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UNIT 1 NATURE AND SCOPE OF ECONOMICS

1.

Welfare Definition (Prof. Marshall)

Prof. Alfred Marshall was the first Economist who saved economies from bitter criticism. He took out economics from the mud and mire of failure and criticism and gave it an honorable place. He very clearly said that Wealth is not a Goal of an End but is a Means. Welfare of man can be increased with the help of Wealth. Thus, Prof. Marshall gave greater emphasis on Man is place of Wealth and on Welfare of Man. Infact, Prof. Marshall wanted to make Economics A Engine of Social Betterment; Prof. Marshall defined Economics from this point of view. Definition of Prof. Marshall, 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 material requisites of well-being. Thus, Economics is on the one side, a study of Wealth, and on the other and more important side, a part of the study of man.

1.1 Features of Marshalls DefinitionOn analyzing the Definition of Economics given by Prof. Marshall we find the gollowing main features, 1) Greater emphasis on Man and Well being of Man than Wealth 2) Economies is a Social Science 3) Study of Mankind in the ordinary Business of Life 1. Greater Emphasis on Man and well-Being of Man than Wealth:According to Prof. Marshall the main subject matter of Economics is Man. He gave greater emphasis on Man and well-being of Man than wealth. He very clearly says in his definition than Economics is Study of mankind in the ordinary business of life. Further he also says that On the on side, it is a study of wealth and on the other hand, he says a part of the study of Man. In short, we study Material well-being (as Marshall says Material requisites of well-being) of man in economics. 2. Economics is a Social Science:As per Prof. Marshall, Economics examines individual and social action man. In Economics, we study about the economics Efforts of real, normal and social man. Thus, according to Prof. Marshall, Economics is a Social Science. 3. Study of Mankind in the ordinary Business of Life:Prof. Vishal V. Bartere Mob. No. 9021066249

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According to Prof. Marshall, in economics we study the activities of mankind in the ordinary business of life. These activities are related with the Production, Exchange, Distribution and Consumption of Wealth. Similar welfare definition of economics has also been given by Prof. Pigou and Prof. Cannon etc.

1.2 CRITICISM OF WELFARE DEFINITION:The welfare definition of economics given by Prof. Marshall has also been criticized. The main criticisms against these definitions have been given by Prof. Leonel Robbins. Main criticisms are discussed below. 1. 2. 3. 4. 5. Classificatory Definition and Not Analytical Definitions Welfare and Economics Economics is Neutral between Ends Economics is Not Only a Social Science but is a Human Science The scope of Economics becomes too much Limited and Narrow

1. Classificatory Definition and Not Analytical Definitions :The Welfare definition is classificatory and they are not analytical, this criticism can be explained as undera) As per Prof. Marshall, study of Economics is limited to the extend of only production and

consumption of Material or Physical things. But according to Prof. Robbins there is no clear distinction between material things and non material things. It is not proper to make such classification. There is nothing material in the services of Doctors or Lawyers etc. but even they are in economics and they are very helpful in human welfare. b) According to Prof. Marshall, in economics we study only the Economic activities or efforts of man and not his Non-economic activities of efforts. Prof. Robbins says that it is improper and impossible to divide the Activities or efforts of Man as Economic activities of efforts and Non-economic activities of efforts. c) According to Prof. Marshall, Economics is the study of Mankind in the ordinary business of life. But as per Prof. Robbins, it is totally improper to divide the Business of Man as Ordinary Business and Extra Ordinary Business. Prof. Vishal V. Bartere Mob. No. 9021066249

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2. Welfare and Economics:Prof. Marshall in his definition establishes the relationship between Economics and Well-being (welfare). But according to Prof. Robbins it is not proper to establish the relationship between Economics and Welfare. Firstly, there are many activities which are not good for the welfare of man, such as production and sale of Liquor and other intoxicants, but even then we study about them in Economics. 3. Economics is a Neutral between Ends:Prof. Marshall and other economists establish the relationship between economics and welfare. To establish the relationship between economics and welfare means that the economists will have to give a judgment regarding Good and Bad Activities of man. In other words, Economics becomes Normative Science. But, Prof, Robbins has criticized such thinking; according to him Economics is a Real or Positive Science only. It studies only What is? and What should be? It cannot be giving any such judgment the What is Good and What is Bad? To say anything regarding Good work or Bad work is the field of Ethics or Moral science and not of Economics. 4. Economics is Not Only a Social Science but is a Human Science:According to Prof. Marshall, economics is a Social Science. According to him the scope of economics is limited only upto the extent of economic activities of the people who live in society. But it is not correct according to Robbins, Economics is a human science. It studies the behavior of all the people whether they lie in society or not. Many laws of economics, such as the Law of Diminishing Utility apply to all the people whether they live in the society or outside the society. 5. The scope of Economics becomes too much Limited and Narrow:The welfare definitions are Classificatory. It means economics studies particular type of activities only, while it leaves other types of activities- such as, earning Non-material Requisites and consumption, Extra-ordinary activities and Non-economic activities. Besides, as Economic activities are measured with the Measuring Rod of Money the activities of Barter economy are left. Similarly, according to Prof. Marshall, the study of the activities of Non-social people is out of the scope of economics. Hence, it is said the Welfare definitions have made the scope of Economics too much limited and narrow.
1. SCARCITY

DEFINITION (Prof. Robbins)

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Prof. Robbins of the London School of Economics published his famous book on economics in the year 1932. The title of his book is An Essay on The Nature and Significance of Economic Science. He defined economics with a different and new view. While throwing a light on the defects and shortcomings of the welfare definition, Prof. Robbins did not give any emphasis either on the Wealth or on the welfare of man but he made an effort to, establish the relationship of Unlimited Wants with the limited Means. He broke the old structure of Economics which was based on wealth and material welfare and defined economics with absolutely a different and new view. DEFINITION OF PROF. ROBBINS:Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

2.1 FEATURES OR CHARACTERISTICS OF ROBBINS DEFINITION:1. 2. 3. 4. Ends Scarce Means Alternative uses Difference in the Importance of the Object or Difference in the Intensity of Wants

1. Ends:Ends means Wants. The wants of man are innumerable and unlimited. Man makes continuous efforts for satisfying his Wants. 2. Scarce Resources:Scarce Resources mean Unlimited Resources. Though the wants of man are unlimited, the Resources to satisfy his wants are limited. Here, Resources means Money (wealth), time and energy. In such condition man has to make a choice between his wants. An important thing to be remembered here is that the quantity of resources is limited as compared to their Demand. 3. Alternative Uses:Our resources to satisfy our wants are not only limited but they have Alternative Uses. It means that the resources can be used in many Uses. For example, we can use Rs100/- for eating food or for watching movies or for purchase of books etc. This is the reason that while using a thing we always have to face an Economic Problem in respect of using that thing. Prof. Vishal V. Bartere Mob. No. 9021066249 Page 4

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4. Difference in the Importance of the Object or Difference in the Intensity of Wants:Our objects or wants differ in respect of their importance or intensity. It means that some or our wants are very important or highly intense, while some of our wants are less important or less intense and some of our wants are not important. This is the reason that with the help of our Limited Resources we try to satisfy those wants first which are more important or which are highly intense. Then, we do not satisfy those wants which are less important.

2.2 CRITICISM OF ROBBINS DEFINITION:The definition of Prof. Robbins has also been criticized by some economists, like Prof. Durbin, Prof. Wootton and Prof. Fraser etc. Main criticisms in short are as under. 1. 2. 3. 4. The Scope of Economics At Once too Wide And Too Narrow Proper Emphasis is not Given On Social Character of Economics Economics is not Neutral Between Ends Economics is Not a Pure or Positive Science

1. The Scope of Economics at Once too Wide and Too Narrow:It is criticized that Robbins made the scope of economics too wide and too narrow at the same time. According to Robbins Time is included in the limited resources. Therefore, the problem of choices arises in respect of time. Thus, the definition of Robbins has made the scope of Economics very wide. On the other hand, the definition of Economics given by Robbins has made the scope of Economics very Narrow for Example, the problem of unemployment arises because of over population but according to Robbins we should do not study the problem of unemployment in economics. 1. Proper Emphasis is not Given On Social Character of Economics:According to Prof. Robbins in economics we study the behavior of those persons also who live out side the society. But infact, economics is a social science and therefore, it is important to study the social aspect of the activities of an individual and society. However, Robbins has not given proper emphasis on the social character of Economics.

2. Economics is not Neutral Between Ends:-

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According to Prof. Robbins, economics is neutral between ends. According to him an economists should not say what is good and what is bad or what is proper or what is improper. An economist should think of welfare of the society. 3. Economics is Not a Pure or Positive Science:According to Robbins Economics is a pure science or positive science. But this is not correct; economics is both a positive science and a Normative Science and also an Art.

2.3 Distinction between the Definition of Marshall and Robbins:Prof. Marshall Welfare Definition Prof. Robbins Scarcity Definition

1) Simple and Clear 1) Difficult and Complicated:The definition of Prof. Marshall is The definition of Prof. Robbins is simple and clear. comparatively difficult and complicated. 2) Social Science:2) Human Science:According to Marshall, Economics is a According to Prof. Robbins economics is a social science. In economics we study the human science also but not Social science activities of social, real, and normal person only. only.
3) Activities Related to Wealth:-

In economics we study only those activities of efforts which are related to wealth and not non-economic efforts. 4) Materialistic:Marshalls definition is based on physical and material things only. 5) Science and Art:Marshall considers economics both as a science and as an art.

3) Activities influenced by Scarcity of Means:According to Robbins in economics we studied both economic and non economic efforts. 4) Scarcity of Resources:The definition of Robbins is based on the scarcity of resources whether they are material or non-material. 5) Only Science:Prof. Robbins considers Economics as Science only and not an Art.

6) Positive Object (End):According to Marshall the Object of 6) Neutral Object:economics is to increase the human According to Prof. Robbins Economics is welfare. neutral between ends. Prof. Vishal V. Bartere Mob. No. 9021066249

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7) Practical Point of View:The definition of Prof. Marshall is based on Practical Point of View. 7) Theoretical Point of View:The definition of Prof. Robbins is based on Theoretical Point of View.

3. Nature of Economic Laws

Meaning:There is no Science without laws. Every science has its own laws. There are different kinds of laws are like the Laws of Science because as the laws of science establish the relationship between the Cause and the Effect. Economic Laws are those laws or statements which indicate the general tendency of economic behavior of man. In order to explain the meaning of Economic Laws we shall give here two important definitions of Economic Laws. According to Prof. Marshall, Economic laws or statements of economic tendencies are those social laws which relate to branches of conduct in which the strength of the motives chiefly concerned can be measured by a money price. According to Prof. Robbins, Economic laws are the statement of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.

3.1 Characteristics or Features of Economic Laws

The main characteristics of Economic Laws are as under, 1) Related with Economic Efforts 2) Statistics of Economic Tendencies 3) Economic Laws are less Exact than the Laws of Other Physical Science 4) Laws of Economics are More Exact that n the Laws of Other Social Sciences 5) Economic Laws are Hypothetical 6) Man is not Bound to Follow Economic Laws 7) Some Economic Laws are Universal while some Economic Laws are Relative 1. Related with Economic Efforts:Economic laws are related with Economic efforts of man. They are not related with noneconomic efforts of man. Prof. Vishal V. Bartere Mob. No. 9021066249

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2. Statistics of Economic Tendencies:Economic laws are not only statements of economic tendencies of man. In other words, they say that in general what the economic behavior of man is in practical life.

3. Economic Laws are less Exact than the Laws of Other Physical Science:The laws of economics are less exact than the laws of Physical Sciences because the subject matter of economics is Man while the subject matter of Physical science is Matter. 4. Laws of Economics are More Exact that n the Laws of Other Social Sciences:The laws of Economics are more exact than the laws of Social sciences such History, Sociology and Philosophy etc. economics has Money for measuring the behavior of man while other social sciences do not have any such measuring rod by which we can measure the behavior of man. 5. Economic Laws are Hypothetical:According to Prof. Seligman, Economic laws are essentially hypothetical. It means that the laws of Economics operate in a certain conditions only. If the conditions change the laws of economics do not operate. Hence while defining any law of Economics; we use the words, other things being equal.
6. Man is not Bound to Follow Economic Laws:-

It is not compulsory to follow economic laws because there is no punishment for breaking economic laws. 7. Some Economic Laws are Universal while some Economic Laws are Relative:Some economic laws are Universal. It means that they are the same for all persons, at all places. For example, the Laws of Diminishing Marginal Utility. On the other hand, there are some economic laws which differ from person to person, from time to time, and from to place to place. For example, the Laws of Banking, the Laws of Insurance and the Laws of trade etc.

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3.2

Distinction Between Laws of Economics and Laws of Natural Sciences or Physical Sciences

Laws of Economics
1. Subject matter:The subject matter of economics is Man.

Natural Science or Physical Science

1. The subject matter of Science is Matter. 2. Use of Laboratory:Economics laws cannot be proved in any 2. laboratory with the help of experiments. In order to prove the laws of sciences we can make experiments in laboratory. 3. Correctness:Laws of Economics are less exact than 3. Scientific Laws. Scientific Laws are more exact than Economic laws. 4. Study:Economic Laws studies the issues related 4. with the society of man, i.e. Social issues On the other hand Natural science studies like political issues, commercial issues, the Natural or Physical issues, like law of money etc. Newton, Law of Gravity etc. 5. Applicability:Economic laws are not universally 5. applicable. For example, Law of demand is Scientific laws are universally applicable. applicable in certain conditions only. For example, law of Gravity is applicable on every part of the earth of world.

3. Micro Economics
Meaning:Micro economics is that branch of modern economic analysis which studies the individual units of an economy. These individual units are a person, a family, a firm and an industry and the price of a particular commodity. Micro economics studies the Principles of Organisation Prof. Vishal V. Bartere Mob. No. 9021066249 Page 9

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and Management of an individual firm, the economic behavior of consumer or producers and an individual industry. Prof. Boulding has defined Micro Economics in his words as, Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industry and particular commodities. Thus, on the above discussion it is clears that Micro Economics is the branch of Economics it studies activities or efforts of the individual firm or industry and not for the whole economy.

4.1 Importance or Need and Uses of Micro Economics

The importance, need and Uses of micro economics can be explained as under, 1) 2) 3) 4) 5) Understanding whole Economy Taking Economics Decisions Analyzing Individual Sources Determination of Individual Price of Commodity Studies Individual Efficiency and Nature

1. Understanding whole Economy:Micro economics studies and analyzes individual and particular economic problems. In order to understand whole economy it is necessary to make particular and detail study of individual units. The reason is that whole economy is made by individual units. 2. Taking Economic Decisions:Micro economics helps individual families, individual firms and individual industries in taking the decision in respect of their economic transactions. 3. Analyzing Individual Sources:Micro economics throws an analytical on the sources and nature of individual income, individual consumption, individual savings snd individual investments etc. 4. Determination of Individual Price of Commodity:Micro economics tells us that how the price of a commodity is determined singly. It also tells us that how the reward or the price of a particular factor of production is determined. In other words, it tells us that how the Rent of Land, Wages of Labour, Interest on capital and Profit of Entrepreneur are determined. 5. Studies Individual Efficiency and Nature:Micro economics studies the efficiency and nature of individual units such as one firm and one industry etc. it also tells us how to solve the problems of individual units. Prof. Vishal V. Bartere Mob. No. 9021066249

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The importance, need and uses of Micro Economics are clear from the above discussion. In this regard Lord Keynes has rightly stated that, it is important apparatus of ones thought.

4.2 Limitation, Drawbacks Defects and Disadvantages of Micro Economics

1) 2) 3) 4) Does not Present Thorough Picture of Whole Economy Many Conclusions of Micro Economics are not Correct for Whole Economy Micro Economics is Based on Various Assumptions which are not found in Real Life Certain Economic Problems cannot be Studied Under Micro Economics

1. Does not Present Thorough Picture of Whole Economy:Micro economics does not pay attention towards the whole economy but pays attention towards particular parts only of the economics. Hence, it does not present thorough picture of the whole economy. 2. Many Conclusions of Micro Economics are not Correct for Whole Economy:It is not necessary that the conclusions derived from individual units are proper for whole economy. For example, Individual savings are good but if all the persons start saving then it will be harmful for whole economy because if everybody savings nobody will spend. 3. Micro Economics is Based on Various Assumptions which are not found in Real Life:These assumptions are Full Employment of Individual Interest and Perfect Competition etc.
4. Certain Economic Problems cannot be Studied Under Micro Economics:-

These problems are related with Public Finance, International Trade, Foreign Exchange and Banking etc.

5. MACRO

ECONOMICS:-

Macro Economics is that branch of modern economics which does not study the behavior of individual units but studies the behavior of all the units collectively, such as, aggregate or total income, total savings, total consumption and total investments etc. Thus, Macro economics is the study of Aggregates or Total it is also called as Aggregate Economics. Definition:Prof. Vishal V. Bartere Mob. No. 9021066249 Page 11

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Prof. Boulding has defined Macro Economics in these words, Macro economics deals, not with individual quantities as such but with aggregates of these quantities, not with the individual income but with the National Income, not with individual Prices but with the Price-level, not with the individual Output but with the National Income. On the basis of above definition we can say that Macro Economics deals with. 1. 2. 3. 4. Total Quantities Total Income or National Income Prices of All the Commodities National Production

5.1 Importance, Needs and Uses of Macro Economics

The importance, need and uses of Macro economics are experienced due to certain disadvantages and defects of Micro Economics. The importance, need and uses of Macro Economics can be explained as under.. 1. 2. 3. 4. 5. For Understanding the Working of Whole Economy Importance in Formation of Economic Policy Helpful in Solving Economic Problems Helps in Development of Micro Economics Study of Macro Economics is Necessary Due to Macro Economic Paradoxes

1. For Understanding the Working of Whole Economy:-

Modern economy is very complicated. Different economic elements depend upon each other. Macro Economics draws the complete picture of the working and organization of whole economy. 2. Importance in Formation of Economic Policy According to Prof. Boulding from the point of view of economic policy of the Government Macro Economics is very important. The Government cannot make the economic policy for an individual but it has to make the economic policy for whole society and nation. The government has to think of general price level, total trade, total industries and total production etc. 3. Helpful in Solving Economic Problems Macro economics in solving the various economic problem such as, problem of national income, food problem, unemployment problem, transport problem and housing problem etc.

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4. Helps in Development of Micro Economics

Macro economics helps in the development of Micro Economics. Macro Economics presents various theories and laws but in presenting these theories and laws Micro Economics has to take the help of Macro Economics. For example: There is an important Law of Consumption in Micro Economics, which is called the Law of Diminishing Utility. This law could be presented only when the study of the behavior of the group of individuals was made. 5. Study of Macro Economics is Necessary Due to Macro Economic Paradoxes According to Prof. Boulding, Macro Economic Paradoxes mean that something may be wrong for whole economy. For example, individual saving is good but if all the people start saving it may create a problem for whole country. It is harmful from the point of view of whole country. Therefore, is is necessary to separately study the whole economy.

6. LAW OF DEMAND
The Law of Demand establishes the relationship between the Price of a Commodity and its Quantity Demanded. The law of Demand can be defined as follows, Other things being equal an increase in the price of a commodity or a service lead to a fall in its demand and a fall in the price leads to an increase in its demand. Thus, the law of Demand shows the inverse relationship between the Price and Demand. The law of demand is a qualitative statement and not a quantitative statement. This means that the Law of Demand tells us only the direction of change in demand. In other words it tells us only the demand will decrease or increase due to a change in the price. It does not tell us how much the demand will increase of decrease. Thus, Law of Demand says that Demand changes inversely with Price, not necessarily proportionately. Explanation of Law The law of Demand is based of the day to day experience. It is our experience that when Price of a commodity is more we buy less quantity and when the price of a commodity is less we buy more quantity. For example, when the price of Banana is Rs.6/- per dozen I purchase 2 dozen Bananas and when the price of Bananas is Rs.12/- per dozen I purchase only 1 dozen Bananas. The Law of Demand can be explained with the help of Demand schedule.

Demand Schedule
The following table shows the quantity of Bananas demanded by me at different prices.

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Price of Bananas in Paise

1) 2) 3) 4) 5)

Quantity of Banana Demanded 1 2 3 4 5

100 paise per Banana 80 paise per Banana 60 paise per Banana 40 paise per Banana 20 paise per Banana

The above table shows that as the price of Bananas decreases its demand is increases. When the price of Banana is 100 paise per Banana I demand only 1 Banana when the price decreases to 80 paise per Banana my demand is 2 Bananas and when the price decreases to 20 paise per Banana my demand increases and it is for 5 Bananas. Thus the Law of Demand shows inverse relationship between the price and the quantity demanded. It means when the Price increases Demand decreases and when the Price decreases the Demand are increases. Explanation with the Help of Diagram:Y 100 80 60 40 20 1 2 3 4 5 D1 X D Demand Curve

Demand for Bananas 1. X-series represents the demand for Bananas and Y-series represents the Price in paise per Bananas. 2. DD1 is the demand curve. 3. The demand curve has a negative slope i.e. it is moving from the top left to right bottom. 4. The negative slope of DD1 curve indicates that as the price of Bananas is decreasing the demand for Bananas are increasing. When the price is 100 paise per Banana the demand is of 1 Banana only and when the price is 20 paise per Banana the demand is for 5 Bananas.

6.1 Assumptions or Limitations or Conditions of the Law of Demand

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1. 2. 3. 4. 5. No Change in the Population No Change in the Social Customs No Change in the Tastes and Fashions No Change in Advertising No Change in Income 6. No Substitute (Better and Cheap) should be available

1. No Change in the Population For the operation of the Law of Demand there should not be any change in the population of the country. If there is any increase of decrease in the population the law will not operate. For example, the price of sugar increase then according to the law of demand the demand of sugar decreases. But if at the same time the population increases the demand for sugar will not decrease but it is increases. 2. No Change in the Social Customs The people of every country follow certain social customs, whether they like or dislike them. If these customs change the Law of Demand will not operate. For example, generally in our country everybody wear caps. But now very few people wear caps, hence even the price of caps fall their demand will not rise. 3. No Change in the Tastes and Fashions The law of demand will not operate if the Tastes and Fashions of the people change. For example, formally the people in our country like to wear Dhotis. But now in general the people do not like to wear Dhotis. Therefore If the price of Dhotis are decreases the demand will not increases. 4. No Change in Advertising The law of demand will not operate if there is an increase in Advertising. It is because, if any product is too much advertised on T.V. and other media of advertising such as Magazines and Newspapers, it enters into the eyes and minds of the people. When the price of that product increases the people will buy it and its demand will not decreases. 5. No Change in Income The law of demand will not operate if there is a change in the income of the People. For example if the price of a commodity increases and at the same time the income of people also increases the demand for that commodity will not decreases. The reason is that with the increase in the prices the income of the people has also increases.
6. No Substitute (Better and Cheap) should be available

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For the operation of the law of demand there should not be a better and cheap substitute available for the commodity which is under consideration. If better and cheap substitute the law of demand will not operate. For example, formally people used to go in Cycle Rickshaw, but now better and cheap substitutes of Cycle Rickshaw in the form of Auto Rickshaw and Two Wheelers are available so people do not like to go for Cycle Rickshaw in less price.

7 Explain the term Utility.

(March-2006)

The law of demand explained by Prof. Marshall is based on Utility Approach or Utility Analysis. In the ordinary language Utility means Usefulness. From this point of view water, air and sunlight possess to Utility. But in Economics the word Utility is used in a different sense than its ordinary sense.

Meaning of Utility
Utility is that power, quality or capacity of a commodity which directly or indirectly satisfy the want of a person. Thus, Utility is the capacity of a commodity to satisfy human wants. In short, Utility is the Want satisfying power of a commodity. In ordinary sense there is no difference between the word Utility and Usefulness. But in Economics, the meaning of Utility not related with Usefulness. In Economics want satisfying power of a commodity is Utility, whether that commodity is good or bad, harmless or harmful. For example, Cigarette or Liquor is harmful but it possesses the Utility because it satisfies the want of smoker or drunkard. The desire for a commodity creates utility in it, whether it is useful or harmful. Thus, on the basis of above discussion it is clear that, Utility is that power, quality or capacity of a commodity which is satisfy the want of a person, whether it is good or bad.

Explain the term Indifference Curve Approach (March-2008)

As there are certain defects on the Utility Analysis of the Demand Theory stated by Prof. Marshall, the modern Economists stated the Demand theory based on Indifference Curve Analysis.

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Prof. Hicks developed the Indifference Curve Analysis. In order to explain the Theory of Demand Prof. Hicks has used Indifference Curve. Before defining and explaining the meaning of Indifference Curve let us first understand the Indifference schedule. According to Prof. Meyers, An indifference schedule may be defined as a schedule of various combinations of goods that will be equally satisfactory to the individual concerned. If we depict these in the form of a curve we get an Indifference Curve.

Explanation of Indifference Curve with the Help of Example:Indifference curve can be more clearly explained with the help of an example. The following schedule indicates the different combination of Oranges and Apples from which a consumer gets equal satisfaction. He is Indifferent towards the choice of the combination. He may choose any on combination because he gets the same satisfaction. No. of Combination 1 2 3 4 No. of Oranges 2 3 4 5 + + + + No. of Apples 6 4 3 0 Rate of Substitute --1 Orange = 2 Apples 1 Orange = 1 Apples 1 Orange = 3 Apples

Representation of Indifference Curve with the Help of Diagram:Y 6 5 4 Apples 3 2 1 Prof. Vishal V. Bartere Mob. No. 9021066249 I

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0 1 2 3 4 5 6 7 X

Oranges 1) In the diagram X-axis represents Oranges and Y-axis represents Apples. 2) It is the Indifference Curve which indicates that the consumer gets equal satisfaction from different combinations of Oranges and Apples.

(Oct-2001, 02, Mar-2002) The law of demand is a Qualitative statement and not Quantitative statement. It means that the Law of Demand tells us only the direction of change in Demand due to the change in the Price but it does not tell us that how much the Demand changes due to the change in the Price. In order to know the how much change in Demand due to the change in the Price economists presented the technical concept of Elasticity of Demand.
8

ELASTICITY OF DEMAND

Definition and Meaning of Elasticity of Demand:Elasticity of Demand is the measure of the change in the Quantity of Demand due to a little change in the price. It is called Price Elasticity of Demand because the change in demand is due to change in price. Prof. Marshall, has defined Elasticity of Demand as, The Elasticity of Demand in as market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price.

9.1 Kinds or Types of Elasticity of Demand:1. 2. 3. 4. 5. Perfectly Elastic Demand Highly Elastic Demand Elastic Demand Inelastic Demand Perfectly Inelastic Demand

1. Perfectly Elastic Demand:When the demand increase too much or decrease too much though there is no change of very little change in the price, it is called Perfectly Elastic Demand. The Demand curve (DD 1) is parallel to X-axis as shown in the diagram Y

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Price D D1

Quantity 2. Highly Elastic Demand:-

When the Proportionate Change in Demand of a commodity is greater than the Proportionate change in the Price is called Highly Elastic Demand. For example, if the Price of a commodity decreased by 20% and its demand increased by 30% or 40% we can say that the Demand for that commodity is Highly Elastic. The Highly Elastic Demand curve is shown in the diagramY D P K Price D1

Quantity

3. Elastic Demand:When the Proportionate change in a Demand is equal to the Proportionate change in Price it is called Elastic Demand. For example, if the Price of a commodity is Decrease by 20% and its Demand is also increased by 20%, then it is called as Elastic Demand. The Demand curve is creates 450 with X-axis and Yaxis, it is shown in diagram as followsY D

Price
450

Quantity
4. Inelastic Demand:-

When the Proportionate change in Demand is less than in the Proportionate change in Price, it is called as In-elastic Demand. For example, if the Price of a commodity decreased by 20% but its Demand increased by 5% or 10% only it is called as In-elastic Demand. Prof. Vishal V. Bartere Mob. No. 9021066249 Page 19

R.J. COLLEGE OF ART, COMMERCE & SCIENCE, AMT.

Y D

Price D1 Quantity X

5. Perfectly Inelastic Demand:-

When the Demand for a commodity does not at all change though there is sufficient change in the Price it is called Perfectly Inelastic Demand. The Demand Curve is parallel to Y-axis; it is shown in the diagramY

Price

Quantity

9.2

Determinants of Elasticity of Demand (Factors Affecting Elasticity of Demand) (Mar-2006, 02, Oct-2001,)

We find that the Elasticity of Demand for all the commodities is not the same. The Demand for some commodities is Elastic while the Demand for some commodities is Inelastic or Less Elastic. The following are the main factors which affect the Elasticity of Demand. 1. 2. 3. 4. 5. 6. Nature of Commodity Postponement of Consumption Availability of Substitutes Price Level Alternative Uses Nature Tastes And Fashion of Consumers 7. Habit of the Consumer 1. Nature of Commodity:There are three kinds of our wants Prof. Vishal V. Bartere Mob. No. 9021066249 Page 20

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a) Necessary

b) Comforts c) Luxuries On the basis of above classification of wants, commodities are also of three kindsa) Necessaries: - The demand for necessaries is Inelastic such as Food Grains and Cloths, etc. b) Comforts: - The demand for Comforts is Moderately Elastic such as Furniture etc. c) Luxuries: - The demand for luxuries is Highly Elastic such as Cars, Jewelry etc.

1. Postponement of Consumption: -

The demand for those commodities is more Elastic whose consumption can be postponed for future. For Example, if the price of Umbrellas increases we will repair the old Umbrella and postponed its consumption for future.
2. Availability of Substitutes: -

Substitute means those commodities which can be used in place of other commodities. E.g. Coffee is the Substitute of Tea, Bus of the Train, etc. The demand for those commodities is Elastic which has more substitutes.
3. Price Level: -

The demand for those commodities is Inelastic whose prices are very high and very low. For E.g. the Prices of Diamonds and Cars are very High, if the Prices of Cars and Diamonds are increases the rich people can buy them. Poor people cannot buy Diamonds and Cars even if their Prices are Decreases. 4. Alternative Uses There are some commodities which have alternative uses such as Electricity and Coal etc. For e.g. Electricity can be used for various purposes such as lighting, cooking, heating, cooling etc. The demand for such commodity is Elastic. If the rate of Electricity increases the people reduce its consumption i.e. the demand for Electricity will decrease.
5. Nature Tastes And Fashion of Consumers: -

If the person has developed taste for a particular commodity he will consume it in the same quantity as before even if its price rises. Thus the demand for such commodities is Inelastic.
6. Habit of the Consumer: -

If the consumer is in the habit of consuming a particular commodity he does not decrease its demand or consumption when its Price increases. For e.g. if the person is having the habit

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smoking of 10 Cigarette daily, he will not decrease their demand though the price will increases.

9.3 Importance of the Concept of Elasticity of Demand: The importance of the study of Elasticity of Demand can be discussed into two parts: 1. Theoretical Importance 2. Practical Importance 1. Theoretical Importance: From theoretical point of view by studying the Elasticity of Demand, we get the knowledge that as a result of the various changes in the Price at different occasions or time, what is the effect on the Demand of the Persons of different classes of society or what would be the likely effect on their demand due to the change in Price.
2. Practical Importance: -

From the practical point of view the study of Elasticity of Demand is important for theMonopolists, Traders, Industrialists and Government. A) Importance to Monopolists: By studying the Elasticity of Demand a Monopolist can decide that at which price the demand for his commodity will maximum and at which price by selling his commodity he will get maximum Profit. If the demand of a commodity is Inelastic of Less Elastic the Monopolist can increase the Price and earns more Profit, because the Demand will not decrease if Prices are increase. On the other hand, if the Demand of the Commodity is Highly Elastic the Monopolist will keep low Price, because if he increases the Price the Demand of a commodity will be decreases. B) Importance to Traders and Industrialists:The study of Elasticity of Demand is also important for Traders and Industrialists. If the Demand for the commodity is Inelastic of less Elastic the Traders and Industrialists can keep high Price and earn maximum Profit. On the other hand, if the Demand is Elastic or Highly Elastic the Traders and Industrialists will have to keep low Price and sell more to earn more Profit. C) Importance to Government: The Government decides Tax on different commodities. While deciding the Tax on a commodity the Government has to take into consideration the nature of the Elasticity of Demand for a commodity. When the Tax rate is fixed on commodity the general rule is that i) If the Demand for a commodity is Inelastic or Less Elastic the Finance Minister can impose Tax on that commodity because though its Price increases due to the Prof. Vishal V. Bartere Mob. No. 9021066249 Page 22

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imposition of tax its Demand will not decrease its Demand is Inelastic. The Government will not loose the Revenue from Tax. ii) On the other hand if Demand of a commodity is Elastic or Highly Elastic the Finance Minister will not be able to impose too much Tax on that commodity because as Demand is Elastic the Demand will fall because its Price increases due to the imposition of Tax. In such condition the Government will loose the Revenue from tax.

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