"Economics is a social science that studies human behaviour as a relationship between

ends and scarce means which have alternative uses. That is, economics is the study of the
trade-offs involved when choosing between alternate sets of decisions."

CHAPTER 1- BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION.

 The fundamental economic problem consists of the fact that our wants are infinite
compared to the availability of our resources which are finite in nature, hence there
is always a trade-off between 2 goods and a choice has to be made which can
depend on a lot of factors according to our preferences, and this affects the demand
in the market.
 We can understand that scarcity is the central economic problem and everyone
including individuals, firms and governments go through it.
 When there are problems related to population in an economy, the government has
to make some serious choices according to the age groups and the percentage of
that particular group in the economy, since not all wants can be met.
 When economists say that wants are unlimited, this is a key assumption that they
make.
 Making a choice made normally involves a trade-off – this means that choosing
more of one thing can only be achieved by giving up something else in exchange. In
order to do this, you have to weigh up the likely costs and benefits that can occur
with you choosing a certain product.
 Example:- The choice between using Euro-Tunnel, a low-cost ferry or an airline when
travelling to Western Europe.
 If there was no scarcity, there would be no need for economics, as economics is the
study of how scarce resources are or should be allocated.
 It is our factors of production which are scarce.
 Then come the basic questions
1. What to produce?
2. How to produce?
3. For whom to produce?
 Example:- In a biscuit firm
1. Should they produce all types of biscuits or certain types?
2. Should they make them by hand/ in a factory?
3. Should they make them for people living in cities/ villages/ for the rich/ or for
people with lower incomes?
 Ceteris Paribus Assumption- Many factors affect demand. When drawing a demand
curve, economists assume all factors are held constant except one – the price of the
product itself. Ceteris paribus allows us to isolate the effect of one variable on
another variable
 “The marginal unit of any factor of production, of any stock of goods and of any
output of goods, is one extra unit of the same.”
 In the short run, at least one factor of production is fixed. This means that output
can be increased by adding more variable factors such as employing more workers
and buying in more raw materials. He time period is not very huge hence, not all
factors can be changed.
 Long run production: Time period where all factor inputs are variable. Time period is
much larger
 Very long run is when not only the factors of production are variable but also the key
input factors are. For example:- technology can change over a period of time,
government regulations can come into play and social considerations.
 Positive and normative statements help us to understand the difference between
facts and value judgements.
 Positive statements are objective statements that can be tested, amended or
rejected by referring to the available evidence. Positive economics deals
with objective explanation and the testing and rejection of theories. For example:
1. A fall in incomes will lead to a rise in demand for own-label supermarket
foods
2. If the government raises the tax on beer, this will lead to a fall in profits of the
brewers.
 Normative statements are subjective statements – i.e. they carry value judgments.
For example:
1. Pollution is the most serious economic problem
2. Unemployment is more harmful than inflation
 There are 4 factors of production-
1. Land- This is a natural resource and is limited in nature. Cannot be made.
Includes plains, mountains, plateaus, etc. Includes all aspects of nature, from
minerals to the climate. Reward is income generated by owning land. And
rent is paid if the property is hired and not bought.
2. Labour- This is a human resource. Basic determinant is the nation’s
population. Helps us to know how many people what percentage of the
population is employed. Reward for labour is the wages or salaries paid, in
return for work done.
3. Capital- This is another man-made aid to production. Include capital goods,
which help land and labour to produce more output, and improve it too.
reward is the rate of return or earned. Interest has to be paid for financial
loans.
4. Entrepreneur- This is actually a person who takes up the responsibility for
arranging all the other 3 factors of production and is willing to take risks. In
larger firms, the company is divided into various departments led by their
particular department heads, and salaried managers. Returns are the profit
enjoyed by the entrepreneur.
 Specialisation is when a firm, an economy or an individual decide to produce that
particular good or service which they have an advantage in producing. Due to this
thing, we know that no one is self-sufficient. Where one group can produce one
good, the other can produce another one better than the other this gives them an
advantage over others, and they may even create a monopoly.
 Division of labour is when a manufacturing process is divided into a series of other
tasks. When it is broken down into another number of activities. This helps workers
to specialize and develop a skill in that particular process, but it can also get tedious
and monotonous doing the same work again and again hence, they need to be
moved around departments for additional skill impartment and new challenges.
 Specialisation and division can help us to make optimal use of our resources
available and produce goods and services more quickly and efficiently.
 Economic structure tells us the way in which economies are arranged into various
sectors.
1. Primary sector: This involves extraction of natural resources e.g.
agriculture, forestry, fishing, quarrying, and mining.
2. Secondary sector: This involves the production of goods in the economy,
i.e. transforming materials produced by the primary sector e.g.
manufacturing and the construction industry.
3. Tertiary sector: the tertiary sector provided services such as banking,
finance, insurance, retail, education and travel and tourism.
4. Quaternary sector: The quaternary sector is involved with information
processing e.g. education, research and development.
 Economic system is the means by which choices are made in an economy. Since
resources are scarce, an economy needs to prioritize who they want to give
maximum benefit to. Thus there are 3 different types of economies, focusing on 3
different type of things.
1. Market economy- Most of the decisions are made by the market forces.
It is a purely profit based economy where allocation of resources is
completely in favour of the maximum amount of goods demanded. The
firms and households play the biggest role in this economy. Need based
goods are produced less as compared to goods which have higher
demand for profit maximisation. Market mechanism, where decisions
on price and quantity are made on the basis of demand and supply
alone plays the biggest role here. Ideal that doesn’t exist and govt.
hardly has any role to play. Closest examples- USA
2. Command or Planned economy- This is where the resource allocation
decisions are taken by a central body. The main priority here is to make
social welfare, which also means that they focus on reducing current
consumption in order to get a better future. All the firms in this type of
economy are centralised and owned by govt. bodies and transactions
and production and consumption is monitored very closely. Their clear
objective is to achieve a higher economic growth in order to secure a
place amongst the economically growing economies. Apart from
allocation, objectives also include setting production targets,
distribution of income, ownership of most productive property or
resources and planning long term growth.
3. Mixed economy- This is where the resources are allocated by both the
private and by the public sector. But nowadays, the trend is moving
towards the privatisation of maximum firms and industries. The public
sector majorly gets involved in, provision of public goods and to correct
perceived market failure. Most of the economies these days are mixed
economies but the ratio of the importance of the market and
government in resource allocation is variable.
 These days because of the increasing role of the enterprise in the modern economy,
there is a huge importance of the entrepreneurs, who are willing to take risks arising
from firms, and arrangement of the factors of production as well as receiving returns
or profits.
 How scarce resources are allocated depends vastly on the type of economy.
Changes to economic structure are made to improve economic well-being.
 A production possibility frontier (PPF) shows the maximum possible output
combinations of two goods or services an economy can achieve when all resources
are fully and efficiently employed.
 It shows us the various combinations of the two products being considered by
making optimal use of the resources available to us. These combinations lie on the
curve.
 If a point is being produced inside or outside the curve, the resource allocation is
inefficient.
 In order to achieve an outward shift in the production possibility, a country would
need to increase their productivity, factor input and a lot of other factors.
 Producing more goods with the same amount of resources available in the economy,
also is an indicator of allocative efficiency.
 There can also be cases leading to inward shift of the PPF, this may be due to a
natural disaster, destruction or loss of factor inputs, etc.
 Economic growth can be seen when the country’s PPF shifts outward. If we want to
increase the output of one particular product then the resources have to be moved
from one to another, this is known as factor mobility.
 Reallocating scarce resources from one product to another involves an opportunity
cost. It is like a trade-off between 2 goods and is the next best alternative forgone.
 Potential economic growth = outward shift; actual economic growth = shift from
within the curve towards the boundary.
 Any point on the curve is consistent with productive efficiency because an economy
is using all its resources. An alternative term for this position would be technological
efficiency.
 Unemployment relates to all factors of production and will be represented by a point
within the curve. A rise in unemployment will not cause the curve to shift, but will
lead only to a movement out towards the curve.
 Money is defined as anything accepted as a means of payment. The functions are:
1. Medium of exchange- allows specialisation which promotes economic
growth
2. Unit of account- allows the operation of the price mechanism which enables
the efficient allocation of resources which promotes economic growth.
3. Standard for deferred payments- allows credit which promotes aggregate
demand which promotes economic growth.
4. Store of wealth- allows savings which allow investment which promotes
economic growth.
 LIQUIDITY- This is the extent to which non cash assets can be turned into cash.
Inverse relationship between liquidity and profitability.
 BARTER- This is the system of exchanging goods and services for other goods and
services without the use of money. This is usually done when the people lose
confidence in their currency.
 NEAR MONEY- These are the non-cash assets that can be quickly turned into cash.
These include bank deposits, cheques, etc.
 FREE GOOD- No price.
 PUBLIC GOOD- For which a direct price cannot be charged. Characteristics are
excludability and rivalry.
  PRIVATE GOOD- Consumed by one person and not available to others.
Characteristics are non-rivalry and non-excludability.
 MERIT GOOD, DEMERIT GOOD, INFORMATION FAILURE, PATERNALISM, MORAL
HAZARD, ADVERSE SELECTION definitions.
CHAPTER 2- The price system and the microeconomy

 Demand is the quantity of goods or services that the consumer is willing and able to
purchase at a given price in a given period of time.
 EFFECTIVE DEMAND is the demand backed by the ability to pay for it.
 NOTIONAL OR LATENT DEMAND is when there is willingness to buy but it is not
backed by the purchasing power to pay for it. It is more like a desire or want, not
actual demand.
 Effective demand is the only one that is actually important to businesses and hence
economists.
 INDIVIDUAL DEMAND is the quantity of a good or service that individuals are willing
and able to buy at various prices in a particular time period.
 The LAW OF DEMAND states that there is an inverse relationship between price and
quantity demanded. In other words:
1. As prices fall, we see an EXPANSION OF DEMAND.
2. As prices rise, there is a CONTRACTION OF DEMAND.

 This is demand which does not obey the law of demand. E.g.: Abnormal demand
arises when consumers demand more at higher prices. E.g.- Apple phones, BMW
cars, although the price is high the demand is still high. These are goods which have
created a monopoly in the market.
 SUPPLY is the quantity of a product that a producer is willing able to supply at a
given price, per period of time.
 As price increases, we see an EXPANSION IN SUPPLY.
 As price decreases, we see a CONTRACTION IN SUPPLY.
 The law of supply states that as the price of a product rises, so businesses expand
supply to the market. A supply curve shows a relationship between price and how
much a firm is willing and able to sell.
 The 3 main reasons why the supply curve is shown sloping upwards from left to right
is because:-
1. THE PROFIT MOTIVE- When the market price rises following an increase in
demand, it becomes more profitable for businesses to increase their output.
2. PRODUCTION AND COSTS- When output expands, a firm's production costs
tend to rise, therefore a higher price is needed to cover these extra costs of
production. This may be due to the effects of diminishing returns as more
factor inputs are added to production.
3. NEW ENTRANTS COMING INTO THE MARKET- Higher prices may create an
incentive for other businesses to enter the market leading to an increase in
total supply.
 A significant reduction in mass-production costs (e.g. via a technological
breakthrough) would enable companies to reduce their prices, producing a
downward curve, but they are only likely to do this if market competition forces
them to.
 MARKET DEMAND is the total demand arrived at by adding together the demand of
every individual willing and able to buy that good or service.
 MARKET SUPPLY is the total supply of every seller willing and able to sell a particular
good or service.
 Factors influencing demand are:-
1. INCOME- Income plays a very vital role in the goods demanded. The
amount of disposable income we have available with us decide how much
we can spend. Goods that have a positive relationship with income are
NORMAL GOODS whose demand goes up as income increases. E.g.- Cars,
expensive phones etc. Then there are some goods that have a negative
relationship with income, INFERIOR GOODS. The demand for these decrease
as income increases. These include poor quality food stuff.
2. PRICE AND AVAILABILITY OF RELATED PRODUCTS- This comprises of 2
categories. SUBSTITUTE GOODS which are alternative goods. Hence, change
 in price of one good affects the demand of other good and the extent
depends upon the degree of the substitutability. Then comes
COMPLEMENTARY GOODS. These are goods that are used together to
derive satisfaction and have a JOINT DEMAND as in, they are consumed
together. Hence, change in price of one affects demand of other too. E.g.-
Car and petrol.
3. FASHION, TASTES AND ATTITUDES- Everyone is unique and has their own
personal preferences and likes. These are built over time or determined by
what we see or read around us.
 Factors influencing supply are:-
1. COSTS- Companies produce goods keeping in mind their costs of
production and distribution to consumers. Many businesses give
preferences to different costs. E.g.- In automobile industry the worker
cost is most important.
2. SIZE AND NATURE OF INDUSTRY- The size of industry determines the
amount of goods that will be supplied. This growth attracts new firms and
competition increases leading to lower price, and eventually lot of firms
exit the market.
3. CHANGE IN PRICE OF OTHER PRODUCTS- As a firm you should be aware of
your competitors. If competitor lowers price, other firms may have
reduced supply.
4. GOVERNMENT POLICY- An increase in taxes causes reduction in supply.
And an increase in subsidy will cause in increase.
5. OTHER FACTORS- Different industries are affected by different factors.
E.g.- The agriculture industry is affected by uncertain weather conditions.
 ELASTICITY refers to the responsiveness of one economic variable, such as quantity
demanded, to a change in another variable, such as price. Ceteris Paribus.
 ELASTIC- Change in demand or supply > Change in price.
 INELASTIC- Change in demand or supply < Change in price.
 If Ped = 0 demand is perfectly inelastic - demand does not change at all when the
price changes – the demand curve will be vertical.
 If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than
the percentage change in price), then demand is inelastic.
 If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price),
then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in
demand leaving total spending the same at each price level.
 If Ped > 1, then demand responds more than proportionately to a change in price
i.e. demand is elastic. For example if a 10% increase in the price of a good leads to a
30% drop in demand. The price elasticity of demand for this price change is –3
 Inelastic demand (Ped <1)
 PED= INFINITY, then it is perfectly elastic.
 PRICE ELASTICITY OF DEMAND is a numerical measure of the responsiveness of the
quantity demanded to a change in the price of the product.
 PED= % CHANGE IN QUANTITY DEMANDED
% CHANGE IN PRICE
 % CHANGE IN QTY. DD= ORIGINAL DD – NEW DD x 100
ORIGINAL DD
 % CHANGE IN PRICE= ORIGINAL P – NEW P x 100
ORIGINAL P
 FACTORS AFFECTING PED ARE:-
1. RANGE AND ATTRACTIVENESS OF SUBSTITUTES- The issues are the
quality and accessibility of information that consumers have about the
product, degree of considering the product to be a necessity, addictive
properties of product and brand image.
2. RELATIVE EXPENSE OF THE PRODUCT- Rise in price will reduce the
purchasing power of the consumer’s income and his ability to pay.
3. TIME- In the short term, the person may find it difficult to change their
spending patterns. However, over a period of time the person may find
ways of adapting and adjusting their budget and PED is likely to increase
over time.
 INCOME ELASTICITY OF DEMAND (YED) shows the effect of a change in income on
quantity demanded.
 If an increase in income leads to an increase in the quantity demanded and vice-
versa then there is a positive relationship and the product is classified as NORMAL.
 If an increase in income leads to a decrease in the quantity demanded and vice-versa
then there is a negative relationship and the product is classified INFERIOR.
 YED= % CHANGE IN QUANTITY DEMANDED
% CHANGE IN INCOME
 CROSS ELASTICITY OF DEMAND (XED) measures the responsiveness of demand for
good X following a change in the price of a related good Y.
 Products that are substitutes, have positive values of XED.
 Products that are complements, have negative values of XED.
 XED= % CHANGE IN QUANTITY DEMANDED OF PRODUCT A
% CHANGE IN PRICE OF PRODUCT B
 TOTAL REVENUE = PRICE X QUANTITY
 THE IMPORTANCE OF THE PRICE ELASTICITY OF DEMAND FOR A BUSINESS can be
shown by the effect that it has on total revenue. The business will want to know
whether a proposed price change will increase or decrease total revenue. This can be
used to explain the following:-
1. Difference between peak and off peak rail travel.
2. Why it is usually cheaper to purchase airline tickets a few months rather
than few days ahead of the travel.
3. Why restaurant meals are more expensive during religious festivals.
 Businesses try to use these tac ticks to increase their profit and exploit opportunities.
PED helps us understand how total spending by consumers will change as price rises
or falls.
 YED provides information on how the quantity demanded varied with a change in
income. This helps businesses and govt. to forecast the future demand for a whole
range of consumer goods. And services. Demand changes will ask for production
changes to occur too.
 XED helps the companies to realize their competition and understand the impact
that pricing strategies of their rivals will have on the demand for their own product.
Substitutes have a positive XED, and this leads to suppliers having a high degree of
 interdependence. XED will also identify products that are most complementary and
help a company to introduce a price structure that generates more revenue.
 CAUTIONARY NOTE- If you want to calculate the PED accurately, you need to put
aside all other influences aside and just focus on impact of price change on quantity
demanded. Similarly, in XED the data available will be unreliable the linger the time
span. Hence, the relevant guesstimates have to be made.
 PRICE ELASTICITY OF SUPPLY- A numerical measure of the responsiveness of the
change in quantity supplied to a change in price of the product, ceteris paribus.
Expressed as PES= %Change in qty supplied. PES takes a positive value.
%Change in price
 If industries and businesses are more flexible in the way they operate, then supply
tends to be more elastic. Factors influencing PES are:-
1. The ease with which businesses can accumulate or reduce stocks of
goods, to meet variations in demand rather than changing the price. E.g.-
In case of airline, if a seat is not booked then revenue is lost.
2. Ease with which businesses can increase production. E.g.- The supply
cannot be increased in case of agricultural products, where it takes time
to alter the type of crops produced.
3. In the long run, the productive capacity by investing in more capital
equipment, often taking advantage of technical advances.
 When a business has spare capacity, then it can quickly hire more factors of
production for increased demand. But to arrange these things may take time. Like
agriculture.
 EQUILIBRIUM- This is the situation of balance, where there is no tendency for
change.
 EQUILIBRIUM PRICE- Price where demand and supply are equal, where the market
clears.
 EQUILIBRIUM QUANTITY- Amount that is traded at the equilibrium price.
 DISEQUILIBRIUM- Where the demand and supply are not equal. The process of
market adjustment is long and has various time lags in between. Hence, the market
is dynamic.
 CHANGE IN DEMAND-When there is a shift in the demand curve due to a change in
factors other than the price of the product.
 CAUSES OF SHIFT IN DEMAND CURVE:-
1. Income/ability to pay for the product- The key things that influence the
income are, purchasing power of their income and the availability of
loans/credits.
2. Price and availability of related products- In terms of both substitute and
complement products.
3. Fashion, tastes and attitudes- Our preferences decide the products we
demand for.
 CHANGE IN SUPPLY- When there is a shift in the supply curve due to a change in
factors other than the price of the product.
 CAUSES OF SHIFT IN THE SUPPLY CURVE:-
1. Costs associated with supply of the product
2. Size and nature of industry
 3. Government policy- Depends on the various taxes like specific tax and ad
valorem.
 Price mechanism works in such a way that the outcome is a new equilibrium position
with consumers’ demand equal to producer’s supply. Price system can also ration
products in the market.
 TRANSMISSION OF PREFERENCES- The automatic way in which the market allows the
preferences of consumers to be made known to the producers. There is always a
time lag involved when market conditions change.
 CONSUMER SURPLUS- The difference between the value a consumer places on units
consumed and the payment needed to actually purchase that product. Usually when
consumers are willing to pay more than market price. When market price increases,
the consumer surplus becomes lesser and vie-versa.
 PRODUCER SURPLUS- Difference between the price a producer is willing to accept
and what is actually paid. When price increases producer surplus becomes lesser and
vice-versa.

CHAPTER 3- GOVERNMENT MICROECONOMIC INTERVENTION

 One of the more controversial areas of economics is concerned with the extent and
reasons for government intervention in markets. This may be due to MARKET
FAILURE, that is where the free market does not make best use of scarce resources.
The various forms of intervention are:-
1. REGULATIONS- Various means by which the government seeks to control
the production and consumption. These have been important in
combating environmental problems while manufacturing vehicles or
chemicals. They may also refer to prices e.g. min wage and max price.
2. FINANCIAL INTERVENTION: USE OF TAXES AND SUBSIDIES- TAXES are
charges imposed by the government on income, profits and some types
of consumer and producer goods to fund their expenditure. SUBSIDIES
are a payment made by the government to the producer to reduce the
market price. Demerit goods usually have high rates of indirect taxes, but
subsidies are usually paid for beneficial goods and services, they can be
partial or total.
3. GOVERNMENT PROVISION- It is possible for the govt. to take over the
production either in whole or a part. E.g.- railways, oil, etc are referred to
as nationalised industries. Some goods and services are produced by both
state and private sectors like education and health care.
 REGUALTION AND EQUITY- The trade-off is between, freedom for firms and
individuals in unregulated markets, and greater social equity through govt.
regulation.
 MAXIMUM OR CEILING PRICE- A price that is fixed and the market price must not
exceed this price. Only valid when the max price imposed is below the normal
equilibrium price. This shows the maximum price that a seller can charge. E.g.- Staple
foodstuffs, rents in housing, services by utilities like water, gas and electricity.
Transport fare. In this case, the demand starts exceeding the supply and it can be
controlled by queuing or rationing but may lead to underground market, where
consumers pay inflated prices.
 MINIMUM OR FLOOR PRICE- A price that is fixed, the market price must not go
below this price. Controls are valid only in markets where the minimum price is set
above the normal equilibrium price. This is the minimum price that a buyer has to
pay. E.g.- Demerit goods like tobacco products and alcohol, wages in certain
occupation and certain types of imported goods where close substitutes are
available. Due to this, the firms may become inefficient. Firms with high cost have
little incentive to reduce these costs since high minimum price protects them from
lower-cost competitors.
 REGUALTION AND EQUITY- Maximum prices interfere with unregulated markets for
social equity. The prices of essential items are lower for those with less incomes and
hence more equal distribution of income. The trade-off is that the free market is
distorted and may not bring full benefits that might be expected.
 TAXES- Their main function is to raise finance for govt. spending. Revenue from
taxation is also used to maintain equity by distribution of income. CANONS OF
TAXATION ARE ADAM SMITH’S CRITERIA FOR A GOOD TAX i.e.-
1. EQUITABLE- Those who can afford should pay more.
2. ECONOMIC- Revenue should be greater than cost of collection.
3. TRANSPARENT- Tax payers show know exactly what they are paying.
4. CONVENIENT- Should be easy to pay.
 There are 2 main types of taxes:-
1. DIRECT TAXES- One that taxes the income of people and firms and cannot
be avoided. E.g.- Income tax, corporation tax, etc. These are called direct as
they are directly paid to the government.
2. INDIRECT TAXES- A tax that is levied on goods and services. E.g.- Value
added tax (VAT), excise duty on fuel, etc. they are indirect as they are
collected for the government by retailers and local government bodies.
Businesses receive a price higher than their original price by the amount of
tax and is represented by a shift to the left of the supply curve. There are 2
types:-
1. AD VALOREM TAXES- Tax that is charged as a given percentage of
the price. The final price paid by the consumers is inclusive of all
taxes and the tax is added at the final transaction stage.
2. SPECIFIC TAXES- Fixed per unit purchased. E.g.- Cigarettes, petrol,
etc.
 INCIDENCE OF TAXATION- The extent to which the tax burden is borne by the
producer or the consumer or both.
 The extent to which the producer is able to pass on the tax by raising the price of the
commodity depends on the type of good. If the good is inelastic, then consumers
bear the tax burden, e.g.- petrol. If the good is elastic, then max burden is borne by
producer as consumer can switch to other products.
 Ways to tackle tax evasion are:-
1. To tax companies on their revenue and not profit.
2. To tackle corruption in the disclosure of personal incomes and the evasion
of sales taxes by small retail businesses.
 Average rate of taxation is defined as the average percentage of total income that is
paid in taxes. The marginal rate of taxation means the proportion of an increase in
income which is paid in taxes to the government. There are 3 relationships:-
 1. PROPORTIONAL TAXES- One that takes the same proportion or percentage
from all who have to pay for it, i.e. it is constant.
2. PROGRESSIVE TAXES- Tax that takes higher percentage from those with
higher income. Hence, the average rate of taxation will therefore be lower
than the marginal rate. E.g.- Income tax.
3. REGRESSIVE TAXES- Tax that takes a greater percentage from those on
lower incomes. Hence, average and marginal rates of taxation are falling.
E.g.- VAT and GST.
 As the rate of taxation increases, there may be disincentive to work between high-
earners. A trend in many economies is to collect increasing revenues from indirect
taxes since these can usually be collected quickly, less liable to evasion and
corruption and don’t interfere with work incentive problem.
 SUBSIDIES- Leads to an equivalent of a fall in costs for the producer and results in a
rightward shift in market supply curve. Reasons to give subsidies are:-
1. Keep down market prices of essential goods.
2. Encourage consumption of merit goods.
3. Contribute to equity.
4. Provide services not provided by free market.
5. Raise producers income esp. farmers.
6. Opp. For exporters to sell more goods.
7. Reduce dependence on imports.
 It is necessary to assess who benefits from the subsidy. E.g.- Staple foods like rice,
cooking oil, etc. and Mass transit.
 TRANSFER PAYMENTS- A hand-out payment made by the government to certain
members of the community. Not made through a market. Function is equity. Extent
to which this payment can be made depends on the amount of taxes collected. E.g.-
1. Old age pensions
2. Unemployment benefits
3. Housing allowances
4. Child benefits
 Way of reducing inequalities in society is for the govt. to provide certain important
services free of charge to the user. This is called direct provision to goods and
services.
 NATIONALISATION- When govts take over a private sector business and transfer to
public sector. E.g.- Railways in India. Arguments to support it are:-
1. Makes sense for strategic services to be with the public sector.
2. Such services are for the public benefit.
3. There is little sense in duplicating these services.
4. Profits made will be returned to the business.
5. Employees feel a sense of ownership.
 PRIVATISATION- The sale of a state owned public sector business to the private
sector. Companies can also offer share to the public. There is also deregulation or
removal of barriers to entry. Franchising may be exclusive or some competition may
be experienced. Arguments to support it are:-
1. Deliberate commitment to reduce govt. involvement.
2. To widen share ownership among ownership.
3. Benefits for consumers, lower prices, wider choice of products.
4. Privatised companies can be successful in raising capital.
CHAPTER 4- THE MACROECONOMY
 MACROECONOMY- The economy as a whole.
 Changes in the demand for and the supply of the economy’s products influence
prices in the country and the international competitiveness of the products made.
 AGGREGATE DEMAND:-
1. CONSUMPTION- Consumer expenditure. Spending by households on goods
and services.
2. INVESTMENT- Spending by private sector firms on capital goods.