Notes And Study Material for Exam Papers

The Classical Theory of Interest or Real Theory of Interest seeks to explain the determination of rate of interest by real factors like productivity and thrift i.e. productivity of capital goods and saving of goods. According to this theory the rate of interest is payment for savings. The rate of interest in this theory is determined by demand for savings to invest in capital goods and the supply of savings. Let us explain there demand and supply side. Demand for Savings: The demand for capital goods comes from firms which desire to invest, that are to purchase or to make new capital goods. Capital goods are demanded because they have a revenue productivity like all other factors. For any given type of capital assets e.g. a machine, it is possible to draw marginal revenue productivity curve showing the addition made to the total revenue by additional unit of machine at various levels of stock of that machine. We have said that capital like other factors of production has margin

Interest is the price paid by borrower to the lender for the sue of loan able funds during a certain period. It is normally expressed as a percentage on the funds loaned or borrowed. In the word of Esthan, “Interest is the payment for parting with the advantage of liquid control of money balances.” According to Betch, “Interest is the price paid for use of money or credit.” There is an element of monopolistic competition in the money market in as much as different borrowers are charged different rates of interest. It may be noted however, the pure interest tends to be the same if calculated over the same period of time in the same money market. The actual differences that prevail are difference in the degrees of risk involved and inconveniences suffered by the lenders. Differences in Pure Interest: If pure interest is calculated over the same period of time in the same money market, it will tend to be the same. It can however differ in different markets on account of th

The theory of economic rent was first propounded by the English classical economist David Ricardo. David Ricardo in his book “Principles of Political Economy and Taxation” defined rent as “That portion of produce of the earth which is paid to a land lord on account of the original and indestructible powers of the sil.” Ricardo in his theory of rent has emphasized the rent is reward for the services of the land which is fixed in supply. Secondly it arises due to original qualities of land which are indestructible. The original indestructible powers of the gil include nature soil fertility, mineral deposits, climatic conditions etc. Rent under extensive cultivation: According to Ricardo, all the units of land are not of the same grade. They differ in fertility and location. The application of the same amount of labour, capital and other cooperating resources give rise to difference in productivity. The difference in productivity or the surplus which arises on the superior unit of

The modern economists like Pareto, Mrs. Joan Robinson, Boulding, Singer, and Shepherd have tried to simplify and generalize the Ricardian Theory of Rent. According to them the Ricardian theory of rent is too closely related to land. This creates an impression that rent is a peculiar earning a land only. The fact however is that other factors of production i.e. labour, capital and entrepreneurship may also be earning economic rent. The determination of economic rent, the modern economists say, can be explained in the same manner as the reward of other factors, which is by demand and supply factor. Demand and Supply Analysis A) Demand for a factor: The demand for a factor which may be land labour or capital is a derived demand. Land say for instance is demanded for its produce. The higher the produce, the greatest is the demand for land. A firm will pay rent equal to the marginal revenue productivity of land. The rent diminishes as more land is used due to the operation of law

In such a situation a humanist not merely relaxes and ignores the problem. He must call upon his studies, his philosophy, and his ancient friends, to guide him. He must grid up his soul to the vigor and tension necessary for meeting the ills of life head on. But precisely why? Montainge seems to sense that this is the weakest point in his argument. Although he says that lack of preparation costs us too much in panic and torment at death, his explanation of the frequent bravery of simple people is not convincing, and he seems to know it; for he offers it tentatively and never repeats it. He knows that common people, whole nations, even cowards, can often perform the bravest actions even without study. He does not insist on the strictest possible regime of preparation, as do those who seek our privation. He says that we may use the body to help us if the soul is not strong enough alone; that all honourable assistance against the ills of life is not only permissible but even laudabl

Firms do not operate in a vacuum, they interact with their customers and with other firms. These interactions take place in markets and economics has developed models of markets that predict how firms will behave in certain situations. The three major markets are 1. Perfect competition, 2. Perfect monopoly, and 3. Monopolistic competition. Perfect competition is the most intense form of market interaction and though it may be intense, it is not as rare as many would have us believe. Perfect competition is characterized by the following: 1.         There are many firms selling a homogenous product. 2.         There are many buyers. 3.         There are no barriers to entering or exiting the industry. 4.         Firms in the industry have no advantage over new entrants. 5.         There are no transaction costs. 6.         There are no externalities. 7.         Firms and buyers in the industry have complete information. Given the assumptions of perfect competition

In oligopolistic industry, there are only a few big firms which control the supply of a commodity and each firm produces a significant portion of the market. They are, therefore, mutually interdependent. In other words, we say the behaviour of the firm directly affects and is affected by the action of the rival firms. The firms under oligopoly are motivated by two opposing forces, one force moves them to co-operate with one another so that the profit of each firm are maximized. The other force takes the away from the joint profit maximizing price and profit. Under oligopoly the pricing theory is fundamentally the same with the difference that the larger the number of firms, the greater will be the differences in the marginal costs and more remote will be the possibility of collusion or agreement, whether taxeit or explicit. When they all deal in a standardized product and each is producing a considerable portion of total output, the price and output policy of each is likely to af

Oligopoly is the market organization in which there are a few or small number of firms in an industry and they produce the major share of the market. The word ‘a few’ or small number is vague. The economists therefore refer to oligopoly as that market situation in which the number of firms is small but each firm in the industry takes into consideration the reaction of the rival firms in the formulation of price policy. The number of firms in the industry thus may be only two or more than two say 5, 10, 20. The basic condition for the existence of oligopoly is that a firm in the ‘group product’ formulate its price policies with an eye to their effects on its rivals.  There is thus a great deal of interdependence between or among the small number of firms. The oligopolistic industries are classified in a number of ways. If there are only two giant firms in an industry and they produce identical products. It is called perfect on pure duopoly. In case the goods produced by the two fi

Montainge’s early view of life was a rather Epicurean pessimism. “The wretchedness of our condition,” he was to write, “makes us have less to desire than to fear...That is why the sect of philosophy that set the greatest value on voluptuousness and raised it to its highest price still ranked it with mere freedom from pain. To have no ill is to have the happiest state of well being that man can hope for.” Though he said that he had thus far lived reasonably happily, except for the loss of his friend, this was a great exception. Moreover, his other bereavements were to contribute their share to his pessimism. Fifteen years later the mere expressions that reminded him of his grief could still revive it: “My poor master! Or, My great friend! Alas, my dear father! Or, My good daughter!” in his gloomy apprehension, he looked for security in preparation, like the healthy young men he had seen carrying pills around to take in case of a cold. As the surest way to the negative contentmen

The religious wars, which had broken out a year and a half before La Boetie’s death, were to involve Montaigne deeply and to form the somber background of the last half of his life. There were intervals of comparative peace, some of them rather long. But they were never better than armed truces, for no settlement could satisfy both sides, and during most of them, sporadic violence continued in one part of France or another. The Protestants were never comparable in numbers to the Catholics; but these were sharply divided, with the government generally holding to a policy at first of tolerance, then of moderation, while the extremists opposed all concessions.  After three lasting each year or two, the Reformists reached their highest peak of influence when their leader Coligny came to court in 1570 and gained greater favour with King Charles IX. But the Catholics grew alarmed as Coligny pressed for armed intervention in the Protestant Netherlands against Catholic Spain. When thousan

In ordinary language, a market means a place where things are bought and sold. But in Economics a different meaning has been given to the term. Professor Chapman says “Economically interpreted the term ‘market’ refers not to a place but to a commodity or commodities and buyers and sellers of the same who are in direct competition with one another.” Thus we speak of cotton market, share market etc. There is a market for every commodity that has buyers and sellers, even though there is no specified place where they meet. All that is required to constitute a market therefore is a commodity that can be bought and sold some are willing to buy and others are willing to sell.  The buyers and the sellers can communicate with one another by words of mouth, by letter, telephone, cable, internet or by wireless, the method or place does not matter. The definition of the market points out two main features of an economic market. Firstly there must be a free competition among buyers and seller

The term Land has been given a special meaning in Economics. It does not mean soil as in ordinary speech but is used in much wider sense. It also includes all natural resources which are free gift of nature. In Marshall ’s words, “land means the materials and the forces which nature gives freely for man’s aid in land and water in air and light and heat.” Importance of Land Land in economics is a term which is often used in a wider sense. It does not mean soil as in ordinary speech. Land stands for all natural resources which yield income or which have exchange value. It represents those natural resources which are useful and scarce actually or potentially. Land is absolutely indispensable for human being and nothing can be produced without land. Land is an important factor of production and survival of human being is directly linked with land. Fertility and productivity of land is essential for economic development. The developed countries have reached the climate of econom

In earlier times, wants were few. Each man did his own efforts and produced things he was in need of. He had his own land, his own labour and capital and thus produced the essential things. But nowadays production is highly organized and complex. The invention of machines has revolutionised the system of production. The modern process of production is very long. It is carried on with the help of hired labourers. The work for producing even an insignificant thing is now divided into a number of operations. This results in the division of labour. Each man or each group of men is engaged in performing only one particular operation. This complexity of modern production has brought the question of organization or entrepreneurship into prominence. The organizer or entrepreneur may not be a risk-taker. He is the captain of the industry. The armies of the industry can no more be raised, equipped, held together, moved and engaged without their commanders or entrepreneurs. He has to select

Capital formation or capital accumulation means the increase of the stock of real in a country. In other words, capital formation involves making more capital goods, such as machines, tools, factories, transport, equipment, materials, electricity, etc., which are used for the further production of goods. For making an addition to the stock of capital savings investments and technical progress are essential. Capital accumulation is the very core of economic development. It may be a predominantly private enterprise system like the American one or a socialist economy like China and Cuba . Economic development cannot take place with technical progress such as the construction of irrigation works, the production of agricultural tools and equipment and reclamation, the building of dams, bridges, and factories with machines installed in them, roads, railways and airports, ships and harbors, all the produced means of further production associated with high-level productivity. In the view of

Montaigne as a boy stands well revealed in the essay “On the Education of Children”. Independent and tenacious but slow to move, he was in danger of doing not wrong, but nothing at all-a reproach he was to hear all his life. Secure in the intelligent love of the father he loved dearly in return, he spent a boyhood generally happy but marred by his first seven years of formal education. These gave him his first real taste of folly and injustice: and from what he tells us of his mind at the time, he may well even then have judged much as he did later the inanity and severity that could come of knowledge and authority misapplied. No matter what his father did, “It was still school.” Montaigne’s Catholicism must have been the result of a real decision. When this came, we do not know, nor even just when his brother and sister-or possibly two sisters-were converted to Protestantism. But his father was presumably concerned about the matter by the time Montaigne was thirteen, for it was