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Define and explain the Economics with the Views of different economists?

"A social science concerned with proper uses and allocation of resources for the
achievement and maintenance of growth with stability"
"It is an art of analyzing, recording, interpretation and communicating the results of
economic transaction."
"Economic is a social science concerned chiefly with way the societies chooses to
employ its limited recourses, which have alternative uses to produce goods and services
for present ant future consumption"
"Economics is the study of how solidifies uses scare recourses to produce valuable
commodities and distribute them among different groups."

Views of Economists

According to Adam Smith: "Economic is science of wealth."

According to J.S.Smith: He supports the definition of Adam Smith.” Economic is the

practical science of production and distribution of wealth."

According to J.E Cairnes: "Economics deal with phenomena of wealth."

Adven Canon: "The aim of political economy is explanations of general causes on which
the material welfare of human being depend."

According to Marshall: "Economics is study of man’s action in ordinary business of life,

it Enquirer how he gets his income and how he spent it. Thus it is on the on the other and
more important side, a part of study of man."
In this definition the expression “man’s’ action in ordinary business of life refers to the
facts that economic studies the activities of real, social and normal human beings.
While the expression” how he get income and how he spend it indicates the study of
wealth. Marshall doesn’t indicate the nature of science. He maintained that economic is
positive science.
According to Robbins: "Economics is science which studies human behavior as a
relationship b/w ends and scare means whish have alternative uses."

The economists to explain the meaning of economics, which will be probably, proceed as
Economics studies only those activities, which are directly related to wealth:
Men have wants. Some wants are elemental and very pressing like the want of
food and water; other are less urgent, e.g., the want for a car or a beautiful
bungalow. All these of different kinds as they are, have to be satisfied. Faced by
this problem, men are driven to work in factories and fields, schools and offices,
so that they may earn money by which they may purchase the article of their
desire. All human activities related to wealth (mean to satisfy human wants
directly) constitute the subject –matter of economics. That’s why they are called “
economic activities”.

It studies only human activities: Economics is concerned with the activities of

human beings only, and not with those of other creatures. Other creatures either
make efforts themselves with a view to satisfy their wants but they are much
below human beings in mental power in intelligence and mental ability. Therefore
their activities are not studied in economics. It studies the activities of only those
Human beings who are social, real and normal:

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Economics is positive, Normative and Applied science: It should be
remembered that Economics is science and science can be divided in three

Positive science: This establishes relation b/w causes and effects.

Normative science: this setup idea.
Applied science: This prescribed rules for guide ness.

Economics is science of all these three types.

It is positive science because it shows the connection b/w causes and effects of
economic phenomena. It is normative science because it sets up ideas concerning
wealth. It is applied science because it prescribed rules for achievement of
material prosperity.
Therefore the correct definition of economics is that in which above four points must be

“ It is positive, normative and applied science which studies those activities of social, real
and normal human beings, that are related to wealth“.

Major Economic Problem

Meaning of economic problem: In view of scarcity means at our disposal and

multiplicity of ends we seek to achieve, the economic problem lies in making the best
possible use of our recourses so as to get maximum satisfaction in the case of the
customer and maximum output or profit for the producer. Hence economic problem
consist in making decision regarding the ends to be perused and the goods to be produced
and the means to be used for achievement of certain ends.

Fundamental Problem facing an economy

Following are the fundamental problem, which an economy has to tackle;
What to produce: The first major decision relates to the quantity and the range of
goods to be produced. Since recourses are limited, we must choose b/w different
alternative collection of goods and services that may be produced. It also implies the
allocation of recourses b/w the different types of goods, e.g. customer goods and
capital goods.

How to produce: When you decide the quantity and types of goods to be produced.
We must next decide the techniques of production to be used e.g. labour intensive or
capital intensive.

For whom to produce: This means how the national product is distributed I- who
should get how much. This is the problem of sharing of national product.

Are the recourses economically used: This is the problem of economic efficiency or
welfare maximization. There is to be no waste or misuse of recourses since they are
Problem of full employment: Fullest possible use must be made of the available
recourses. In other words, an economy must endeavor to achieve full employment not
only of labour but of all its recourses.

Problem of growth: Another problem for an economy is to make sure that it keeps
expanding or developing so that it maintain conditions of stability. It is not to be static
its productive capacity must continue to increase. It is an under developed economy,
it must accelerate its process to growth.

Micro and Macro Economics

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The study of economics is divided into two parts.
Micro Economics
Macro Economics
Micro economics: The word micro means a millionth part. Microeconomics is the study
of the small part or component of the whole economy that we are analyzing. For example
we may be studying an individual firm or in any particular industry. In Microeconomics
we study of the price of the particular product or particular factor of the production.
The Micro Economics theory studies the behavior of individual decision-making units
such as consumers, recourse owners and business firms.
Importance of Micro & Macro Economics
It has both theoretical and practical importance, from the theoretical point of view, it
explains the functioning of a free enterprise economy. It tells us how million of
consumers and producers in an economy take decision about the allocation of productive
recourses and million of goods and services. As for the practical importance Micro
economics in the formulation of economics policies calculate to promote efficiency in
production and welfare of the masses.

The role of Micro economics is both positive and normative; it not only tells how
economy operates but also how it should operate in to improve general welfare.
Macro Economics
Macro economics is the study of behavior of the economy as a whole. It examines the
overall level of nations out put, employment, price and foreign trade.
Macroeconomics is concerned with aggregate and average of entire economy.
e.g. In Macro economics we study about forest not about tree.
In other words in macro economics study how these aggregates and averages of economy
as whole are determined and what causes fluctuation in them. For making of useful
economic policies for the nation macroeconomics is necessary.
We can summarize the objects of macroeconomics as follows.
1. A high and rising level of real output.
2. High employment and low unemployment, providing good jobs at high pay to those
who want to work.
3. A stable or gently rising price level, with process and wages determined by free
4. Foreign economic relations marked by stable foreign exchange rate and exports more
or less balancing imports.

Macro economics involves choice among alternative central objectives.

A nation can’t high consumption and rapid growth. To lower a high inflation rate
requires either a period of high unemployment and low output, or interfering with free
markets through wage-price policies. These difficult choices are among those that must
be faced by macroeconomic policy makes in any nation.

Micro Economics
¾ Micro economics is the study of small part of component of the whole economy.
¾ Micro economics is called the price theory. It’s explained its composition, or
allocation of total production why more of something is produced than of others.
¾ In Micro study about individual consumer behavior or individuals firm or what
happens in any particular industry.
¾ If it be an analysis of price, we study about the price of a particular producer or of a
particular factor of production.
¾ If it is demand we analysis demand of an individual or that of an industry.
¾ Here we study the income of an individual.
¾ It is both positive and normative science. It not only tells us how the economy
operates but also how it should be operated to promote general welfare.
¾ It can not give an idea of the functioning of the economy as a whole example. An
individual industry may be flourishing whereas, the economy as a whole may be
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¾ It assumes full employment, which is rare phenomenon, at any state in the capitalist
world. It is therefore, an unrealistic assumption.
¾ Study of individual aspects of economy will lead us now here.

Macro Economics

¾ Macro economics is the study and analysis of economic system as a whole

¾ Macro economics is called income theory. It explains the level of total production and
why the level rises and fall.
¾ In Macro we study how the aggregates and the averages of the economy as whole is
determined and what causes fluctuation in them.
¾ In macro we study the general price level in country.
¾ In macro we study the aggregate demand of the entire country.
¾ Here we study the national income of the country.
¾ It shows how an economy grows. It gives bird eye view of economic world.
¾ Individual ignored altogether. It is individual welfare, which is the main aim of
economics. Increasing national saving at the expense of individual welfare is not a
wise policy.
¾ It over looks individual differences for instance, the general price level may be stable
but the prices of food grains may have gone spelling ruin to the poor.
¾ The economy as a whole is more important for formulation of useful economic
policies for the nation.

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Chirag delhi, India
Scale of Production
The scale of production has important bearing on the cost of the production. It is
manufactures common experience that larger the scale of production, the lower generally
the average cost of production. That is why the entrepreneur id tempted to average the
scale of production so that he may benefit from the resulting economics of scale. These
economics are broadly speaking of two types:
Internal economics External economics

Internal economics:
Internal economics are those economics in production, those reductions in
production cost, which is accrue to the firm itself when it expands its output or
enlarge it scale of production. The internal economics arise within a firm as a
result of its own expansion independent of the size and expansion of the industry.
The internal economics are simply due to the increase in the scale of the
production. They arise from the use of methods which small firms don’t find it
worthwhile to empty internal economics may be of the following types: large
machine and he is a mechanical advantage in a use of large machine. Technical
economics pertain not to the size of the firm but to a size of factory or
Technical economics: They arise from the fact that it is easy to make the a large
machine, and there is a mechanical advantage in a the use of large machines. technical
economics pertain not to size of the firm but to a size of a factory or establishment `
Managerial economics: Those economics arise from the certain of special
departments. They also result from the delegation of routine and details matter to
subordinates. The managerial expenses can be reduced by increasing the size of an
establishment under one management.
Commercial economics: They arise from the purchase of materials and scale of
goods. Large businesses have bargaining advantages and are accorded a preferential
treatment by the firms they deal with.
Financial economics: These economics arise from the fact that a big firm has a
better credit and can borrow on more favorable terms. Its share enjoys a wider market,
which encourages a prospective investor.
Risk- bearing economics: A big firm can spread risks and can often eliminate
them. This it does by diversifying outputs.

External Economics:
External economics are those economics which accrue to each number firm as a
result of the expansion of the industry as a whole.
Various types of the external economics are given below:
Economic of concentration: These economic are relate to advantages arising
from the availability of skilled workers, the provision o better transport an credit
facilities, stimulation of improvement , benefits from subsidiaries and so on.
Economics of information: These economics refer to the benefits which all firms
engaged in an industry derived from the publication of trade and technical journals and
from central research institution.
Economics of disintegration: When an industry grows, it becomes possible to
split up some of the processes which are taken over by specialist firms. For example, a
number of con mills located in a particular locality may have the benefit of a separate
calendaring plant.

Advantage of Large scale production

Efficient use of capital equipment: There is large scope for use of machinery,
which results in lower costs. A Large producer can install an up-to- date and expensive
machinery. He can also have own repairing unit. Specialized in machinery can be
employed for each job. The result is that production is very economical. Small producer
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with a small markets cant keep the machinery continuous working. Keeping it idle is
uneconomical.. A large Producer can work it continuously and reap resulting economies.

Using of specialized labour: Specialized labour produce a large output and of

better quality. It is only in a large business organization that every person can be put on
the job that he can best perform.

Better utilization of special in management: The use of capable manager’s time

in an enlarged scale production. His assistance and specialized may be used in a large-
scale production where his ability is more fruitful.

Economies of buying and selling: While purchasing raw material and other
accessories , a big business can secure specially favorable term an account of its large
custom. He can attract customer by offering a greater variety and by ensuring prompt
execution of the orders, placed with it when he selling a product.

Economy in rent: A large-scale producer makes a saving in rent too. If the same
factory made to produce a large Quantity of goods, the same amount of rent is divided
over a large output. This means a smaller addition to the cost per unit in the form of rent.

Experiment and research: A large concern can afford to spend liberally on

research and experiments. Successfully research may lead to the discovery of cheaper

Advertisement and salesman ship: A big concern can afford to spent large
amount of money on advertisement and salesmanship. Amount of money spent on
advertisement per unit comes to a low figure when production is on large scale. Salesman
can make a careful study of individual markets and thus acquire a hold on new market or
strengthen it on old ones.

Utilization of by-products: A big producer will not have to throw away any of
its by products or waste products. It will be able to make an economical use of them.

Meeting adversity: A big business can show better resistance in times of

It has much better recourses. Losses can easily bear.

Cheap credit: A large business can secure credit facilities at cheap rate. Its credit
in the money market is high and banks are only two willing to give advance. Low cost of
credit reduces cost of production.

Disadvantage of large-scale production

Large –scale production is not without is disadvantages. Some of these disadvantages are:

Over-worked management: A large-scale producer cannot pay off that you can
think of full attention to every detail. costs often raise on account of the employees or
waste of material by them. This is due to the lack of supervision. Owing to laxity of
control costs of production go up. The management is overworked

Individual tastes ignored: Large-scale production is a mass production or

standardized production. Goods of uniform quality are turned out irrespective of the
preferences of individual customers. Individual tastes are not therefore, satisfied. This
results in a loss of custom.

Personal element: Paid employees generally manage a large-scale business. The

owner is usually absent. The sympathy and personal touch, which ought to exit between
the master and the men, are missing frequent misunderstandings lead to strikes and lack
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outs. This is positively harmful to the business.

Possibility of depression: large-scale production may result overhead production.

Production may exceed demand and cause depression unemployment. It is not always
easy or profitable to dispose of a large output.

Dependence on foreign market: A large-scale producer has generally to depend

on foreign markets. The foreign markets may be cut of by war or some other political
upheaval this makes the business risky.

Cut throat competition: Large-scale producers must fight for the markets. These
are wasteful competition, which does not to society. Many promising businesses are
ruined by senses competition. There is also competition and biddings for resorts and

International complications and war: When the large-scale producer operates

on an international scale, their interest clash either on the score of markets or of
materials. These complications sometimes lead to armed conflicts. Many a modem war a
rose on account of scramble for materials & markets.

Lack of adaptability: A large scale producing units find its very difficult to
switch on from one business to another, in a depression small firms are able to move
away from declining trades to flourishing ones easily. In this way they are able to avoid
losses. This adaptability is lacking in a big business.

Business Organizations
There are basically three types of business organizations
• Sole-proprietorship
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• Partnership
• Joint stock company

When a business is owned and managed by a individual or single, he is known as
the sole trader or individual entrepreneur.
Characteristics of Sole-proprietorship:
a) Formation: No restriction in formation. There is no registration of any sort. Any
body can start this business according to his will and time at any place.
b) Capital: In this business the businessman himself provide capital, but his
resources are limited. Some time he borrows money from his friend or relatives.
c) Unlimited liabilities: Businessman has unlimited liabilities. If the business gets
losses, sometime he has to sell his personal property.
d) Management of the business : He is the single person to manage the business.
He is singly responsible for the decision making and for policies.
e) Secrecy Every business has its own secrets, which is the basis of its success. Trade
secrets such as secret formulas, special accounts are very important. This type of business
has more security as compared to other types.
f) Personal Relations : As in this type of business, the businessman has direct contact with the
customers therefore, he knows the likes and dislikes and the need of the customers.
g) Saving in Expenses The same members of the family usually run single person
business, therefore, saving in expenses is highly observed.
h) Legal Entity: It has its legal entity
i) Distribution Of Profit He is the only person who enjoys the profit.
j) Business On The Small Scale It is a small scale and usually he does not extend due to
the reason of control.
k) No Need of Agreement
No need of agreement with second or third parties.
l) Adminstrative And Contrl Of Business
He is responsible for whole business administrative and control process.

Merits /advantage of Sole-proprietorship:

1. Easy formation
2. Secrecy
3. Personal interest
4. Immediate decision
5. Personal contracts
6. Saving in expenses
7. Publicity
8. Satisfaction of individual liking and interest
9. Flexibility
10. Free in depended
Demerits/disadvantages of sole-proprietorship:

1. Limited capital
2. Limited management ability
3. Unlimited liabilities
4. Unsuitable for large-scale business
5. Lack of continuity
6. Wrong decisions
7. Less public interest
9. Danger of loss
10. Lack of expert services
11. Insolvency
12. Business success depends upon personal ability
13. Limited life
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Chirag delhi, India
Partnership is the relation between persons who have agreed to share the profits of the
business carried on by all or any of them acting for all
Features Of Partnership
Maximum of 2 members ordinary business have 20 and for bank it is 10.
Any business can be started but it should be legal one.
Can run them or can keep agent
d) Division of profit
e) Unlimited liability
f) Legal entity
Partners cannot transfer his share without concerning the partner.
Free from restriction of audit.
Every partner has to pay his own tax.


1. Easy formation
2. Large financial resources as compared to sole trades
3. Better management ability
4. Flexible organization can change any strategy or policy.
5. Ease of raising loan
6. Personal interest
7. Mutual consultation
9. Protection of minorities
10. Employer and employee relationship


1. Unlimited liabilities
2. Limited capital
3. Transfers of rights
4. Lack of confidence as no audit, people do not trust
5. Instability
6. Delay in decision
7. Possibility of disagreement
8. Undeserving employees, including of relations
9. Negligence: every partner runs where he gets more profits

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Chirag delhi, India
Association consisting of more than ten person formed for carrying on a banking business
and any association consisting of more than 20 person formed for the purpose of carrying
on any business, is to be known as joint stock company
1. Share holders are limited to their shares.
2. More capital
3. Easily transferable share from person to person.
4. Board of directors runs the administration.
5. In public limited company the maximum member’s should be seven and there is no
limit for maximum number.
6. In private limited company the minimum numbers should be two and maximum is
7. Shares of profit are distributed according to their share valve. Some profit is kept
reserve for future use
8. Company does not discontinue due to expel of any member due to death, madness etc
9. Change of business is difficult because there are more legal restrictions
10. Every shareholder does not participate directly in the business
11. Company can sell its assets by its name.

Merits of Joint Stock Company

Large mount of capital
Limited liability
Transfer of shares
Better management
Large scale business
Long life
Encouragement of investment
Services of experts
Auditing of accounts
Experiment and research
Democratic style

Demerits of Joint Stock Company

Unsatisfactory management
Difference of opinions
Heavy expenses of formation
Lack of secrecy
Difference of interest
Heavy taxes: Tax paid by the company at the time of dividend distribution
Danger of fraud: From directors
Relation b/w employer and labors are sometime tense.
Individual choice is not concerned.

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Chirag delhi, India
Difference B/W Private Limited Company And Public Limited Company
Private limited company This company is not title to publish any
prospectus and can not sell its share for
Minimum No: are 7 and maximum have no common people.

The members can not transfer their

The company can not start business after shares.
registration unless and until it get
registration certificate from Registrar
office. This company has not to submit any
prospectus to registrar office.
This company has to publish their
prospectus for public or share holders
and debentures holder. For administrative purpose this company
must have 2 directors.
The share holders can transfer their share
This company has no any restriction of
this kind.
This company has to submit prospectus
to registrar office. No need of calling any meeting before
commencement of business
For administrative purpose this company
must have 7 directors.
. No need of it.
This company has to submit their
accounts in registrar office.
The present of at least 7 promoters are
necessary to start the business
For starting business this company
should called a meeting after 3 and 6
months in which a report is presented to

The directors of this company should

have to submit their detail of
responsibility to the Registrar.

The present of at least 7 promoters are

necessary to start the business.

Public limited company

Minimum no: are 2 and maximum are 50

This company can start business after

getting registered.

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Utility is the capacity of commodity to satisfy human wants.

Measure of utility
It is the fact of common experience that the utility of all commodities is not the
same, some commodity have greater utility than others.
Utility cannot be directly measured
Economist doesn’t posses any accurate means or apparatus for measuring utility.
Money measure of utility
Economists have, however, is devised indirect method of measuring utility. The amount
of that a person is prepared to pay for a commodity rather than go without it, is a measure
of its utility. Suppose you have a need of a pen for exams so badly that you are prepared
to pay even 100 rupees for it, and then the utility of fountain pen is Rs.100.
10.4 Want, utility and satisfaction are different Want creates utility, Utility is a measure
of satisfaction and satisfaction is the object of utility and negotiation of want.

Marginal utility
It is defined as the change in the total utility resulting form a one unit change in
the consumption of commodity per unit of time.
When man is purchasing a commodity, he is consciously or weighting in h9is mind the
price he has to pay and the utility of each unit that he buys.
He will continue purchasing till the marginal utility equals the price. Here is a
fundamental proposition of the theory of customer demand. A consumer will exchange
money for units of any commodity A, up to the point where the last (marginal) unit of A
which he buys has for him a marginal significance in terms of money just equal to its
money price.

Basic Assumption of marginal utility analysis

Cardinal Measurement of utility
Marginal utility analysis assumes in the first place that utility can be measured by
assigning definite numbers such as 1,2,3,4, e.t.c. That is it is assumed that utility is the
quantifiable entity. This means that a person can express the satisfaction derived from his
consumption of commodity is quantitative terms. He can say, for instance, that for him
the first unit of the commodity has utility equal to 10, the second unit 8, and so on, In this
way, it is possible for a consumer to compare the utilities of different goods. Utility is
usually measured in imaginary units.

Utilities are independent

Marginal utility analysis assumes that the utilities are different commodities are
independent of one another. That is the utility of one commodity does not in any way
affect that of another. Thus according to this assumption, the utilities of various goods are
additive or separate utilities of various goods can be added to obtain the total sum of the
utilities of all goods consumed.

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Chirag delhi, India
Constant marginal utility of money
Another important assumption of marginal utility analysis is that marginal utility
of money remain constant can even though the quantity of money with the consumer is
diminished by the successive purchase made by him. It is assumed that while marginal
utility of a commodity varies with quantity of the commodity purchases their marginal
utility of money remains throughout the same as the quantity of the goods purchase
The marginal utility analysis also assumes that from ones own experience
(judging what happens in ones own mind), it is possible to draw inference about another
person. This is self-observation applied to another person.

Characteristics affecting consumer behavior

The set of basic values, perceptions, wants, and behavior learned by a member of
society from family and other important institution.
A group of people with shared value systems based on common life experiences
and situation.
Social classes
Relatively permanent and ordered divisions in the society whose members share
similar values, interest and behaviors.
Reference group Two or more people who interact to accomplish individual or mutual
Family buying decision: Depending on the production and situation, individual family
members exert different amount of influence.
Role of status: A person belongs to many groups-families, clubs, organization. The
person position in each group can be defined in terms of both role and status.
Age and life cycle stage: People change the goods and services they buy over their life
Occupation: A person’s occupation affects the goods and services bought.
Economics situation: A person’s economic situation will affect product choice.
Life style: People coming from the same subculture, social class, and occupation may
here quite different lifestyle. Life style is the person’s pattern of living as expressed in his
or her psycho graphics.
Personality and self-concepts: A person’s distinguishing psychological characteristics
that lead to relatively consistent and lasting responses to his or her own environmental.
Motivation: Motivators researchers collect in depth information from small samples of
consumers to uncover the deeper motives for their product choice.
Perception: The process by which people select, organize, interpret information to form
a meaningful picture of the world.
Learning: Changes in individual behavior arising from experience.
Belief: A descriptive thought that a person holds about something.
Attitude: A person consistently favorable or unfavorable evaluations, feelings and

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tendencies toward an object or idea.

Law Of Diminishing Marginal Utility:

Satisfactions of human wants follow some very important laws and one of them in
the law of diminishing marginal utility. The law refers to the common experience of
every consumer. Suppose a person start-eating piece of bread one after another. The first
toast gives him great pleasure. By the time he start taking second, the edge of his appetite
has been blunted, and the second toast, meeting with a less urgent want, yield less
satisfaction, the satisfaction of third less than of the second, and soon. The additional
satisfaction goes on decreasing with every successive toast till it drops down to zero. If
the customer is forced to take more the satisfaction may become negative or the utility
may change in disutility.
Therefore, Law of diminishing utility may be stated as follow.
“Each unit of commodity gives, other things remaining the same, less
utility to the consumer than the foregoing unit.”
Marginal and total utility
The last unit of commodity consumed at any particular time is known as final or
marginal utility. Example: If a man takes two oranges at the time, yielding 10 and 9 units
of utility respectively, the second unit is marginal unit and its utility namely 9, is the
marginal utility of oranges.

Essential conditions: Marginal utility is based upon two essential conditions:

Consumption should take place at any particular time or the act o consumption should be
regular and unbroken.
The utility in question should be the utility of the marginal or final unit that is consumed.
Illustration: Suppose a big family consumes several kg of wheat at a time. If it purchases
only one kg of wheat, then it would be the marginal unit, and its utility.
Suppose it is 100, could be the marginal utility. If it is purchase another kg of wheat then
second kg becomes the marginal unit, and its utility becomes the marginal utility. If this
family purchases 5 kg of wheat the marginal utility declines.

Diagrammatic Representation
Wheat(Kg) Utility
1 100
2 80
3 60
4 25
5 10
6 0
7 -20
Total utility:
Definition: The sum of the utilities of all the commodities consumed at a particular time
is known as total utility.
Example: If you eat five oranges at the time the sum of the utilities of all the five oranges
will be the total utility.
As we consumed more and more of the commodity, the total utility derived from its

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consumption goes n increasing, but this increase takes place at the diminishing rate( or
less than proportionality) because of the operation of the law of diminishing utility.
For instance if the utility of the first unit of orange is 100, the utility of the second unit is
80, so that when two units are consumed, the total utility come as to 180.

Units Marginal utility of Oranges Total utility

1 100 100
2 80 180
3 60 240
4 20 260
5 10 270
6 0 270
7 -20 250

Importance of law in consumption

Advantage of this law is that the consumer is able to derive maximum satisfaction from
given resources
The consumer can apply this law in
Spending money
Making use of commodity
Apportioning money income over present and future events.
Allocating a commodity over present and future uses.
Spending money: As we know that a person can obtain maximum satisfaction out of the
money that he spends by following this law.
He has only to take care that the derived from the last unit of money spent on each head
is nearly the same.
Making use of commodity: This law can be made to apply to a commodity which has
several uses for instance, if we have 20 m of cloth, we can use for the preparation of
shirts, kurtas or caps etc. The wire course will be to distribute cloth on these various use
in such a manner as to derive, more or less, the same utility from the last meter of cloth
devoted to each purpose.
Present and future use of money: According to the law of equi-Marginal utility, one
should apportion one’s income over saving and spending in such a way that the
satisfaction yielded by the last rupee in each case is, more or less, the same.
This would enable one to earn maximum satisfaction.
Present and future use of commodity: Sometimes a person uses only one part of a
commodity, and sets aside another part for being used in future. Here, again he should act
according to the law of Equi- Marginal utility. He should distribute the whole volume of
the commodity over present and future uses in such a manner that the satisfaction yielded
by marginal unit in each case is, more or less the same.
It is equally important in the field of production where the producer is advised to
substitute a cheaper factor of production for a dearer one.
In exchange purchaser purchases the articles which gives them greater satisfaction for
the same price and thus try to follow this law.
In the sphere of the distribution, the law has an important bearing. The theory of equal
distribution of wealth, which is the basis of socialistic movements.

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Chirag delhi, India
In the public finance it is the guiding principle in the matter of revenue and expenditure.
Law of Equi-Marginal utility
Maximum satisfaction out of the expenditure of a given sum can be obtained if
the utility derived from the last unit of money spent on each object of expenditure is,
more or less the same.
Suppose a man goes to the market with Rs.400 in his pocket, which is want to
spend on oranges, caps and milk, and further. Suppose that the utility he expects to derive
from each unit of Rs.20 spent on these commodities is follows.

Rs25/unit Oran Caps Milk

Utility derived from the Rs.25 spent on ges

1St 10 13 11
2nd 8 12 9
3rd 7 10 6
4rth 5 8 5
5th 4 6 4
6th 3 4 2
7th 2 3 1

The purchaser will spend the first 25 on the object, which will give him the greatest
satisfaction. In this case such an article is cap, the utility of its first unit is 13, which is
Guided by the same motive, he will spend the second Rs. 25 on caps. He will spend the
third Rs. 25 on milk and the forth-on oranges. In this way he will go spending money.
The following table indicates the order in which he will spend the Rs.400 he has got with

Rs.25 Object of Utility derived

1St Cap 13
2nd Cap 12
3rd Milk 11
4rth Orange 10
5th Cap 10
6th Milk 9
7th Orange 3
8th Cap 8
9th Orange 7
10th Cap 6
11th Milk 6
12th Orange 5
13th Milk 5

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Chirag delhi, India
14th Orange 4
15th Cap 4
16th Milk 4

Total utility derived from Rs. 400 out off 117

The above table shows that he will spend Rs. 25 each 5 on oranges, 6 on caps, and 5 on
milk, and will in total derive 117 units of utility. This is the maximum satisfaction that he
can obtain out of his expenditure. If he does not follow this scheme of expenditure, he
will not be able to derive maximum total utility.
Therefore, if we want to derive maximum satisfaction out of our expenditure, we should
spend our money in such a way as to derive, more or less, the same satisfaction from the
last unit of money spends on each head. This is the law of Equimarginal utility.

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Chirag delhi, India
Factors of production:

There are certain things wish contribute to production. They are therefore, called factors
of production. The factors of production are chiefly two:
(i) The personal exertion or effort of human beings.
(ii) The object to which or the exertion is applied.
If a hunter waits to kill animals, he must make an effort to kill then and the animals
which he waits to kill must exist.
Similarly, the grass_culter who want to cut grass must devote himself to the purpose, and
the grass which he wants to cut must be in existence. These two resuiremeuts are
indispensable for production: wiltout either of them no production is possible.
These two resuirements of production are known is economics as.
(i)Labour which refers to the personal exertion of human beings.
(ii)land or free gift of nature, which signifies the objects provided by nature and which
men adapt for their use. The external impleneut or appliance which increase the
effectiveness of human efforts, and which and which emerged as third fabler of
production at as early stage of civilization is known as capital.
Other factors also came to be recognized a little later while advaucewent of learning,
production took a ca

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Chirag delhi, India
Explain the Problems of organization?
The most important problem, which an organizer has to solve, is three.
The problem of division of labour inclusion the localization of industry.
The problem of the scale of production
The problem of the legal organization of the business concern.
Division of labor: Division of labor is an important characteristic of modern
“ When making of an article is split up intro several processes and each process is
entrusted to a separate set of workers, it is called division of labour”
The division of labour is of the following main types.

• Division in occupation and professions: In this type, workers are divided into
various groups according to the occupation or profession.
• Division into complete processes: In this type, labour was the breaking up of each
occupation into a number of complete processes involved in the preparation of an
article and the sub division of the labour into the corresponding no: of groups. The
product of the one group of the labour is only a semi manufactured article which is
passed on to the other group for the next operation, and so on till it takes the final
shape For example, Shoe Company is divided into 80 different processes.
• Division into incomplete process: With the introduction of machinery and factory
system and with multiplication of wants, division of labour is pushed still further.
Each process is now divided into various incomplete processes.( semi manufactured
or finished product).
• Territorial division of labour: The division of labour into sub-process is associated
with the localization of particular industries and callings in certain regions. Industries
tend to localize in a particular place or region mainly due to some favorable
geographical, geological, climatic, economic or particular condition found there. The
localization of industry is a form of division of labour and is called territorial division
of labour.

Advantage of division of labour

Division of the labour results in an increase in the productive capacity. The increase in
productive power is about due to the following factors.
• Gain in adaptation: The great advantage of division of labour is that it makes possible
the division of the labor’s into various groups according to their level of intelligence,
physical strength, and natural bent of mind, and the allocation to each of them of the
task they are best fitted for.
• Gain in skill: Another advantage is that it requires the labor’s to move his muscles,
brain and eyes in one particular manner all the time he work; consequently. His limbs
become automatic, quick and precise. The skill of man thus increases through
constant practice and specialization. In the absence of division of labour would be a
jack of all trades and probably master of none.
• Increase use of machinery: Division of labour thus leads to an extensive use of
machinery. Machine increase output, lower cost per unit, diminish the strain on
• Increase in no: of inventions: Firstly, each work is divided in such minute and simple
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process that the scope of inversion become large. Secondly, when the laborers work
on one machine all the time, he gets the occasion for thinking out the improvements
that can be made in that machine.
• Economy of implements and capital: Under the division of labour each laborers is
engaged in one operation only and requires few specialized tools, which are
constantly used all the time. Implements and machinery thus find full employment.
As he processes only few implements he takes proper care of them not likely to lose
• Implement in the quality of product: Since the finished product passes through the
hands of master craftsman, as specialist in their particular work, its quality is bound to
be excellent.
• Reduction in the period of apprenticeship: Division of labour brings about the sub
division of production into simple sub-processes and each laborers is require to
engage himself only in one sub-process rather than in the entire production.
Therefore, he has to learn merely a part of the work and the period of his
apprenticeship become short. He saves time and money as a consequence.
• Saving of time: Being engaged only in one operation under division of labour, a
laborer is not require to move from one place to other place or put down one tool and
take UP ANOTHER. The time which is lost in changing work, place and tool is
• Saving of skill: Since the laborer is given the task, which he is best fitted, his capacity
is used to best advantage and his skill is not wasted. He is also relieved of much
monotonous and cheap work, which can be performed by women and children and in
some cases, even by the crippled and the blind.
• Increase in mobility: When the processes of production are minutely divided and sub
divided, they become very simple and similar to each other. It becomes easier for the
laborer then to move from one occupation to another. Mobility of labour is thus
• Expansion and diversification of occupation: The invention and use of new
machinery open fresh avenues of employment. Employment as a whole increases; and
even women and partly disabled person get some work.
• Effect on probation as a whole: The ultimate effect of division of labour on
production as a whole is that output improves both in quality and quantity, and is
obtained at a reduced cost per unit.

Disadvantage of division of labour.

• Loss of efficiency and responsibility: Specialization narrows down one’s mental out
look. A labour is required do and knows about only a part of work, he does not
usually know more than that. The range of his usefulness is also reduced. Since the
raw material passes through several hands before it is finally finished, no laborer can
be made responsible for the excellence of article as whole.
• Loss of interest: When a man manufactures one whole article, he takes pleasure and
interest in preparing it. The beauty of article please its maker, being credit to him and
gives him satisfaction that his work has brought joy and satisfaction to others. But
when he made to work in a factory, in a scheme of mass production where his
contribution cannot be located, he losses interest in the job.
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• Monotony: A labor that performs the same task all the time he works, begin to feel
monotonous. Monotony gives raise to industrial fatigue, mixed wondering and day
dreaming which reduce the efficiency of laborer his output.
• Employment of women and children: Division of labor creates the employment for
women and children, but very often the task is too arduous and laborious for them and
seriously injures their health and hinders their growth. This is a matter of great
national concern, weak mothers gives birth to weak children, and weak children turn
out to be weak men of tomorrow.
• Loss of mobility: If a work is engaged in doing only one kind of work for some time,
he might become unfit for another occupation. The mobility of labour may thus be
seriously curtailed.

Localization of industry
When a factory is newly started, the organizer has to determine its locality. To arrive at
the right decision, he should obtain full knowledge of the places where that industry is
localized. After a careful consideration of the relative advantages of the various places
where the point of view of availability of raw materials, skilled labour, Good markets,
means of communication and transport and so forth he should locate the industry at the
most favorable site. The correctness of this decision is very important and determines, to
a large extent.
Causes of localization: It is interesting to investigate into the causes, which attracts
organizer to the same place. The most important of such causes are mentioned below:
• Availability of power: The most important cause of the localization of industry is the
availability of power. Industry should establish in those areas where power for that
production may available.
• Availability of raw material: Raw materials are important ingredients of
manufacturing. The regions where raw materials are available mostly become the
centers of industries. For example; lumbering industry must be localized where forest
are to be found.
• Climate: Climates help in the growth of industries in as much as it determines the
conditions of work. Extremes of the temperature are not suited top hard work. The
regions with temperature climate are therefore, important for localization of
industries. In certain cases, the climate requires as special importance as in the case of
cotton textile industry. The industry require moist climate so that fine thread could be
spun out of cotton. If climate is dry, the thread soon become dry and breaks.
• Availability of skilled labour: The origin and persistence of localization is
sometimes the result of availability of skilled labour. The glass bangles
manufacturing industry of Pakistan is localized at Hyderabad not because it is near to
sources of raw material but simply because skilled labour is available here.
• The movement of an early start: Sometimes a place where an industry get an early
start begins to enjoy so many advantage s with respect to industry that ultimately its
get localized there. New entrants into business find it economical and profitable to set
up a factory at the old place rather at anew place.
• Nearness to market: Product have to be transported to the market for sale, the
nearness of the market saves the cost of transport.
• Availability of means of transport and communication: The disadvantage of
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Chirag delhi, India
distant market is reduced if cheap, quick and easy means of transport and
communication are available.
• Accessibility of market: Markets should not only exits in the geographical sense but
should also be available in the economic sense. The accessibility of markets implies
that the purchases in those markets should have the demand for goods. The
competition therein should not be prohibitive, there should not exist very high import
and export or duties, which check the movements of goods.
• Miscellaneous causes: There are various miscellaneous considerations, which favour
the localisation of industries, are water for factory use and cheap land.

Advantage of localisation:
• Growth of skill: When in industry is localized in a particular place, the laborer of
that place acquires special skills in that industry. The skill once acquired becomes
hereditary and is passed on from father to son.
• Growth of local market for skill: Localisation gives rise to local market for the
particular kind ok skilled labor, An organizer of a few factory in that line can find
skilled labor in that market, while the labors skilled in that line can hope to find
employment there. Not only does labor become specialized but specialized machinery
also makes its appearance.
• Reputation or good will: When a industry is localized in a particular place, the
product of that place earn a reputation or good will for themselves, so that the article
manufactured there find a ready market.
• Growth or subsidiary industries: Near 6he industry center many subsidiary industries
tend to grow. Thus the iron and steel industry generally leads to establishment of
cement industry b/c the slag, which is the waste product of the iron and steel factory,
happens to be raw material of the cement industry.

• Growth of supplementary industries: Localization of industries also lead to the

development of supplementary industries which provide to the women and the
• Growth of machinery of commerce: An industry center becomes a bee-hire of
commerce. Huge quantities of the products are sent out regularly. Therefore its needs
means of communication and transport, banking, organization and capital market.

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Chirag delhi, India
Demand, Supply and Elasticity
Demand and supply are basic concepts in economic analysis. This is because economics
is fundamentally concerned with ends and means. The quantities of various goods
demanded are expected to bring satisfaction of different wants or ends, the supply of
these goods is conditioned by the availability or scarcity of resources which act as the
means of production. Both the terms ‘demand’ and ‘supply’ have technical implications.
By demand, we mean the quantity of any commodity that ‘buyers are willing and have
the ability to buy.’ Both the conditions must be satisfied together before goods can be
demanded. One who smokes wishes to purchase cigarettes but he must have enough
money or resources to do so. Similarly, a quantity of a commodity is said to be supplied
only when a seller is willing to sell it at the market price.
The two concepts of demand and supply are, however, relative in nature and
conveniently interchangeable. For example, a person may visit a distant wholesale market
and purchase 50 small cans of beer at a somewhat lower price than what he would have
paid in the local market. Therefore 50 cans of beer can be said to be his demand for the
commodity. On his way home he meets a friend B who requests for 10 cans of beer at a
particular price. If the bargain is acceptable, A will sell 10 cans to B, which will consist
of his (that is A’s) ‘supply’ and the remaining 40 cans will then be his demand. Later on
if a close relative of A (say C) requests him to part with 5 cans of beer on a ‘no profit no
loss’ basis, then that becomes a further part of his ‘supply’ and his demand is reduced to
35 cans of beer. Similarly a shopkeeper who begins with 200 cans of beer (which is his
supply) may retain 10 cans for himself and for his family members (this is known as self-
consumption). In that case, his supply is reduced to 190 cans and demand would be 10
Finally demand and supply are mutually opposing concepts, in the sense that demand is
an inverse (falling) function of the price, while supply is a direct (rising) function of the
price. This is explained in the following sections.
Demand Schedule, Function and Law
D(demand) Schedule
qd P
10 0
8 1
4 2
1 3
0 4

Demand Schedule : The various quantities demanded of a particular commodity are

presented here in a schedule. At arbitrarily chosen prices, the quantity of a commodity an
individual consumer is expected to demand, is explained by the schedule. Since quantity
demanded (qd) depends on the relevant prices of goods, the two can be expressed in the
form of an algebraic function as well. The schedule shows that as price goes on rising
(from zero to 4) the quantity demanded goes on falling (from 10 to zero).
The scheduled information has been presented in the form of a demand curve in Figure
2 (below). In the figure, the units of quantity of the goods have been measured along the

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Chirag delhi, India
horizontal axis (OX) and the respective prices have been shown along the vertical axis
(OY). The curve intersects OY axis at point A which shows highest price at which
quantity demanded is zero. On the contrary the curve intersects OX axis at point B
showing largest quantity demanded where price is zero. Both OA and OB are said to be
intercept quantities when one of the variables assumes zero value. Note that demand
curve is sloping downward. This follows the law of demand (given below). But the
demand curve of such a shape is obvious from the fact that quantities demanded and price
in the demand schedule hold an inverse relationship.

Law of demand: The law of demand explains the inverse relation between quantity and
price in general. It can be stated as follows:
" (other things remaining equal), the quantity of a good demanded will rise (expand) with
every fall in its price and the quantity of a good demanded will fall (contract) with every
rise in its price."

Supply Schedule: Just as goods are demanded by consumers, they are supplied by
manufacturers or sellers. At any point of time quantity supplied by them is a function of
the market price. Several such prices can be related to the relevant quantities supplied:
this would give the supply schedule. In the given schedule, as price of the goods rises
(from zero to 3) the quantity supplied also rises (from zero to 6 units).

Supply Schedule
qs P
0 0
2 1
4 2
6 3

(B) Supply Function: Supply is a direct function of the price and it rises or falls with the
price. This is because the law of supply is based on the behavior of the cost of
production. Assuming that manufacturers begin at the point where cost of production is
minimal any further production and supply of goods can be possible only at an
increasing additional or marginal cost per unit. Hence they can afford to supply more
only at a rising price. Further, logically any seller would be willing to sell more goods if
the price were to rise.

Law of Supply: The law of supply can be stated as follows:

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Chirag delhi, India
" the quantity of a good supplied will rise (expand) with every rise in its price and the
quantity of a good supplied will fall (contract) with every fall in its price."

the graphical representation (the supply curve) of the supply schedule. It begins at the
point of origin where both quantity supplied and price are zero in value, and then it
continuously rises upwards. This upward sloping curve indicates the positive relationship
between supply and price: there is a rise in the quantity supplied with every successive
rise in the price.

4 Elasticity of Demand and Supply

(A) Price Elasticity
i) Elasticity of Demand: Elasticity of demand can be classified into two major divisions:
one the highly elastic, unitary elastic and the highly inelastic type and two, the extreme
cases of the perfectly elastic and the perfectly inelastic type.
a) Highly elastic, Unitary elastic and highly inelastic: The laws of demand and supply
are no doubt an important part of economic analysis. But the knowledge about demand
and supply relations serves only a limited purpose. This is in view of the fact that both
demand and supply laws are applicable to all kinds of goods. However, an actual rise or
fall in the quantity demanded or supplied with a small variation in the price may
considerably differ for different goods such as food, automobiles, film shows, garments,
hardware materials, machines, land etc. In other words it is important to know the extent
of rise or fall in the demand with a given change in the price for each individual good.
This is exactly the purpose served by the concept of price elasticity of demand; this
concept is advanced and subtle in nature. It was first developed by Alfred Marshall; he
has defined elasticity as follows:
Elasticity of demand is the degree of responsiveness with which quantity demanded
changes for a given change in price.
In other words it is a proportional change in the quantity demanded to a
proportional change in price.
Price Elasticity of demand is then the ratio of the proportional change in the quantity
demanded to the proportional change in price.

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Chirag delhi, India
Elasticity of Supply: Like demand, elasticity of supply can also be classified into two
major divisions: one the highly elastic, unitary elastic and highly inelastic type and two,
the extreme cases of the perfectly elastic and the perfectly inelastic type.
a) Highly elastic, unitary elastic and highly inelastic: Elasticity of supply can similarly
be defined and computed at varying prices and quantities supplied.
Elasticity of supply is the degree of responsiveness with which quantity supplied
changes with a given change in the price.

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Chirag delhi, India