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STUDY MATERIAL

ON

ECONOMICS-I

B.A;LL.B. 1

ST

SEMESTER

Contents:

(Paper Code : BL – 1004)

1. General Principles

(a). Economics as a science and its relevance to Law. (b). Economics as a basis of social welfare and social justice. (c). Free enterprise, planned economy and mixed economy.

2. General Principles of Economics (a). Demand and Supply. (b). Saving, consumption, investment. (c). Theories of Economic growth and problems of development. (d). Banking and fiscal policy – Changing profile of Indian Banking, RBI and its challenging policy.
3. Indian Economics (a). Introduction to Indian Economics. (b). Trends in population growth. (c). Estimates of national income in India. (d). Post independence economic policies in India.
4. The Logic of India’s development strategy (a). Planning process. (b). Priorities between agriculture and Industry. (c). Choice of technology. 5. (a). The role of public, private and joint sector (b). Large, medium and small industries (c). Role of capital formation, credit and banking system

BOOKS RECOMMENDED Dhingra, M.L., Principles of Economics. Roger Leroy Miller, Principles Of Economics Today, Prentice – Hall, India. Roger Leroy Miller , Economics Today , Canfield Press, San Francisco. Seth, M.L., Principles of Economics. Singh, S.P., Principles of Economics. Soloman, Economics, Prentice – Hall, India.

Introduction of Economics

Wealth Definition :

 According to Adam Smith: “ An enquiry into nature & cause of wealth of nations.”  Adam Smith defines Economics as the “Science of wealth”. Economics was regarded as the science which studied the production & Consumption of wealth

Welfare Definition :

 According to Alfred Marshall’s: “ 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 the use of the material requisites of well being.”

Scarcity Definition:

 According to Robbin’s: “Economics is the science which studies human behavior as a relationship between scarce means which have alternative uses."  ‘Scarcity (also called paucity) is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs.’

Growth Oriented Definition:

 According to Him “ Economics is the study of how people and society end-up choosing, with or without, the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future among the costs and benefits of improving patterns of resource allocation ”.

Nature of Economics:

The objective of the study of nature of economics is to know whether economics is a Science or an Art or it is both sciences as well art.

According to Samuelson , “Economics is the oldest of the Arts, the Newest of Science – Indeed the queen of all the Social Science”.

Economics as a Science: The term Science has its origin in term ‘Scientia’ of Latin Language. It means “to know”. By knowing a subject we mean understanding it and begin able to describe its causes and effects. Science has been defined in these terms-“ Science is a systematic body of knowledge concerning the relationship between causes and effects of a particular phenomenon”.

According to Poincare , “Science is built-up of facts as a house is built of stones but an accumulation of facts is no more a science than a heap of stones is a house”. In other words, to build science, we must collect, classify and analyse the facts systematically. In economics also one collect classifies, and analyses economics facts systematically. \

Economics is Positive science.

 It is defined as a body of systematized knowledge concerning what is.

 The objective of a positive science is the establishment of uniformities

 It deals with things as they are.

 It explains their causes & effects.

Economics is Normative science.

 It is defined as a body of systematized knowledge relating to the criteria of what ought to be.  It deals with things as they ought to be  The objective of a normative science is the determination of ideals.

Nature Of Economics

Science

Positive

Normative

Art

Free Enterprises Economy : Capitalism is an economic system in which the means of production are privately owned and operated for profit usually in competitive market.

In other word “An economics System in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporation.

Merits of Free Enterprises Economy :

1. The resources are utilized efficiently and economically.
2. Producers, consumers and the workers all enjoy economic freedom and are free to work, as they like. Goods are produced according to the taste, preference and circumstances of the economy.
3. Capitalist System can make change according to the needs and circumstances of the economy. It has inbuilt flexibility.
4. An automatic equilibrium is brought about by the operation of price mechanism and market forces. No central direction is required for the operation of the economy.
5. There is no interference in economic matters. Every individual is free to take decisions as to his economic activities keeping in mind his own – interest.

DEMERITS OF FREE ENTERPRISES ECONOMY :

In a Capitalist economy, wealth enjoys the prestige in the society, which results in erosion of human values. There is a large – scale wastage of resources due to unnecessary competition. In capitalist system, owners of the means of production can earn more as compared to those who do not possess much means of production. This brings wide inequalities in the distribution of income and wealth. In modern capitalist market group rivalries and price wars, price-agreements etc. are commonly found.

Economics System

Free Enterprise Economy Planned Economy^ Mixed Economy

In capitalist countries, society possesses two classes such as haves and have- notes. Such division result in conflict in the form of strikes, lockouts and industrial disputes in the economy. Under capitalism, Capitalists generally exploit the poor laborers.

Planned Economy: A socialist economic system is characterized by social ownership and democratic control of the means of production, which may mean autonomous cooperatives or direct public ownership; wherein production is carried out directly for use. The term socialism refers to any system in which the production and distribution of goods and services is a shared responsibility of a group of people. Socialism is based upon economic and political theories that advocate for collectivism. In a state of socialism, there is no privately owned property.

PLANNED ECONOMY IS CHARACTERIZED IN THE FOLLOWING WAYS:

 The means of production are owned by public enterprises or cooperatives (the state), and individuals are compensated based on the principle of individual contribution.  There is equal opportunity for all.

MERITS OF PLANNED ECONOMY :

 NO LABOUR EXPLOITATION :

There is only one class in a socialistic economy hence there is no question of exploitation.

 PROPER UTILISATION OF RECOURSES : Under this economy, all types of natural resources are utilized in a most organized manner. Its main objective is to exploit these resources for the welfare of society. Proper Planning: In order to solve various problems, which arise from time to time, there is proper economic plan in this type of economy. Thus, with the help of economic plans socialist economy will adopt the balanced development strategy.

 SOCIAL WELFARE: The aim of socialist economy is to maximize social welfare of the society. It provides equal opportunities of employment to all individual according to their abilities Demerits of Planned Economy: Economists like Robbins, Maurice Dobb, and Georg Helm etc., have criticized the socialist economy on the following:  Evils of Bureaucracy: In socialist economy, all economic activities are controlled by the government. Thus, they develop all evils of bureaucracy like favoritism, delay; corruption and other evils,  Burden on Government :

All the economic activities are performed by the Central Authority on behalf of the government. Hence, it is overburdened with daily activities

Difference Between Free Enterprise &Planned Economy

Free Enterprises Planned Economy

1. Individual Freedom.
2. Consumer is Sovereign.
3. Unearned income in the form of profits.
4. Existence of Competition.
5. Right to acquire private property.
6. Wastage of resources.(advertisements).
7. Price fixed by Demand and Supply.
8. No equal opportunities, wealthy people get all the opportunities. 1. No Individual Problem. 2. Loss of Consumer’s Sovereignty. 3. No Unearned Income. 4. Absence of Competition 5. State ownership of all factors of production. No right to acquire private property. 6. No wastage of resources. 7. No rationale in Price system. State fixes prices. 8. Equal opportunities to all.

UNIT -

Introduction of Demand

One of the market forces which determine price is demand. Demand is related to

consumption. It represents the process through which a consumer obtains goods

and services he wants to consume The Demand in economics is something more

than desire to purchase through desire is one element of it. For Example A

beggar may desire food but due to lack of means to purchase it, his demand is not

effective. It economics, demands refer to effective demand, which implies three

things

1. Desire,

2. Means to purchase

3. On willingness to use those means for that Purchase

Definition ,of Demand

According to G.L Thiekttle : The demand for any commodity or service is

amount that will be bought at any given price per unit time.

According to Benham : The demand for anything at a given price is amount of it ,

which will be bought per unit of time , at that price.

According to Bobber: By demand we mean the various quantities of a given

commodity or service which consumers would buy in one market in a given period

of time at various prices.

Features of Demand :

1. When the person, who is in need and desiring, is willing and able to pay for what he desires, the desire changes into demand. 2. The demand is always at a price. 3. The demand is always per unit of unit of time. 4. The demand indicates the quantity or the amount of the commodity the consumer are prepared to buy at the particular price.

Type of Income Demand:  Superior Demand: Superior goods make up a larger proportion of consumption as income rises, and therefore are a type of normal goods in consumer theory. Such a good must possess two economic characteristics: it must be scarce, and, along with that, it must have a high price.  Inferior Goods: an inferior good is a good that decreases in demand when consumer income rises (or rises in demand when consumer income decreases), unlike normal goods , for which the opposite is observed. Normal goods are those for which consumers' demand increases when their income increases.

Cross Demand : The cross demand, other things remaining constant, refers o the

quantities of a good or service which will be purchased with reference to change in

price not of this good but of other inter-related goods. These goods are either

substitutes, or complementary good.

Substitution Goods : Substitute goods are two goods that could be used for the

same purpose. If the price of one good increases, then demand for the substitute is

likely to rise. Therefore, substitutes have a positive cross elasticity of demand. A

decrease in the price of A will result in a rightward movement along the demand

curve of A and cause the demand curve for B to shift in. Examples of substitute

goods include margarine and butter, tea and coffee

Complementary Goods: A complementary good or complement is a good with

a negative cross elasticity of demand, in contrast to a substitute good. This means

a good's demand is increased when the price of another good is decreased.

Conversely, the demand for a good is decreased when the price of another good is

increased.

Factors affecting demand or causes of changes in demand :

 Price of the commodity: Demand is decisively affected by the change in the price of the commodity concerned. There is inverse relation between price and the quantity demanded.

Demand Schedule:

Demand schedule is a table or a chart which shows the relationship between

price and demand of a commodity or service unit of time. If we list the different

quantities of a commodity demanded at different prices in the form of raw and

column the resulting format is demand schedule. In other words, demand schedule

establishes a functional relationship between independent variable price and

dependent variable demand.

Type of Demand Schedule

Demand schedule are of two types:

1. Individual Demand Schedule
2. Market Demand Schedule.

 Individual Demand Schedule : This is a tabular statement showing the different quantities of a commodity demanded by a consumer or a household within a given period of at different prices. For Example Let us suppose that a household purchase 350 gm of apples per days at a price of Rs. 10 per kilogram. When the price fall to Rs. 9 per kilogram It increases its demand to 600 grams. As the price goes on decreasing. The household continues to increase its demand. When the price falls to Rs. 1 per kilogram ,its demand shoots upto 8 kilogram

Price per kg Apple demanded (in kg)

**10.

8 1. 7 1. 6 1. 5 2.**

4 3.

Market demand Schedule for obtaining the market demand schedule quantities

demanded by different buyers at each price are added up. Every individual buyer

will purchase different quantities of apple at different prices. The slope of this

demand curve will be negative. It will slope downward from left to right. If there

are only two buyers in the market and their demand schedule are identical then the

demand for the commodity in the market will be exactly double the quantity

demanded by a single buyer. Therefore, we have added up the quantities demanded

by various buyers at different prices. This gives us the market demand schedule.

Price per

kg

Qty demanded 1

Qty demanded 2

Market demanded

10 .35 1.25 1.

9 .60 1.40 2.

8 1.00 1.45 2.

7 1.40 1.60 3.

6 1.90 1.75 3.

5 2.50 1.95 4.

4 3.40 2.10 5.

3 4.60 2.15 6.

2 5.90 2.50 8.

1 8.00 3.35 11.

Reason for the law of demand or the sloping downwards of the demand curve

The downward slope of the demand curve implies inverse relationship between

demand and price of a commodity. Following are the reasons for the downward or

negative slope of the demand curve:

1. Substitution Effect : when the price of a commodity falls, it becomes relatively cheaper than other commodities. It induces consume to substitute the commodity whose price has fallen for other commodities. When have

demanded in the market. And the lower the price. The higher would be the

quantity demanded in the market. “The law of demand says that and the price and

the quantity demanded are inversely related, all other things being equal”.

According to Marshall “( The amount demanded increases with a fall in price and

diminishing with a rise in price).”

According to Bilas “ ( T he law of demand states that other things being equal the

quantity demanded per unit at time will be greater , lower the price and smaller,

higher the price”)

According to Prof. Samuelson “(law of demand states that people will buy more

at lower prices and buy less at higher prices other things remaining the same)”

According to Ferguson’s “ (the law of demand the quantity demanded varies

inversely with price)”

Assumptions of the Law of demand

According to Prof.Stigler and Boulding, the main assumptions of the law are:

1. No change in tastes and preferences, fashions of the consumers;
2. Consumer’s income ,both money and real income must remain the same;
3. The price of the other commodities related to the commodity in demand should not change;
4. There should be no change in the wealth of the consumers;
5. Substitutes are not discovered ;
6. No anticipatory changes in prices.

Different types changes in demand for a commodity

There are four types of changes in demand. Two types of changes take place due to change in price and they are extension of demand and contraction of demand. Two types of changes take place due to change of other things and they are increase in demand and decrease in demand

1. Extension of Demand: when other things remain the same with a fall

in the price, the amount demanded goes up or extends. There will be downwards movement along the same demand curve.

PRICE QTY

In Table when price of commodity is Rs. 5, its quantity demanded is 5 unit. As the price of the commodity falls Rs. 4 quantity demanded increase to 10 unit, again when price falls to Rs 1 ,its quantity demanded further increases to 25 unit

2. Contraction of Demand it means other things remaining the same ,an

increase in price leads to a fall in demand.

When price of commodity is Rs. 1, its quantity demanded is 30 unit. As

the price of the commodity falls Rs. 3 quantity demanded increase to 20

unit, again when price falls to Rs 5, its quantity demanded further increases

to 10 unit

Price Qty 1 30 2 25 3 20 4 15

5^10