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Nature and Scope of Economics

By mohdraes May 25, 2011 6145 Words








DEFINITION OF ECONOMICS Economics is social science, which is concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants. A basic understanding of economics is essential for well-informed people. Most of today’s political problems have important economic aspects. What level of taxes should we have? How can we make social security retirement program financially secure? How can we increase rate of economic growth? How can we reduce poverty? How can we ensure that companies directors act in the long-run interest of their shareholders and not just for themselves? As citizens & voters we can influence decisions of our elected politicians in responding to such questions, therefore, a sound grasp of economics is very helpful to all of us. An understanding of basics of economic decision-making and the operation of economic system enables businessmen to increase profit. The businessman who understands when to use new technology, when to merge with another firm, when to expand employment, and so on, will be in a p osition to earn more profit. Economics helps consumers and workers make better buying and employment decisions. How can we spend our limited income to maximize our satisfaction? Is it more economical to buy a car on cash or to take it on lease? Should we use credit card or pay cash; and which occupation we should adopt that pays us well? Economics is part of social sciences, which include sociology, psychology and political science. It is a study of how people make choices to satisfy their wants. Whenever an individual, a firm, or a nation faces alternatives, a choice must be made and economics helps us to study how those choices are made, for example, if we have to choose how to spend our limited income, how much of our firm’s limited funds to spend on advertising and how much to spend on new product’s research. In economics we examine situations in which individuals can choose how to do things, when to do things and with whom to do them. Ultimately the purpose of economics is to understand choices. ADAM SMITH Adam Smith was a professor at University of Glasgow. He wrote his book, ‘An enquiry into the Nature and Causes of Wealth of Nations’ in 1776 (231 years ago). Adam Smith argued that if producers were free to seek profits by providing goods and services then the‘ invisible hand’ of market forces would ensure that right goods services were produced. He explained concept of Price System. He divided this book into four main chapters, production, consumption, exchange and distribution. To him Economics is a science of wealth and one of the great objects of political economy of every country is to increase wealth and power of that country. According to Adam Smith rights of private property and wealth are natural and moral rights. He emphasized on profit motive and said that ‘it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest’ and that interest is profit. Adam Smith was in favor of accumulation of wealth and free trade policy. He finally defines economics as: Economics is a study of causes of Wealth of Nations.




Adam Smith’s main task was to develop a framework for understanding the mechanism through which the seemingly chaotic hubbub of daily trading actually resulted in a natural order. He believed that trade in unregulated markets would maximize wealth of nations. ALFRED MARSHALL Alfred Marshall was a professor at University of Cambridge. He wrote his book ‘Principles of Economics’ in 1890 (117 years ago). Marshall has emphasized on material welfare of an individual. He says that ‘Economics is a study of mankind in ordinary business of life. It examines that part of individual and social action which is most closely connected with attainment and with use of material requirements of well-being.’ It enquires how man gets his income and how he uses it. Thus to him economics is mainly concerned with material welfare of an individual. Marshall was able to show how value is partly determined by marginal utility of a good and how intensity of want decreases with the units acquired. He was able to explain how luxuries like diamonds have a higher price than essential goods like water, because consumers have few diamonds while water is plentiful. He gave concept of consumer’s surplus, elasticity of demand and laws of return He said that industries would experience reducing costs and prices due to Economies of Scale by greater specialization. Supply, demand, elasticity, utility, equilibrium, short run, and long run reflect on the astonishing fact that these concepts originally were presented by Alfred Marshall. LIONEL ROBBINS Lionel Robbins was a professor at University of London. He wrote his book ‘Essay on Nature and Significance of Economic Sc ience’ in 1932 (75 years ago). According to him economics is science, which studies human behavior as a relationship between ends and scarce means, which have alternative, uses. Ends means wants of human beings, which are unlimited whereas resources to satisfy them are limited. Scarce resources have alternative uses; therefore, choice making becomes essential. A person fulfills that desire; first, which is more important to him. Robbins emphasized that, ‘Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses’. His main emphasis is on the following points: 1 2 3 4 5 6 Human desires are unlimited. All desires are not equally important. One desire can be fulfilled by alternative means. Resources are limited. Resources can be utilized for different purposes. Economics is a scientific subject




J. M. KEYNES Keynes was a professor at University of Cambridge. He wrote his book ‘General Theory of Employment, Interest and Money” in 1936. The Depression of 1930 had affected national economies of the world. In United States, real GDP declined by 40 percent and unemployment rate rose to 25%. Other nations experienced similar impacts and cyclical unemployment continued for a decade. Keynes explained why cyclical unemployment could occur in a market economy. He pointed out that not all income is spent in the same period that it is produced. Investment expendit ure is volatile. A substantial decline in investment will lead to insufficient total expenditure. Unsold goods will accumulate in firm’s warehouses and firms will reduce their output and remove workers. A depression will result and widespread cyclical unemployment will occur. He said that recessions or depressions are not likely to correct themselves. He argued that government should play an active role in stabilizing economy. Keynesian economics is macro economic analysis that leads to the conclusion that a capitalistic economy is characterized by macro economic instability for which fiscal policy and monetary policy can be used to promote full employment, price level stability and economic growth. Classical economists said that laissez-faire policy of govt. is best. Keynes said laissezfaire capitalism brings widespread unemployment. In his view active govt. policy is required to stabilize economy and to prevent valuable resources from standing idle. ECONOMIC GOALS Economic policies are made to achieve following economic goals. 1----ECONOMIC GROWTH

It means to produce more better goods and services and to develop a higher standard of living of the people. 2----FULL EMPLOYMENT To provide suitable jobs for all citizens who are willing and able to work. 3----ECONOMIC EFFICIENCY

To achieve maximum fulfillment of wants, using available productive resources . 4----PRICE LEVEL STABILITY

To avoid large upswings and downswings in general price level that is, avoid inflation and deflation.

To guarantee that businesses, workers and consumers have a high degree of freedom in their economic activities.





To ensure that no group of citizens faces poverty while most others enjoy abundance of wealth. 6----EQUITABLE DISTRIBUTION OF INCOME

To ensure that no group of citizens faces poverty while most others enjoy abundance and prosperity. 7----ECONOMIC SECURITY

To provide for those who are disabled, chronically ill, aged, laid off from jobs or otherwise unable to ear minimum levels of income. 8----BALANCE OF TRADE

To seek reasonable overall balance with countries of the world, in international trade and financial transactions. ECONOMIC POLICY Economic policy and economic analysis are closely related. All economic policies are adopted on the basis of economic theories. The creation of policies to achieve specific goals is not a simple matter. Therefore following points should be kept in mind before framing any economic policy. 1----STATE THE GOAL

First step is to make a clear statement about economic goal. If we say that we want full employment, do we mean that everyone between, 16 & 65 years of age should have a job? Or do we mean that everyone who wants to work should have a job? Or should we allow for some unemployment caused by inevitable changes in structure of industry and workers voluntarily changing job? Therefore goal must be specific. 2----DETERMINE POLICY OPTIONS

Next step is to formulate alternative policies to achieve the goal and determine the possible effects of each policy. This requires a detailed assessment of economic impact, benefits, costs and political feasibility of alternative policies. For example, to achieve full employment, should govt. use fiscal policy (which involves changing govt. spending and taxes), monetary policy (which entails changing interest rates), an education and training policy that enhances worker-employment or a policy of wage subsidies to firms, which hire disadvantaged workers? 3-----IMPLEMENT AND EVALUATE POLICY THAT WAS SELECTED

After implementing policy, we need to evaluate how well it worked. Only through unbiased evaluation we can improve on economic policy. Did a specific change in taxes or money supply alter level of employment to the extent predicted? Did deregulation of a particular industry (for example, electricity) yield the required beneficial results? What were harmful side effects? How might the policy be altered to make it work better Economic Policy is the strategies and measures adopted by govt. to manage economy as a




means of achieving its economic objectives. In general terms, govts are concerned with at macro level, securing full employment, price stability, economic growth and balance of payments equilibrium and at micro level an efficient use of resources. In practice, given complexities of economy and its exposure to international influences, the simultaneous achievement of all these objectives is virtually impossible, so that a degree of prioritizing is required. Inevitably, political and economic considerations will influence this process. In nutshell at macroeconomic policy level, Govts can use various general measures, operating in mixed economies to achieve their objectives, including Fiscal Policy (the change in tax rates and govt. expenditure), Monetary Policy (control of money supply and interest rates), Prices and Incomes Policies (controls on costs & prices) and management of Exchange Rate which influences country’s external trade & payments position. These policies are augmented at a more specific level by measures designed for industrial investment, research and development and to protect consumers’ interests. ECONOMIC METHODOLOGY Economics like other social sciences has two aspects, firstly theoretical aspect, which is concerned with the framing of economic laws and principles, and secondly, practical aspect which is concerned as to how principles of economics can be implemented and how these theories can be made useful in practical life of a man. Economic theories are developed in somewhat the same way as theories are developed in other sciences. Economists observe economic events, attempt to find patterns in them, formulate theories about them, test their theories and finally apply them. These steps are discussed below: 1---OBSERVATION OF FACTS

First job of an economic theorist is to observe events about which a theory is to be made. In natural sciences such observations may be made easier through use of controlled experiments in laboratories but in economics collecting relevant data or facts is difficult. Economists would not create a depression in economy just to understand causes and effects of depression. The historical data regarding economic phenomena are collected by govt. agencies and are available to economic researchers. Some data are available from business firms and chambers of commerce and industry. 2----FORMULATING THEORY

Economists try to find consistent relationships in data, which they collect. They might ask for example, Does a decline in price of a product usually increase in quantity purchased of that good? The facts surrounding any single economic event are so numerous that it is virtually impossible to list all of them. For example we cannot analyze all facts connected with a single depression.. Economic theorists try to cope with this situation by first analyzing facts that they believe are most likely to be relevant to a specific economic event. They then look for patterns in data. For example they might see that people’s consumption expenditures usually




increase when their income increases. From such patterns, economists formulate an economic theory, which explains a certain type of economic event. An economic theory is a generalization based on a variety of facts about why or how an economic event occurs. Theory is a generalization because it explains how economic variables generally behave when certain conditions exist. 3----TESTING THEORY

Once a theory has been formulated it must be tested to see if additional data are consistent with it. Testing process is frequently most difficult aspects of economic theorizing because it is hard to set up controlled experiments in laboratories. Law of demand states that if price of a product falls, quantity of its demand will increase, as long as all other things remain the same. But even in case of a price decrease for a specific product it is often difficult to keep other things constant. For example, price of a competing product may also fall or personal incomes of consumers may fall at the time when price decrease is in itiated. In either case the effect of both changes may actually be a decrease in quantity purchased. 4----APPLICATION OF ECONOMIC THEORY

Once an economic theory has been accepted as valid we can use it to predict outcomes of specific economic events .For example, law of demand states that as price of a product falls quantity d emanded of the product rises. We would presume that if price of shoes falls, people would buy more shoes. DEDUCTIVE METHOD Ricardo, Malthus, and Marshall used deductive method in their theories. This method is less time consuming and less expensive. In this method reasoning precedes from ‘general behavior’ to ‘particular behavior’ for example a generally perceived truth or principle forms the beginning point of reasoning and then an Economist considers particular facts. If result of his finding is against his primary assumed facts, he declares it as False and if it agrees with his primary facts then he declares it as True. Suppose if we accept general proposition that man prefers a greater gain to a lesser gain, then we can conclude that Mr. Atta, will work for a maximum profit or gain because he is a human being. If we observe that with i crease in price of a good, many sellers are producing and n supplying that product in the market for having a greater profit, it is a general phenomena therefore, we can conclude from this general situation to a particular and specific law that is, law of supply, which says with increase in price of a product, there will be more supply of goods and wit h fall in price there will be less supply of goods. Main steps, which are adopted for deductive method, are: 1 2 3 4 Perception of problem to be investigated Defining terms and making assumptions Deriving generalizations Verification of hypothesis (a theory which is to be proved)




INDUCTIVE METHOD In inductive method, economic generalizations are derived on the basis of experiences and observations. It insists on examination of facts and then laying down general principles. In it we move from ‘particular’ to ‘general’, for example if we observe that Mr. Atta is buying more mangoes b ecause the price of mangoes has gone down, Mr. Karim is buying more mangoes due to fall in price and Mr. Fareed is also buying more mangoes due to fall in price of that good, all these activities of buying mangoes in the market are general phenomena and after observing this situation in the market, we can draw a conclusion that with fall in prices of a product its demand increases and with rise in price its demand decreases. This makes a famous law of demand of economics. Inductive means to proceed from general observation towards law. Deductive means to proceed from law towards general observation. In nutshell inductive & deductive both methods are needed for economic analysis as right and left feet both of them are needed for walking. ECONOMICS AS A SCIENCE Economics, like other social sciences, make little use of laboratory methods in which changes in variables can be explained in controlled conditions. Economists usually have to examine what has already happened in the past in the real world in order to test their theories. If a simple model can explain observed behavior repeatedly, it has some value, for example, law of demand explains cause and effect relationship between price and demand for a good. With the fall in price (cause), demand of a good increases (effect) and with rise in price of good, its demand decreases. All economic laws have similar cause and effect relationships. Economics is not an exact science because it depends upon economic behavior of a man and behavior of a person is very complex and unpredictable. Economics is a social science, which is concerned with proper use and allocation of resources for the achievement and maintenance of growth with stability. In Economics for analyzing facts we move step by step. We firstly, collect facts, (secondly), we very analyze these collected facts, (thirdly), we put these facts under suitable classif ications and (fourthly), we discover general theories governing these facts. ECONOMICS AS AN ART Science is a theoretical aspect whereas Art is a practical aspect. In economics we study consumption, production, public finance etc, which provide practical s olutions to our daily economic problems. Study of cause and effect of inflation or deflation falls within the purview of science but framing appropriate and suitable monetary and fiscal policies to control inflation and deflation is an art.




Lionel Robbins used the word science for Economics. He says Economics is a science, which studies human behavior as a relationship between ends and scarce means that have alternative uses. Economists on Continent of Europe have emphasized Art side of economics and have pointed out the great practical utility of Economics. According to Keynes study of fiscal & monetary measures and their application to solve problems of unemployment, depression, and inflation etc for promoting welfare of human being makes economics an art. Economics is a science light-giving in its methodology and an Art, fruit-bearing in its application. POSITIVE ECONOMICS Positive Economics or positive science or positive analysis describes facts of an economy. It describes theories and laws to explain observed economic phenomena. It avoids value judgment, tries to establish scientific statements about economic behavior and deals with what the economy is actually like. It is the analysis of facts and behavior in an economy or ‘the way things are’ for example, there is inequality of income in economy of Pakistan. This simple statement is called Positive Economic analysis. Robbins said that functions of Economics are to explore and explain and not to advocate and condemn the things. NORMATIVE ECONOMICS Normative economics or normative analysis i volves value judgments about what, how n and for whom of an economy. It looks at the desirability of certain aspects of economy. It embodies subjective feelings about what ought to be. In nutshell we can say that positive economics describes facts while normative economic s evaluates facts. There is general unemployment in Pakistan. It is a fact and therefore it is positive analysis. There should not be general unemployment in Pakistan. It is a value judgment/opinion and tells what ought to be, hence, it is a normative analysis. Whenever words such as ‘ought’ or ‘should’ appear in a sentence there is a chance that normative economics is being discussed. MICRO ECONOMICS Microeconomics is that part of economic analysis which studies decisions of individuals and firms in economy. It is microeconomics that tell us how a free market economy with its millions of consumers and producers work to decide about allocation of productive resources among thousands of goods and services. It tells us how goods and services produced are distributed among various people for consumption through price mechanism. It is like looking through a microscope to focus in small parts of economy. In it we study demand of one consumer for a good and from there we go to derive market demand for that good. In microeconomics we study following issues.




1 2 3 4 5

Individual consumer’s behavior. One product’s price One individual consumer’s demand and his income Study of individual firm’s location, cost, revenue, and profit Remuneration of individual factors of productions

While conducting economic analysis on micro basis we assume that in economy there is full employment. Microeconomics explains how consumers and producers take their decisions regarding allocation of productive resources among various goods and services. How through market mechanism goods and services produced in economy is distributed and how prices of goods and remuneration of factors of production is determined. MACRO ECONOMICS It is primarily concerned with the behavior of economic system as a whole and in its totality. In using aggregates, it seeks to obtain an overview or general outline of the structure of economy and the relationships of major aggregates. It deals with economywide phenomena such as changes in unemployment, general price level & national income etc. Macro analysis is helpful in understanding the functioning of economic system because one individual’s economic study is not helpful for framing any policy, hence whole economy’s study and its analysis is important. It deals with the following: 1 2 3 4 5 6 7 8 9 National income and national output. Balance of Trade and Balance of payments. External value of money (Foreign exchange). Savings and Investment relationship. Employment and economic growth Fluctuations in national income /Trade cycles in economy Fiscal & Monetary policies. General Price level Aggregate output & aggregate supply of goods & services BLENDING MICRO AND MACRO ECONOMICS

There is blending of microeconomics and macroeconomics in modern economic theory. Modern economists are increasingly using microeconomic analysis—the study of decision-making by individuals and by firms--- as the basis of macroeconomic analysis. They do this because even though in macroeconomic analysis aggregates a being re examined, those aggregates are made up of individuals and firms. Consider an example. Some economists believe that reducing income tax rates will lead to greater total output. Why? Because, using microeconomic analysis, they predict that individuals will respond to lower income tax rates by working longer, taking fewer vacations and taking on second jobs and using the extra take-home pay to buy more goods and services.




In Microeconomics we examine the sand, rocks and shells and not the beach. In Macroeconomics we examine the beach, not the sand, rocks, and shells. Microeconomics is concerned with choice making processes of individuals & firms, whereas Macroeconomics focuses on performance of economy of country as a whole. SCARCITY AND CHOICE Scarcity is not a shortage. Scarcity occurs among poor and rich alike. Economics is a study of how scarce resources can be used to satisfy our wants. Scarce resources are raw materials, energy and labor etc. that can be used to produce goods and services in the economy to satisfy human wants and needs. Scarcity is a relative term. A product may be available in small quantity but if no one has any use of this product then it is not scarce. In the same way there may be too much stock of sugar, wheat, rice and cl thes in the o country even then these items are called scarce because demand for sugar, wheat, rice and clothes is greater than their supply. It is demand in relation to supply of a good and not its quantity alone that determines whether a particular product is scarce or not. Scarcity means limited means and resources to satisfy human wants. Since resources /means are limited at the disposal of an individual or nation, choices are necessary. Economic activity lies in individuals’ utilization of scarce resources that have alternative uses for satisfaction of individual or nation’s wants. As all demands cannot be met with limited resources, an i dividual will make a choice and will fulfill that demand first n which is more important to him. So is the case with a nation as a whole. An easy example of the problem of choice is a person’s decision about how to allocate his time. As the old saying goes. There are only 24 hours in a day, if we take off 8 hours for a night’s sleep this leaves 16 hours to be allocated among all other possible activities that is (1) working at job (2) studying course books (3) playing cricket (4) watching TV etc. Each person must make choices as to how much of his limited available time, 16 hours, will be spent on his each possible activ ity. Scarcity means that we do not and cannot have enough income or wealth to satisfy our every desire. Scarcity exists because human wants always exceed what can be produced with the limited resources and time that nature makes us available PRICE MECHANISM Price Mechanism or price system or market economy is an economic system in which relative prices constantly change to reflect changes in supply and d emand of different goods. Prices of commodities are signals to every one within the system as to what is relatively scarce and what is relative abundant. It is the signaling aspect of price system that provides information to buyers and sellers about what should be bought and what should be produced.





1 2 3 4

What and how much should be produced? How should it be produced? For whom goods are to be produced? Determination of money income.


In a price system interaction of demand and supply for each good determines as to what and how much to produce. If highest price that consumers are willing to pay for a good is less than the lowest cost of production, then output will be negligible or zero. 2---HOW TO PRODUCE? A firm can use various combinations of labor and capital to produce the same amount of output. In price system, the least cost combination technique is chosen because it maximizes profit. Firms using this technique will be able to offer for sale their goods at a lower price and will make profit. Lower price will i duce consumers to shift their n demand from high priced goods to low priced goods. Inefficient firms will be forced to go out of business and firms will close their inefficient business and will induce consumers to shift their demand from high priced goods to low priced goods. 3----FOR WHOM GOODS ARE PRODUCED?

In a market system, choices about what is to be produced are made by individual firms, but their this choice is determined by distribution of money incomes in the society. Those people who will have higher income , they would demand different commodities than those who have less income. Those consumers who are able to pay the price of good can obtain it, otherwise poor people like Mr. Atta who cannot afford, will not have burgers of McDonald’s. The only thing that he can do is a Window- shopping. 4---DETERMINATION OF MONEY INCOME When a person is selling his labor services then his money income is based on his wages, which he can get in labor market. If a person owns land and capital then rent of land and interest of his capital will determine his ability to buy consumer goods. If his income from wages, interest and rent is less then his demand for goods will be less. ECONOMIC WANTS Economic wants means desire for goods and services. The attempt to satisfy wants forms the basis of all economic activity. Wants are expressed in market not by desire but by willingness and ability to actually purchase goods and services. A desire of a person cannot become want unless and until he has money to purchase and is also willing to give away money for that good. Economic wants are fulfilled by consumptions of goods and services. These wants are classified into the following:




1---Necessities of life are basic needs of a person, without out which life is not possible. These include ordinary food, clothing and shelter. 2---Comforts of life make life easy and comfortable. These wants increase efficiency of a person. These wants include vitaminized food, comfortable bed & transport facilities. 3---Luxuries of life are neither necessary nor they increase efficiency of a person. These wants are for pomp and show and for mental satisfaction of a consumer. These wants include an expensive car, a big bungalow, and costly jewellery etc. CHARACTERISTICS OF ECONOMIC WANTS 1---WANTS ARE UNLIMITED

Economic wants are unlimited, after fulfilling one want another want comes up, hence there is no end to them. 2---WANTS ARE REPEATED

Wants once fulfilled, never ends, they are repeated again and again. Wants to fulfill hunger, thirst and clothing keeps on repeating. 3--WANTS COMPETE WITH EACH OTHER Some wants are felt urgently than others. Some of them cannot be postponed while others can be postponed. An individual will fulfill his that want first, which is more pressing and important to him. 4---WANTS CAN BE FULFILLED BY ALTERNATIVES

Some wants can be fulfilled with the use of alternative goods, for example eating rice; bread or fruits can satisfy our want of hunger. PUBLIC GOODS Public goods have zero marginal cost i.e. they could be provided or their benefit could be extended to additional consumers without incurring further cost. These are those goods to which principle of rival consumption does not apply. These goods can be consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity of good. National defense, police protection and legal system for example are public goods. If you partake of them, you do not take away any one else’s share of those goods. A Smallpox vaccine, a drop of polio, street light & similar Govt. projects are examples of public goods. CHARACTERISTICS OF PUBLIC GOODS

1-----Public goods cannot be produced or sold very easily in small units. More and more people at no additional cost can use public goods. Once money is spent on national defense, the defense protection received by one person does not reduce the amount of protection of another person.




2-----Additional users of public goods do not deprive other peoples right of any of the services or the goods. If one person turns on his television set, his neighbors do not get weaker reception of TV program. 3-----No one can be excluded from benefits of a public good, even though a person has not paid for it. A very poor person does not pay any tax, yet he cannot be denied benefits of Govt. hospitals and police protection. Public goods cost of extending the service to an additional person is zero and it is impossible to exclude individuals from enjoying them. 4-----Public goods are ones whose benefits are indivisibly spread among the entire community, whether the individuals desire to purchase the public good or not. QUASI RENT Alfred Marshall gave this concept. According to him some factors of production may be in relatively price-inelastic supply in short-run but more ela stic supply in long-run and thus may earn temporary economic rents until supply is able to adjust fully to meet the demand. Economic rent accruing to such factors of production is called Quasi rent and it tends to disappear in long-run as supply catches up with demand. For example, in the case of particular types of work where a lengthy training period is required, a sudden increase in demand for such work would enable persons already possessing appropriate skills to secure large quasi rents through high wage rates. Quasi Rent arises on land whose supply is fixed, it also arises on building, machinery and highly technical labor and whose supply become short for the time being but in long run supply of which can be increased. Quasi rent is a temporary surplus and with the increase in supply of these factors, rent becomes normal. GIFFEN GOOD It is a good for which quantity demanded increases as its price increases. It only applies in highly exceptional case of a good, which a ccounts for such a high proportion of household’s budgets that an increase in price produces a large negative income effect, which completely overcomes the normal substitution effect. Sir Robert Giffen said that a rise in price of bread makes so large a drain on resources of poor laboring families that they are forced to curtail their consumption of meat and other more expensive food items and bread being still the cheapest food item which these poorer families can get and will take, they consume more and not less of it (that is bread). When price of bread rose, poor people bought more bread and less more expensive foodstuffs. Giffen goods are special type inferior goods. It absorbs a large proportion of consumer’s income. Giffen good has two properties. Firstly it is an inferior good and secondly a consumer is bound to spend a greater share of his income on such an inferior good. For example a labor who is earning Rs.500 per month and if he spends Rs.300 on wheat, when wheat is not only an inferior good as compared with rice but it is also a Giffen good




because Rs.300 out of Rs.500 is major share of income which is being spent on wheat. When the price of a Giffen good falls consumer purchase less of it. Giffin goods are those goods for which demand decreases when their prices decrease and demand increases when their prices increase. INFERIOR GOOD It is a good for which income elasticity of demand is negative that is as income increases consumer purchases less of this good, because they can now afford to replace them with other more desirable goods, for example people may reduce demand of potatoes and may increase demand of mutton burgers. Likewise people may reduce demand of old/used televisions and increase demand of brand new TV sets with the increase in their income. Most goods for which demand rises when income rises are called Normal goods but for some goods demand falls as income rises. These are called inferior goods. In Pakistan demand for Dal-chana and other pulses falls

with increase in the income of consumer. TRANSFER PAYMENTS Transfer payments are expenditures of Govt. for which it receives no goods or services in return. Such payments involve ‘transfer’ of i come from one group of individuals (tax n payers) to other groups of individuals in the form of welfare provisions, for example, unemployment allowance, social security benefit, old-age pensions to the retired govt. servants etc Transfer payments are not made in return for goods and services therefore they are not added in national income. TRANSFER EARNINGS It is a payment that a factor of production must earn to prevent its transfer to its next best alternative use. Earnings that a factor of production receives over and above its transfer earnings are called its Economic Rent. Suppose a Lecturer is presently earning Rs.5000 per month. In case he has to give up teaching and the next best alternative employment is an accountant in a firm, which provides him Rs.4000 per month. Therefore, this amount of Rs.4000 is transfer earnings. This is the remuneration that he will get on transfer to his next best alternative employment as an accountant. This means that in his present position as a lecturer, he must at least get Rs.4000 (his transfer earnings), otherwise the lecturer will give-up his present position and will join the next best alternative employment as an accountant. Transfer earnings are the minimum payments to be paid to workers to induce them to stay in present jobs.



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