UNIT- 2 GENERAL PROBLEMS OF ECONOMICS

 A)DEMAND AND SUPPLY:

#DEMAND DEFINITIONS:

Demand may be defined.As the quantity of our commodity that a consumer is able and willing to buy at each possible price over a given period of time. 

It's initial elements of demand are quantity, ability, willingness, prices and period of time. 

#Demand law:

The law of demand is one of the most fundamental concepts in the economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we Observes in everyday transaction. 

The law of demand It's the inverse relationship between the price of a good and the quantity of it demanded is observed in reality with such regularity It is known as the law of demand.The law of demand holds because when the price of goods increases consumer tend to buy less or it and more of the goods.

Demand is derived from the law of Diminishing marginal utility.The fact that consumers use economic goods to satisfy their Most urgent needs first. 

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. 

#Factors affecting demand:

Price of the given quantity.It is the most important factor affecting demand for the given commodity. Generally, there exists an inverse relationship between price and quantity demanded. It means and price increase. The quantity demanded falls due to decrease in the satisfaction level of consumers.example the price of a given commodity increases the quantity demanded with fall as the satisfaction.

Price of related goods-Demand for the given community is also affected by the change in price of the related goods.Example if the price of a substitute good.Coffee increases, then demand for the given commodity tea will rise as T will become relatively cheaper in comparison to coffee.

Income of the consumerDemand for commodity is always affected by income of the consumer.

Tastes and preferences-Taste and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits.

Expectations of change in price in future-If the price of a certain commodity is expected to increase in near future, then people will buy more of commodity than what they normally buy. 

#Demand function-

Demand function is what describes a relationship between one variable and its determinants.It describes how much quantity of goods is purchased as alternatively, prices of goods and related goods, alternative income levels and alternative values of the other valuables affecting demand.

The principal variables that influence the quantity demanded:

1. The price of the goods.
2. The prices of related goods.
3. Taste and preferences.
4. The income of consumer.
5. Expected price of product in future periods.
6. The number of consumers in the market. 

note:The relationship between quantity demanded and these above factors is referred to as the general demand function. 

#Elasticity of demand:

• Price elasticity of demand. 
• Elasticity is equals to responsiveness of consumer due to the price change of any commodity.
• Alfred Marshall-Elasticity of demand may be defined as a percentage change in quantity demanded to the percentage change in price.

1. Perfectly elastic demand.
2. Perfectly inelastic demand.
3. Relatively elastic demand.
4. Relatively inelastic demand.
5. Unitary Inelastic demand. 

#Perfectly elastic demand-

Perfectly elastic demand means when the percentage of change in quantity demanded is infinite, even if the percentage of change in price is 0, the demand is set to be perfectly elastic. 

Quantity demanded =∞

#Perfectly inelastic demand:

No change in quantity demanded

#Relatively elastic demand:

When the percentage change in quantity demanded is greater than the percentage change in price, the demand is set to be elastic. 

Quantity demanded.> Price

#Relatively inelastic demand:

More change in the price of the goods, but less change in demand for the goods. 

Quantity demanded.<Price

#Unitary elastic demand:

The proportionate of change in price of goods and services is equal to the proportionate change of demand for goods and services. 

Quantity demanded.=Price

#SUPPLY:

B)SAVING,CONSUMPTION,INVESTMENT:

#SAVING:

• Saving function [Propensity to save]
• Saving function refers to the functional relationship between saving and national income.
•              S= f [Y]
• Where,S= Saving; Y=National income; f = Functional relationship.
• Propensity to save shows the different levels of saving at different levels of income in an economy.
• Types of propensities to save:
• Average propensity to save [APS]:
• It refers to the ratio of saving [S] to the corresponding level of income [Y] at a point of time.
• APS can be less than zero when there are dissavings .i.e. still consumption is more than national income. 
• Formula; APS=S/Y

• Marginal Propensity to Save(MPS):

  • Marginal Propensity to save [MPS]
  • it refers to the ratio of change in saving [𝚫S] to change in total income [𝚫Y] over a period of time
  • MPS can never be less than zero as change in saving can never be negative, i.e.Change in consumption can never be more than change in income. 
  • Formula; 𝚫S/𝚫Y.

#CONSUMPTION:

• Consumption function [propensity to consume]
• Consumption function refers to functional relationships between consumption and national income. 
•                   C= f [Y]
• Where, C=Consumption; Y= National; f = Functional relationship
• Consumption function represents the willingness of households to purchase goods and services at a given level of income during a given time period.
• It also shows the consumption level at different levels of income in an economy.
• It is a psychological concept as it is influenced by subjective factors like consumers, preferences, habits, etc.

*Types of propensities to consume:
Average Propensity to consume [APC]:

• it is the ratio of consumption expenditure [C] to the corresponding level of income [Y] at a point of time. 
• APC can be more than one as long as consumption is more than national income.i.e. still the break even point. 
• When income increases, APC falls, but at a rate less than that of MPC. 

Marginal propensity to consume[MPC]:

• It is the ratio of change in consumption expenditure [𝚫C] to change in income [𝚫Y] over a period of time.
• MPC cannot be more than one as change in consumption cannot be more than change in income. 
• When income increases, MPC also falls, but at a rate more than that of APC.

Relationship between APS and APS:

The sum of APC and APS is equal to one. It can be proved as under;

      We know:Y= C+S

     Dividing both sides by Y,we get

   Y/Y=C/Y+S/Y

1 = APC + APS                                             

Relationship between MPC and MPS:

The sum of MPC and MPS is equal to one. It can be proved as under;

We know: 𝚫Y=𝚫C+𝚫S

Dividing both sides by 𝚫Y, we get:

               𝚫Y/𝚫Y=𝚫C/𝚫Y+𝚫S/𝚫Y

               1 = MPC+MPS

#INVESTMENT FUNCTION:

• Investment refers to the expenditure incurred on creation of new capital assets.It includes the expenditure incurred on assets like machinery, Building, equipment, raw materials etc. which lead to increase in the productive capacity of an economy.
• The investment expenditure is classified under two heads:

Induced investment:

• Induced investment refers to the investment which depends on the profit expectations and is directly influenced by income level.
• It is driven by profit motive i.e it depends on profit expectations. 
• It is income elastic i.e. increase in income level raises its level.
• Its curve slopes upwards as it is income elastic.
• It is generally done by the private sector. 

Autonomous Investment:

• Autonomous Investment refers to the investment which is not affected by changes in the level of income and is not induced solely by profit motive.
• It is done for social welfare and not for profit.
• It is unaffected by changes in income level.
• Its curve is parallel to the X-axis as it is income inelastic.
• It is generally done by the government sector. 

C)THEORIES OF ECONOMIC GROWTH AND PROBLEMS OF DEVELOPMENT:

Economic growth. Economic development. Economic growth is defined as an increase in the country's real output of goods and services. Economic development and tails changes in income, savings and investment as well as gradual changes in the countries socioeconomic structure. Growth is defined as a increase in one of the components of GDP.Like consumption, government spending, investment, and Net export. Related to human capital growth or reduction in inequality numbers and structural changes that improve the population's quality of life. Economic growth is measured quantitative . Such as real GDP growth or per capita income growth. Economic development is a qualitative indicator, such as HDI, Human Development Index, gender related indexes, human poverty indexes.Infant mortality literacy rate. Quantitative changes in the economy are brought about by economic growth. Economic development results in both qualitative and quantitative changes in the economy. Economic growth reflects national or per capita income growth. Economic development reflects progress in our country's quality of life.

#Obstacles of economic development:

1. Insufficient resources-This is allocated.To the formation of human capital have been much less than the resources required. Due to this reason, the facilities for the formation of human capital have remained grossly inadequate.
2. Brain drain- People migrate from one place to another in search of better job opportunities and handsome salaries. It leads to the loss of quality people like doctors, engineers, etc, who have high caliber and are rare in a developing country. The cost of such loss of quality human capital is very high.
3. High growth of population-High growth of population is one of the main obstacle in.Economic development.The continuous rise in population has adversely affected the quality of human capital. It reduces per head availability of the facilities and resources.
4. Vicious cycle-Vicious cycle of poverty is the greatest obstacle in the way of economic development in developing countries. There is low income debt leads to low saving and low investment which stops the economic development.
5. Lack of proper manpower planning-There is an imbalance between the demand and supply of human resources of various categories, especially in case of highly skilled personnel. The absence of such balancing has resulted in the wastage of resources.
6. Weak science and technology-And respect of education, the performance is particularly unsatisfactory in the fields of science and development of modern technology.

#Factors affect Economic development:

1. Effective use of physical capital:The growth and productivity of physical capital depends Extensively on the human capital formation.The physical capital can be created only by means of hard and intelligent work of human beings in the economy.Human skill and their efforts help in effective utilization of physical capital.
2. Higher productivity and production-Economic development raises the productivity and production as knowledgeable and skilled worker makes better use of the resources.Increase in productivity and quality production depends on technical skills of the people, which can be acquired only by means of education, training and maintaining the health of the people.
3. Inventions, innovations, and technological improvement-The human capital formation stimulates innovation and creates ability to absorb new technologies.Education provides knowledge to understand changes in society and scientific advancement which facilitates inventions and innovations.
4. Modernization of attitudes- The knowledgeable.Skilled and physical fit people are powerful instrument of change in the society's economic development of a country depends on the minds of the people and their changing attitudes towards creating a will for development.
5. Control on population growth-It has been observed that educated person have some smaller families as compared to Illiterate families.So it's spread of education is necessary to control the population growth rate.

D)BANKING AND FISCAL POLICY:

#Excess demand:

• It refers to the situation when AD is more than AS corresponding to full employment level in the economy. 
• It leads to inflationary gap.
• It indicates over full employment equilibrium.
• It occurs due to excess of anticipated expenditure.i.e. Due to rise in consumption expenditure, investment expenditure, etc.
• It does not affect the output and employment, as economy is already operating at full employment level.
• It leads to inflation.i.e.It results in rise in general price level.

#Deficient demand:

• it refers to the situation when AD is less than AS Corresponding to full employment level in the economy.
• It leads to deflationary gap.
• It indicates underemployment equilibrium.
• It occurs due to shortage of anticipate expenditures i.e.Due to fall in consumption expenditure, investment expenditure, etc.
•  It leads to fall in output and employment due to shortage of aggregate demand.
• It leads to deflation.i.e.It results in fall in general price level.

MONETARY POLICY:

• It is a Financial tool that is used by the central banks in regulating the flow of money and the interest rates in an economy.
• Central bank of an economy.
• It measures the interest rates applicable for lending money in an economy
• Focus area is The stability of an economy
• Exchange rates improve when there is higher interest rates. 

FISCAL POLICY:

• It is a financial tool that is used by the central government in managing tax revenues and policies related to expenditure for the benefit of the economy. 
• Ministry of Finance of an economy. 
• It measures the capital expenditure and taxes of economy.
• Focus area is growth of an economy.
• It has no impact on the exchange rates. 

#GOVERNMENT APPLIES THE FISCAL POLICY TO CORRECT THE EXCESS DEMAND:

1.Change in government spending
Government spends huge amount on public works like construction of roads.Fly overs, buildings, railway lines, etc changes in such expenditure directly affect the level of AD in the economy and helps to control the situations of excess and deficient demand.
2.Change in taxes
Government imposes different kinds of direct and indirect taxes on the public. Changes in taxes by the government directly influence The level of aggregate demand and help to control access and deficient in demand in the economy. 

#RBI APPLIES THE MONETARY POLICY TO CORRECT EXCESS DEMAND:

Change in money supply or availability of credit
The Reserve Bank of India.[RBI]Empowered to regulate the money supply in the economy through its.Monetary policy.It is policy of.Central Bank to control money supply and credit creation in the economy.Monetary policy.Helps to control the situation of excess and deficient demand through its following instrument:

A)Quantitative instruments: These instruments aim to influence the total volume of credit in circulation.Major instruments or measures are.

[a] Bank rate and repo rate

[b] Market operationAnd.

[c] Legal reserve requirements

*CASH RESERVE RATIO(CRR)

*STATUTORY LIQUIDITY RATIO(SLR)

B)Qualitative instruments: 

#INCREASE IN MARGIN REQUIREMENT

#MORAL SUASION

#SELECTIVE CREDIT CONTROLS