HTTP WWW Allonlinefree Com

http://www.allonlinefree.
com/
Basic Concepts in Economics
1) Production: Any economic activity directed towards the satisfaction of human wants is
known as production. The production of goods and services is necessary for the existence of an
economy. The level of production in any economy is the best measure of its performance, living
standards of its people and the extent of technological development and growth. It includes
both the manufacturing of material goods as well as the provision of services. The production of
electrical and electronic goods, automobiles etc and the work of teachers, doctors, lawyers etc
are all production in the economic sense.
2) Consumption: The act of satisfying one’s wants is called consumption. Goods and services are
produced only because human wants need to be satisfied. No one will produce if there is no
consumption. The quality and quantity of consumption reflects the levels of income and
employment in an economy.
3) Investment: Investment is the addition made to the existing total stock of capital. The
amount to make investment is coming from saving and this saving is the unspent income.
Income comes from employment. An economy can grow only if it saves something from its
present consumption and invests it again in the production process. It adds to the productive
capacity of an economy.
4) Goods: Anything that can satisfy human wants is called goods in economics. While services
also satisfy human wants, the difference is that goods are tangible and visible but services are
intangible and invisible. Goods can be of various types. They can be free goods or economic
goods, transferable, private or public and so on.
Utility: The want satisfying capacity of a commodity is called its utility or the power of a
commodity to satisfy human wants is called utility. Utility is subjective that is it does not lie in
the good but is a function of the consumer’s mind. Utility of good changes with the change in
conditions and circumstances. There are three main forms of utility-form utility, place utility and
time utility.
http://www.allonlinefree.com/
Value: The commodity which has utility and possesses the condition of scarcity and
transferability, then it has value. For example air has utility but it is abundant and a free
resource, it has no value in economic sense. Likewise rotten eggs are scarce and transferable but
possess no utility, they also don’t have value. A television since it possesses utility and is scarce
as well as transferable has value.
Price: Value of a commodity expressed in terms of money is called price. In modern times,
goods are exchanged for money; the value of a commodity is its price.
Wealth: Anything that has value is called wealth. In economics; wealth does not only refer to
money, but to all goods that have value. Wealth includes material wealth and human wealth
(education, health, knowledge etc)
Income: The amount of money which wealth yields is known as income. Thus, wealth is a stock
concept while income is a flow concept. That is wealth is valued at a particular point of time and
income is measured over a period of time particularly a year.
Gross Domestic Product (GDP)
When we take the sum total of values of output of goods and services in the country, without
adding net factor incomes received from abroad, the figure so obtained is called Gross Domestic
Product (GDP).
GDP = C+I+G
GNP may be defined as the aggregate market value of all final goods and services produced
during a given year. The concept of final goods and services stands for finished goods and
services, ready for consumption of households and firms, and exclude raw materials, semi-
finished goods and such other intermediary products. More clearly, all sales to households,
business investment expenditure, and all government expenditures are obviously regarded as
final goods. In an open economy (an economy which has economic relationship with the rest of
the world in the form of trade, remittances, investment etc-all economies are open economies),
GNP may be obtained by adding up:
1) The value of all consumption goods which are currently produced

2) The value of all capital goods produced which is defined as Gross Investment. Gross
Investment, in the real sense, here implies the increase in inventories plus gross
products of buildings and equipments. It, thus, includes the provision for the
consumption of capital assets, i.e., depreciation or replacement allowances.
3) The value of government services which are measured in terms of governmental
expenditure on various goods and services for rendering certain services to the benefit
of the entire community.
4) The value of net exports, viz, the difference between total exports and total imports of
the nation. This value may be positive or negative.
5) The net amount earned abroad. This represents the difference between the income
received by the nationals from abroad minus the income remitted by the foreigners
working in India.
GNP at market price, thus, represents:
GNP= C+I+G+(X-M)+(R-P),
Where,
C stands for consumption goods,
I stands for capital goods/ or gross investment,
G stands for government services,
X stands for exports,
M stands for imports,
R stands for income receipts from abroad, and
P stands for income remitted by foreigners.
The Sectors of the Economy
The economic activities of an economy is classified mainly into three primary sector economic
activities (agriculture and allied), secondary sector (manufacturing, construction etc) and
service sector or tertiary sector activities (transport and communication etc).The Ministry of
Statistics and Programme Implementation (MOSP), Government of India has been publishing
National Accounts Statistics annually classifying the Indian economy into three sectors and re-
classifying the sectors into various sub sectors. In this classification primary sector includes
agriculture, forestry and logging and fishing. The secondary sector includes manufacturing
(registered and un-registered manufacturing), construction, electricity, gas and water supply.
Tertiary sector or service sector includes transport, storage and communication, railway, trade,
hotels and restaurants, banking and insurance, real estate, ownership of dwellings and business
services, public administration and other services. In Indian economy the contribution of
primary sector is less than 20 per cent and the agriculture share in national GDP is reducing
even though 58 per cent of India’s labour force still engaged in agriculture and allied activities.
This is a serious issue in the rural life of India. The agrarian sector has been facing serious crisis
and to a greater extent it is structural and institutional. The area under irrigation has been
almost constant for the last several years, declining capital expenditure by the public sector in
agriculture, lack of infrastructural facilities, declining institutional credit to agriculture etc all
these are burning issues of India’s farm sector. Sharp decline of agriculture in value-added terms
to GDP, increasing amenities in urban India and not much in rural India where more than 70 per
cent of the population lives etc are some disturbing facts to those who hold ‘Indian Economic
Miracle’ theory. We have good demographic advantage, vast agricultural land and in this land
we can cultivate all most all crops sufficiently to meet the requirements of our growing
population. But now the present situations of India like poor state of our education, public
health, agriculture and rural economy, poor amenities in rural areas and urban slums, poor
public delivery systems, high poverty ratio, still high illiteracy rate, malnutrition and high infant
mortality rate are burning issues to be addressed urgently.
At the national level the contribution of manufacturing sector is around 18 per cent and it is
almost constant for the last so many years. But in Kerala it is around 10 per cent and in Kerala
we have a stagnant manufacturing sector. The contribution of service sector to the national
economy is nearly 60 per cent. There are serious disparities in the growth rates of agriculture,
manufacturing and service sectors of the Indian economy.
Functions of Money
The functions of money can be classified as follows.
1) Money as a medium of exchange
The basic function of money in an economy is to act as a medium of exchange. Money has
general acceptability and purchasing power so it can act as a medium of exchange. When
money is transacted, purchasing power is transacted from one person to another. In earlier
periods we had been following barter system. Barter system means exchanging goods for goods.
But most of the time, for such exchange to take place, there must occur a double coincidence of
wants. That is each party to the exchange must have precisely what the other party requires,
and in an appropriate quantity and at the time required. The use of money as a common
medium of exchange has facilitated exchange greatly.
2) Money as a Unit of Account.

Money customarily serves as a common unit of account or measure of value in terms of which
the values of all goods and services are expressed. This makes possible meaninigful accounting
systems by adding up the values of a wide variety of goods and services whose physical
quantities are measured in different units
3) Money as a Standard of Differed Payment
Money also serves as a standard or unit in terms of which deferred or future payments are
stated. This applies to payments of interest, rents, salaries; pensions etc.Large fluctuations in
the value of money (inflation or deflation) make money not only a poor measure of value, but
also a poor standard of deferred payment. This is because the value of money is not something
intrinsic to it, but a social phenomenon. This makes monetary management for the stable value
of money socially very important.
3) Money as a Store of Value

Money also serves as a store of value i.e., members of the public can hold their wealth in the
form of money. This function is derived from the use of money as a medium of exchange in a
two-fold manner. First, the use of money as a medium of exchange decomposes a single barter
transaction into two separate transactions of purchase and sale.
Significance of Money in Modern Economic Life
Money occupies a central position in our modern economy. Money is everywhere and for
everything in the modern economic life. Money has become the religion of the day in the
ordinary business of life. Every branch of economic activity in a money economy is basically
different from what it would have been in a barter economy. Money has created a far reaching
effect on all facets of economic activities; consumption, production, exchange and distribution,
as also on public finance and economic welfare.
Money and Consumption
Money enables a consumer to generalize his purchasing power. It gives him command over a
wide variety of goods. It enables him to canalize his purchasing power and get what he wants. In
fact, it is money through its immense purchasing power that makes a consumer sovereign in a
capitalist economy. The consumer’s sovereignty can be expressed through money spending.
Money provides freedom of choice of consumption. Money and the price mechanism help a
consumer to allocate his income over goods in such a way so that he derives maximum
satisfaction from his consumption.
Money and Production
The introduction of money has made present day mass production possible. Without money,
production on a large scale would be impossible. The benefits of money in production are as
follows
1) Money has made extreme division of labour possible. Intensive specialization is

necessary for large scale production.
2) Money is the very essential for modern enterprise. Entrepreneurs are concerned, while
planning their production activities, with the cost of production and selling prices
together with the resulting profit, all calculated in terms of money.
3) The use of money enables a producer to concentrate on the organization of the
production process. Money provides a basis for supporting more complex methods of
organizing production.
4) Money has facilitated borrowing and lending and these are essential in present day
production. Credit is the main pillar of modern business.
5) Money is the most liquid and general form of capital which is highly mobile between
different regions and industries.
6) Money helps the producer to discover through the price mechanism what buyers want
and how much they want, so that he can produce and supply accordingly. In fact, money
has changed the basic characteristics of production.
Money and Exchange.
Money overcomes the difficulties of a barter system of exchange. In a money economy; it is

simple matter to ascertain the market price in terms of monetary units. Money facilitates trade
by serving as a medium of exchange. Thus, rapid exchange in a modern economic system is
possible because of money. Money is the basis of the pricing mechanism through which
economic activities are adjusted.
Money and Distribution.
Money eases the process of distribution of factors rewards like wages, interests and profits
which are all measured and distributed in terms of money. It is with the help of money that the
shares of different factors of production are properly adjusted. Accounting, receiving and
storing of its share of income by any factor-unit in kind is most inconvenient. Here money comes
to the rescue.
Money and Public Finance
In a modern economy, government plays a very important role. Government receives income in
the form of taxes, fees, prices of public utility services, etc and uses this income for
administrative and developmental purposes. But the great magnitude of public revenues and
public expenditure in a modern state would become impossible without money. Further, fiscal
devices like public borrowing and deficit financing for economic development can be adopted
only in a monetary economy.
In recent times, the fiscal policy of a government acquired very great importance in economic
life, since economic activities can be regulated through budgetary operations that are facilitated
by the institutions of money.
Money, thus, plays an important role in the shaping of the economic life of a country. The
growth of money economy has made the growth of economic liberalism and, hence, of the
present day free enterprise or capitalists system possible. In fact the pattern of economic life
has changed in accordance with the changes in the economic progress. For better performance
of an economy, a country’s monetary system should be operated in such a manner as to
maintain high levels of employment and avoidance of business fluctuations.
Inflation
Inflation is commonly understood as a situation of substantial and rapid general increase in the
price level and consequent fall the value of money over a period of time. Inflation means
persistent rise in the general level of prices. Inflation is a long term operating dynamic process.
By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow
of money and credit. In fact, the root cause of inflation is the expansion of money supply
beyond the normal absorbing capacity of the economy. The behaviour of general prices is
measured through price indices.The trend of price indices reveals the course of inflation or
deflation in the economy. Crowther defines inflation as “a state in which the value of money is
falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs when the general
level of prices and costs is rising”.
INFLATION
Inflation is commonly understood as a situation of substantial and rapid general increase in the
price level and consequent fall the value of money over a period of time. Inflation means
persistent rise in the general level of prices. Inflation is a long term operating dynamic process.
By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow
of money and credit. In fact, the root cause of inflation is the expansion of money supply
beyond the normal absorbing capacity of the economy.The behaviour of general prices is
measured through price indices.The trend of price indices reveals the course of inflation or
deflation in the economy. Crowther defines inflation as “a state in which the value of money is
falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs when the general
level of prices and costs is rising”.
Types of Inflation.
On different grounds, economists have classified inflation into various types. According to the
rate inflation there are four types of inflation.
1) Moderate Inflation
2) Running Inflation
3) Galloping Inflation
4) Hyper Inflation
Moderate inflation is a mild and tolerable form of inflation. It occurs when prices are rising
slowly. When the rate of inflation is less than 10 per cent annually, or it is a single digit annual
inflation rate, it is considered to be moderate inflation in the present day economy. It does not
disrupt the economic balance. It is regarded as stable inflation in which the relative prices do
not get far out of line.
When the movement of price accelerates rapidly, running inflation emerges. Running inflation
may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more
than 10 per cent a year, running inflation occurs. When prices are rising at double or triple digit
rates of 20,100 or 200 per cent a year, the situation may be described as galloping inflation.
Galloping inflation is really a serious problem. It causes economic distortions and disturbances.
In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per year.There is
at least a 50 per cent price rise in a month, so that in a year it rises to about 130 per cent
times.Hyper inflation is a monetary disease.
Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull Inflation and Cost
Push Inflation.
Demand Pull Inflation: According to the demand-pull theory, prices rise in response to an
excess of aggregate demand over existing supply of goods and services. It is also called excess-
demand inflation. In the excess-demand theories of inflation, excess demand means aggregate
real demand for output in excess of maximum feasible, or potential, or full employment, output
(at the going price level). The demand-pull theorists point out that inflation (demand-pull)
might be caused, in the first place, by an increase in the quantity of money. Demand-pull or just
demand inflation may be defined as a situation where the total monetary demand persistently
exceeds total supply of real goods and services at current prices, so that prices are pulled
upwards by the continuous upward shift of the aggregate demand function. Causes of Demand-
pull inflation are
4) Increase in Public Expenditure 2) Increase in Investment 3) Increase in money supply.
COST PUSH INFLATION
Cost push inflation or cost inflation is induced by the wage-inflation process. This is especially
true for a Country like India, where labour intensive techniques are commonly used. Theories of
cost-push inflation (also called sellers’ or mark-up inflation) came to be put forward after the
mid-1950s.They appeared largely in refutation of the demand-pull theories of inflation and
three important common ingredients of such theories are 1) that the upward push in costs is
autonomous of the demand conditions in the concerned market 2) that the push forces operate
through some important cost component such as wages, profits (mark up), or materials cost.
Accordingly, cost-push inflation can have the forms of wage-push inflation, profit-push
inflation, material-cost push inflation, or inflation of a mixed variety in which several push
factors reinforce each other and that the increase in costs is passed on to buyers of goods in
the form of higher prices, and not absorbed by producers. Thus, a rise in wages leads to a rise
in the total cost of production and a consequent rise in the price level, because fundamentally,
prices are based on costs.It has been said that a rise in wages causing arise in prices may , in
turn , generate an inflationary spiral because an increase would motivate the workers to
demand more wages.
(Graphs of demand pull and cost push inflation)
Causes of Inflation
1) Over- Expansion of Money Supply: Many a times a remarkable degree of correlation

between the increase in money and rise in the price level may be observed. The Central
Bank (India’s RBI) should maintain a balance between money supply and production and
supply of goods and services in the economy. Money supply exceeds the availability of
goods and services in the economy, it would lead to inflation.
2) Increase in Population: Increase in population leads to increased demand for goods and
services. If supply of commodities are short, increased demand will lead to increase in
price and inflation.
3) Expansion of Bank Credit: Rapid expansion of bank credit is also responsible for the
inflationary trend in a country.
4) Deficit Financing: Deficit financing means spending more than revenue. In this case
government of India accepts more amount of money from the Reserve Bank India (RBI)
to spend for undertaking public projects and only the government of India can practice
deficit financing in India. The high doses of deficit financing which may cause reckless
spending, may also contribute to the growth of the inflationary spiral in a country.
5) High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise on account
of high excise duties imposed by the Government on raw materials and essentials.
6) Black Money: It is widely condemned that black money in the hands of tax evaders and
black marketers as an important source of inflation in a country. Black money
encourages lavish spending, which causes excess demand and a rise in prices.
7) Poor Performance of Farm Sector: If agricultural production especially foodgrains

production is very low, it would lead to shortage of foodgrains, will lead to inflation.
8) High Administrative Pricing
Other reasons are capital bottleneck, entrepreneurial bottlenecks, infrastructural bottlenecks
and foreign exchange bottlenecks.
EFFECTS OF INFLATION
1) Effects of Inflation on Business Community: Inflation is welcomed by entrepreneurs and

businessmen because they stand to profit by rising prices. They find that the value of
their inventories and stock of goods is rising in money terms. They also find that prices
are rising faster than the costs of production, so that their profit is greatly enhanced.
2) Fixed Income Groups: Inflation hits wage-earners and salaried people very hard.
Although wage- earners, by the grace of trade unions, can chase galloping prices, they
seldom win the race. Since wages do not rise at the same rate and at the same time as
the general price level, the cost of living index rises, and the real income of the wage
earner decreases.
3) Farmers: Farmers usually gain during inflation, because they can get better prices for
their harvest during inflation.
4) Investors: Those who invest in debentures and fixed-interest bearing securities, bonds,
etc, lose during inflation. However, investors in equities benefit because more dividend
is yielded on account of high profit made by joint-stock companies during inflation.
5) Inflation will lead to deterioration of gross domestic savings and less capital formation in
the economy and less long term economic growth rate of the economy.
MEASURES TO CONTROL INFLATION
The measures to control inflation can be broadly divided into TWO- Monetary and Fiscal
Measures.
Inflation is primarily a monetary phenomenon. Hence, the most logical solution to check
inflation is to check the flow money supply by devising appropriate monetary policy and
carefully implementing monetary measures. The Central bank’s monetary management
methods, devices for decreasing or increasing the supply of money and credit for monetary
stability is called monetary policy. Monetary policy is a policy of money supply influencing the
quantity, cost and availability of money supply. Central Banks generally use the three
quantitative measures namely:
1) Bank Rate Policy

2) Open Market Operations
3) Variable Reserve Ratio
1) Bank Rate Policy: Bank rate is the rate at which Central Bank lends loans and advances to
commercial banks. When bank rates are hiked by the Central bank as a follow up of this
increased bank rate, commercial banks hike the rate of interest. Bank rate is hiked during
the period of inflation to reduce money supply. During the period of falling prices
(deflation) central banks reduces bank rate to increase money supply. As follow up,
commercial banks reduce rate of interest. At a low rate of interest, investors find it much
attractive to borrow money and make investment.
2) Open market Operations: Open market Operation means open buying and selling of
government securities by the Central Bank for the Central Government. In India the term
‘opens market operations’ stands for the purchase and sale of government securities by
the RBI from/to the public and banks on its own account. In its capacity as the
government’s banker and as the manager of public debt, the RBI buys all the unsold
stock of new government loans at the end of the subscription period and thereafter
keeps them on sale in the market on its own account. Such purchases of government
securities by the RBI are not genuine market purchases but constitute only an internal
arrangement between the government and the RBI whereby the new government loans
are sold not directly by the government but through the RBI as its agent.
3) Variable Reserve Ratio: Under the existing law enacted in 1956, RBI is empowered to
impose statutorily ‘Cash Reserve Ratio’ (CRR) on commercial banks anywhere between 3
per cent and 15 per cent of the net demand and time liabilities. It is the authority of the
RBI to vary the minimum CRR which makes the variable reserve ratio a tool of monetary
control. It may be noted that the RBI pays interest to banks on the additional required
reserves over the minimum CRR of 3 per cent.
Fiscal Policy
Fiscal policy is the policy of the government implementing through the government treasuries.
Fiscal policy intervention areas are taxation, public expenditure, borrowing, subsidies and deficit
financing. Inflation means a general rise in prices. To control inflation policy should be directed
to reduce the price level and control excess money supply. First measure is reducing indirect
taxes. High indirect taxes lead to increase in the prices of goods and services. So to reduce the
prices of goods and services widely used by common people and intermediate goods, the
indirect taxes should be reduced. Increased public expenditure leads to increase in the level of
economic activities and more income to people. It also leads to increase in money supply.So
during the period of inflation, we should reduce excess public spending/public expenditure.
Deflation
Deflation is just opposite of inflation. It is essentially a matter of falling prices. Deflation is that
state of falling prices when the output of work by productive agents increases relatively to
money income. Deflation arises when the total expenditure of the community is not equal to
the value of output at existing prices. Consequently, the value of money goes up, and prices fall.
In short, deflation is a condition of falling prices, accompanied by the decreasing level of
employment, output and income.
Definitions of Economics
The book of Adam Smith “An Enquiry into the Nature and Causes of Wealth of Nations”
popularly known as Wealth of Nations, published in the year 1776, laid the strong foundation
for the growth of Economics. So Adam Smith is rightly called the “Father of Economics” and
pioneer of Classical Economics. Although there is a plethora of definitions, there is no
concensus among economists about a precise definition of economics.
Stock Exchange: Stock exchange is a place where second-hand securities are bought and sold.
Stock exchange is essential for industrial development and a developed stock exchange is one of
the features of a developed industrialized country.
Wealth Definition
The early classical economist’s defined economics mainly as a study of wealth. To his famous
treatise, Adma Smith gave the suggestive tittle ‘An Enquiry into the Nature and Causes of
Wealth of Nations’. It means economics investigates into the nature of wealth and the laws of
production and distribution. The atmosphere of the Industrial Revolution marked by
unprecedented material prosperity and accumulation of wealth should naturally justify the
scope which these economists assigned to economics.
Criticism of wealth Definition
1) Too much Emphasis on wealth: Literary writers and religious leaders strongly voiced
their protest against the study of economics because of its too much attachment to
wealth. Adam Smith treated economics as political economy and therefore emphasized
the importance of wealth from a national angle
2) Restricted Meaning of Wealth: The classical definition considered wealth as, material
goods only, like table, radio, furniture etc. Non-material services of drivers, singers,
teachers, professors etc are not taken as wealth. But in modern days wealth denotes
both goods and services, material wealth and human wealth.
3) Concept of Economic Man: Classical wealth definition was based mainly upon the
assumption of an ‘economic man’ who had no consideration for love, affection,
sympathy, patriotism etc.In other words, an economic man was supposed to give
attention to economic activities only.But in reality human behaviour cannot be properly
understood and analysed unless the other motives are also given due weightage.
4) No Mention of man’s Welfare: Wealth definition explains the wealth-getting and

spending activities of man It pays no attention to the equity principle which is of
paramount importance to maximize the welfare of the society.
5) Economic Problem: Wealth definition is silent over the basic economic problem of
meeting unlimited wants with scarce means.In other words, the central problem of
economics is not at all touched by wealth definition.
Welfare Definition
Adam Smith’s wealth definition made economics a dismal science. Alfred Marshall was the first
neo-classical economist to rescue economics from ridicule, condemnation and
misunderstanding. So Marshall gave welfare definition to economics in his classic work
‘Principles of Economics’, published in 1890.His definition shifted the emphasis from wealth to
human welfare. According to him wealth is simply a means to and an end in all activities, the
end being human welfare.
Marshall defines “economics is a study of man kind in the ordinary business of life; it examines
that part of individual and social action which is almost closely connected with the attainment
and with the use of the material well being.” He adds that economics is on the one side a study
of wealth; and the other and more important side, a part of the study of man. That is Marshall
gave primary importance to man and secondary importance to wealth.
Criticism of Welfare Definition
1) Material and Non-Material Welfare: Lionel Robbins begins his attack by pointing out that
economists should not narrow down the scope of economics by confining their attention
to the study of material welfare alone. The services of teachers, actors, singers, lawyers
etc. do promote welfare and such welfare may be termed as non-material welfare. The
above mentioned services have much economic significance because they are scarce in
relation in relation to demand and possess value.
2) Objection to material: Robbins objects not only to the word ‘material’ but also to the
very idea of ‘welfare’. For the neo-classical economists, economics is concerned with the
causes of material welfare. According to Robbins, there are certain material activities
which do not promote welfare. The manufacturers of intoxicants such as wine and
opium are certainly economic activities. But they are not conducive to human welfare.
3) Welfare cannot be measured: The neo-classical economists’s idea of welfare is based on
cardinal utility. But utility is a psychological entity which cannot be measured. It varies
from person to person, place to place and time to time. Therefore, the concept of
welfare based on measurable utility is elusive in character.
4) Economics is a Social Science: Robbins disputed the Marshallian conception of
economics as a social science.The study of man as they live and move and think in the
ordinary business of life.According to Marshall, the activities of an individual living in
seclusion like a Himalayan Sadhu or Robinson Crusoe fall outside the orbit of
economics.Robbins on the other hand regards economics as a human science.The
central problem in economics, according to Robbins is the allocation of scarce means
among alternative ends.
Scarcity Definition
After rejecting the materialist definition of Marshall, Lionel Robbins formulated his own
conception of economics in his book “The Nature and Significance of Economic Science”
published in 1932. In the words of Lionel Robbins, “Economics is the science which studies
human behaviour as a relationship between ends and scarce means which have alternative
uses.” He deduced his definition from our fundamental characteristics of human existence.
1) Unlimited Wants: “Ends” refers to human wants which are boundless but the resources
available to satisfy these wants are limited. Some wants are inborn but others are
acquired through customs and conventions. When one want is satisfied another crops
up.
2) Scarcity of Means: The resources (time or money) at the disposal of a person to satisfy
his wants are limited. The external world does not offer full opportunities for their
complete achievement. If things are available in abundance just like free goods, the
economic problem will not arise.
3) Alternative Uses of Scarce Means: Economic resources are not only scarce but are also
versatile. If the resources cannot be put to alternative uses, the question of choice will
not arise. We may use land for raising crops or for building houses. We cannot do both.
If we choose one thing, we must give up others.
4) The Economic Problem: When the means at the disposal of a person are limited and the
resources can be put to several uses and when wants can be graded on the basis of
intensity, the behaviour necessarily takes the form of choice. Thus the choosing of one is
at the cost of another. In order to make choice scientific, some form of pricing process is
inevitable.
Criticism of Scarcity Definition
Robbins’ definition is based on two foundation stones-multiplicities of wants and scarcity of

means.
1) Economics of Abundance: According to Robbins, economic problem arises due to

scarcity. But economic problems may also arise due to plenty rather than scarcity as had
happened during the great depression of 1930s.Professor John Kenneth Galbraith, a
noted American economist in his book,” The Affluent Society”, states that scarcity is not
a problem in America. So that the conventional scarcity idea has only little relevance.
2) Not Applicable to Underdeveloped Countries: Robbins definition provides no solution to
the problems of underdeveloped countries. A peculiar feature of many under developed
countries is that the resources are not scarce, but they are either under utilized, or
unutilized. Robbins simply assumes the resources as given and analysed their allocation
among alternatives uses.
Growth Definition
Economics has now become a fastly growing discipline in the field of social science and its scope
and significance have widened from mere a value theory or a theory of resource allocation. The
credit for revolutionizing the study of economics surely goes to Lord JM Keynes. Keynes defined
economics as the study of the administration of scarce resources and the determinants of
income and employment.
Professor Paul.A Samuelson has given a definition based on Growth aspects which is known as
the Growth Definition. “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 various persons or groups in society. Economics analyses the costs and the
benefits of improving patterns of resource use”.
Firstly, it is applicable even in a barter economy where money measurement is not possible.
Secondly, the inclusion of time element makes the scope of economics dynamic.
Thirdly, this definition possesses universality in its application. Thus we may conclude that
though in a sense it is similar to Robbins’ definition, it is an improvement over Robbins’ scarcity
definition.
Production Possibility Curve
The concept of production possibility curve was introduced by Professor Samuelson.The set of
problems facing in every economic system can be clearly analysed with the tool of production
possibility curve. Human wants are unlimited and the economic resources to satisfy these
unlimited human wants are scarce or limited. Therefore, the every society faced with the basic
problem of choosing and allocating its scarce resources among alternative uses. Production
Possibility Curve shows the menu of choice along which a society can choose to substitute one
good for another assuming a given state of technology and given total resources. The
production possibility curve illustrates three concepts: scarcity, choice and opportunity cost.
Modern economy produces thousands of products, and therefore choices before us are
complex. In order to reduce the problem to its simplest form we consider the economy in which
two goods ‘butter’ and ‘guns’ are produced with the available resources and technology.
Production Possibility Curve is based on the following Assumptions:
1) Only two goods x (butter) and y (guns) are produced in the economy.
2) There is full employment of resources.
3) The resources are fixed in quantity. But they can be re-allocated from the production of
one commodity to that of another.
4) The state of technology is given and constant.
5) The time period is short
Law of Supply
The law of supply states that the functional relationship between price and the quantity offered
for sale. The law of supply states, other things remaining same, the higher the price, the greater
will be the willingness of sellers to make a product available. At higher prices, more sellers are
interested in producing the product, and each existing seller wants to sell more.The opposite
holds good when prices decline.
Factors Determining the Supply of a Commodity
The supply of a commodity depends upon the following factors.
1) Different firms may follow different objectives.Some firms may be interested in

maximizing profit, while others may be interested in sales or revenue maximization or
satisfying etc.The amount of commodity supplied is often influenced by the objectives
of the firm.Normally, sales maximization firm’s output will be greater than the profit
maximization firm’s output.
2) State of Technology: Technical improvements reduce the costs of production enbling a
shifting a shifting of the supply curve to the right.Similarly, obstacles in the existing
technology increases costs of production, forcing a shift in the supply curve to the left. A
constant state of technology keeps the supply at the existing level.
3) Political Disturbances: Political disturbances may destabilize trade and thus create a
scarcity for certain kinds of goofs’
4) Government Policy: Any change in government’s policy would affect the production
sector and thereby the supply of goods and services in the market. The government
policy related to tax and subsidy will have serious impact on the production and supply
of goods and services in the market.
Law of Demand
Meaning of Demand
Demand is essential for the Creation, Survival and Profitability of a firm. It is essential to
distinguish between demand and desire. A beggar’s demand for a Maruti car is only s desire and
does not constitute a demand. A miser may possess enough money but he may not be willing to
spend it. In this case also desire will not be called demand. Therefore, demand is not merely a
wish or desire but an effective demand, this is, desire backed by purchasing power and
willingness to buy.
Demand has the following Four characteristics
1) Price: Demand is always related to price. It is meaningless to say that demand for
refrigerator in the market is one thousand. The person must state the price at which the
consumer is prepared to purchase the said quantity of the commodity.
2) Time: Demand always means demand per unit of time, per day, per week, per month or
per year.
3) Market: demand is always related to the market. Market here simply refers to the
contact between buyers and sellers. There is no need for a definite geographical area.
4) Amount: Demand is always a specific quantity which a consumer is willing to purchase. It
is not an approximation, but is to be expressed numerically.
Demand Schedule: A demand schedule is a list of prices and corresponding quantities. Since the
demand schedule obeys the law of demand, price and quantity demanded vary inversely The
following is the hypothetical demand schedule of an individual.
Types of Demand: There are three kinds of demand,
1) Price Demand
2) Income Demand
3) Cross Demand
1) Price Demand: Price demand refers to the various quantities of a commodity that a
consumer would purchase at a given time in the market at various hypothetical prices.
2) Income Demand: Income refers to the various quantities of a commodity that a
consumer would purchase at a given time in a market at various levels of income.
3) Cross Demand: The relationship between the prices of a substitute or complements and
the quantity purchased of a related commodity is called cross demand.
Law of Demand: The inverse relationship between the price of a commodity and its quantity
demanded per unit of time is referred to as the law of demand. In the words of 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.” The phrase “other things being equal” is an important
qualification; when we say “other things being equal” we assume;
1) No change in the consumers’ income.

2) No change in the prices of substitutes and complements
3) No change in consumers taste and preferences
4) No new substitutes for the goods have been discovered
5) People do not feel that the present fall in price is a preclude to a further decline in
prices.
6) The commodity in question is not one which has a prestige value.
Determinants of Demand
According to D.S Watson a change in demand is caused by changes in income . tastes and
prices of substitutes and complements.The various determinants of demand are listed as
follows.
1) Changes in Tastes and Fashions: The demand for some goods and services is very
susceptible to changes in tastes and fashions.If a commodity becomes more fashionable
a larger quantity of it may be bought at the old price or even at a slightly higher price.
The fashion among ladies to keep their hair long or short brings about changes in
demand for their hair-pins, hair-nets etc. Similarly if tastes have deteriorated for a
product, less of it will be deamanded without any rise in its price.
2) Changes in Weather : An unusually dry summer results in a decrease in the demand for
umbrellas.The demand curve in such a case shifts to the left.
3) Channges in Income and Distribution of income: An increase in family income increases
the demand for durables like video recorders and refrigerators.The demand curve then
shift to the right., More over, if income in a country is evenly redistributed by taking the
rich and transferring it to raise the income of the poor, it may increase the demand for
goods consumed by the poor people.
4) Changes in expectations: Expectations also bring about a change in demand.Rumours
that the government is going to levy fresh taxes on a particular good may push the in
favour of purchasing more of that commodity alone.
5) Changes in Savings: Savings and demand are inversely related.If the marginal propensity
to save becomes high the amount available for consumption will become less. The
demand will therefore decrease.
6) State of Trade Activity: During the periods of boom and prosperity, the demand for all
commodities tends to increase. On the contrary, during times of depression there is a
general slackening of demand.
7) A Change in Real Income: As money income increases, real income also increases. If the
income goes to the rich, demand does not increase as much as it increases when such
income benefits go to the poor.The simple reason is that the marginal propensity to
consume of the rich is less than that of the poor.
8) Consumer Credit Policy: With a liberalization in the credit policy of the banks or the hire
purchase system adopted by companies, the demand for VCRs,Cars, houses etc will
increase.
9) Advertisement: In advanced capitalist countries advertising is a powerful instrument
affecting the demand in the market.
10) Taxation and subsidy: If fresh taxes are levied or the existing rates of taxation on
commodities are increased, their prices go up.The demand for such commodities will
decrease. On the other hands, if rebates and subsidies are given as in the case of
consumer products during festival seasons, the demand will increase.
11) Change in the value of money:During times of inflation, the prices will rise. Therefore,
consumers will have to their expenditure pattern so that the demand for certain
products will have to be reduced and for others stimulated.
12) Change in Population:The demand for goods and services depend on population.As
population increases demand increases and vice versa.
MEANING OF PRODUCTION
In economic terminology ‘production’ implies creation of utility for sales. The act of utility
creation is possible by transforming inputs into output. According to Prof.Hicks, “production is
any activity directed to the satisfaction of the people’s wants through exchange.” Production is
an activity of converting inputs into out put with the help of technology or mode of production.
In production process we use four factors of production ie; land, labour,capital and
organization.For engaging in economic activity, these factors would get rewards. Land or
building would get rent as its reward,labour would get wage / salary,capital would get profit
and organizer would get profit as the reward.
Knowledge is the only instrument of production that is not subject to diminishing returns –
J.M.Clark, 1957
The production function shows only the physical relationship between inputs and output, but
says nothing about the optimal combination of inputs.
Two things must be noted when we discuss production function.
1) It must be considered with reference to a particular period of time.

2) It is determined by the state of technology.Any change in technology may alter output,
even when the quantities inputs remain fixed.
Law of Returns to Scale
The law of returns to scale examines the relationship between output and the scale of inputs in
the long-run when all the inputs are increased in the same proportion.
Assumptions
This law is based on the following assumptions
1)All factors are variable but the enterprise is fixed.
2) There is no change in technology
3) Perfect competition prevails in the market.
4) Returns are measured in physical terms.
Three Phases of the Law of Returns to Scale.
First phase is increasing returns to scale
Second phase is constant returns to scale
Third phase is diminishing returns to scale.
Depending on whether the proportionate change in output exceeds, equals or decrease in

proportionate to the change in both the inputs, the production is classified as increasing
returns to scale, constant retuns to scale and decreasing returns to scale.
Increasing Returns to Scale
Increasing returns to scale arises due to the following reasons.
a) Dimentional economies,2) economies flowing from indivisibility 3)Economies of

specialization 4) Technical economies, 3) Managerial economies, 6) Marketing
economies
Marshall exlains increasing increasing returns in terms of “ increased efficiency” of labour and
capital in the improved organization with the expanding scale of output and employment of
factor unit.It is referred to as the economy of organization in the earlier stages of production.
Constant Returns to Scale: As a firm continues to expand, it gradually exhaust the economies,
internal and external, which enabled the operation of increasing returns to scale. In this stage,
the economies and diseconomies of scale are exactly in balance over a particular range of
output. In the case of constant returns to scale increases in all the inputs cause proportionate
increases in output.
A production function showing constant retuns to scale is often called ‘Linear and
Homogeneous’ or ‘Homogeneous of the first Degree’.The Cobb-Douglas production function
evolved by the American economists Cobb and Douglas is a linear and homogeneous
production function.
Diminishing Returns to Scale
When a business firm continues to expand even beyond the point of constant returns, stage
comes when diminishing returns to scale set in. There are decreasing returns to scale when the
percentage increase in output is less than the percentage increase in iutput. As the size of the
firm expands, managerial efficieny decreases.Another factor responsible for diminishing retuns
to scale in the limitation of exhaustibility of the natural resources, for example, doubling of coal-
mining plants may not double the coal output, because of limited availability of coal deposits or
due to difficult accessibility to coal deposits.
The Law of Variable proportions OR Law of Diminishing Returns
The law of variable proportions is one of the basic laws in economics. The law of variable
proportions is the modern version of the law of diminishing returns. This law states that a
technical physical relationship between the fixed and variable factors of production in the short
run. Here it is assumed that only one factor of production is a variable factor while other factors
are assumed to remain fixed. As we increase the quantity of the variable factor while keeping
other factors constant, the output of the variable factor may increase more than
proportionately in the initial stages of production, but eventually it will not increase even
proportionately. Alfred Marshall, a neo-classical economist, considered the law of diminishing
returns in relation to agriculture only.
The law of variable proportions has been defined in the following way; “As the proportion of
one factor in a combination of factors is increased, after a point, first the marginal and then the
average product of that factor will diminish”.
Assumptions of the Law
The law of variable proportions is valid when the following conditions are fulfilled.
1) The state of technology is given below

2) Only one factor is varied and all other factors remain fixed.
3) The fixed factor and the variable factor are combined together in variable proportions in
the process of production.
4) The units of the variable factor are homogeneous
5) The law operates in the short run.
Total Product (TP) : Total Product is the amount of output produced from land with the given
number of labourers employed.
Average product (AP): The average product of labourer is the total product (TP) divided by the
number of labourers employed AP =TP/No.
Marginal Product (MP): The marginal product is the change in the total product due to change
in labour.
DIAGRAM
Law of Supply
The law of supply states that the functional relationship between price and the quantity offered
for sale. The law of supply is a hypothesis that states, other things remaining same,, the higher
the price, the greater will be the willingness of sellers to make a product available. At higher
prices, more sellers are interested in producing the product, and each existing seller wants to
sell more.The opposite holds good when prices decline.
The law of supply can be explained with the help of a schedule and a curve.
Supply Schedule: Supply schedule represents the relationship between prices and the quantities
that the firms are willing to produce and supply.
SUPPLY SCHEDULE
SUPPLY CURVE
MARKET SUPPLY CURVE
MARKET SUPPLY SCHEDULE
ECONOMIC REFORMS
NEW ECONOMIC REFORMS OF 1991
Changing Global Scenario

Several major economic and political changes occurred during the 1970s and 1980s, which
affected the developing countries and paved the way for the implementation of IMF-sponsored
Structural Adjustment Policies (New Economic Policy) in India in 1991. This was due to a
combination of factors such as stagnant agriculture, low levels of industrial growth and
diversification, inadequate capital formation, adverse terms of trade in international markets,
limits to domestic resource mobilization due to a fairly narrow tax-base, loss making public
sector enterprises, over regulated and controlled economy, poor industrial productivity, huge
amount of fiscal deficit, huge amount of public debt, poor rating of Indian economy by
international agencies, foreign exchange crisis etc.
New Economic Policy of 1991 includes globalization, liberalization and privatization

(Disinvestment)
1) Globalization means flow capital (finance in the form of foreign direct investment (FDI)
and foreign portfolio investment (FPI), technology, human resource, goods and service
among countries. FDI is investment in real assets like automobile, consumer goods
production, service sectors like insurance, telecommunication, air transport etc.
2) Liberalisation means freeing the economic activities and business from unnecessary
bureaucratic and other controls imposed by the governments.
3) Privatisation or Disinvestment: Selling the government owned public sector enterprises
to private industrialists and opening the government operating sectors for private
investment.
The New Economic Policy includes reduction in government expenditure, opening of the
economy to trade and foreign investment, adjustment of the exchange rate from fixed exchange
rate system to flexible exchange rate system, deregulation in most markets and the removal of
restrictions on entry, on exit, on capacity and on pricing.
Immediate consequences of economic liberalization that are to focus on are (a) an increase in
internal and external competition and (b) structural change induced by changes in
relative prices in the economy.
The Major areas of New Economic Policy 1991 are
1) Fiscal policy reforms

2) Monetary policy reform
3) Pricing policy reform
4) External policy reform
5) Industrial policy reform
6) Foreign investment policy reform
7) Trade policy reform
8) Public sector policy reform
The principal reforms initiated in the year 1991 included; reduction in import tariffs on most
goods other than consumer goods, removal of quantitative restrictions and liberal terms of
entry for foreign investors. India’s simple average tariff rate was reduced from 128% in 1991 to
about 32.3% in 2001-02. Quotas and non-tariff barriers were also reduced.. To restore Macro
economic stability, the reforms package of structural adjustment policies are aimed at freeing
markets by dismantling controls on production, prices and trade and reducing intervention in
the economy. The need to control the fiscal deficit led to policies to curb public expenditure and
these cuts were mainly on social sector expenditure and on production and consumption
subsidies, which directly affected the living standards of the economically vulnerable sections of
the population. Privatisation, Liberalisation and export-promotion were the main features of the
economic reforms recommended by the international institutions for the problems facing by the
developing countries .At the same time, the role of the state in advanced industrial economies
was not shrinking as expected, but growing despite the ideological bias in favour of a “rolled
back” state. The share of national income spends by government, which averaged 30% in the
rich industrial countries in 1960 increased to 42.5% by 1980 and 45% by 1990.The experiences
of countries, which have undergone these reforms, have in most cases not led to the expected
outcome but have infact worsened the state of their economies. In India, the New Economic
Policy (NEP) is a set of policy (ies) and administrative procedures introduced in July 1991 to
bring about changes in the economic direction of the country.
Industrial Policy Resolution 1991 (IPR-1991)
Industrial Policy
The regulatory policy framework which acted as a barrier to entry and growth by the
entrepreneur was sought to be basically changed by the Industrial Policy announced in July
1991.The measures introduced in this area along with other economic reforms were as under:
Industrial licensing has been abolished for all projects except for a list of 15 industries related to
security, strategic or environmental concerns and certain items of luxury consumption that have
a high proportion of imported inputs. The exemption from licensing also applies to the
expansion of existing units.
 Industrial licensing was abolished for all projects except for a list of 15 industries
related to security, strategic or environmental concerns and certain items of luxury
consumption that had a high proportion of imported inputs.
 The Monopolies and Restrictive Trade Practices (MRTP) Act applied in a manner
which eliminated the need to seek prior government approval for expansion of
present undertakings and establishment of new undertakings by large companies.
 The set of activities henceforth reserved for the public sector was much narrower
than before, and there would be no ban on the remaining reserved areas being
opened up to the private sector.
Foreign Investment Policy
The Industrial Policy 1991 also provided increased opportunities for foreign investment with a
view to take advantage of technology transfer, marketing expertise and introduction of modern
managerial techniques. It was also intended to promote a much – needed shift in the
composition of external private capital flows. The following measures were announced in this
regard:
 Automatic approval would be given for direct foreign investment upto 51 per cent
foreign equity ownership in a wide range of industries. Earlier, all foreign investment
was generally limited to 40 per cent.
 To provide access to international markets, major foreign equity holdings upto 51 per
cent equity would be allowed for trading companies primarily engaged in export
activities.
 Automatic permission would be given for foreign technology agreements for royalty
payments upto 5 per cent of domestic sales or 8 per cent of export sales or for
lumpsum payments of Rs.10 million. Automatic approval for all other royalty
payments will also be given if the projects can generate internally the foreign
exchange required.
 Abolished MRTP Act and FERA and instead of FERA, FEMA Act was passed in the
Parliament.
 The threshold (Minimum) asset limit for companies under MRTP Act was raised from
Rs.20 crores to Rs.100 Crores.
Public Sector Policy
The Government was of the view that public sector had not generated internal surpluses on a
large scale. On account of its inadequate exposure to competition; the public sector was subject
to a high cost structure. To provide a solution to the problems of the public sector, Government
decided to adopt a new approach, the key elements of which were:
 The existing portfolio of public sector investment would be reviewed with a greater
sense of realism to avoid areas where social considerations were not paramount or
where the private sector would be more efficient.
 Enterprises in areas where continued public sector involvement was judged appropriate
would be provided a much greater degree of managerial autonomy.
 Budgetary support to public enterprises would be progressively reduced
 To provide further market discipline for public enterprises, competition from the private
sector would be encouraged and part of the equity in selected enterprises would be
disinvested; and
 Chronically sick public enterprises would not be allowed to incur heavy losses.
As a follow up of this policy, several measures were taken:
 The number of industries reserved for the public sector was reduced from 17 to 8. Even
in these areas, private sector participation was allowed selectively. Joint ventures with
foreign companies would be encouraged.
 Public enterprises that were chronically sick and unlikely to be turned around would be
referred to the Board for Industrial and Financial Reconstruction (BIFR) for rehabilitation
or restructuring.
 The existing system of monitoring public enterprises through Memorandum of
Understanding (MOU) was strengthened with primary emphasis on profitability and rate
of return.
 Initiated the disinvestment of public sector enterprises.
Global Financial meltdown in 2008
In the western capitalists economies and the economies closely linked to the United States
economies were negatively affected by this financial crisis of 2008. That is all the economies
having economic relationship with each other were affected by this financial crisis of 2008 so it
is called a global financial crisis. Capitalism is a system of economic organization featured by the
private ownership and the use for private profit of man-made and nature-made capital. It is
clear that under capitalism all means of production such as farms, factories, mines, transport,
communication, education etc are owned and controlled by private individuals and firms.
Private initiatives and ideas are promoted and respected highly and there is personal freedom
and liberty.
The global financial crisis of 2008 is an extreme manifestation of the crisis in the capitalism due
to wrong practice and misuse of freedom enjoyed by the financial institutions in the United
States of America. Indian economy was more integrated to the global economy after the
introduction of the New Economic Policy (NEP) of 1991. This encouraged more integration of
the Indian economy with the global economy.But in the Indian banking system, nearly 90 per
cent of the banking institutions are in the public sector and our financial sectors are well
regulated by the Reserve bank of India (RBI). So this financial management system, to a greater
extent insulated Indian economy from the global financial crisis.
The Major Reasons for the Global Financial Crisis are
1) Consumption was seen as the driver of economic growth and prosperity and debt to
facilitate such consumption was consequently seen as a good thing. This had led to the
rather extreme situation in which vendor financing (i.e., lending of money by producers
to consumers for purchasing products they produce) of the US by the developing nations
was seen as a necessary business practice.
2) The sub-Prime Crisis – Sub-Prime Lending is the latest chapter in the story of the
economics of greed wrapped as modern economics, a process in which the US’s entire
financial architecture — the government and the Federal Reserve System (the Central
Bank of the US like India’s RBI) is involved. The sub-prime crisis is now presented as the
villain of US economy as also the global economic scene. Sub-prime lending refers to
loans given to persons who, in simple terms, are unfit to borrow. That is, no lender will
part with his own money to such a borrower. Two reasons are there. First, such lending
was popularised from the White House to ordinary American homes as achieving a
noble purpose to induce Americans to borrow and shop for their country. That is, it was
part of the patriotic duty the Americans as a whole to borrow and shop.
The Major Features of the Present Global Financial Crisis are

1) The Current US recession is much deeper than in 1991 or 2001.
2) Yet Asia’s growth will slow by less than in the previous US recessions. It is now less dependent
on US demand.
3) Asia is led by India and China increasingly becoming important as the engines of global
growth.
4) This global financial crisis is the beginning of the end for the dollar as the main reserve
currency
5) The USA has been borrowing $ 3 billion every day to fund its spending
6) The USA’S national debt is more than $10 trillion, which is more than 80 per cent of its
national income.
7) The budget deficit is skyrocketing; it is expected to reach mote than 10 per cent soon.
8) The federal deficit as percentage of GDP is now expected to reach more than 10 per cent.
9) Unlike the Great Depression of the 1930s, the current crisis of the West is not just an
economic crisis. It has a dimension of demography and conflict.o it. Demographic, because
Europe is slowly fading away from the global map. It used to have more than 20 per cent of the
global population during the First World War, and now has less than 11 per cent. It is expected
to shrink to three per cent in as many decades. The reproductive rate in many European
countries is less than 1.5 whereas the stable one is 2.1. In the case of US, the crisis is more
severe due to its declining savings rate.
10) The personal saving as a percentage of disposable income has now become negative.
The debt ridden financial institutions like Lehman Brothers’ assets were $ 690 billion and capital
was $ 22 billion. Lehman filed for the biggest bankruptcy in American history. Merrill Lynch
assets were $ 1020 billion and capital was $ 32 billion, Freddie Mac’s assets were $ 794 and
capital was $ 27 billion, Fannie Mae’ assets were $880 billion and capital was $ 44 billion, Bear
Stearns’s was $ 400 billion and capital was $ 11 billion. The allegations that ratings are not
forward looking has been proved right in more than one occasion in the current financial crisis.
Many repackaged sub-prime loans were rated high by global credit rating agencies, down
graded only after accelerated defaults and stoppage in trading. Ratings are not sancrosanct and
lenders need to form own view about the credit worthiness of borrowers, independent of any
external ratings.
Conclusions
Asia is more important than the US as a driver of global economic growth. Thanks to the vigour
of Asia and other emerging economies, a US recession need not drag the whole world into
recession. A prolonged downturn in the US, while emerging economies continue to grow rapidly
will reinforce the shift in global power from the old industrial world to the new emerging
markets. In future the world economy will be steered not by the US and Europe, but
increasingly by India and China. As Maharishi Aurobindo says: “India shall arise upon the ruins
of the West”. He says by the year 2011 the Western countries will fall and India will rise. The
question is, are we getting ready to create a new world order?
Keynesian Theory
Keynes’s Theory and Underdeveloped Countries.
Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a
solution to the problem of periodic unemployment faced by developed industrial nations of the
West during the great depression of the thirties. Keynesian theory singles out deficiency of
effective demand as the major cause of unemployment and low level of income in industrial
economy operations under a laissez faire system. Deficiency of effective demand is a prominent
feature of economies undergoing depression and in order to improve the level of effective
demand in an economy. Keynes suggested policy measures like cheap money policy,
government’s compensatory investment spending, deficit financing and other fiscal methods. In
essence, therefore, Keynesian economics turn out to be economics of depression applicable to
developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan
Robinson: “ Keynes’s theory has little to say directly, to the underdeveloped countries, for it was
framed entirely in the context of an advanced industrial economy, with highly developed
financial institutions and a sophisticated business class.
Though Keynesian Economics has revolutionized modern economic thinking, it has inherent
weaknesses:
1) It is fundamentally a capitalistic theory. It basically examines the determinants of

employment in a free enterprise economy. Though Keynes suggests government
intervention and controlled capitalism his theory fails to deal with the socialist economic
system. In communism, Keynes is as Ricardo.
2) Keynesian economics is, by and large, characterized as depressionary economics. It was
the outcome of the Great Depression of the Thirties. It suggested policy measures like
deficit financing to solve the problem of unemployment in a depressionary phase of the
capitalist economy. In the era of inflationary situation, the theory has not much validity.
3) Keynes’s theory deals with short-run phenomena only. It pays little attention to the long-
run problems of a dynamic economy.
4) Keynesian theory is not strictly applicable to underdeveloped countries. Keynes deals
with the problem of cyclical unemployment. Underdeveloped countries have the
problem of chronic unemployment and disguised unemployment. Keynes encouraged
spending and condemned savings.But; poor countries need curbs on spending and
increase in savings for capital formation and wide-scale investment to break the vicious
circle of poverty. In short, Keynes’s theory is not really “general” in application as Keynes
claimed.
5) One dangerous practice is that the solution to global economic crisis and depression in
advanced capitalism was sought to be applied for solving the economic crisis of less
developed countries. In fact in the west there are arguments against Keynes’s economics
that it is not Keynesian economics but the Second World war revived the world
economy. Keynesian revolution succeeded the industrial revolution as an adhoc theory
of countering the industrial depression in Britain during the thirties, just before the
Second World War, became the all-encompassing theory of development. Dennis
Robertson at the out set of his Cambridge lecturers, delivered between 1945-46 to 1956-
57, warned the under graduate students about the controversial nature of Keynes’s
General Theory and to supplement its readings by critical writings on the same.
6) Laws of economics are relative and valid for particular situations in the economic history
of a nation. To the British economists, the economic forces generated by the industrial
revolution in that country was universal and economic laws were accordingly
formulated. What was good for Britain was good for the entire world, irrespective of
differences in socio-economic conditions. But great personalities like Arnold Toynbee
argued against this dominant view and the need for region specific models of
development. His dream of this way of study never materialized because of his
premature death and lack of followers. Adam Smith advocated free trade at a time when
British manufacturing industries, particularly the textile mills had increased their
capacity through various practical innovations. Trying to universalize economic laws has
been one of the greatest disservices to the science of economics. The attempt by the
third world countries to formulate their development plans on the basis of these
economic laws has created serious imbalances in their economy and has kept them
perpetually indebted, leading to erosion of their economic independence.
7) Lord John Maynard Keynes (J.M. Keynes) was a great advocate of easy money policy and
abundance of credit for economic prosperity. Keynesian prescriptions failed in
developing countries due to inelastic nature of agriculture sector and high inflation.
Keynes found D.Robertson’s ideas inconvenient and chose to ignore it. An academically
and theoretically sound thesis will not shy away from an academic debate. The relation
between agriculture and industry does not form a part of the theoretical frame work of
the General Theory of Keynes. Keynes was highly intolerant of his critics and he had high
hope in capitalism and he could avoid economists jumped into Marxist band wagon.
Indian planning was over influenced by Keynesian school because of the economic
experts trained in British Universities or Anglo-Saxon schools. In India Dr.B.S.Minhas
resigned from Planning Commission protesting against high inflationary practice
(Keynesian model of deficit financing).But no one from the academic world or Planning
Commission came to his support. It is of importance to note that deficit financing started
with the recommendation of the IMF in its report in 1953.N.Kaldor says that the deficit
financing imply a corresponding increase in privately owned wealth.
Conclusion
Although the policy measures suggested by the Keynesian theory may not be suitable to the
problems of underdeveloped countries, it does not mean that Keynesian economics has no
significance. Indeed, Keynesian methodology of thinking in macro-economic terms is very
essential and appropriate in understanding the major problems of any economy, whether
developed or developing. However, in view of the changing institutional set-up of the
developing economies during the process of planning and socio-economic reforms, Keynesian
tools have to be adopted with suitable modifications.
Faster Moving Consumer Goods (FMCG)
Indian FMCG sector is the fourth-largest sector in the country, with a current turnover of over
US$ 28 billion (Rs. 113,000 crore), including tobacco. Most large FMCG categories managed to
grow in the healthy double digits in 2008 in India. Breaking down the sales growth into
categories, detergents, which saw sales value expand by over 25 per cent in 2008, were among
the fastest growing categories. Soaps and shampoos grew by about 16 per cent each and
beverages such as packaged tea and coffee expanded 13-16 per cent, according to industry
estimates. Categories such as toothpaste and confectionery managed lower growth of 14-15 per
cent in the same period. Sales growth for the 15 large listed FMCG companies actually
accelerated from 14.5 per cent in the last two financial years to 20 per cent in the first nine
months of 2008-09.High penetration categories like soaps and detergents reported flat volumes
due to sharp price increases and weight reduction.
The FMCG market shifts from a period of relatively effortless growth to a more challenging
environment. The companies are making tactical and strategic shifts to deal with the changed
scenario. As growth slows in overseas markets, companies are likely to proceed with caution on
acquisitions and refocus on organic growth that is mainly India-driven.
Indian Automobile Industry
The automobile industry consists of passenger cars,multi-utility vehicles,commercial

vehicles,two wheelers and three wheelers.After liberalization in 1991, there is a progressive
growth in the number of manufacturers, thus replacing the earlier monopoly of a few
manufacturers.At present, there are 15 manufacturers of passenger cars and multi-utility
vehicles, 9 manufacturers of commercial vehicles,14 manufacturers of two/three wheelers.The
Indian automobile industry has come a long way since in the first car ran on the streets of
Bombay (now Mumbai) in 1898. The initial years of the industry were characterized by
unfavorable government policies. The real big change as we see in the industry today, started to
take place with the liberalization policies that the government initiated in the 1991. The
liberalization policies had a salutary impact on the Indian economy and the automobile industry
in particular. The automobile industry in the country is one of the key sectors of the economy in
terms of the employment opportunities. The industry directly employs close to around 0.2
million people and indirectly employs around 10 million people. The prospects of the industry
also has a bearing on the auto-component industry which is also a major sector in the Indian
economy directly employing 0.25 million people. The Indian automotive component industry is
dominated by around 500 players which account for more than 85% of the production. The
turnover of this industry has been growing at a mammoth 28.05% per annum from 2002-03
onwards. Global as well as local forces have affected the Indian auto industry, leading to a rapid
transformation over the last decade or so. After the end of licensing era in early 1990s, the
industry has witnessed rapid growth in volumes and capacity. 100% Foreign Direct Investment,
absence of much government regulations, manufacturing and imports free from licensing &
approvals in the automobile sector coupled with customs tariff for a u t o components reducing
to 12.5% resulted in increased number of multinationals establishing their bases in India and
with export markets looking up, the Indian automobile industry is poised for a phenomenal
growth. India has made a mark in the global automobile industry; India is the second largest
two-wheeler market in the world, Fourth largest commercial vehicle market in the world,
Eleventh largest passenger car market in the world, Fifth-largest bus and truck market in the
world (by volume). Envisaged to be the seventh largest automobile market by 2016 and world's
third largest by 2030 (behind only China and the US).
ENVIRONMENT AND DEVELOPMENT
ENVIRONMENT
The environment can be defined as one’s surroundings. The welfare of the community depends
on the availability of goods and the availability of goods depends on the availability of resources
that come from environment.
Economic Growth and Environment
Soon after Independence, the Government of India adopted a policy of rapid economic
development through extensive and intensive exploitation of natural resources. Unfortunately
the Government has allowed landlords, private contractors, mine owners and industrialists to
encroach upon public lands, and literally loot and destroy forests, water resources and mineral
wealth. While economic development has enriched a small group of people-namely, the rich
landlords in the villages, the small and large industrialists, the contractors, the smugglers, the
bureaucrats and the politicians-environmental degradation which is the direct result of this
economic development has led to tremendous suffering and misery to millions of
tribals,traditional craftmen and fisherfolk.It has been responsible for the steady growth in the
number of landless labourers’ migration to cities.
Poverty
A major issue is the removal of mass poverty. Indian economy indicates a very high proportion
of people below the poverty line. Poverty is defined on the basis of norms of nutritional
requirements, i.e., 2400 calories per person per day for rural areas and 2100 calories for the
urban areas. According to Planning Commission estimates in 1999-2000 nearly 260 million
people (26 per cent of the population) were living below poverty line. Out of this 193 million in
rural areas and 67 million in urban areas. The burden of poverty is very massive. Rapid
reduction and eventually the elimination of poverty is, there fore, the most important issue of
development. The prevalence of ‘mass poverty’ which is the cause as well as consequence of
their low level of development. Poverty is the result of low economic and human resource
(education and other professional skills) base of the poor who own a very small portion of the
total assets in the form of land, capital, house property etc. The low resource base of the poor
also inhibits them from giving education and training to their children. This enables them to
earn very low and meager wages and thus perpetuate poverty. In other words, inequality in the
distribution of assets is the principal cause of unequal distribution of opportunities on the other.
Environment – Economy Interaction
Resources include human resources, financial resources and natural resources like land, water,
fisheries, minerals, forests,, marine resources, climate, rainfall and topography. Natural
resources determine the course of development of a country. While some natural resources
such as land, water, fisheries and forest are renewable others like mineral and mineral oils are
exhaustible and can be used only once. The principal objective of resource development is to
maximize gross domestic output (GDP) or national production and for this purpose there should
be optimum utilization of resources not only in the short period but, in a sustained manner,
over the long period.
But the exploitation of natural resources should not result in the disturbance of ecological
balace.The unintended side effects of economic development have to be avoided or controlled
They include mismanagement of natural resources, large scale deforestation, the unplanned
discharge of residues and wastes, the handling of toxic chemicals, growth of slums etc.
Deforestation is directly responsible for greater frequency and intensity of floods, soil erosion,
heavy dams built at enormous expense and changes in climate conditions. It has also caused
increased suffering to the landless labourers and marginal and small farmers who have steadily
lost their traditional sources of fuel wood and fodder for their cattle. Loss of fuel wood, in turn,
has led to the use of cowdung as fuel, resulting in loss of precious organic manure.
Environmental Issues
1) Deforestation
2) Pollution
3)Ground Depletion
4)Climate Change
Climate is weather conditions of a place or area, conditions of temperature, rainfall, wind, etc.
The saying goes, “climate is what you expect; weather is what you get.” The word climate
describes the general average pattern of the weather in a place over a period of years.
Climatologists generally consider 30 years as the time needed to assess the climate of a place.
Change is a fundamental characteristic of the environment. Earth’s climate is a result of complex
interactions between the sun , atmosphere , oceans , land and biosphere. Relatively small
changes in climate could have a major effect on our resources like food , energy and water. The
factors that influence global climate are the aamount of solar energy the earth receives, the
condition of the atmosphere , the shape and rotation of the earth , and the currents and other
processes of the ocean. The scientific evidence suggest that the earths climate is changing . The
atmosphere is warming and this trend will continue. By the year 2050, scientists predict that the
world will be warmer by an average of between 1.5degree Celsius and 4.5 degree Celsius. A
TASK Group set up by WHO had warned that climate change may have serious impact on human
health.
5)Green House Effect.
A glass house used for raising delicate plants is called “green house’. A green house has higher
temperature inside than outside though the interior receives less radiation. This is called green
house effect. The factors that contribute to its effects are; i) glass walls ii) high carbon dioxide
content iii) high water vapour content of air in the green house. They let the short wave
radiations pass through them but prevent passage of long wave radiation emitted by the earth’s
surface. This makes inside of the green house warmer than outside. As the suns radiation enters
the atmosphere, some of it is reflected by the clouds and other particles and the rest reaches
the earth. Part of the radiation reaching the earth is reflected by the earth’s surface while the
rest is absorbed. During this process these gases in the atmosphere called green house gases
obstruct the shape of heat from the earth into space while allowing radiation from the sun to
the earth. Without green house effect it is not possible to sustain life on the plant as the
average temperature of the earth would be 18 degree celsius than 15degree Celsius.
The atmospheric gases which are permeable to short wave solar radiation but are strong
absorber of long wave relations emitted from the surface of earth are called green house gases.
They include
i) Carbon dioxide
ii)Methane
iii)Nitrous Oxide
iv) Chlorofluro Carbons
v)Hydrofluro carbon gases
vi)Perfluro carbons
vii)Sulphur hexafluoride
viii) Ozone
ix) Carbon monoxide
The green house gases added to the atmosphere by human activities can significantly affect the
amount of heat trapped in the atmosphere over time and leads for global warming which had
adverse effect on human life. The Inter –Governmental Panel on Climate Change (IPCC)
periodically makes an assessment of the atmospheric abundance of green house gases and its
possible impact on climate and related issues.
6)Global Warming
Global warming is an increase in the earth’s temperature due to the use of fossil fuels and other
industrial professes leading to a build up of green house gases in the atmosphere. Air pollution
traps more heat in the atmosphere rendering the earth warmer. This effect is called global
warming.
Causes of Global Warming
The main cause of global warming is green house effect. These include carbon dioxide,
methane, nitrous oxide , clorofluro carbons and ozone. Human activities during the last few
decades of industrialization and population growth have polluted the atmosphere that it has
begun to effect the climate. By burning large amount of fossil fuels we release huge quanities of
carbon dioxide into the atmosphere. Currently, deforestation also releases carbon trapped in
the tissues of the trees. Natural process like volcanic eruptions and earth quake induced fires
also contribute to carbon dioxide emissions. The Inter –governmental Panel on Climate Change
held earlier in 2007 found that man made additions to the global atmospheric carbon dioxide
were indeed responsible for warming .
Effects of Global Warming
i) Climate Effects
a) There will be a warming of the earth’s surface and lower atmosphere and a
cooling of atmosphere.
b) The warming trend over the earths surface is varied , warming in the tropics
is lesser than the global mean by about 2-3 degree celcius depending on seasonal
changeswhich in other latitude the average warming might amount for 5-10 degree Celsius
increase in temperature.
C) precipitation patterns will be changed. Some areas will become wetter and
some areas dryer.
d)Seasonal patterns will change due to the changing of temperature and

prcepitation matters.
e) Soil moisture regions will be changed due to the changes in evaporation and
precipitation.
f) With the increase in cloud cover over Eurasia in summer, which will enhance
the solar heating of the surface and increase the land-sea temperature contrast,tropical
mansoon will be driven with more severity and intensity.
g) Wind direction and wind stress over the sea surface will be changed,which will
alter ocean cirrents and cause changes in nutrient mixing zones and productivity of the
oceans.
7)Rise in Sea Level
The global warming also contributes to rise in sea level due to thermal expansion of ocean
and melting of glaciers and Greenland ice sheets.The level of sea has been rising by 1 to 2
mm per year during the 20th century.A rise of even half a metre in sea level would affect
human population,one- third of which lives within 60 km of a coast line.Many important
birds and fishes inhabiting in coastal salt marshes and estuaries will become extinct die to
inundation of their breeding ground.
The direct effects of rise in sea level are:
1) recession of shorelines and wetlands,

2) increased tidal range and estuarine salt-front instruction, and
3) an increase in salt-water contamination of coastal fresh-water aquifers.
Thus a rise in sea level will have a negative impact on human settlements, tourism, fisheries,
agriculture, water suppliers and coastal ecosystems.
Impacts on Forests
Forests are highly sensitive to climate change and upto one third of currently forested and
conservation of forest inhabitats in a rapidly warming world will present us with new challenges.
Effects on range of species distribution
Each plant and animal species occurs within a specific range of temperature.The global warming
will shift the temperature range,which would affect attitudinal and latitudinal distribution
pattern of organisms. Rapid rise in temperature may cause large scale death of many trees, as
they are sensitive to temperature stress and many species may disappear.
Effects on human settlements and society
Population would be displaced by the inundation of low-lying coastal plains,deltas, and islands
in the next century if efforts to reduce greenhouse gas accumulation in the atmosphere were
unsuccessful.
Effects on Food Production
Global warming will reduce crop production due to increased incidence of plant disease and
pests, explosive growth of weeds and enhanced bastal rate of respiration of plants. Global
warming could produce colder temperature in Russia and northern Europe resulting in the
reduction of crop yields.
Effects on health
As the earth becomes warmer, the floods and droughts become more frequent, increase in
water-borne diseases,infectious disease carried by mosquitoes and other disease
vectors.Temperature change may have an impact on several major categories of diseases
including cardiovascular, cerebrovascular, and respiratory disease.
Solutions for global Warming
The following are some of the suggested solutions to prevent global warming
a) Reduction in the use of fossil fuels.

b) Shifting to renewable energy resources that do not emit GHGs.
c) Development of substitutes for chlorofluorocarbons.
d) Increase of the vegetation cover, particularly forest for photosynthetic utilization of CO2.
e) Limiting population
f) Exploring other options to sequester carbon.
g) Adopting practices and technologies to make agriculture sustainable.
h) Reduce deforestation, adopt better forest management practices and undertake
afforestation to sequester carbons.
i) Reduce deforestation, adopt better forest management practices and undertake

afforestation to sequester carbons.
j) Use fewer automobiles and public transportation immediate and drastic reduction of
emissions.
SUSTAINABLE DEVELOPMENT
Development should be perceived as a multi-dimensional process involving the re-organization

and re-orientation of entire economic and social systems. Development is a continuous process
which has to be extended over a long period to lead a country to a stage of self-sustained
growth or to a self-generating economy. It is an evolutionary product of the idea progress.
Progress can be achieved by generating wealth through maximization of productivity of labour
and capital.
Friedman defined growth as an expansion of the systems in one or more

dimensions without change in the structure and development as also as an innovative process
leading to the structural transformation of social systems. For eg; growth can be compared with
change in body whereas development can be compared with the change in body and mind
together. Growth refers to quantitative improvement in the scale of physical dimension while
development signifies improvement in both physical and non-physical dimension.
Development is the conservation and management of the natural resources base and
the orientation of technological and institutional change in such a manner so as to assure this
attachment and continued satisfaction of human needs of present and future generations. Such
sustainable development in agriculture, forestry and fisheries section conservation of land ,
water, plant and animal genetic resources , technically appropriate , economically viable and
socially acceptable.
SUSTAINABILITY
The term sustainable development refers to keeping an effort going continuously

or the ability to last out and keep from falling. Sustainability implies that human use of
enjoyment of the worlds natural and cultural resources should not in, in overall terms , diminish
or destroy them. Thus sustainability is the ability of an activity or development to continue in

the long term without undermining that part of environment which sustains it.
SUSTAINABLE DEVELOPMENT
The term sustainable development comes into common usage after the use by the World
commission on Environment and Development (WCED) headed by Dr. Geo Halem
Brundland. Sustainable Development.Sustainble development is now widely accepted as a
primary goal economic and social activity. Sustainble development suggest that the primary
focus of environmental protection efforts on the international level should be to improve
the human condition. It also implies the integration of environmental and social concerns
into all aspects of economic policy. Principle 4 of the Rio Declaration states that inorder to
attain the sustainable development , environmental protection shall constitute an integral
part of the development process and cannot be considered in isolation from it.Injecting
sustainability concept in developmental policies has broad implication for macro and micro
economics.Regarding macro economic policies , the move towards sustainable development
requires for example traditional national accounting system be changed to better measure
over all qualities of life.
Intergenerational Equity and Responsibility.
Sustainable development as defined in our common feature is closely associated with the goal
of intergenerational equity. Sustainable development recognizes each generation’s
responsibility to be fair to the next generation by leaving an inheritance of wealth no less than
they themselves have inherited.At a minimum, meeting this goal may require emphasizing the
sustainale use of natural resource for subsequent generation and avoiding any environmental
damage.
Common but differentiated Responsibilities.
Sustainable development was common challenge to all countries but because of the different
development path, industrialized countries may be asked to carry more of the immediate
burden. The developed countries explicitly acknowledged the for the central responsibility for
the present environmental degradation and its remediation. To accomplish sustainable
development, a number of areas have to be organized such as,
1) Improving energy efficiency

2) Saving forests,
3) Safeguarding biodiversity,
4) Adopting water resource management,
5) Managing coastal zones and oceans fisheries.
6) Arresting pollution,
7) Planning cities better,
8) Accomplishing a second green revolution,
9) Stabilizing world population, and
10) Stopping environmentally destructive subsidies.
Guidelines for Sustainable Development
The following guidelines are suggested for achieving sustainable development:
1) Reduce the input of matter and energy resource in production process to prevent
excessive depletion and degradation of planetary resources.
2) Use energy more efficiently and economically
3) Shift from exhaustible and potentially polluting fossil and nuclear fuels to less harmful
renewable wind energy or solar energy.
4) Avoid wasting non-renewable and use them no faster than the rate at which a
renewable resource used sustainably can be sustained.
5) Recycle and use the matter discarded as waste.
6) Use locally adaptable, ecofriendly and resource efficient technology, which will use less
of resources and produce minimum wastes.
7) Utilise resources as per carrying capacity of the environment.
8) Adoption of 3-R approach, ie., reduce,reuse,recycle approach to minimize scarce

resource use.
9) Emphasise pollution prevention and waste reduction instead of pollution clean-up and
waste management.
10) Study before the construction of dams, major highways, mining, industry etc whether
they can seriously damage ecosystems and bio-diversity before they are begun.
11) Insist and implement the technique of pollution control of toxic and hazardous gases in
existing industries.
Global Environmental Concerns
1) Population explosion enhances the ecological demands which resulting degradation on

natural resouces.
2) Almost half of the world’s original expanse of tropical forests has been cleared.Within
the next 30 to 50 years there may be little of these forests left.
3) Millions of hectares of grass lands have been overgrazed, some especially in Africa and
the Middle East,have been converted to desert.
4) Between 25 % and 50 % of the world’s wet lands have been drained, built upon, or
seriously polluted.
5) An estimated 36,500 species of plants and animals become extinct each year, mostly
because of human activities.
6) About 8.1 million square kilometers of once-productive land (crop land, forests,
grasslands) have become desert in the last 50 years. Each year almost 61,000 square
kilometers of new desert are formed.
7) Top soil is eroding faster than it forms on about 35 per cent of the world’s crop land.
Crop productivity on one-third of the earth’s irrigated crop land has been reduced by
salt build up in top soil.
8) Most of the wastes we dump into the air, water, and land eventually end up in the
oceans. Oil slicks, floating plastic debris, polluted estuaries and beaches, and
contaminated fish and shellfish are visible signs that we are using the oceans as the
world’s largest trash dump.
9) In developing countries 61 per cent of the people living in rural areas and 26 per cent of
urban dwellers do not have access to safe drinking water. Each year 5 million people die
from preventable water diseases.
10) Water is withdrawn from underground reservoirs (aquifers) faster than it is replenished
by precipitation.
11) In the world’s population more than one out of every four live in absolute poverty.
12) It is estimated that 70 per cent of the surface water resources are polluted and that in
large stretches of major rivers, water is not even fit for bathing, leave alone drinking.
13) Environmental pollution although typically associated with industrialization, is a great
and growing concern in developing countries.
14) Use of fertilizers and pesticides pollute the environment.
15) Over the past few years air pollution has been increasing as a regional or global
problem, not a local one. Acid rain may fall to earth thousands of miles away from the
places of emission of sulphur dioxide world and nitrogen oxide.Thus the clouds
generated in the developed world may rain in the territory of the developing world.
16) Emissions of carbon dioxide and other gases into the atmosphere from fossil fuel
burning and other human activities may raise the average temperature of the earth’s
lower atmosphere several degrees by 2050.This would disrupt food production and
flood low-lying coastal cities and croplands.
17) Chlorofluorocarbons and halons released into the lower atmosphere are drifting into the
upper atmosphere and reacting with and gradually depleting ozone faster than it is
being formed.
18) Atmospheric levels of heat-trapping carbons dioxide are now 26 per cent higher than
the pre-industrial concentration and continue to rise higher and higher with ‘green
house effect’.

HTTP WWW Allonlinefree Com

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HTTP WWW Allonlinefree Com

Uploaded by

Copyright:

Available Formats

http://www.allonlinefree.

Basic Concepts in Economics

Gross Domestic Product (GDP)

1) The value of all consumption goods which are currently produced

C stands for consumption goods,

I stands for capital goods/ or gross investment,

G stands for government services,

X stands for exports,

M stands for imports,

R stands for income receipts from abroad, and

P stands for income remitted by foreigners.

The Sectors of the Economy

The functions of money can be classified as follows.

1) Money as a medium of exchange

2) Money as a Unit of Account.

3) Money as a Standard of Differed Payment

3) Money as a Store of Value

Significance of Money in Modern Economic Life

Money and Consumption

Money and Production

1) Money has made extreme division of labour possible. Intensive specialization is

Money overcomes the difficulties of a barter system of exchange. In a money economy; it is

Money and Distribution.

Money and Public Finance

4) Increase in Public Expenditure 2) Increase in Investment 3) Increase in money supply.

COST PUSH INFLATION

(Graphs of demand pull and cost push inflation)

1) Over- Expansion of Money Supply: Many a times a remarkable degree of correlation

7) Poor Performance of Farm Sector: If agricultural production especially foodgrains

1) Effects of Inflation on Business Community: Inflation is welcomed by entrepreneurs and

MEASURES TO CONTROL INFLATION

1) Bank Rate Policy

Criticism of wealth Definition

4) No Mention of man’s Welfare: Wealth definition explains the wealth-getting and

Criticism of Welfare Definition

Robbins’ definition is based on two foundation stones-multiplicities of wants and scarcity of

1) Economics of Abundance: According to Robbins, economic problem arises due to

Production Possibility Curve

Production Possibility Curve is based on the following Assumptions:

Factors Determining the Supply of a Commodity

The supply of a commodity depends upon the following factors.

1) Different firms may follow different objectives.Some firms may be interested in

Demand has the following Four characteristics

Types of Demand: There are three kinds of demand,

1) No change in the consumers’ income.

Two things must be noted when we discuss production function.

1) It must be considered with reference to a particular period of time.

This law is based on the following assumptions

1)All factors are variable but the enterprise is fixed.

2) There is no change in technology

3) Perfect competition prevails in the market.

4) Returns are measured in physical terms.

Three Phases of the Law of Returns to Scale.

First phase is increasing returns to scale

Second phase is constant returns to scale

Third phase is diminishing returns to scale.

Depending on whether the proportionate change in output exceeds, equals or decrease in

Increasing Returns to Scale

Increasing returns to scale arises due to the following reasons.

a) Dimentional economies,2) economies flowing from indivisibility 3)Economies of

Diminishing Returns to Scale

The Law of Variable proportions OR Law of Diminishing Returns

Assumptions of the Law