Approved by the Government of Nepal, Ministry of Education, Science and Technology,
Curriculum Development Centre, Sanothimi, Bhaktapur as an Additional Learning Material
vedanta
HIGH SCHOOL
ECONOMICS
10Book
Author
Sanjay Karki
vedanta
Vedanta Publication (P) Ltd.
Vanasthali, Kathmandu, Nepal
+977-01-4382404, 01-4362082
[email protected]
www.vedantapublication.com.np
vedanta
HIGH SCHOOL
ECONOMICS
10Book
Author
Sanjay Karki
All rights reserved. No part of this publication may
be reproduced, copied or transmitted in any way,
without the prior written permission of the publisher.
Vedanta Publication (P) Ltd.
First Edition: B.S. 2077 (2020 A. D.)
Layout and Design
Pradeep Kandel
Printed in Nepal
Published by:
Vedanta Publication (P) Ltd.
Vanasthali, Kathmandu, Nepal
+977-01-4382404, 01-4362082
[email protected]
www.vedantapublication.com.np
Preface
I have immense pleasure to bring out the book ‘High School Economics’ which is
designed strictly in accordance with the syllabus of Economics for Class IX prescribed
by the Curriculum Development Centre, Ministry of Education, Government of Nepal.
I have made a careful effort with this edition to incorporate features that will facilitate
the teaching and learning of economics. The book has been written in a very simple
language to suit the students for whom it is their first book about economics. The matters
are dealt with exhaustively within the parameters set for Class IX students. Concepts
and terms have been clearly defined and presented wherever necessary in the form of
‘Keynote, Glossary, Key Idea and Checkpoint.’ The underlying idea is to provide the
reader general understanding of economics as a subject more clearly and analytically.
In addition, Reading Between the Lines, Economist’s Profile, Eye on the Past and Did
You Know? have been incorporated to make the study refreshing and meaningful. Unit
Summary is provided at the end of every unit to enable the reader quick recap of the
matter studied. Each unit contains an exercise with very short answer, short answer,
and long answer questions as per CDC specifications.
I am thankful to Vedanta Publication (P) Ltd. Kathmandu for getting the series published.
I would like to thank Chairperson Mr. Suresh Kumar Regmi, Managing Director
Mr. Jiwan Shrestha, Academic Director Mr. Hukum Prasad Dahal and Marketing Director
Mr. Manoj Kumar Regmi for their invaluable suggestions during the preparation of the
series.
Thanks are due to my wife Deepa Karki for her support in the course of writing this
book. I am thankful to Mr. Pradeep Kandel, the Senior Designer of the publication
house for his skill in designing the series in attractive form.
I would like to mention my two children Sayon and Anu. Their contribution to this
book was putting up with a father spending too many hours in his study while working
on this book.
Finally, I take responsibility for errors and shortcomings. I would always invite critical
views and suggestions for improvement of the book from both students,fellow teachers
and reviewers.
Sanjay Karki
Waldorf, MD,United States
CONTENT 1
33
Unit 1 Introduction 49
Unit 2 Utility Analysis 73
Unit 3 Demand and Supply Equilibrium 109
Unit 4 Factors of Production 121
Unit 5 National Income 145
Unit 6 Economic Resources 179
Unit 7 Agriculture, Cooperatives and Industry 193
Unit 8 Theory of Production 207
Unit 9 Household Economics
Unit 10 Contemporary Economics Issues
UNIT 1 REVENUE AND COST CURVES
Learning Objectives Weight: 15 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the concept of revenue and
cost
• Define and explain TR, AR and MR
• Show the derivation of revenue curves
under perfect competition
• Show the derivation of revenue curves Before you begin
under Monopoly Costs are expenses to a firm while reve-
• Point out the relation between TR, AR and nues are its incomes. Cost-Revenue analy-
MR sis is used to examine the social impacts
• Explain the various concepts of costs of a particular program. Understanding
the basics of this concept is important in
• Show the derivation of various cost curves management, whether in the public or the
private sector.
• Show the relation between AC and MC
Very Short Type Short Type Long Answer Type Total Marks
2 1 07
5 Vedanta High School Economics - 10
1.0 CONCEPT OF COST
The act of production involves employment of various inputs. A producer or a firm
needs land,labour,capital and organization to produce an output. These facor inputs
have to be paid in terms of rent, wages, interest and profit. Such expenses incurred in
the process of production activity is called cost of production. In other words, cost
is the aggregate of the monetary expenses incurred by the producer in the course of
production of goods and services.
1.1 SHORT RUN COSTS AND LONG RUN COSTS
There is no fixed time that can be marked to separate In the short run at least
the short run from the long run. The short run and KEY one factor is fixed, others
IDEA
long run distinction depends on the time needed for are variable. In the long
adjustment in plant (firm) and varies from one industry run, all factors are variable
to another.
Short run Cost:
The short run is the time frame in which the quantities of some resources are fixed. For
most firms, the fixed resources are the firm’s technology and capital; its equipment and
buildings. It is a period of time in which the quantity of at least one input is fixed and
the quantities of the other inputs can be varied. To increase output in the short run,
a firm must increase the quantity of variable factors it uses. So short run cost is that
which varies with output when the plant and capital equipment are held constant.
Long run Cost:
The long run is the time frame in which the quantities of all resources can be varied. It
is a period in which the firm can change its plant. Hence, all costs are variable in the
long run. To increase output in the long run, a firm can increase the size of its plant.
As a firm can make adjustment in all factors in the long run, all inputs are variable and
there are no fixed costs. Long run costs are those, which vary with output when all
inputs are variable including plant and capital equipment.
CONCEPTS OF SHORT RUN COSTS
Short run cost is that which varies with output when the plant and capital equipment
are held constant in the short run. The total cost, average cost and marginal cost in the
short run are shown below:
1. TOTAL FIXED COST (TFC)
Total Fixed Cost(TFC) refers to total money expenses incurred on fixed inputs like
plant, machinery, tools & equipments etc. in the short run. It is independent of output.
It must be paid even if the firm produces no output. It is independent of output and
remains fixed whether output is large or small. Fixed costs are also called ‘overhead
costs’, ‘sunk costs’ or ‘supplementary costs’.
Total Fixed cost comprises the following:
1. Salaries of administrative staffs and other administrative expenses.
2. Charges such as contractual rent, insurance fee, license fee, property taxes, interest on
borrowed fund. Key Term
3. Depreciation of machinery. Depreciation: wear and
4. Expenses for building depreciation and repairs. tear of machinery and
5. Expenses for land maintenance and depreciation (if any). equipments
Vedanta High School Economics - 10 6
60 Y POINTS TO NOTE
Output TFC Short run: The
50 TFC time frame in which
0 50
1 50 40 Total Fixed Cost the quantities of some
2 50 30 resources are fixed.
Long run: The time
3 50 20 frame in which the
4 50 10 quantities of all re-
sources can be varied.
5 50 0 X
0123456
Output
The table shows total fixed cost remaining constant at 50 at all levels of output. The
TFC curve in the figure is horizontal and parallel to X-axis, indicating that it is constant
regardless of output.
2. TOTAL VARIABLE COST (TVC)
TVC refers to total money expenses incurred on the variable factor inputs like raw
materials, power, fuel, water, transport and communication etc, employed by a firm in
the short run. Total variable cost corresponds to variable inputs employed in the short
run. Key Term
Variable: that which can be
TVC is an increasing function of output. In other words increased or decreased
TVC varies with output. It may be expressed symbolically
as;
TVC = f (Q)
Here, Q denotes output; and f denotes function.
The total variable cost is incurred only when production takes place. When a firm halts
production in the short run, the total variable cost will be zero. TVC rises sharply in the
beginning, gradually in the middle and sharply at the end in accordance with the law
of variable proportion. Let us Summarize
Output TVC 90 Y TVC Fixed cost represents
0 0 the expense that is
1 10 Total Variable Cost 80
2 18
3 24 70 paid out even when
4 32 60
5 50 50 no output is pro-
6 80 40 duced.
30 Variable cost repre-
20 sents expenses that
10
0 1 2 3 4 5 6 X vary with the level of
output
0 7
Output
TVC curve slope upwards from left to right. TVC curve rises as output is expanded.
When output is zero, TVC is also zero. Hence, the TVC curve starts from the origin.
7 Vedanta High School Economics - 10
Total Variable cost includes the following: The law of variable
a. Expenses on labour force employed. proportions explains pro-
b. Expenses on raw materials, fuel and power KEY duction function with one
c. Transportation expenses. IDEA variable input
d. Running expenses of fixed capital equipments.
e . Marketing and publicity expenses.
The TVC curve has an inverse-S shape, which reflects the law of variable proportions.
Initially, due to increasing returns the TVC curve is concave downwards and eventually
it becomes convex downwards due to decreasing returns. It implies that initially the
total variable cost(TVC) increases at a decreasing rate and at later stages, it increases at
an increasing rate.
3. TOTAL COST (TC)
It is the cost to produce given units of output. It refers to the aggregate money expenditure
incurred by a firm to produce a given quantity of output. The total cost initially
Symbolically, the TC may be expressed as: increases at a decreasing
TC = f (Q) KEY rate and later increases at
Here, Q denotes output; and f denotes function. IDEA an increasing rate
It means that the TC varies with output. For example total cost to produce 10 units of
output at the rate of Rs. 20 per unit is Rs. 200 [10x20=Rs. 200]. Similarly total cost to
produce 10 units of output at the rate of Rs. 25 per unit is Rs.250.
Total cost includes fixed as well as variable costs.n Hence, TC = TFC +TVC.
TC varies in the same proportion as TVC. In other words, a variation in TC is the result
o f variation in TVC since TFC is always constant in the short run. to Note
Point
Output TFC TVC TC 140 Y
0 50 0 50 The TFC is constant-it
120 TC graphs as a horizontal
1 50 10 60 100 line and TVC increases
2 50 18 68 80 TVC as output increases. TC
Keynote also increases as output
3 50 24 74 Cost 60
TFC increases. The vertical
40
4 50 32 82 distance between the to-
20
5 50 50 100 X tal cost curve and the to-
6 50 80 130 0
0 1 23456 7 tal variable cost curve is
Output total fixed cost.
The total cost curve rises upwards from left to right. In our example the TC curve
starts from Rs. 50 because even if there is no output, TFC is a positive amount. TC and
TVC have same shape because an increase in output increases them both by the same
amount since TFC is constant. TC curve is derived by adding up vertically the TVC
and TFC curves. The vertical distance between TVC curve and TC curve is equal to
TFC and is constant throughout because TFC is constant.
• Fixed costs are costs that do not change according to change in output.
• Variable costs are costs that change along with the change in output.
• The TFC curve in the figure is horizontal and parallel to X-axis, indicating
that it is constant regardless of output
Vedanta High School Economics - 10 8
4. AVERAGE FIXED COST (AFC)
Average fixed cost (AFC) is total fixed cost per unit of output. It is the ratio of Total
Fixed Cost to output produced and is obtained as:
SAAivFneCcrea=,gAe FFTCiQFxiCesdfa Clolisntg=steadTiolTytoaatlasFloiOxueutdptpuCutotisntcreases; the AFC curve also falls steadily from
left to right and has a negative slope.
O1 ut put AFC Average Variable Cost 60 Y Point to Note
2 50
25 50 The AFC curve never
40 touches either axis.
It is a rectangular
3 16.6
30 hyperbola and gets
4 12.5 20 closer to both X- axis
5 10 10 AFC and Y-axis but never
6 8.3 0 touches them.
X
01234567
Output
AFC curve approaches both axes. It gets very near to but never touches either
axis. AFC will never become zero because the TFC is a positive amount.
If the total fixed cost of producing 5 units of output is Rs. 100, then AFC is obtained as: AFC=
TFC/Q=100/5= Rs. 20
5. AVERAGE VARIABLE COST (AVC)
The average variable cost is total variable cost per unit of output. It is the ratio of total
variable cost to output. Pause for Thought
“Both the TVC and TC curves
Symbolically, Total Variable Cost are of inverse S-shape due to
the law of variable propor-
Average Variable Cost = Total Output tions”
TVC
AVC = TVQC= Variable Cost, What does the inverse S-shape
Where, Total imply?
Q= Output
Point to Note
Output TVC AVC 14 Y AVC The law of variable pro-
1 10 10 12
Average Vaiable Cost portion is a short run law
10
2 16 8 of production. It exam-
8 ines the nature of change
in output in the short
3 21 7 6 run when an increas-
4 36 8 4
5 50 10 2 ing quantity of variable
6 78 13 0 0 1 2 34 5 6 X factor is combined with
Output 7 a given amount of fixed
The AVC curve falls initially, reaches a minimum and then risfaecstoars output increases.
It falls slowly as the firm’s output rises from zero to the normal capacity level. Once
normal capacity output is reached AVC curve rises sharply with the increase in output.
As such, the AVC curve is of U- shape.
If the total variable cost of producing 5 units of output is Rs. 50, then AVC is obtained as: AVC=
TVC/Q=50/5= Rs. 10
9 Vedanta High School Economics - 10
2. AVERAGE COST (AC)
Average cost is per unit cost of output. It is the total cost divided by the total number
of units produced, In other words average cost is the ratio of total cost to total output.
Total cost
Average cost TC = total output
Q
AC =
Example : Suppose Rs. 500 is required to produce 50 units of output. Here total cost
(TC) = Rs 500, output (Q) = 50 Average cost falls low-
TC er and lower at first. AC
AC = Q KEY reaches a minimum and
IDEA then slowly rises.
= Rs. 500 =Rs. 20
50
AC is also obtained as the sum of AFC and AVC. i,e AC = AFC + AVC
In the short run AC curve also tends to be U-shaped. The combined influence
of AFC and AVC curves shapes the nature of the AC curve. Initially AC falls due to
increasing returns and eventually rises due to decreasing returns.
Output TC 14 YAverage Cost AC Point to Note
1 10
2 16 AC 12 The Average Cost, AC, is
3 21 10 10 the sum of average fixed
4 36 88 cost, AFC, and average
variable cost, AVC. So
76 the shape of the AC curve
combines the shapes of
84
5 50 10 2 the AFC and AVC curves.
6 78 13 0X
01234567
Output
The short run AC curve is also called “Plant curve”. It indicates the optimum utilization
of a given plant or optimum plant capacity.
3. MARGINAL COST (MC)
Marginal Cost may be defined as the net addition to the total cost as one more unit of
output is produced. It is expressed as the change in total cost.
Symbolically, Pause for Thought
“Marginal cost is primarily re-
MCn = TCn–TC n-1.
lated to TVC and is independent
Where,
of TFC” Show that MC changes
MCn = MC of nth unit. with the change in TVC
TCn= TC of current output.
TC n-1= TC of previous output.
Marginal cost is also defined as the additional cost
to produce an additional unit of output. In other words marginal cost is the ratio of
change in total cost to change in total output.
MarWMginChae lrec,o=ΔstT=CΔΔ TQC=chCahCnahgneagneingientottoiantlaol uctotoptsautlt cost and ΔQ = Change in quantity
The total cost of producing 1units of output is Rs. 110, and the total cost of 2units of output is
Rs.118. Then MC is obtained as: MC= ∆TC/∆Q=18/1= Rs. 18
Vedanta High School Economics - 10 10
MC is independent of TFC and it is directly related to TVC. In the short run, the MC
curve also tends to be U-shaped.
The shape of the MC curve is determined by the laws of variable proportions. If MC
is falling, production will be under the conditions of increasing returns and if MC is
rising, production will be subject of diminishing returns. Points to Note
MC 25 Y • The Marginal cost is the
increase in total cost that
Output TC MC
1 10 - 20 results from a one-unit
2 18 8 15 Marginal Cost increase in output.
3 24 6 10 • TC is related to MC in the
same way that total prod-
4 28 4 5 uct is related to marginal
5 50 12 0 X product or that total util-
6 72 22 0 ity is related to marginal
1 2 34 5 6 7 utility.
Output
DERIVATION OF AVERAGE COST (AC) AND MARGINAL COST (MC)
The derivation of various shrt run costs is shown in the table given below:
Output(Q) Total Cost(TC) Average Cost(AC) Marginal Cost(MC)
1 10 10 10
2 18 9 8
3 24 8 6
4 28 7 4
5 30 6 2
6 36 6 6
7 49 7 13
8 64 8 15
9 81 9 17
10 100 10 19
In the above schedule total cost, average cost and marginal cost are shown. The schedule
shows that both average and marginal costs are declining with rise in units of output.
The average cost is minimum when the level of output is 6. At that level both average
and marginal costs are equal. The marginal cost rises from its minimum points. The
minimum marginal cost is equal to 2 when output is 5 unit. Average cost also rises
from its minimum point. The minimum average cost is 6 when level of output is 6. This
clearly shows that both curves decline up to certain limit and move upwards.
Points to Note
The MC curve intersects the
AC curve at the minimum
point of AC curve. When
marginal cost is less than
average cost, average cost
is decreasing; and when
marginal cost exceeds av-
erage cost, average cost is
increasing.
In the above figure Average cost decreases up to 6 units of output then increases but
11 Vedanta High School Economics - 10
marginal cost decreases up to 5 units of output then increases. This means both average
and marginal cost curves are U-shaped. Average cost is equal to marginal cost when
average cost is minimum. In other words MC curve passes through minimum point
of AC curve. AC decreases till MC is less than AC and AC starts increasing when MC
becomes more than the AC.
RELATION BETWEEN AC AND MC
Some definite relationship exists between AC an MC. It is important to understand the
link between average cost and marginal cost The relationship between them may be
pointed out as:
Points to Note
The MC curve intersects the
AC curve at the minimum
point of AC curve. When
marginal cost is less than
average cost, average cost
is decreasing; and when
marginal cost exceeds av-
erage cost, average cost is
increasing.
1. Both MC and AC fall at a certain range of output and rise afterwards.
2. When AC falls, MC also falls but at certain range of output MC tends to rise even
though AC continues to fall.
3. So long as AC is falling, MC is less than AC.
4. When AC is rising, after the point of intersection, MC will be greater than AC.
5. When MC just equals AC, AC is constant. At the bottom of a U-shaped AC, MC AC
minimum AC.
6. MC curve cuts the AC curve at the minimum point of the AC curve.
The relationship between average and marginal cost can be easily remembered with the
help of Figure below:
MC
AC MC
MC
It is illustrated in this figure that when marginal cost (MC) is above average cost (AC), the
average cost rises, that is, the marginal cost (MC) pulls the average cost (AC) upwards.
On the other hand, if the marginal cost (MC) is below the average cost (AC); average cost
falls, that is, the marginal cost pulls the average cost downwards. When marginal cost
(MC) stands equal to the average cost (AC), the average cost remains the same, that is, the
marginal cost pulls the average cost horizontally.
Vedanta High School Economics - 10 12
1.2 CONCEPT OF REVENUE
Revenue is the income that a business or a firm has from its normal business
activities, usually from the sale of goods and services to customers. it is the total
receipts of the firm by selling output. For example, if a firm gets Rs. 16,000 from sale
of 100 chairs, then the amount of Rs. 16,000 is known as revenue. Revenue is a very
important concept in economic analysis. It is directly influenced by sales level, i.e., as
sales increases, revenue also increases.
TYPES OF REVENUE
The concept of revenue consists of three important terms; Total Revenue, Average
Revenue and Marginal Revenue. Revenue is the amount
a. Total Revenue (TR) of money received from
b. Average Revenue (AR) KEY the sale of goods and ser-
c. Marginal Revenue (MR) IDEA vices
1. TOTAL REVENUE (TR)
Total Revenue refers to total receipts from the sale of a given quantity of a commodity.
It is the total income of a firm. Total revenue is obtained by multiplying the quantity of
the commodity sold with the price of the commodity.
Total revenue can also be defined as the sum of marginal revenue.
TR = ∑MR
Total revenue is calculated by multiplying output and price.
Total revenue = Price × output
TR = P × Q
Example: Suppose price of a book is Rs.200 and a producer sells 20 books.
Here Total Revenue = Price × output
TR = P×Q
Total revenue = Rs. 200 × 20 If we add up the Mar-
= Rs. 4000 ginal Revenues we obtain
= Rs. 4000 KEY the value of Total Revenue
IDEA
2. AVERAGE REVENUE (AR)
Average revenue refers to revenue per unit of output sold. It is obtained by dividing
the total revenue by the number of units sold. It is measured as the ratio of total rev-
enue (TR) to output sold (Q). A buyer’s demand curve graphically
Average revenue = Total revenue represents the quantities demanded at
TR output various prices. It shows the various levels of
AR = Q average revenue at which different quantities
of the good are sold by the seller. Therefore,
in economics, it is customary to refer AR
Average revenue is synonymous to price. curve as the Demand Curve of a firm.
Since the demand curve shows the relationship between price and the quantity demand-
ed, it also represents the average revenue or price at which the various amounts of a
commodity are sold, Therefore, average revenue curve of the firm is the same as demand
curve of the consumer.
TR P×Q
AR = Q = Q =P
13 Vedanta High School Economics - 10
3. MARGINAL REVENUE (MR)
Marginal revenue is the additional revenue generated from the sale of an additional
unit of output. It is the change in TR from sale of one more unit of a commodity.
Marginal revenue may be expressed as; Marginal Revenue is the
change in Total Revenue. If
WMRh=erTe,Rn- TRn-1. KEY we subtract previous TR from
IDEA current TR we obtain the MR
TTRRnn-=1 =TTRRfrformomththe esaslaeleofocf uprrreevniot uosutopuuttp.ut.
In other words marginal revenue is the ratio of change in total revenue to change in
number of output sold.
ΔTR
MR = ΔQ ΔTR = change in total revenue, and
ΔQ = change in total quantity of a commodity sold.
Suppose total revenue by selling 10 units of output is Rs.500 and 11 units is Rs.550.
Here change in total revenue (ΔTR) = Rs.550 - Rs. 500 = Rs. 50 and change in output
sold (ΔQ) = 11-10 = 1
ΔTR Rs. 50
MR = ΔQ = 1 = Rs.50
Keynote • Revenue is also known as sales receipts or turnover
• Total revenue is obtained as the sum of Marginal Revenues
• Average Revenue is same as Price
• Marginal Revenue is the change in Total Revenue
1.3 REVENUES UNDER PERFECT COMPETITION
Perfect competition is a market structure characterized by the existence of a large
number of buyers and sellers dealing in homogenous commodity. Under perfect
competition an individual firm cannot influence a given market price determined
by the industry. So a firm is a price- taker. Hence, the price remains constant as more
and more units are sold. The marginal revenue of a firm is always equal to its average
revenue.
DERIVATION OF TR, AR AND MR CURVES UNDER PERFECT COMPETITION
In perfect competition no individual firm can influence the price and the firm is only
the price taker. The demand and supply in the industry determine price. So we assume
that price of each unit of the commodity remains same. Assuming the price per unit of
a commodity to be Rs. 10, the relationship between TR, AR and MR may be shown in the
following table.
Output Price(Rs.) Total Average Marginal
Sold(Q) Revenue(Rs.) Revenue(Rs.) Revenue(Rs.)
1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
6 10 60 10 10
7 10 70 10 10
As shown in the above schedule price of each unit is Rs. 10. When 1 unit of output is
sold total revenue is Rs 10. As the sale in output rises to 2 units, total revenue rises to
Vedanta High School Economics - 10
14
Rs 20. Similarly rise in output sold to 7 units, total revenue rises to Rs 70. Since the
price of each unit of output is same, the average revenue and marginal revenue are
equal to the price. That is P=AR=MR= Rs 10 in the schedule.
1. DERIVATION OF TR CURVE
The TR Curve is derived from the above mentioned schedule by plotting the values in the
graph given below.
Key Terms
Y Industry: group of firms
TR producing similar commodity
Total Revenue 50 Homogenous: same in all
aspects
40 Schedule: table
30 Commodity: good
Proceeds: revenue
20
In perfect competition a
10 firm is a price taker and ac-
O 12 3 45 X KEY cepts the price deteermined
Quantity IDEA by the industry
The various amount of revenue against different quantities are plotted and joined together
to derive a linear upward sloping TR curve. With price remaining unchanged at Rs 10 per
unit, the TR increases at a constant rate from Rs.10 to Rs.20, Rs.30, Rs. 40 and Rs. 50 as
the quantity sold of a commodity increases from 1 unit to 2 units, 3 units, 4 units and 5
units respectively.
1. DERIVATION OF AR CURVE AND MR CURVE
The AR and MR is derived from the above mentioned table. The various amount of revenue
against different quantities are plotted and joined together to derive a perfectly elastic AR
= MR curve. With price remaining unchanged at Rs 10 per unit, the AR and MR remain
constant at Rs. 10 Key Takeaways
Features of Perfect Competition
Y 1. Large number of buyers and
sellers
AR and MR 2. Homogenous commodity
20 3. Uniformity in price
15 4. No government intervention
AR=MR 5. Perfect knowledge about
10
5 market conditions
O 12 3 45 X 6. Free entry and exit of firms
7. Absence of transportation
Quantity
cost
Under perfect market condition, the AR curve will be a horizontal straight line and parallel
to X axis. This is because a firm has to sell its product at the constant existing market
price. The MR curve also coincides with the AR curve. This is because additional units
are sold at the same constant price in the market.
• In perfect competition a firm is a price taker and accepts the price de-Keynote
termined by the industry
• In perfect competition TR curve increases at constant rate as MR is
constant
15 Vedanta High School Economics - 10
1.3 REVENUES UNDER IMPERFECT COMPETITION INCLUDING MONOPOLY
Monopoly is a market structure in which one firm sells a good or service that has no
close substitutes and strong barriers to entry block the entry of new firms. Under
monopoly the demand curve of a firm for its product slopes downward from left to right.
It shows that, such a monopoly firm can sell more only at a lower price. Hence, its total
revenue increases at diminishing rate.
DERIVATION OF TR, AR AND MR CURVES UNDER MONOPOLY
A monopoly firm is a price-maker. It can influence the price. A monopolist can fix a high
price of his product and sell the quantity demanded by consumers. A monopolist can
charge a high price only by reducing the supply of his product.
Under monopoly price is lowered to sell more quantity. The word Monopoly
When the AR or price declines the MR also falls. So the net KEY comes from the Greek
IDEA
addition made to the TR will be less than the price or AR. words mono for “one”
Hence, TR of a monopoly firm increases at a diminishing and poly for “seller.”
rate.
The following schedule shows the various concepts of revenue under monopoly.
Output Price(Rs.) Total Average Marginal
Sold(Q) Revenue(Rs.) Revenue(Rs.) Revenue(Rs.)
10
1 9 10 10 10
2 8 18 9 8
3 7 24 8 6
4 6 28 7 4
5 5 30 6 2
6 4 30 5 0
7 28 4 -2
1. DERIVATION OF TR CURVE
The TR Curve is derived from the above mentioned schedule. The various amount of
revenue against different quantities are plotted and joined together to derive a concave
downward TR curve. As price falls successively from Rs. 10 to Rs. 4; the TR increases at
a diminishing rate from Rs.10 to Rs. 30 and thereafter decreases as the quantity sold of a
commodity increases from 1 unit to 2 units, 3 units, 4 units, 5 units, 6 units and 7 units
respectively.
Y Key Takeaways
Y
Features of Monopoly
30 • • • •
1. A single seller
25 • TR 2. Absence of close substi-
Total Revenue 20 • tutes
3. Strong barriers to entry
15 4. A price maker
5. One firm industry
10 • 6. Price discrimination
5 x
0
1 2 3 4 5 67
Quantity of X
Vedanta High School Economics - 10 16
1. DERIVATION OF AR CURVE AND MR CURVE
The AR and MR curves are derived from the above mentioned table. The various amount
of revenues (AR and MR) corresponding to different prices are plotted against their
respective quantities and joined together to derive both the downward sloping AR and
MR curves.
Points to Note
Forms of Imperfect Competi-
Y tion Market
12
AR and MR 10 • Monopoly: A market with a
• single seller of a commodity
which has no close substitutes
8 •• Monopolistic Competition: A
• market with large number of
sellers selling similiar but not
6 •• homogenous commodity
•
4 ••
2 • AR
0 • X Oligopoly: A market with feww
-2 1 2 3 4 5 6 7• sellers of a commodity
MR
Quantity of X
Under monopoly, the AR curve of an individual firm slopes downward from left to right.
This is because; a firm can sell larger quantities only when it reduces the price. Hence, AR
curve has a negative slope. The MR curve is similar to that of the AR curve. But MR is less
than AR. AR and MR curves are different. Generally MR curve lies below the AR curve.
Under both monopoly and monopolistic competition, AR curve slopes downward. ButKeynote
under monopolistic competition it is more elastic. This is because under monopoly there
is lack of close substitutes of the monopoly product, whereas there are large numbers of
close substitutes of the product in monopolistic competition.
• At one pole of the competitive spectrum is the perfect competiton and
at the other extreme is monopoly
• A monopolist is a price maker and determines the price on its own
while a perfectly competitive firm is a price taker
RELATION BETWEEN AR AND MR CURVES
A. UNDER PERFECT COMPETITION
MR is always equal to AR from an individual firm’s point of view. In this case the AR
curve is horizontal to the ‘X’ axis and the MR curve coincides with AR curve. This is
shown in the figure below. Points to Note
• In perfect competition the
Y
AR curve overlaps the MR
curve. It is because MR
Revenue remains constant and
P AR=MR does not change with the
change in output
• In perfect competition TR
increases at a constant
rate as price remains
O X constant
Quantity
17 Vedanta High School Economics - 10
B. UNDER IMPERFECT COMPETITION INCLUDING MONOPOLY
When AR and MR curves are downward sloping linear straight lines, the MR curve lies
below the AR curve. In such a situation MR curve is exactly half way between AR curve
and ‘Y’ axis. This is because the MR falls twice than the fall in price at each level of
output. It may be noted that PA=AB in the figure below.
YRevenue Key Takeaways
P AB Relation between AR and MR
MR AR 1. AR is the ratio of TR to
OX
output sold, MR is the
Quantity change in TR
2. Both AR and MR are de-
rived from TR
3. In perfect competition AR
curve overlaps the MR
curve
4. In imperfect competi-
tion MR curve is twice as
steep as AR curve
CONCEPTS FOR REVIEW
Short run cost Long run cost Fixed cost
Variable cost Average cost Marginal cost
Revenue Perfect competition Monopoly
Total revenue Average revenue Marginal revenue
UNIT OVERVIEW
Cost of production: The aggregate of all of output. It is obtained as the ratio of total
monetary expenses incurred by the producer fixed cost to output.
in the course of production of goods and Average Variable Cost: It is the variable cost
services is called cost of production. per unit of output. It is obtained as the ratio of
Short run cost: The short run costs are the total variable cost to output.
costs which are incurred by a firm in the short Marginal cost: Marginal cost is the additional
run in the process of production activity. cost of producing and extra unit of output8.
The short run costs includes: Introduction of machinery
a. Total fixed cost Revenue: Revenue is the proceeds obtained
b. Total variable cost from the sale of output.
c. Total cost
d. Average cost The three concepts of revenue are:
e. Marginal cost
a. Total revenue
The Short run Total cost includes: b. Average revenue
a. Total fixed cost c. Marginal revenue
b. Total variable cost Total Revenue: It is the total proceeds obtained
The Short run Average cost constitutes: from the sale of output.
a. Average fixed cost Average Revenue: It is the revenue per unit
b. Average variable cost of output. It is obtained as the ratio of total
Average Fixed Cost: It is the fixed cost per unit revenue to output.
Vedanta High School Economics - 10 18
UNIT OVERVIEW
Marginal Revenue: It is the additional revenue unchanged
obtained from the sale of an additional unit of • In perfect competition a firm is a price
output.
taker
Perfect Competition: A perfect competition Monopoly: Monopoly is a market structure
is a market structure characterized by the with a single producer,
existence of a large number of buyers and
sellers dealing in homogenous commodity. • In monopoly a firm is a price maker
• In momopoly, price is lowered to sell more
• The TR curve under perfect competition is
a linear straight line sloping upward. output.
• Both the AR and MR curves are downward
• In perfect competition AR and MR are
equal as price of the commodity remain sloping under monopoly
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. What is meant by cost of production?
2. What is the nature of TFC curve?
3. What is the reason for the inverse S - shape of the TVC curve?
4. What accounts for the U - shape of the AC curve?
5. Introduce marginal cost with the formula.
6. If total cost of 50 units of output is Rs. 2000, find average cost.
7. What is marginal cost?
8. Why is AR and MR same in case of perfect competition market?
9. Why AC curve is U-shaped?
10. Define total revenue.
11. Introduce average revenue with the formula.
12. Define marginal revenue.
13. Why the AR curve is called the demand curve?
14. What is the nature of TR curve under perfect competition?
15. What does the concave downward TR curve under imperfect competition imply?
16. In which market structure does the AR curve overlaps the MR curve?
Short Answer Type Questions
1. What are the constituents of the total fixed cost?
2. Distinguish between Total fixed cost and Total variable cost.
3. Explain and illustrate the relation between AC and MC curve.
4. Prepare a table and show the derivation of TC, AC and MC
5. Prepare revenue schedule under perfect competition.
6. Prepare revenue schedule under imperfect competition.
7. Show the derivation of AR and MR curve under monopoly.
8. Show the relation between AR and MR curve
9. Explain Total revenue with example.
10. Compare AR and MR curves under monopoly and perfect competition.
11. Derive total revenue, average revenue and marginal revenue under monopoly.
12. Define total cost, average cost and marginal cost. Draw average cost and marginal
cost with the help of schedule.
19 Vedanta High School Economics - 10
QUESTIONS FOR REVIEW
13. Draw MC and AC curves from the table given below:
Output Total Cost Average Cost Marginal Cost
1 30 30 30
2 40 20 10
3 45 15 5
4 48 12 3
5 50 10 2
6 72 12 22
7 105 15 33
14. Find AR and MR from the Total Revenue of the given table:
Units of goods Price ( in Rs.) Total Revenue Average Rev- Marginal Rev-
enue enue
1 20 20
2 18 36
3 16 48
4 14 56
5 12 60
6 10 60
7 8 56
15. Find AC and MC from the given Total Cost and show it in curve diagram
Output Total Cost Average Cost Marginal Cost
1 10
2 18
3 24
4 28
5 30
6 36
7 49
8 64
Vedanta High School Economics - 10 20
2UNIT PRODUCT PRICING
Learning Objectives Weight: 10 Lecture Hours
On Completion of this unit the student will be
able to:
• Define and explain the concept of market
• Classify market and point out the differences
• Explain the concept and features of perfect
competition market
• Explain the determination of price and
• output in perfect competition you begin
BeforeExplain the concept and features of monopoly
The price of a product is determined by
market
the law of supply and demand. Consumers
• Understand and explain the determination have a desire to acquire a product, and
• of price and output under monopoly producers manufacture a supply to meet
Make comparison between perfect this demand. The equilibrium market price
competition and monopoly of a good is the price at which quantity
supplied equals quantity demanded.
Very Short Type Short Type Long Answer Type Total Marks
2 1 0 7
21 Vedanta High School Economics - 10
2.0 CONCEPT OF MARKET
In the general sense market is a place where buyers and sellers can meet to facilitate
the exchange or transaction of goods and services. In Economics however, the term
“Market” does not refer to a particular place as such but it refers to an arrangement
whereby buyers and sellers come in close contact with each other directly or indirectly
to sell and buy goods as well as to determine the price of the product.
Cournot “ Economist understands by the term market not only particular place in which
things are bought and sold, but the whole of any region in which buyers and sellers are in
such a free intercourse with each another that the prices of the same goods tend to equal
easily and quickly.” :
Benham: “We must therefore, define a market as any area over which buyers and sellers
are in such close touch with one another either directly or through dealers that the
prices obtainable in one part of the market affect the prices in other parts.”
Further, it follows that for the existence of a market, buyers and sellers need not
personally meet each other at a particular place. They may contact each other by any
means such as a telephone or telex. So the meaning of market can be generalized in
Market does not necessarily requires
a wider sense. Thus, market is a mechanism
the existence of a geographical area, it
through which, buyers and sellers interact
KEY is the mechanism throutgh which buy-
and deal a bargain. IDEA ers and sellers come into contact with
each other for transaction
CHARACTERISTICS OF MARKET
The following three points need to be
considered in the definition of market. They are:
1. Buyers and Sellers: A market requires the existence of buyers and sellers of the commodity.
2. Contact between Buyers and Sellers: There is establishment of contact between the buyers and
sellers. Buyers and sellers could also contact each other through the available communication
system like telephone, agents, letter correspondence and Internet.
3. Area: There should be a certain area where buyers and sellers meet to do transactions. It does
not necessarily be a geographical area.
4. Products: There should be certain products to be traded. Goods, services, ideas etc are taken
as products. The market may be different for different products.
5. Price: There should be a certain price for the commodity bought and sold in the market.
2.1 TYPES OF MARKET
Market can be classified on the basis of different criteria such as region, industry,
volume of transaction, types of competition, etc.
A. ON THE BASIS OF GEOGRAPHICAL COVERAGE:
1. Local Market: In this market, goods are product in local level and consumed it.
Generally, perishable goods like vegetables, fruits, milk and bulky goods like bricks,
stones etc are sold and purchased in local market.
2. National Market: In this market, goods are sold and purchased all over the country.
Sometime it is not possible to establish large industry in all the region of the country. So
goods produced in one place are distributed in all the regions of the country depending
upon the demand for the products in different region.
3. Regional Market: Regional market is the market which is specific to a particular region.
Commodities that are demanded and supplied over a region have regional market.
4. International Market: If goods and services are traded all over the world, the market is
Vedanta High School Economics - 10 22
called global market or international market. When demand and supply conditions are
influenced at the global level, we have international market. e.g. gold, silver, cell phone
etc. tea and machinery items etc.
B. ON THE BASIS OF VOLUME OF TRANSACTION
1. Wholesale Market: If the goods are sold and purchased in bulk quantity it is said to
be wholesale market. In wholesale market goods are purchased for further sale or final
consumption.
2. Retail Market: If the goods are sold and purchased in small quantity, it is said to be
retail market. In retail market goods are purchased for final consumption only. Price of
goods is higher in retail market as compared to wholesale market.
C. ON THE BASIS OF REGULATION
1. Regulated Market: In such a market there is some oversight by appropriate government
authorities. This is to ensure there are no unfair trade practices in the market. For
example, the stock market is a highly regulated market.
2. Unregulated Market: This is an absolutely free market. There is no oversight or
regulation, the market forces decide everything.
D. ON THE BASIS OF NATURE OF SALES
1. Commodity Market: In this market, physical such as grain, gold, crude oil etc are
bought and sold for cash.
2. Service Market: In this market, consumers do not get physical good, they get certain
types of services of their satisfactions.
3. Financial Market: It refers to any place where securities, currencies, bonds, and other
securities are traded between two parties.
4. Labour Market: It refers to any place where employers and and workers interact with each
other.As per the qualification and experience of labour employment is provided by employers.
E. ON THE BASIS OF DEGREE OF COMPETITION
1. Perfect Competition Market: A market characterized by the existence of a large number
of buyers and large numbers of sellers dealing in homogenous commodity is called
perfect competition market. In this market there is perfect knowledge among buyers
and sellers about market conditions.
2. Imperfect Competition Market: In this market there is some level of competition among
sellers. Price of the product is not same in all cases. There is some control of sellers
over the market. Imperfect competition market may further be classified as:
a. Monopoly: It is a market structure where there is a single producer-seller of a
commodity that has no close substitutes and there are strong barriers to entry.
b. Oligopoly: A market structure which is characterized by few firms or sellers
producing homogenous or differentiated products is the oligopoly market.
c. Monopolistic Competition: Monopolistic competition is a market structure where
there are large number of buyers and sellers, buying and selling differentiated
products. It is characterized by the presence of both, monopoly as well as competitive
element.
Homogenous: Same in all aspects
Glossary
Differentiated: Make something appear different or distinct
Firm: A production entity or unit
Bond: Interest yielding financial asset
23 Vedanta High School Economics - 10
4.2 PERFECT COMPETITION
Perfect competition is a market structure characterized by the existence of a large
number of buyers and sellers. All sellers produce homogeneous product. Since the
output produced by the seller are perfect substitutes, there is complete absence of
rivalry. No individual firm or seller can influence the market. Only the industry which
is a group of seller determines the price of the output. All firms are price taker.
Koutsoyiannis: “Perfect competition is a market structure characterized
by a complete absence of rivalry among the individual firms”.
Samuelson and Nordhaus: “ Perfect competition is an idealized market of atomistic fi
rms who are price-takers.”
Perfect competition is an idealized market structure that is not observed in the real
world. While unrealistic, it does provide an excellent benchmark that can be used
to analyze real world market structures. In particular, perfect competition efficiently
allocates resources. Firms are price taker
CHARACTERISTICS OF PERFECT COMPETITION KEY and adjust output at the
The characteristics of perfect competition market IDEA the
are price determined by
explained below: industry
1. Large number of Buyers and Sellers: There are a large number of buyers and sellers in
a perfect competitive market that neither a single buyer nor a single seller can influence
the price. The price is determined by market forces of demand for and supply of the
product.
2. Homogenous Product: The products produced by all the firms must be homogeneous
and identical in all respects i.e. the products in the market are the same in quantity,
size, taste, etc. The products of different firms are perfect substitutes.
3. Free Entry and Exit: There is freedom to entry and exit of firms or sellers in the
industry. The firms are freely allowed to start the business or close the business without
restriction.
4. Perfect Knowledge: Both buyers and sellers are fully aware of the current price in the
market. Therefore the buyer will not offer high price and the sellers will not accept a
price less than the one prevailing in the market. In this market, information is free and
costless. taker
orPefrsitpcheoenTpsarikobedleru:tcNot.odTeihnteedrdimveiimdnueaanpldrfiiacrnemdoofsurthpseepllplyerrofadccautnoctri.niAnflltulhefeinricmnedsiunsshtporryuiclidesFiapninrrdidmcuessatddrjyeautresetrmopuinrtpiecduet at the
5. by the
follow the price determined by the industry and adjust the
output to produce at the given price. So all firms are price taker and output adjuster.
6. Perfect Mobility of Factors of Production: Factors of production refers to land, labour,
capital and enterprise. All factors of production are free to move from one firm to
another throughout the economy. There is no restriction in mobility of factors of
production.
7. No Government Regulation: There is no government intervention (such as tariffs,
subsidies rationing of output) in the market.The demand and supply factors freely
determine price of the product. The government adopts Laisezz- faire- policy.
8. Absence of Transport Cost: There are no transport costs. Even if transportation cost
Vedanta High School Economics - 10 24
exists, it is negligible. It ensures uniformity in price throughout the market. If transport
cost is incurred, the firms nearer to the market will charge low price than the firms far
away. Firms are assumed to
9. Independence of Decision Making: All buyers and KEY be rational and as such
IDEA
sellers are fully independent. The buyers are free to their goal is profit maxi-
purchase the required commodity from any seller and mization
sellers are free to sell their commodity to any buyer.
10. Profit Maximization: The goal of all firms is profit maximization. All the firms accept
the price determined and adjust output to maximize profits.
Glossary Benchmark: Something that serves as a standard by which others may be judged
Barriers: Obstacles
Differentiated: Make something appear different or distinct
Laisezz faire: Non interference of the government
PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETITION
Perfect competition is a market structure characterized by the existence of a large
number of buyers and sellers dealing in homogenous commodity. In perfect competition
market, no individual seller or firm can determine the price of output. Firms are only
price taker. Industry, which is a group of firms, is responsible to determine price and
output. Key Term
The demand and supply factors in the industry determine Equilibrium price: price
price and output. The price determined by the equilibrium which is determined by the
point is said to be equilibrium price and quantity is equality of demand for and
equilibrium quantity. In equilibrium quantity demanded supply of the product
equals quantity supplied. The demand and supply is
balanced at equilibrium price. All firms sell the output at this equilibrium price.
We can explain how price and output are determined in perfect competition market
with the help of following schedule and graph.
Price (Rs.) Quantity Demand Quantity Supply (Kg)
(Kg)
10 500 100
15 400 200
20 300 300
25 200 400
30 100 500
The above schedule shows the quantity demanded and quantity supplied of the product
in the industry at the different prices. When price of the commodity is Rs. 10 quantity
demanded exceeds quantity supplied. When price is Rs.20 quantity demanded equals
quantity supplied. Similarly when price rises gradually from Rs.20 to Rs.30, quantity
supplied exceeds quantity demanded. Quantity demanded and quantity supplied
remain equal when price is Rs.20. So this price is known as the equilibrium price. It is
the market clearing price as quantity demanded in the market equals quantity supplied
by all firms.
25 Vedanta High School Economics - 10
Y Key Takeaways
• Price under perfect competition is deter-
D S mined by the twin forces of market de-
30 mand and market supply. On the demand
Excess Supply
25 c side it is buyers and on the supply side it
Price (in Rs.) d is sellers who take part in the process of
determining price.
20 E
ab • Perfect competition is a market in which
15 Excess Demand there are many firms, each selling an
identical product; many buyers; no bar-
10 D riers to the entry of new firms into the
S
X industry; and buyers and sellers are
O 100 200 300 400 500 well informed about prices.
Quantity
In the figure X-axis represents quantity and Y-axis represents price per unit of the
commodity. DD is market demand curve and SS is market supply curve. The market
demand curve intersects the market demand curve at point E, which defines market
equilibrium. This determines equilibrium price Rs. 20 and equilibrium quantity 300
units.
If price rises higher than Rs.20, there is excess supply equal to ab and this situation
leads to fall in price back to equilibrium price Rs. 20. In case, if price falls below
Rs.20, there is excess demand equal to cd and this results into the rise in price back to
equilibrium price i.e. Rs. 20.
Thus, in perfectly competitive market, the forces of demand and supply, interacting
with each other, determine equilibrium price and output and any disequilibrium
situation will generate forces that restore equilibrium.
Laissez-faire is an economic system in which transactions between pri-
vate parties are free from government interference such as regulations,
privileges, tariffs, and subsidies. The phrase laissez-faire is part of a larger
French phrase and literally translates to “let (it/them) do”, but in this context
usually means to “let go”. The French phrase laissez-faire gained currency
in English-speaking countries with the spread of Physiocratic literature in
the late 18th century
4.3 MONOPOLY
The word monopoly is derived from Greek word “mono” which means one and “poly”
means seller. Therefore, monopoly is a market structure where there is a single seller
or a producer producing a commodity which has no close substitutes in the market
and there are strong barriers to entry of new firms. The seller, being the sole seller, has
full control over the supply of the goods. As the seller is a price maker price can be
increased or decreased due to the sole right of the producer in supply of the commodity.
According to A. Koutsoyiannis: “ “Monopoly is a market situation in which there is
a single seller, there are no close substitutes for commodity it produces, there are
barriers to entry.”
At one pole of the competitive spectrum is the perfect competitor, which is one firm
among a vast multitude of firms. At the other pole is the monopoly, which is a single
seller with complete control over an industry.
Vedanta High School Economics - 10 26
CAUSES LEADING TO THE FORMATION OF MONOPOLY
There are many reasons, which cause the formation of monopoly. Some of them are:
1. Merger or Takeover: Monopoly may be created due to merger and takeover. Merger
means to make a group of different sellers as one firm whereas takeover is buying of
other small firms by one firm. Key Term
2. Patent Rights: Patent rights are such right which is given Patent right: A right granted
to an inventor that permits the
by the government to a firm to produce a commodity of inventor to exclude others from
specific quality and character. Such rights to the firm making, selling or using the in-
creates monopoly. vention for a period of time
3. Legal Restrictions: Rules and regulations of government
also create monopoly. We can see government monopoly in water supply, electricity,
petroleum product, etc which is due to government law.
4. Control over Supply of Inputs: A monopoly situation may arise due to control of a firm
over the supply of essential inputs like raw materials, skilled labour, technology etc.
5. Rival Firms Eliminated: Pressure tactics and unfair means by a giant firm may lead to
elimination of rival firms from the industry to secure sole position of a giant firm.
6. Market Size: The size of the market may be such as to support a single firm of the
optimum size. In such a case, the existing firm becomes a monopoly firm.
7. Large Amount of Capital: The manufacture of some goods requires a large amount of
capital. All firms cannot enter the field because they cannot afford to invest such a
large amount of capital. This may give rise to monopoly.
CHARACTERISTICS OF MONOPOLY MARKET
The following are the major characteristics of monopoly market.
1. Singer Seller: There is only one seller but many buyers. A single firm is the only
producer of a given product or the sole supplier of the product.
2. No Close Substitutes: There are no close substitutes of the product produced by the
monopolist in the market. This means monopoly cannot exist in the market if there are
close substitutes of the product produced by the monopolist.
3. Strong Barriers to Entry: There is strong barrier to entry of new firms. The existence
of monopoly depends on the existence of the barrier. There may be various types of
barriers to entry such as legal, economic, technological and other obstacles.
4. Price Maker: In monopoly a firm has full control over the supply of the product. The
firm is in the position to fix the price. So the firm is price maker.
5. One Firm industry: There being only one firm, the firm itself is an industry. The
distinction between the firm and the industry doesn’t exist in a monopoly.
6. Price Discrimination: A monopolist may charge different prices from different customers
for the same quantity of commodity in different markets. Price discrimination is the
practice of a monopolist to charge different prices to different consumers for the same
commodity.
Glossary Equilibrium: A situation of perfect balance
Merger: A combination of two things, especially companies into one
Substitutes: Goods or services having the same uses
Spectrum: An array of entities
27 Vedanta High School Economics - 10
PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY
A monopoly is a market structure where there is a single seller or a producer producing
a commodity which has no close substitutes in the market and there are strong barriers
to entry of new firms. A monopolist firm itself determines price under monopoly
market. A monopolist has sole control over supply of its product. In this sense, the
monopolist firm is a price maker not a price taker.
A monopolist firm can control either the price or output, but not the both. However,
the firm cannot make decisions on price and quantity of output to be supplied at the
same time. His price and output decision is motivated by profit maximization.
Conditions for Equilibrium:
The profit maximizing monopolist will determine KEY In perfect competition a
the price and quantity of output at a point where IDEA firm is a price taker and ac-
following two conditions are satisfied: cepts the price deteermined
a. Necessary condition: MC = MR by the industry
b. Sufficient condition: MC must cut MR from below
Point of Equilibrium: Determination of equilibrium price and output
The aim of the monopolist is to maximize profit therefore; he will produce that level of
output and charge that price that gives him maximum profits. A monopolist determines
the price and output at a point when he is in equilibrium. He will be in equilibrium at
that price and output at which his profits are the maximum.We can explain how price
and output is determined by the monopolist with the help of following figure.
Y Did you know?
Price’ Cost, Revenue MC MONOPOLY IN NEPAL
Profits AC Nepal Electricity Authority
(NEA), founded on August 16,
PA
1985, is the parent generator
CB and distributor of electric pow-
er under the supervision of the
E government of Nepal.NEA owns
Hydroelectric Plants connected
AR
MR to the grid and also buys power
O Q Output X from Independent Power Pro-
ducers (IPP)
Equilibrium under monopoly
In the above figure, output is taken along X-axis and price, revenue, cost along Y-axis.
Here we observe the firm’s equilibrium condition at point e. This is because at point e
the firm’s equilibrium conditions are satisfied.
It can be seen from the diagram that till OQ output, marginal revenue is greater than
marginal cost, but beyond OQ the marginal revenue is less than marginal cost. At point
E, both conditions for equilibrium are fulfilled. Therefore, the monopolist will be in
equilibrium at output OQ where marginal revenue is equal to marginal cost and the
profit is maximum. The corresponding price in the diagram is OP or AQ. It can be seen
from the diagram that ‘AQ’ is the average revenue, BQ is the average cost, and AB is the
profit per unit. Now the total profit is equal to the shaded area PABC.
Vedanta High School Economics - 10 28
IS MONOPOLY PRICE NECESSARILY HIGH?
It is generally assumed that price under monopoly is higher and output less than that
of perfect competition. A monopoly price is supposed to be higher than the price under
perfect competition. But it is not that monopoly price is always higher. A monopoly
price is not necessarily high due to the following reasons:
1. Under monopoly a firm is the sole producer. A monopolist reaps economies of scale. If
the output is produced in large quantity, price can be reduced.
2. Advertisement is not necessary for the product produced by the monopolist. So due to
internal economies price can be reduced. Point to Note
3. Due to investment on research and experience a monopolist can Limit entry pricing
implement new strategies to create demand with lower price. It is an anti-competitive
4. A monopolist may knowingly or intentionally fix a low price notmeasure employed by
to attract government attention by charging exploitative price. a dominant company
to protect market share
5. A monopolist is afraid of losing goodwill by charging high from new or existing
6. price. competitors.The price
is set deliberately low
There can be government intervention if price is fixed high. A
monopolist loathes government intervention.
7. Charging high price can attract new firms into the industry. This would mean losing
monopoly power.
8. A monopolist usually practice limit entry pricing to block out potential entrants into
the industry.
• Price discrimination is the act of charging different price for the sameKeynote
commodity to different consumers
• A monopolist is a price maker and determines the price on its own
while a perfectly competitive firm is a price taker
COMPARISON BETWEEN PERFECT COMPETITION AND MONOPOLY
The main aim of firms both under monopoly and perfect competition is to maximize
profit. In both the market forms, the firms are in equilibrium at the output level where
MC = MR. The differences are as follows:
1. Price: A firm under perfect competition is a price-taker. It has to take the price which
prevails in the market whereas a monopolist is a price-maker.
2. Output: The firm under perfect competition produces output at the minimum point
of the AC. The monopolist, on the other hand produces at the falling part of its AC
defined by the equality of MC with MR. As such, a monopolist output is lower than a
perfectly competitive firm’s output under similar conditions.
3. Profit: A firm under perfect competition enjoys only KEY A monopolist may quit if it
normal profits in the long-run. But a monopolist IDEA continues to earn only nor-
normally enjoys super normal profits even in the mal profits in the long run
long-run.
4. Revenue: A firm under perfect competition faces a horizontal revenue curve. The
Marginal revenue curve coincides with the average revenue curve. But in case of
monopoly the AR curve is downward sloping and MR curve falls faster than the AR
curve.
29 Vedanta High School Economics - 10
5. Cost: In case of perfect competition a firm cannot be in equilibrium under condition
of falling cost. Whereas a monopolist can be in equilibrium under conditions of rising,
falling and constant cost.
6. Assumptions regarding Production: Under perfect competition it is assumed that
all firms produce and sell homogeneous products. A monopoly firm may or may not
produce homogeneous products.
7. Number of Sellers: Under perfect competition there are large numbers of sellers of
homogeneous product. On the contrary, under monopoly there is only one seller.
8. Assumptions regarding Entry: Under perfect competition, there is no restriction on the
entry and exit of firms from the industry. In case of the monopoly, there is restriction
on the entry of new firms.
9. Implication regarding Decisions: Under perfect competition, a firm can take decision
only in respect of the quantity to be produced. On the other hand, a monopolist can
determined either the quantity of output or the price, but cannot determined both.
10. Difference between Firm and Industry: There is large number of sellers or firms in
perfect competition. So, there is distinction between firm and industry. Since there is
only one seller in monopoly, there is no difference between a firm and an industry.
READING BETWEEN THE LINES
True monopolies are rare today. Most monopolies persist because of some form of government
regulation or protection. For example, a pharmaceutical company that discovers a new
wonder drug may be granted a patent, which gives it monopoly control over that drug for a
number of years. Another important example of monopoly is a franchised local utility, such
as the fi rm that provides your household water. In such cases there is truly a single seller of a
service with no close substitutes. One of the few examples of a monopoly without government
license is Microsoft Windows, which has succeeded in maintaining its monopoly through large
investments in research and development, rapid innovation, network economies, and tough
(and sometimes illegal) tactics against its competitors.
EYE ON THE PAST
NEPAL TELECOM - Fallen Monopolist
You don’t have a choice, either buy it, or stay
out of it. You won’t get any other option except
this! This is called a Monopoly Market. Nepal
Telecom’s monopoly terminated when private
telecommunication entered the market. The big
ticket of NTC dropped in such a manner that
any citizen could make use of it. Ultimately,
nearly every individual in the country has a
mobile. The competition among the companies
benefitted users. The ongoing competition is
likely to benefit the consumers in the days to come as well. Today, one can choose whether to
use NTC or opt for another, or use both.
Vedanta High School Economics - 10 30
CONCEPTS FOR REVIEW
Exchange Market Perfect competition
Monopoly Oligopoly Laissez faire policy
Supernormal profit Normal profit Industry
Equilibrium Price discrimination Mergers
Patent right State monopoly Economies of scale
UNIT OVERVIEW
Market: Monopoly:
A mechanism through which, buyers and A market structure with a single producer-
sellers interact and deal a bargain. seller of a commodity which has no close
substitutes and there are barriers to entry.
Characteristics of a Market Characteristics of Monopoly
1. Single seller of the product
1. Existence of buyers and sellers 2. Absence of close substitutes
3. Barriers to entry
2. The establishment of contact between the 4. Price discrimination
buyers and sellers. Causes leading to the formation of monopoly:
a. Legal sanction
3. Buyers and sellers deal with the same b. Control over supply of inputs
commodity or variety. c. Merger and takeovers
d. Rival firms eliminated
4. There should be a price for the commodity e. Patent right for a firm’s product
bought and sold in the market. f. Large amount of capital
g. Market size to suit a single firm
Classification of Market hWighhy: a monopolist price is not necessarily
1. Perfect competition market.
2. Imperfect competition market. a. A monopolist gain from the usual economies
of scale
Imperfect competition is further sub divided
as: b. He is afraid of losing goodwill by charging
a. Monopoly high price.
b. Oligopoly
c. Monopolistic Competition c. Risk government intervention if price is
high.
Perfect Competition:
d. Charging high price can attract new firms
A market characterized by the existence of a into the industry.
large number of buyers and large numbers of
sellers dealing in homogenous commodity. e. Consumers may boycott consumption if
Characteristics of Perfect Competition price is fixed high.
1. Large number of buyers and sellers
2. Uniformity in price f. A monopolist is spared of huge advertisement
3. Homogeneous Product and promotional expenses.
4. Perfect knowledge
5. Free entry and exit g. With investment on research and can
6. Perfect mobility of factors of production implement new strategies to create demand
7. Absence of transport cost with lower price.
8. Absence of Government restrictions
9. Independence of Decision Making
10. Independence of Decision Making
31 Vedanta High School Economics - 10
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Define exchange.
2. How is market defined in economics?
3. What is meant by price discrimination?
4. What are the conditions for monopolist equilibrium?
5. What is the necessary condition for price determination under perfect competition
market?
6. What is equilibrium price?
7. What is barter exchange?
8. How many transactions it takes to satisfy a want under barter system?
9. In which market is a firm price taker?
10. What is meant by market clearing price?
Short Answer Type Questions
I1. List out the necessary elements of market.
2. Explain any five characteristics of perfect competition.
3. Explain any five characteristics of monopoly.
4. What are the causes of monopoly?
5. Is a monopoly price necessarily high?
Long Answer Type Questions
1. Differentiate between perfect competition market and monopoly market.
2. How is price determined in perfect competition market? Explain with table and figure.
3. What is monopoly? How is price determined under monopoly market? Explain with
diagram
Vedanta High School Economics - 10 32
3UNIT FACTOR PRICING
Learning Objectives Weight:13 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the concept of distribution
• Explain the subsistence theory of wages
• Distinguish between gross interest and net
interest
• BeforeUnderstand and explain the classical theory you begin
of interest The theory of factor pricing is also called
• Distinguish between gross profit and net theory of distribution. The distribution
may be either functional or personal. The
profit functional distribution is concerned with
• Explain the uncertainty bearing theory of the remuneration paid to various factors
profit of production viz., land, labour, capital,
• Understand and explain the Ricardian entrepreneur and organisation in the form
theory of rent of rent, wages, interest and profit.
Very Short Type Short Type Long Answer Type Total Marks
1 1 0 6
33 Vedanta High School Economics - 10
3.0 MEANING OF DISTRIBUTION
In economics, there are four main factors of production, namely land, labour, capital,
and enterprise. The services of factors of production such as land, labour, capital
and entrepreneur are used to produce certain goods and services. The price that an
entrepreneur pays for availing the services of these factors is called factor pricing or
distribution.
Samuelson -“Distribution is concerned with the problem of how the different factors of produc-
tion-land, labour, capital and entrepreneurship are priced in the market.”
Chapman - “The theory of distribution accounts for the sharing of the wealth produced
by a community among the agents, or the owners of the agents, which have been active
in its production.”
The theory of distribution in economics is concerned with the allocation of total
production among various factors of production like land, labour. capital, and
enterprises in the form of rent, wages, interest and profits respectively. Thus, the
problem of distribution is just a problem of pricing of factors of production.
3.1 WAGES
When workers are involved in production activities employer pays price to the
workers. Therefore wages refer to the price paid to the labourers for their work.
In other words, wages is the remuneration paid to the labourers for their involvement
in the production process. For example, price paid to workers working in agricultural
field, industry, in construction and in service sector such as school, college, hotel etc
are wages.
According to Benham, “ A wage may be defined as the sum of money paid under
contract by an employer to worker for services rendered.”
MONEY WAGES AND REAL WAGES
A. Money Wages or Nominal Wages: The total amount of money received by the labourer
in the process of production is called the money wages or nominal wages. It may be
paid on the basis of hour, day, week or month. For example a worker gets Rs 5000 as his
monthly wages or salary. This is money wage or nominal wages.
B. Real Wage: Real wages mean translation of money wages into real terms or in terms
of commodities and services that money can buy. It is the purchasing power of money
wages. It depends on how much volume of goods and services can be purchased with
a given money wages. It is the ratio between money wage and price of goods.
Re al wa ge = =M onPeryiwpcwe a(gpe) (w)
Real wages is inversely re-
KEY lated to price level and is the
IDEA
purchasing power of money
wages
If the price of goods and services is high, real wages
becomes low and in case of low price of goods and services, real wage becomes high.
For example, money wage of a worker is Rs 5000 and price level in market is Rs 10.
Rs 5000
Here real wage = Rs 10 Note the Difference
Money wages or nominal wages are wages that are paid
= 500 to a person regardless of the inflation rate in the market.
Real wages can also be defined as the amount of goods
When price rise to Rs 20 and services that can be bought from the individual’s
5000 wages after taking inflation into account.
Real wage = 20 = 250
Vedanta High School Economics - 10 34
DIFFERENCE BETWEEN MONEY WAGES AND REAL WAGES
The following differences may be pointed out between nominal wages and real wages:
1. Definition: Nominal wages are the wages received by a worker in the form of money
while, real wages are the purchasing power of nominal wages.
2. Relation to Price Level: Nominal wages are independent of price level. Real wages
varies inversely with price level.
3. Relation to Inflation: Nominal wages don’t consider inflation and any market conditions.
Real wages are determined by the inflation rates and consider the purchasing power of
a given compensation amount.
4. Purpose: Nominal wages purpose is to compensate the time and efforts put into
completing a task assigned. The purpose of real wages is to maintain the purchasing
power during changes in market conditions such as inflation.
5. Time Frame: Nominal wage only considers the current point in time. Real wages take
into account different periods in time, e.g the past years market conditions.
FACTORS DETERMINING REAL WAGES
Real wages depend on many factors which are given as follows:
1. Price Level: There is an inverse relationship between real wages and price level. If
price level increases, the purchasing power of money wages decreases and the real
wages also decreases and vice-versa.
2. Chances of Extra Income: The chances of extra income that could be earned also have
to be taken into consideration while calculating the real wages. If a worker can have
extra earnings in addition to his wages from his job, his real wages will be considered
more.
3. Regularity of Employment: Real wages also depends on the nature of the job. If the job
is temporary, the real wages are considered lower. If a worker is on a permanent job,
even if with lower money wages, his real wages will be more.
4. Nature of Work: Real wages can be determined by the risk and uncertainty involved in
the work. If the risk in work is more, real wages will be lower. Contrary to this, the real
wages will be higher when the risk in the work is lower.
5. Prospects of Promotion: If the chance of promotion of a worker is more, his real wages
will be more. For example, a person working in a bank has better prospects of promotion
than a worker working in a factory.
6. Permanency of Job: If the job is permanent, real wage will be high compared to a
temporary job.
7. Working Environment: If working environment is very sound, there is no conflict in
staff and office environment is good, real wage will be high.
8. Working Hours: If working hour is suitable to the worker, real wage rises. Some workers
do not prefer to work in night time.
9. Extra Benefits: If workers can get benefit from overtime working, pension, allowance,
bonus etc. real wages will be high.
10. Other Facilities: Other facilities such as transportation facilities, medical facilities, free
education to child etc help to increase real wages. More such fringe benefits, real wage
will be high.
35 Vedanta High School Economics - 10
A THE SUBSISTENCE THEORY OF WAGES
The subsistence theory of wages was first put forward by Quesnay, a member of
physiocratic school of economists in the 18th century and developed by classical
economist David Ricardo. The theory is also called ‘Iron law of wages’. It was so named
by Lassalle, a German economist as it advocates a critical minimum wage rete which
barely fulfils bare necessities. The theory of population, expounded by Malthus is
based on this “iron law”.
The French School of economists, as the physiocrats, looked upon this theory of wages
as a natural law. Quesnay had said, “Wages are fixed and reduced to the lowest level by
Point to Note
the extreme competition of the workers“. The Physiocrats were
Assumptions of the Theory: a group of 18th century
The theory is based on two assumptions: economists from France
1. Food production is subject to the law of diminishing returns who believed that the
2. Population increases at an increasing rate. wealth of nations was
derived solely from ag-
Statement of the Theory: riculture.
According to this theory, wages tend to remain at the subsistence level. Subsistence wages
refers to the level of wages which provides the workers only with bare subsistence which
is just the sufficient amount by which workers and their family can survive.
As per the theory, wages tend to settle at the subsistence level due to the following two
reasons:
1. Firstly, If the wage is above the subsistence level, workers are encouraged to give
birth of more children, their family size will increase. This is responsible to increase
labour supply in the labour market. Large supply of labour brings wages down to
the subsistence level.
2. Secondly, If wage is below the subsistence level, some worker will die due to poverty
and starvation. Number of labour force will decrease. The decrease in labour supply
in the market causes wage rate to rise eventually to the subsistence level.
According to this theory, wages tend to remain at the subsistence level in the long
run. In the short run, wages may be higher or lower than the subsistence wage rate.
However such a deviation is temporary. In the long run wage rate will always settle at
the subsistence level enabling the workers to fulfill just the bare necessities
CRITICISMS OF SUBSISTENCE THEORY OF WAGES
Though subsistence theory of wages is the first theory of wages, it is not free from
criticism. The theory has been criticized on the following grounds.
1. One sided Theory: This theory is one sided. It explains the wages from the supply side
only. It completely ignored the demand for labour. But if a rise in wages leads to an
increase in population, the larger supply of labour may be balanced by an increase in
the demand for labour.
2. Exploitation Theory: There is tendency toward exploitation in this theory. Wages are
paid in subsistence level and not on the basis of performance of workers.As per the
theory wages must be equal to the subsistence level whatever may be the productivity
of the worker.
3. Regressive in Nature: This theory advocates that if wage is higher than subsistence
Vedanta High School Economics - 10 36
level, population increases due to encouragement of more birth. This is regressive
thought. If we take the example of developed countries, population is not rising as
mentioned in the theory. “The subsistence theory of
Glossary
wage is also known as “iron
Viewpoint law” of wages”.
3. Lacks Motivation: This theory lacks motivation. Why is it called so?
All workers are paid wages in subsistence level. So
efficiency of labour cannot be increased.
4. No Clear Concept of Subsistence Level: Wages are paid in subsistence level but this
theory didn’t explain clearly the level of wages which is the subsistence wages.
5. Ignores the Role of Trade Unions: This theory has ignored trade unions through which
the workers make the collective bargaining for their benefits. Sometime, it can increase
wages more than the level of subsistence.
6. Cannot Explain Wages Variation: The subsistence of wages has been criticized as it
has failed to explain the wage variation of workers. Workers with efficiency and high
productivity get more wage than unskilled one.
Subsistence: Survival
Deviation: Departure
Regressive: That which affects the poor harshly
Trade Union: Labour union
3.2 INTEREST
In simple meaning interest is a payment made by a borrower to the lender for the
money borrowed and is expressed as a rate percent per year. It is usually expressed
as an annual rate in terms of money and is calculated on the principal of the loan. It is
the price paid for the use of other’s capital fund for a certain period of time.
In the real economic sense, however, interest implies the return to capital as a factor of
production. But for all practical purposes, “interest is the price of capital.” It is defined
as the reward for the use of capital for investment.
Different economists have expressed different views regarding interest.
Prof. Wicksell: “Interest is payment made by the borrower of capital by virtue of its
productivity as a reward for his (capitalists) abstinence”
Marshall: ”Interest is the price paid for the use of capital in any market”
Keynes: “Interest is the reward of parting with liquidity for a specified period.”
It follows that interest is the reward for the yield of capital, of saving, for the foregoing
of liquidity and the supply of money..
GROSS INTEREST AND NET INTEREST
GROSS INTEREST
Gross interest is the total amount of the interest that lender receives from the borrower.
The total payment made by the borrower to the lender on a certain amount of loan
received for a period of time is known as gross interest. The payment made by borrowers
to lenders is a composite payment. So, gross interest constitutes the following:
a. Net or Pure Interest: The payment made exclusively for the use of capital is called net
or pure interest. It is paid to compensate the lender for allowing the borrower the use
of his money for a certain fixed period.
37 Vedanta High School Economics - 10
b. Insurance against Risk: When a person lends, it runs the risk or loss of non payment
due to the failure of borrowers. The risk maybe personal if the borrowers are dishonest
or run away with the money without payment. So borrowers charge additional amount
which is insurance against risk.
c. Payment of Inconvenience: The money of the lender is locked up for a fixed period.
He cannot invest in other areas even if good opportunity arises. He himself may have to
borrow from others. He thus compensates himself by charging more than the net
c. Administrative Cost: When a lender gives any amount of money to borrower, he has
to bear some amount in administrative work. For this, he needs accountant, other
staffs and stationeries to keep records. This is the additional cost of the lender. So it is
included in gross interest.
d. Compensation for the Changing Value of Money: When prices are rising, the purchasing
power of money declines over a period of time and the creditor loses. To avoid such
loss and high rate of interest may be demanded by the lender.
To sum up, Gross interest =Net interest+ Payment for insurance against risk + payment
of inconvenience +Payment for administrative cost+ Compensation for change in
value of money
2. NET INTEREST
The payment made exclusively for the use of capital is regarded as Net Interest or
Pure Interest. According to Prof. Chapman, “Net Interest is the payment for the loan of
capital when no risk, no inconveniences apart from that involved in saving and no work
is entailed on the lender.” The interest rate charged in
Net interest is only the part of gross interest. So, the actual practice is gross inter-
gross interest minus payment for risk, inconvenience KEY est. Net interest is a constitu-
and management is net interest. IDEA ent of gross interest
Net interest = Gross interest - Payment on
insurance against risk - Payment of inconvenience - Payment for administrative cost -
.Compensation for change in value of money
• Interest is the reward for the use of capital
Keynote
• The rate of interest is expressed as rate percent per annum
• The actual rate of interest in practice is gross interest
• Net interest is a constituent of gross interest
A THE CLASSICAL THEORY OF INTEREST
The Classical theory of Interest was propounded by classical economists and put
forwarded by Marshall and Pigou. According to the classical theory, rate of interest
is determined by the supply of and demand for capital. The supply of capital is governed
by the time preference and the demand for capital by the expected productivity of
capital. Both time preference and productivity of capital depend upon waiting or
saving or thrift. This theory is also known as real theory of interest because it explains
the determination of interest by the interaction between real factors like saving and
investment.
According to this theory, the rate of interest is determined by the demand and supply
of capital. So, this theory is also known as Demand and Supply theory of interest or the
Saving-Investment Theory of Interest.
Vedanta High School Economics - 10 38
Assumptions
The classical theory of interest is based on certain assumptions which are given below:
1. Full employment prevails in the economy.
2. Saving and investment are influenced by the rate of interest.
3. Saving and investment are equal in the market. The Classical theory of in-
4. Money is neutral and plays a passive role. KEY terest is an amalgamation of
IDEA
The basic idea of this theory is that the demand for the various views on interest
capital and supply of capital determine the rate of given by classical economists
interest.
Demand for Capital
Capital is demanded for its productivity. So, businessmen, industrialists, investors
demand capital and use it for productive work and expect profit. The relationship
between demand for capital and rate of interest is negative. When rate of interest
decreases demand for capital increases. In opposite demand for capital decreases at the
time of high rate of interest. Alfred Marshall-(26 July 1842 – 13
July 1924)
Y
Rate of Interest D Alfred Marshall, was one
of the most influential
economists of his time.
His book, Principles of
Economics (1890), was
the dominant economic
textbook in England for many years. It brings
O D the ideas of supply and demand, marginal
X utility, and costs of production into a coherent
whole. He is known as one of the founders of
Demand for Capital
neoclassical economics.
In the above figure, quantity demand for capital is along X-axis and rate of interest
along Y-axis. DD represents demand for capital, which is downward sloping. This
shows negative relationship between rate of interest and demand for capital.
Supply of Capital
Supply of capital depends upon saving. Saving is the part of income after consumption.
The relationship between supply of capital and rate of interest is positive. When rate of
interest decreases supply of capital also decreases. Similarly supply of capital increases
at the time of high rate of interest.
Y A.C Pigou-(18 Nov 1877 – 7 March
S 1959)
Arthur Cecil Pigou was an
Rate of Interest English economist. As a
teacher and builder of the
School of Economics at the
University of Cambridge,
he trained and influenced
S X many Cambridge economists who went on to
O take chairs of economics around the world.
His work covered various fields of economics,
Supply of Capital particularly welfare economics,
39 Vedanta High School Economics - 10
In the above figure, quantity supply of capital is The demand for capital
taken along the X-axis and rate of interest along varies inversely with the rate
the Y-axis. SS represents supply of capital which is KEY of interest and the supply of
upward slopping. This shows positive relationship IDEA capital varies positively with
between rate of interest and supply of capital. the rate of interest
Determination of the Rate of Interest:
The equilibrium rate of interest is determined by the equality of demand and supply of
capital or by the equality of saving and investment. The process of determination the
equilibrium rate of interest can be shown with the help of table and figure.
Interest Rate (in %) Demand for Capital Supply of Capital
10 5 25
8 10 20
6 15 15
4 20 10
2 25 5
The table shows that as the rate of interest falls from 10% to 8%, 6%, 4% and 2%; the
quantity demanded of capital increases from 5 units to 10 units, 15 units, 20 units and
25 units respectively. While the quantity supplied of capital decreases correspondingly
from 25 units to 20 units, 15 units, 10 units and 5 units. At 6% rate of interest both the
demand for capital and the supply of capital are equal at 15 units. This defines money
market equilibrium at which the equilibrium rate of interest so determined is 6%.
Graphically, the rate of interest is determined at a point where demand for capital and
supply of capital interact. Gist of the Theory
Y
D S According to Classical Theory Of Interest, the
10 rate of interest is determined by the demand
Rate of interest(in %) Excess Supply and supply of capital. The rate of interest is
8 cd determined at the point where the demand for
6E capital is equal to the supply of capital. The
ab demand for capital arises from investment
4 and the supply of capital springs from sav-
ings. Hence, the rate of interest is determined
Excess Demand
2
S D by savings and investment.
O5 10 15 20 25
X
Demand and Supply of Capital
In the figure X-axis represents demand and supply of capital and Y-axis represents
rate of interest. DD is demand curve for capital and SS is supply curve of capital.
The demand curve for capital intersects the supply curve of capital at point E, which
defines the point of equilibrium. This determines the equilibrium rate of interest at 6%
at which both the demand for capital and the supply of capital are equal at 15 units.
Equilibrium: A situation of perfect balance
Glossary
Indeterminate: Not exactly known, established, or defined
Critic: A person who expresses an unfavorable opinion of something
Varies : Changes
Vedanta High School Economics - 10 40
CRITICISMS OF THE CLASSICAL THEORY OF INTEREST
The theory of interest propounded by classical economists has been criticized on
several grounds. The main defects of the classical theory as pointed out by their critics
Key Term
have been listed below;
1. Assumption of Full Employment: This theory is based Full Employment: a situa-
on the assumption of full employment of resources. tion in which all available re-
But, in reality, full employment of resources is a rare sources are being used in the
most efficient way possible
phenomenon.
2. Neglects Monetary Factors: The classical theory is a pure or real theory of interest
which takes into consideration the real factors like the time preference and the marginal
productivity of capital. It completely neglects the influence of monetary factors on the
determination of the rate of interest.
3. Saving and Investment not Interest-elastic: The classical theory assumes both saving
and investment as the function of interest rate. But, saving is function of income. So,
the equality between saving and investment is brought by the change in income and
not by the change in rate of interest.
4. Saving is not only the Source of Capital: According to the Key Term
classical theory, supply of capital directly comes from Dis-hoarding: When money
saving. But, it is a narrow concept of supply of capital. or goods that have been kept
are brought back into the
Besides saving, supply of capital also comes from bank economy,
credit and dis-hoarded money.
5. It ignores Demand for Capital for Unproductive Purpose: The classical theory of interest
assumes that demand for capital is only for investment purpose. But, critics mentioned
that capital is demanded not only for investment, but also for consumption.
6. Ignored the Role of Credit Money: This theory has completely ignored the role played
by credit money in the determination of rate of interest. Unlike this theory, rate of
interest may remain constant even if the investment demand increases because of the
expansion of bank credit.
7. Equality between Equilibrium and Market Rates of Interest: According to the classical
view, the market and the equilibrium (natural) rates of interest are always equal. Any
discrepancy between the two is only a temporary phenomenon which would disappear
in the long run. Keynes, however, does not regard the discrepancy between the two as
accidental and temporary.
6. Indeterminate: According to this theory the rate of interest is determined by demand
and supply of capital. The supply of capital varies with general level of incomes.
Hence, we cannot know rate of interest unless we know the level of income. We cannot
know level of income unless we know rate of interest. The classical theory is, therefore,
indeterminate.
CHECKPOINT 1. Explain the Subsistence theory of wages. What are its criticisms?
2.. Why is the subsistence theory of wages called the “Iron law of wages”?
3.. What are the factors affecting real wages?
4. Explain the classical theory of interest. What are its criticisms?
41 Vedanta High School Economics - 10
3.3 RENT
Meaning of Rent
In the ordinary sense rent is the payment made for the use of a material asset such as
land, carriage, buildings, etc. But in economics the meaning of rent is different. Rent is
the payment made to the landlord by the tenant for the use of land.
According to David Ricardo “Rent is that portion of the product of the earth which is
paid to landlord for the use of original and indestructible power of the soil”.
According to Marshall, “The term rent is referred to the income derived from the free gift
of nature”.
Modern economists have extended the meaning of rent to all factors of productions.
According to the modern view, rent is a surplus accruing to a factor over its transfer earnings.
The transfer earnings of a factor is the earning of a factor in its next best alternative use.
GROSS RENT AND NET RENT
A. GROSS RENT
Gross rent is the rent which is paid by the tenant to landlord is usually gross rent. Gross
rent includes not only rent for the use of land but also for the use of other facilities
such as telephone, building, electricity, drinking water, etc So gross rent is the total
payment by the tenant to the landlord. Gross rent is the rent
Gross rent consists of the following: which is paid for the
1. Net rent. It refers to payment made for the use of land. services of land and
2. Interest on capital invested for improvement of land. the capital invested on
3. Reward for risk taken by landlord in investing his capital. it. It includes net rent
too
B. NET RENT
Ne rent is also known as pure rent. So Net rent is the payment by the tenant to the
landlord for the use of land only. Net rent is the part of the gross rent. If we exclude
other payments such as payment for improvement of land, reward for risk taken by
landlord in investing his capital etc. from gross rent we get net rent. Net rent depends
upon the productivity of land, limited supply of land, location of land etc.
A RICARDIAN THEORY OF RENT
In the early years of the 19th century, David Ricardo propounded the theory on rent in
his book “Principles of Political Economy and Taxation”, which is commonly known as
the Ricardian Theory of Rent.
According to David Ricardo “Rent is that portion of the product of the earth which is
paid to landlord for the use of original and indestructible power of the soil”.
David Ricardo -(1772-1823)
Assumptions
David Ricardo was
a. Supply of land is limited and cannot be increased a British political
according to demand. economist.. He is best
b. Rent arises only on land which is free gift of nature. known for his theory
c. Land possesses some original and indestructible on wages and profit,
labor theory of value,
power. theory of comparative
d. The productivity of land is on diminishing order. advantage, and
e. The law of diminishing returns operates in agricultural theory of rent. His most well-known work
products. is the Principles of Political Economy and
Taxation (1817).
Vedanta High School Economics - 10 42
f. There is availability of marginal rent or no rent Real wages is inversely
land. KEY related to price level and
IDEA
g. There is perfect competition in land in the market. is the purchasing power of
How rent arises? money wages
As per Ricardo, rent arises under two situations:
• Due to differences in fertility, (i,e Rent under extensive cultivation)
• Due to diminishing returns in agriculture, (i,e Rent under intensive cultivation)
Rent under Extensive Cultivation
Ricardo explained his rent theory taking an example of a small un-inhabitated island
where people go to settle. Suppose that in a new uninhabitated island, there are four
pieces of land A. B, C and D in order of fertility. Grade A being the most fertile and
grade D being the least fertile. He assumed that these grades of land can be used only for
growing corn and have no alternative uses. As people come to settle there in batches,
the first settlers cultivate A grade land, and the subsequent settlers cultivate B, C and
D respectively.
We can explain this with the help of schedule and figure.
Grades of land Production( in quintals) Rent
A 80 80-20=20
B 60 60-20=40
C 40 40-20=20
D 20 20-20=0
As shown in the above schedule and figure, the first grade land is A in which 80
quintals food grain is produced. The second and third grade lands are B and C where
60 and 40 quintals food grain is produced respectively. The lowest grade land is D
where 20 quintal is produced. Here rent of A, B. and C grade land are 60, 40, and 20
respectively. The D grade land is marginal land or no rent land. So the rent of D grade
land is zero. The determination of rent is shown in the figure given below:
Y Marginal Land
80 Marginal land is land that is of lit-
tle agricultural value because crops
60 produced from the area would be
worth less than any rent paid for ac-
40 cess to the area. Although the term
marginal is often used in a subjec-
20 tive sense for less-than-ideal lands,
Cost of Production what constitutes marginal land var-
Output in metric ies both with location and over time.
tons
Rent
Rent
Rent
O A BC X
Grades of Land D
In the figure, the four grades of land of equal area A, B, C and D has been shown along
the OX axis. The corresponding rectangles of A, B, C & D show their respective yields,
that is 80, 60, 40 and 20 metric tons of wheat. The shaded area of each rectangle shows
their rent. Since D is the marginal land it has no rent. Its yield just covers the cost of
production. The marginal land thus plays a decisive role in the determination of rent.
43 Vedanta High School Economics - 10
CRITICISMS OF THE RICARDIAN THEORY OF RENT
The Ricardian theory of rent has been criticized on the following grounds:
1. Order of Cultivation: Ricardo assumed that the cultivators first of all cultivate the most
fertile land but historically, the easily accessible lands were used at first stage because
the best land was lying under thick forests.
2. Original and Indestructible Power: Ricardo observed that rent is paid for original
and indestructible powers of the soil. But the power of soil is neither original nor
indestructible. The productivity of land can be increased with scientific technology
and sometime land depreciates due to man made action.
3. Assumption of Perfect Competition: Ricardian theory of rent is based on the assumptions
that there exists perfect competition in the economy. There is no perfect competition in
the market for land. Perfect competition never exists in the real world.
4. Concept of Marginal Land: The theory has been criticised Key Terms
on the ground that Ricardo assumes that there exists Marginal land: an inferior
marginal land in every country, but the existence of land which yields no rent
such types of land is not necessary. In an over populated Tenant: a person who occu-
pies land or property rented
country even the most inferior lands also gets rent.
5. Rent Enters the Price: Ricardo concluded that rent does not enter into price. He
observed that rent is not included in the cost of marginal land. Since marginal land is
no rent land, thus, rent does not enter into price. But, the modern economists opined
that in many cases rent is a part of cost and enters into price.
6. Difficult to Separate Productivity of Land Alone: The output is produced on land also by
investing capital. Hence, it is not possible to separate the output produced due to original
fertility of land and investment of capital.
7. Law of Diminishing Returns: Ricardo maintained that in agricultural sector, law of
diminishing returns holds good. But, the law is not always applicable particularly in
the initial stages of production. Moreover, due to the better techniques of farming and
fertilizer, the applicability of the law of diminishing returns can be postponed.
8. Competing Uses of Land: Ricardo ignored the fact that there might be competing uses
for a particular piece of land. This theory does not explain the use of land for industries.
Only focussed on agricultural land. Perfect competition is an
9. Imaginary and Unrealistic: The Ricardian theory is idealistic market structure
based on the assumption of perfect competition between with a large numbers of
landlord and tenants. This is rarely found in the real KEY buyers and sellers dealing
world. Hence, the theory is imaginary and unrealistic. IDEA in homogenous commodity
10. Rent Arises Due to Scarcity: Ricardo maintained that rent arises due to the difference in
the fertility of soil. But in reality rent arises due to the scarcity of land. On this basis, this
theory is defective.
Keynote • As per Ricardo rent is the suplus enjoyed by more fertile land over
less fertile land
• The marginal land doesn’t earn rent as its produce just covers the cost
of production
Vedanta High School Economics - 10 44
3.4 PROFIT
The term profit has distinct meaning for different people, such as businessmen,
accountants, policymakers, workers and economists.Profit simply means a positive
gain generated from business operations or investment after subtracting all expenses or
costs.In economic terms profit is defined as a reward received by an entrepreneur by
combining all the factors of production.
According to Schumpeter, “The function of the entrepreneur is to introduce innovations
and profits are a reward for his introducing innovation.”
Profits are residual income left after the payment of the contractual rewards to other factors
of production. Since, profit is a non-contractual income; it may be positive or negative.
Entrepreneurs will only risk their money in production if there is the chance of being
rewarded for doing so. The reward for taking such risk is profit. Thus, Profit is the
reward to an entrepreneur for bearing the risk and uncertainty associated with the
business and for carrying out innovations.
GROSS PROFIT AND NET PROFIT
A. GROSS PROFIT
Gross profit is the surplus which accrues to a firm when it deducts its total costs in
producing products from its total income received from the sale of goods. In producing
goods, a firm incurs explicit costs and implicit costs. A firm’s explicit costs are
While calculating gross profit, explicit costs are the actual cash payments it
deducted from total revenue.In the ordinary language, KEY makes to those who provide
the term profit is used in the sense of gross profit. IDEA resources.
Gross profit is also known as business profit. Gross profit consists of several elements of
which net profit is one.
The elements of gross profit are as follows:
1. Reward for Entrepreneur Owned Factors: An entrepreneur himself may own various
factors of production. He may use his own land; invest his own capital and work as
a manager. He need not pay to any outsider for them. He does not receive any reward
separately. This payment is merged in gross profit.
2. Depreciation and Maintenance Charges: Some provision is made for the maintenance or
replacement of capital. This provision is known as depreciation charge. This charge must
be deducted to arrive at net profit.
3. Extra-personal Gains: The extra-personal gain may occur due to two reasons:
Monopoly Gains. The monopolist may earn abnormal profit as a result of the restriction of
output. Since this part of profit is not due to his efficiency. It should be deducted to arrive
at net profit
Windfall Gains. The occurrence of certain unforeseen circumstances may enable an
entrepreneur to earn additional reward. As for instance, during drought or earthquake, the
traders in grain receive high price for their products. Such gains should also be deducted
to arrive at net profit.
4. Pure or Net Profit: Net profit is the reward for the entrepreneurial function of the
entrepreneur. To find net profit, we have to deduct the implicit cost from gross profit.
45 Vedanta High School Economics - 10
B. NET PROFIT
Net profit is the profit which accrues to an entrepreneur for his functions as an
entrepreneur. These functions include risk bearing ability, innovating spirit, bargaining
ability etc. It is the exclusive reward for the entrepreneur for the following functions
Gross Profit= Total Revenue -
performed by him:
Explicit Costs
1. Reward for co-ordination
Net Profit = Gross Profit - Im-
2. Reward for risk taking plicit Costs
3. Reward for uncertainty bearing, and
4. Reward for innovation.
Net profit is a constituent of gross profit. The following costs are excluded in gross profit
to get net profit.
a. Depreciation and Maintenance Charge: In production fixed asset and equipment like
building and machineries are used. The value of machineries depreciates and this
depreciation charge is deduced in gross profit to get net profit.
b. Monopoly Profit and Windfall Gains: Sometime due to excessive rise in demand for
the product extra income occurs. Windfall gain is also unexpected profit due to sudden
changes in the economy such as war diseases, inflation etc. Monopoly profit and
windfall gains are deducted.
c. Insurance: Insurance premium which is regularly paid by the enterprises should be
deducted from gross profit to get net profit.
d. Amount of Rent, Wages and Interest: Enterprises pay wages to labour, rent to land and
interest to capital. This should be deducted to get net profit.
Summing up
Gross Profit = Net profit + (Wages+ Rent+ Interest) -+depreciation and maintenance
charge + monopoly profit + windfall profit -+ insurance charge.
Net Profit = Gross profit - (Wages+ Rent+ Interest) - depreciation and maintenance
charge - monopoly profit-windfall profit - insurance charge.
A UNCERTAINTY BEARING THEORY OF PROFIT
The uncertainty bearing theory of profit was propounded by an American economist
professor F H. Knight. This theory, starts on the foundation of Hawley’s risk bearing
theory of profit. There are two types of risks viz. foreseeable risk and unforeseeable
risk. According to Knight unforeseeable risk is called uncertainty bearing. As such,
profit is the reward for uncertainty bearing in the business organization rather than
risk taking. Simply, profit is the residual return to the entrepreneur for bearing the
uncertainty in business. As per F.H Knight, profit
Knight had made a clear distinction between the risk and arise due to uncertainty
uncertainty. In line with it, he divides risks into two types: bearing by an entrepreneur
• Foreseeable risk
• Unforeseeable risk
a. Foreseeable Risk: The foreseeable risks are those whose probability of occurrence can
be anticipated through a statistical data. There are certain risks which are foreseen
such as fire, accident, theft,etc. These types of risks are insurable risk and borne by
insurance company. Such risks are calculable and hence can be insured in exchange
for a premium. So these risks are not actual risk and no profit is gained.
Vedanta High School Economics - 10 46
b. Unforeseeable Risk: Unforeseeable risks are those whose probability of occurrence
cannot be determined. These types of risks cannot be insured. Insurance company
will not be ready to bear these types of risk. For example risks like earthquake, change
in market price, change in demand and government policy are uncertainties which
cannot be insured. The insurance company does not bear these types of risks. This
incalculable area of risk is the uncertainty. So profit is the reward for taking unforeseen
risk or uncertainties. “As per Knight profit arise
Glossary
Some of the non-insurable risks which arise in due to uncertainty bearing by
Viewpointmodern business are as follows:
an entrepreneur” Give your
1. Competitive Risks: Any business firm has the risk opinion.
due to increase in number of competitors .These risks arise from the possibility of
the new firms entering into the industry and existing firm may have to face serious
competition from them.
2. Technological Risks: Technology advances with flight of time. Some new technique of
production or new type of machinery might be evolved. The existing firms may not be
able to catch up with this. If any firm fails to adjust the change in technology, the firm
suffers loss.
3. Risk of Governmental Intervention: The government may change its policy related
to investment, export, import, taxes, and so on. change in policy of government. This
might ultimately reduce the profit of the firm. Due to it, any firm may suffer loss.
4. Business Cycle Risks: The advent of business recession or depression might reduce
consumer purchasing power and reduce demand for the product. This may cause profit
to fall. This type of risk arises because of the occurrence of business depressions when
prices fall much more than costs.
Since these risks cannot be foreseen and statistically measured, no insurance company
will be ready to insure them. Hence these are non-insurable risks or uncertainty-
bearing. In the opinion of Knight there is a direct relationship between uncertainty
bearing and profit. Greater the uncertainty bearing, the higher is the level of profit.
Innovation: Introduction of something new
Depreciation: Wear and tear especially of capital asset
Windfall: Unexpected
advent: The arrival of a notable person, thing, or event
CRITICISMS OF THE UNCERTAINTY BEARING THEORY OF PROFIT
Uncertainty bearing theory of profit has been criticized on the following grounds.
1. Profit not only for Uncertainty Bearing: This theory stresses that profit arises due to
uncertainty. Besides uncertainty bearing, an entrepreneur also provides services such
as organizing, mobilizing and coordinating other factors. Profit is the reward for these
functions as well.
2. Unable to Explain Monopoly Profit: This theory does not suit well to expose the
phenomenon of monopoly profit when there is least uncertainty involved in a monopoly
business. Though there is less uncertainty in a monopoly market, profit is higher.
3. Neglects Skill and Efficiency of the Entrepreneur: This theory neglects the skills
like use of resources, good bargaining skill, efficiency and proper management and
coordination.
47 Vedanta High School Economics - 10
4. No Relationship with Uncertainty: According to this theory, there is direct relationship
between profit and uncertainty bearing. In the real world there is no direct relationship
between uncertainty bearing and profit. If the business involves high risk, there is more
probability of failure and loss rather than profit.
5. Cause of Scarcity: According to this theory uncertainty limits the supply of
entrepreneurs. But uncertainty is not the only factor that limits the supply of
entrepreneurs. The factors such as lack of fund, knowledge and opportunity also limit
the supply of entrepreneurs.
6. Uncertainty is not a Factor of Production: According to this theory, uncertainty seems
to be the factor of production but factor of production is organization not uncertainty.
Uncertainty bearing cannot be treated as a separate factor or production.
7. Supply of Entrepreneurs : Prof. Knight says that the supply of entrepreneurs is restricted
due to uncertainty bearing. But it is not the only factor that restricts the supply of
entrepreneurs. There are some other factors like lack of funds, lack of knowledge, lack
of opportunities etc.
CONCEPTS FOR REVIEW
Nominal wages Real wages Fringe benefits
Subsistence wages Gross interest Net interest
Liquidity Time preference Full employment
Credit money Residual incomes Innovations
Uncertainty bearing Windfall gains Foreseeable risks
Unforeseeable risks Differential surplus Transfer earnings
Marginal land Contract rent Economic rent
ECONOMISTS PROFILE
DAVID RICARDO
David Ricardo (1772-1823) was a classical British economist best known
for his theory on wages and profit, labor theory of value, theory of
comparative advantage, and theory of rents. David Ricardo and several
other economists also simultaneously and independently discovered the
law of diminishing marginal returns. His most well-known work is the
Principles of Political Economy and Taxation (1817).
Vedanta High School Economics - 10 48
UNIT OVERVIEW
Distribution: It is the process of allocating Criticisms of the theory
national income among factors of production a. Assumption of full employment
according to their contribution in the bel.a sticSaving and Investment not interest-
production process. c. Saving is not only the source of capital
d. Ignored the role of credit money
Wages: It is the remuneration paid to a labourer e. Indeterminate
for his involvement in the production process.
Profit: It is the residual income left with the
Types of wages entrepreneur after other factors of production
a. Money wages are paid their rewards.
b. Real wages
Gross Profit: It is the profit derived by
Real wages: It is the purchasing power of subtracting the cost of other factors of
money wages. production.
Factors determining real wages: Net Profit: It is the reward for the entrepreneur
a. Price Level ial function of the entrepreneur.
b. Chances of Extra Income Elements of Gross Profit
c. Fringe Benefits 1. Net profit
d. Permanent or Temporary Nature of job 2. Depreciation and maintenance charges
e. Nature of Work 3. Extra-personal gains
f. Environment Conditions of Work 4. Insurance
g. Chances of the Promotion 5. Rent, wages and interest
h. Timely Payment Uncertainty bearing theory of profit
Subsistence Theory of Wages
According to this theory, wages tend to remain According to Knight, profit is the reward for
at the subsistence level. It will provide the uncertainty bearing rather than risk-taking.
workers only with bare subsistence.Wage rate Profit is paid for the non-insurable risks and
tends to settle at the subsistence level in the not for the insurable risks.
long run.
Rent: Rent is the reward paid by a tenant to the
Criticisms of the subsistence theory of wages landlord for the use of land.
a. One sided theory Ricardian theory of rent
b. Ambiguous
c. Unrealistic According to Ricardo, rent arises due to
d. Wage variation not explained difference in fertility of the land. Some lands
e. Exploitation theory are more fertile while some lands are less
f. Ignore the role of trade unions fertile. So rent arises to superior land over
inferior land.
Interest: The payment made by the borrower Criticisms of the Ricardian Theory
to the lender for the use of capital is known as 1. Original and Indestructible Power
interest. 2. Order of Cultivation
Classical theory of interest 3. Restricted Rent to Land
4. Neglect of Scarcity Rent
The classical theory of interest is also called 5. Competing Uses
real theory of interest. The basic idea of this 6. Imaginary and Unrealistic
theory is that the demand for capital and 7. No Marginal Land
supply of capital determine the rate of interest. 8. Difficult to Separate Productivity of Land
49 Vedanta High School Economics - 10
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. What is meant by nominal wages?
2. What is the purchasing power of money wages called?
3. How is real wages related to price level?
4. What is meant by subsistence wages?
5. Why is the subsistence wage theory called the ‘Iron law of wages’?
6. What is meant by gross interest?
7. What is net interest?
8. Why the classical theory of interest is called the real theory of interest?
9. How is the demand for capital related to interest rate?
10. What is the main source of supply of savings?
11. How is the supply of capital related to interest rate?
12. What is meant by net profit?
13. What are unforeseeable risks?
14. Mention the risk in industry according to Knight.
15. What is meant by uncertain risk?
16. What causes uncertainty as per Knight?
17. What is rent as per Ricardo?
18. What is contract rent?
19. What is the actual earnings of a factor over its transfer earnings called?
20. What is meant by marginal land?
Short Answer Type Questions
1. Introduce wages. Distinguish between money wage and real wage.
2. What is interest? What are the elements included in gross interest?
3. Distinguish between gross interest and net interest.
4. What are the elements included in gross profit?
5. What is rent? Distinguish between contract rent and economic rent.
6. Explain any five factors affecting real wages.
7. What are non insurable risks? Mention the non insurable risks in business.
Long Answer Type Questions
1. Introduce real wages. Explain the factors affecting real wages.
2. Explain the subsistence theory of wages. What are its criticisms?
3. What is interest? Explain the classical theory of interest.
4. Explain the uncertainty bearing theory of profit. What are its criticisms?
5. Critically explain the Ricardian theory of rent.
Vedanta High School Economics - 10 50
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