Economics Part 1 Full Book Important Short Definitions

 CHAPTER 1

1. Opportunity Cost: Scarcity of resources compels people to make choices or trade-off decisions. The best alternative sacrificed is called opportunity cost.

2. Characteristics of Robbins’ definition: 1-It is scientific. 2- It is universal. 3-It is neutral.

3. Characteristics of Marshall’s definition: 1- It studies the daily life of human beings, rich or poor. 2- Economics is a social science.

4. Two drawbacks of Marshall’s definition: 1-It focuses only on material welfare. 2- Welfare is not measurable.

5. Imp points of Robbins’ definition: 1- Wants are unlimited. 2- Resources/means are limited. 3- Resources have alternative uses.

6. Drawbacks of Robbins’ definition: 1- It ignores the aspect of welfare. 2- Economics cannot be neutral. 3- Economics is reduced to science only, whereas it is also art.

7. Is economics a science or art: Firstly economics is science. It follows the usual scientific method of study. Secondly, it is also an art. Economic principles are applied tactfully to solve practical problems.

8. Assumptions: Assumptions make complex economic problems simpler to understand by focusing on what really matters.

9. Basic Wants: Wants that must be satisfied in order to maintain human life is called basic wants or necessities e.g. want for food, clothing, and housing.

10. Applied Economics: Applied economics is that branch of economics that studies the application of economic laws for the solution of economic problems.

11. Classical Economics: It is the name given to the macroeconomic theories before the 1930s that led to the conclusion that a market economy is self-regulating and usually works at a full-employment level.

12. Ceteris Paribus: It is a Latin expression that means ‘all other things remaining constant.

13. Deductive Method: In this method, some major existing principle is used as a base and through logical reasoning, some untested principle is made out o it.

14. Inductive Method: In this method, we move from facts to theory. It becomes possible to identify some principles underlying the observed facts.

15. Economic Goods: Economic goods are those goods that are scarce in relation to the demand for them.

16. Economic Law: Economic law is a statement that shows the relationship between some cause and its effect e.g. law of demand which shows the relationship between price and quantity bought.

17. Economic Problem: Economic problem means the problem of scarcity of resources which people face against their unlimited wants.

18. Good: A good is any material thing which people want to use. A good may be free like air or maybe economic good that has a price like soap, shoes, etc.

19. Human Wants: Human wants means the desire to get and use something which provides utility.

20. Economic Wants: These are the wants which can be satisfied only by spending money e.g. want to get a car.

21. Non-Economic Wants: The desire which can be satisfied without the use of money e.g. desire for friendship.

22. Macroeconomics: The study of the economy as a whole. The main topics of macroeconomics are national income, inflation, employment, etc.

23. Microeconomics: The study of small units of the economy like households and firms etc to see how they make economic decisions.

24. Scarcity: Scarcity describes a situation where resources are limited to meet all wants. Demand for something is greater than its supply.

25. Positive Science: Study of something ‘as it is’ without adding personal opinion like ‘what it should be.

 

 

 

CHAPTER 2

 

· Consumption: Consumption means the use of goods and services for direct satisfaction.

· Consumer Behaviour: The behavior of the people with regard to selection, purchase and consumption of goods & services for maximum satisfaction is known as consumer behaviour.

· Utility: The power or ability of a good or service to satisfy a human want is called utility. I.e: when a thirsty person drinks water, we say that water has utility for him.

· Marginal Utility: The additional satisfaction a consumer gains from consuming one more unit of a good or service. It is DTU/DQ.

· Total Utility: The total utility is simply the sum of all the marginal utilities of the individual units.

· Value: Value of a good is the amount of other goods and services, which is obtained in exchange for it. I.e: if 1 pen is exchanged for 2 books, these books are the value of the pen.

· Determinants of Value: 1) It must have utility. 2) It must be scarce. 3) It must be transferable.
· Price: Value of a product expressed in terms of money is called price. I.e: if a pair of shoes is exchanged for Rs. 400, then this amount is the price of shoes.
· Income: The amount or reward which a person receives for his services is called his income.
· Transfer Payments: The amount or reward which a person receives without providing his services is called transfer payments. I.e: Zakat, scholarship, gifts etc.

· Wealth: Wealth means all those things, which people used and are not free. Such as house, land, clothes, money, books, machinery etc.

· Law of Diminishing Marginal Utility: Other things being equal, an increase in the stock of a commodity with a consumer diminishes its marginal utility.

· Law of Equi-Marginal Utility (Law of Substitution or Law of Maximum Satisfaction): Total utility from a given amount of money is maximum, when it is spent on various goods in such a way that marginal utility of money spent on each good becomes equal.

· Utility Maximizing Rule (Consumer’s Equilibrium point): MUA/PA= MUB/PB =………. MUn /Pn

· Indifference Curve (IC): A graph which shows all combinations of two commodities that gives same level of satisfaction to the consumer is called indifference curve.

· Slope of IC: Slope of IC is known as Marginal Rate of Substitution (MRS) =DY/DX

· Marginal Rate of Substitution: The rate at which a consumer is willing to substitute commodity X for Y is called MRS. Marginal Rate of Substitution (MRS) =DY/DX

· Budget Line: A line shows all combinations of 2 goods X and Y which a consumer can buy at given prices, using all income he wants to spend.

· Equilibrium Point: The point where an IC is tangent to budget line is the equilibrium point.

· Consumer’s Surplus: Difference between Actual Price and Paid Price.

· Kinds of Wealth: 1) Individual Wealth 2) Public Wealth 3) National Wealth 4)International Wealth.

· Changes in Budget Line: 1) Income Effect. 2) Price Effect.

 

 

 

CHAPTER 3

 

Variable: A variable is a symbol which during a discussion may assume different values. I.e price, time, cost etc.

·         Kinds of Variables: There are many kinds of variables; i)continuous variable, ii)discontinuous variable, iii)independent variable, iv)dependent variable and v)parameters.

·         Continuous Variable: A continuous variable is one, which can take on any value within its range. It does not leave any gap or interval. For example speed, time, temperature, height etc.

·         Discontinuous Variable: A discontinuous variable is that, which while assuming different values, always leaves gap in the values. It changes by jumps. For example price of a good.

 

 

·         Independent Variable: An independent variable is that which changes of its own and is not dependent on the values of other variable.

·         Dependent Variable: A dependent variable is the one whose value is determined by the values of independent variable. If a change occurs in independent variable it causes a change in dependent variable.

·         Constants: A constant is a number that has a fixed value or whose value is assumed as fixed during a discussion. For example in law of demand, we take income as a constant.

·         Parameters: Some variable quantities which actually changes in real life, are not changing during a discussion, are known as parameters. For example in law of demand income, weather, taste, population etc are parameters.

·         Equation: Equation is that kind of  statement in which two algebraic expressions are equal. For example:  (i) 2x⁴+3y+5=0    (ii) ax+b=0. In 1^st equation: 2,3 and 5 are constants, 3 is coefficient of y and 4 is power of x. in 2^nd equation a and b are parameters.

·         Kinds of Equations: (i) Linear equation or 1^st degree equations. (ii) Quadratic equation or 2^nd degree equations. (iii) Simultaneous equations.

·         Linear Equation: If in an equation, the maximum power of the unknown is only one, it is called linear equation, i.e 3x+6=0. The general form of linear equation is ax+b=0.

·         Quadratic Equation: If in an equation, the maximum power of the unknown is two, it is then called quadratic equation, i.e 3x²+2x-1=0. Its general form is ax²+bx+c=0.

·         Simultaneous Equations: A system of equations where more than one unknown are used are called simultaneous equations. For example, x+y=16.

·         Function: If two variables x and y are related to each other that for any value assumed for x, there is a single value for y, then y is said to be the function of x. For example, y=f(x) or in economics Qd= f(P).

·         Kinds of Functions: (i) Increasing function and (ii) Decreasing function.

·          Increasing Function: If in a functional relationship, both the independent and dependent variables move in the same direction, it is called increasing function.

·         Decreasing Function: If in a functional relationship, both the independent and dependent variables move in the opposite direction, it is called increasing function.

·         Statistics: Statistics is a science which is concerned with the collection, presentation, analysis and interpretation of numerical data.

·         Uses of Statistics: (1) Population census. (2) Agricultural statistics to provide information about yield, crop prices, farm size etc. (3) Industrial statistics to provide information about products, costs, profits etc. (4) Financial statistics provide information about banking and insurance etc. (5) Trade statistics to study the volume and direction of trade.

·         Statistical Data: Statistical data refers to numerical facts in any field of study, collected in a systematic manner for some purpose.

·         Characteristics of Statistical Data: (1) Statistical data consist of more than one numerical information. (2) Are always in numerical form. (3) Are collected with a definite purpose.

·         Kinds of Data: (a) Primary Data. (b) Secondary Data.

·         Primary Data: Primary data are the first hand numerical information, collected by somebody for a certain purpose.

·         Secondary Data: Secondary data mean the data used by some person or an organization which had originally been collected by someone else.

·         Methods of Collecting Primary Data: (1) Direct personal observation. (2)Questionnaire method. (3) Through registration. (4) Interviews

·         Methods of Collecting Secondary Data: (1) Official/semi official source. (2) Journals. (3) Technical people. (4) Reports of international organizations. (5) Internet and newspapers.

·         Classification of Data: Classification is the process of arranging data into classes or categories according to some common characteristics present in the data.

·         Tabulation: Tabulation means the process of arranging data into rows and columns of table.

·         Types of Tabulation: (1) One-way Tabulation. (2) Two-way Tabulation.

·         Parts of Tables: (1) Title. (2) Stub-Row caption. (3) Box Head-Column caption. (4) Body of table- containing data. (5) Source note.

 

 

 

 

CHAPTER 4

Demand:  Demand in common language means to wish, desire, or want for a commodity but in economics demand has two components i.e. Wish to purchase and Power to purchase.

Factors cause change in demand: (i) Change in the income of buyers (ii) Change in fashion (iii) Change in taste (iv) Change in price of related commodities (v) Change in population etc.

 

Substitute for some goods: 

Pepsi -- Coca-Cola

Train – Bus

Email – Letter

Gas -- Coal

 

Compliments for some goods:

Toothbrush – Toothpaste

Bat – Ball

Car – Petrol

Computer --  Monitor

 

Complementary good: The goods which are needed together to consume are known as complementary goods, for example, car and petrol.

 

Quantity demanded: Quantity demanded means the quantity bought at any one price.  It is a point on the demand curve.

 

Elastic demand goods: Toys, CD–player, Durable goods.

 

Inelastic demand goods: Sugar, Perishable Goods, Bread, Milk.

 

Determinants of demand: Income of buyers, Prices of substitutes, Taste of consumer, Population of the consumer.

 

Determinants of the elasticity of demand: Necessities, Luxuries,  The proportion of income spent on goods,  Close substitutes.

 

Zero cross elasticity: It means that the two goods are unrelated, neither substitutes nor complements.

 

Negative cross elasticity: It indicates that the two goods are complements if the price of one good and the quantity demanded of other good are inversely related.

 

Positive cross elasticity of demand: It means that two goods are substitutes. The price of one good and quantity demand of other good are directly related.

 

Point elasticity: The elasticity on a single point on the demand curve is known as point elasticity of demand. The concept of point elasticity is used when there is a small change in price.

 

Arc elasticity of demand: It means elasticity between two distinct points on a demand curve. Arc elasticity is used when there is a large change in price.

 

Factors cause change in demand: Change in the income of buyers, Change in fashion, Change in taste, Change in price of related commodities, Change in population etc.

 

Giffen good: It is a commodity that is demanded in larger quantities when its price rises and is bought less when its price falls.

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CHAPTER 5

Supply: Supply means the quantity of a product that is offered for sale at different prices during a given period of time. 

Stock: Stock is the total quantity of a commodity available near the market which can be brought for sale at a short notice.

 

Reserve Price: It is the minimum price below which a seller does not want to sell its commodity.

 

Types of supply: Market period supply, Short period supply, and Long-period supply.

 

Law of supply: Other things remaining the same, quantity supplied of a product increases with decrease in price and falls with rising in price.

 

Assumptions of the law of supply: Prices of raw materials, Cost of inputs, Number of sellers, Political situation, Production technology.

 

Change in supply: Extension and Contraction of supply, Rise and Fall of supply.

 

Extension and contraction of supply: When the price of a commodity rises, more quantity is offered for sale it is called the extension of supply. On the other hand, when the price falls, less quantity will supply it is known as a contraction of supply.

 

Rise and fall of supply: When the supply of commodity changes due to factors other than the price it is called rise or fall of supply.

 

Factors affecting supply or supply shifter:  Cost of inputs, Technology, Taxation, Number of producers, War.

 

The elasticity of supply: It is the degree of responsiveness of the supply of a commodity to change in its price.

 

Infinite elasticity of supply: When a very small rise in price leads to an infinite increase in supply the elasticity of supply is said to be infinity.

 

 

 

 

CHAPTER 6

·        Market Equilibrium: The equilibrium of the market refers to a situation where forces of demand and supply balance each other and a price is settled, (Qd=Qs).

·         The firm or market is said to be competitive where the following conditions prevail: (1) a very large number of buyers and sellers. (2) Every seller or buyer is a price taker. (3) Goods offered for sale are identical. (4) Free entry or exit for the firms. (5) Every buyer and seller has perfect knowledge about the market.

·         If a market lacks any one condition of a perfect market, it is then called an imperfect market.

·         A black market is the one in which there is illegal trading. The price charged is higher than the legally fixed price.

·        The price of a good which balances supply and demand in the market. Below this price, there is a shortage and above this equilibrium price, there is a surplus in the market.

·         this term refers to the non-intervention of the government in the market mechanism or free working of the economy.

·         It refers to such a period of time in which all necessary changes can be brought in the industry to meet the permanent shift of demand and supply of products. In a long-period market, fluctuations in prices are smaller.

·        It is a market with one seller. In monopoly market (i) a single firm controls the whole market supply of the product e.g. WAPDA. (ii) no close substitute available.

·         It is the average price over a long period of time during which the industry has a full chance to expand and contract according to the position of demand.

·         It is a market in which only a few firms doing business. The product of the firm may be identical or differentiated. For example Auto-mobile market, steel mills, etc.  

·        It is a legally fixed maximum price at which a good can be sold. It is below the equilibrium price of a free market.

·         It is a legally fixed minimum price at which a good can be sold. It is above the equilibrium price of a free market.

·         It is the payment made by the government to producers of a commodity so that they charge lower price in the open market (so that people get goods at lower prices).

·         A situation in which quantity demanded is greater than quantity supplied.

·         The situation, where demand is less than the supply of goods and services, is called a surplus. Supply exceeds demand.

·        A monopolist firm that can charge a price of its choice for its products called price maker.

·        Price taker means a competitive firm. It is compelled to accept the same price for its product which its competitor firms are charging.

·         It refers to such period of time which is enough to make adjustments by sellers in response to change in price. However, the time available is not very long.

 

 

 

CHAPTER 7

• Production: Production refers to all the activities undertaken to provide goods and services for satisfying human wants.

• Factors of Productions: All the things which are needed to produce goods and services are called factors o production. Factors are also called inputs. These are four in numbers: (1) Land (2)Labour (3) Capital (4) Organization.

• Land: Land means all free gifts of nature available for human use.

• Characteristics of Land: 1- It is a free gift of nature. 2- Its total supply is fixed. 3- It lacks geographical mobility.

• Labour: Labour means any physical or mental effort of human beings for some monetary reward.

• Characteristics of Labour: 1- It cannot be stored. 2- Its supply cannot be readily adjusted to demand.

• Labour Force: The number of people who work with their hands and mind are called labour force or human resource.

• Human Capital: The number of working people along with their education, training, skill and experience is called human capital.

• Capital / Physical Capital: All man made things which help in production of more goods and services are known as capital e.g. buildings, machinery, tools etc.

• Organization: A person or a group of persons who organizes the production process of goods and services is known as organization.

• Productivity: Productivity of a factor is its ability to produce output. Productivity= Quantity of output / Quantity of Input.

• Extensive Cultivation: It is the method of increasing the agricultural output by bringing new lands under cultivation.

• Intensive Cultivation: It means that the agricultural output is increased not by using additional lands but also by using more capital and labour on existing lands.

• Fixed Capital: Buildings or machinery which is useable again and again is called fixed capital.

• Working Capital: Raw material is known as working capital because it is used only in one round of production.

• Enterprise: The ability to run a production process is known as enterprise.

 

 

 

CHAPTER 8,9,10

 

·   Three External economies of scale: 1-Relaated workshops. 2-Banking services.        3-Transport facilities.

·    3 Internal economies of scale: 1-Managerial 2-Financial. 3-Risk bearing.

·   3 advantages of joint stock company:            1-Large scale production. 2-Long life.             3-Spread of risk.

·   3 advantages of large scale production: 1-Division of labour. 2- Research. 3-Use of by-products.

·  3 advantages of small scale production: 1-Contact with customers. 2-Proper handling. 3-Variety of products.

·   3 advantages of partnership: 1-Division of work. 2-Careful decision. 3-Personal interest.

·  3 advantages of cooperative business: 1-Public welfare. 2-Easy credit. 3-Research.

·        Capital Formation (Capital accumulation): It is the increase in the capital stock in the form of machinery, plant and buildings during a period of time.

·        Capital-Labour ratio: It is the ratio of the total value of capital used to the total number of workers employed.

·        Capital-Output ratio: It is the ratio of the total value of capital used to the total amount of output produced.

·        Company: An organization legally allowed to produce goods or trade. It is owned by shareholders whose liability is limited to the value of their shares.

·        Unemployment: A situation in which workers are jobless, either because of non-availability of jobs or because workers are not willing to accept jobs due to low wages.

·        Voluntary unemployment: It occurs when jobs are available but an unemployed person is not willing to accept it at the going wage rate.

·        Structural unemployment: It is unemployment of those workers whose skills are not demanded by employers because of new technologies or changes in the structure of the economy.

·        Frictional unemployment: It is the temporary unemployment of the workers that arises when people leave and enter the labour force or change their jobs.

·        Cyclical unemployment: It is the unemployment that takes place because of downturn of business cycle in the economy.

·        Debenture: A bond issued by a company providing for payment of interest at fixed intervals.

·        Dividend: Profit distributed by a business corporation to its shareholders.

·        Entrepreneur: The person, who combines the other resources/factors to produce a product, makes decisions, innovates and bears risk.

·        Firm: An independent decision making unit or organization that hires productive resources to produce and sell goods and services.

·        Mobility of Labour: There is mobility of labour when labour can easily shift from one job to another or from one location to another.

·        Occupational Mobility: It refers to changing of profession by a worker to enjoy higher income or a better status. For example a driver may become an engineer.

·        Social Mobility: It means the movement of people from one social class or group to another e.g. a factory may become a businessman.

·        Horizontal Mobility: If a worker moves from one job to another having similar salary or status, in the same or some other profession, it will be called horizontal mobility of labour.

·        Vertical Mobility: Through promotion or otherwise shifting from a junior to senior position is called vertical mobility. For example, a clerk may become an officer or a teacher.

·        Partnership: It means a business having more than one shareholder. The partners share profit according to the percentage of share in the capital invested.

·        Sole Proprietor: A person who is single owner and who has the right to all profits. He also bears all debts or losses of his firm.

·        Public Limited Company/ Company: It is a business which is registered under the Company Act and collects capital by selling shares in the open market. It produces goods and services.

 Ch: 11, 12, 13

Average Product: The output per worker is known as average product. It is calculated as TP/N where TP is total product and N in number of workers.

Capital Intensive Good: A product that requires relatively larger amount of capital input in comparison to labour used is called capital intensive good.

Diminishing Marginal Product: The property of marginal product of an input to fall as the quantity of the input is increased.

Economies of Scale: It refers to the property of long run average cost (LAC) to decline as the scale of production increased.

External Diseconomies of Scale: It refers to those common disadvantages which all firms of an industry have to face when there is expansion in industry, like rise in cost of production.

External Economies of Scale: It refers to those common advantages which all firms of an industry have to face when there expansion in industry, like fall in cost of production. internal

Economies of Scale: it refers to those common advantages which a single firm of an industry has to ace when there is expansion in industry, like managerial, risk bearing economies etc.

Firm: An independent decision making unit or organization that hires productive resources (land, labour, capital and organization) to produce and sell goods or services.

Industry: A group of firms that produce similar or identical products.

Marginal Product: It is a change in total output resulting from one unit change in a variable factor. Marginal product may be rise, fall or remains constant. It is calculated as ΔΤΡ / ΔΝ.

Production: Production refers to all activities undertaken for supply of goods and services which have value.

Returns to Scale: It means the rate of change of output produced when all the inputs are increased in the same proportion.

Scale of Production: It refers to the size of a business, total quantity of inputs used and volume of production.

Average Cost (AC): Total cost of production divided by the number of units of output produced. TC/Q.

Average Fixed Cost (AFC): Total fixed cost divided by quantity of output. TFC/Q.

Average Variable Cost (AVC): Total variable cost divided by quantity of output. TVC/Q. 

Cost of Production: The total market value of the inputs a firm uses in producing goods.

Envelop Curve: It is the long run average cost curve which is drawn as enveloping (touching from below) short run average cost curves. 

Fixed Cost/ Sunk Cost: It is the cost which is fixed and the firm has to bear to start a production in the form of building, salaries etc.

 Variable cost / Prime Cost: It is the cost which varies with the quantity of output produced. For example purchase of raw material, paying of sales tax etc.

Marginal Cost: Change in total cost that arises from an extra unit of good produced. ATC/AQ.