LECTURES ON ECONOMICS-I (General Principles) Lecture-I Introduction (Economics: Meaning and Definitions) ‘This lecture deals with — 1, Economics: Meaning. 2. Economics: Definitions A) Adam Smith’s Wealth Definition. B) Marshall's Welfare Definition. C) Robbins’ Scarcity Definition and D) Moder or Growth Definition. 1. Economics: Meaning Economics is one of the most important branches of Social Science. Itis described as “the Queen of Social Sciences.” Adam Smith (1723-1799), who is popularly known as ‘the Father of Economics’, said for the first time that economics is a social science. Itis a study of how people make choices under conditions of scarcity and of the results of those choices for the society. Economics is a study of various economic activities, namely consumption, production, exchange, distribution and revenue. In other words, it is a branch of social science, which is concemed with the production, consumption and transfer of wealth. Human wants are unlimited. But, the means available to satisfy the wants. with limited means/resources. So, those wants, which need immediate satisfaction should be given priority and the others of less importance are to be postponed. The term ‘Economics’ was originally derived from the two _ Greek words ‘Oiks’ (Oekos), which means “household or a house” and ‘Nemain’ (Nomos), which means “Management” or Eco-l .2 Lectures on Economics-1 [Leey “Managing a household”. The term ‘Economics’ was applied to g frugal use of ‘one’s limited resources and the term “Economy” to the manner in which a particular society organized its resource, for the maximum production of desired goods and services. It els to explain systematically, a large variety of questions pertainin to economic behavior of individuals, society and the economy, 2, Economics: Definitions ; The term ‘Economics’ has been defined by several economi: at various points of time in different ways. They can be cae in a chronological order as follows — led A) Adam Smith’s Wealth Definition. 9° B) Marshall's Welfare Definition. C) Robbins’ Scarcity Definition and D) Growth Definition. A) Adam Smith’s Wealth Definition The credit to define Economics for the first time goes to Adam Smith (1723-1799). He is described as the father of economi He, in his book entitled “An En iry into the nature and C: = of Wealth of Nations (1776)" defined economics as “a science which enquires into the nature and causes of wealth of nations”, He says — ~ “Political Economy, considered as a branch of science of statesman or legislator, proposes two distinct objects, first, to provide a plentiful revenue or subsistence for the people, or more properly enable them to provide such a revenue or subsistence for themselves, and secondly. to supply the State or Commonwealth with the revenue sufficient for the public services. It proposes to enrich both the people and Sovereign” Adam Smith emphasized the production and growth of wealth as the subject matter of economics. His followers/supportes namely, J.B-Say, JS Mill, Walker Senior and Ricardo etc. defined similarly as follows: a) J.B.Say: Economics in the science which treats of wealLec.l] Introduction 3 b) J.S.Mill: Economics investigates the nature of wealth and the laws of its production and distribution. c) Walker: Economics is the body of knowledge that relates to wealth. d) N.W.Senior: The subject of political economy is not happiness but wealth. e) Ricardo: Ricardo in his ‘Principles of Political Economy and Taxation” says thus: ‘Economist studies how the produce of the earth is distributed”. Thus, economics deals with distribution of income and wealth. cat in sida at Senger pesca meerdaeatea Seas The classical economists regarded economics as a science of wealth. a " Criticism: The wealth definition given by Adam Smith was subject to criticism on the following grounds : i) Adam Smith in his definition, has given primary importance to wealth. According to his definition, wealth was defined in a narrow and restricted sense. Only material goods are included in wealth. But, services, which constitute wealth according to modern economists has been ignored. ii) Adam Smith emphasizes only the accumulation of wealth. and gave no importance to economic welfare.of the society. Therefore, Adam Smith’s definition was bitterly criticized in 17" and 18" centuries. Thomas Carlyle and John Ruskin described it as the ‘science of bread and butter’, Gospel of Mammon’, ‘a Dismal Science’, ‘a pig science’, etc. They alleged that classical. economists have ignored the higher values of life such as happiness, love, and affection. B) Marshall’s Welfare Definition To overshadow the criticism leveled against the definition of Adam Smith, Dr. Alfred Marshall (1842-1924), in his book titled eeetures on Economics-I A Lec [heey Din. nomics’, published in 1890 gave a new defi ae Ne ss to human welfare than to wealth and 8 it is called as the ‘Welfare Definition of Marshall’. ‘economics’ as “Political eco hall defined ‘economics’ as oe ae i a study of mankind in the ordinary business of fa economi ~—* of individual and social action which is oe i ines that part it exami h the attainment and with the use o} Materia ted will as = closely aenvel being. ‘Thus, it is, on the one side, a study of oe Ava as supported by the economists namely 5 definition wé a soem Edwin Cannan, Sir William Beveridge ang Penson as follows: mae i) Prof. AC. Pigou: Prof. Pigou in his Economic Welfare’ defined economics as “the range of our enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with measuring rod of inition hence, money.” Prof. Edwin Cannan: Prof. Cannan in his “Elementary Political Economy’, Says —““The aim of political economy is the exploration of the general causes on which the material welfare of human beings depends.” iii) Sir William Beveridge: Sir William Beveridge in his ‘Economics and a Liberal Education’ says — Economics is the study of general methods by which men cooperate to meet their material needs.” iv) Pension: Pension, a distinguished economist says ~ “Economics is the science of material welfare”. => Marshall's definition emphasized primarily the study of mankind than the study of y wealth, which according to him is _-secondary that provides means for existence (survival), comfort and enjoyment. In simple words, according to Marshall, human welfare is primary, while the wealth is secondary because wealth i Yorman but nat is not for wealth. ii) and more important side, @ part of the re ST aeLec-I] Introduction 5 Although, Marshall's definiti many economists as stated Ge les teste eee ae subjected to severe Criticism: Prof. Robbins Lionel Charles, a well know: economist criticized the welfare definition of Marshall on te following grounds. 1. Prof. Robbins enunciates that— “economics is not a social science. It is not simply a human science, but a pure science like physics as it has universally applicable principles/laws. A social science studies the activities of individuals living in organized communities as members of the society, whereas, a human science studies the individuals whether they are living in the society or in isolation. According to welfare definition the activities of an isolated individual like Robinson Crusoe lie outside the orbit of economics; thereby Timiting the scope of economics. 2, Robbins says that economics is no way concerned with welfare, which varies from person to person and from place to place. Production and consumption of intoxicated material goods or intoxicants like, drugs; alcoholic drinks, guns etc. constitute economic activity, but do not promote human welfare. 3. Marshall's definition is confined to the study of material goods and ignores non-material goods like the services of doctors, engineers, teachers and other human eee — — — resources. 4. Further, Robbins says that, Marshall’s welfare definition concems itself with a certain group of activities, rather than with certain aspect of every activity. C) Robbins’ Scarcity Definition Prof, Robbins Lionel Charles, an eminent economist in his famous book entitled, “An essay on the Nature and significance fionaLectures on Economics-I fay 6 of Economic Scien follows “Economics i a relationship between en alternative uses- Robbins calls “wants” (human wants/needs) as ends ang - calls “means” as the funds available to meet/satisfy bea needs. The word, ‘scarce’ denotes deficit or insufficient/inag, = sources/funds. Human wants are unlimited, but the icine ca available to meet all the needs are strictly limited. Hae =) has to choose between more urgent and less urgent wants/ng ite. to choose between ends (wants) ‘and means (funds), fe term scarcity denotes deficit of funds to meet all wvantieed Robbins” scarce definition contains three fundamenta} ce” published in 1931 defined economics as s the science, which studies human behavior ds and scarce means which hay, ie principles namely,— a) ends, b) scarce means (limited funds), and c) alternative application of scarce means. Let us discuss about an example in practical life. A middle class man adjusts his limited funds (salary or other source of earning) among various needs (wants/ends) by fulfilling urgent needs like house rent, food provisions, children’s school/college fees immediately by ignoring/postponing the need to PUrchase jewelry, vehicle ete. is what we mean to say ‘alternative application of scarce means.” In simple words, basic needs like food, clothing, shelter, medical and educational expenses are attended/met/ satisfied first and the less urgent and luxurious requirements are postponed or ignored. Main Features of Robbins’ Definition: Following are the main features of Robbins’ Scarcity definition — i) Unlimited Wants or Ends: Human wants ar innumerable/countless i.e unlimited, which can be satisfied by goods and services, which are not freelywell Gat eee » % available, We have to pay for them. Hence, they are calle economls, wants and services. Only those, which ne freely (without price) available are free goods. E.g: aie water etc, (not mineral/purify water against price), evi limited means (funds/money) one cannot satisfy all the needs/wants. Therefore, he has to choose the most urgent wants for immediate satisfaction. ii) Scare or Limited Means: The word ‘Scare’ literally means deficit or limited or inadequate, It refers to various productive resources i.e. factors of production namely, land, labour, capital required for production of goods and services to satisfy human wants. In view of scarce means, one has to satisfy some of them and leave the rest remain unsatisfied. iii) Alternative uses of Means: Our means (funds) are scarce (limited). But, they can be put to (utilize) for number of uses. In other words, the same resource can be used for more than one use. Some resources have a large number of uses, while others have a limited number of uses. For instance, a piece of land can be used for many purposes viz. for running factories, railways, households etc. Choice or Wants are of different intensity: Human wants are unlimited, But the means (funds) available to satisfy all of them are scarce (limited). Of them some wants need immediate satisfaction, while the others can be postponed/outweighted/cancelled. Therefore, a man is forced/constrained to choose between wants due to their different intensities. The scarcity of means makes the choice necessary. Thus, economics is called as “the science of choice.” y) Neutral between Ends: An economist is not expected to pass judgments on the most appropriate uses of the means for reaching the ends themselves. According to iv)Robbins, the economics consists of laws of the Vario results of the act of choice in particular cases, maximizi - the achievement of ends or minimizing the use of nets is the general criterion on which choices are based. we the restrictions on the choice. Behe Robbins’ definition is widely accepted by the economists in view of its superiority over the earlier definitions. It brings out the real cause of economic problems and emphasizes the universal nature of the subject, which is applicable everywhere and at all times: He included, in the scope of economics, all those activities which come under the cover of choice making, whether performed by people living in the society or outside it. Criticism: Robbins’ definition also, is not free from the clutches of criticism by several economists like Wooten, Beveridge, Durbin, Fraser, Ely etc. on the following grounds — i) Concealed Concept of Welfare: Critics point out that, Robbins rejected the Marshall’s definition for its welfare content. However, his (Robbins’) ends relate to welfare. But, he has concealed the concept of welfare. ii) Self Contradictory: Robbins contradicted himself with his two views. Firstly, he considered economics as ‘neutral between ends’ ic. economics has nothing to do with the good or bad nature of the ends. Secondly, he considers economics as the science of choice. These two contentions are mutually contradictory. iii) Treats Economics a Positive Science: Critics charged Robbins that he treats economics, a positive science. He treats economics as a science of value determination and choice making. iv) Economic Growth not covered: Robbins’ definition does not cover economic growth, which determines national income and per-capita income of a country. Based on per-capita, a particular country is determined0 Introduction 9 as an advanced state or developing state or under- developed/backward country. v) Micro Aspect of Economics ignored: Robbins in his definition ignored the micro aspect of economics by reducing the subject matter of economics to the theory of resource allocation. Not applicable to Socialist Countries: According to Prof, Maurice Dobb, Robbins definition of economics does not apply to socialist countries where the economic activities are subject to government control and regulation. In these economies, the government chooses between the ends and the means, therefore, the individual choice has no relevance there. Despite above criticisms, Robbins’ definition of economics as been considered to be the best by many economists. D) Modern or Growth Definition Although Robbins” definition of economies has been sidered to be the best and supported by many economists, it cludes economic growth, which determines the financial status f a state/country. Therefore, Prof. Samuelson has given the jodern or growth definition of economics, which reads as follows, — “Economics is the study of how people and society choose, ith or without the use of money, to employ scarce productive ources, which could have alternative uses, to produce various mmodities over time and distribute them for consumption now d in the future among various people and groups of society.” The above modem definition of Prof. Samuelson incorporates e essence of material welfare and contains future consumption econoinic growth. Main Features: Following are the notable features of amuelson’s modern/growth definition — i) Samuelson’s modem/growth definition of economics is exhaustive, comprehensive and expansive over the vi. [Le Robbins’ scarcity definition of econo; . wider in scope, but also dynamic Ot On], applicable.even to barter economy and m and jg exchange economy, ONEY Using mics, Itis n 1 content ii) Samuelson’s definition is applicable to all economies, Past, present and future, Itiis Sorts of applicable/suitable to capitalist, socialist cone qually mixed economies. a MIMUNist ang iii) Like Robbins, Samuelson too stressed scarcity i.e. limited means and unlimite, emphasized on proper allocation o| satisfaction of maximum wants. the Problem of ‘d ends, He also f Tesources fo, iv) Samuelson made his definition dynamic, b time element for production, dis consumption of goods and commodities time. y i Ncorporating tribution and over a particular The modern or growth definitions given by other economists are given below: According to Keynes, “Economics is the study of the administration of scarce resources and of the determinates of income and employment.” Spencer, Milton. H in his ‘Contemporary Economics’ says, “Economics is a social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability.” Frederick Benham in his book ‘Economics’ says, “Economies is a study of the factors affecting the size, distribution and stability of country’s national income.” —: 00000 :—Lecture-V General Principles Demand and Supply This lecture covers — 1. Human Wants. 2. Goods. 3. Classification of human wants/Goods A) Necessaries. B) Comforts. C) Luxuries. Consumption. Utility. Marginal Utility. cot yw Ss The Law of Diminishing Marginal Utility. Law of Equi-Marginal Utility or The Law Equilibrium or The Principle of Equi-M: 9. The Consumer’s Surplus. 1, Human Wants of Consumer’ arginal Returns, Meaning: From early morning to late night, we need many goods and services to meet our requirements. In other words, man has a bundle of wants, which can be satisfied by consumption of various goods and services — namely, food, clothing, shelter (house), water, electricity, medical aid, education etc, To satisfy human wants, we have to pay for such goods and services since they are not free. So, man has to work ie. to engage himself ina economic activity to earn money and pay for them. Therefore, he basis for the emergence of any economic activity is human wanls: Human wants vary from man to man and place to place, Fir instance, the wants and tastes of a person ina village are differet! from an inhabitant of a city viz, way of life style, nature of foot clothing etc. 52ie yl General Principles Demand and Supply 53 2, Goods: Meaning Things: which have power to satisfy human wants, are called fae Man, by using, or consuming the goods and services derive wilt to satisfy his wants. Goods may be classified as — a) Free Goods, and b) Economic Goods. Free goods are those, which are freely/abundantly available jn nature. g.: ait, sunlight etc. Whereas economic goods are ne goods, for which money is to be paid. Further, goods and services can be classified as tangible and intangible goods. Tangible roads are those, which can be seen and touched. E.g.: Radio, TV. carcle- Intangible goods and services are those, which cannot be seen of touch, Eg. air, sunlight, electricity, internet, cell phone ‘e-charge, COPY rights on books published, good-will, patent rights ele. ay Classification of Goods and services, classified under the following heads — A) Necessaries. B) Comforts, and C) Luxuries. A) Necessaries: which are very essenti Human Wants/Goods which satisfy human wants can be Necessaries are such goods and services, ‘al for survival of human life. E.g: food, clothing, shelter, services of doctor i.e. medical aid, services of teacher i.e. education etc. The necessaries can be sub-divided into three classes, namely — a) Necessaries of Existence. b) Necessaries of Efficiency, and c) Conventional Necessaries. a) Necessaries of Existence: These are the things without which we cannot exist, e-g.: a minimum of food, clothing and shelter.2 peer yor yo tore atts — b) Necessaries of Efficiency: Some goods may not necessary to enable us to live, but necessary to be us efficient workers. A table and a chair e necessaries of efficiency fora student, Having ia he will be able to read and write better. Se, c) Conventional Necessaries: These are the thin which we are forced to use either by social cas s or because the people around us expect us to do Itis clear that we cannot dress ourselves in a ane fashion. We must dress according to our Station j life and in a manner acceptable to the people, B) Comforts: Comforts means the requirement of sy. goods and services beyond the necessaries. In Other words, aman, after having satisfied his necessaries Would like to have something better. For instance, for a College student, college fee, exam fee, uniform, books, pen et, are necessaries. Chair, table and required furniture a the necessaries of efficiency. Whereas cushion Tevolving chair, scooter etc. are comforts. C) Luxuries: Man does not stop even at comforts. Afie; comforts have been provided, he wants luxuries too, Luxury has been defined as a superfluous consumption, something we could easily do without. Costly furniture, juxurious car, shower baths, silk clothes, jewellery, . house fitted with refrigerators, electric cookers, washing machines, cushioned beds and meals consisting of a large number of costly dishes — are all luxuries. They are unnecessary and one can lead a healthy and useful life eyen without them. 4. Consumption i) Consumption: Meaning: Consumption means, the use of goods and services to satisfy human wants. We use both free goods like air, sun-shine, unpaid water etc. and economic goods like fruits, sweets, radio, T.V., furniture ete. Only economic goods willLec.V] General Principles Demand and Supply ss come within the meaning/purview of consumption. So, consumption means the use of economic goods and services, but not free goods. By consumption, we mean the satisfaction of our wants by the use of commodities and services. When we use a particular commodity or service, we really use its want- -satisfying quality or utility. Hence, consumption means using up of utilities. ii) Kinds/Types of consumption: Consumption is classified under the following heads— a) Direct Consumption. b) Indirect Consumption, and c) Wasteful Consumption. a) Direct Consumption: When a person eats fruit or sweet, uses pant, shirt, vehicle etc. it is called ‘direct consumption.’ All economic goods and services, which are directly enjoyed by consumers to satisfy wants is called “Direct Consumption’ or ‘Financial Consumption’. b) Indirect Consumption: Consumption of such economic goods and services, which produce consumer goods and services, is called ‘Indirect Consumption.’ E.g.: productive goods namely — plant, machinery, raw material etc. Similarly, services of direct labour are direct consumption for production of consumer goods. While the services of administrative, selling and distribution staff is indirect consumption. ¢) Wasteful Consumption: In the event of fire accident, earth quake or other natural calamity, the goods survived/ remained will be destroyed and will not be eng It is called wasteful consumption. 5. Utility Utility: Meaning: Human wants/needs get satisfied by fulfilling that want/need by consuming (using/making use of) it. The term ‘utility’ literally means, it is the power or capacity or extent of satisfaction derived (extracted/enjoyed) by consuming _Lectures on Economics 56 (using or making use of)a good/commodity or service. In simple words, it means they want satisfying power of a commodity, In economics, the power of commodity on service to satisfy the iF js called utility. In other words, utility is the intensity of Satisfaction derived (we get) by consuming a commodity. (E.g.: eating z apple or watching T.V. or riding a motor cycle respectively es the eater, watcher and rider are called consumers: ). Consumption, is an act of satisfying one’s wants. The utility derived from 4 commodity varies from person to person, time to time, Place: g place and situation to situation. Some people derive utility 5, consuming dangerous/harmful commodities like cigarette, alcoholic drinks, drugs etc. Thus, utility is that quality ing commodity by virtue of which it is capable of satisfying a hu: want. Free goods like air, sun-shine, unpaid water and economic goods like food, clothing, shelter i.e. residential house/flat et. possess utility to satisfy human wants. Forms or Kinds of Utility: As stated earlier, utility Varies from person to person, place to place and from time to time. has been classified/categorized under the following heads — a) Form utility. b) Place utility. c) Time utility, and d) Service utility. a) Form Utility: Utility is derived by changing the formof a commodity so that it is made fit for consumption. Fo. instance, conversion/making of wood into furniture, piece of gold into ornament, raw rice into boiled rice ete. b) Place Utility: The utility of a commodity is increased by transporting it from one place to another. For instance, log wood from forest to market, vegetables from field market, manufacturing goods and commodities from factory to shops etc. ©) Time Utility: Some goods deriy times/periods. For instance,Lec.V] General Principles Demand and Supply 57 winter, umbrellas during rainy season. Similarly, Air Coolers and Air Conditioners during summer. d) Service Utility: Human wants get satisfied by consumption of goods and service. Utility derived from services of doctors, lawyers, engineers, teachers etc. is called service utility. 6. Marginal Utility Marginal Utility: Meaning: Utility represents the degree of pleasure or satisfaction that arises from consuming a particular commodity or service. If the consumption is increased one unit after another, the utility derived by each unit is called marginal utility, which gets decreased/diminished, if the number of units consumed is increased. The utility given by each unit is called “Marginal Utility’. The word ‘marginal’ means, “additional or extra’. So, marginal utility can be stated as the additional or extra utility we get by consuming one more unit of the commodity. Marginal utility can be defined as~‘the change in the consumption of a commodity per unit of time’. According to Boulding, marginal utility is the increase in consumption. ‘Therefore — Marginal Utility = Change in total utility/change in quantity consumed, Total Utility =Total satisfaction got/derived by consuming all the units of a commodity. Example: ‘A’ has capacity to consume five apples. By consuming the 1* apple, he derives utility (utils) equal to 10 units (utils). Immediately on consuming 2" apple, he derives less utility (utils) equal to 8 units (utils), “Immediately on consuming the 3% apple, utility derived will further come down to 5. tils) Likewise after consuming 5" one, the units (atils), he derives no utility, i.e. 0 consume 7" apple and 8" apple, the u Negative i.e. -5 and -10 Tespectively. seat} seme Uno Bead gw Vi -58 Lectures on Economics-I [Lee.y 7. The Law of Diminishing Marginal Utility The Law of Diminishing Marginal Utility is the principle which we witness in our regular course of practical life. Satisfaction of human wants follow/result in some important laws. One among such laws is the law of diminishing marginal utility, which refers to common experience of every consumer. Suppose a person starts eating apples one after the other. The first apple will give him great pleasure. By the time he consumes the second one, his appetite is reduced and the second apple will yield him a lesser satisfaction. When he consumes a third one, the satisfaction reduces further. Thus, the additional satisfaction will go on decreasing with every successive apple till it drops down to zero. If the consume; js forced to consume more, the satisfaction may become negative or the utility may change into disutility. This type of practical experience has been explained technically for the first time by an ‘Austrian Economist Gossen, and hence, it is called as “Gossen’s First Law” and in course of time came to be known as “The Law of Diminishing Marginal Utility”. Marshall, a distinguished and very famous economist states the law as, “The additional benefit which a person derives froma given increase of his stock of a thing diminishes with every increase in the stock that he already has.” Another economist, Chapman states the law as - “The more we have a thing, the less we want additional increments of it or the more we want not to have additional increments of it.” consumption of any one commodity, keepin, he consumption of all other commodities, the marginal | utili & sc variable commodity must eventually decline.” er A 1 shed Thine According to Baumol — “The law of diminishi a utility can be stated that — “As the quant possessed by a person at any time increases him diminishes”. Also we give priority toLec.V] General Principles Demand and Supply 59 have two, we give the second to our wife, a third we keep for our- self and a fourth we give to our mother in law. Explanation of the Law of Diminishing Marginal Utility: The principle or the Law of Diminishing Marginal Utility can be explained with reference to the following example with supporting Table and Diagram. ‘A’ a hungry man wants to consume apples one by one immediately. After consuming (eating) the first apple, he received/ derived 20 units of marginal utility (utils/satisfaction). After consuming the 2"! apple, he has received satisfaction/derived 15 units of marginal utility (15 utils). Then the total marginal utility after consumption of 2 apples is 20 + 15 = 35 units (utils). After consumption of the 3“ apple, he has received 10 units of satisfaction raising total utility to 45 units/utils. Further on consuming the 4" apple, he has received 05 units of satisfaction and the total utility goes up to 50 units/utils. After consuming immediately the 5" apple, i.e. he did not derive any marginal utility ie. zero and the total utility remains the same at 50 units. Still he starts or forced to consume further i.e. 6" and 7* apples there will not be any more satisfaction (i.e. marginal utility), but will be disutility of 5 and -15 respectively on the otherhand. The following table and diagram further explains the concept. Number of apples Marginal utility Total Units (TU) consumed (MU) (Utils) ol 20 02 15 03 10 04 05 05 00 06 5 07 -15Lectures on Economics-I [Lee,y 60 Figures in the above table are explained in the following diagram: ; rn ‘ \~e 5 in 1» TEs. Units of Commodity (Apples) The above diagram indicates the figures in the table referring to consumption of apples (commodity) explaining the law of diminishing marginal utility. Units of apples is measured on x axis i.e. OX and the units of utility is measured on Y axis i.e. OY. ‘MU is the Marginal Utility curve and TU is the Total Utility curve, We can observe from the above diagram that total utility increases ‘on consuming more units of commodity (apples) one after another, till it reaches maximum i.e. on completing the consumption of 48 apple and thereafter it starts decreasing. Marginal utility falls consistently till it reached zero on consuming the 5* apple, where the total utility is at maximum when total utility starts falling, the marginal utility becomes negative. It is clear from the above i.e. according to the law of diminishing marginal utility, when a person consumes more and more units of commodity, its marginal utility declines. Assumptions: The Law of Diminishing Marginal Utility is based on the following assumptions. i 1, The taste of the consumer should remain unchanged during the process of consuming the units of commodity,Lee.V] General Principles Demand and Supply 61 one after another immediately i.e. an apple or any other: fruit or an eatable/food. 2. The units of the commodity must be homogenous i.e. equal/same in size, quantity, quality, taste etc. 3, Immediate consumption of one unit after another without any gap between the consumption of two units. Exceptions to the Law of Diminishing Marginal Utility: The Law of Diminishing Marginal Utility is applicable in respect of the following cases. i) Hobbies and Collection of rare and curious things. ii) Music. iii) Book reading and poetry. iv) Consumption of intoxicants and v) Money and wealth. i) Hobbies and Collection of rare and curious things: The law of diminishing marginal utility is not applicable to hobbies like collection of curious and rare things ie. the collection of stamps belonging to various countries in the world. Similarly, the collection of various coins belonging to different countries of the world. The more, the collection, the more will be the utility. ii) Music: The law is not applicable to music lovers, who derive more and more utility on listening to their favorite music again and again. iii) Book Reading and Poetry: The law is not applicable to oratious book readers and the lovers of poetry since they enjoy more satisfaction/utility. iv) Consumption of Intoxicants: The law is not applicable to intoxicants like drugs, alcoholic drinks etc. Since the consumption, while consuming more and more units/ quantity do not lose satisfaction/utility, = fester62 Bal aa y) Money and Wealth: The law of diminishing m,; inal utility is not applicable in respect of money and We; because millionaire wants to become billionaire an pillionaire wants to become multi millionaire/trillionaj, Similarly, a land lord of 100 acres wants to become : Jand lord of 1000 acres and so on. a Importance or Advantages: Following are the NOtable advantages of the law of diminishing marginal utility. 1. Itprovides basis for several laws of consumption Ramely_ a) The principle of equi-marginal utility, b) The principle of consumer surplus. c) The law of demand. d) Elasticity of demand etc. 2. The law of diminishing marginal utility explains about the water diamond paradox value. The supply of Water is high and its price is low or no value, where ag the supply of diamonds is very low and hence, its Price/value is very high. Marginal utility depends upon supply of the commodity. If greater the supply, lower will be marginal utility and hence the price will be less/low, Since the supply of diamonds is very low, its marginal utility is very high and hence, its price also is very high, 3. It forms basis for taxation. A finance minister keeps this law in mind when he taxes the commodities purchased by the rich at a high rate and those purchased by the poor people at a lower rate. 4. Ithelps the State/Government for redistribution of wealth from rich to the poor. The poor man derives more marginal utility from money, when compared to a rich man, The | State by collecting taxes from rich and utilizing them for | poor for free housing etc. establishes welfare state. The law tells us the difference between value-in-use and value-in-exchange.pel General Principles Demand and Supply Criticism: The law of diminishing margi ility jj caject £0 criticism on the following aie bile es 1, Utility is a mental/psychological feel; i cannot be measured. ice ee 63 2, Thelaw of diminishing marginal utility assumes constant utility of money, and 3, Inour practical life, very few commodities are consumed in quick succession i.e. one after another immediately without any gap. . The Law of ‘Equi-marginal Utility or the Law of Consumers’ Equilibrium or the Principle of Equi-marginal Returns The law of Equi-marginal utility is another fundamental Principle ofeconomics. Itis also known as the Law of Consumer’s Equilibrium, or the law of Equi-Marginal Retums, or the Law of Substitution, or the Law of Indifference, or the Law of Maximum Satisfaction. This principle was formulated by H.H.Gossen, an Austrian Economist and hence, it is known as “Gossen’s Second Law.” Human wants are unlimited. But the means (funds) to satisfy the wants/needs are strictly limited. Therefore, it is necessary to pick-up the most urgent wants that can be satisfied with the limited funds/money, that a consumer has. A reasonable and prudent consumer, decides to buy just the right quantity to make the best use of the money at his disposal and derive satisfaction. In other words, the consumer has means (limited income) to satisfy his unlimited purpose, he has to give priority or su e commodities than that of the : | his consumption for maximization of sa : Explanation of the Law of Equi-' basis for formulation of this la limited funds against unlimited (fundy/tesources) are limited, th We have to choose between/:Lectures on Economics-I 64 Sas a egy equi-marginal utility or the principle of substitution Explains j the problem of scarcity and choice is solved. Th order to 4. extract maximum satisfaction (marginal utility) out of the lime! funds, we carefully weigh the satisfaction obtained from each 1 that we spend. We have to distinguish between more Urgent Jess urgent wants. and The consumer spends money on different commodities compares the marginal utilities derived from the differe, commodities. When he goes on buying a particular commog Ut the marginal utility from subsequent commodities Will gt y diminishing while purchasing the same commodity one by. at he will reach a point of margin or doubt, whether to buy furthe; the same commodity A or to go for the alternative 'i.e, to Duttchae another commodity, B. Then he compares the marginal Utilities derived from commodity A and commodity B. If he finds that commodity B gives more marginal utility than that of commog; A,he stops to purchase further, commodity A, and then Prefers tg purchase commodity B i.e. chooses to substitute the coy ity, B. Thus, by substituting the another commodity (alternative commodity B), which gives greater marginal utility, he distributes his income on different wants. Marshall defined the ‘Law of Equi-Marginal Utility person has a thing which he can put to several uses, he will, distribute it among those uses in such a way, that it has the same marginal utility in all.” otc Illustration: The Law of Equi-marginal Utility can be explained with the help of the following table.ecVI General Principles Demand and Supply 65 Total The consumer starts spending his first and second Tupee on A, third on B, fourth on A, fifth on B, sixth on A, seventh on B, eighth on A, ninth on B and tenth on A. Thus he substitutes his income on a commodity of more utility for the commodity of less utility. We find the last rupee spent on commodity A gives the same marginal utility as the last rupee spent on commodity B. ‘The total utility for the consumer is 197 utils which is the highest for his income of rupees ten. Any other allocation of the ten rupees shall give less total utility to the consumer. If he spends all the ten rupees on A he gets 165 utils of total utility and if he spends all the ten rupees on B he gets 130 utils of total utility which are less than the total utility at equimarginal utility i.e. 197 units. The law can be illustrated with the following diagram. MU of X and Y S Qubo A MHKg Bag elRas SSA g STS units of money spent’commodities consumed66 Lectures on Economics-I ana Weeyy The consumer, with his limited income, Purcha combination of M units of commodity A and N units of a the B where the marginal utility is equal. If the consumer redu ‘Odity units to MI units on commodity A and increases N ieee units on commodity B, the loss is more than the gain ai change and the marginal utilities are not equal. Heer consumer gets maximum satisfaction when the marginal acd of commodities are equal and he will be at equilibrium, Generally, the prices of the commodities have different pri Then for the maximization of utility, the following conte should be fulfilled. = Marginal utility of A/Price of A= Marginal utility Of BiPrice of B =and so on. Limitations of the Law of Equi-Marginal Utility: The jay, of Equi-marginal Utility is criticized on the following ground, i.e. itis subject to the following limitations. Calculation and Weighing of Utilities is not possible. Effect of Fashions and Customs. Multiplicity of Commodities. Use of Indivisible goods. Purchase of less useful goods due to scarcity of more useful goods. ie Ignorance of prices. : . Durable Goods. Z iO 1. Calculation and Weighing of Utilities is no The law of equi-marginal utility consumer weighs or calculates utility, equalizes them. This assumption is no wre pe no 2. not be able to purchase goods and cc adherence to their utilities for sevLec.V] 6. ia General Principles Demand and Supply 67 fashions, customs and traditions, advertisements, consumption of alcoholic drinks etc. The utility derived from a fashion designer saree/dress or customs/traditional goods or drugs and alcoholic drinks is less when compared to the price paid for them. Similarly, we pay higher price to certain goods as a consequence of having inspired by its advertisement. Multiplicity of Commodities: In view of innumerable/ multiplicity of goods in the market, it is not possible to calculate or weigh the marginal utilities and equalize them. Use of Indivisible Goods: Certain goods like rice, sugar, oil etc. are divisible into any number of small units of our choice. But, such divisibility is not possible in respect of the goods like radio, T.V., two wheeler, four wheeler etc. as we cannot purchase 2 % radios or 1 4 T.Vs. Purchase of Less Useful Goods due to Scarcity or lack of more useful goods: Consumer prefers to purchase the more useful goods at lower price. However, there are certain circumstances in which he is forced to purchase less useful goods at higher price. The law is not applicable in such cases. Ignorance of prices: The law does not apply if the consumer is ignorant of the different prices of the various commodities in the market Durable Goods: It is not possible to calculate marginal utility in respect of durable goods, which are many years old. 9. Consumer’s Surplus i) Consumer’s Surplus: Meaning & Definition: Consumer's Surplus is one of the most important concepts in economics. It was coined for the first time by A.J. Dupit and was developed by Alfred Marshall. In our practical life, we witness that the utilityon Economics- haan or satisfaction we derive from a commodity 1S much more the price, We Pay for it. Consumer 's surplus is found in ¢. apeap commodities/goods, which are highly useful and the consumer would be willing to pay higher than the actyay Price For instance, salt packet, post card/postal envelop, match bos newspaper in respect of which, the consumer is willing 1g more price than the price fixed/determined/paid for it. sj; today the price paid for cell phone recharge for natio international calls to speak for hours together. These are v, and more useful from which we derive maximum Satisfactiony utility and for which we are willing to pay much more than what we actually paid for them. This extra satisfaction over and above the price is called ‘Consumer's Surplus.’ People are often heard saying, “I would have paid much more for it rather than go Without it.’ This means that he has made a saving or derived extra satisfaction over and above the money he has paid. larly Mal ang Consumer's surplus is the excess of what we are prepared to pay over what we actually pay for a commodity. Itis the difference between what we are prepared to pay and what we actually Pay. Marshall defined consumer's surplus.as, “The excess of the price which he (i.e. consumer) would be willing to pay rather than go without the thing over that which he actually does pay is the economic measure of this surplus satisfaction. It may be called consumer’s surplus.’ According to Penson, “The difference between what we would pay and what we have to pay is called the consumer’s surplus,” Hicks says, ‘It (ie. consumers surplus) is the difference between the marginal valuation of a unit and the price which is actually paid for it.’ J.K. Mehta defined consumer’s surplus as ‘Consumer's surplus obtained by a person from a commodity is the difference between the satisfaction, which he derives from it and which he forgoes in order to procure that commodity.” A deolLec.) General Principles Demand and Supply 69 According to Taussig, “Consumer’s surplus is the difference petween the sum, which measures the total utility and that which measures total exchange value.’ In short, consumer's surplus is what we are prepared to pay minus what we actually pay. Consumer's Surplus = Total Utility — Total amount spent. iy) Assumptions: Marshall's Concept of Consumer’s Surplus is based on the following assumptions. 1, The concept of consumer surplus refers to cheap goods, commodities of high value and use. 2. The price of all units of a commodity is one and the same in a perfect market: 3. The tastes and preferences of the consumer will remain the same. 4. The utility derived from consumption of a commodity can be measured in terms of cardinal numbers. 5. Each commodity is treated as an independent commodity. Its utility depends upon its quantity. 6. There will be no change in income, fashion and taste of the consumer. 7. There are no substitutes for the commodity which we take for finding consumer’s surplus. marginal utility. Acco! unit gives more satisfaction/i comes down i.e. diminis subsequent units one by one can be explained with t table and diagram.In the above table, it is assumed that, the price of an Oran; in the market is Rs.10/-. The consumer derived maximum maro; = utility by purchasing 1* unit i.e. first apple i.e. 50 - 10 = 49 a utils. He will purchase as many apples (units) as possible until the marginal utility derived comes down equivalent to the actual Price paid for each unit ic. Rs.10/-, In the above table/example, aj purchase of 5" apple, the price paid and utility derived became equal and hence, there is no consumer's surplus i.e. Zero. Therefore, the consumer will not purchase beyond 5® unit/apple. In case he purchases beyond five units disutility follows. In the above example/table, the total marginal utility derived after purchase of 5* unit/apple is 150 units/utils, while the total money spent for purchase of five units/apples is Rs.50/-. Hence, the consumer’s surplus is, total marginal utility minus money spent _ ite. 150 —5- = 100 as stated above. In the above example, the consumer pays Rs.10/- and derives 50 utils against the purchase of first unit/apple. As he derives 50 units/utils, he will be prepared to pay Rs.SO/- i.e. 40/-extra, Similarly, he is ready to pay Rs.30, 20, 10 respectively for 2", 3° and 4 units/apples and would not be willing to pay above 10/- for the 5" unit/apple as there is no surplus utility for the S* unit. So, if we add the figures in the fourth column, we arrive at the v m of the consumer’s surplus against the purchase of 5* cunivapple i.e. 100 units/utils. !Lec:V] __ General Principles Demand and Supply n iv) Diagramatic Representation: Consumer’s Surplus stated in the above example/table can be represented in the following diagram. CONSUMER GTO P, aT CAy _ PRICE THAT THE Is LUN UNITS OF COMMODITY Consumer's Surplus In the aboye diagram the units of commodity (apples) is measured on OX axis. The marginal utility in terms of money is measured on OY axis. If the market price is PM, the consumer is willing to purchase upto M(5)th unit i.e. upto OM quantity, The reason is the marginal utility and price became equal and there is no consumer’s surplus, But the marginal utility for earlier four commodities (i.e. 1*, 2", 3", and 4" units/apples) is more than PM. For M unit for instance, his marginal utility is PM, but he only pays the market price PM (=P M) for this unit as for others. He, thus obtains an excess of utility for the M (5)th unit equal to P’P”. This is consumer’s surplus from this unit. Similar, surplus arises from the purchase of other units. The total consumer’s surplus is thus derived by him, when OM units are purchased at PM price is shown by the shaded area i.e. UAP. If the market Price (PM) rises to M, he will purchase only OM. quantity and the consumer’s surplus will fall to the smaller triangle UAP.72 y) Importance or h consumer's surplus has some practic: the notabl a) b) ©) d) e) f) a) b) ©) Lectures on Economics-I [Lee.y uses of the concept: The concept o¢ al importance. Following ie ¢ uses/advantages of the concept. In Public Finance. In International Trade. To measure the difference between value in use and valy, in exchange. i Conjunctional Advantages. Useful to Business and Monopolists. Consumer's surplus and elasticity of demand. In Public Finance: The concept of consumer’s surpl is very advantageous to the Finance Minister, eh provides necessary guidelines for fixation of taxes 7 can impose taxes on such goods and commodities . consumers’ surplus for which the consumers are wile to pay more prices than what they are priced at ree In International Trade: The concept of consumer’. surplus measures the benefits from international ea Generally, any country imports goods from a forei country, if they are available at cheaper rates/prices, oe compared to their cost of production in the one state! country. The difference between the import price and home state production price is called the consumer's surplus of that commodity or gain from the international trade. To measure the difference between value in use and value in exchange: Value in use indicates the price We " would be willing to pay. Value-in-exchange is the price we actually pay. Consumer's surplus clearly brings ot the distinction between value in use and value:t exchange. Consumer’s surplus is high on commodities which have high use-value but low exchange-value like salt, matches ete. aLec General Principles Demand and Supply 73 d) Conjunctional Advantages: Consumer’s surplus indicates conjunctional advantages. When the consumer lived in two places, where a particular product is very cheap in one place. For instance, goods which are costly in India may be very cheap in Saudi Arabia or U.S.A. and vice versa. Similarly, services of domestic servants is cheap in India, itis high in U.S.A. and other advanced states. In some states the domestic servants cannot be available even at high remuneration/salary. Thus, the concept of consumer’s surplus helps in comparing the adyantages of two different places, e) Useful to Businessmen and Monopolists: To the businessman also, the concept is very useful. He can raise prices of those articles in which there is a large consumer’s surplus. In such cases, the consumers are willing to pay more than the prevailing price. The seller will be able to raise the price especially if he is a monopolist and controls the supply of the commodity. Consumer’s Surplus and ee tac consumer's surplus on a commodity ©) Not applicable to 4) Presence of substitul nh. being a wD stgious goo hes i sed.14 a) b) ° d) e) Lectures on Economics-I Meg 0 Measure When we Surplus as More th; Pay highe, from place pifficult to measure: It is very difficult 1 exactly the concept of consumer's surplus, say that, a particular product has consumer's the consumers in the market are willing to pay the market price. But, such willingness to price varies from consumer to consumer and to place. An imaginary idea: The concept of consumer's surplus states that the consumer derives extra Utility/excesciy, satisfaction from a particular commodity and hence, he is willing to pay more than its actual price which is just an imaginary and vague idea. There may be some consumers, who feel that even when price is high ang wants it for a lesser price, if possible. Thus, inclination of consumer to pay higher price in all cases is not correct, Hence, it is unreal. Not applicable to necessaries: The idea of consumer's surplus does not apply to the necessaries of life or conventional necessaries. In such cases, the surplus is immeasurable. Presence of substitutes: Many commodities have substitutes. Tea and coffee are substitutes. When there are substitutes, there is no question of ‘what the consumer is willing to pay rather than go without it’, He can usea substitute if the commodity is not available. Prestigious Goods: Prestigious goods like diamonds are of very high value. If they become cheap, rich people may not buy them because they have lost the prestige value. When the satisfaction is less at a lower price, there is no consumer's surplus, Surplus Exhausted: Itis pointed out that if the consuét knew that any such thing existed, he would go on buying more and more till the surplus utility he enjoyLec.V] General Principles Demand and Supply Ms disappeared. This is wrong. A consumer does not rin after a surplus yielded by one commodity. He has to weigh “the utilities of other commodities too. a —: 00000:— - ’ Yah a Hs) 3 u x 7 brgteds Q Wi a) iN Gel stay cheer Ginna shietidins yningsl4 sh wv siti ant Lame fi ain ij ‘ci rica) heyy it iharte ¢ 1 agai, Wie deieestg flit ibaa act thy vot recite Att Settee eoed! Oy eer gtitl ee lide 2 th eS ss BETIS 1 Meret a} hea tee ayers ab Hanmi gif — e=ibonmatet ibidw vt i taormalal ~ iii biew-ob ont oeseeenl fost choad apr x pulaLecture-VI Demand and Supply This lecture deals with— Demand: Meaning, Definition and Kinds, The Law of Demand. Demand Schedule and Demand Curve. Why Demand Curve Slopes Downwards, 5. Elasticity of Demand. 1. Demand: Mening, Definition and kinds i) Demand: Meaning: The term ‘demand’ literally Means “one of the forces in a free market that determines the Price of commodity of service.” It is an amount of a commodity, which the consumer is willing to purchase at a fixed time and Price, Demand means the willingness and ability to pay fora co) Fry. which a person (consumer) desires. To constitute demand, thee must exist, willingness/desire, ability i.e. means to purchase ang willingness to use/consume. In short, demand means the desire for acommodity or service backed by willingness as well as ability to pay. As stated above, the concept of demand is casually connected to the place, time and price since the demand fora particular commodity varies from place to place and from time to time depending upon its price and desire of the consumers. Thus, demand is an effective desire, i.e. a desire accompanied by the will to purchase and the power to purchase. Demand is always at a price and has a time dimension. 7 aad in jeak ii) Definitions: Prof. Benham defines “ demand for anything at a given place, is the amo will be brought as per unit of time at that price.” In the words of J.S. Mill — “We must | ‘demand’, the quantity demanded and ren fixed quantity but in general varies according SRS 6Lec.VI] Demand and Supply 77 According to Waugh (in his Principles of Economics) — “Demand for any commodity is the relationship between the price andthe quantity that will be purchased at the price”. Bober defined ‘demand’ as—“By demand, we mean the various. quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices, or at various incomes, or at various prices of related goods.” Thus, demand means various quantities of goods/ commodities or services, which the consumers are willing to buy in a market in a given time at a particular price. iii) Kinds of Demand: Demand can be classified under the following heads, namely — a) Price Demand. b) Income Demand, and ©) Cross Demand. Price Demand: Price demand, other things remaining unchanged, refers to the various quantities of a commodity or service that a consumer would purchase at a given time in a market at various prices. a) b) goods and services which w consumer at various | ol °) in price not of this good but of These goods are either sub goods, Ay vines ‘are 2. The Law of Demand ine i) Meaning and Definition: The law of relation between the price of a cor nodityf Te Lectures on Economics-I (Lec.VI i mand. We practically witness in vegetable/fruit ee fruit or market is Rs. 100/- per kilo and Rs. 150/ for two kilos. If the price is high, the quantity demanded will be less/low. ‘Therefore, in the words of Marshall — “The amount demanded increases with a fall in price and diminishes with a rise in price”, Similarly, Benham states that — “usually, a large quantity of a commodjty will be demanded at a lower price than at a higher price.” » According to Bilas — “The law of demand states that, other things being equal, the quantity demanded per unit at time will be greater, lower the price and smaller, higher the price”. Prof. Samuelson says - “Law of demand states that people will buy more at lower prites and buy less at higher prices, other things remaining the same.” In Ferguson’s words — “According to the law of demand, the quantity demanded varies inversely with price.” “At any given time, the demand for a commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at a lower price.” The qualifying phrase ‘at any given time’ is very important, for demand is different at different times and under different conditions, even if the price does not alter. ii) Factors that influence Demand: Quantity of a particular commodity or service depends upon the following factors. a) Price of the Commodity. b) Income of the Consumers, c) Alternate/Related Goods. 4) Consumers’ Expectations about Future Prices. €) Consumers’ Tastes and Preferences, and f) Credit Facilities.Lee-V Demand and Supply 79 a) Price of the Commodity: If the price of goods/ commodities or setvices is high, its demand will be less. If the prices diminish/come down, its demand will be increased. Thus demand is a relationship between the price and quantity of a commodity or a service. b) Income of the Consumer: The source of income determines the purchasing power of the consumers. If the income is high, demand for the goods desired by the consumers will be higher. For instance, high priced/ costly goods and services are seen/available in rich localities/areas. The availability of the nature of goods and services are available as per the income level of the people living in that area, ) Alternate/Related Goods: Demand depends upon the prices of related goodsi.e. substitutes and complimentary goods. For instance, if the price of Apple is high, the consumer may go for a substitute, orange or banana. Similarly, Mutton, Chicken, Eggs etc. complimentary goods are those, which can be used jointly. For instance, vehicle (car, two wheeler) and fuel (petrol, diesel). Practically, we find that, consumer prefers a diesel vehicle for the reason, the price of diesel is economical (i.e. less) when compared to the price of petrol. d) Consumers’ expectations about Future Prices: If the consumers” expect that the price of a particular commodity will fall down, they postpone their desire to purchase. ‘Consequently, the demand for that commodity comes down. For instance, consumers preferto purchase fans, air-coolers, air-conditioners during the time other than summer (i.e. in off season Fates). Simnilarly, the expectations of gold prices. Further, there are expectations of rise in certain goods and commodities after the submission/presentation of budget by the Union Finance Minister, the consumers rush to purchase such goods and the demand goes up.80 e) Consumers Lectures on Economics-L [Leeyy > Tastes and Preferences: Tastes ang preferences of consumers in respect of the goods decide has a great influence on the demand. Some consumers always prefer branded. products inspite of their higher price. For instance, celebrities (Heroines) atten functions, dressed in costly designer wear i.e. gowns, sarees etc. Some customers, consistently prefer same goods and services irrespective of the rise or fall in the prices of their preferred/desired products. Credit Facilities: Traditionally, it is said that, there are some persons, who would be ready to purchase an elephant, if available on (if offered on) credit without any further thinking about how to feed/maintain it. Such consumers’ weakness to purchase even an unwanted) undesired or unnecessary products is being exploited through various credit facilities in particular credit cards issued by Banks and other financial institutions. iii) Assumption: According to Prof. Stigler and Boulding, the main assumptions of the law are — a) b) °) 4) e) No change in tastes and preferences, fashions of the consumers. Consumer’s income, both money and real income must remain the same. The prices of the other commodities related to the commodity in demand should not change. Substitutes are not discovered, and No anticipatory changes in prices. > , iy) Exceptions: Following are the exceptions or limitations t of the law of demand. a) b) ) Giffen Goods or special type of interior goods. Prestigious goods or articles of distinction. Consumers’ expectations about future prices.4) e) a) b) °) qd) Demand and Supply 81 Emergencies, and Ignorance about quality. Giffen goods or special type of inferior goods: There are some commodities of consumption which are inferior like bread, broken rice, jowar, bajra, etc. If the price of such inferior goods rises, poor consumers will be forced to spend more on their purchase because these are essential for their survival. Thus, they will increase the demand for inferior commodity (bajra) at the cost of superior commodity (wheat or rice). This paradox is termed as Giffen’s Paradox because the economist Robert Giffen was the first person to point out this phenomenon. According to him, demand for inferior goods declines when their prices fall and increases when their prices increase. Such goods are called Giffens goods. All inferior goods are not Giffen goods. All those goods whose income effect is negative are inferior goods. Prestigious goods or articles of distinction: Veblen explained that the demand for articles of distinction like diamonds and jewelery is more when their price is high and the demand for articles of distinction falls with a fall in their prices. Consumers expectations about future prices: Tastes and preferences of consumers in respect of the goods they decide has a great influence on the demand, Some consumers always prefer branded products inspite of their higher price. For instance, celebrities: (Heroines) attend functions, dressed in costly designer wear i.e. gowns, sarees etc, Some customers, consistently, prefer same prices of their preferred/desired products. Emergencies: During the emergencies viz. outbreak of in near future, Bharat bandh, closure of shops for indefinite period, the consumers rush to purchase more quantity goods and services irrespective of the rise or fall in the i82 Lectures on Economics-I les VI irrespective of prices more or less. The law of dey not hold good during emergencies like war, fami in near future, there is a possibility of breaking ay consumers start buying more of the commodity iin having any regard to its prices. This is due to the fag, they know that during war, goods would not be wat if available, would be at a higher price. = €) Ignorance about quality: Sometimes, People buy m, of a commodity at higher prices due to their ignoranes Consumers assume that higher priced goods are of better quality than the lower priced goods, They consi des price as an index of quality. In such cases, more of th goods will be demanded at a higher price. . 2. Demand Schedule and Demand Curve The Law of Demand can be explained with teference to — A) Demand Schedule, and B) Demand Curve. A) Demand Schedule Demand Schedule is a Table or a chart, which shows the quantities of a commodity demanded at different prices in a given period of time. There is an inverse functional relationship between price and demand of a commodity. It means, when price of a commodity increases, its demand falls and when price decreases, the quantity demanded increases. The following table i.e. demands schedule shows how much quantity of a commodity is purchased: demanded at different prices in a given time. Price of a commodity Quantity of a Commodity (Tea) in Rupees (Tea) in Kilograms 1)! eee batLec.VI) Demand and Supply: 83 The above imaginary table is a Demand Schedule which shows that, the quantity demanded for a commodity is less if the price of a commodity is high. Similarly, the quantity demanded for the commodity increases, if the price decreases. B) Demand Curve Y' Price 5 1 BD 0 20 40 60 80 100 Quantity The above diagram i.e. curve shows the maximum quantity of acommodity (tea in kilograms) demanded at different prices of the same commodity. According to R.G Lipsey — “The curve, which shows the relation between the price of a commodity and the amount (quantity) of that commodity, the consumer wishes to purchase, is called Demand Curve’.” The demand curve slopes downwards from left to right, In the above diagram/demand curve, OX axis shows the quantity of the commodity (Tea in Kilograms). OY axis shows. the different prices of the commodity at different times. It slopes downwards from left to right. When the price points on the OY axis fall, the demand quantity points on the OX axis extend. Therefore, the price demand points84 Lectures on Economics-I léey, come one below the other. When they are joined we Bet the downward slo ping demand curve. 3. Why Demand Curve Slopes Downwards Demand curve slopes downwards from left to right for the reason, demand for a commodity expands, when the price come down. Following are the main reasons, why demand curve slopes downwards from left to right — 1G avryn The law of Diminishing Marginal Utility. Income Effect. Substitution Effect. Increase in Number of Buyers and Entry of New Buyers, Different uses of the same commodity, and Consumer Equilibrium. The law of Diminishing Marginal Utility: The Law of Diminishing Marginal Utility forms the basis for the law of demand. According to the Law of Diminishing Marginal Utility, if a consumer consumes constantly successive units of a commodity for the satisfaction of a human want, the utility which he derives from the successive units goes on declining. However, a consumer will obtain only that many units of a commodity where the marginal utility of the commodity is equal to its price. As the price of the commodity falls, the consumer purchases more of it because marginal utility is also less. Income Effect: When the price of a commodity falls down, the consumer will be able to purchase more for the same money or will purchase same quantity with less money and can save in proportion to the fall in price, Indirectly, fall in price of commodity results in the like of consumer's income. In other words, rise and fall i price of a commodity has great influence of the income of the consumers.Lec. VO) Demand and Supply 85 3. 5. Substitution Effect: When the price of a commodity falls, the consumers compare its price with its substitutes in the market and come forward to purchase it. With the increase in consumers, its demand gets expanded and hence, the demand curve slopes downwards. Increase in number of buyers and entry of new buyers: When the price of a commodity falls, many consumers who were not in a position to buy it earlier because of it being costly now start buying it. Thus, the number of consumers increases due to decrease in the price of the commodity. Further, if the price decreases, the existing consumers get prepared to purchase more quantity for the same old price. On the other hand, if the price of the commodity increases even the existing consumers stop buying that commodity and as a result the demand decreases. Different uses of the same commodity: There are many commodities, which are used/consumer for different purposes. For instance, if electricity charges are low, consumers make use of it for several purposes viz. lighting, ironing of cloths, cooking, air condition etc. In case, electricity charges go up, the consumer, confines the consumption of electricity by restricting its use for lighting and other most important purposes only- Consumer Equilibrium: Prof. Benham, a distinguished economist, explains in another way, why demand curve slopes downwards? According to him, with a given income and prices, a consumer purchases different commodities equalizing the ratio of their marginal utilities and prices. If the price of a commodity falls, this equilibrium is disturbed. Marginal utility price ratio changes. Therefore, to equalize the marginal utility price ratio, he has to buy more of the commodity whose price has fallen.Lectures on Economics-1 86 4. Elasticity OF Demand Weeyy i) Meaning and Definition: The law of demand there is an inverse relationship between the price and es commodity. Tf the price rises/increases, demand for Pa If the price falls down, the demand for it rises/expands, 3 the rate of rise or fall in respect of demand is not the * : OWever in respect of all goods, commodities and services in the ea vr varies/differs/changes from commodity to commodity. ae It of rise in demand is less, when price falls down in respect a . needs/necessaries like rice, wheat, milk etc. Similarly, the basic decline in demand also will be less even if the price of saci of goods (rice, wheat, milk etc.) goes up/rises. The law of de asic does not explain the amount of change or rate or proportio, rate of change in demand as a consequence of rise or fall ha price of commodity. the The concept of ‘Elasticity of Demand’ explains the definj relationship between the change in price and demand of eae commodity. ii) Definitions: Elasticity of demand defined by differen, economists has been detailed below: a) Alfred Marshall: The credit for introducing the concep of elasticity of demand goes to an eminent economist ‘Alfred Marshall. According to him, the degree of change in quantity demanded due to change in price is knownas ‘Elasticity of Demand’. In the words of Dr.Marshall — “The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price.” b) Stonier & Hague: In the words of Stonier and Hague - “Blasticity of demand is a technical term used by economists to describe the degree of responsiveness of demand for a good to a change in its price.” and ofLec.VI] Demand and Supply 87 c) Prof. Bouliding: According to Prof. Bouliding — “Tt measures the degree of responsiveness of the quantity to a change in the price.” d) Mrs. Joan Robinson: In the words of Mrs. Joan Robinson — “The elasticity of a demand, at any price or at any output, is the proportional change of amount purchased in response to a small change in price, divided by the proportional change of price.” e) A.L. Meyer: In the words of AL. Meyer—“The elasticity of demand is a measure of the relative change in amount purchased in response to a relative change in price on a given demand curve.” f) A.K. Cairncross: A.K. Cairncross states —“The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes.” 5. Types or Kinds of Elasticity of Demand The Elasticity of Demand is classified under three heads, namely — A) Price Elasticity of Demand. B) Income Elasticity of Demand, and C) Cross Elasticity of Demand. A) Price Elasticity of Demand: The expression “Elasticity of Demand” generally refers to “The Price Elasticity of Demand” unless otherwise mentioned. It means the ratio of proportionate change in demand as a consequence of proportionate change in price in respect of commodity, In other words, price elasticity of demand is the responsiveness of demand to change in price of a_ commodity. It can be explained with the help of the following formula: Proportionate change in demand bo proportionate change in price ee AQxP P APxQLectures on Economics-I (Lec.vy where, Pp = Original Price Q= Original Demand AP =Change in price AQ = Change in Demand Generally, price elasticity of demand is negative because of the inverse relationship between price and quantity demanded, B) Income Elasticity of Demand: Income elasticity of demand means, “a change in demand in response to a change in the consumer’s income.”” According to Watson = ‘income elasticity of demand means the ratio of the percentage change in the quantity demanded to the percentage changes in income.” It explains as to what will be the effect on demand, when the income of the consumer changes. In other words, income elasticity means ‘the ratio of proportionate change in demand as a consequence of change in consumer's income. It is measured under the following formula — Proportionate change in demand = |Proportionate change nee ra Proportionate change in income ee AQxY Pe AYxQ where, ep = elasticity of demand Y = Original Income Q = Original Demand AQ= Change in Demand AXY = Change in Income This elasticity is based on the assumption that the prices of goods do not change. Generally, it is positive. In case of inferior goods, income elasticity is negative.Lee. V0) Demand and Supply 89 C) Cross Elasticity of Demand: It means ‘change in demand for a commodity owing to (as a consequence of) change in price of another commodity. For instance, if the price of the substitute, commodity B increases, the price of the commodity A appears to be less/low, when compared to the price of commodity B and hence, the demand for commodity A increases. It is based on substitution effect. It may be defined as the ratio of proportionate change in demand of one commodity to the proportionate change in the price of another commodity. It can be measured by using the following formula — oe % change in demand for X Pp % change in price ory ee AQ, xP, a AP, x Q where, os elasticity of demand ae Original price of commodity Y Q = Original Quantity of commodity X AQ = Change in Demand of commodity X AP, = Change in price of commodity Y When two goods are substitutes for one another, cross elasticity will be positive. Complementary goods have negative cross elasticities. However, if two goods are not related to each other, cross elasticity will be zero. 6. Degrees of Price Elasticity of Demand b There are various commodities in a market with different prices. Further, the prices of commodities and respective substitutes vary/differ/change from market to market and from place to place coupled with the tastes of the consumers of the areas concemed. Therefore, the demand for various commodities does not change in the same proportion/ratio as a result (as a consequence) of changes in their prices. In other words, the degree of change in90 Lectures on Economics-I [Lee.yy price elasticity varies from product to producticommodity Therefore, the degrees of elasticity of demand are classified under the following heads, namely — A) Definite or Infinite or Perfectly Elastic Demand. B) Perfectly Inelastic Demand. C) Unitary Elastic Demand or Unit Elasticity. D) Relatively Elastic Demand, and E) Relatively Inelastic Demand. A) Definite or Infinite or Perfectly Elastic Demand: I refers to the situation, where a slight fall or rise in Price of commodity will bring about drastic change in demangy quantity demanded. The consumers are willing to purchase a definite quantity at a particular price. In the event of a slight rise in price, consumers will abstain from purchasing a commodity. In other words when the quantity demanded at a given price is definite or infinite, it is called ‘perfectly elastic demand.” In real life, incidence of such situation is very rare. ern ° x ‘Quantity Demanded In the above diagram, OX represents quantity demanded and OY represent price of the commodity, DD shows infinite elasticity of demand. rutsMemand and Suppk pec-V ply a ge in price of a . InCreases or B) Perfectly Inelastic Demand: If the chan, commodity, whether rises or falls (i, decreases), does not affect/influence the demand/ : demanded, it is called Perfectly Inelastic ect tty other words, the change in demand is zero. The follow table and diagram explains the point in detail, Demand (quantity demanded) 100 units 100 units 100 units The above table shows that, decline in price did not bring about any change in quantity demanded i.e. the demand remains absolutely unchanged. It is explained in the following dia; Xi ‘eam lowing Price (P) Oo x Quantity (Q) In the above diagram OX represents the quantity demanded, while OY represents price of the commodity. The vertical line DD'shows perfectly inelastic demand, In other words, the elasticity of demand is zero. Neither rise nor fall in price has no impact! affect/influence in the quantity demanded. Thus, in real life, the elasticity of demand of most goods and services lies between the two limits given above, viz. infinity and zero. Some have highly elastic demand while others have less elastic demand, xi raeLectures on Economics-I Lee.yy 92 ©) Unitary Elastic Demand or Unit Elasticity: It the change in demand is in accordance with es commensurate to) the change in price, itis called ‘Uni Elasticity of Demand or Unit Elasticity’. In other: words the proportionate change in the price results in the same proportionate change in the price of the commodity, Fo, instance, the hike/rise/increase in the price is 5%, the decline/fall/decrease of demand also will be 5q_ Similarly, the position is the same in respect of decline, fall/decrease in the price of the commodity. Unj elasticity is explained under the following table and the diagram. (Pie inRa[_Deand in Quins) 400 500 1000 The example given in the above table is explained in the following diagram. D Price (P) spied 0 ‘Quantity (Q) In the above diagram OX represents demand | commodity that rises with commensurate decline in the’ shown in the demand curve, DD that slopes downwards.Memand and suppl pee. VI pply 93 resents the price of the commodity. It is clear from the above that the change in the demand is in equal proportion to the change in the price. D) Relatively Elastic Demand: If the proportionate chan re in the demand is greater than the proportionate change in the price, it is called relatively elastic demand. [t is also known as ‘More Elastic Demand’ for the reason, the change in the demand is more when compared to the change in the price. Itis explained in the following table: Price mR [Demand in Qaimats 100 100 200 300 400 The above table shows that the demand for the commodity is greater than the change/fall/decrease in the price of the commodity. It is presented in the following diagram. Price 4d e Quantity dema: In the above diagram, OX represents quantity demanded and OY represents the price of the commodity in rupees. DD is the94 Lectures on Economics-I MLee.yy demand curve Y is the elasticity which is more when compared tg fall in the price. E) Relatively Inelastic Demand: If the Proportionate change in demand is very less when compared to. the change in price, itis called ‘Relatively Inelastic Demang’ In other words, rise or fall in the price will not have substantial impact/affect on the quality demanded for the commodity. In other words, great rise or fall in pricg results in small/fess decline or hike/rise in the demang respectively, Following table and diagram’explain on this point. Price Demand (in Rupees) (in Quintals) The contents in the above table make it clear that change/ decline in price does not have commensurate response in the quantity demanded. It is further explained in the following diagram. ¥ o P2| PT Price D 7 a at Fe UT <> ayec.V) Demand and Supply 1 In the above diagram OX represents dem: ; represents price and DD shows the demand curve, ccc that the demand is relatively inelastic i.e. its change is very low/ Jess against the change in the price. 7, Supply (The Theory of Supply: Supply and Supply Curves) 1. Supply: Meaning and Definition: The term ‘supply’ literally means “ volume or quantity of goods, which the producer offers for sale”. In other words, supply is the amount of a commodity that firms are able and willing to offer for sale at a articular price or different prices. Like demand, which implies willingness and ability to purchase a specific/requisite quantity at a particular price or different prices, supply also implies both ability and willingness to deliver a specific/requisite quantity at a particular price or different prices. Further, justas demand, supply also varies from person to person, time to time and from place to place. In simple words, supply is the quantity of a commodity, with a particular market price at a given time. According to Thomas — “The supply of goods is the quantity offered for sale ina given market at a given time at yarious prices.” In words of Meyers ~ “We may define supply as a schedule of the amount of a good that would be offered for sale at all possible prices at any one instant of time, or during any one period of time, for example, a day, week and so on, in which the conditions of supply remain the same.” 2. Supply and Stock: The term ‘Supply and Stock’ are interchangeably used giving room for confusion. But they differ from each other. The term ‘stock’ refers to total quantity of the goods/commodity available with the producer/firm that will be released into market for sale as per demand. Therefore, supply emerges from the stock. Whereas supply is the specific/particular quantity of the commodity released into market for sale at a particular price or prices. Stock is at the back of supply. It constitutes potential Supply means the quantity actually offered for sale at a certainLeen : i ECV .s the total quantity which can be off; sale if the conditions are favourable. red for The quantity that actually comes out is the supply, Th will change into supply and vice versa, according to the © Stock, price, as it rises or falls. In case of perishable articles, lik milk and vegetables, there is no difference between, A © fres supply. The entire stock is supply and has to be sold off, sere itis disposed of quickly, it will perish. 9 TOT Unless 3, The Law of Supply: Subject to certain exceptio, as in the case of price and demand, there is iter ea connection between price and supply of acommodity, If th increases, quantity offered for sale i.e. supply also iner \¢ Price vice versa. ‘The law of supply explains the relationshiy ce and the price and supply of a commodity. It states that — ae ween remaining the same, as the price of a commodity rises i things ig extended, and as the price falls its supply is eee Supply, _ The quantity offered for sale varies directly with 7 He a the same’ imply the determinants o e price of the cor ity, a fea ae oe pe and may include | i policy, goals 96 price, put stock mean: A) Supply Schedule, and B) Supply Curve. A) Supply Schedule: supply schedule. ytibomines 200,