to consider all these factors which
characterise the labour market.

10. Trade unionism - Workers may combine to form trade unions so as to bargain with their
employers and thereby secure higher wages and improve their conditions of work. There is
no such trade unionism in capital and land. Labour can strike and refuse to work.

11.Labour is a human capital - Public spending on labour such as investment in education,

health, training, etc. will improve the efficiency of labour. Hence, labour is referred to as
human capital.

The economic development of a country depends to a greater extent upon the size of the
labour force and the efficiency of labour.

CAPITAL

Capital refers to that part of wealth which is created by man for further production of goods
and services. Capital is a man-made factor of production.Capital is a produce means of
production
Capital goods are those goods which are used to produce other goods. Hence capital is
defined as produced means of further production.

'The term capital is used to describe all instruments of production which are deliberately
made by man to be used to carry on production in future.' - Stonier and Hague.

CHARACTERISTIC FEATURES

1. Capital is man - made-Capital is a man-made factor of production. It is produced by man

in order to produce other goods and services. It is a means of production. Capital is an
artificial resource as it is produced by man. The creation of capital requires human effort.

2. Capital is a stock - Capital is a stock of a producer's goods used to produce other

goods. Capital is a fund, a stock of wealth.
3. Capital is productive - Capital accelerates the pace of production. It increases the overall
productivity. It enables productive efficiency and enables large scale production.

4. Capital is elastic in supply - The supply of capital can be increased by increasing the rate
of savings and capital formation. Since capital is a man made factor of production, its supply
can be increased as and when the demand for it arises.
5. Capital is durable - Physical goods like machines, tools, buildings, etc. are durable.
They contribute to production for a long time although they depreciate over time.
6. Capital is mobile - Since capital is a non human factor of production, it is more mobile than
land and labour. Money capital us highly mobile, geographically and occupationally. Fixed
capital is mobile only if it has alternative uses.
7. Capital makes the production process round about - Capital goods satisfy our wants
indirectly as they contribute to the production of consumer goods which satisfy our wants
directly. The resources are first diverted to produce capital goods and then these capital
goods are used to produce consumer goods.
8. Capital goods have derived demand - Capital goods are demanded to produce
other goods. The demand for capital goods is derived from the demand for the goods which
it produces. For e.g. the demand for raw cotton is derived from the demand of cloth.
9. Capital involves social cost - The production of capital goods involves the sacrifice of
current consumption as the resources are diverted to the production of capital goods. This
sacrifice of current consumption by people is known as social cost.
10.All capital is wealth - Since capital has all the characteristics of wealth, I.e. utility,
scarcity, transferability and externality, it is regarded as wealth.

CAPITAL AND WEALTH

'All capital is wealth, but all wealth is not capital.'

All capital goods possess all attributes of wealth such as utility, scarcity, transferability and
externality. Hence all capital is wealth, but all wealth is not capital. Goods like gold and
diamond are wealth but they are not capital as they are not used in production process. All
wealth is not capital. Only that part of wealth which is used for further production is capital.
Wealth used as producer's goods is capital, but wealth used as consumer's goods is not
capital. For e.g. cotton used by a housewife to light a lamp is not capital but cotton used in a
textile mill for the production of yarn is capital.

Capital yields income. Wealth by itself does not yield any income. Only when wealth is used
as capital, it generates income. Wealth covers both consumer and producer goods. Capital
includes only producer's goods. Wealth is thus a wider term than capital.

• CLASSIFICATION OR TYPES

1. On the basis of ownership.

On the basis of ownership, capital is classified as:

Personal or private capital
Assets that are owned by private individuals or firms are known as private capital. For e.g.
buildings, shares, etc. owned by private individuals.
Public or social capital
Assets that are owned by the society as a whole or by government bodies, either central,
state or local are known as public capital. For e.g. public parks, railways, etc. By
nationalisation of any industry, private capital is converted to public capital.

National capital
The sum total of private and public capital is national capital.
2. On the basis of durability

On the basis of durability, capital is classified as:

Fixed or block capital Fixed capital refers to durable fixed capital goods like machinery, tools,
equipment, which are used again and again in the process of production. Fixed capital
remains fixed irrespective of the output in the short period. It has a longer life and is used up
slowly in the process of production. It is used indirectly in producing goods.
Circulating or working capital Circulating capital refers to goods which can be used only
once in the process of production. For e.g. raw material, fuel, power, etc. get exhausted after
one use. It is directly absorbed into finished goods. Circulating capital varies directly with the
output. It is used directly in producing goods.

3. On the basis of specificity in use On the basis of specificity in use, capital is classified as:

Sunk or specific capital

Capital that can be used only for a specific purpose is called sunk capital or specific capital.
It is called sunk capital because it will not fetch any reasonable price if the factory is shut
down. For e.g. road roller have no alternative use. The y are occupationally immobile.

• Floating capital or non specific capital

Capital that can be used for various purposes are known as floating or non specific capital.
For e.g. coal, electricity etc. Floating capital has alternative uses. It is professionally mobile.
Money capital is floating capital because it has multiple uses.

4. On the basis of nature: On the basis of nature, capital is classified as:

Real capital

Real capital refers to physical and tangible capital goods like machinery, raw

Money capital

shares, debenture, etc. are money capital. It is also known as financial capital. When
materials, factory building, transport vehicles etc. Real capital is expressed in terms of
money, it is called money capital. Money Is liquid.

ENTREPRENEUR OR ENTERPRISE

MEANING

The entrepreneur or enterprise refers to that factor of production which coordinates the other
factors I.e. land, labour, and capital, in such a way so as to minimise the cost of production,
and maximise the output and profits. The person who runs the enterprise is called the
entrepreneur. He directs all resources, makes all business decisions and policies, and brings
about efficiency in production. He shoulders all the responsibilities of the production process
and is the sole risk bearer. The entrepreneur is the pioneer, organiser, controller and risk
taker of the firm.

'An entrepreneur is the person who performs the dual function of risk taking and control.'-
Frank H. Knight

'Entrepreneur is associated with innovation.'-Schumpeter

QUALITIES OF AN ENTREPRENEUR

The entrepreneur is the captain of the industry and he must possess certain qualities.
Intelligence - An entrepreneur must be a man of vision, conceive new ideas and have a
sense of proportion and moderation.

Administration - An entrepreneur must be a good administrator and must get the work
done from the workers.

Knowledge - An entrepreneur must have general knowledge and complete information

about the processes involved in the production of the firm so as to make quick decisions and
avoid malpractices. He must have a quick grasp of technical matters too. Foresight - An
entrepreneur must have good judgement to anticipate future changes in demand patterns,
government policies, techniques of production etc.

Leadership - An entrepreneur should possess leadership qualities and must be a person of

action. He must not only plan business but execute it.

Responsibility-An entrepreneur must be prepared to face the risk and uncertainty of running
the enterprise. His firmness to deal with problems should be supported by a sympathetic
outlook towards his workers.

Other qualities - The entrepreneur must be form and strong willed so that his decisions can
Factor coordination - The entrepreneur coordinates the other factors like land, labour and
capital in the most optimum manner to minimise the cost and maximise the output.

Decision making - The entrepreneur plans and takes several decisions like what, how, how
much, when and where to produce, at what cost to produce, when, where and at what price
to sell, etc. Thus decision making is an important function of the entrepreneur.

Management activities - The entrepreneur supervises, manages, directs, regulates and

controls the activities of all factors of production. He chalks out a plan for his business and
determines his own business policy. He has to explore new markets from time to time and
increase his sales. The entrepreneur thus performs the important function of managing his
firm efficiently.

Distribution - The entrepreneur is the hiring factor as he provides employment to all other
factors. He distributes the rewards to the different factors l.e. rent to land, wages to labour,
and interest to capitalists etc.

Risk and uncertainty bearing functions

One of the most important functions of the entrepreneur is to shoulder the risks and
uncertainties involved in business. Professor Frank Knight classifies risks as:
Those risks which can be insured i.e. risks like floods, famines, fire etc. borne by the
insurance companies.
Those risks which cannot be insured - These risks are called uncertainties and no insurance
company can bear them. These are the risks due to changes in the market conditions,
government policies, technology etc. For bearing these uncertainties, the entrepreneur gets
a reward known as profits.be implemented. He should be able to win the confidence of his
workers.Factor coordination - The entrepreneur coordinates the other factors like land,
labour and capital in the most optimum manner to minimise the cost and maximise the risk.
Meaning and Definition of Macroeconomic
Definitions:

(1) "Macro economics is that branch of economics which considers the relationship between
large aggregates such as the volume of employment, total amount of savings, investment,
national income, etc."
- J. L. Hansen
(2) "Macro economics views the forest as a whole, independently of the individual trees
composing it."
- Alfred Marshall
(3) "Macro economics deals with the functioning of the economy as a whole."
Prof. Carl Shapiro
Features of Macroeconomic
(1) Income Theory:

A major task of macro economics is the determination of national income. It studies the
concept of national income, its different elements, methods of measurement and social
accounting. It explains the causes of fluctuations in the national income that lead to business
cycles i.e. inflation and deflation.

(2) Policy-Oriented:

Although macro economics is difficult and complicated, yet it tends to be more realistic
because the entire economy is taken into consideration. Macro economic analysis helps in
formulating suitable economic policies to promote economic growth, to generate
employment, to control inflation and deflation, etc.

(3) Interdependence:

Macro analysis takes into account interdependence between aggregate economic variables,
such as income, output, employment, investments, price level, etc.

Example: Changes in the level of investment will finally result into changes in the level of
income, level of output, employment and eventually the level of economic growth.
(4) Lumping Method:

Macro economics uses lumping method for the purpose of economic study. It is studying the
economy as a whole rather than in part. What is true of parts is not necessarily true of the
whole. Therefore, there is a need to have a lumping approach to deal with the problems of
the whole economy.

(3) Employment Theory:

Macro economics is also known as the theory of employment. It studies the various factors
determining the level of employment and the causes, extent and effects of unemployment.

(6) General Price Level:

General price level is the average of all prices of goods and services currently being
produced in the economy. Determination and changes in general price level are studied in
macro economics.

(7) Study of Aggregates:

Macro economics is the study of aggregates and not of individual economic units. It is

concerned with the aggregate concepts such as national income, aggregate demand,

aggregate savings, general price level, trade cycle, etc.

(8) Growth Models:

Macro economics studies various factors that contribute to economic growth and
development. It is useful in developing growth models. These growth models are used for
studying economic development.

Example: Mahalanobis growth model emphasised on basic heavy industries.

(9) General Equilibrium Analysis:

Macro economics is based on general equilibrium analysis as it is concerned with the

behaviour of aggregates and their interdependence. It deals with the behaviour of demand,
supply and prices in the whole economy
Scope of macroeconomics
(1) Theory of Income and Employment:

Macro economics explains the factors determining the level of national income, output and
employment and the causes responsible for their fluctuations. Theory of business cycles,
aggregate supply, aggregate demand, consumption function and investment function are
useful to understand how the level of income and employment is determined

(2) Theory of General Price Level and Inflation:

Macro economic analyses how the general price level is determined in the economy and
also explains the causes of its fluctuation. The serious economic problems like inflation and
deflation can be understood with the help of the study of general price levels.

(3) Theory of Growth and Development:

Macro economics consists of the theory of growth and development. It analyses the causes
of underdevelopment and poverty and provides strategies for accelerating economic growth
and development.

(4) Macro Theory of Distribution:

The macro theory of distribution deals with the determination of the relative share rewards of
various factors of production (rent, wages, interest and profit) in national income.

Importance of Macro Economics

• Functioning of an Economy
• Economic Fluctuations
National Income
Economic Development
• Performance of an Economy
• Study of Macro Economic Variables
• Level of Employment

(1) Functioning of an Economy:

Macro economics helps to understand the working of a complex economic system. It

describes how the economy functions as a whole and also helps to determine the level of
national income and employment.

(2) Economic Fluctuations:

The theory of economic fluctuations can be understood and built up with the help of macro
economics. It analyses the causes of fluctuations in income, output and employment and it
tries to control their severity on the economy.

(3) National Income:

It is not possible to formulate correct economic policies and evaluate the growth
performance of an economy without a study of national income. Macro economic analysis
highlights the importance of the study of national income and social accounts.
(4) Economic Development:

Macro economics study helps us to focus on the problems of underdeveloped and

developing countries such as poverty, unemployment, inequality of income and wealth etc. It
also suggests important steps to promote economic growth and welfare in such countries.

(5) Performance of an Economy:

Macro economics helps us to understand the growth performance of an economy. National

Income estimates are used to measure the performance of an economy over different time
periods. It helps us to compare the production of goods and services in one period with that
of the other period.
(6) Study of Macro Economic Variables:

The study of aggregates (macro economic variables) such as aggregate income, aggregate
consumption, general price level, etc. is important to understand the working of an economy
and to draw correct conclusions. These macro economic variables can be studied well with
the help of macro economics.

(7) Level of Employment:

Macro economics through its various tools and techniques helps us to analyse the general
level of employment and output in an economy.
NATIONAL INCOME

INTRODUCTION:

National income is one of the most important macroeconomic variable that represents the
economy as a 'whole.' The level of national income determines the level of all other macro
variables - aggregate consumption, savings, investment, employment and the price level.
Therefore, a systematic and reliable estimate of national income is indispensable for the
study of the economy as a whole.

National income is the flow of goods and services in the country during a year. It is the
aggregate money value of all final goods and services produced in a country during one
year.

The importance of national income accounting lies in the fact that the performance and
behaviour and an economy are studied on the performance of its economic variable i.e. –
National Income.

National income data is used for measuring the standard of living and economic welfare of
its people, formulation of economic policies for the management of the economy, and
making international comparisons about the status of the economy. In India, the National
Income estimation has been done by the Central Statistical Organisation (CSO) since 1955.

MEANING AND DEFINITION:

MEANING: In the general sense of the term, 'National Income' refers to the total money
value of all final goods and services produced in the country during a period of time, usually
one year. It includes net income from abroad, but does not include depreciation.

DEFINITIONS:

ALFRED MARSHALL: According to Marshall, "The labour and capital of a country acting on

its natural resources produce annually, a certain net aggregate of commodities, material and
immaterial, including services of all kind." It is the true net annual income or national
dividend.
IRVING FISHER: According to Irving Fisher, "The term National dividend or income consists
solely of services as received by ultimate consumers whether from their material or from
their human environments." According to Fisher, the National Income of a country is
determined not by its annual production but by its annual consumption.

NATIONAL INCOME COMMITTEE: According to the National Income Committee, "A

National Income estimate measures the volume of commodities and services turned out
during a given period counted without duplication." Here, the National Income is calculated
without double counting.

FEATURES OF NATIONAL INCOME:

1. Macro-economic concept - National income is a macroeconomic concept ass it is the

aggregate income of the country. It includes the value of goods and services produced in the
different sectors of the economy. National income data present the picture of the
performance of the economy as a whole during a given period of time.

2. Flow concept - National income is the flow of goods and services produced in the
economy during a year. The flow of goods takes place when there is production activity in
the economy. It generates flow of income in the form of rent, wages, interest and profit.

3. It is the money valuation of goods - National income is always expressed in money terms.
Only those goods and services which are exchanged for money are included. Unpaid
services like the service of a housewife should not be included.

4. It avoids double counting - While estimating national income, we include only the

value of final goods and services and not the intermediate goods or raw materials to avoid
double counting. 5. Transfer income is not included - Transfer income in the form of old age
pension,

lottery prize, scholarship etc. are not to be included as they are received without

contributing anything to the national income.

6. It includes net income from abroad - While estimating national income, net income from
abroad i.e. the difference between the exports and imports (X-M) as well as net income from
foreign investment should be included. (R-P)

7. National income is the net aggregate value - National income includes the net value of
goods and services produced. It does not include depreciation cost. Depreciation is wear
and tear of capital goods due to their continuous use.

8. National income is calculated at current and constant price - National income when
calculated at the prevailing market price is called National income at current price, and when
it is calculated at the base year price, it is called National Income at constant price.
9. National income is calculated for one year - National income is always expressed with
reference to time period I.e. generally, one financial year from 1st April to 31st March of
every year.
S METHODS OF MEASURING NATIONAL INCOME (N.I.)

There are three methods of measuring National Income

1. Product method or Output Method

2. Factor Cost Method or Income Method

3. Expenditure Method or Total Outlay Method

Any of the three methods can be adopted to measure National Income of a country because
National Income can be viewed from three angles i.e. from production side, distribution or
income side and expenditure. This is known as the triple identity of national income.

i.e. NI = NP = NE

NP = National Product

NI = National Income

NE = National Expenditure

In India, national income accounting is done through a combination of output and income
method.
ECONOMIC GROWTH

MEANING AND DEFINITION:

Economic growth refers to an increase in the real national income of the country and real
national income means the total output of all final goods and services produced in a country,
rather than money. Hence, it is a quantitative concept as it mainly refers to size and quantity.

The term economic growth is defined by Professor Miller in the following words, 'Economic
growth has been defined as the process whereby the per capita real income of a country
increases over a longer period of time.'

In the words of Professor Salvatore, 'The process whereby a country's real per capita gross
national product or income increases over a sustained period of time through continuing
increase in per capita productivity.'

Economic growth is generally measured in terms of Gross Domestic Product at Factor Cost
at constant prices (GDPFC). GDPFC at constant prices implies the selection of a base year
and this is done to eliminate the effects of inflation. The following formula is generally used
to calculate economic growth. The growth rate for a particular time period 't' can be
calculated as follows:
Gt- Economic Growth

Gt= Qt -Qt-1/Qt-1

Here,

Gt- Growth rate in time period 't'.

Qt-GDPFC In Period 't'.

Qt-1-GDPFC in period 't-1'.

• FEATURES OF ECONOMIC GROWTH

‫اد‬

1. Increase in per capita real income - If the rate of increase in real national income is
greater than the rate of growth of population, per capita real national income increases and
this is an important feature of economic growth.

2. Long term process - Economic growth is a long term process i.e. production should

continuously increase over a long period of time." 3. Continuous process - There should be
continuous increase in the production of

goods and services. 4. Quantitative concept - Economic growth is considered in terms of

increase in the quantity of output produced. It does not consider the quality of goods, taste of
consumers, etc.

5. No solution to the problem - The concept of economic growth does not solve the problems
of poverty, inequality, unemployment etc.

INDICATORS OF ECONOMIC GROWTH

1. Increase in Gross Domestic Product (GDP) - GDP is the money value of all goods and
services produced within the geographical boundaries of the country during a year. When it
increases continuously over a long period of time, it indicates economic growth of a country.
2. Increase in Per Capita Income (PCI) - PCI is the average income per head of
population in one year. It is obtained by dividing the national income of a country
during a year by the total population of the country. Thus, PCI =National income/Total
population.
3. Increase in Per Capita Consumption (PCC) - PCC is the average private consumption
expenditure in a country in one year. When the total private consumption expenditure of a
country is divided by the total population, we get PCC. Thus, PCC = National Expenditure
/Total Population

ECONOMIC DEVELOPMENT
MEANING AND DEFINITION

Economic development means economic growth plus progressive changes in certain

economic variables which determine the well-being of the people e.g. removal of mass
poverty, reduction in unemployment, higher literacy rate etc. Hence, it is a qualitative
concept.

According to Professor Peterson, 'Economic development is a process whereby the real per
capita income and economic welfare increases over a long period of time.'

In the words of Professor M.P.Todaro, 'Economic development is a multi-dimensional

process involving major changes in social structures, popular attitudes and national
institutions as well as the acceleration of economic growth, the reduction of inequality and
eradication of absolute poverty.
Theabove definitions imply that development indicates a rise in real per capita income. Real
per capita income is calculated as follows:

Real per capita income = Real National Income /Population

FEATURES OF ECONOMIC DEVELOPMENT 1. Qualitative concept - Economic

development is related to the qualitative changes in goods, wants, reduction in poverty,
better level of living, more employment, etc.
2. Sectoral shift - Economic development takes place only when there is a shift of the
working population from the agricultural sector to the industrial and service sector.
3. Structural transformation - Economic development takes place when the share of
agricultural sector to national income falls and that of industrial and service sector
increases due to better skills and use of machinery.
4. Public Participation - Economic development takes place when more people in a country
cooperate and take part in the process of development.
5. Long period - When the country's output continues to increase over a long period of time
along with structural changes, there is said to be economic development of that country.
6. Economic and non-economic factors - Economic growth involves only economic indicators
while economic development involves both economic and non-economic factors. Economic
factors are removal of mass poverty, increase in literacy rate, fall in death rate, more skilled
workers, better infrastructure, etc. and non-economic factors are political freedom, stable
governance, etc.
7. Increase in Real National Income - If the real national income i.e. total output of goods
and services increases, there is said to be economic development of the country.

INDICATORS OF ECONOMIC DEVELOPMENT

1. Industrial Progress - Industrial progress is a very important indicator of economic

development. It helps to increase the national output and per capita income in the country.

2. Structural transformation - Structural transformation means better roads, water supply,

electricity, healthcare facilities, educational facilities, transport and communication, etc. All
these changes lead to urbanization and hence, economic development.
3. Productivity per hectare of land - A rise in productivity per hectare of land over a longer
period of timeis an indicator of economic development.
4.Per capita income-Real PCI ie the average income of the people in a country is a more
preferable indicator of economic development as compared to real national income as it
indicates the welfare of the country. It is obtained with the help of the following formula:PCI=
National income/Total population
5. Per capita consumption (PCC) - PCC indicates the average consumption of goods and
services by the people. It is obtained by dividing the total consumption expenditure by the
population of the country. A high PCC rate indicates a high standard of living and is
therefore, an important indicator of economic development.

6. Gross national product (GNP) - A rise in the real national income of the country over a
long period of time means higher economic growth. Since growth is essential for
development, GNP is an indicator of economic development.
7. Capital formation - capital formation means conversion of savings into physical, durable
assets. Thus, higher the capital formation, higher the economic development.
8. Qualitative entrepreneurship - The quality of the leadership of the entrepreneur, i.e.
one of the four factors of production indicates the growth of the enterprise and thus,
economic development. 9. Physical quality of life index (PQLI) - PQLI refers to the overall
well-being of the people which depends upon life expectancy, literacy rate and infant
mortality rate.

PQLI = LEI+BLI+IMI/3

Where, LEI-Life Expectancy Index

BLI-Basic Literacy Index
IMI-Infant Mortality Index

10.Human Development Index (HDI)- HDI refers to a process of enlarging people's choices
and well-being and is an average of life expectancy, educational attainment, and GDP per
capita (standard of living). It was formulated by the United Nations' Development Programme
in 1990.

Literacy rate or educational attainment index =2/3 ALR +1/3CER

Where ALR =Adult Literacy Rate and CER = Combined enrolment ratio
CER = Number of students enrolled for education / total population

HDI =LEI+EAI+SLI /3
where,
EAI - Educational attainment index
SLI-Standard of living index
Basic Concepts of Macro Economics:

(a) Saving: It is that part of the income which is set aside to satisfy the future needs by
foregoing current consumption.
(b) Investment: In an economic sense, an investment refers to creation of capital assets
through mobilisation of savings.

(c) Trade Cycles: Trade cycles are fluctuations in business. They are ups and downs in th
overall economic activities. Ups and downs means fluctuations caused by inflation and
depression respectively.