Economics NCERT

Some of the factors responsible the competing uses of land for
for land degradation are (i) loss forestry, agriculture, pastures, human
of vegetation occuring due to settlements and industries exert an
deforestation (ii) unsustainable fuel enormous pressure on the country’s
wood and fodder extraction (iii) shifting finite land resources.
cultivation (iv) encroachment into forest
lands (v) forest fires and over grazing The per capita forest land in the
(vi) non-adoption of adequate soil country is only 0.08 hectare against
conservation measures (vii) improper the requirement of 0.47 hectare to meet
crop rotation (viii) indiscriminate use of basic needs, resulting in an excess
agro-chemicals such as fertilisers and felling of about 15 million cubic metre
pesticides (ix) improper planning and forests over the permissible limit.
management of irrigation systems
(x) extraction of ground water in Estimates of soil erosion show that
soil is being eroded at a rate of 5.3
billion tonnes a year for the entire

Work These Out

 In order to enable the students to appreciate the contribution of environment

to economic development, the following game can be introduced. One student
may name a product used by any enterprise and the other student may
trace out its roots to nature and earth.

trucks steel and rubber
steel
rubber iron mineral earth
books earth
cloth trees forests forest
petrol nature
machinery paper trees earth
earth
cotton plant

earth

iron mineral

 A truck driver had to pay Rs 1,000 as challan as his truck was emitting

black soot. Why do you think he was penalised? Was it justified? Discuss.

excess of the recharge capacity (xi) country as a result of which the
open access resource and (xii) poverty country loses 0.8 million tonnes of
of the agriculture-dependent people. nitrogen, 1.8 million tonnes of
phosphorus and 26.3 million tonnes
India supports approximately 17 of potassium every year. According to
per cent of the world’s human and 20 the Government of India, the quantity
per cent of livestock population on a of nutrients lost due to erosion each
mere 2.5 per cent of the world’s year ranges from 5.8 to 8.4 million
geographical area. The high density tonnes.
of population and livestock and

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Box 9.4 : Pollution Control Boards

In order to address two major environmental concerns in India, viz. water and
air pollution, the government set up the Central Pollution Control Board (CPCB)
in 1974. This was followed by states establishing their own state level boards
to address all the environmental concerns. They investigate, collect and
disseminate information relating to water, air and land pollution, lay down
standards for sewage/trade effluent and emissions. These boards provide
technical assistance to governments in promoting cleanliness of streams and
wells by prevention, control and abatement of water pollution, and improve
the quality of air and to prevent, control or abate air pollution in the country.

These boards also carry out and sponsor investigation and research
relating to problems of water and air pollution and for their prevention, control
or abatement. They also organise, through mass media, a comprehensive mass
awareness programme for the same. The PCBs prepare manuals, codes and
guidelines relating to treatment and disposal of sewage and trade effluents.

They assess the air quality through regulation of industries. In fact, state
boards, through their district level officials, periodically inspect every industry
under their jurisdiction to assess the adequacy of treatment measures provided
to treat the effluent and gaseous emissions. It also provides background air
quality data needed for industrial siting and town planning.

The pollution control boards collect, collate and disseminate technical and
statistical data relating to water pollution. They monitor the quality of water
in 125 rivers (including the tributaries), wells, lakes, creeks, ponds, tanks,
drains and canals.

 Visit a nearby factory/irrigation department and collect the details of

measures that they adopt to control water and air pollution.

 You might be seeing advertisements in newspapers, radio and television

or billboards in your locality on awareness programmes relating to water
and air pollution. Collect a few news-clippings, pamphlets and other

information and discuss them in the classroom.

In India, air pollution is widespread vehicles (two-wheeled vehicles and cars
in urban areas where vehicles are the only) constituted about 80 per cent of
major contributors and in a few other the total number of registered vehicles
areas which have a high concentration thus contributing significantly to total
of industries and thermal power plants. air pollution load.
Vehicular emissions are of particular
concern since these are ground level India is one of the ten most
sources and, thus, have the maximum industrialised nations of the world.
impact on the general population. The But this status has brought with
number of motor vehicles has increased it unwanted and unanticipated
from about 3 lakh in 1951 to 67 crores consequences such as unplanned
in 2003. In 2003, personal transport urbanisation, pollution and the risk of
accidents. The CPCB (Central Pollution

170 INDIAN ECONOMIC DEVELOPMENT

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Control Board) has identified seventeen allow all future generations to have a
categories of industries (large potential average quality of life that is
and medium scale) as significantly at least as high as that which is being
polluting. enjoyed by the current generation. The
concept of sustainable development
Work This Out was emphasised by the United Nations
Conference on Environment and
 You can see a column on the Development (UNCED), which defined
it as: ‘Development that meets the need
measure of air pollution in of the present generation without
any national daily. Cut out compromising the ability of the future
the news item a week before generation to meet their own needs’.
Diwali, on the day of Diwali
and two days after Diwali. Read the definition again. You will
Do you observe a significant notice that the term ‘need’ and the
difference in the value? phrase ‘future generations’ in the
Discuss in your class. definition are the catch phrases. The
use of the concept ‘needs’ in the
The above points highlight the definition is linked to distribution of
challenges to India’s environment. The resources. The seminal report — Our
various measures adopted by the Common Future — that gave the above
Ministry of Environment and the definition explained sustainable
central and state pollution control development as ‘meeting the basic
boards may not yield reward unless needs of all and extending to all the
we consciously adopt a path of opportunity to satisfy their aspirations
sustainable development. The concern for a better life’. Meeting the needs of
for future generations alone can make all requires redistributing resources
development last forever. Development and is hence a moral issue.
to enhance our current living styles, Edward Barbier defined sustainable
without concern for posterity, will development as one which is directly
deplete resources and degrade concerned with increasing the material
environment at a pace that is bound to standard of living of the poor at
result in both environmental and the grass root level — this can be
economic crisis. quantitatively measured in terms of
increased income, real income,
9.4. SUSTAINABLE DEVELOPMENT educational services, health care,
sanitation, water supply etc. In more
Environment and economy are specific terms, sustainable development
interdependent and need each other. aims at decreasing the absolute poverty
Hence, development that ignores its of the poor by providing lasting and
repercussions on the environment will secure livelihoods that minimise
destroy the environment that sustains resource depletion, environmental
life forms. What is needed is sustainable
development: development that will

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degradation, cultural disruption and line for the economy, human scale grows
social instability. Sustainable beyond the carrying capacity of the earth
development is, in this sense, a and deviates from sustainable
development that meets the basic needs development (ii) technological progress
of all, particularly the poor majority, for should be input efficient and not input
employment, food, energy, water, consuming (iii) renewable resources
housing, and ensures growth of should be extracted on a sustainable
agriculture, manufacturing, power and basis, that is, rate of extraction should
services to meet these needs. not exceed rate of regeneration (iv) for
non-renewable resources rate of depletion
The Brundtland Commission should not exceed the rate of creation
emphasises on protecting the future of renewable substitutes and
generation. This is in line with the (v) inefficiencies arising from pollution
argument of the environmentalists who should be corrected.
emphasise that we have a moral
obligation to hand over the planet earth 9.5 STRATEGIES FOR SUSTAINABLE
in good order to the future generation; DEVELOPMENT
that is, the present generation should
bequeath a better environment to the Use of Non-conventional Sources of
future generation. At least we should Energy: India, as you know, is hugely
leave to the next generation a stock of dependent on thermal and hydro
‘quality of life’ assets no less than what power plants to meet its power
we have inherited. needs. Both of these have adverse
environmental impacts. Thermal power
The present generation can plants emit large quantities of carbon
promote development that enhances dioxide which is a green house gas. It
the natural and built environment in also produces fly ash which, if not used
ways that are compatible with properly, can cause pollution of water
(i) conservation of natural assets bodies, land and other components of
(ii) preservation of the regenerative the environment. Hydroelectric projects
capacity of the world’s natural inundate forests and interfere with the
ecological system (iii) avoiding the natural flow of water in catchment
imposition of added costs or risks on areas and the river basins. Wind power
future generations. and solar rays are good examples of
conventional but cleaner and greener
According to Herman Daly, a leading energy sources but are not yet been
environmental economist, to achieve explored on a large scale due to lack of
sustainable development, the following technological devices.
needs to be done (i) limiting the human
population to a level within the carrying LPG, Gobar Gas in Rural Areas:
capacity of the environment. The carrying Households in rural areas generally use
capacity of the environment is like a wood, dung cake or other biomass as
‘plimsoll line’ of the ship which is its load
limit mark. In the absence of the plimsoll

172 INDIAN ECONOMIC DEVELOPMENT

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fuel. This practice has several adverse Work This Out
implications like deforestation,
reduction in green cover, wastage of  In Delhi buses and other
cattle dung and air pollution. To rectify
the situation, subsidised LPG is being public transport vehicles
provided. In addition, gobar gas plants use CNG as fuel instead of
are being provided through easy loans petrol or diesel; some
and subsidy. As far as liquefied vehicles use convertible
petroleum gas (LPG) is concerned, it is engines; solar energy is
a clean fuel — it reduces household being used to light up the
pollution to a large extent. Also, energy streets. What do you think
wastage is minimised. For the gobar about these changes?
gas plant to function, cattle dung is fed Organise a debate in class
to the plant and gas is produced which on the need for sustainable
is used as fuel while the slurry which development in India.
is left over is a very good organic
fertiliser and soil conditioner. Wind Power: In areas where speed of
wind is usually high, wind mills can
CNG in Urban Areas: In Delhi, the use of provide electricity without any adverse
Compressed Natural Gas (CNG) as fuel in impact on the environment. Wind
public transport system has significantly turbines move with the wind and
lowered air pollution and the air has electricity is generated. No doubt, the
become cleaner in the last few years. initial cost is high. But the benefits are
such that the high cost gets easily
absorbed.

Fig.9.4 Gobar Gas Plant uses cattle dung to produce energy 173
ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

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Solar Power through Photovoltaic They have been more a component of
Cells: India is naturally endowed with the environment and not its controller.
a large quantity of solar energy in the If we look back at our agriculture
form of sunlight. We use it in different system, healthcare system, housing,
ways. For example, we dry our clothes, transport etc., we find that all practices
grains, other agricultural products as have been environment friendly. Only
well as various items made for daily use. recently have we drifted away from the
We also use sunlight to warm ourselves traditional systems and caused large
in winter. Plants use solar energy to scale damage to the environment and
perform photosynthesis. Now, with the also our rural heritage. Now, it is time
help of photovoltaic cells, solar energy to go back. One apt example is in
can be converted into electricity. These healthcare. India is very much
cells use special kind of materials to privileged to have about 15,000 species
capture solar energy and then convert of plants which have medicinal
the energy into electricity. This properties. About 8,000 of these are in
technology is extremely useful for remote regular use in various systems of
areas and for places where supply of treatment including the folk tradition.
power through grid or power lines is With the sudden onslaught of the
either not possible or proves very costly. western system of treatment, we were
This technique is also totally free from ignoring our traditional systems such
pollution. as Ayurveda, Unani, Tibetan and folk
systems. These healthcare systems are
Mini-hydel Plants: In mountainous in great demand again for treating
regions, streams can be found almost chronic health problems. Now a days
everywhere. A large percentage of such every cosmetic produce — hair oil,
streams are perennial. Mini-hydel toothpaste, body lotion, face cream and
plants use the energy of such streams what not — is herbal in composition.
to move small turbines. The turbines Not only are these products environment
generate electricity which can be used friendly, they are relatively free from side
locally. Such power plants are more or effects and do not involve large-scale
less environment-friendly as they do not industrial and chemical processing.
change the land use pattern in areas
where they are located; they generate Biocomposting: In our quest to
enough power to meet local demands. increase agricultural production
This means that they can also do away during the last five decades or so, we
with the need for large scale almost totally neglected the use of
transmission towers and cables and compost and completely switched over
avoid transmission loss. to chemical fertilisers. The result is that
large tracts of productive land have
Traditional Knowledge and been adversely affected, water bodies
Practices: Traditionally, Indian people including ground water system have
have been close to their environment. suffered due to chemical contamination

174 INDIAN ECONOMIC DEVELOPMENT

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and demand for irrigation has been help in controlling pests. For example,
going up year after year. snakes are one of the prime group of
animals which prey upon rats, mice and
Farmers, in large numbers all over various other pests. Similarly, large
the country, have again started using varieties of birds, for example, owls and
compost made from organic wastes of peacocks, prey upon vermin and pests.
different types. In certain parts of the If these are allowed to dwell around the
country, cattle are maintained only agricultural areas, they can clear large
because they produce dung which is varieties of pests including insects.
an important fertiliser and soil Lizards are also important in this
conditioner. regard. We need to know their value and
save them.
Earthworms can convert organic
matter into compost faster than the Sustainable development has
normal composting process. This become a catch phrase today. It is
process is now being widely used. ‘indeed’ a paradigm shift in
Indirectly, the civic authorities are development thinking. Though it has
benefited too as they have to dispose been interpreted in a number of ways,
reduced quantity of waste. adherence to this path ensures lasting
development and non-declining welfare
Biopest Control: With the advent of for all.
green revolution, the entire country
entered into a frenzy to use more and 9.6 CONCLUSION
more chemical pesticides for higher
yield. Soon, the adverse impacts began Economic development, which aimed at
to show; food products were increasing the production of goods and
contaminated, soil, water bodies and services to meet the needs of a rising
even ground water were polluted with population, puts greater pressure on
pesticides. Even milk, meat and fishes the environment. In the initial stages
were found to be contaminated. of development, the demand for
environmental resources was less than
To meet this challenge, efforts are that of supply. Now the world is
on to bring in better methods of pest faced with increased demand for
control. One such step is the use of environmental resources but their
pesticides based on plant products. supply is limited due to overuse and
Neem trees are proving to be quite misuse. Sustainable development aims
useful. Several types of pest controlling at promoting the kind of development
chemicals have been isolated from neem that minimises environmental problems
and these are being used. Mixed and meets the needs of the present
cropping and growing different crops generation without compromising the
in consecutive years on the same land ability of the future generation to meet
have also helped farmers. their own needs.

In addition, awareness is spreading
about various animals and birds which

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Recap

 Environment performs four functions: supplies resources, assimilates
wastes, sustains life by providing genetic and bio diversity and provides
aesthetic services.

 Population explosion, affluent consumption and production have placed
a huge stress on the environment.

 Developmental activities in India have put immense pressure on its finite
natural resources, besides creating impact on human health and
well-being.

 The threat to India’s environment is of two dimensions — threat of poverty
induced environmental degradation and the threat of pollution from
affluence and a rapidly growing industrial sector.

 Though the government, through various measures, attempts to safeguard
the environment, it is also necessary to adopt a path of sustainable
development.

 Sustainable development is development that meets the need of the present
generation without compromising the ability of the future generation to
meet their own needs.

 Promotion of natural resources, conservation, preserving regenerative
capacity of ecological system and avoiding the imposition of environmental
risks on future generations would lead to sustainable development.

EXERCISES

1. What is meant by environment?

2. What happens when the rate of resource extraction exceeds that of
their regeneration?

3. Classify the following into renewable and non-renewable resources
(i) trees (ii) fish (iii) petroleum (iv) coal (v) iron-ore (vi) water.

4. Two major environmental issues facing the world today are ____________
and _____________.

5. How do the following factors contribute to the environmental crisis
in India? What problem do they pose for the government?
(i) Rising population
(ii) Air pollution

176 INDIAN ECONOMIC DEVELOPMENT

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(iii) Water contamination
(iv) Affluent consumption standards
(v) Illiteracy
(vi) Industrialisation
(vii) Urbanisation
(viii) Reduction of forest coverage
(ix) Poaching
(x) Global warming.

6. What are the functions of the environment?

7. Identify six factors contributing to land degradation in India.

8. Explain how the opportunity costs of negative environmental impact
are high.

9. Outline the steps involved in attaining sustainable development in India.

10. India has abundant natural resources — substantiate the statement.

11. Is environmental crisis a recent phenomenon? If so, why?

12. Give two instances of

(a) Overuse of environmental resources
(b) Misuse of environmental resources.

13. State any four pressing environmental concerns of India. Correction
for environmental damages involves opportunity costs — explain.

14. Explain the supply-demand reversal of environmental resources.

15. Account for the current environmental crisis.

16. Highlight any two serious adverse environmental consequences of
development in India. India’s environmental problems pose a dichotomy
— they are poverty induced and, at the same time, due to affluence in
living standards — is this true?

17. What is sustainable development?

18. Keeping in view your locality, describe any four strategies of sustainable
development.

19. Explain the relevance of intergenerational equity in the definition of
sustainable development.

SUGGESTED ADDITIONAL ACTIVITIES

1. Suppose 70 lakh cars are added every year to the roads of metropolitans.
Which type of resources do you think are undergoing depletion? Discuss.

2. Make a list of items that can be recycled.

ENVIRONMENT AND SUSTAINABLE DEVELOPMENT 177

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3. Prepare a chart on the causes and remedies of soil erosion in India.

4. How does population explosion contribute to the environmental crisis?
Debate in the classroom.

5. The nation has to pay heavily for correcting environmental damages —
discuss.

6. A paper factory is to be set up in your village. Arrange a role play
consisting of an activist, an industrialist and a group of villagers.

REFERENCES

BOOKS
AGARWAL, ANIL and SUNITA NARAIN. 1996. Global Warming in an Unequal World.

Centre for Science and Environment, Reprint Edition, New Delhi.

BHARUCHA, E. 2005. Textbook of Environmental Studies for Undergraduate
Courses, Universities Press (India) Pvt Ltd.

CENTRE FOR SCIENCE AND ENVIRONMENT. 1996. State of India’s Environment
1: The First Citizens’ Report 1982. Reprint Edition, New Delhi.

CENTRE FOR SCIENCE AND ENVIRONMENT. 1996. State of India’s Environment
2: The Second Citizens’ Report 1985, Reprint Edition, New Delhi.

KARPAGAM, M. 2001.Environmental Economics: A Textbook. Sterling Publishers,
New Delhi.

RAJAGOPALAN, R. 2005. Environmental Studies: From Crisis to Cure. Oxford
University Press, New Delhi.

SCHUMACHER, E.F. Small is Beautiful. Abacus Publishers, New York.

Reports
State of India’s Environment (for various years), Centre for Science and
Environment, New Delhi.

Journals
Scientific American, India, Special Issue, September 2005
Down to Earth, Centre for Science and Environment, New Delhi.

Websites

http://envfor.nic.in
http://cpcb.nic.in
http://www.cseindia.org

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UUNNIITT

IIVI

DEVELOPMENT EXPERIENCES OF INDIA: A COMPARISON
WITH NEIGHBOURS

2018-19

In today’s globalised world, where geographical
boundaries are slowly becoming meaningless, it
is important for neighbouring countries in the
developing world to understand the development
strategies being pursued by their neighbours. This
is more so because they share the relatively limited
economic space in world markets. In this unit, we
will compare India’s developmental experiences
with two of its important and strategic neighbours
— Pakistan and China.

2018-19

10

COMPARATIVE
DEVELOPMENT EXPERIENCES OF INDIA

AND ITS NEIGHBOURS

After studying this chapter, the learners will
• figure out comparative trends in various economic and human

development indicators of India and its neighbours, China and Pakistan
• assess the strategies that these countries have adopted to reach their

present state of development.

2018-19

Geography has made us neighbours. History has made us friends. Economics
has made us partners, and necessity has made us allies. Those whom God has
so joined together, let no man put asunder.

John F. Kennedy

10.1 INTRODUCTION understanding of the other economies
in our neighbourhood is also required
In the preceding units we studied the as all major common economic
developmental experience of India in activities in the region impinge on
detail. We also studied the kind of overall human development in a
policies India adopted, which had shared environment.
varying impacts in different sectors.
Over the last two decades or so, the In this chapter we will compare the
economic transformation that is taking developmental strategies pursued by
place in different countries across the India and the largest two of its
world, partly because of the process neighbouring economies—Pakistan
of globalisation, has both short as and China. It has to be remembered
well as long-term implications for that despite being endowed with vast
each country, including India. Nations natural resources, there is little
have been primarily trying to adopt similarity between the political power
various means which will strengthen setup of India - the largest democracy
their own domestic economies. To this of the world which is wedded to a
effect, they are forming regional and secular and deeply liberal Constitution
global economic groupings such as for more than half a century, and the
the SAARC, European Union, militarist political power structure of
ASEAN, G-8, G-20, BRICS etc. In Pakistan or the command economy
addition, there is also an increasing of China that has only recently
eagerness on the parts of various started moving towards a democratic
nations to try and understand the system and more liberal economic
developmental processes pursued by restructuring respectively.
their neighbouring nations as it
allows them to better comprehend 10.2 DEVELOPMENTAL PATH—A
their own strengths and weaknesses SNAPSHOT VIEW
vis-à-vis their neighbours. In the
unfolding process of globalisation, Do you know that India, Pakistan and
this is particularly considered China have many similarities in their
essential by developing countries as developmental strategies? All the three
they face competition not only from nations have started towards their
developed nations but also amongst developmental path at the same time.
themselves in the relatively limited While India and Pakistan became
economic space enjoyed by the independent nations in 1947, People’s
developing world. Besides, an Republic of China was established in
1949. In a speech at that time,

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Jawaharlal Nehru had said, “These The Great Leap Forward (GLF)
new and revolutionary changes in campaign initiated in 1958 aimed at
China and India, even though they industrialising the country on a
differ in content, symbolise the new massive scale. People were encouraged
spirit of Asia and new vitality which is to set up industries in their backyards.
finding expression in the countries in In rural areas, communes were
Asia.” started. Under the Commune system,
people collectively cultivated lands. In
All three countries had started 1958, there were 26,000 communes
planning their development strategies covering almost all the farm
in similar ways. While India population.
announced its first Five Year Plan for
1951–56, Pakistan announced its first GLF campaign met with many
five year plan, now called the Medium problems. A severe drought caused
Term Development Plan, in 1956. havoc in China killing about 30 million
China announced its First Five Year people. When Russia had conflicts with
Plan in 1953. Since 2013, Pakistan is China, it withdrew its professionals
working on the basis of 11th Five Year who had earlier been sent to China to
Development Plan (2013–18), whereas, help in the industrialisation process.
China is now working on 13th Five Year In 1965, Mao introduced the Great
Plan (2016–20). Until March 2017,
India has been following Five Year Proletarian Cultural Revolution
Plan- based development model. India (1966–76) under which students and
and Pakistan adopted similar professionals were sent to work and
strategies, such as creating a large learn from the countryside.
public sector and raising public
expenditure on social development. The present day fast industrial
Till the 1980s, all the three countries growth in China can be traced back to
had similar growth rates and per capita the reforms introduced in 1978. China
incomes. Where do they stand today introduced reforms in phases. In the
in comparison to one another? Before initial phase, reforms were initiated in
we answer this question, let us trace agriculture, foreign trade and
the historical path of developmental investment sectors. In agriculture, for
policies in China and Pakistan. After instance, commune lands were divided
studying the last three units, we into small plots, which were allocated
already know what policies India has (for use not ownership) to individual
been adopting since its Independence. households. They were allowed to keep
all income from the land after paying
China: After the establishment of stipulated taxes. In the later phase,
People’s Republic of China under one- reforms were initiated in the industrial
party rule, all critical sectors of the sector. Private sector firms, in general,
economy, enterprises and lands owned and township and village enterprises,
and operated by individuals were i.e., those enterprises which were
brought under government control. owned and operated by local collectives,
in particular, were allowed to produce

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Fig. 10.1 Wagah Border is not only a tourist place but also used for
trade between India and Pakistan

goods. At this stage, enterprises owned co-existence of public and private
by government (known as State Owned sectors. In the late 1950s and 1960s,
Enterprises—SOEs), which we, in Pakistan introduced a variety of
India, call public sector enterprises, regulated policy framework (for import
were made to face competition. The substitution-based industrialisation).
reform process also involved dual The policy combined tariff protection for
pricing. This means fixing the prices in manufacturing of consumer goods
two ways; farmers and industrial units together with direct import controls on
were required to buy and sell fixed competing imports. The introduction of
quantities of inputs and outputs on the Green Revolution led to mechanisation
basis of prices fixed by the government and increase in public investment in
and the rest were purchased and sold infrastructure in select areas, which
at market prices. Over the years, as finally led to a rise in the production of
production increased, the proportion of foodgrains. This changed the agrarian
goods or inputs transacted in the structure dramatically. In the 1970s,
market also increased. In order to nationalisation of capital goods
attract foreign investors, special industries took place. Pakistan then
economic zones were set up. shifted its policy orientation in the late
1970s and 1980s when the major
Pakistan: While looking at various thrust areas were denationalisation
economic policies that Pakistan and encouragement of private sector.
adopted, you will notice many During this period, Pakistan also
similarities with India. Pakistan also received financial support from western
follows the mixed economy model with nations and remittances from

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continuously increasing outflow of the population growth as being the
emigrants to the Middle-east. This highest in Pakistan, followed by India
helped the country in stimulating and China. Scholars point out the one-
economic growth. The then government child norm introduced in China in the
also offered incentives to the private late 1970s as the major reason for low
sector. All this created a conducive population growth. They also state that
climate for new investments. In 1988, this measure led to a decline in the sex
reforms were initiated in the country. ratio, the proportion of females per
1000 males. However, from the table,
Having studied a brief outline of you will notice that the sex ratio is low
the developmental strategies of China and biased against females in all three
and Pakistan, let us now compare countries. Scholars cite son preference
some of the developmental indicators prevailing in all these countries as the
of India, China and Pakistan. reason. In recent times, all three
countries are adopting various
10.3 DEMOGRAPHIC INDICATORS measures to improve the situation. One-
child norm and the resultant arrest in
If we look at the global population, out the growth of population also have other
of every six persons living in this implications. For instance, after a few
world, one is an Indian and another a decades, in China, there will be more
Chinese. We shall compare some elderly people in proportion to young
demographic indicators of India, people. This led China to allow couples
China and Pakistan. The population to have two children.
of Pakistan is very small and accounts
for roughly about one-tenth of China The fertility rate is also low in
or India. China and very high in Pakistan.
Urbanisation is high in China with
Though China is the largest nation India having 33 per cent of its people
and geographically occupies the largest living in urban areas.
area among the three nations, its
density is the lowest. Table 10.1 shows

TABLE 10.1
Select Demographic Indicators

Country Estimated Annual Density Sex Fertility Urbanisation
India Population Growth of (per sq. km) Ratio Rate (2015)
(in million) Population (2015) (2015)
441 33
(2015) (2015) 929 2.3 56
1.6 39
1311 1.2 3.7

China 1371 0.5 146 941

Pakistan 188 2.1 245 947

Source: World Development Indicators 2017, www.worldbank.org

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 185

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10.4 GROSS DOMESTIC (Not to scale)

PRODUCT AND

SECTORS

One of the much-talked

issues around the world

about China is its growth

of Gross Domestic

Product. China has the

second largest GDP (PPP)

of $19.8 trillion, whereas,

India’s GDP (PPP) is

$8.07 trillion and

Pakistan’s GDP is $ 0.94

trillion, roughly about

12 per cent of India’s

GDP. India’s GDP is

about 40 per cent of

China’s GDP. Fig. 10.2 Land use and agriculture in India, China and Pakistan

When many developed countries TABLE 10.2
were finding it difficult to maintain a

growth rate of even 5 per cent, China Annual Growth of Gross Domestic
was able to maintain near double-digit Product (%), 1980–2015

growth for one decade as can be seen Country 1980–90 2011–2015

from Table 10.2. Also, notice that in the India 5.7 6.7

1980s, Pakistan was ahead of India; China 10.3 7.9

China was having double-digit growth Pakistan 6.3 4.0

and India was at the bottom. In 2011–15, Source: Key Indicators for Asia and Pacific 2016,
there has been a decline in India and Asian Development Bank, Philippines; World
Development Indicators 2016

Work These Out

Does India follow any population stabilisation measures? If so, collect the
details and discuss in the classroom. You may refer to the latest Economic
Survey, annual reports or website of the Ministry of Health and Family
Welfare (http://mohfw.nic.in).

Scholars find son preference as a common phenomenon in many developing
countries, including India, China and Pakistan. Do you find this phenomenon
in your family or neighbourhood? Why do people practise discrimination
between male and female children? What do you think about it? Discuss it
in the classroom.

186 INDIAN ECONOMIC DEVELOPMENT

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(Not to scale) due to topographic and
climatic conditions,

the area suitable for

cultivation is relatively

small — only about 10

per cent of its total land

area. The total cultivable

area in China accounts

for 40 per cent of the

cultivable area in India.

Until the 1980s, more

than 80 per cent of the

people in China were

dependent on farming

as their sole source

of livelihood. Since

then, the government

encouraged people

to leave their fields

and pursue other

activities such as

handicrafts, commerce

and transport.In 2014–15,

with 28 per cent of

Fig. 10.3 Industry in India, China and Pakistan its workforce engaged
in agriculture, its

China’s growth rates, whereas, Pakistan contribution to the GDP in China is

met with drastic decline at 4 per cent. 9 per cent (see Table 10.3).

Some scholars hold the reform In both India and Pakistan, the

processes introduced in 1988 in contribution of agriculture to GDP were

Pakistan and political instability over 17 and 25 per cent, respectively, but

a long period as reasons behind this the proportion of workforce that works

trend. We will study in a later section in this sector is more in India. In

which sector contributed to this trend Pakistan, about 43 per cent of people

in these countries. work in agriculture, whereas, in India,

First, look at how people engaged in it is 50 per cent. The sectoral share of

different sectors contribute to the Gross output and employment also shows

Domestic Product. It was pointed out in that in all three economies, the

the previous section that China and industry and service sectors have less

Pakistan have more proportion of proportion of workforce but contribute

urban population than India. In China, more in terms of output. In China,

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 187

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TABLE 10.3
Sectoral Share of Employment and GDP (%) in 2014-2015

Sector Contribution to GDP Distribution of Workforce

Agriculture India China Pakistan India China Pakistan
Industry 17 9 25 50 28 43
Services 30 21
Total 53 43 21 29 29 23
100
48 54 100 43 34

100 100 100 100

Source: World Development Indicators 2016 ; Key Indicators of Asia and Pacific 2016

manufacturing and service sectors Pakistan employed 17, 12 and 27 per
contribute the highest to GDP at 43 cent of its workforce in the service
and 48 per cent, respectively whereas sector respectively. In 2014, it has
in India and Pakistan, it is the service reached the level of 29, 43 and 34 per
sector which contributes the highest cent, respectively.
by more than 50 per cent of GDP.
In the last three decades, the
In the normal course of growth of agriculture sector, which
development, countries first shift their employs the largest proportion of
employment and output from workforce in all the three countries, has
agriculture to manufacturing and then declined. In the industrial sector, China
to services. This is what is happening has maintained a near double-digit
in China as can be seen from Table growth rate whereas for India and
10.4. The proportion of workforce
engaged in manufacturing in India Work These Out
and Pakistan were low at 21 and 23
per cent respectively. The contribution Do you think it is necessary
of industries to GDP is at 30 per cent for India and Pakistan to
in India and 21 per cent in Pakistan. concentrate on t h e manu-
In these countries, the shift is taking facturing sector as China
place directly to the service sector. does? Why?

Thus, in both India and Pakistan, Scholars argue that the
the service sector is emerging as a service sector should not be
major player of development. It considered as an engine of
contributes more to GDP and, at the growth whereas India and
same time, emerges as a prospective Pakistan have raised their
employer. If we look at the proportion share of output mainly in
of workforce in the1980s, Pakistan this sector only. What do
was faster in shifting its workforce to you think?
service sector than India and China.
In the 1980s, India, China and

188 INDIAN ECONOMIC DEVELOPMENT

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TABLE 10.4
Trends in Output Growth in Different Sectors, 1980–2015

Country Agriculture 1980–90 Service 2011–15 Service
3.1 Industry 6.9 Agriculture Industry 8.4
India 5.9 7.4 8.4
China 4 10.8 13.5 2.3 5 4.4
Pakistan 7.7 6.8 4.1 8.1
2.7 3.4

Pakistan growth rate has declined. In 10.5 INDICATORS OF HUMAN DEVELOPMENT
case of service sector, China was able
to raise its rate of growth during You might have studied about the
1980–2015, while India and Pakistan importance of human development
stagnated with its service sector indicators in the lower classes and the
growth. Thus, China’s growth is mainly position of many developed and
contributed by the manufacturing and developing countries. Let us look how
service sectors and India’s growth by India, China and Pakistan have
the service sector. During this period, performed in some of the select
Pakistan has shown deceleration indicators of human development.
in all three sectors. Look at Table 10.5.

TABLE 10.5
Some Selected Indicators of Human Development, 2016

Item India China Pakistan

Human Development Index (Value) 0.624 0.738 0.550

Rank (based on HDI) 131 91 148

Life Expectancy at Birth (years) 68.3 76 66.4

Mean years of Schooling (% aged 15 and above) 6.3 7.6 5.1

GDP per capita (PPP US$) 6092 14,400 4866

People Below Poverty Line (at $3.10 a day ppp) (%) (2011) 37 32 44

Infant Mortality Rate (per 1000 live births) 38 9 66

Maternal Mortality Rate (per 1 lakh births) 174 27 178

Population using Improved Sanitation (%) 40 77 64

Population with Sustainable Access to 94 96 91
Improved Water Source (%) 39 9 45
Percentage of Undernourished Children

Source: Human Development Report 2016 and World Development Indicators (www.worldbank.org)

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 189

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Table 10.5 shows that China is decision-making’ but it has not been
given any extra weight. Some obvious
moving ahead of India and Pakistan. ‘liberty indicators’ like measures of ‘the
This is true for many indicators — extent of Constitutional protection
income indicator such as GDP per given to rights of citizens’ or ‘the extent
capita, or proportion of population of constitutional protection of
below poverty line or health the Independence of the Judiciary and
indicators such as mortality rates, the Rule of Law’ have not even
access to sanitation, literacy, life been introduced so far. Without
expectancy or malnourishment. including these (and perhaps some
Pakistan is ahead of India in more) and giving them overriding
reducing proportion of people below importance in the list, the construction
the poverty line and also its of a human development index may
performance in sanitation. But be said to be incomplete and its
neither of these two countries have usefulness limited.
been able to save women from maternal
mortality. In China, for one lakh births, 10.6 DEVELOPMENT STRATEGIES — AN
only 27 women die whereas in India APPRAISAL
and Pakistan, about 178 and 174
women die respectively. Surprisingly all It is common to find developmental
the three countries report providing strategies of a country as a model to
improved drinking water sources for others for lessons and guidance for
most of its population. You will notice their own development. It is particularly
that for the proportion of people below evident after the introduction of the
the international poverty rate of $ 3.10 reform process in different parts of the
a day, India has the largest share of world. In order to learn from economic
poor among the three countries. Find performance of our neighbouring
out for yourself how these differences countries, it is necessary to have an
occur. understanding of the roots of their
successes and failures. It is also
In dealing with or making necessary to distinguish between, and
judgements on such questions, contrast, the different phases of their
however, we should also note a problem strategies. Though countries go
while using the human development through their development phases
indicators given above with conviction. differently, let us take the initiation of
This occurs because these are all reforms as a point of reference. We
extremely important indicators; but know that reforms were initiated in
these are not sufficient. Along with China in 1978, Pakistan in 1988 and
these, we also need what may be called India in 1991. Let us briefly assess their
‘liberty indicators’. One such indicator achievements and failures in pre- and
has actually been added as a measure post-reform periods.
of ‘the extent of democratic
participation in social and political

190 INDIAN ECONOMIC DEVELOPMENT

2018-19

Why did China introduce in agriculture, as pointed out earlier
structural reforms in 1978? China did by handing over plots of land to
not have any compulsion to introduce individuals for cultivation, it brought
reforms as dictated by the World Bank prosperity to a vast number of poor
and International Monetary Fund to people. It created conditions for the
India and Pakistan. The new subsequent phenomenal growth in
leadership at that time in China was rural industries and built up a strong
not happy with the slow pace of growth support base for more reforms.
and lack of modernisation in the Scholars quote many such examples
Chinese economy under the Maoist on how reform measures led to rapid
rule. They felt that Maoist vision of growth in China.
economic development based on
decentralisation, self sufficiency and Scholars argue that in Pakistan
shunning of foreign technology, goods the reform process led to worsening of
and capital had failed. Despite all the economic indicators. We have
extensive land reforms, collectivisation, seen in an earlier section that
the Great Leap Forward and other compared to 1980s, the growth rate
initiatives, the per capita grain output of GDP and its sectoral constituents
in 1978 was the same as it was in the have fallen in the 1990s.
mid-1950s.
Though the data on international
It was found that establishment of poverty line for Pakistan is quite
infrastructure in the areas of healthy, scholars using the official
education and health, land reforms, data of Pakistan indicate rising
long existence of decentralised poverty there. The proportion of poor
planning and existence of small in 1960s was more than 40 per cent
enterprises had helped positively in which declined to 25 per cent in 1980s
improving the social and income and started rising again in 1990s. The
indicators in the post reform period. reasons for the slow-down of growth
Before the introduction of reforms, and re-emergence of poverty in
there had already been massive Pakistan’s economy, as scholars put
extension of basic health services in it, are agricultural growth and food
rural areas. Through the commune supply situation were based not on
system, there was more equitable an institutionalised process of
distribution of food grains. Experts technical change but on good harvest.
also point out that each reform When there was a good harvest, the
measure was first implemented at a economy was in good condition, when
smaller level and then extended on a it was not, the economic indicators
massive scale. The experimentation showed stagnation or negative trends.
under decentralised government You will recall that India had to borrow
enabled to assess the economic, social from the IMF and World Bank to
and political costs of success or failure. set right its balance of payments
For instance, when reforms were made crisis; foreign exchange is an essential
component for any country and it is

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 191

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Work These Out

While India has perfromed relatively well vis-à-vis other developing
countries (including its Asian neighbours) in terms of economic growth,
India’s human development indicators are among the worst in the world.
Where India went wrong ? Why did we not take care of our human
resources? Discuss in the classroom.

There is a general perception going around in India that there is sudden
increase in dumping of Chinese goods into India which will have
implications for manufacturing sector in India and also that we do not
engage ourselves in trading with our neighbouring nations. Look at the
following table, which shows exports from India to, and imports from,
Pakistan and China. Interpret the results and discuss in the classroom.
From newspapers and websites and listening to news, collect the details
of goods and services transacted in trading with our neighbours. In order
to get detailed information relating to international trade, you can log on
to the website: http://dgft.gov.in.

Country Exports from India ( Rs in crore) Imports to India (Rs in crore)

Pakistan 2004-2005 2015-2016 Annual 2004-2005 2015-2016 Annual
China Rate of Rate of
Growth (%) Growth (%)

2,341 14,286 46 427 2884 52

25,232 58,932 12 31,892 4,04,043 107

192 INDIAN ECONOMIC DEVELOPMENT

2018-19

important to know how it can be earned. India, with democratic institutions,
If a country is able to build up its foreign performed moderately, but a majority of
exchange earnings by sustainable export its people still depend on agriculture.
of manufactured goods, it need not Infrastructure is lacking in many parts
worry. In Pakistan most foreign exchange of the country. It is yet to raise the level of
earnings came from remittances from living of more than one-fourth of its
Pakistani workers in the Middle-east and population that lives below the poverty
the exports of highly volatile agricultural line. Scholars are of the opinion that
products; there was also growing political instability, over-dependence on
dependence on foreign loans on the one remittances and foreign aid along with
hand and increasing difficulty in paying volatile performance of agriculture sector
back the loans on the other. are the reasons for the slowdown of the
Pakistan economy. Yet, last three years,
However, during the last few years, many macroeconomic indicators began
Pakistan has recovered its economic showing positive and higher growth
growth and has been sustaining. In rates reflecting the economic recovery. In
2015-16, the Annual Plan 2016-17 China, the lack of political freedom and
reports that, the GDP registered a its implications for human rights are
growth of 4.7 per cent, highest when major concerns; yet, in the last three
compared to the previous eight years. decades, it used the ‘market system
while agriculture recorded growth without losing political commitment’ and
rate far from satisfactory level, industrial succeeded in raising the level of growth
and service sectors grew at 6.8 alongwith alleviation of poverty. You will
and 5.7 per cent respectively. Many also notice that unlike India and
macroeconomic indicators also began Pakistan, which are attempting to
to show stable and positive trends. privatise their public sector enterprises,
China has used the market mechanism
10.7 CONCLUSION to ‘create additional social and economic
opportunities’. By retaining collective
What are we learning from the ownership of land and allowing
developmental experiences of our individuals to cultivate lands, China has
neighbours? India, China and Pakistan ensured social security in rural areas.
have travelled more than five decades of Public intervention in providing social
developmental path with varied results. infrastructure even prior to reforms has
Till the late 1970s, all of them were brought about positive results in human
maintaining the same level of low development indicators in China.
development. The last three decades have
taken these countries to different levels.

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 193

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Recap

With the unfolding of the globalisation process, developing countries
are keen to understand the developmental processes pursued by their
neighbours as they face competition from developed nations as also
amongst themselves.

India, Pakistan and China have similar physical endowments but
totally different political systems.

All the three countries follow the five-year plan pattern of development.
However, the structures established to implement developmental
policies are quite different.

Till the early 1980s, the developmental indicators of all the three
countries, such as growth rates and sectoral contribution towards
national income, were similar.

Reforms were introduced in 1978 in China, in 1988 in Pakistan and in
1991 in India.

China introduced structural reforms on its own initiative while they
were forced upon India and Pakistan by international agencies.

The impact of policy measures were different in these countries — for
instance, one-child norm has arrested the population growth in China
whereas in India and Pakistan, a major change is yet to take place.

Even after fifty years of planned development, majority of the workforce
in all the countries depends on agriculture. The dependency is greater
in India.

Though China has followed the classical development pattern of
gradual shift from agriculture to manufacturing and then to services,
India and Pakistan’s shift has been directly from agriculture to service
sector.

China’s industrial sector has maintained a high growth rate while it
is not so in both India and Pakistan.

China is ahead of India and Pakistan on many human development
indicators. However these improvements were attributed not to the
reform process but the strategies that China adopted in the pre-reform
period.

While assessing the developmental indicators, one also has to consider
the liberty indicators.

194 INDIAN ECONOMIC DEVELOPMENT

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EXERCISES

1. Why are regional and economic groupings formed?
2. What are the various means by which countries are trying to

strengthen their own domestic economies?

3. What similar developmental strategies have India and Pakistan
followed for their respective developmental paths?

4. Explain the Great Leap Forward campaign of China as initiated in
1958.

5. China’s rapid industrial growth can be traced back to its reforms in
1978. Do you agree? Elucidate.

6. Describe the path of developmental initiatives taken by Pakistan
for its economic development.

7. What is the important implication of the ‘one child norm’ in China?

8. Mention the salient demographic indicators of China, Pakistan and
India.

9. Compare and contrast India and China’s sectoral contribution
towards GDP in 2003. What does it indicate?

10. Mention the various indicators of human development.

11. Define the liberty indicator. Give some examples of liberty indicators.

12. Evaluate the various factors that led to the rapid growth in economic
development in China.

13. Group the following features pertaining to the economies of India,
China and Pakistan under three heads

• One-child norm
• Low fertility rate
• High degree of urbanisation
• Mixed economy
• Very high fertility rate
• Large population
• High density of population
• Growth due to manufacturing sector
• Growth due to service sector.

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS 195

2018-19

14. Give reasons for the slow growth and re-emergence of poverty in
Pakistan.

15. Compare and contrast the development of India, China and Pakistan
with respect to some salient human development indicators.

16. Comment on the growth rate trends witnessed in China and India
in the last two decades.

17. Fill in the blanks
(a) First Five Year Plan of ________________ commenced in the
year 1956. (Pakistan/China)
(b) Maternal mortality rate is high in _____________. (China/
Pakistan)
(c) Proportion of people below poverty line is more in __________.
(India/Pakistan)
(d) Reforms in ______________ were introduced in 1978. (China/
Pakistan)

SUGGESTED ADDITIONAL ACTIVITIES

1. Organise a class debate on the issue of free trade between India
and China and India and Pakistan.

2. You are aware that cheap Chinese goods are available in the market,
for example, toys, electronic goods, clothes, batteries etc. Do you
think that these products are comparable in quality and price with
their Indian counterparts? Do they create a threat to our domestic
producers? Discuss.

3. Do you think India can introduce the one-child norm like China to
reduce population growth? Organise a debate on the policies that
India can follow to reduce population growth.

4. China’s growth is mainly contributed by the manufacturing sector
and India’s growth by the service sector —prepare a chart showing
the relevance of this statement with respect to the structural
changes in the last decade in the respective countries.

5. How is China able to lead in all the Human Development Indicators?
Discuss in the classroom. Use Human Development Report of the
latest year.

196 INDIAN ECONOMIC DEVELOPMENT

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REFERENCES

Books

DREZE, JEAN AND AMARTYA SEN. 1996. India: Economic Development and Social
Opportunity. Oxford University Press, New Delhi.

Articles

RAY, ALOK. 2002. ‘The Chinese Economic Miracle: Lessons to be Learnt.’
Economic and Political Weekly, September 14, pp. 3835-3848.

ZAIDI, S. AKBAR. 1999. ‘Is Poverty now a Permanent Phenomenon in Pakistan?’
Economic and Political Weekly, October 9, pp. 2943-2951.

Government Reports

Annual Plan 2016-17, Ministry of Planning, Development & Reform, Government of
Pakistan accessed from http://pc.gov.pk on 02 January 2017.

Economic Survey, Ministry of Finance, Government of India (for various years).

Human Development Report 2005, United Nations Development Programme,
Oxford University Press, Oxford.

Labour Market Indicators, 3rd Edition, International Labour Organisation,
Geneva.

Pakistan: National Human Development Report 2003, United Nations
Development Programme, Second Impression 2004.

World Development Report 2005, The World Bank, Oxford University Press,
New York.

World Development Indicators (for various years), Washington; Human Develop-
ment Report 2015, United Nations World Bank Development Programme
Geneva; Key Indicators of Asia and Pacific 2016, Asian Development Bank,
Philippines.

Websites 197

www.stats.gov.cn
www.statpak.gov.pk
www.un.org
www.ilo.org
www.planningcommission.nic.in
www.dgft.delhi.nic.in

COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS NEIGHBOURS

2018-19

Introductory

Microeconomics

Textbook in Economics for Class XII

2018-19

First Edition ISBN 81-7450-678-0
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Nidhi Wadhwa

2018-19

Foreword

THE National Curriculum Framework (NCF), 2005, recommends that
children’s life at school must be linked to their life outside the school.
This principle marks a departure from the legacy of bookish learning
which continues to shape our system and causes a gap between the
school, home and community. The syllabi and textbooks developed
on the basis of NCF signify an attempt to implement this basic idea.
They also attempt to discourage rote learning and the maintenance
of sharp boundaries between different subject areas. We hope these
measures will take us significantly further in the direction of a child-
centred system of education outlined in the National Policy of
Education (1986).

The success of this effort depends on the steps that school
principals and teachers will take to encourage children to reflect on
their own learning and to pursue imaginative activities and
questions. We must recognise that, given space, time and freedom,
children generate new knowledge by engaging with the information
passed on to them by adults. Treating the prescribed textbook as the
sole basis of examination is one of the key reasons why other resources
and sites of learning are ignored. Inculcating creativity and initiative
is possible if we perceive and treat children as participants in
learning, not as receivers of a fixed body of knowledge.

These aims imply considerable change in school routines and
mode of functioning. Flexibility in the daily time-table is as necessary
as rigour in implementing the annual calendar so that the required
number of teaching days are actually devoted to teaching. The
methods used for teaching and evaluation will also determine how
effective this textbook proves for making children’s life at school a
happy experience, rather than a source of stress or boredom. Syllabus
designers have tried to address the problem of curricular burden by
restructuring and reorienting knowledge at different stages with
greater consideration for child psychology and the time available
for teaching. The textbook attempts to enhance this endeavour by
giving higher priority and space to opportunities for contemplation
and wondering, discussion in small groups, and activities requiring
hands-on experience.

The National Council of Educational Research and Training
(NCERT) appreciates the hard work done by the textbook development
committee responsible for this book. We wish to thank the
Chairperson of the advisory group in Social Sciences, at the higher
secondary level, Professor Hari Vasudevan and the Chief Advisor for
this book, Professor Tapas Majumdar, for guiding the work of this

2018-19

committee. Several teachers contributed to the development of this textbook; we are
grateful to their principals for making this possible. We are indebted to the
institutions and organisations which have generously permitted us to draw upon
their resources, materials and personnel. We are especially grateful to the members
of the National Monitoring Committee, appointed by the Department of Secondary
and Higher Education, Ministry of Human Resource Development, under the
Chairpersonship of Professor Mrinal Miri and Professor G.P. Deshpande for their
valuable time and contribution. As an organisation committed to systemic reform
and continuous improvement in the quality of its products, NCERT welcomes
comments and suggestions which will enable us to undertake further revision and
refinements.

New Delhi Director
20 November 2006 National Council of Educational

Research and Training

iv
2018-19

CHAIRPERSON, ADVISORY COMMITTEE FOR SOCIAL SCIENCE TEXTBOOKS
AT THE HIGHER SECONDARY LEVEL
Hari Vasudevan, Professor, Department of History, University of
Calcutta, Kolkata
CHIEF ADVISOR
Tapas Majumdar, Professor Emeritus of Economics,
Jawaharlal Nehru University, New Delhi
ADVISOR
Satish Jain, Professor, Centre for Economics Studies and Planning,
School of Social Sciences, Jawaharlal Nehru University, New Delhi
MEMBERS
Harish Dhawan, Lecturer, Ramlal Anand College (Evening) New Delhi
Papiya Ghosh, Research Associate, Delhi School of Economics, New Delhi
Rajendra Prasad Kundu, Lecturer, Economics Department,
Jadavpur University, Kolkata
Sugato Das Gupta, Associate Professor, CESP, Jawaharlal Nehru
University, New Delhi
Tapasik Bannerjee, Research Fellow, Centre for Economics Studies
and Planning, Jawaharlal Nehru University, New Delhi
MEMBER-COORDINATOR
Jaya Singh, Lecturer, Economics, Department of Education in Social
Sciences and Humanities, NCERT, New Delhi

2018-19

The National Council of Educational Research and Training (NCERT)
acknowledges the invaluable contribution of academicians and
practising school teachers for bringing out this textbook. We are grateful
to Anjan Mukherjee, Professor, JNU, for going through the manuscript
and suggesting relevant changes. We thank Jhaljit Singh, Reader,
Department of Economics, University of Manipur for his contribution.
We also thank our colleagues Neeraja Rashmi, Reader, Curriculum
Group; M.V. Srinivasan, Ashita Raveendran, Lecturers, Department of
Education in Social Sciences and Humanities (DESSH), for their
feedback and suggestions.

We would like to place on record the precious advise of (Late) Dipak
Banerjee, Professor (Retd.), Presidency College, Kolkata. We could have
benefited much more of his expertise, had his health permitted.

The practising school teachers have helped in many ways. The
Council expresses its gratitude to A.K. Singh, PGT (Economics), Kendriya
Vidyalaya, Varanasi, Uttar Pradesh; Ambika Gulati, Head, Department
of Economics, Sanskriti School; B.C. Thakur, PGT (Economics),
Government Pratibha Vikas Vidyalaya, Surajmal Vihar; Ritu Gupta,
Principal, Sneh International School, Shoban Nair, PGT (Economics),
Mother’s International School, Rashmi Sharma, PGT (Economics),
Kendriya Vidalaya, JNU Campus, New Delhi.

We thank Savita Sinha, Professor and Head, DESSH, for her support.
Special thanks are due to Vandana R. Singh, Consultant Editor,
NCERT for going through the manuscript.
The council also gratefully acknowledges the contributions of Dinesh
Kumar, In-charge, Computer Station; Amar Kumar Prusty and Neena
Chandra, Copy Editors; in shaping this book. The contribution of the
Publication Department in bringing out this book is duly acknowledged.
This textbook has been reviewed with the support of experts like
Meeta Kumar, Associate Professor, Miranda House, University of Delhi;
Shalini Saksena, Associate Professor, DCAC; and Bharat Garg, Assistant
Professor, Shyam Lal College, University of Delhi. Their contributions
are duly acknowledged.
The council is also thankful to Tampakmayum Alan Mustofa, JPF;
Ayaz Ahmad Ansari, Farheen Fatima and Amjad Husain, DTP Operators,
in shaping this textbook.

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Contents

Foreword iii

1. INTRODUCTION 1

1.1 A Simple Economy 1

1.2 Central Problems of an Economy 2

1.3 Organisation of Economic Activities 4
1.3.1 The Centrally Planned Economy 4
1.3.2 The Market Economy 5

1.4 Positive and Normative Economics 6

1.5 Microeconomics and Macroeconomics 6
1.6 Plan of the Book 6

2. THEORY OF CONSUMER BEHAVIOUR 8

2.1 Utility 8
2.1.1 Cardinal Utility Analysis 9
2.1.2 Ordinal Utility Analysis 11

2.2 The Consumer’s Budget 15
2.2.1 Budget Set and Budget Line 15
2.2.2 Changes in the Budget Set 17
19
2.3 Optimal Choice of the Consumer

2.4 Demand 21
2.4.1 Demand Curve and the Law of Demand 21
2.4.2 Deriving a Demand Curve from Indifference
Curves and Budget Constraints 23
2.4.3 Normal and Inferior Goods 24
2.4.4 Substitutes and Complements 25
2.4.5 Shifts in the Demand Curve 25
2.4.6 Movements along the Demand Curve and Shifts 26
in the Demand Curve

2.5 Market Demand 26

2.6 Elasticity of Demand 27

2.6.1 Elasticity along a Linear Demand Curve 29

2.6.2 Factors Determining Price Elasticity of Demand for a Good 31

2.6.3 Elasticity and Expenditure 31

3. PRODUCTION AND COSTS 36

3.1 Production Function 36
3.2 The Short Run and the Long Run 38

3.3 Total Product, Average Product and Marginal Product 39
3.3.1 Total Product 39

3.3.2 Average Product 39
3.3.3 Marginal Product 39

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3.4 The Law of Diminishing Marginal Product and the Law of 40
Variable Proportions

3.5 Shapes of Total Product, Marginal Product and Average Product Curves 41

3.6 Returns to Scale 42

3.7 Costs 43
3.7.1 Short Run Costs 43
3.7.2 Long Run Costs 48

4. THE THEORY OF THE FIRM UNDER PERFECT COMPETITION 53

4.1 Perfect competition: Defining Features 53

4.2 Revenue 54

4.3 Profit Maximisation 56
4.3.1 Condition 1 56
4.3.2 Condition 2 56
4.3.3 Condition 3 57
4.3.4 The Profit Maximisation Problem: Graphical Representation 58

4.4 Supply Curve of a Firm 59
4.4.1 Short Run Supply Curve of a Firm 59
4.4.2 Long Run Supply Curve of a Firm 60
4.4.3 The Shut Down Point 61
4.4.4 The Normal Profit and Break-even Point 61

4.5 Determinants of a Firm’s Supply Curve 62
4.5.1 Technological Progress 62
4.5.2 Input Prices 62

4.6 Market Supply Curve 63

4.7 Price Elasticity of Supply 65

5. MARKET EQUILIBRIUM 71

5.1 Equilibrium, Excess Demand, Excess Supply 71
5.1.1 Market Equilibrium: Fixed Number of Firms 72
5.1.2 Market Equilibrium: Free Entry and Exit 80

5.2 Applications 84
5.2.1 Price Ceiling 84
5.2.2 Price Floor 85

6. NON-COMPETITIVE MARKETS 88

6.1 Simple Monopoly in the Commodity Market 88
6.1.1 Market Demand Curve is the Average Revenue Curve 89
6.1.2 Total, Average and Marginal Revenues 92
6.1.3 Marginal Revenue and Price Elasticity of Demand 93
6.1.4 Short Run Equilibrium of the Monopoly Firm 93

6.2 Other Non-perfectly Competitive Markets 98
6.2.1 Monopolistic Competition 98
6.2.2 How do Firms behave in Oligopoly? 99

Glossary 102

viii
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Chapter 1

Introduction

1.1 A SIMPLE ECONOMY

Think of any society. People in the society need many goods and
services1 in their everyday life including food, clothing, shelter,
transport facilities like roads and railways, postal services and
various other services like that of teachers and doctors. In fact, the
list of goods and services that any individual2 needs is so large that
no individual in society, to begin with, has all the things she needs.
Every individual has some amount of only a few of the goods and
services that she would like to use. A family farm may own a plot of
land, some grains, farming implements, maybe a pair of bullocks
and also the labour services of the family members. A weaver may
have some yarn, some cotton and other instruments required for
weaving cloth. The teacher in the local school has the skills required
to impart education to the students. Some others in society may
not have any resource3 excepting their own labour services. Each of
these decision making units can produce some goods or services
by using the resources that it has and use part of the produce to
obtain the many other goods and services which it needs. For
example, the family farm can produce corn, use part of the produce
for consumption purposes and procure clothing, housing and
various services in exchange for the rest of the produce. Similarly,
the weaver can get the goods and services that she wants in exchange
for the cloth she produces in her yarn. The teacher can earn some
money by teaching students in the school and use the money for
obtaining the goods and services that she wants. The labourer also
can try to fulfill her needs by using whatever money she can earn by
working for someone else. Each individual can thus use her
resources to fulfill her needs. It goes without saying that no
individual has unlimited resources compared to her needs. The
amount of corn that the family farm can produce is limited by the
amount of resources it has, and hence, the amount of different goods

1By goods we means physical, tangible objects used to satisfy people’s wants and needs. The
term ‘goods’ should be contrasted with the term ‘services’, which captures the intangible satisfaction
of wants and needs. As compared to food items and clothes, which are examples of goods, we can
think of the tasks that doctors and teachers perform for us as examples of services.

2By individual, we mean an individual decision making unit. A decision making unit can be a
single person or a group like a household, a firm or any other organisation.

3By resource, we mean those goods and services which are used to produce other goods and
services, e.g. land, labour, tools and machinery, etc.

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Introductory Microeconomics and services that it can procure in exchange of corn is also limited. As a result, the
family is forced to make a choice between the different goods and services that are
available. It can have more of a good or service only by giving up some amounts of
other goods or services. For example, if the family wants to have a bigger house, it
may have to give up the idea of having a few more acres of arable land. If it wants
more and better education for the children, it may have to give up some of the
luxuries of life. The same is the case with all other individuals in society. Everyone
faces scarcity of resources, and therefore, has to use the limited resources in the
best possible way to fulfill her needs.

In general, every individual in society is engaged in the production of some
goods or services and she wants a combination of many goods and services not
all of which are produced by her. Needless to say that there has to be some
compatibility between what people in society collectively want to have and what
they produce4. For example, the total amount of corn produced by family farm
along with other farming units in a society must match the total amount of corn
that people in the society collectively want to consume. If people in the society
do not want as much corn as the farming units are capable of producing
collectively, a part of the resources of these units could have been used in the
production of some other good or services which is in high demand. On the
other hand, if people in the society want more corn compared to what the farming
units are producing collectively, the resources used in the production of some
other goods and services may be reallocated to the production of corn. Similar is
the case with all other goods or services. Just as the resources of an individual
are scarce, the resources of the society are also scarce in comparison to what the
people in the society might collectively want to have. The scarce resources of the
society have to be allocated properly in the production of different goods and
services in keeping with the likes and dislikes of the people of the society.

Any allocation5 of resources of the society would result in the production of a
particular combination of different goods and services. The goods and services
thus produced will have to be distributed among the individuals of the society.
2 The allocation of the limited resources and the distribution of the final mix of goods
and services are two of the basic economic problems faced by the society.

In reality, any economy is much more complex compared to the society
discussed above. In the light of what we have learnt about the society, let us now
discuss the fundamental concerns of the discipline of economics some of which
we shall study throughout this book.

1.2 CENTRAL PROBLEMS OF AN ECONOMY

Production, exchange and consumption of goods and services are among the
basic economic activities of life. In the course of these basic economic activities,
every society has to face scarcity of resources and it is the scarcity of resources
that gives rise to the problem of choice. The scarce resources of an economy
have competing usages. In other words, every society has to decide on how to
use its scarce resources. The problems of an economy are very often summarised
as follows:

4Here we assume that all the goods and services produced in a society are consumed by the people
in the society and that there is no scope of getting anything from outside the society. In reality, this
is not true. However, the general point that is being made here about the compatibility of production
and consumption of goods and services holds for any country or even for the entire world.

5By an allocation of the resources, we mean how much of which resource is devoted to the
production of each of the goods and services.

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What is produced and in what quantities?

Every society must decide on how much of each of the many possible goods and
services it will produce. Whether to produce more of food, clothing, housing or
to have more of luxury goods. Whether to have more agricultural goods or to
have industrial products and services. Whether to use more resources in education
and health or to use more resources in building military services. Whether to
have more of basic education or more of higher education. Whether to have
more of consumption goods or to have investment goods (like machine) which
will boost production and consumption tomorrow.

How are these goods produced?

Every society has to decide on how much of which of the resources to use in the
production of each of the different goods and services. Whether to use more
labour or more machines. Which of the available technologies to adopt in the
production of each of the goods?

For whom are these goods produced?

Who gets how much of the goods that are produced in the economy? How should
the produce of the economy be distributed among the individuals in the economy?
Who gets more and who gets less? Whether or not to ensure a minimum amount
of consumption for everyone in the economy. Whether or not elementary education
and basic health services should be available freely for everyone in the economy.

Thus, every economy faces the problem of allocating the scarce resources to
the production of different possible goods and services and of distributing the
produced goods and services among the individuals within the economy. The
allocation of scarce resources and the distribution of the final goods and
services are the central problems of any economy.

Production Possibility Frontier 3

Just as individuals face scarcity of resources, the resources of an economy Introduction
as a whole are always limited in comparison to what the people in the
economy collectively want to have. The scarce resources have alternative
usages and every society has to decide on how much of each of the resources
to use in the production of different goods and services. In other words,
every society has to determine how to allocate its scarce resources to different
goods and services.

An allocation of the scarce resource of the economy gives rise to a
particular combination of different goods and services. Given the total amount
of resources, it is possible to allocate the resources in many different ways
and, thereby achieving different mixes of all possible goods and services. The
collection of all possible combinations of the goods and services that can be
produced from a given amount of resources and a given stock of technological
knowledge is called the production possibility set of the economy.

EXAMPLE 1

Consider an economy which Table1.1: Production Possibilities
can produce corn or cotton
by using its resources. Possibilities Corn Cotton
Table 1.1 gives some of the
combinations of corn and A 0 10
cotton that the economy can B19
produce. When its resources C27
D3 4
are fully utilised. E40

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If all the resources are used in the production of corn, the maximum

amount of corn that can be produced is 4 units and if all resources are used

in the production of cotton, at the most, 10 units of cotton can be produced.

The economy can also produce1 unit of corn and 9 units of cotton or 2 units

of corn and 7 units of cotton or 3 units of corn and 4 units of cotton. There

can be many other possibilities. The figure illustrates the production

possibilities of the economy. Any point on or below the curve represents a

combination of corn and cotton that can be produced with the economy’s

resources. The curve gives the maximum amount of corn that can be produced

in the economy for any given amount of cotton and vice-versa. This curve is

called the production possibility

frontier. Cotton
The production possibility

frontier gives the combinations of A
corn and cotton that can be B

produced when the resources of the C

economy are fully utilised. Note D
that a point lying strictly below the

production possibility frontier O E
represents a combination of corn Corn
and cotton that will be produced

when all or some of the resources

are either underemployed or are

utilised in a wasteful fashion.

If more of the scarce resources are used in the production of corn,

less resources are available for the production of cotton and vice versa.

Therefore, if we want to have more of one of the goods, we will have less

of the other good. Thus, there is always a cost of having a little more of

one good in terms of the amount of the other good that has to be forgone.

This is known as the opportunity costa of an additional unit of the
4 goods.
IntroductoryMicroeconomics
Every economy has to choose one of the many possibilities that it has.

In other words, one of the central problems of the economy is to choose

from one of the many production possibilities.

aNote that the concept of opportunity cost is applicable to the individual as well as the
society. The concept is very important and is widely used in economics. Because of its
importance in economics, sometimes, opportunity cost is also called the economic cost.

1.3 ORGANISATION OF ECONOMIC ACTIVITIES

Basic problems can be solved either by the free interaction of the individuals
pursuing their own objectives as is done in the market or in a planned manner
by some central authority like the government.

1.3.1 The Centrally Planned Economy

In a centrally planned economy, the government or the central authority plans
all the important activities in the economy. All important decisions regarding
production, exchange and consumption of goods and services are made by the
government. The central authority may try to achieve a particular allocation of
resources and a consequent distribution of the final combination of goods and
services which is thought to be desirable for society as a whole. For example, if it
is found that a good or service which is very important for the prosperity and

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well-being of the economy as a whole, e.g. education or health service, is not 5
produced in adequate amount by the individuals on their own, the government
might try to induce the individuals to produce adequate amount of such a good Introduction
or service or, alternatively, the government may itself decide to produce the good
or service in question. In a different context, if some people in the economy get
so little a share of the final mix of goods and services produced in the economy
that their survival is at stake, then the central authority may intervene and try
to achieve an equitable distribution of the final mix of goods and services.

1.3.2 The Market Economy

In contrast to a centrally planned economy, in a market economy, all economic
activities are organised through the market. A market, as studied in economics,
is an institution6 which organises the free interaction of individuals pursuing
their respective economic activities. In other words, a market is a set of
arrangements where economic agents can freely exchange their endowments or
products with each other. It is important to note that the term ‘market’ as used
in economics is quite different from the common sense understanding of a
market. In particular, it has nothing as such to do with the marketplace as you
might tend to think of. For buying and selling commodities, individuals may or
may not meet each other in an actual physical location. Interaction between
buyers and sellers can take place in a variety of situations such as a village-
chowk or a super bazaar in a city, or alternatively, buyers and sellers can interact
with each other through telephone or internet and conduct the exchange of
commodities. The arrangements which allow people to buy and sell commodities
freely are the defining features of a market.

For the smooth functioning of any system, it is imperative that there is
coordination in the activities of the different constituent parts of the system.
Otherwise, there can be chaos. You may wonder as to what are the forces which
bring the coordination between the activities of millions of isolated individuals
in a market system.

In a market system, all goods or services come with a price (which is mutually
agreed upon by the buyers and sellers) at which the exchanges take place. The
price reflects, on an average, the society’s valuation of the good or service in
question. If the buyers demand more of a certain good, the price of that good
will rise. This signals to the producers of that good that the society as a whole
wants more of that good than is currently being produced and the producers of
the good, in their turn, are likely to increase their production. In this way, prices
of goods and services send important information to all the individuals across
the market and help achieve coordination in a market system. Thus, in a market
system, the central problems regarding how much and what to produce are
solved through the coordination of economic activities brought about by the
price signals.

In reality, all economies are mixed economies where some important
decisions are taken by the government and the economic activities are by and
large conducted through the market. The only difference is in terms of the
extent of the role of the government in deciding the course of economic activities.
In the United States of America, the role of the government is minimal. The
closest example of a centrally planned economy is the China for the major part
of the twentieth century. In India, since Independence, the government has
played a major role in planning economic activities. However, the role of the

6An institution is usually defined as an organisation with some purpose.

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Introductory Microeconomics government in the Indian economy has been reduced considerably in the last
couple of decades.

1.4 POSITIVE AND NORMATIVE ECONOMICS

It was mentioned earlier that in principle there are more than one ways of
solving the central problems of an economy. These different mechanisms in
general are likely to give rise to different solutions to those problems, thereby
resulting in different allocations of the resources and also different distributions
of the final mix of goods and services produced in the economy. Therefore, it is
important to understand which of these alternative mechanisms is more
desirable for the economy as a whole. In economics, we try to analyse the
different mechanisms and figure out the outcomes which are likely to result
under each of these mechanisms. We also try to evaluate the mechanisms by
studying how desirable the outcomes resulting from them are. Often a
distinction is made between positive economic analysis and normative
economic analysis depending on whether we are trying to figure out how a
particular mechanism functions or we are trying to evaluate it. In positive
economic analysis, we study how the different mechanisms function, and in
normative economics, we try to understand whether these mechanisms are
desirable or not. However, this distinction between positive and normative
economic analysis is not a very sharp one. The positive and the normative
issues involved in the study of the central economic problems are very closely
related to each other and a proper understanding of one is not possible in
isolation to the other.

1.5 MICROECONOMICS AND MACROECONOMICS

Traditionally, the subject matter of economics has been studied under two broad
branches: Microeconomics and Macroeconomics. In microeconomics, we study
6 the behaviour of individual economic agents in the markets for different goods
and services and try to figure out how prices and quantities of goods and services
are determined through the interaction of individuals in these markets. In
macroeconomics, on the other hand, we try to get an understanding of the
economy as a whole by focusing our attention on aggregate measures such as
total output, employment and aggregate price level. Here, we are interested in
finding out how the levels of these aggregate measures are determined and how
the levels of these aggregate measures change over time. Some of the important
questions that are studied in macroeconomics are as follows: What is the level of
total output in the economy? How is the total output determined? How does the
total output grow over time? Are the resources of the economy (eg labour) fully
employed? What are the reasons behind the unemployment of resources? Why
do prices rise? Thus, instead of studying the different markets as is done in
microeconomics, in macroeconomics, we try to study the behaviour of aggregate
or macro measures of the performance of the economy.

1.6 PLAN OF THE BOOK

This book is meant to introduce you to the basic ideas in microeconomics. In
this book, we will focus on the behaviour of the individual consumers and
producers of a single commodity and try to analyse how the price and the
quantity is determined in the market for a single commodity. In Chapter 2, we

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shall study the consumer’s behaviour. Chapter 3 deals with basic ideas of
production and cost. In Chapter 4, we study the producer’s behaviour. In Chapter
5, we shall study how price and quantity is determined in a perfectly competitive
market for a commodity. Chapter 6 studies some other forms of market.

Key Concepts Consumption Production Exchange
Scarcity Production possibilities Opportunity cost
Market Market economy Centrally planned economy
Mixed economy Positive analysis Normative analysis
Microeconomics Macroeconomics

Exercises ? 1. Discuss the central problems of an economy.
2. What do you mean by the production possibilities of an economy?
3. What is a production possibility frontier?
4. Discuss the subject matter of economics.
5. Distinguish between a centrally planned economy and a market economy.
6. What do you understand by positive economic analysis?

? 7. What do you understand by normative economic analysis?
8. Distinguish between microeconomics and macroeconomics.

7

Introduction

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Chapter 2

Theory of
Consumer Behaviour

In this chapter, we will study the behaviour of an individual
consumer. The consumer has to decide how to spend her income
on different goods1. Economists call this the problem of choice.
Most naturally, any consumer will want to get a combination of
goods that gives her maximum satisfaction. What will be this ‘best’
combination? This depends on the likes of the consumer and what
the consumer can afford to buy. The ‘likes’ of the consumer are
also called ‘preferences’. And what the consumer can afford to buy,
depends on prices of the goods and the income of the consumer.
This chapter presents two different approaches that explain
consumer behaviour (i) Cardinal Utility Analysis and (ii) Ordinal
Utility Analysis.

Preliminary Notations and Assumptions

A consumer, in general, consumes many goods; but for simplicity,

we shall consider the consumer’s choice problem in a situation

where there are only two goods2: bananas and mangoes. Any

combination of the amount of the two goods will be called a

consumption bundle or, in short, a bundle. In general, we shall

use the variable x1 to denote the quantity of bananas and x2 to

denote the quantity of mangoes. x1 and x2 can be positive or zero.

(x1, x2) would mean the bundle consisting of x quantity of bananas
1

and x2 quantity of mangoes. For particular values of x1 and x2, (x1,

x2), would give us a particular bundle. For example, the bundle

(5,10) consists of 5 bananas and 10 mangoes; the bundle (10, 5)

consists of 10 bananas and 5 mangoes.

2.1 UTILITY

A consumer usually decides his demand for a commodity on the
basis of utility (or satisfaction) that he derives from it. What is
utility? Utility of a commodity is its want-satisfying capacity. The
more the need of a commodity or the stronger the desire to have it,
the greater is the utility derived from the commodity.

Utility is subjective. Different individuals can get different levels
of utility from the same commodity. For example, some one who

1We shall use the term goods to mean goods as well as services.
2The assumption that there are only two goods simplifies the analysis considerably and allows us
to understand some important concepts by using simple diagrams.

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likes chocolates will get much higher utility from a chocolate than some one 9
who is not so fond of chocolates, Also, utility that one individual gets from the
commodity can change with change in place and time. For example, utility from Theory of Consumer
the use of a room heater will depend upon whether the individual is in Ladakh Behaviour
or Chennai (place) or whether it is summer or winter (time).

2.1.1 Cardinal Utility Analysis

Cardinal utility analysis assumes that level of utility can be expressed in
numbers. For example, we can measure the utility derived from a shirt and say,
this shirt gives me 50 units of utility. Before discussing further, it will be useful
to have a look at two important measures of utility.

Measures of Utility

Total Utility: Total utility of a fixed quantity of a commodity (TU) is the total
satisfaction derived from consuming the given amount of some commodity x.
More of commodity x provides more satisfaction to the consumer. TU depends
on the quantity of the commodity consumed. Therefore, TUn refers to total utility
derived from consuming n units of a commodity x.
Marginal Utility: Marginal utility (MU) is the change in total utility due to
consumption of one additional unit of a commodity. For example, suppose 4
bananas give us 28 units of total utility and 5 bananas give us 30 units of total
utility. Clearly, consumption of the 5th banana has caused total utility to increase
by 2 units (30 units minus 28 units). Therefore, marginal utility of the 5th banana
is 2 units.

MU5 = TU5 – TU4 = 30 – 28 = 2
In general, MUn = TUn – TUn-1, where subscript n refers to the nth unit of the
commodity
Total utility and marginal utility can also be related in the following way.
TUn = MU1 + MU2 + … + MUn-1 + MUn
This simply means that TU derived from consuming n units of bananas is
the sum total of marginal utility of first banana (MU1), marginal utility of second
banana (MU2), and so on, till the marginal utility of the nth unit.
Table No. 2.1 and Figure 2.1 show an imaginary example of the values of
marginal and total utility derived from consumption of various amounts of a
commodity. Usually, it is seen that the marginal utility diminishes with increase
in consumption of the commodity. This happens because having obtained some
amount of the commodity, the desire of the consumer to have still more of it
becomes weaker. The same is also shown in the table and graph.

Table 2.1: Values of marginal and total utility derived from consumption
of various amounts of a commodity

Units Total Utility Marginal Utility

1 12 12
2 18 6
3 22 4
4 24 2
5 24 0
6 22 -2

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Notice that MU3 is less than
MU2. You may also notice that
total utility increases but at a

diminishing rate: The rate of

change in total utility due to

change in quantity of commodity

consumed is a measure of

marginal utility. This marginal

utility diminishes with increase

in consumption of the

commodity from 12 to 6, 6 to 4 The values of marginal and total utility derived
and so on. This follows from the from consumption of various amounts of a
law of diminishing marginal commodity. The marginal utility diminishes with

utility. Law of Diminishing increase in consumption of the commodity.

Marginal Utility states that

marginal utility from consuming each additional unit of a commodity declines

as its consumption increases, while keeping consumption of other commodities

constant.

MU becomes zero at a level when TU remains constant. In the example, TU

does not change at 5th unit of consumption and therefore MU5= 0. Thereafter,
TU starts falling and MU becomes negative.

Introductory Derivation of Demand Curve in the Case of a Single Commodity (Law of
Microeconomics Diminishing Marginal Utility)

Cardinal utility analysis can be used to derive demand curve for a commodity.
What is demand and what is demand curve? The quantity of a commodity that
a consumer is willing to buy and is able to afford, given prices of goods and
income of the consumer, is called demand for that commodity. Demand for a
commodity x, apart from the price of x itself, depends on factors such as prices
of other commodities (see substitutes and complements 2.4.4), income of the
10 consumer and tastes and preferences of the consumers. Demand curve is a
graphic presentation of various quantities of a commodity that a consumer is
willing to buy at different prices of the same commodity, while holding constant
prices of other related commodities
and income of the consumer.

Figure 2.2 presents hypothetical
demand curve of an individual for
commodity x at its different prices.
Quantity is measured along the
horizontal axis and price is measured
along the vertical axis.

The downward sloping demand
curve shows that at lower prices, the
individual is willing to buy more of
commodity x; at higher prices, she is
willing to buy less of commodity x. Demand curve of an individual for
Therefore, there is a negative commodity x
relationship between price of a
commodity and quantity demanded which is referred to as the Law of Demand.

An explaination for a downward sloping demand curve rests on the notion
of diminishing marginal utility. The law of diminishing marginal utility states
that each successive unit of a commodity provides lower marginal utility.

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Therefore the individual will not be willing to pay as much for each additional
unit and this results in a downward sloping demand curve. At a price of Rs. 40
per unit x, individual’s demand for x was 5 units. The 6th unit of commodity x
will be worth less than the 5th unit. The individual will be willing to buy the 6th
unit only when the price drops below Rs. 40 per unit. Hence, the law of
diminishing marginal utility explains why demand curves have a negative slope.

2.1.2 Ordinal Utility Analysis

Cardinal utility analysis is simple to understand, but suffers from a major

drawback in the form of quantification of utility in numbers. In real life, we

never express utility in the form of numbers. At the most, we can rank various

alternative combinations in terms of having more or less utility. In other words,

the consumer does not measure utility in numbers, though she often ranks

various consumption bundles. This forms the starting point of this topic – Ordinal

Utility Analysis.

A consumer’s preferences over the set of available bundles can often be

represented diagrammatically. We

have already seen that the bundles

available to the consumer can be

plotted as points in a two- A

dimensional diagram. The points

representing bundles which give the

consumer equal utility can generally

be joined to obtain a curve like the

one in Figure 2.3. The consumer is

said to be indifferent on the different

bundles because each point of the

bundles give the consumer equal

utility. Such a curve joining all points

representing bundles among which Indifference curve. An indifference curve joins 11
the consumer is indifferent is called all points representing bundles which are
an indifference curve. All the points considered indifferent by the consumer. Theory of Consumer
Behaviour
such as A, B, C and D lying on an

indifference curve provide the consumer with the same level of satisfaction.

It is clear that when a consumer gets one more banana, he has to forego

some mangoes, so that her total utility level remains the same and she remains

on the same indifference curve. Therefore, indifference curve slopes downward.

The amount of mangoes that the consumer has to forego, in order to get an

additional banana, her total utility level being the same, is called marginal rate

of substitution (MRS). In other words, MRS is simply the rate at which the

consumer will substitute bananas for mangoes, so that her total utility remains

constant. So, MRS =| ∆Y / ∆X | 3.

One can notice that, in the table 2.2, as we increase the quantity of bananas,
the quantity of mangoes sacrificed for each additional banana declines. In other
words, MRS diminishes with increase in the number of bananas. As the number

3 | ∆Y / ∆X |= ∆Y / ∆X if (∆Y / ∆X ) ≥ 0
= −∆Y / ∆X if (∆Y / ∆X ) < 0

MRS =| ∆Y / ∆X | means that MRS equals only the magnitude of the expression ∆Y / ∆X . If
∆Y / ∆X = −3 / 1 it means MRS=3.

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Table 2.2: Representation of Law of Diminishing Marginal Rate of Substitution

Combination Quantity of bananas (Qx) Quantity of Mangoes (Qy) MRS

A1 15 -

B2 12 3:1

C3 10 2:1

D4 9 1:1

of bananas with the consumer increases, the MU derived from each additional
banana falls. Similarly, with the fall in quantity of mangoes, the marginal utility
derived from mangoes increases. So, with increase in the number of bananas,
the consumer will feel the inclination to sacrifice small and smaller amounts of
mangoes. This tendency for the MRS to fall with increase in quantity of bananas
is known as Law of Diminishing Marginal Rate of Substitution. This can be
seen from figure 2.3 also. Going from point A to point B, the consumer sacrifices
3 mangoes for 1 banana, going from point B to point C, the consumer sacrifices
2 mangoes for 1 banana, and going from point C to point D, the consumer
sacrifices just 1 mango for 1 banana. Thus, it is clear that the consumer sacrifices
smaller and smaller quantities of mangoes for each additional banana.

Shape of an Indifference Curve

It may be mentioned that the law of Diminishing Marginal Rate of Substitution
causes an indifference curve to be convex to the origin. This is the most common
shape of an indifference curve. But in case of goods being perfect substitutes4,
the marginal rate of substitution does not diminish. It remains the same. Let’s
take an example.

Table 2.3: Representation of Law of Diminishing Marginal Rate of Substitution

12 Combination Quantity of five Quantity of five MRS

Introductory Rupees notes (Qx) Rupees coins (Qy)
Microeconomics
A1 8-

B2 7 1:1

C3 6 1:1

D4 5 1:1

Here, the consumer is indifferent for all these combinations as long as the total
of five rupee coins and five rupee notes remains the same. For the consumer, it
hardly matters whether she gets a five rupee coin or a five rupee note. So,
irrespective of how many five rupee notes she has, the consumer will sacrifice
only one five rupee coin for a five rupee note. So these two commodities are
perfect substitutes for the consumer and indifference curve depicting these will
be a straight line.

In the figure.2.4, it can be seen that consumer sacrifices the same number of
five-rupee coins each time he has an additional five-rupee note.

4 Perfect Substitutes are the goods which can be used in place of each other, and provide exactly
the same level of utility to the consumer.

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Monotonic Preferences Indifference Curve for perfect
substitutes. Indifference curve depicting two
Consumer’s preferences are commodities which are perfect substitutes is
assumed to be such that between a straight line.
any two bundles (x1, x2) and (y1, y2),
if (x1, x2) has more of at least one of
the goods and no less of the other
good compared to (y1, y2), then the
consumer prefers (x1, x2) to (y1, y2).
Preferences of this kind are called
monotonic preferences. Thus, a
consumer’s preferences are
monotonic if and only if between
any two bundles, the consumer
prefers the bundle which has more
of at least one of the goods and no
less of the other good as compared
to the other bundle.

Indifference Map

The consumer’s preferences over all the Indifference Map. A family of 13
bundles can be represented by a family indifference curves. The arrow indicates
of indifference curves as shown in Figure that bundles on higher indifference curves Theory of Consumer
2.5. This is called an indifference map of are preferred by the consumer to the Behaviour
the consumer. All points on an bundles on lower indifference curves.
indifference curve represent bundles
which are considered indifferent by the
consumer. Monotonicity of preferences
imply that between any two indifference
curves, the bundles on the one which lies
above are preferred to the bundles on the
one which lies below.

Features of Indifference Curve

1. Indifference curve slopes

downwards from left to right:

An indifference curve slopes downwards

from left to right, which means that in

order to have more of bananas, the

consumer has to forego some mangoes.

If the consumer does not forego some

mangoes with an increase in number of

bananas, it will mean consumer having

more of bananas with same number of

mangoes, taking her to a higher Slope of the Indifference Curve. The
indifference curve. Thus, as long as the indifference curve slopes downward. An

consumer is on the same indifference increase in the amount of bananas along the

curve, an increase in bananas must be indifference curve is associated with a

compensated by a fall in quantity of decrease in the amount of mangoes. If ∆ x1
mangoes.
> 0 then ∆ x2 < 0.

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