AEC 102 FUNDAMENTALS OF AGRICULTURAL ECONOMICS (1+1)

PRACTICAL MANUAL CUM RECORD

DEPARTMENT OF AGRICULTURAL ECONOMICS

CENTRE FOR AGRICULTURAL AND RURAL DEVELOPMENT STUDIES
TAMIL NADU AGRICULTURAL UNIVERSITY
COIMBATORE -641 003

2023

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2
 TAMIL NADU AGRICULTURAL UNIVERSITY

COIMBATORE - 641 003

Certified that this is the bonafide record of work done by

Mr./Selvi.........................................................................I.D.No.............................
of the .................................... B.Sc. (Hons.) Agriculture Degree Programme for
the course AEC 102. Fundamentals of Agricultural Economics (1+1) during the
....................semester of the year..........................

Course Teacher External Examiner

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INDEX
Name of the Student : Batch:
I.D.No. :
Initial of
Date of
Ex.No. Date Title Course
submission
Teacher
1 Law of Diminishing Marginal Utility
2 Law of Equi-Marginal Utility
Indifference Curve Analysis – Properties,
3
budget line and consumer equilibrium
Individual and Market Demand -
4 Graphical Derivation of Individual and
Market Demand
Measurement of Point and Arc Elasticities
5 of Demand - Own Price, Income and Cross
Price Elasticities of Demand
6 Estimation of Consumer Surplus

Law of Diminishing Marginal Returns:

7
Relationship Among TPP, APP and MPP
Cost Concepts and Graphical Derivation
8
of Cost Curves

9 Estimation of Total Revenue and Profit

10 Estimation of Producer Surplus

11 Supply: Estimation of Supply Elasticity

Exchange : Market Structure and Price
12
Determination
Approaches to Computation of National
Income – Analysis of Trends in National
13
Income - Study of Structural Changes in
the Economy
Estimation of Growth Rate of Population
14
and Food Grain Production

15 Money: Quantity Theory of Money

Measures of Standard of Living and

Human Development : Human
16
Development Index – Physical Quality of
Life Index – Gender Development Index
17 Practical Examination

4
Ex.No.1 LAW OF DIMINISHING MARGINAL UTILITY
Date:

1. Law of Diminishing Marginal Utility

Utility refers to the amount of satisfaction a person gets from consumption of a certain
item. In simplest form, want satisfying power of a commodity is called utility. As we know,
by marginal we mean, additional, the marginal utility refers to the addition made to the total
utility, we get after consuming one more unit of the commodity. This law states that as the
amount consumed of a commodity increases, the utility derived by the consumer from the
additional unit, i.e. marginal utility goes on decreasing. The law of diminishing marginal
utility explains the downward sloping demand curve.
Definition:- According to Marshall, “The additional benefit which a person derives from a
given increase of his stock of a thing diminishes with every increase in the stock that he
already has”
Assumptions
• Utility can be absolutely or cardinally measured
• The units of the commodity are homogeneous, i.e., they are alike in size and quality.
• The tastes of the consumers remain unchanged during the process of consumption.
• There is no time gap between consumption of the two units of the commodity.
• There should be no change in the price of the
substitute goods
• Money income of the consumer remains the
same.
Explanation
As more and more quantity of a commodity is
consumed, the intensity of desire decreases and also the
utility derived from the additional unit of the
commodity consumed declines.
Suppose a person eats Bread and 1st unit of
bread gives him maximum satisfaction. When he eats
2nd bread his total satisfaction would increase. But the
utility added by 2nd bread (MU) is less than the 1st
bread. His total utility and marginal utility can be put in

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the form of a following schedule.
• Here, from the MU curve we
Pieces of bread Total utility Marginal utility
(Qx) (TUx) (MUx) can see that MU is declining

0 0 … as consumer consumes more

of the commodity.
1 70 70
• When TU is maximum, MU
2 110 40
is Zero.
3 130 20
• After that, TU starts
4 140 10
declining and MU becomes
5 145 5
negative.
6 145 0
7 140 -5
Total utility is the total satisfaction or amount of utility derived from the consumption of a
given quantity of goods and services by the consumer. Measured in imaginary units called
utils.
Marginal utility is the change in the total utility resulting from one unit change in the
consumption of a commodity (or) it is the additional satisfaction resulting from an additional
unit of consumption.
MUx = TUx / Qx
Equilibrium Condition: The aim of the consumer is assumed that he should get as much
higher satisfaction as possible from his purchases. Thus, the rational behaviour of the
consumer is to get maximum total utility.
If MU from the commodity is greater than the price, he will buy more of the
commodity. If MU from the commodity is lesser than the price, he will buy less of the
commodity. If the MU of the commodity is equal to the price of the commodity, i.e., MUx =
Px, he will stop his purchase of the commodity. Here, MU is measured in terms of money. If
the price of bread is Re.5 per piece, at this point, consumer is said to be in equilibrium i.e., he
attains maximum satisfaction where MU = Price i.e 5 at which TU=145 and able to buy 5
units of bread.
Exceptions
• Money
• Hobbies and collection of rare things (eg. stamp collection)
• Listening to Music

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Solved Exercises
Question No.1. For the given problem, i) Calculate the marginal utility (MU) for the given total
utility derived by a consumer, ii) draw the TU and MU in graph sheet, iii) Identify the maximum
satisfaction of consumption level and iv) Identify the Consumer Equilibrium if Px = Rs. 2 per unit of
lemon.
Unit (No.) 0 1 2 3 4 5 6 7 8 9 10
Lemon (TUx) 0 13 23 31 37 41 43 44 44 43 40

Solution:
i) Find the MUx for each unit of consumption of lemon by Tabular method
Quantity (Qx) 0 1 2 3 4 5 6 7 8 9 10
Total Utility (TUx) 0 13 23 31 37 41 43 44 44 43 40
Qx 0 1 1 1 1 1 1 1 1 1 1
TUx 0 13 10 8 6 4 2 1 0 -1 -3
MUx 0 13 10 8 6 4 2 1 0 -1 -3
Px 2 2 2 2 2 2 2 2 2 2 2

ii) Graphical representation of TU and MU

LDMU
50

40

30

20

10

0
0 2 4 6 8 10 12
Lemon (TU) MU
-10

iii) Maximum satisfaction of the level of the consumer (TU) is attained when MU =0 .
Therefore, TU = 44 at which MU=0
iv) Consumer Equilibrium is at MUx =Px and hence the maximum TU is 43 and the
consumption of lemon is 6 at Px =Rs.2 (MU=2)
Interpretation: Consumer Equilibrium is attained when it satisfies the criteria MU =Price, at
which, the maximum satisfaction was 43 (TU) and quantity consumed was 6 Nos.

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Exercises
1. According to the below table, which of the four people have utility schedules characterized
by the law of diminishing marginal utility?
Quantity per week Total utility
Ram Sridhar Krish Shobhana
0 0 0 0 0
1 50 1000 60 60
2 99 1900 120 130
3 147 2700 180 220
4 194 3400 240 310
5 240 4000 300 425
6 285 4500 360 575
7 329 4900 420 900
8 372 5200 480 1275
9 414 5400 540 1770

2. Calculate the marginal utility for the given total utility derived by a consumer and draw the TU
and MU in graph sheet. Identify maximum satisfaction of consumption level.

Unit Pomegranate Unit Mango

1 17 1 12
2 31 2 22
3 42 3 30
4 53 4 36
5 55 5 40
6 58 6 40
7 58 7 36
8 53
9 50
10 46

3. For the problem two, identify the equilibrium consumption, when price of the Pomegranate
and mango are at Rs.3 and Rs. 4, respectively .

8
Ex.No.2 LAW OF EQUI-MARGINAL UTILITY
Date:
Law of Equi-marginal Utility
The Law of equi-marginal utility is one of the most fundamental principles of
economics. Often this is also called Law of Substitution or Law of Maximum Satisfaction.
As we all know that the human wants are unlimited whereas the means to achieve or
satisfy all these wants are only limited. Hence, it becomes essential for a consumer to
prioritize his wants as most urgent wants which need to be fulfilled first. Also the consumer
has to choose right quantities of different commodities so that his utility is maximized. The
law of equi-marginal utility helps us to understand how a consumer maximizes his level of
satisfaction or utility from different commodities with a given income.

Definition: Alfred Marshall stated this law as follows: “If a person has a thing which can be
put to several uses, he will distribute it among these uses in such a way that it has the same
marginal utility in all”.
According to this law, a consumer distributes a given quantity of money among its
various uses in such a manner that its marginal utility in all uses is equal. Such a distribution
of the money income among different commodities will secure the consumer the maximum
satisfaction.
Assumptions
• Utility can be absolutely or cardinally measured
• The units of the commodity are homogeneous, i.e., they are alike in size and quality.
• The tastes of the consumers remain unchanged during the process of consumption.
• There is no time gap between consumption of the two units of the commodity.
• There should be no change in the price of the substitute goods
• Money income of the consumer remains the same.
Explanations
According to this law, a consumer substitutes some units of the commodity of greater
utility tor some units of the commodity of less utility. The result of this substitution will be
that the marginal utility of the former will fall and that of the latter will rise, till the two
marginal utilities are equalized. That is why the law is also called the Law of Substitution or
the Law of equi-marginal utility.

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Consumer’s equilibrium: Consumer is in equilibrium position when marginal utility of
money expenditure on each good is the same. Now, the marginal utility of money expenditure
on a good (MUEx) is equal to the marginal utility of a good (MUx) divided by the price of
the good (Px).
The consumer is in equilibrium, in respect of the two goods, X and Y, when
MUx / Px = MUy/Py
The question is how far consumer goes on purchasing the goods that he wants. This is
determined by the size of his money income. With a given income, a rupee has a certain
utility for him; this utility is the marginal utility of money (MUm) to him. Since the law of
diminishing marginal utility applies to money income also, the greater the size of his money
income, the lesser the marginal utility of money to him and vice versa. Now, the consumer
will go on purchasing goods till the marginal utility of money expenditure on each good
becomes equal to the marginal utility of money to him. Thus, the consumer will be in
equilibrium when the following equation holds good:
MUx MUy
= = MUm
Px Py

Solved Exercise
Question No.1: Given the total budget of Rs.20 with the marginal utility derived in each of
the commodity say Mango and Orange, identify the best combination of purchase?
Unit (Qx) MU of Mango (MUx) MU of Orange (MUy)
1 33 36
2 30 32
3 27 28
4 24 24
5 21 20
6 18 16
Price (Rs./unit) Px = 3 Py = 4

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Step 1: Find the MUx / Px and MUy / Py for two goods with a given marginal utility of two
goods and its prices.
Step 2: Find the Consumer Equilibrium MUx / Px = MUy / Py
In this example, MUx / Px = MUy / Py is equal in four different combinations. i.e. in all the
four different combinations, consumer gets equal satisfaction.
Combination 1 : 3 units of mango, 1 unit of orange
Combination 2 : 4 units of mango, 2 units of orange
Combination 3 : 5 units of mango, 3 units of orange
Combination 4 : 6 units of mango, 4 units of orange
Step 3: Find the best combination of goods which gives same satisfaction with a given Total
budget of Rs.20.
Q MUx MUy MUx /Px MUy /Py MUx /Px = MUy /Py Qx Qy Budget (Rs.)
0 0 0 0 0
1 33 36 11 9 9 3 1 3*3 +1*4= 13
2 30 32 10 8 8 4 2 4*3 +2*4=20
3 27 28 9 7 7 5 3 5*3 +3*4=27
4 24 24 8 6 6 6 4 6*3 +4*4=34
5 21 20 7 5
6 18 16 6 4
Price/unit 3 4

The best combination of purchase will be 4 units of mango and 2 units of orange at which
MUx /Px = MUy /Py and also budget is exhausted fully. But it is not found in other
combinations.
Exercises
1. Given the total budget with the marginal utility derived in each of the commodity, identify
the best combination of purchase for each team?
Budget Rs.33 Budget Rs.27
Mango Apple Apple Orange
44 63 72 48
36 56 60 44
28 49 54 40
24 35 42 24
20 28 30 20
12 14 18 16
3 4 3 4

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2. Let us assume that Ram intends to purchase two commodities in market viz., tea and
coffee and the marginal utility is given below. Each is priced at Rs.10. He has Rs. 50.
Guide him in his purchase decisions with law of equi -marginal utility.
S.No. MU of tea MU of coffee
1 10 12
2 8 10
3 6 8
4 4 6
5 2 3

3. Let us assume there are only three commodities available in the market, A, B and C. Also
assume that Tom has a daily income of only Rs.15 to spend and that he can exactly order
his utility preference for each of the three products. Product A costs Rs.1 per unit, Product
B costs Rs.3 per unit and Product C costs Rs.5. Note that diminishing marginal utility per
rupee of expenditure sets in immediately for each of the three products.
No. Marginal utility A Marginal utility B Marginal utility C
1 20 36 40
2 15 24 35
3 11 15 30
4 8 9 25
5 6 6 20
4. Consider the following data showing Raju’s total utility from the consumption of two
goods: Drama show and IPL match. Assume the price of drama show ticketis Rs.50 (Raju
gets his tickets early), the price of IPL cricket ticket is Rs.100 (Raju likes to sit in the IPL),
and Rs.300 to spend on the two goods.

No. of drama U MU No. of IPL U MU

1 1,000 1000 1 1,000 1000
2 1,800 800 2 1,800 800
3 2,500 700 3 2,500 700
4 3,000 500 4 3,000 500
5 3,200 200 5 3,200 200
a. Assuming that he wishes to maximize his utility, what combination of drama shows
and IPL matches will Raju purchase? Carefully justify your answer.
b. If the price of IPL doubles, what will happen to Raju’s purchase of the two goods?
Explain.

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Ex.No.3 INDIFFERENCE CURVE ANALYSIS – PROPERTIES,
Date: BUDGET LINE AND CONSUMER EQUILIBRIUM

Modern economists disregarded the concept of ‘cardinal measure of utility’. They were of the
opinion that utility is a psychological phenomenon and it is next to impossible to measure the
utility in absolute terms. According to them, a consumer can rank various combinations of
goods and services in order of his preference. For example, if a consumer consumes two
goods, Mango and Guava, then he can indicate:
• Whether he prefers mango over guava; or
• Whether he prefers guava over mango; or
• Whether he is indifferent between mango and guava, i.e. both are equally preferable
and both of them give him same level of satisfaction.

This approach does not use cardinal values like 1, 2, 3, 4, etc. Rather, it makes use of ordinal
numbers like 1st, 2nd, 3rd, 4th, etc. which can be used only for ranking. It means, if the
consumer likes mango more than guava, then he will give 1st rank to mango and 2nd rank to
guava. Such a method of ranking the preferences is known as ‘ordinal utility approach’.

Under ordinal utility approach, the indifference curves are used to determine the consumer’s
equilibrium.
What is an indifference curve?
When a consumer consumes different goods and services, then there are some combinations,
which give him exactly the same level of total satisfaction. The graphical representation of
such combinations is termed as indifference curve. Thus, an indifference curve refers to
“locus of all possible combinations of two commodities which give the consumer same
level of satisfaction or utility”. The indifference curve is also called iso-utility curve.

Let us understand this with the help of following indifference schedule, which shows all the
combinations giving equal satisfaction to the consumer.
Indifference Schedule
Combination Mango Guava

I 1 15
II 2 10
III 3 6
IV 4 3
V 5 1

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 As seen in the schedule, consumer is indifferent between five combinations of mango
and guava. Combination ‘I’ (1M + 15G) gives the same utility as (2M + 10G), (3M + 6G)
and so on. When these combinations are represented graphically and joined together, we get
an indifference curve ‘IC1’.
In the diagram, units of mangoes are measured along the X-axis and guavas on the Y-
axis. All points (I, II, III, IV and V) on the curve show different combinations of mangoes
and guavas. These points are joined with the help of a smooth curve, known as indifference
curve (IC1). An indifference curve is the locus of all the points, representing different
combinations of the two commodities that are equally satisfactory to the consumer.
Every point on IC1, represents an equal amount of satisfaction to the consumer. So,
the consumer is said to be indifferent between the combinations located on Indifference
Curve ‘IC1’. The combinations I, II, III, IV and V give equal satisfaction to the consumer and
therefore he is indifferent among them. These combinations are together known as
‘Indifference Set’.
Assumptions
The various assumptions of indifference curve are:
1. Two commodities:
It is assumed that the consumer has a fixed amount of money, whole of which is to be
spent on the two goods, given prices of both the goods.
2. Non Satiety
The consumer is assumed to be not reached the point of saturation. Consumer always
prefers more of both commodities, i.e. he always tries to move to a higher indifference curve
to get higher and higher satisfaction.
3. Ordinal Utility
Consumer can rank his preferences on the basis of the satisfaction from each bundle
of goods.
4. Diminishing marginal rate of substitution
Indifference curve analysis assumes diminishing marginal rate of substitution. Due to
this assumption, an indifference curve is convex to the origin.
5. Rational Consumer
The consumer is assumed to behave in a rational manner, i.e., he aims to maximize
his total utility with the given level of income and set of prices.

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Properties
1. Indifference curves are always convex to the origin
An indifference curve is convex to the origin because of diminishing MRS. MRS
declines continuously because of the law of diminishing marginal utility. When the consumer
consumes more and more of mangoes, his marginal utility from mangoes keeps on declining
and he is willing to give up less and less of guava for each mango. Therefore, indifference
curves are convex to the origin. It must be noted that MRS indicates the slope of indifference
curve.
2. Indifference curve slope downwards
Let a consumer consumes more of one good, he must consume less of the other good.
It happens because if the consumer decides to have more units of one good (say mango), he
will have to reduce the number of units of another good (say guava), so that total utility
remains the same. Hence, substitution between two commodities takes place leading to
downward sloping of indifference curves.
3. Higher Indifference curves represent higher levels of satisfaction
Higher indifference curve represents large bundle of goods, which means more utility.
4. Indifference curves can never intersect each other
As two indifference curves cannot represent the same level of satisfaction, they
cannot intersect each other. It means, only one indifference curve will pass through a given
point on an indifference map. Therefore, two indifference curves cannot intersect each other.

Budget Line: The budget line shows all those combinations of two goods which the
consumer can buy by spending his given money income on the two goods at their given
prices. Suppose that a consumer has Rs.50 to spend on goods, Viz., mango and guava.
Let the prices of goods mango and guava be Rs.10 per
unit and Rs. 5 per unit respectively. If he spends his
Guava

Budget Line
whole income (Rs.50) on mango, he would buy 5 units of
mango, and if he spends his whole income on guava, he
would buy 10 units of guava. If a straight line joining 5
Mango units of mango and 10 units of guava is drawn, we get
what is called the price line or budget line.
Consumer’s Equilibrium: The consumer reaches equilibrium position i.e., attains maximum
satisfaction at the point of tangency between the indifference curve and the budget line. This

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 indifference curve is of the highest order in the consumer’s scale of preference within his
reach.
At equilibrium point (e), the slopes of the
Price Line
indifference curve and the price line are
P
R same. Slope of the indifference curve
shows the marginal rate of substitution of
Guava (G)

e
IC mango for guava (MRSxy), while the slope
N 4
IC3 of the price line indicates the ratio between
IC the prices of two goods
2IC
S 1
PM
i.e
0 M L PG

Mango (M)
Thus as point ‘e’, the consumer is I n equilibrium, i.e.,

At the point R, the MRSMG is greater than the given price ratio. Hence, the consumer
will substitute mango for guava and will come down along the price line PL. He will continue
to do so till the MRSMG is equal to the price ratio, i.e., the indifference curve becomes tangent

to the given price line, PL. At the point S, the MRSMG is less than the given price ratio.

Therefore, it will be to the advantages of the consumer to substitute guava for good mango
and accordingly move up along the price line (PL) till the MRSMG rises and becomes equal

to the given price ratio.

Solved Exercises
Question 1: Graphically find the Least Cost Combination (LCC) for the two commodities
with the available budget of Rs. 16. Px =Rs.2 and Py= Rs.1. Draw budget line and Iso Quant.
Solution:
PX1 * X1 + PX2 * X2 = 16
If X1 =0 ; X2 =16
If X2 = 0 ; X1 = 8
Budget line = 8X1 , 16 X2

X1 3 4 5 6 7 8
X2 12 8 6.3 5 4.4 4

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Draw Indifference curve using X1 and X2
LCC is the tangency of the budget line and indifference curve. Here, the LCC is at 4X1 and
8X2 which is the best combination of goods X1 and X2.

Exercise:

1. Briefly explain what an indifference curve is and how it can be graphically derived?

2. What is the Marginal Rate of Substitution? What information does it convey?

3. Explains the concept of perfect substitute, and how it affects the shape of an indifference
curve?

4. How will a consumer’s budget constraint be affected if his income increases permanently?

5. How will a consumer’s budget constraint be affected if the price of good X increases?

6. Can indifference curves cross? Why? (Use graphical explanation.)

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Problem
1. a. Plot three indifference curves for a consumer
Indifference curve I Indifference curve II Indifference curve III
Qx Qy Qx Qy Qx Qy
1 10 3 10 5 12
2 5 4 7 6 9
3 3 5 5 7 7
4 2.3 6 4.2 8 6.2
5 1.7 7 3.5 9 5.5
6 1.2 8 3.2 10 5.2
7 0.8 9 3 11 5
8 0.5 10 2.9 12 4.9
9 0.3
10 0.2
b. Given Px and Py= Rs.1 and consumer’s income is Rs.10, draw budget line
c. Find out the equilibrium of the consumer.
2. a. Plot four indifference curves for a consumer
Indifference curve I Indifference curve III Indifference curve IV
Qx Qy Qx Qy Qx Qy
2 13 5 12 7 12
3 6 5.5 9 8 9
4 4.5 6 8.3 9 7
5 3.5 7 7 10 6.3
6 3 8 6 11 5.7
7 2.7 9 5.4 12 5.3
b. Given Px =Rs.2 and Py= Rs.1 and consumer’s income is Rs.16, draw budget line
c. Find out the equilibrium of the consumer.

3. Considering given data set, representing different combinations of two commodities

which give same level of satisfaction. Note the price and allowable budget to the
consumer:
1. Draw the indifference curve with given combinations of commodities
2. Graphically derive the budget line
3. Identify the consumer equilibrium using IC approach with given price (last row) and
Budget
4. Find the new equilibrium when price of the first commodity increases by 20 %
Budget =Rs. 75 Budget Rs.600
Combination Mango Orange Rice Atta
I 1 20 40 22
II 2 15 48 15
III 3 12 52 12
IV 4 10 60 10
V 5 9 68 9
VI .. .. .. ..
Price Rs./unit 10 5 30 40

18
Ex.No.4 INDIVIDUAL AND MARKET DEMAND – GRAPHICAL
Date: DERIVATION OF INDIVIDUAL AND MARKET DEMAND
Demand Schedule
The demand is the quantity of goods and services that can be desired and purchased
by a person at a particular price, place and time. The demand of one person is called
individual demand and demand of many persons is known as market demand.
The demand schedule shows the relationship between the quantity demanded of a
commodity and its price.
Individual demand schedule
An individual’s demand schedule is a list of various quantities of a commodity, which
an individual consumer purchases at different (alternative) prices in the market at a given
Y D
time.
Individual demand schedule
5
Price in Rupees Demand in Kilograms 4
5 5
Price

3
4 10
3 15 2
2 20 D

X
0 5 10 15 20
Quantity
The curve, which shows the relationship between the price of a commodity and the
amount of that commodity the consumer wishes to purchase, is called demand curve. The
individual demand curve slopes down from left to right.
Market demand schedule
The market demand schedule means ‘quantities of given commodity which all
consumers want to buy at all possible prices at a given point of time’. The demand schedule
of all individuals can be added up to find out market demand schedule. The following table
shows the market demand schedule.
Price in Demand of Demand of Demand of Market demand
Rupees individuals ‘A’ individual ‘B’ individual ‘C’ (A+B+C)
5 20 30 50 100
4 40 60 100 200
3 60 90 150 300
2 80 120 200 400

19
 Y
D
The market demand schedule can be presented
5
graphically. The demand curve shows the
4
maximum quantities per unit of time that all
Prices

3
consumers buy at various prices.
2
The diagram shows that when price is 5 rupees
D
0 D
D X the market demand is 100 kilograms. When price
100 200 300 400 D
Demand is 4 rupees the demand is 200 kilograms. When
price is fixed at 3 rupees the demand is 300
kilograms. There is increase in demand to 400 kilograms when price is 2 rupees. It means that
there is inverse relationship between price and quantity demanded for goods.

Solved Exercise
Draw the demand curve for the following
Banana demand per week
Price (Rs. per Banana)
(Number)
9 0.5
8 1
6 2
4 3
2 4

Inference: Demand curve is negative sloping. As the price of the commodity increases, the
quantity demanded decreases

20
Exercise
1. Draw the demand curve for Ram

Price (Rs. per Banana) Banana demand per week (Number)

0.50 9
1.00 8
2.00 6
3.00 4
4.00 2

2. For the given demand schedule, draw the demand curve for Sita

P 6 5 4 3 2 1 0
Qd 0 2 4 6 8 10 12

3. Draw the individual demand curves for Ram, Sundar and Shobana and also the market
demand curve

Ram’s Sundar’s Shobana’s

Price (Rs. per Banana)
demand demand demand
0.50 9 6 1
1.00 8 5 1
1.50 7 4 0
2.00 6 3 0
2.50 5 2 0
3.00 4 1 0
3.50 3 0 0
4.00 2 0 0
4. Draw the individual demand curves for individual 1, 2 and 3 and also the market demand
curve if only these 3 persons are in the market.

Price Qd of individual 1 Qd of individual 2 Qd of individual 3

6 9 18 30
5 10 20 32
4 12 24 36
3 16 30 45
2 22 40 60
1 30 60 110

21
22
Ex.No.5 MEASUREMENT OF ARC AND POINT ELASTICITIES OF
Date: DEMAND - OWN PRICE, INCOME AND CROSS PRICE
ELASTICITIES OF DEMAND
Measurement of Elasticity
We have studied the law of demand and seen that there is an inverse relation between
quantity demanded and price. A change (rise or fall) in price leads generally to a change
(contraction or extension) of demand. “The term elasticity expresses the responsiveness of
one variable with respect to some influence of other variable”.

Elasticity of demand is the measure of the responsiveness of quantity demanded with

respect to changes in the determinants of demand. It may be price of own commodity, related
commodity, income, etc. In general, elasticity of demand means price elasticity of demand.
It is denoted as “e”.
Proportionate change in quantity demanded
ep =
Proportionate change in price
Qd
ep =
Qd P
P
The elasticity can be measured by two methods viz., point elasticity and arc elasticity.
Point elasticity: In this method, the elasticity of demand is found out at a particular point in
the demand curve.
• For example, at the middle point (K) of the
straight line demand curve, elasticity is Ep 
t
equal to unity.
Ep > 1
• At the higher points of the demand curve, to •
M Ep = 1
the left of the middle point (M), elasticity is
•
more than unity
Price

K Ep < 1
• At lower points, to the right of the middle •
Ep = 0
L
point (L), elasticity is less than unity
0 T
• Elasticity is infinity at the point, where the Demand
demand curve coincides with the Y- axis (t).
• The elasticity is zero at the point where the demand curve coincides with the
X-axis (T).

23
Arc elasticity:
• The point method considers minute changes in price and demand which is not
realistic.
• In reality, we come across demand
schedules with gaps in prices and D

Price
quantities
In arc elasticity, we express the price change P1 K

as a proportion of the average of the initial

P2 L
price and change in price; and similarly, we D
express the change in the quantity demanded
as a proportion of the average of the initial 0 Q1 Q2
Q uantit y Dema nde d
and the changed quantity. Thus, the arc
elasticity is the average elasticity. Its
magnitude will differ accordingly as we make
smaller or bigger moves on the demand curve.
The formula to measure arc elasticity between two points K and L is as follows:
Q
ep =
(Q1 + Q 2 )/2 P
(P1 + P2 )/2
 Q(P1 + P2 )
ep =
 P(Q1 + Q 2 )

Types of Elasticity
We may distinguish among the three types of elasticities, viz., Price Elasticity,
Income Elasticity and Cross Elasticity
Price Elasticity of demand

Price elasticity measures responsiveness of quantity demanded with respect to

changes in price, keeping other things constant. It is the ratio of proportionate change in
quantity demanded in response to a proportionate change in price.
Proportionate change in quantity demanded
ep =
Proportionate change in price
Qd
ep =
Qd P
P
Where, Qd is the quantity demanded and P is own price of the commodity.

24
Income Elasticity of demand

Income Elasticity is a measure of responsiveness of quantity demanded to change in

income. It shows how the quantity demanded will change when the income of the consumer
changes, keeping other things constant. Thus,
Proportionate change in the quantity demanded
Income Elasticity =
Proportionate change in income

Qd
eI =
Qd I
I
Where, Qd is the quantity demanded and ‘I’ is income of the consumer.
Cross Elasticity of demand

It refers to the proportionate change in quantity demanded with respect to change in

price of the related commodity. The related commodity may be substitutes or complements.
Proportinate change in quantity demanded of X
exy =
Proportionate change in the price of Y
The two commodities will be complementary, if a fall in the price of Y increases the
demand for X. Conversely, if a rise in the price of one commodity increases the demand for
the other, called substitute.
Solved Exercises
Income Ed =
S. Type of the
Income Qd ∆I ∆ Qd ∆I/I ∆Qd/Qd (∆Qd/Qd) /
No. good
( ∆I/I)
1 2 3 4 5 =3/1 6= 4/2 7= 6/ 5
Normal good;
1 4000 100 4000 100
1.00 1.00 1.00 Luxury
Normal good;
2 6000 200
2000 100 0.33 0.50 1.50 Luxury
Normal good;
3 8000 300
2000 100 0.25 0.33 1.33 Luxury
Normal good;
4 10000 350
2000 50 0.20 0.14 0.71 Necessary
Normal good;
5 12000 380
2000 30 0.17 0.08 0.47 Necessary
Normal good;
6 14000 390
2000 10 0.14 0.03 0.18 Necessary
7 16000 350 2000 -40 0.13 -0.11 -0.91 Inferior good
8 18000 250 2000 -100 0.11 -0.40 -3.60 Inferior good

25
Exercise
1. For the given problem i) Draw the Income demand curve ii) Work out the income elasticity
of demand and interpret iii) show graphically the income demand
S. No. Income Quantity demanded
1 4000 100
2 6000 200
3 8000 300
4 10000 350
5 12000 380
6 14000 390
7 16000 350
8 18000 250

26
2. Estimate the following elasticities and offer your comments.
Team A: Estimate the cross price elasticity with the following data table

Quantity demand (cup/month) Price (Rs/cup)

Tea : Q1 Coffee: Q2 Tea : P1 Coffee: P2
60 70 4.5 5
70 60 5 4.5

Team B: Estimate the price elasticity of edible oil with the following data table

Edible oil demand change (lit/month) Edible oil price change (Rs/lit)
Q0 Q1 P0 P1
10 15 2.5 2
15 10 2 2.5

Team C: Estimated the income elasticity of rice consumption with the following data table

Change in Rice demand (kg/month) Per capita family income change (Rs/month)
Q0 Q1 I0 I1
25 28 1000 1200
28 25 1200 1000

27
28
Ex.No.6 ESTIMATION OF CONSUMER’S SURPLUS
Date :

Consumer’s surplus
In the word of Marshall,” The excess of the price which he (i.e., consumer) would be
willing to pay rather than go without the thing over that which he actually does pay is the
economic measure of this surplus satisfaction.... it may be called Consumer’s surplus.
In short, consumer’s surplus is what the consumer is willing to pay minus what he
actually pays. Graphically , it is the SHADED AREA

It can be measured in different ways.

1. Consumer Surplus = What consumer is willing to pay – What the consumer actually pays
2. Consumer Surplus = Sum of marginal utility - (Price of the commodity x No. of units
purchased)
3.Consumer Surplus = ½ bh = ½ * total qty purchased (WTP – Equilibrium Price )
Solved Exercises:
1. Suppose, a consumer is willing to pay up to Rs.100 for a ticket to a concert, but actually
pays Rs.60, then his consumer surplus per ticket is:
Consumer surplus = 100 – 60 = Rs.40 per ticket.
2. Find the Consumer Surplus.
Step 1: Estimate MU
Step 2: Estimate CS = MU – Price
However, condition is
MU = PRICE at which 6 units are consumed with TU of 90
(OR)
CS= Sum of marginal utility - (Price of the commodity x No. of units purchased)

29
 Units TU MU Price / unit CS = Marginal Utility – Price
1 20 20 10 10
2 38 18 10 8
3 54 16 10 6
4 68 14 10 4
5 80 12 10 2
6 90 10 10 0
7 98 8 10 …
Ʃ 90 30

Therefore, Consumer Surplus= 90-(6*10)= 90- 60 = 30

4. Graphically measure Consumer Surplus. For example, if a consumer is willing to pay

$10 for a kilogram of tomato, whereas the equilibrium price is $5. At this price, 20 kg of
tomato are supplied.

Consumer Surplus = 1/2 * 20* ($10 -$5 )

= $50

30
Exercise
1. Suppose this is a watermelon market.

a. If John is willing to pay as much as $8 for a

watermelon, how much surplus would he receive
if he pays the market price for a watermelon?

b. How much total consumer surplus is received in

this market?

c. Draw the total consumer surplus

31
32
Ex.No.7 LAW OF DIMINISHING MARGINAL RETURNS:
Date : RELATIONSHIP AMONG TPP, APP AND MPP

By production we mean, the process through which various inputs get transformed
into output.
Production function is the mathematical representation of technical relationship
between inputs and output. Thus, a production function with four inputs can be expressed as
follows:
Y = f (X1, X 2 , X 3, X 4 )

Where Y is the output, X1, X2, X3, X4 are the inputs used in the production. Among
the inputs, X1 and X2 are the variable inputs and X3 and X4 are the fixed inputs.
Law of Diminishing Marginal Returns (LDMR)
Alfred Marshall stated the law thus: “An increase in labour and capital applied in the
cultivation of a land causes, in general, a less than proportionate increase in the amount of
produce raised, unless it happens to coincide with an improvement in the arts of agriculture”.
The LDMR states that in a production process, as one variable input is increased,
there will be a point at which the marginal output per unit of input will start to decrease,
holding all other factors constant.
As the amount of a
variable resource used in
the production of an
output is increased, the
level of output will at first
increase at an increasing
rate, then increase at a
decreasing rate and finally
a point will be reached,
where further applications
of the variable resource
will result in a decline in
the total output of the
production.

33
TPP is the Total physical product.
It is the total output (Y) produced as a result of input (X1) use.
APP is the Average physical product.
Y
It is the output per unit of input i.e. APP =
X
MPP is the marginal physical product which indicates change in total physical product (TPP)
with respect to a unit change in input (X1), i.e.
Y
MPP =
X 1
Three Stages of production
Since both average and marginal products are derived from total products, the average
and marginal product curves are closely related to the total product curve. The input-output
relationship showing total, average and marginal productivity can be divided into three zones.
As we increase the level of a variable input, say seed rate per hectare, the total
production (yield per hectare) increases at an increasing rate till point ’L’ is reached on the
TPP curve. Thus, upto this point (L) the marginal physical product (MPP) is shown as
increasing and then it starts declining. Point L is the point of inflexion on the TPP curve
where the curvature changes from convex to concave to the input axis as we move away from
origin. The TPP curve is continuously increasing but at a decreasing rate as we move from
the point L to M on TPP by increasing the seed rate from Xi to Xm. Beyond Xm, TPP
declines.
Stage I: The stage I ends at the point N where marginal product is equal to average product
when the latter is at its maximum. In this stage, APP keeps on increasing and MPP remains
greater than APP. It is not reasonable to stop the use of an input when its efficiency in use is
increasing (This is indicated by continuous increase in APP). This zone doesn’t tell us where
to stop production and what the optimum level of input and output. So it is irrational to stop
increasing the use of variable input, as long as fixed inputs are not fully utilized. For this
reason it is called irrational stage of production.
Stage II: The Stage II occurs when MPP is decreasing and is less than APP. It starts at a
point where APP is at its maximum and ends where the total product is at its maximum or
MPP is zero. It is only in this region that marginal product of variable factors is positive. This
stage tells us where to stop production and the physical optimum level of input and output.
Hence, it is called rational stage of production.

34
 Stage III: A part of TPP curve beyond the point M is called the third stage of production. As
variable input use is extended beyond Xm, the marginal product beyond point M is negative.
It is irrational to increase the input level for obtaining lower total product. Thus, stage III is
also called irrational stage of production.
Relationship between TPP, MPP and APP:
• When TPP is maximum, MPP is zero
• When TPP is decreasing, MPP is negative
• MPP is equal to APP, when APP is at its maximum
• When MPP decreases, APP is greater than MPP

The elasticity of production refers to the proportionate change in output with

respect to proportionate change in input.

Proportionate change in Output (Y)

eY =
Proportionate change in input (X)
Y X MPP
eY = * =
X Y APP
Y
MPP Y X
eY = X = = *
Y APP X Y
X

Relationships among MPP, TPP, APP and elasticity of production

MPP TPP APP Stage Elasticity
Increasing at increasing
Increasing Increasing I >1
rate
Increasing but less
Maximum Point of Inflexion I >1
than MPP
Positive but Increasing at decreasing Maximum and End of I
=1
decreasing rate equal to MPP stage
Positive but Increasing at decreasing Decreasing but
II <1
decreasing rate greater than MPP
End of II
Zero Maximum Decreasing =0
stage
Declining but
Negative Declining III <0
positive

35
Exercise:
Draw TPP, APP and MPP curves for the given data below and also, demarcate three regions
of production (use graph sheet). Find the Physical optimum input and output both by tabular
method and graphical method.
Solution:

Ep = Region
Labour(X) TPP(Y) APP Y X MPP
MPP/APP
0 0 0 0 0 0 0 Region I
1 2 2.00 2.00 1 2.00 1.00
2 5 2.50 3.00 1 3.00 1.20
3 9 3.00 4.00 1 4.00 1.33
4 12 3.00 3.00 1 3.00 1.00 Region II
5 14 2.80 2.00 1 2.00 0.71
6 15 2.50 1.00 1 1.00 0.40
7 15 2.14 0.00 1 0.00 0.00
8 14 1.75 -1.00 1 -1.00 -0.57 Region III
9 12 1.33 -2.00 1 -2.00 -1.50

Inference:
Physical optimum input and output is achieved when MPP = 0. Hence optimum input is 7
Units and optimum output is 15 units.

36
Exercise
1. Given the following factor product relationship between Nitrogen response to output per
ha. (use graph sheet)
N in Kgs Output (Y) APP=Y/ X1 Y X1 MPP = Y / X1 Ep =
(X1 ) in Qtls
0 0
1 2
2 5
3 9
4 14
5 19
6 23
7 26
8 28
9 29
10 29
11 28
12 26
Answer the following
1. Work out TPP, APP and MPP and draw their curves.
2. Estimate the elasticity of production at different output level.
3. Demarcate the different regions of production function.
4. Estimate the optimum level of input use when the Nitrogen cost is Rs.20/ Kg and the
price of output is Rs.20 per unit.

37
38
Ex.No.8 COST CONCEPTS AND GRAPHICAL DERIVATION
Date : OF COST CURVES

The term cost refers to the outlay of money for productive services. It is value in use. If
the money value of irrigating field on a farm during a given period is Rs.1500, it is termed as
the cost incurred in the farm. Cost may be total cost or per unit cost.
Total cost: Money value of all the inputs used on a certain farm during a given period,
season or year, is termed as the total costs. If the inputs used are represented by X1, X2, ….
Xn and their respective prices are Px1, Px2…..Pxn, then the total cost (TC) can be expressed as
Total cost (TC) = Px1.X1 + Px2.X2 + ………+ Pxn.Xn
Fixed and Variable costs: The total cost comprises of two components i.e. fixed and
variable costs.
Fixed costs are those costs, which are
not a function of output, hence they do not
vary with the level of output. For example,
land revenue, taxes, interest, insurance
premium and contractual payments such as
rent represent fixed costs.
Variable costs constitute the outlay of
funds that are a function of output in a given
production period, i.e. they vary with the level
of output. The outlay of funds on labour, fuel
and oil, electricity are a few examples of variable costs.
If we represent total costs by TC, total fixed cost by TFC and total variable cost by TVC, then
TC = TFC + TVC
Signifying that the total fixed and variable costs add up to the total cost of which they
are two constituents.
Average cost: The total cost can be expressed
per unit of the output (Y) and that refers to
average cost (AC).
AC = TC / Y

39
We know that TC = TFC + TVC. If we divide throughout by Y, the quantity or level of
output, we obtain the following.

TC TFC TVC
= +
Y Y Y

AC = AFC + AVC

Thus average cost consists of two components i.e., average fixed cost (AFC) and
average variable costs (AVC).
Marginal cost (MC): It is the change in total cost due to an addition of one unit of output to
the total production. i.e., it is the change in total cost with respect to change in output.
TC
MC =
Y
Solved Exercise
With the given data on input and output, work out TVC, TC, AVC, AFC, AC and MC. The
cost of input N is Rs.5/kg and the price of maize is Rs.11 per kg. Draw the cost curves in a
graph sheet.
Input (X) in kg 0 20 40 60 80 100 120 140 160 180 200
Output (Y) in kg 0 50 110 175 225 255 270 275 275 260 250
Total Fixed Cost 150 150 150 150 150 150 150 150 150 150 150

Solution
TVC TC AFC AVC ATC MC
S.No Input (X) Out put (Y) TFC ΔTC ΔY
(X* Px) (TFC+TVC) (TFC/Y) (TVC/Y) (TC/Y) (ΔTC/ ΔY)
1 0 0 150 0 150 0.00 0.00 0.00 150.0 0.00 0.00
2 20 50 150 100 250 3.00 2.00 5.00 100.0 50.00 2.00
3 40 110 150 200 350 1.36 1.82 3.18 100.0 60.00 1.67
4 60 175 150 300 450 0.86 1.71 2.57 100.0 65.00 1.54
5 80 225 150 400 550 0.67 1.78 2.44 100.0 50.00 2.00
6 100 255 150 500 650 0.59 1.96 2.55 100.0 30.00 3.33
7 120 270 150 600 750 0.56 2.22 2.78 100.0 15.00 6.67
8 140 275 150 700 850 0.55 2.55 3.09 100.0 5.00 20.00
9 160 275 150 800 950 0.55 2.91 3.45 100.0 0.00 0.00
10 180 260 150 900 1050 0.58 3.46 4.04 100.0 -15.00 -6.67
11 200 250 150 1000 1150 0.60 4.00 4.60 100.0 -10.00 -10.00

Inference
As the increase in quantity of input use, increases the total variable cost and total cost.
However, the fixed cost is remains same for all levels of output. The average fixed cost is

40
declining continuously since the output alone increased. The average variable cost and
average total cost is decreases upto 100 kg of input 225 kg of output and afterwards started
increasing. The initial decrease in ATC is caused by the spreading of fixed costs among an
increasing number of units of output and the increasing efficiency of variable units used i.e
cost of producing one unit of output. The marginal cost reveals the change in total cost per
unit increase in output. The MC will be decreased upto 60 kg of input and 175 kg of output
and afterwards started increasing reveals that efficiency of variable input decreases.

41
Exercise
1.Determine the most profitable yield of rice for the given data, when the price of variable
input N is Rs.15 per kg and the price of paddy is Rs.15 per kg. With the given level of
input use, output and prices of input and output, work out TVC, TC, AVC, AFC, AC, MC,
and TR. Draw the cost curves in a graph sheet.
Level of N (Kg) Output (Kg) TFC TVC TC AFC AVC ATC MC
0 0 1000
20 500 1000
40 1100 1000
60 1750 1000
80 2250 1000
100 2550 1000
120 2700 1000
140 2750 1000
160 2730 1000
180 2700 1000
200 2600 1000

2.Workout TVC, TC, AVC, AFC, ATC & MC and graphically illustrate 7 cost curves.
(Output price Rs 6 per Kg). Labour cost=Rs.60/number; Fixed cost is120 (use graph sheet)
No. Worker Q TVC TFC TC AFC AVC ATC MC
0 0
1 10
2 22
3 36
4 52
5 70
6 86
7 100
8 112
9 122
10 130
11 137
12 143
13 148
14 152
15 155

42
EX.NO.9 ESTIMATION OF TOTAL REVENUE AND PROFIT
Date :

Revenue: Revenue or gross income refers to the money value of output and we often talk of
total and average revenue.

Total revenue is the synonymous of total value product. The average revenue is
defined as the revenue per unit of output. If we define the quantities of outputs as Y1, Y2,
Y3….Yn and their respective prices as Py1, Py2….Pyn , then the total revenue (TR) can be
expressed as

Total Revenue (TR) = Py1.Y1+Py2.Y2 +………..+Pyn.Yn

TR is also called Total Value Product (TVP)

The average revenue (AR) can be easily derived from total revenue.

TR
AR =
Y

Gross margin: The gross margin (GM) may be defined as the total revenue (TR) less total
variable costs (TVC).

Gross margin (GM) = Total value product - Total variable costs

Profit (or Loss): As we know, one of the important objectives of the farmer is to maximize
the farm profit on a continuous basis. It is important that the farm profit concept be
understood very clearly.

Profit ( π ) = TR – TC
= TR– (TFC + TVC)
Where, π refers to profit when positive and loss when negative.

The optimum profit is obtained when equating marginal revenue with marginal cost

Solved Exercises

With the given data on input and output, work out total cost, total revenue, gross margin and
profit. The total fixed cost is Rs. 150, cost of input N is Rs.5/kg and the price of maize is
Rs.11 per kg.
Input (X) 0 20 40 60 80 100 120 140 160 180 200
Output (Y) 0 50 110 175 225 255 270 275 275 260 250

43
Solution

Input TVC TC TR GM Profit

S.No Output (Y) TFC
(X) (X* Px) (TFC+TVC) (Y * Py) (TR-TVC) (TR-TC)
1 0 0 150 0 150 0 0 -150
2 20 50 150 100 250 550 450 300
3 40 110 150 200 350 1210 1010 860
4 60 175 150 300 450 1925 1625 1475
5 80 225 150 400 550 2475 2075 1925
6 100 255 150 500 650 2805 2305 2155
7 120 270 150 600 750 2970 2370 2220
8 140 275 150 700 850 3025 2325 2175
9 160 275 150 800 950 3025 2225 2075
10 180 260 150 900 1050 2860 1960 1810
11 200 250 150 1000 1150 2750 1750 1600

Inference
The results inferred that total cost increases continuously and total revenue is increases upto
140 kg of input and 275 kg of output. The similar pattern is observed in case of gross margin
and profit. The further increase in quantity of input will decrease the profit and it is not
rational to continue the increase in use of input.

Exercise
1. Workout the total revenue, gross margin, profit for the given data. Determine the most
profitable yield of rice when the price of variable input N is Rs.15 per kg and the price of
paddy is Rs.15 per kg.
Level of N (Kg) Output (Kg) TFC TVC TC TR GM Profit
0 0 1000
20 500 1000
40 1100 1000
60 1750 1000
80 2250 1000
100 2550 1000
120 2700 1000
140 2750 1000
160 2730 1000
180 2700 1000
200 2600 1000

44
2. Workout the total revenue, gross margin, profit for the given data. (Output price Rs 6 per
Kg). Labour cost=Rs.60/number; Fixed cost is 120.
No. Worker Q TVC TFC TC TR GM Profit
0 0
1 10
2 22
3 36
4 52
5 70
6 81
7 95
8 109
9 123
10 137
11 151
12 165

45
46
Ex.No.10 ESTIMATION OF PRODUCER SURPLUS
Date :

Producer Surplus
It is the difference between the price that the producer is willing to offer for sale (Willingness
to Accept) and the price he actually receives. As the price increases, the incentive for
producing more goods increases, thereby increasing the producer surplus.
A producer always tries to increase his producer surplus by trying to sell more and more at
higher prices. However, it is simply not possible to increase the producer surplus indefinitely
since at higher prices there might be very little or no demand for goods.
Producer surplus is an economic measure of welfare of sellers, producers, suppliers.

Copyright: www.educba.com

The producer surplus derived by all firms in the market is the area above from the supply
curve to the price line, EPB i.e. equilibrium price.
Producer Surplus = (Market Price – Minimum Price to Sell (Reserve Price)) * Quantity Sold
Producer Surplus = ½ * PS * (OP – OQ)
Economic welfare
Economic welfare is the total benefit available to society from an economic transaction or
situation.
Economic welfare is also called community surplus. Welfare is represented by the area ABE
in the diagram below, which is made up of the area for consumer surplus, ABP plus the area
for producer surplus, PBE.

47
Example 1
Let us take the example of a farmer who is cultivating the crop in his land. The production
cost of the product is Rs.150 per kg and the producer is willing to sell the product at Rs. 180.
However, due to a sudden increase in the demand for the product resulted in increase the
market price to Rs.240. Calculate the producer surplus for the farmer if he sold 500 kg of
output during the year.
Solution
Minimum price to sell - Rs. 180
Market price - Rs. 240
Quantity sold - 500 kg

Producer Surplus = (Market Price – Minimum Price to Sell) * Quantity Sold

= (240 – 180) * 500
= Rs. 30,000
Inference
The producer is selling the goods at an equilibrium market price (Rs. 240) which his higher
than his reservation price (Rs. 180) and received the surplus of Rs. 30,000 as net gain.

Example 2
A market where the demand curve and supply curve governed by (30-0.0006x) and (15 +
0.0006x) where ‘x’ is the quantity of goods sold. Let us take the market situation in a year.
Calculate the producer surplus in the given market scenario.
S.No 1 2 3 4 5 6 7 8
Qty sold (x) 0 5000 10000 12500 15000 20000 25000 30000

48
Solution
Demand Curve Supply Curve
Quantity sold (x)
(30-0.0006x) (15 + 0.0006x)
0 30.0 15.0
5000 27.0 18.0
10000 24.0 21.0
12500 22.5 22.5
15000 21.0 24.0
20000 18.0 27.0
25000 15.0 30.0
30000 12.0 33.0

Minimum Price to Sell = Rs.15.00 (Zero Demand)

Market Price = Rs. 22.50 (Equilibrium Price)
Quantity Sold = 12,500 (Equilibrium Quantity)
Producer Surplus is calculated using the formula given below
Producer’s Surplus = ½ * Equilibrium Quantity * (Market Price – Minimum Price to Sell)
= ½ * 12,500 * (22.50 – 15.00)
= Rs. 46,875
Exercise
1.Suppose this is a watermelon market.
i. If a firm is willing to sell as much as $4 for a watermelon, how much producer surplus
would he receive for one watermelon if the equilibrium price is $6
ii. How much total producer surplus is received in this market? and the Equilibrium
quantity is 200 kg.
iii. Draw the total producer surplus

2. Find the Producer’s surplus and draw graphically the Producer’s Surplus

Qd Qs P
20 0 3
14 6 6
10 10 8
6 14 10
0 20 13

49
50
Ex.No.11 SUPPLY AND ESTIMATION OF SUPPLY ELASTICITY
Date :

Supply refers to the quantity of goods and services offered for sale at a particular price, place
and time.

• As price of the product increases, the quantity supply increases; and vice versa
• It is positively sloping
Elasticity of supply
Elasticity of supply is defined as the proportionate change in quantity supplied with
respect to some proportionate change in determinants of supply.
When a small fall in price leads to great contraction in supply, the supply is
comparatively elastic. But when a big fall in price leads to a very small contraction in supply,
the supply is said to be relatively inelastic. Conversely, a small rise in price leading to a big
extension in supply shows elastic supply, and a big rise in price leading to a small extension
in supply indicates inelastic supply.
The elasticity of supply is really the measure of the ease with which an industry can
be expanded and of the behaviour of the marginal costs.
Measurement of Elasticity of Supply
A vertical straight line will represent absolutely inelastic supply (zero-elasticity) and a
horizontal straight line an infinitely elastic supply. In between these two extremes, there will
be varying degrees of elasticity. A straight line supply curve drawn through the origin has a
unit elasticity. The following formula is a general measurement of elasticity of supply:
Proportionate change in quantity supplied
Price Elasticity of supply =
Proportionate change in price
In mathematical symbols, the price elasticity of supply can be expressed as
Q P
es = 
P Q

51
Where es is the price elasticity of supply, Qs is the quantity supplied, ΔQs is the change in the
quantity supplied, P is the price of good supplied, ΔP is the change in the price of the good.

Solved Exercises
Find out elasticity of supply for the given problem
S. No. 1 2 3 4 5 6
Price (Rs/kg) 8 9 10 11 12 13
Quantity Supplied (Kgs) 50 70 80 88 95 100

Apply the formula and find Solution ΔQS , ΔP, ΔQS / ΔP and P/Qs
Quantity Q P
S.No Price Supplied ΔQS ΔP ΔQS / ΔP P/Qs es = 
P Q
(Qs)
1 4.0 50 - - - - -
2 5.5 70 20 1.5 13.3 0.08 1.05
3 7.0 80 10 1.5 6.7 0.09 0.58
4 9.6 88 8 2.6 3.1 0.11 0.34
5 11.4 95 7 1.8 3.9 0.12 0.47
6 12.8 100 5 1.4 3.6 0.13 0.46

Inference
The price elasticity of supply measures the responsiveness of quantity supplied to a change in
price. The es 1.05 reveals that increase in price leads to an increase in supply i.e., elastic
supply. The es less than one reveals the inelastic in supply i.e., increase in price leads to a
smaller change in supply.

Exercise
1. Draw supply curve of rice and find out elasticity of supply for the given problem
Rice Price (thousand Rs/qtl) Quantity supplied
(in Quintals)
5.00 20
4.50 16
4.00 12
3.50 10
3.00 8
2.50 4

52
2. Draw supply curve for the output and find out elasticity of supply for the given problem
Price per tonne Quantity Supply (tonnes)
900 28
1000 30
1200 45
1300 60

3.Draw Demand and supply curves and find out elasticity of demand and supply.

Market demand Market supply

Price (Rs/kg) (tonnes) (tonnes)
9.00 100 1000
8.50 300 800
8.00 400 600
7.50 500 500
7.00 700 400
6.50 1000 200

53
54
Ex.No.12 EXCHANGE: MARKET STRUCTURE AND PRICE DETERMINATION
Date :

Economists understand by the term market not any particular place in which things
are bought and sold but the whole of any region in which buyers and sellers are in such free
interaction with one another that the price of the same goods tends to stability or attain
equilibrium easily and quickly.” Thus, the essentials of a market are: a) a commodity which
is dealt with; b) the existence of buyers and sellers; c) a place, be it a certain region, a country
or the entire world; and d) such exchange of goods and services between buyers and sellers
that only one price should prevail for the same commodity at the same time.
Market structure
The type of market depends on the degree of competition prevailing in the market.
Broadly speaking, there are two types of competition prevailing in the markets:- (i) Perfect
competition and (ii) Imperfect competition.
Perfect competition
The conditions of perfect competition are:-
• Large number of buyers and sellers
• Homogeneous product
• Free Entry or Exit: There should be no restrictions, legal or otherwise, on the firms’
entry into, or exit from, the industry
• Perfect knowledge: The buyers and sellers are fully aware of the prices that are being
offered and accepted and other market information.
• Perfect Mobility of the Factors of Production: This mobility is essential in order to
enable the firms to adjust their
supply to demand. Y
D
Price determination S

Under perfect competition, the 5

equilibrium price and quantity is

Price

4
determined by interaction of demand and P

supply. The quantity demanded and 3 R

quantities supplied vary with price. The

2
price which will tend to settle down in the D

1 S M
market is one at which the quantity
0 5 10 12 15 20 X
Quantity
Interaction of Demand and Supply
55
demanded is equal to the quantity supplied. Only at this price, will all the buyers and sellers
wish to be satisfied. This price at which demand and supply are equal is known as
equilibrium price, since, at this price, the forces of demand and supply are balanced, or are
in equilibrium. The quantity bought and sold (or the amount demanded or supplied) at this
equilibrium price is known as equilibrium quantity.

Imperfect competition:
Imperfect competition takes three main forms:-
1. Monopolistic competition
2. Oligopoly, and
3. Monopoly
We shall briefly describe below these forms of imperfect competition.
Monopolistic Competition: The main features of monopolistic completion are as under:-
• Under monopolistic competition, the number of sellers are many
• Free entry or exit condition
• The products are not homogeneous; they are, on the other hand, differentiated, inter
alia, by means of different labels attached to them such as different brands of
groundnut oil. Thus, product differentiation is the unique one.
• Either out of ignorance or on account of transport costs or lack of mobility of the
factors of production, same price does not rule in the market throughout. Rather
different prices are charged by different producers for products which are really
similar, but are made to appear different through advertisement, high salesmanship
and labelling and branding.
• Under monopolistic competition, the demand curve is a downward sloping curve. The
seller can thus have a price policy of his own, whereas a seller under perfect
competition has no price policy; he has merely to accept the market price.
Oligopoly
When in a market, there are only a few sellers of a product, it is called Oligopoly.
• The basic characteristic of an oligopolistic situation is the fact that every seller can
exercise an important influence on the price-output policies of his rivals. This is due
to the fact that the number of sellers is not very large and each seller controls a
substantial portion of the supply.
• Every seller is so influential that his rivals cannot ignore the likely adverse effect on
them of a given changes in the price-output policy of any single manufacturer. This

56
 rival consciousness, or the recognition, is the most important feature of oligopolistic
situations.
• In Oligopoly, there are only a few sellers.
Monopoly
The main characteristics are:
• A single producer or seller controls the entire market.
• There is no substitute for his product. He controls the entire supply and he can fix the
price. He is the firm and he also constitutes the industry. He is the price setter
• Entry for new firms is restricted
Price determination under monopoly
The aim of the monopolist, like every other producer, is to maximize his total money
profits. Therefore, he will produce up to a point and charge a price which gives him the
maximum money profits.
In other words, he will be in
equilibrium at that price-output level
at which his profit are the maximum.
He will go on producing so long as
additional units add more to the
revenue than to the cost. He will stop
at that point beyond which additional
units of production add more to cost
than to revenue. i.e.
The monopolist will be at
equilibrium at the point where,
MR = MC.
The price–output equilibrium of the monopolist can be easily understood from
diagram. AR is the demand curve or average revenue curve faced by the monopolist. MR is
the marginal revenue curve which has below the average revenue AR (i.e. twice steeper than
AR). AC is the average cost curve and MC is marginal cost curve. It can be seen from the
diagram that up till Qs output, marginal revenue is greater than marginal cost but beyond Qs
the marginal revenue is less than marginal cost. Therefore, the monopolist will be in
equilibrium at the output Qs, where marginal revenue is equal to marginal cost and profits are
the greatest. The price at which output Qs is sold in the market can be known from looking at

57
demand or average revenue curve AR. It can be seen from the diagram that corresponding to
equilibrium output Qs, the price on the demand or average revenue curve is Ps. Thus, it is
clear that, given the cost-revenue situation as presents in figure, the monopolist firm will be
in equilibrium at the output Qs and will be charging price equal to Ps.
Now the question is: - what amount of total profits although maximum they would be
in the given cost-revenue situation will be earned by the monopolist in this equilibrium
position?
To produce Qs output, the cost per unit of output incurred by the monopolist is ACs.
Thus, the shaded area becomes the profit per unit to the monopolist.

Solved Exercises
1. Find the AR, MR & TR under Monopoly show the AR, MR graphically

No. of Units sold Price TR (P.Q) MR AR (TR/Q)

1 10 10 10 10
2 9 18 8 9
3 8 24 6 8
4 7 28 4 7
5 6 30 2 6
6 5 30 0 5
7 4 28 -2 4

2. Find the Profit maximizing output of firm under short run under perfect competition

Total Cost function (TC) = 25 + 1.5 Q +0.01 Q2

Let TC function
TC = 25 + 1.5 Q + 0.01 Q2
MC= Change in TC / Change in Q (OR) Differentiate TC w.r.t Q
= 1.5 + 0.02 Q
Profit maximization occurs at MC = MR (MR can also be taken as P)
If P = 10 , Profit maximization occurs at
MC = Price (i.e) (MR)
1.5 + 0.02 = 10
0.02 Q = 10 -1.5
Q = 8.5 / 0.02
Q = 425
Economic profit of the firm is when TR - TC

58
 = (P.Q) – 25 +1.5Q +0.01 Q2
= (10x 425) - 25 +1.5 (425 ) +0.01 (425)2
= 4250 – ( 25 + 637.5 + 1806.25)
= 4250 - 2468.75 = 1781.25
3. Calculate the shutdown price & Quantity

TC = 500 +120 Q -18 Q2 +1.2 Q3

TVC = 120Q -18 Q2 +1.2 Q3
TFC = 500
Solution:
Find MC = d TC / d Q = 120 -18Q + 3.6 Q2
Find AVC = TVC /Q = 120 -18Q +1.2 Q2

Equality condition is MC= MR ; Here, MC = Min point of AC Curve

MC =AVC
120 -18Q + 3.6 Q2 = 120 -18Q +1.2 Q2 Equating this two , will get
Q = 7.5

Here P = MC
P= 120 -18Q + 3.6 Q2 (Apply Q= 7.5 )

BY SOLVING P = Rs.52.5 is the Shutdown price

Exercise:
1. Identify different types of markets suitable for different commodities
2. What are the monopoly and monopsony market and product in our country/state?
3. Qd =120 -2 P ; C = 10Q +0.4 Q2 . Work out Equilibrium level of output & price under
monopoly & Find the profit maximization

59
60
Ex.No.13 APPROACHES TO COMPUTATION OF NATIONAL INCOME –
Date : ANALYSIS OF TRENDS IN NATIONAL INCOME - STUDY OF
STRUCTURAL CHANGES IN THE ECONOMY
National Income
National income is a measure of the total value of the goods and services (output)
produced by an economy over a period of time (normally a year).
Measurement of National Income
The national income can be measured in three ways. They are: (income method, (ii)
product method and (iii) expenditure method.
(i) Income method
This method approaches national income from the distribution side. Sum of all
incomes, both in cash and kind, is derived from providing payment to all factors of
production in a given time period.
According to this method national income is obtained by summing up of the income
of all individuals in the county. Individuals earn income by contributing their own services
and the services of their property such as land, labour, capital and entrepreneurship to the
national production. Therefore, national income is calculated by adding up the rent of land,
wages and salaries of employees, interest on capital, profits of entrepreneurs (including
undistributed profits of joint-stock companies) and income of self-employed people.
This method of estimating national income has the great advantage of indicating the
distribution of national income among different income-groups such as landlords, capitalists,
workers, etc. Therefore this is called national income by distributive shares
(ii) Product method
This method approaches national income from the output side. Sum of value of all
the outputs (goods and services) is arising in several sectors of the nation’s production during
a given year. According to this method, the economy is divided into different sectors such as
agriculture, mining, manufacturing, small enterprises, commerce, transport, communication
and other services. Then, the gross product is found out by adding up net values of all the
production that has taken place in these sectors during a given year.
In order to arrive at the net value of production of a given industry, the purchases of
the producers of this industry from producers of other industries or sectors are deducted from
the gross value of production of that industry. The aggregate or net values of production of
all the industries and sectors of the economy plus the net income from abroad will give us the

61
Gross National Product. By subtracting the total amount of depreciation from the figure of
gross national product, we get the net national product.
This method of estimating national income enables us to trace the origin of the
national income aggregate to the different sectors of the economy. Therefore, this is called
national income by industrial origin.
Expenditure method
This method arrives at national income by adding up all the expenditure made on
goods and services during a year. It is the sum of consumers’ expenditure, government
expenditure of goods and services and net expenditure on capital goods.
Trend Analysis
Fit a trend line and estimate the slope of the trend line for the given variable
Y=a+ bx ……… (1)
The intercept (a) and slope (b) parameters are estimated using following formula;

y  xy
a = ---------- and b = -----------
n  x2
Example : Fit a least squares trend line to the annual revenues (in thousands of Rupees) of a
agricultural input sales (pesticides) of retailer for the year 2011 to 2019.
Year Total annual sales, (y) in ‘000 of Rupees)
2011 789
2012 542
2013 769
2014 1093
2015 1175
2016 1067
2017 1166
2018 1426
2019 1692

Since we have figures for nine years (an odd number of years), we label them -4, -3, -2, -1, 0,
1, 2, 3, 4 and the sum needed for substitution into the formula for a and b are obtained the
following table.

62
 Year x y xy x2 Y^
1079.9 + 117.2 (-4) =
2011 -4 789 -3156 16
611.10
2012 -3 542 -1626 9 1079.9 + 117.2 (-3) =
2013 -2 769 -1538 4 1079.9 + 117.2 (-2) =
2014 -1 1093 1093 1
2015 0 1175 0 0
2016 1 1067 1067 1
2017 2 1166 2332 4
2018 3 1426 4278 9
1079.9 + 117.2 (4) =
2019 4 1692 6768 16
1548.7
 0 9719 7032 60

Substituting n = 9,

y 9719
a = -------- = --------- = 1079.9
n 9
 xy 7032
b = ---------- = ------- = 117.2
 x2 60

Y^ = 1079.9 + 117.2 x for equation of trend line.

In our example we write,

y’ = 1079 + 117.2 x

(origin = 2011; x unit = 1 year and y= total annual sales in ‘000 of rupees)

This makes it clear that 1079 is the trend value for 2011 and that the annual trend
increment (the year to year growth) in the retail sales is estimated as Rs. 117.2 thousand
rupees for the given period.

Using the equation, we can determine the trend value for any year by substituting the
corresponding values of x. for example, for 2011, we substitute x = -4 and get a trend value
of y^ = 1074.9 + 117.2(-4) x = -4 = 611.1 and for 2019 we substitute x = 4 and get x a trend
of y^ = 1079.7 + 117.2(4) = 1548.7.

63
Exercise
1. Using the following information, perform a critical analysis of trend in various economic
variables. Graphically show the trend line.
Select Economic and Social Indicators in India
GDP at Current Prices GDP at Constant Prices Per capita income
Year
(in Lakh Crores) (in Lakh Crores) (Rs.)
2010-11 72.49 49.19 36202
2011-12 87.36 87.36 63462
2012-13 99.44 92.13 65538
2013-14 112.34 98.01 68572
2014-15 124.68 105.28 72805
2015-16 137.72 113.69 77659
2016-17 153.92 123.08 83003
2017-18 170.98 131.75 87828
2018-19 189.71 139.81 92085
Source: Agricultural Statistics at a Glance, 2019, Government of India, New Delhi.

64
Ex.No.14 ESTIMATION OF GROWTH RATE OF POPULATION AND
Date : FOOD GRAIN PRODUCTION

The growth in both the population and food grain production in an economy are key
for the development. Understanding the growth in population and food grain production is
thus essential.
The percentage change from one period to another period can be calculated and
interpreted. For instance, to know the annual percentage change of population from one
period to another can be calculated as follows:

( POPpresent − POPprevious )
PR = X 100
POP previous

Where,
PR : Percent Rate
POPPresent : Present year Value
POPprevious : Previous year Value

Compound growth rate

The compound annual growth rate (CAGR) is a useful measure of growth over
multiple time periods. It can be thought of as the growth rate that gets you from the initial
value to the ending value if you assume that the value has been compounding over the time
period.
Steps involved:
Step 1: Fit a trend line and estimate the slope of the trend line for the given variable
y= a bt……… (1)

Slope and intercept parameters of non-linear equation (1) can be estimated by taking
natural logarithm of (1) to transform eq. (1) to linear form as
Ln(y)= Ln(a )+ t Ln(b). …(2)

Now let Y=ln(y); A= Ln(a ); B=Ln(b); (2) can be written as =linear equation
Y=A+tB… (3) The intercept (A) and slope (B) parameters are estimated using following
formula;

65
 B=
 (t − t )(Y − Y )
i i

 (t − t )
i
2

A = Y − Bt
Step.2: Compute annual compound growth rate
CGR = (Anit log (B) -1) *100
The compound growth rate can be used to project economic variables such as area,
production, productivity, population etc. Following is the formula for projection.

Where:
Y Future : Future value
Y Present : Present value
R : Compound Growth Rate
t : Number of Periods

66
Solution
Area − − − − −
S.No Year
(lakh ha)
t t (t − t ) Y= ln (Area) Y (Y − Y ) −
(t − t )
−
* (Y − Y ) (t − t ) 2
1 2008-09 32 1 5.50 -4.50 3.46 3.48 -0.02 0.08 20.25
2 2009-10 30 2 5.50 -3.50 3.41 3.48 -0.07 0.24 12.25
3 2010-11 32 3 5.50 -2.50 3.46 3.48 -0.02 0.06 6.25
4 2011-12 32 4 5.50 -1.50 3.47 3.48 -0.01 0.02 2.25
5 2012-13 26 5 5.50 -0.50 3.28 3.48 -0.20 0.10 0.25
6 2013-14 35 6 5.50 0.50 3.55 3.48 0.07 0.03 0.25
7 2014-15 36 7 5.50 1.50 3.59 3.48 0.11 0.16 2.25
8 2015-16 38 8 5.50 2.50 3.63 3.48 0.15 0.36 6.25
9 2016-17 29 9 5.50 3.50 3.38 3.48 -0.10 -0.34 12.25
10 2017-18 35 10 5.50 4.50 3.57 3.48 0.09 0.39 20.25
∑ -0.0141 1.09 82.5
B = 1.09/ 82.5
= 0.013

CGR = (1.013-1) * 100

= 1.33

A = 3.48-0.013*5.5
= 3.48-0.071 = 3.41

Y 2020-21 = 32 (1+0.0133)13
= 37.99 lakh hectare
Inference: The compound growth rate of area under food grains in Tamil Nadu is 1.33 % from 2008-09 to 2017-18. The projected area under
food grain crops in Tamil Nadu during 2020-21 is 37.99 lakh hectare.

63
Exercise
1. The data on total population in Tamil Nadu is given in the table. Work out the decadal
percentage change of population and percentage growth rate of population. Project population
for Tamil Nadu state by 2050.
Sl. No 1 2 3 4 5 6 7
Census Year 1951 1961 1971 1981 1991 2001 2011
Population (in Crores) 3.01 3.37 4.12 4.84 5.59 6.24 7.21

2. The data on production of food grains in Tamil Nadu from 1998-99 to 2017-18 is given.
With the given information workout, the compound growth rate of food grain production and
project the state food grain production by 2022-23.
Production Production
S.No. Year S.No Year
(lakh tonnes) (lakh tonnes)
1 1998-99 94.1 11 2008-09 71.0
2 1999-2000 88.4 12 2009-10 75.0
3 2000-01 86.2 13 2010-11 75.9
4 2001-02 76.9 14 2011-12 101.5
5 2002-03 44.6 15 2012-13 56.1
6 2003-04 43.1 16 2013-14 110.0
7 2004-05 61.5 17 2014-15 128.0
8 2005-06 61.2 18 2015-16 113.9
9 2006-07 82.6 19 2016-17 52.4
10 2007-08 65.8 20 2017-18 107.1

64
Ex.No.15 MONEY: QUANTITY THEORY OF MONEY
Date :

Money
Money is defined as anything that the public readily accepts in payment for goods and
services and other assets and in the discharge of debt. According to Crowther, “Money is
anything that is generally acceptable as a means of exchange”.
The Quantity Theory of Money
The quantity theory of money states that there is a direct relationship between the
quantity of money in an economy and the level of prices of goods and services sold.
The quantity theory of money gives reasons for changes in the general price level.
According to this theory, an increase in the quantity of money in country will lead to a rise in
the price level. On the other hand, a decrease in the quantity of money in the country will lead
to a fall in the price level.
Irving Fisher, an American Economist, has refined this theory by adding the velocity
of circulation of money or the rate at which it is exchanged as a factor. According to Fisher,
the general price level is dependent on supply of and demand for money.
Supply of Money:
On any day, the supply of money is equal to the total amount of money in circulation
in the country. Money in circulation in the county consists of (i) legal tender money and (ii)
bank money. Over a period of time, money changes from hand to hand. The number of times
it is passed on from one person to another is called the velocity of circulation of money.
Thus, to find out total money supply during a period of, say, one year, we have to take into
account, (i) the amount of legal tender money and bank money and (ii) the velocity of money
circulation.
The supply of money is given by:
Supply of Money = MV + M’V’
where,
M = legal tender money,
V = Velocity of circulation of M,
M’ =bank money and
V’ = Velocity of circulation of M’.

65
Demand for Money:
In order to find out the money demanded by people during one year period, we
consider,
(i) the total amount of goods purchased by people, that is, the total volume of transactions in
the country (T) and (ii) the general price level (P). Therefore, the demand for money = PT.
Fisher says that demand for money will equal its supply, i.e., PT = MV + M’V’.
MV + M 'V '
P=
T
Fisher assumes V’, V and T to remain unchanged. He also assumes that the ratio
between M and M’ will remain unchanged. Hence, he concluded that wherever there is a
change in money (M), there would be a change in price level (P). Thus, P (Price level) is
dependent on money supply (M). Thus, Fisher’s equation of demand and supply of money
leads us to the conclusion that with every increase in the quantity of money, the price level
will increase and the value of money will fall.

Exercise: Classroom discussion on Money, different types of money, functions and money
supply.

66
Ex.No.16 MEASURES OF STANDARD OF LIVING AND HUMAN
Date : DEVELOPMENT: HUMAN DEVELOPMENT INDEX–PHYSICAL
QUALITY OF LIFE INDEX – GENDER DEVELOPMENT INDEX

Human development Index (HDI)

The Human Development Index (HDI) is a summary measure of average achievement
in key dimensions of human development: a long and healthy life, being knowledgeable and
have a decent standard of living. The HDI is the geometric mean of normalized indices for
each of the three dimensions. The method followed in UNDP is as follows:

The Human Development Index (HDI) value of a country is calculated by taking three
indicators:
I. The health dimension is assessed by life expectancy at birth (P1): as an index of
population, health and longevity
II. The education dimension (P2) is measured by mean of years of schooling for adults
aged 25 years and more and expected years of schooling for children of school
entering age
III. Standard of living (P3) is measured by gross national income per capita: The HDI uses
the logarithm of income, to reflect the diminishing importance of income with
increasing GNI.

Before calculating HDI, an index for each of the above three dimensions is created.
For this purpose, maximum and minimum values are chosen for each indicator.

67
 Maximum and Minimum Values for Calculating HDI
Sl.No. Dimension Indicators Maximum Minimum
Value Value
1 Health Life Expectancy (Years) 85 20
2 Mean Years of Schooling 15 0
Education (Years)
Expected years of Schooling 18 0
(Years)
3 Standard of living Gross National Income per 75000 100
capita (2017 PPP$)
Source: UNDP (2014), Technical Note 1. p.2
Steps involved in calculating HDI: There are two steps involved.
Step1: Creating the dimension indices
Minimum and maximum values (goalposts) are set in order to transform the indicators
expressed in different units into indices between 0 and 1. These goalposts act as the ‘natural
zeros’ and ‘aspirational goals’, respectively, from which component indicators are
standardized. They are set at the following values:
Having defined the minimum and maximum values, the dimension indices are calculated as:
Actual Value - Minimum Value
Dimension Index =
Maximum Value - Minimum Value
For the education dimension, equation 1 is first applied to each of the two indicators,
and then the arithmetic mean of the two resulting indices is taken.

Step.2: Aggregating the dimensional indices to produce the Human Development Index.
The HDI is the geometric mean of the three dimensional indices:

HDI = (IHealth . IEducation . IIncome) 1/3

Solved Exercises:
Question No.1.
Life expectancy at birth (years) - 65.3
Expected years of schooling (years) - 7.9
Mean years of schooling (years) - 3.8
Gross national income per capita (2017 PPP $) - 3,829
1. Health index = 65.3 – 20 /85 – 20 = 0.6971
2. a. Expected years of schooling index = 7.9 – 0/ 18 – 0 = 0.4380
b. Mean years of schooling index = 3.8 – 0 /15 – 0 = 0.2513

68
 3. Education index = 0.4380 + 0.2513 /2 = 0.3447
4. Income index = ln (3,829) – ln (100) / ln (75,000) – ln (100) = 0.5506

Human Development Index (HDI) = (0.6971 X 0.3447 X 0.5506)1/3 = 0.510

The cut-off points on the HDI for grouping countries that were introduced in the 2014 UNDP
Report is as follows:
Very high human development - 0.800 and above
High human development - 0.700–0.799
Medium human development - 0.550–0.699
Low human development - Below 0.550

Interpretation
The HDI value of 0.510 reveals that the country is in low level of human development.

Physical Quality Life Index (PQLI)

The Physical Quality of Life Index (PQLI) is an attempt to measure the quality of
life or well-being of a country. The value is the average of three statistics: basic literacy rate,
infant mortality and life expectancy.
If the indicators of life expectancy and basic literacy rate are positive, the best
performance is shown as the maximum and the worst as the minimum. Infant mortality rate
being a negative indicator, for this the best indicator is shown as minimum and worst as the
maximum. Each indicator of the three components is placed on a scale of zero to 100 where
zero represents the worst performance and 100 represents best performance.
Maximum and Minimum Values for Calculating PQLI
Sl.No. Indicators Maximum value Minimum Value
1 Infant Mortality Rate 229 9
2 Life Expectancy at Birth 77 38
3 Basic Literacy Rate 180 0

Achievement level of negative indicators

Maximum Value – Actual Value
Infant Mortality Rate Index (IMRI) =
Maximum Value – Minimum Value

69
Achievement level for the positive indicators such as life expectancy and literacy rate

Actual Value – Minimum Value

Achievement level =
Maximum Value – Minimum Value

Gender Related Development Index

The Gender Development Index (GDI) is an index designed to measure of gender
equality. The method followed in UNDP is as follows:

Steps to calculate Gender Development Index values

Step 1. Estimating female and male earned incomes
To calculate estimated earned incomes, the share of the wage bill is calculated for each
gender. The female share of the wage bill (Sf ) is calculated as follows:
Step 2. Normalizing the indicators
Actual Value - Minimum Value
Dimension Index =
Maximum Value - Minimum Value

Step 3. Calculating the female and male Human Development Index values

HDIf = (IHealth_f . IEducation_f . IIncome_f) 1/3

HDIm = (IHealth_m . IEducation_m . IIncome_m) 1/3

70
Step 4. Comparing female and male Human Development Index values
The GDI is simply the ratio of female HDI value to male HDI value:
GDI = HDIf / HDIm
Maximum and Minimum Values for GDI
Indicator Minimum Maximum
Life expectancy at birth (years)
Female 22.5 87.5
Male 17.5 82.5
Expected years of schooling (years) 0 18
Mean years of schooling (years) 0 15
Estimated earned income (2017 PPP $) 100 75,000

Solved Exercises
Question No.2.

Indicator Female value Male value

Life expectancy at birth (years) 74.1 65.8
Expected years of schooling (years) 14.8 13.7
Mean years of schooling (years) 10.7 9.7
Wage ratio (female/male) 0.821
Gross national income per capita (2017 PPP $) 10838.67
Share of economically active population 0.458 0.542
Share of population 0.507 0.493

Female wage bill (Sf ) = (Wf/Wm) * EAf / (Wf/Wm *EAf ) + EAm

Where,
Wf/Wm – Ratio of female to male wage
EAf – Female share of economically active population
EAm – Male share of economically active population

Sf = (0.821 *0.458) / [(0.821* 0.458) + 0.542] = 0.4096

Estimated female earned income per capita (GNIpcf) = GNIpc *(Sf/Pf)

Where,
GNIpc - Gross national income per capita
Pf – Female share of Population (Nf/N)
GNIpcf = 10,838.67 * 0.4096 / 0.507 = 8,756.10

Male wage bill Sm= 1-Sf

Sm =1 -0.4096 = 0.5904

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 Estimated male earned income per capita: (GNIpcm) = GNIpc *(Sm/Pf)
Where,
GNIpc - Gross national income per capita
Pf – Female share of Population (Nf/N)

GNIpcm= 10838.67 * 0.5904 / 0.493 = 12,980.55

Female health index = ( 74.1 -22.5) / (87.5-22.5) = 0.7938

Male health index = (65.8-17.5) / (82.5-17.5) = 0.7431

Female education index = [(14.8 / 18) + (10.7 / 15)] / 2 = 0.7578

Male education index = [(13.7 / 18) +(9.7 / 15)] / 2= 0.7039

Estimated female earned income index:

[In 8,756.106)-In (100)] / [In (75,000) – In (100] = 0.6756
Estimated male earned income index:
[In 12,980.55) -In (100)] / [In (75,000) – In (100] = 0.7350

Female HDI = (0.7938*0.7678 * 0.6756) 1/3 =0.744

Male HDI = (0.7431 * 0.7039 * 0.7350) 1/3 = 0.727

GDI = 0.744 / 0.727 = 1.023

Exercise:
1. The human development indicators for the various countries during 2019 are given in the
tables. Construct the human development index and categories the countries level of
development.
Life Expected years Mean Years of Gross National
S.No. Country Expectancy of Schooling Schooling Income per
(Years) (Years) (Years) capita (PPP$)
1 India 69.7 12.2 6.5 6681
2 Sri Lanka 77.0 14.1 10.6 12707
3 Singapore 83.6 16.4 11.6 88155
4 US 78.9 16.3 13.4 63826
5 China 76.9 14.0 8.1 16057

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2. Collect the district wise data pertaining to different human development indicators of
Tamil Nadu and categories the level of human development.

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