CA Cpt Economics

Full text

(1)TUTORS CIRCLE www.TutorsCircle.com. Super Circle Summary Economics.

(2) TutorsCircle.com. Thank you for downloading our. CPT Super Circle Summary.. The guide has been. designed and abridged to help you navigate through CPT Economics in the easiest possible way. We have used different Colours, Pictures and Visual learning methods so you remember everything the easiest possible way. Most of your dreams can be turned into reality. You just need to dream and we PLEDGE we will do the most to make it a reality. Nothing is Impossible, not even this exam. We will be soon launching our guides for CWA, CS, ICSE, ISC, CBSE, AIEEE …….. The list is long.... Make sure you browse and test yourself (over and over again) on our. TutorsCircle.com, a state of the art web education (its FREE) has been carefully engineered to get you SO. TBANK online at. portal. The web application familiar with the topics and. material that once you walk out of that exam you’d know you killed it. The database is regularly updated if we find newer questions. We also have a lot of questions in there which had appeared in the last exam. The basic idea is to equip you with such a strong armor that in the exam you……... Don’t think, Just Circle it….!!! Good Luck!. www.TutorsCircle.com. CPT Super Circle Summary.

(3) TutorsCircle.com Chapter 1 Economics is the study of how society allocates scarce resources and goods. Resources are the inputs that society uses to produce output, called goods. Resources include inputs such as labor, capital, and land. Goods include products such as food, clothing, and housing as well as services such as those provided by barbers, doctors, and police officers. These resources and goods are considered scarce because of society's tendency to demand more resources and goods than are available. Scarcity: Resources are finite, so decisions must be made as to how to allocate those resources in the most efficient manner possible. Oil and petrol have rather become scarce and hence the prices of such commodities continuously rise. In 1995 you could get a liter of petrol of 20 Rs but the same today costs almost 80 Rs. So let’s assume, today if you have Rs 1000 would you want to go on a drive with your friends or use the money to go to a close by restaurant. The two fundamental facts of Economics is (i) Human beings have unlimited wants; and (ii) The means of satisfying these wants are relatively scarce form the subject matter of Economics. Adam Smith, the father of Economics, published “The Nature and Causes of Wealth of Nations “in 1776. He defined Economics as “An inquiry into the nature and causes of the wealth of the nations.” J B Say defined economics as “Science which deals with wealth” Alfred Marshal’s definition of economics: “Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus, it is on the one side a study of wealth and on the other and more important side a part of the study of the man.” A C Pigou – “The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money” Prof. Lionel Robbins - book “Nature and significance of Economics” 1931 “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.. www.TutorsCircle.com. CPT Super Circle Summary.

(4) TutorsCircle.com Classical Economics- was the first modern style of how people perceived economics. It flourished in the 18th and 19th century. Some famous Classical economists were Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill. Neo-classical Economics -Flourished during the late 19th century where economists related supply and demand to an individual's rationality and his or her ability to maximize utility or profit.. Paul A. Samuelson defined economics as “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society”.. Prof Henry Smith - Economics, is the “the study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined”.. Jacob Viner According to him, “Economics is what Economists do” Keynesian Economics J.M. Keynes An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability. Keynesian economists believed that the government should actively participate to smoothen out the bumps in a business cycle.. 'Laissez Faire' An economic theory from the 18th century that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a freeenterprise system to operate according to its own economic laws. The transactions between private parties should be free from taxes, tariffs, and government subsidies. The phrase laissez-faire is French and literally means "let them do as they will," It has a few other assumptions: (i) (ii). The economic market rises or falls based upon its own fluctuations with no government input to stabilize it. Literally to let things take their own course without interfering.. www.TutorsCircle.com. CPT Super Circle Summary.

(5) TutorsCircle.com Microeconomics- micro means small, it studies the markets on a small scale. It focuses on how a market is impacted by decisions and choices made by small economic units such as individual consumers, individual firms, or individual government agencies. It includes (I) Product pricing (II) Consumer behavior (III) Factor pricing. (IV) Economic conditions of a section of the people (v) Study of firms (VI) Location of an industry. Macro Economics– Is a term derived from the Greek work Makros – meaning large. Macroeconomics considers the aggregate performance of all markets in the market system and is concerned with the choices made by the larger subsectors of the economy—the household sector or consumers; the business sector, or firms; and the government sector or all government agencies. It includes: (I) National income and output (ii) General Price level (iii) Balance of trade and payments. (IV) External value of money (v) saving and investment (VI) employment and economic growth. An economic policy is a course of action taken with an intention to influence or control the behavior of the economy. Economic policies and decisions taken by the government affect a nation's gross domestic product (GDP), the unemployment rate, its trade with other nations. Economic policies are generally implemented and administered by the government. Examples would be  How much money to spend on making roads  How much tax to impose on BMW’s and Audi’s  How to redistribute Income from rich to the poor.  How to control the supply of money in an economy. The effectiveness of economic policies can be assessed in one of two ways, known as Positive and Normative economics. Positive Economics – Economics as positive since analyses cause & effect relationship. It states facts and uses empirical evidence. Normative Economics- Economics as normative science involves judgments. It analyses the values and then prescribes the action to be taken. Deductive Method (Abstract, analytical and priori method) –It involves deducing of laws logically. Some fundamental assumptions are made & conclusions are drawn accordingly.. www.TutorsCircle.com. CPT Super Circle Summary.

(6) TutorsCircle.com Inductive Method –Facts are collected & analyzed & then conclusions are drawn based on them.. The Four basic economic problems are    . What to produce and how much to produce? How to produce? For whom to produce? How to accelerate economic growth?. Production Possibilities Curve (PPC)A PPF. curve shows and determines all maximum output possibilities of two goods that can be produced simultaneously given a set of inputs (resources, labor, etc.) during a given period of time. The PPF assumes that all inputs are used efficiently.. Points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs. TYPES OF ECONOMIES. - Capitalist Economy – Means of production are in private hands Characteristics  Private ownership of productive factors  Freedom of enterprise  Freedom to choice by consumers  Work on profit motive  Competition among sellers & buyers  Income inequalities. www.TutorsCircle.com. CPT Super Circle Summary.

(7) TutorsCircle.com Merits         . Initiative to innovate by producers High standard of living Works through price mechanism Productive efficiency Liberty & freedom to act Maximum satisfaction to consumers Preserves fundamental rights Rewards initiatives Growth of business talent, research & development etc.. De-merits  Income inequalities  Welfare is not protected  Economic instability  Huge amount spent on product promotion  Class conflict between employers & employees  Misuse of resources  Formation of monopolies  Insecure employment. - Socialist Economy – Controlled, managed & regulated by the Government Characteristics –  Collective ownership of resources  Central planning authority  No choice for consumers  Less income inequalities  Absence of price mechanism Merits Less income inequalities  Better utilization of resources  Strict economic planning  Economic stability  Better employment conditions  No class war  Ensures right to work  Protection from exploitation & monopoly. www.TutorsCircle.com. CPT Super Circle Summary.

(8) TutorsCircle.com De-merits  Predominance of bureaucracy  No freedom  No right of private property  No incentive to work hard  Improper cost calculation  Extreme form not practicable. - Mixed Economy – Public sector & private sector co-exist. It has the best features of market economy & controlled economy Characteristics –  Co-existence of public & private sector  Better economic planning  Balanced regional development  Dual system of pricing Merits –  Merits of both capitalism & socialism  Protects individual freedom  Price mechanism operates  Reduced income inequalities  Stable economy  Balanced economic development for developing countries De-merits –  Difficult to operate  Excessive controls and heavy taxes  Red-tapism, nepotism, favoritism, officialdom exist  According to Schumpeter, advantages offered are temporary. www.TutorsCircle.com. CPT Super Circle Summary.

(9) TutorsCircle.com CHAPTER 2 Demand: Willingness & ability of consumers to purchase at various prices for a given period of time.. Demand is effected by 1) Desire 2) Means to purchase 3) Willingness to purchase. Quantity demanded: 1) Always expressed for a given price 2) It is a flow. Definition of Demand: “By demand, we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time, at various prices, or at various incomes, or at various prices of related goods”.. Determinants of demand: 1) 2) 3) 4) 5). Price of the good Price of related goods Level of household income Tastes & preferences of consumers Other factors- Population size - Composition of population - Income distribution. Relation between determinants of demand & demand: 1) Price of good: Other things remaining constant, there is an inverse relation between price of good and its quantity demanded. 2) Price of related goods: - Complementary goods: Inverse relation between price & demand of complementary goods. For e.g. pen & ink. Price of pen, price of pen increases, demand for ink decreases - Substitute goods: Direct relation between price & demand of substitute goods. For e.g. tea & coffee. Price for tea increases, demand for coffee increases. 3) Level of income: - Normal goods: Direct relation between income & demand. Income increases, demand increases. - Inferior goods: Inverse relation between income & demand. Income increases, demand decreases.. www.TutorsCircle.com. CPT Super Circle Summary.

(10) TutorsCircle.com 4) Taste & preferences: Taste changes in favour of good, demand increases & vice versa. 5) Other factors: - Population: Population increases, demand increases - Composition of population: Effected by the age group of people - Income distribution: Less rich people & more of poor people – Less demand Law of demand:. Prof. Alfred Marshall - “The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers or in other words the amount demanded increases with a fall in price and diminishes with a rise in price”.. Law of demand states that, ceteris paribus, or other things remaining constant, people will buy more at lower price and will buy less at higher price.. Demand schedule: Data stating different quantity of goods demanded by consumers at different prices - Individual schedule: Shows the demand pattern of an individual consumer - Market schedule: Shows the demand pattern for entire market. It is constructed by aggregating the demand schedules of many individual consumers.. Demand curve: Horizontal axis – Price Vertical axis – Quantity Curve – Negatively sloping i.e. slopes downwards to the right.. www.TutorsCircle.com. CPT Super Circle Summary.

(11) TutorsCircle.com Rationale for law of demand: (Reason for the negative slope) 1) Law of diminishing marginal utility: As more of a good is consumed, the satisfaction derived decreases. So consumer will only buy till the price it equalizes their satisfaction. 2) Substitution effect: As the price of good increases, consumers replace the goods with the substitutes. 3) Income effect: As price increases, the real income of the consumer decreases and therefore quantity demanded falls & vice versa. 4) Arrival of new consumers: As price for a good fall, new consumers also move in to buy them. This increases the demand at lower price. 5) Different uses: If price for commodities with multiple uses rises, consumer will limit their use and this will decrease demand and vice versa.. Exceptions of Law of Demand: 1) Conspicuous goods: These are also called article of distinction or Veblen goods. These goods act as a status symbol and there is direct relation between their price and quantity demanded. For e.g. Diamonds, jewellery & gems. 2) 3) 4). 5) 6) 7). Giffen goods: These are the goods whose demand falls even if price falls. For e.g. coarse grains like bajra, low quality rice etc. Conspicuous necessities: These goods have become necessities due to their constant usage. For e.g. television, coolers etc. Future expectations about prices: If price of good increases and is expected to increase even more in futures then consumers will buy them in present despite of a price increase. Ignorance: Due to poor knowledge and ignorance of consumers, impulsive purchases are made without appropriate calculations. Demand for necessities: The demand for necessities is not affected much by price change. Speculative goods: Speculative goods like stocks and shares, demand increases with price.. Expansion & Contraction of Demand Expansion: When price falls and quantity demanded increases. There is a downward movement along the demand curve. Contraction: When price rises and quantity demanded decreases. There is an upward movement along the demand curve.. www.TutorsCircle.com. CPT Super Circle Summary.

(12) TutorsCircle.com. Increase & Decrease in Demand Increase: Price of the commodity remains the same but there is an increase in demand due to change in other factors. There is a rightward shift in the demand curve. Decrease: Price of the commodity remains the same but there is a decrease in demand due to change in other factors. There is leftward shift in the demand curve.. Movement along demand curve vs. Shift in curve Movement along curve 1. Indicate change in quantity demanded due to change in price.. Shift in curve 1. Indicate change in demand due to change in factors other than price.. 2. There is a movement along the same curve.. 2. There is a shift in whole curve and a new curve is formed.. 3. It is termed as change in “quantity demanded”.. 3. It is termed as change in “demand”. www.TutorsCircle.com. CPT Super Circle Summary.

(13) TutorsCircle.com Elasticity of Demand. Definition: Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends or we can say that it is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends..  Price elasticity: It measures responsiveness of quantity demanded to the change in price when other things remain constant. Ep = % change in quantity demanded ÷ % change in price (Change in quantity/ Original quantity) x (Original price/ Change in price) Price elasticity is negative because of the inverse relationship between price and quantity demanded. Degrees of price elasticity: Perfectly elastic. Perfectly inelastic. Unit elastic. Elastic. Inelastic. www.TutorsCircle.com. E=∞ A little change in price causes infinite change in quantity demanded. E=0 Quantity demanded doesn’t change with price. E=1 Change in quantity demanded is equal to the change in price ∞> E > 1 Proportionate change in quantity demanded is more than change in price 0<E<1 Proportionate change in quantity demanded is less than change in price. CPT Super Circle Summary.

(14) TutorsCircle.com.  Point elasticity: It measures elasticity at a given point on demand curve. Point elasticity = Lower segment ÷ Upper segment It is zero at the midpoint and increase as we move from bottom to top i.e. from quantity axis to price axis..  Arc elasticity: It is used when change is price is larger. It measures price elasticity between two prices or two points in demand curve. Elasticity by Arc method = [(q1-q2)/ (q1+q2)] x [(p1+p2)/ (p1-p2)]  Total outlay method of calculating Price Elasticity: This method measure the price elasticity of demand by analysing the changes in total expenditure or outlay. It only states whether the good is elastic or inelastic.. www.TutorsCircle.com. CPT Super Circle Summary.

(15) TutorsCircle.com Total outlay method ELASTICITY. PRICE. TOTAL EXPENDITURE. E > 1, Elastic demand. Increases. Decreases. Decreases. Increases. E = 1, Unitary elastic. 100% increase. Unchanged. E < 1, Inelastic demand. Increases. Increases. Decreases. Decreases. Determinants of price elasticity: . .  .    . Availability of substitutes: Goods with close or perfect substitutes have highly elastic demand & vice versa. For e.g. tea & coffee. Change in price of tea will affect the demand for coffee. Position of commodity in consumer’s budget: If greater proportion of income is spent on a commodity then its elasticity of demand will also be high & vice versa. For e.g. needle. It has a very small proportion in consumer’s budget & any price change will not affect the demand for it. Nature of need that a commodity satisfies: Luxury goods- elastic demand Necessities- inelastic demand Number of uses to which a commodity can be put: The more the possible uses of a commodity the greater will be its price elasticity and vice versa. For e.g. electricity. If the price of electricity increases, its use will be restricted to important things & demand will be elastic. The period: Longer the period, for which elasticity is measured, more elastic will be the demand & vice versa. Consumer habits: If consumer is habitual to the commodity then its demand will be inelastic. For e.g. tobacco. Tied demand: If demand for a good is tied to demand for another good then it will have inelastic demand. Price range: High or low price range- inelastic demand Middle price range- elastic demand. www.TutorsCircle.com. CPT Super Circle Summary.

(16) TutorsCircle.com.  Income elasticity of demand: It measures responsiveness of quantity demanded of goods to the change in the income of the consumer.. Ey = % change in the quantity demanded ÷ % change in the income Income elasticity = 1. Proportion of income spent on a goods remains the same as income increases. Income elasticity > 1. Proportion of income spent on a goods increases as income increases Proportion of income spent on a goods decreases as income rises. Income elasticity < 1. Positive income elasticity: With increase in income, demand for goods increases & vice versa. It happened for normal goods.. Negative income elasticity: With increase in income, demand for good falls & vice versa. It happens for inferior goods, also known as Giffen goods.. Zero income elasticity: There is no change in the demand with the change in income. It happens for necessities like salt etc..  Cross Elasticity of Demand: It measures the responsiveness of change in demand of a good to the change in price of other good. Ec = % change in demand of good A ÷ % change in price of good B Positive cross elasticity: Substitute goods have positive cross elasticity. Their curve slopes upwards from left to right. Negative cross elasticity: Complementary goods have negative cross elasticity. Their curve slopes downwards from left to right. Zero cross elasticity: Goods are unrelated.. www.TutorsCircle.com. CPT Super Circle Summary.

(17) TutorsCircle.com Demand distinctions: 1. Producer goods- Intermediate goods used for further production. Consumer goods- Used for final consumption 2. Durable goods- Consumer goods which can be used more than once over a period of time Non-durable goods- Consumer goods which can be used just once. 3. Derived demand- Demand of these goods is consequence of purchasing another good. Autonomous demand- Demand of these goods is independent. 4. Industry demand- Total demand of a particular industry Company demand- Demand by a particular individual company 5. Short run demand- Demand with its immediate reaction to changes in the factors affecting demand Long run demand- Demand with changes after allowing enough time to react. Wants: Tastes, desires & motives of human beings. Classification of wants: 1. Necessaries: Goods essential for living 2. Comforts: Not essential for living but are required for happy living 3. Luxury: Expensive goods which adds consumers’ efficiency. Utility: Satisfaction derived from the consumption of a commodity.. Total utility (Full Satiety): Sum of utility derived from consumption of different units of commodity. It is sum total of marginal utilities.. Marginal utility (Marginal Satiety): Additional utility derived from the consumption of one additional unit of a commodity.. MU = TUn– TUn-1 Assumptions of Marginal Utility Analysis: 1. The Cardinal Measurability of Utility- It states that utility is measurable. 2. Constancy of the Marginal Utility of Money- While consumer is spending money on commodity, the marginal utility of money remains the same. 3. The Hypothesis of Independent Utility- It states that the total utility is just the sum total of different utilities of goods.. www.TutorsCircle.com. CPT Super Circle Summary.

(18) TutorsCircle.com The Law of Diminishing Marginal Utility. “The additional benefit which a person derives from a given increase in stock of a thing diminishes with every increase in the stock that he already has.” – Marshall. In simple words it states that as the more of a thing is consumed, the lesser marginal utility it has. As the consumption of a good is increased the marginal utility starts falling and after the point of saturation it becomes negative. Due to this the total utility also falls. Relationship between Total Utility& Marginal utility: 1. When the total utility rises the marginal utility diminishes. 2. When the total utility is at maximum then the marginal utility is zero. 3. When the total utility is diminishing then the marginal utility is negative.. Assumptions of Law: 1. Units consumed should be homogeneous in nature 2. Units consumed should be measured in standard units. 3. Consumption should be continuous i.e. without any time gap. 4. Prestigious goods like gold, cash etc. are exemptions. 5. Presence of related goods affects the shape of utility curve.. Consumer Surplus Consumer surplus as per Marshall-“Excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay”.. www.TutorsCircle.com. CPT Super Circle Summary.

(19) TutorsCircle.com Consumer surplus is the difference between what a consumer is willing to pay for one unit of a commodity and what he actually pays for it. Consumer surplus = Value of the product for consumer – price paid by consumer for it Consumer surplus declines as more of a commodity is consumed. This is because of the law of diminishing marginal utility, which suggests that the first unit of a good or service consumed generates much greater utility than the second, which generates greater utility than subsequent units.. Consumer Equilibrium: Price = Marginal utility Graphical representation of consumer surplus: The demand curve shows the amount that consumers are willing and able to pay for a good or service. The actual amount paid by them is the market price. As consumer surplus = Amount consumer is willing to pay – Price And demand curve shows the maximum amount consumer will pay for the good. Therefore, it is the area below the demand curve and above the price line.. Limitations: 1. Cannot be measured precisely 2. In case of necessities, marginal utility varies infinitely for different units 3. It is affected by availability of substitutes. 4. Utility of prestigious goods like diamonds cannot be measured appropriately. 5. Consumer surplus assumes that marginal utility of money remains constant, which is unrealistic. 6. It assumes utility is measurable in monetary terms.. www.TutorsCircle.com. CPT Super Circle Summary.

(20) TutorsCircle.com Indifference Curve The indifference curve represents a set of possible consumption bundles between which the individual is indifferent i.e. the consumer derives equal satisfaction for each bundle.. It is also called Iso- utility curve.. Assumptions: 1. Consumer is rationale 2. Consumer has complete knowledge 3. Consumer can rank combination of goods according to the satisfaction derived from them. 4. Consumer has consistent consumption pattern. 5. More is preferred to the less of any commodity. In the figure below, consumer is indifferent at point A & B i.e. the combination of goods at point A & point B gives consumer equal satisfaction.. www.TutorsCircle.com. CPT Super Circle Summary.

(21) TutorsCircle.com Indifference map: It is a collection of many indifference curves.. Marginal Rate of Substitution (MRS) The rate at which an individual must give up "good A" in order to obtain one more unit of "good B", while keeping their overall utility (satisfaction) constant is the Marginal rate of Substitution. It is calculated between two goods placed on an indifference curve. As such, the marginal rate of substitution is always changing for a given point on the indifference curve, and mathematically represents the slope of the curve at that point.. Properties of Indifference curve 1. It slopes downwards to the right. 2. They are convex to the origin 3. Two indifference curves can never intersect each other. 4. Higher indifference curve represents higher level of satisfaction as compared to a lower indifference curve. 5. It will not touch the axis.. www.TutorsCircle.com. CPT Super Circle Summary.

(22) TutorsCircle.com Budget Line Budget line characterizes on a graph the maximum amounts of goods that the consumer can afford with the given income and prices.. Consumer Equilibrium Consumer is at equilibrium at the point where the budget line touches the highest indifference curve on an indifference map.. The budget line touches indifference curve L2, which is the highest one it touches. Therefore we can say that the optimum consumption point for these two goods would be X1 of good X and Y1 of good Y. Slope of the budget line is Px / Py and the indifference curve slope at any point is MUx / MUy. Therefore, the consumer equilibrium point is the point where (Px / Py) = (MUx / MUy).. www.TutorsCircle.com. CPT Super Circle Summary.

(23) TutorsCircle.com SUPPLY: Supply is willingness and ability to offer to the market at various prices during a period of time. -It is the quantity that is offered for sale and not what is successfully sold. - It is a flow Determinants of supply 1. Price of good- Direct relation between price & supply. Price of the good increases, quantity supplied increases & vice versa. 2. Price of related goods- If price for other goods increases then supply is shifted to other goods. 3. Price of factors of production-Inverse relation between price of factors of production & supply. Price of factors increases, supply decreases. 4. State of technology- If technology improves, supply increases 5. Government policy- Imposition of taxes – supply decreases Subsidies- supply increases 6. Other factors like government’s industrial and foreign policies, goals of the firm, infrastructural facilities, market structure, natural factors etc. also affects supply.. Law of Supply Law of supply states that other things being constant equal, higher the price, the greater is the quantity supplied & vice versa.. Law of supply is based on 2 factors: 1. When price rises, firm substitutes the production of goods from one to other 2. Assuming other things remain same, higher prices implies higher profits. Behaviour of supply depends on: 1. Phenomenon considered 2. Degree of possible adjustment in supply 3. Time. www.TutorsCircle.com. CPT Super Circle Summary.

(24) TutorsCircle.com. Shifts in supply curve- Increase or Decrease in Supply Increase in supply- Quantity supplied increases due to change in factors other than price. This shifts the supply curve rightwards. Decrease in supply- Quantity supplied decreases due to change in factors other than price. This shifts the supply curve leftwards.. Movements on the Supply Curve- Increase or Decrease in the Quantity Supplied Expansion-Increase in quantity supplied due to increase in price. This leads to an upward movement along the supply curve.. Contractions-Decrease in quantity supplied due to fall in price. This leads to a downward movement along the supply curve.. www.TutorsCircle.com. CPT Super Circle Summary.

(25) TutorsCircle.com. Elasticity of Supply Elasticity of supply measures responsiveness of the quantity supplied to the changes in the price.. Es = % change in quantity supplied / % change in price = (Change in quantity/ Original quantity) x (Original price/ Change in price). Degrees of price elasticity: Perfectly elastic. E=∞ A little change in price causes infinite change in quantity supplied.. Perfectly inelastic. E=0 Quantity supplied doesn’t change with price.. Unit elastic. E=1 Change in quantity supplied is equal to the change in price. ∞ Elastic. >E>1 Proportionate change in quantity supplied is more than change in price. Inelastic. 0<E<1 Proportionate change in quantity supplied is less than change in price. www.TutorsCircle.com. CPT Super Circle Summary.

(26) TutorsCircle.com. Measurement of Elasticity of Supply: 1. Point elasticity: It measures the elasticity at a particular point on the supply curve.. Es = (dq/dp) x (p/q) 2. Arc elasticity: It is used to find elasticity between two points.. Elasticity by Arc method = [(q1-q2)/(q1+q2)] x [(p1+p2)/(p1-p2)]. www.TutorsCircle.com. CPT Super Circle Summary.

(27) TutorsCircle.com. Equilibrium price: Price at which Quantity Demanded = Quantity Supplied It is also called market clearing price.. www.TutorsCircle.com. CPT Super Circle Summary.

(28) TutorsCircle.com CHAPTER 3. Production Production is the act of creating output, a good or service which has value and contributes to the utility of individuals. It means creation or addition of utility. “Production is the organized activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy the demand of such transformed resources”. - James Bates and J.R. Parkinson. Production process: 1. Change the form of natural resources – Form utility 2. Change the place of the resources to a place where they have greater utility – Place utility 3. Making materials available when they are required – Time utility 4. Using personal skills. Factors of Production 1. LAND Economic definition - All free gifts of nature which would include besides the land, in common parlance, natural resources, fertility of soil, water, air, natural vegetation etc. Characteristics:  Free gift of nature  Supply of land is fixed i.e. it is strictly limited in quantity  Land is fixed and cannot be shifted from one place to another  Properties of land cannot be destroyed  Land yields results only after human efforts. 2. LABOUR In economics labour means expenditure of physical or mental efforts for production of goods & services. Anything done out of love & affection or for pleasure is not a part of economic activity. Characteristics:  Connected with human efforts  It is highly perishable  Labour cannot be separated from the labourer  Labour power & skills differ from labourer to labourer  All labours are not productive  Labour has poor bargaining power  Labourer has to choose between hours of leisure & hours of labour  Labour is a mobile factor. www.TutorsCircle.com. CPT Super Circle Summary.

(29) TutorsCircle.com 3. CAPITAL It is a part of wealth which is used for further production of wealth. It is also termed as produced means of production as they are already produced goods which are used in production of goods & services. Types of capital:  Fixed capital – Exists in a durable shape and is available for a long period  Circulating capital – Available for a single use  Real capital – physical goods  Human capital – human ability & skills  Tangible capital – can be touched  Individual capital – personal property  Social capital – belongs to society. Capital formation: It is a term used to describe net capital accumulation during an accounting period. Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods. It is also known as investment. Stages of capital formation Savings – The ability and willingness to save forms the base of the capital formation. It is more for the higher income group or richer country.  Mobilization of savings – It involves circulating the saved money to facilitate the process of capital formation. It is done through banks & financial institutions.  Investment – It involves converting the real savings into the real capital assets. This is the final stage of capital formation.. 4. ENTREPRENEUR Entrepreneur mobilizes all the factors of production, combines them in right proportion, initiates the process of production & bears the risk involved in it. They are also called organiser, manager or risk taker. Functions:  Initiating a business enterprise and resource co-ordination  Risk bearing or uncertainty bearing  Introduce innovations. www.TutorsCircle.com. CPT Super Circle Summary.

(30) TutorsCircle.com Production Function “The term production function is applied to the physical relationship between a firm’s input of resources and its output of goods or services per unit of time leaving prices aside” -Richard H. Leftwich. Production function states the relationship between inputs and output i.e., the maximum amount of output that can be produced with given quantities of inputs under a given state of technical knowledge. Equation of production function: q = f (a, b, c, d …….n) ‘Q’ = rate of output of given commodity a,b,c,d…….n, are different factors (inputs) and services used per unit of time. Short run production function: Capital remains constant where as other factors vary during short run. It applies law of variable proportion. Q = T (K, L) Long run production function: All factors of production can be varied. It applies law of returns to scale. Assumptions:  It is related to a particular unit of time.  The technical knowledge during that period of time remains constant.  The factors of production are divisible into most viable units.  Best available technique is used.. Total product - Total quantity of output produced with the given quantity on inputs. If one factor is kept constant then total product will vary with the quantity of variable factor.. Average product -Output of each unit of variable input employed. AP = Total product / Units of variable input Marginal product- Change in total output due to a one unit change in the variable input.. MP = TPn – TPn-1. www.TutorsCircle.com. CPT Super Circle Summary.

(31) TutorsCircle.com. Relationship between Average Product & Marginal Product 1. Both are derived from total Product 2. When AP rises with the increase in quantity of variable input then MP>AP 3. When AP is maximum the AP and MP curve intersect AP curve at its maximum 4. When AP falls with decrease in quantity of variable input then MP<AP. Law of variable proportions or Law of diminishing returns “The law of diminishing return is the marginal product of each unit of input will decline as the amount of that output increases, holding all other inputs constant”- Samuelson. If the variable factor of production is increased, there will come a point where extra unit of input become less productive than previous ones. Therefore, these extra inputs will have a lower marginal product. Assumptions:  Technology remains same  One input is variable and others are fixed  Factors of production can be used in different proportions  Only physical inputs & outputs are considered. www.TutorsCircle.com. CPT Super Circle Summary.

(32) TutorsCircle.com. STAGES. TOTAL PRODUCT. MARGINAL PRODUCT Initially reaches the maximum point & then starts falling.. AVERAGE PRODUCT. 1ST stage (MP > AP) Law of increasing returns. Initially increases at an increasing rate. Later at diminishing rate. 2nd stage (MP < AP) Law of diminishing returns. Increases at a diminishing rate & reaches its maximum point. Decreases & become zero at point M. After reaching its maximum point, begins to fall. 3rd stage (Beyond H) Law of negative returns. Begins to fall. Becomes negative. Continues to fall but remains positive. Increases & reaches its maximum point. Here, AP = MP. Stage of operation: Inappropriate stages of production1. Stage 1 – As MP is negative 2. Stage 2 – Resources are underutilized and AP can be increased by increasing variable factor. www.TutorsCircle.com. CPT Super Circle Summary.

(33) TutorsCircle.com Efficient stage of productionA rationale produced will produce in Stage 2 where MP & AP are falling. Resources are efficiently utilized.. Returns to Scale It studies the production in long run where all factors are variable. It studies the change in output with the change in scale i.e. all the factors are increased (decreased) in same proportion. 1. Constant Returns to Scale – It states that with increase in the scale in some proportion, output increases in same proportion. It is also called “Linear Homogenous Production Function”. 2. Increasing Returns to Scale – It states that with increase in the scale in some proportion, output increases in higher proportion. 3. Decreasing Returns to Scale – It states that with increase in the scale in some proportion, output increases in lower proportion.. Economies & Diseconomies of Scale The Scale of Production Economies of scale are the advantages arising because of large scale production. Economies of scale are experienced till a point after that diseconomies follow i.e. there are increasing returns to scale initially till a point and after that limit firm experiences decreasing returns to scale.. 1. Internal economies & diseconomies – These economies or diseconomies are related to a single firm due to its individual operations. TYPES Technical. Managerial. ECONOMIES (Reduces cost) As production in increased better utilization of capital & machinery is possible. Also there is greater degree of division of labour or specialisation. DISECONOMIES (Increases cost) After the maximum point of efficient utilization of resources further increase will make things unmanageable. With increase in scale, application of division of labour to management enables managers to look after their own sections more efficiently. Increase in scale beyond a limit lead to improper coordination & complex structure. www.TutorsCircle.com. CPT Super Circle Summary.

(34) TutorsCircle.com Commercial. Requirement of large After the optimum scale amount of materials economies converts into enables to place bulk diseconomies orders & enjoy discounts. Sales can be increased with little extra cost. Financial. Finance can be raised easily for large firms as it provides security to financers.. Risk bearing. Large business with After a point diversification diversified & multi- can increase exposure to production capabilities economic disturbances have better risk bearing. Financial cost increases after optimum scale due to over dependence on external finance. 2. External economies & diseconomies These accrue to firms as a result of expansion in the output of whole industry and not just one firm. External economies Cheaper raw materials & capital equipment – Expansion helps in exploring new & cheaper sources of raw material, machinery & other capital equipment.  Technological external economies – New technical knowledge can be discovered which will improve overall productivity of the industry.  Development of skilled labour – Labour becomes for skilled & specialized in their areas of production.  Growth of ancillary industries – Ancillary industries become more specialised & developed and provide raw material, tools & machinery at lower prices.  Better transportation & marketing facilities - Marketing & transportation networks develops with industry expansion & reduces costs.. External diseconomies –   . Some factor prices may rise due to increased demand High pollution cost Government policies may restrict expansion in particular area. www.TutorsCircle.com. CPT Super Circle Summary.

(35) TutorsCircle.com Cost Analysis It is the study of the behaviour of in relation to or more production criteria like size of output scale of operations, price of production factors.. 1. Accounting costs – Payments made to suppliers of various productive factors. For e.g. wages paid to the workers. These are also called explicit costs & are recorded in the books of accounts. 2. Economic costs– Economic costs = Accounting costs + Implicit costs. It includes - Implicit cost i.e. the normal return on money capital invested by the entrepreneur himself in his own business. - The wages or salary not paid to the entrepreneur but could have been earned if the services had been sold somewhere else. Abnormal profits = Revenues – Explicit costs – implicit costs 3. Outlay costs– Includes actual expenditure of funds. For e.g. wages, rent, interest etc. it involves financial expenditure & is recorded in books of accounts. 4. Opportunity cost - Opportunity cost is the sacrifice related to the second best choice available to someone who has picked among several choices. These are not recorded in books of accounts. 5. Direct or traceable cost– These costs can be directly traced to a cost object such as a product or a department. For e.g. cost of woods for a furniture manufacturing firm.. 6. Indirect or non-traceable cost - These costs cannot be traced to a specific product or department. For e.g. Rent for the building that houses production unit, warehouse & office.. 7. Fixed costs– Fixed costs do not vary with output and remains the same irrespective of the level of output. These cannot be avoided. They are also called inescapable or uncontrollable costs.. 8. Variable costs- These costs vary with the level of output. These are a function of output in the production period.. www.TutorsCircle.com. CPT Super Circle Summary.

(36) TutorsCircle.com Cost Function It is the mathematical relationship between cost of a product and factors affecting the cost. C= f(Q, T, Pf, K) C = total cost Q = Output T = Technology Pf = factor price K = Capital. Short Run Total Cost Fixed Costs – These costs do not vary with output. Variable Costs – These costs vary with the level of output Semi-variable costs – These costs are neither completely variable nor completely fixed. For e.g. electricity charges. Stair-step variable cost – Remains fixed till a level of output and suddenly increases majorly beyond that limit of output. Fixed factors – Factors of production which cannot be easily varied like building Variable Factors – Factors which can be easily adjusted like workers Short run - Period of time in which output can be increased or decreased by changing only the amount of variable factors. This period is too short to vary fixed factors. Long run – This is the period in which all factors are variable Total costs – it is the sum total of variable cost & fixed costs.. TC = TVC + TFC. www.TutorsCircle.com. CPT Super Circle Summary.

(37) TutorsCircle.com. Short run average cost Average Fixed costs – Fixed cost per unit of output AFC = TFC / Output It decreases as the output increases but is never zero and is therefore negatively sloping. Average Variable Costs – Variable costs per unit of output AVC = TVC / Output It normally falls as output increases from zero to normal capacity. Beyond normal capacity it increases due to diminishing returns. Therefore, it first falls and reaches its minimum and then starts rising. Average Total Cost – Total cost per unit of output ATC = AFC + AVC or TC / Output. In beginning AFC & AVC falls, so ATC falls When AVC rises but AFC falls, ATC continues to fall as AFC > AVC After a point AVC begin to increase and becomes more than AFC & hence ATC rises. Due to this ATC is “U” shaped.. Marginal cost – Increase in total cost when one additional unit of output is produced. MC = TCn – TCn-1 It first declines, reaches its minimum & then begins to increase.. www.TutorsCircle.com. CPT Super Circle Summary.

(38) TutorsCircle.com. Relation between MC & AC 1. Average costs falls with increase in output, MC < AC 2. AC rises with increase in output, MC > AC 3. AC minimum, MC = AC i.e. MC curve cuts AC curve at its minimum point.. Long Run Average Cost Curve In long run firm can vary plant size and move to bigger plant to increase output & vice versa. During long run the cost of production is least possible cost at which a given level of output can be produced when all factors are variable. Long run cost curve shows the relation between output & long run cost of production. The minimum point on this curve is called “Minimum Efficient Scale”.. www.TutorsCircle.com. CPT Super Circle Summary.

(39) TutorsCircle.com In order to derive a long run average cost curve short run average cost curves for different periods are considered and then long run cost curve is drawn as tangent to all these short run average cost curves. It is NOT tangent to them at their minimum points. Long run cost curve is “Planning curve” as firm produces any output in long run by choosing a plant on the long run average cost curve corresponding to the given output. It is also called “Envelope curve” because it envelopes short run average cost curves from below.. Reason for “U” shape Initially when firm expands there are economies of scale (increasing returns to scale) & cost falls. Then after the minimum point further expansion leads to diseconomies of scale (decreasing returns to scale) & cost increases.. www.TutorsCircle.com. CPT Super Circle Summary.

(40) TutorsCircle.com CHAPTER 4 Elements of Market (i) Buyers and sellers; (ii) A product or service; (iii) Bargaining for a price; (iv) Knowledge about market conditions; and (v) One price for a product or service at a given time.. Classification of Market On basis of area 1. Local markets – perishable goods are traded 2. Regional markets –semi-durable goods are traded 3. National markets –durable goods & industrial items are traded 4. International markets –precious goods are traded On basis of time 1. Very short period market – perishable goods, fixed supply 2. Short period market – supply can be increased by increasing variable factors 3. Long- period market – supply can be increased by changing fixed factors 4. Very long period or secular period – very long period in which there is movement in factors like population size, supply of capital & raw material etc. On basis of nature of transactions 1. Spot market – goods are physically transacted on the spot 2. Future market – involves future contracts On basis of regulation 1. Regulated market - transactions are statutorily regulated 2. Unregulated market – no restrictions On basis of volume of business 1. Wholesale market – commodities are bought & sold in bulk 2. Retail market – commodities are sold in small quantities On basis of competitions 1. Perfectly competitive market 2. Imperfect competition. www.TutorsCircle.com. CPT Super Circle Summary.

(41) TutorsCircle.com Types of Market Structure Criteria. Perfect Comp.. Monopolistic. Oligopoly. Monopoly. No. of sellers. Many. Many. A few. One. Nature product. of Homogeneous. Differentiated. Differentiated. Unique. Freedom entry & exit. of Complete freedom. Complete freedom. Barriers to entry. Barriers to entry. Price elasticity Infinite of demand. Large. Small. Small. Degree of price None control. Some. Some. Very considerable. Total revenue, Average revenue & Marginal revenue Total revenueMoney realised by the sale of commodity TR = P x Q P = Price Q = Quantity of the commodity. Average revenue – Revenue per unit & is equal to price of the commodity AR = TR / Q TR = Total revenue Q = Quantity sold. Marginal revenue – Increase in revenue due to sale of an extra unit MR = TRn – TRn-1 AR, MR, TR & Elasticity of demand MR = AR [(e – 1) / e] Where, e = elasticity of demand MR = 0, e = 1 MR > 0, e > 1 MR < 0, e < 1. www.TutorsCircle.com. CPT Super Circle Summary.

(42) TutorsCircle.com Behavioural Principles 1. Firm should produce till TR = TC or TR > TC 2. Production should be expanded if MR > MC till MR = MC. Determination of Prices Price is fixed at the point where demand = supply I.e. demand curve intersects supply curve. Changes in Demand 1. Increase in demandDemand increases – demand curve shift rightwards – price & quantity increases. 2. Decrease in demandDemand decreases – demand curve shift leftwards – price & quantity falls. www.TutorsCircle.com. CPT Super Circle Summary.

(43) TutorsCircle.com 3. Increase in supply Supply increases – supply curve shift rightwards – quantity increases, price decreases. 4. Decrease in supply Supply decreases – supply curve shift leftwards – quantity falls, price rises. Simultaneous changes in demand & supply 1. Equal increase in demand & supply – quantity increases, price remain same 2. Increase in demand > increase in supply – quantity increases, price increases 3. Increase in demand < increase in supply – quantity increases, price decreases 4. Equal decrease in demand & supply – quantity falls, price remains same 5. Decrease in demand > decrease in supply – quantity decreases, price decreases 6. Decrease in demand < decrease in supply – quantity decreases, price increases. www.TutorsCircle.com. CPT Super Circle Summary.

(44) TutorsCircle.com Perfect competition Also called pure competition 1. 2. 3. 4. 5. 6.. Large no. of buyers & sellers Homogenous commodity Free entry & exit Perfect market knowledge Buyers & sellers are indifferent Firms are price takers & there is a uniform price. Industry equilibrium: Total output = Total demand Firm equilibrium: Price line is the demand curve. Produces where profit is maximum i.e. - MC = MR - MC curve cuts MR curve from below. Supply curve: MC curve above AVC depicts firm’s supply curve AVC > Price – firm’s supply is zero AVC > Price – firm’s supply at point where MC = Price Breakeven: AVC = Price Normal profits: AR = ATC Super normal profits: AR > ATC Losses: In case of losses firm will try to produce where loss is minimized i.e. where it covers its variable cost & a part of fixed cost.. Long run equilibrium of firm: Where, long run marginal cost = Long run average cost = Price At this point Short run average costs = Long run average costs. www.TutorsCircle.com. CPT Super Circle Summary.

(45) TutorsCircle.com Short run marginal costs = Long run marginal costs. Long run equilibrium of industry: 1. All firms are in equilibrium, & 2. There is no further entry or exit from market At long run equilibrium industry satisfies following conditions: 1. Output is produced at least possible cost 2. MC = AR = Price 3. MC = AC i.e. there is no wastage 4. AC = AR, firms earn normal profits 5. MC = MR i.e. profits are maximised but are normal.. Monopoly Features: 1. 2. 3. 4. 5.. Single seller Strong barriers to entry No close substitutes for the products sold Price discrimination can be adopted Firms are price maker & not price taker. As there is only one seller, the firm’s supply curve is also the market’s supply curve & firm’s demand curve is also the market demand curve.. Revenue curves: 1. AR & MR are negatively sloped 2. MR curve lies half-way between the AR curve and the Y axis 3. AR can never be zero but MR can be zero or even negative. Profit maximization or Equilibrium Short run equilibrium: 1. MC = MR, & 2. MC curve cuts MR curve from below. www.TutorsCircle.com. CPT Super Circle Summary.

(46) TutorsCircle.com. Profit: When firm charges price which is more than the equilibrium price of the firm. Losses: Firm will suffer losses if ATC > AR. However, production is continued if firm can cover AVC & a part of fixed cost.. Shutdown: Price < AVC Long run equilibrium: Produces at any point where profits are maximum. It need not be the minimum point on LAC curve.. Price discrimination Price discrimination occurs when same commodity is sold at different prices to different buyers by the same producer. It is possible only if following conditions are satisfied1. Seller should have some control over supply 2. Market should be divisible into two or more sub markets 3. Price elasticity should be different in different markets – Price elasticity < 1, charge higher price 4. Buyers should not be able to resell the product at higher price.. Objectives of price discrimination1. To earn maximum profit 2. To dispose of surplus stock 3. To enjoy the economies of scale 4. To capture foreign markets 5. To secure equity through pricing. www.TutorsCircle.com. CPT Super Circle Summary.

(47) TutorsCircle.com. Degrees of price control1. 1st degree – when the fixed price eliminates the entire consumer surplus 2. 2nd degree – price takes away a part of consumer surplus 3. 3rd degree – price vary according to location or customer segment. Equilibrium under price discrimination – -. -. The discriminating monopolist will maximize his profits by producing the level of output at which marginal cost curve MC intersects the aggregate marginal revenue curve AMR. This output will be divided between the sub markets in such a way that the marginal revenues of the markets are equal. The MC of the markets should also be equal Prices will be decided according to the quantity that can be sold in the different markets.. Imperfect competition – Monopolistic market Features: 1. 2. 3. 4.. There is a large no. of sellers Products are differentiated on the basis of brands Firms are free to enter or exit Non- price competition exist i.e. seller compete on basis of factors other than price. 5. Demand is not perfectly elastic 6. Firms are price makers. Equilibrium of firm Conditions to be satisfied 1. MC = MR 2. MC cuts MR curve from below Firms earn super normal profits during short run. During long run, due to entry of new firms, firm earns only normal profits.. www.TutorsCircle.com. CPT Super Circle Summary.

(48) TutorsCircle.com. Loss: If AC > Price then firm suffer loss. Firms which suffer losses during short run will exit till the remaining firms earn just normal profits. During long run, firms have excess capacity at equilibrium but the output will not be increased as it will reduce the AR more than it will reduce the AC.. Oligopoly Features: 1. Few sellers 2. Homogeneous or differentiated products. Types: 1. Open oligopoly – free entry in market 2. Closed oligopoly – entry is restricted 3. Collusive oligopoly – firms act in collusion with each other i.e. on basis of understanding 4. Competitive oligopoly – there is no understanding & firms compete with each other 5. Partial oligopoly - one large firm dominate the market 6. Full oligopoly – there is no leadership 7. Syndicated oligopoly – products are sold through centralised syndicate 8. Organized oligopoly – firms organise themselves into central association. Characteristics: 1. 2. 3. 4.. Firms’ policies are interdependent on each other Major advertising & selling cost exist As firms are interdependent there exist group behaviour i.e. firms act as a group They compete on terms other than price i.e. there is a non- price competition. www.TutorsCircle.com. CPT Super Circle Summary.

(49) TutorsCircle.com Price & output decisions: Change in price by any firm will result in reaction by other firms by changing prices. Due to this the demand curve keep shifting & there is no specific demand curve, price or output. Kinked demand curve It is known as “Sweezy’s model” as it is proposed by economist Paul M. Sweezy. Kinked demand curve explains the price stickiness or rigidity in an oligopoly market. According to the kinked-demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve. At low prices, the firm faces the relatively inelastic market demand curve.. www.TutorsCircle.com. CPT Super Circle Summary.

(50) TutorsCircle.com CHAPTER 5 Features of Underdeveloped economy 1. Agriculture is the main occupation 2. Wide spread poverty 3. High rate of population growth 4. Low standard of living 5. Low productivity of labour 6. Backward production techniques 7. High unemployment & underemployment 8. Low level of human well being 9. Widespread income inequalities 10. Low rate of capital formation 11. Low participation in foreign trade 12. Traditional social life 13. Weak infrastructure. India’s case: 1. Agriculture main occupation- population involved at the time of independence 72% and currently nearly 50% 2. 1/3rd of world’s poor live in India. Population in India below poverty line – 1993-94 – 36% 1999-2000 – 26% 2004-05 – 22% 3. High population growth rate of 2% 4. The dependency rate i.e. percentage of people in non-working age group is nearly 40% 5. Low per capita income - $1410 (2011) 6. Low gross capital formation – Gross domestic savings: - 1990-91 – 23% - 2010-11 – 32.3% Domestic capital formation: - 1990-91 – 26% - 2010-11 – 35.1% 7. Backward techniques of production 8. High unemployment& underemployment – Currently 6.6% - 1999-2000: 7.31% - 2004-05: 8.2%. www.TutorsCircle.com. CPT Super Circle Summary.

(51) TutorsCircle.com 9. Low level of human well-being – Measured by Human Development Index (HDI) on the basis of longevity, knowledge and standard of living. 2000 – 0.44 2010 – 0.519 2011 – 0.547 Relative global ranking (2010) – 119 among 169 countries Ranking in 2011 – 134 out of 187 countries 10. Highly unequal income distribution – Income inequalities are measured by GINI index: - Zero index – perfect equality - One index – perfect inequality As per HDI, India’s GINI index 1994 – 0.297 2000-10 – 0.368. India – A developing country 1. National income (NNP at factor cost) has increased fromRs.2,20,000 crore (195051) Rs.42,60,000crore (2010-11). 2. Per capita income has increased 5 times from Rs.6,122 (1950-51) to Rs.35,917 (2010-11) 3. There are significant changes in the occupational distribution of people Occupation 1951 (%) 2009-10 (%) Primary sector 72.1 49.3 Secondary sector 10.6 21.9 Tertiary sector 17.3 28.8 Total 100 100. 4. Sectoral distribution of domestic product has changed i.e. the share of agricultural sector in GDP has reduced.. Agriculture Industry Service. 1950-51 (%) 53.1 16.6 30.3. 2011-12 (%) 13.9 27.0 59.0. 5. There is a growth in the capital base of the economy 6. Social overhead capital has improved i.e. transport facilities, irrigation facilities, energy, education system, health and medical facilities. - Asia’s largest & world’s second largest rail network - World’s 2nd largest road network - Increase in installed capacity. www.TutorsCircle.com. CPT Super Circle Summary.

(52) TutorsCircle.com Increase in area under irrigation from 22.6 million hectares (1950-51) to 87.2 million-hectares (2007-08) - Increase in literacy rate from 18.33% (1951) to 74% (2011). - Improvement in medical field. No. of doctors has increased by more than 12 times & bed population ratio has increased to 1.03 per 1000 7. Development in banking & financial sector -. India – A Mixed Economy 1. 2. 3. 4. 5.. Private ownership of most of the sectors Market forces freely determine prices. Government regulations have reduced. Growth of monopoly houses Development of public sector Economic planning is an integrated part of Indian economy. Agriculture Contribution 1. Provide employment 2. Share in National Income. Detail 50% of population (2010-11) is engaged in agriculture sector It contributes 12.3% of GDP (2010-11) & 13.9% of national income (2011-12). 3. Support industries. 4.. 5. 6. 7. 8.. Provide inputs for many industries. Demand of industrial products depends on income of farmers. Share in foreign trade Agricultural exports forms 10% of national exports (2010-11) Agricultural imports constitute 3% of national imports (2010-11) Supplier of food & fodder It meets food needs of people & fodder needs of livestock. Savings of capital It requires lesser capital per unit of output produced compared with the industries. Contribution to government’s Indirectly influences revenues of state & revenue central government. Solving problems of urban Progress in agricultural sector helps in congestion and brain drain solving the problem of migration from rural areas to urban areas. Growth of agriculture sector: 1. Increase in production – - Agricultural production has increased by more than 3 times in last 6 decades. - Food grains production increased from 51 million tonnes (1950-51) to 245 million tonnes (2010-11) - Green revolution –. www.TutorsCircle.com. CPT Super Circle Summary.

(53) TutorsCircle.com     . Also called wheat revolution or High Yielding Varieties Programmes (HYVP) Programme started in 1966 Significant breakthrough in production of food grains from 81 million tonnes to 245 million tonnes in 2010-11 Restricted to 5 crops i.e. wheat, bajra, jowar, maize & rice Wheat production increased from 827kg per hectares (1965-67) to 2938kg per hectare in 2010-11.. 2. Increase in productivity – - Productivity increased at a rate of around 2.06% per annum during 1967-2003 - Productivity of food grains increased from 2.74% (1980-1990) to 2.91% (200012) 3. Diversified agriculture – - Share of non-crop sectors in agricultural output is increasing. - Area under commercial crops & superior cereals is increasing 4. Modern agriculture – - Increased use of high yielding varieties of seeds, fertilizers, pesticides etc. - Use of intensive cultivation, multiple cropping, scientific water management is increasing - Adoption of modern techniques by farmers which is resulting in improved agricultural capacity. - Better marketing of agricultural products 5. Improved agrarian system – - Abolition of zamindari system, the ryotwari system and the mahalwari system & of exploitation of cultivators - Introduction of tenancy reforms –  Rents were fixed between 25-50% for different states  Legislations disallowing the ejectments of tenants were passed  Ceilings were imposed on agricultural holdings  2.18 million hectares of land has been distributed as surplus area - Land holdings were reorganised 6. Other developments – - Inputs are provided at subsidised rates - Provision of credit at low interest rate - Minimum wage level is fixed - Government’s support in marketing & selling - Special programmes to provide employment to rural people - Special schemes passed to support production of various product. www.TutorsCircle.com. CPT Super Circle Summary.

(54) TutorsCircle.com Problems of agriculture sector Problems. Slow & uneven growth. Backward techniques. Flaws in land reforms. Finance related problems. Warehousing & marketing problems. Details 1. 2. 3. 4.. Targeted growth rate is not met Certain crops have higher growth rate than others Low yield per unit area Regional imbalances. 1. Only 44% of the gross cropped area is covered by HYVP 2. Old methods are used 3. 60% of net sown area in rain fed 4. 40 per cent of the gross cropped area has irrigation facilities 1. All states are not covered 2. There are snags in legislation. Steps: 1. 14 banks were nationalised in 1969 & 6 in 1980 2. Regional Rural Banks (RRBs) were set up in 1975 3. National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 as apex bank 4. Kisan Credit Card scheme was started in 1998 5. Agricultural Debt Waiver and Debt Relief Scheme in 2008 6. Rehabilitation package was initiated Problems: 1. Loans concentrated to limited regions 2. Nearly 40% of amount financed does not come back to the society 3. Large & medium farmers enjoyed major benefits 4. Lack of proper staff in financial institutions 1. Improper storage facilities 2. Lack of organization among farmers 3. Existence of agents between farmers & buyers who charge heave fees 4. Produces have to be sold in nearby markets at low prices due to improper transport facilities 5. Existence of several malpractices 6. Improper knowledge of market 7. Low level grading & standardization. www.TutorsCircle.com. CPT Super Circle Summary.

(55) TutorsCircle.com. Warehousing & marketing problems. Steps for improvement: 1. Agricultural Produce Market Committee (APMC) Act has been amended 2. Initiatives have been taken to transfer agricultural technologies and information to the farming sector 3. National Policy for Farmers, 2007 is being adopted providing many facilities to farmers 4. Schemes insuring the farmers against crop loss are introduced. Agriculture under XI Plan Targeted growth – 4% (double of X year plan’s growth rate) Urgent requirement of 2nd Green Revolution. Industry Role of Industry 1. Modernises & improves agricultural productivity 2. Generate employment opportunities. Currently employs 22% of labour force (2009-10) 3. Share in GDP increased from 12% (1950-51) to 27% (2011-12) 4. Contributes to more than 2/3rd of export earnings. 5. Industrial development increases GNP per capita 6. Industrialization enhances self-sustaining economic growth 7. Industries helps in meeting high-income demands 8. It strengthens the economy - Produce capital goods at low cost - Helps in production of economic infrastructure - Supports agricultural sector - Makes country self-reliant in defence materials. Growth of Industrial Sector in India 1. Industries on basis of size: - Large industries - Medium industries - Small industries 2. On basis of end use: - Basic good industries - Capital goods industries - Intermediates goods - Consumer goods Annual average rate - 6.9 % per annum. www.TutorsCircle.com. CPT Super Circle Summary.

(56) TutorsCircle.com Pattern of Industrial Development 1. 2. 3. 4. 5. 6. 7. 8.. It is lopsided i.e. dominated by large or small industries Low capital employed per worker More focus on consumer goods Steady growth of 8% during 1951-65 Growth fell down to 4.1% during 1965-80 Growth rate was 7.8% during 1980-91 Annual growth rate of production 1990-91 to 1999-2000: 5.7% X Plan (2002-2007) – - Aim- 10% growth rate - Actual- Average growth rate of 8.7% p.a. 9. The Eleventh Plan aims at 8.5 per cent per annum growth in the GDP. Important points 1. Based on Mahalanobis model, during 2nd plan, focus was shifted on basic & capital goods & Three Steel Plants were set up in the public sector at Bhilai, Rourkela and Durgapur. 1st 5 year plan in India started in 1951. 2. Industrial sector has become broad-based and modernised 3. Massive increase in the size and diversification of public sector from 5 units (1951) to 242 units (2008) 4. Emergence of many big industries in Private Sector from 2 units (1951) to 80 in present 5. Major expansion of infrastructural facilities - Emergence of public financial institutions - Improvement power generation, railway transport facilities, telecommunications etc. 6. India ranks high in the world in respect of technological talent and manpower and in development of information and communication etc. 7. Since 1951 there has been the mammoth growth of small-scale industrial units. They employ nearly 312 lakh people. 8. Classification of industries as per Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 In Manufacturing Sector- Investment up to Rs.25 lakh - micro enterprises - Investment between Rs.25 lakh and Rs.5 crore – small enterprises - Investment between Rs.5 crore and Rs.10 crore – medium enterprises In Service Sector - Investment up to Rs.10 lakh - micro units - Investment between Rs.10 lakh and Rs. 2 crore - small enterprises - Investment between Rs. 2 crore and Rs.5 crore - medium enterprises. www.TutorsCircle.com. CPT Super Circle Summary.

(57) TutorsCircle.com. Reasons behind deceleration and retrogression during 1965-80 (a) Unsatisfactory performance of agriculture. (b) Slackening of real investment especially in public sector. (c) Slow-down in import substitution. (d) Regulation and control over private sector (e) Narrow market for industrial goods. Problems of Industrial Development in India 1. Failure to achieve targets 2. Underutilization of capacity 3. Absence of world class infrastructure 4. Increase in capital – output ratio 5. Cost of production in India is higher as compared to international market 6. Inadequate employment generation in relation to investment made 7. Performance of public sector is quite poor 8. Sectoral imbalances 9. Regional imbalances 10. Industrial sickness – Around 96% of sick units are small units and 4% are big units.. Services Service sector includes: 1. Business & professional services 2. Communication services 3. Real estate & related services 4. Distributive services 5. Education services 6. Energy & environmental services 7. Financial services 8. Health services 9. Tourism 10. Transport. Role of Service Sector in India 1. Increase in GDP – 1950-51 – 1/3rd of GDP 2011-12 – 59% of GDP 2. Provide employment – 1951 – 17.3% of work force. www.TutorsCircle.com. CPT Super Circle Summary.

(58) TutorsCircle.com 2009-10 – 29% 3. Providing support to other sectors – Support agriculture & industries 4. Contribution to exports – - Services accounted for about one third of total exports in India (2010-11) - In 2006, India's share in world's total commercial services export was 2.7% - There is a growth of 20% in India’s service exports (2004-11). Growth of service sector during planning period 1. 2. 3. 4. 5. 6. 7. 8. 9.. 7.54% per annum in the Eighth Plan 8.1 per cent per annum in the Ninth Plan 9% p.a. during Tenth plan Eleventh plan – Aim: 9.4% - Actual growth till now: 10% Transport, storage and communication are fastest growing – Avg. growth 15.3% per annum during the Tenth plans. Tourism – 6.7% p.a. during 2009-10 Financial – 9.2% during 2009-10 Community & social services – 12% during 2009-10 Third largest scientific and technical manpower in the world. Reasons for service sector growth 1. Income elasticity of demand for services is greater than one 2. Outsourcing has become more efficient 3. It has become possible to deliver services over long distances at a reasonable cost 4. Economic reforms worked in favour of service sector. Problems of service sector 1. 2. 3. 4. 5.. Inadequate infrastructure facilities High contribution in GDP but low in providing employment Inadequate financial structure Inappropriate behaviour Inappropriate maintenance. NATIONAL INCOME National income is the money value of all the final goods and services produced by a country during a period of one year.. Basic Concepts 1. Gross Domestic Product (GDP):Goods & services produced within the domestic territory of a country during an accounting year. www.TutorsCircle.com. CPT Super Circle Summary.

No results found