Ugc Net Management - 2020 by Hilal Ahmed

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SESSION-2020
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UNIVERSITY GRANTS COMMISSION NET BUREAU
NET SYLLABUS
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Subject: Management Code No. : 17
Unit – I
Management – Concept, Process, Theories and Approaches, Management Roles and Skills
Functions – Planning, Organizing, Staffing, Coordinating and Controlling. Communication –

Types, Process and Barriers.
Decision Making – Concept, Process, Techniques and Tools
Organization Structure and Design – Types, Authority, Responsibility,

Centralization, Decentralization and Span of Control
Managerial Economics – Concept & Importance
Demand analysis – Utility Analysis, Indifference Curve, and Elasticity & Forecasting Market
Structures – Market Classification & Price Determination
National Income – Concept, Types and Measurement Inflation – Concept, Types and
Measurement Business Ethics & CSR
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Ethical Issues & Dilemma Corporate Governance Value Based Organization
Unit – II
Organizational Behaviour – Significance & Theories
Individual Behaviour – Personality, Perception, Values, Attitude, Learning and Motivation
Group Behaviour – Team Building, Leadership, Group Dynamics Interpersonal Behaviour &
Transactional Analysis
Organizational Culture & Climate
Work Force Diversity & Cross Culture Organizational Behaviour Emotions and Stress
Management
Organizational Justice and Whistle Blowing

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Human Resource Management – Concept, Perspectives, Influences and Recent Trends
Human Resource Planning, Recruitment and Selection, Induction, Training and

Development
Job Analysis, Job Evaluation and Compensation Management
Unit – III
Strategic Role of Human Resource Management Competency Mapping & Balanced

Scoreboard Career Planning and Development
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Performance Management and Appraisal
Organization Development, Change & OD Interventions Talent Management & Skill

Development
Employee Engagement & Work Life Balance
Industrial Relations: Disputes & Grievance Management, Labour Welfare and Social
Security
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Trade Union & Collective Bargaining
International Human Resource Management – HR Challenge of International Business
Green HRM
Unit– IV
Accounting Principles and Standards, Preparation of Financial Statements
Financial Statement Analysis – Ratio Analysis, Funds Flow and Cash Flow Analysis, DuPont
Analysis
Preparation of Cost Sheet, Marginal Costing, Cost Volume Profit Analysis Standard Costing
& Variance Analysis
Financial Management, Concept & Functions
Capital Structure – Theories, Cost of Capital, Sources and Finance Budgeting and Budgetary
Control, Types and Process, Zero base Budgeting
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Leverages – Operating, Financial and Combined Leverages, EBIT–EPS Analysis, Financial

Breakeven Point & Indifference Level.
Unit –V
Value & Returns – Time Preference for Money, Valuation of Bonds and Shares, Risk and
Returns;
Capital Budgeting – Nature of Investment, Evaluation, Comparison of Methods; Risk and

Uncertainly Analysis
Dividend – Theories and Determination
Mergers and Acquisition – Corporate Restructuring, Value Creation, Merger Negotiations,

Leveraged Buyouts, Takeover
Portfolio Management – CAPM, APT

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Derivatives – Options, Option Payoffs, Option Pricing, Forward Contracts & Future Contracts
Working Capital Management – Determinants, Cash, Inventory, Receivables and Payables

Management, Factoring
International Financial Management, Foreign exchange market
Unit - VI
Strategic Management – Concept, Process, Decision & Types

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Strategic Analysis – External Analysis, PEST, Porter’s Approach to industry analysis, Internal
Analysis – Resource Based Approach, Value Chain Analysis
Strategy Formulation – SWOT Analysis, Corporate Strategy – Growth, Stability,

Retrenchment, Integration and Diversification, Business Portfolio Analysis - BCG, GE
Business Model, Ansoff’s Product Market Growth Matrix
Strategy Implementation – Challenges of Change, Developing Programs Mckinsey 7s

Framework
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Marketing – Concept, Orientation, Trends and Tasks, Customer Value and Satisfaction
Market Segmentation, Positioning and Targeting
Product and Pricing Decision – Product Mix, Product Life Cycle, New Product development,
Pricing – Types and Strategies
Place and promotion decision – Marketing channels and value networks, VMS, IMC,
Advertising and Sales promotion
Unit –VII
Consumer and Industrial Buying Behaviour: Theories and Models of Consumer Behaviour
Brand Management – Role of Brands, Brand Equity, Equity Models, Developing a Branding
Strategy; Brand Name Decisions, Brand Extensions and Loyalty
Logistics and Supply Chain Management, Drivers, Value creation, Supply Chain Design,
Designing and Managing Sales Force, Personal Selling
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Service Marketing – Managing Service Quality and Brands, Marketing Strategies of Service
Firms
Customer Relationship Marketing – Relationship Building, Strategies, Values and Process
Retail Marketing – Recent Trends in India, Types of Retail Outlets.
Emerging Trends in Marketing – Concept of e-Marketing, Direct Marketing, Digital

Marketing and Green Marketing
International Marketing – Entry Mode Decisions, Planning Marketing Mix for International
Markets
Unit –VIII
Statistics for Management: Concept, Measures Of Central Tendency and Dispersion,

Probability Distribution – Binominal, Poison, Normal and Exponential
Data Collection & Questionnaire Design Sampling – Concept, Process and Techniques
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Hypothesis Testing – Procedure; T, Z, F, Chi-square tests Correlation and Regression Analysis
Operations Management – Role and Scope
Facility Location and Layout – Site Selection and Analysis, Layout – Design and Process
Enterprise Resource Planning – ERP Modules, ERP implementation Scheduling; Loading,

Sequencing and Monitoring
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Quality Management and Statistical Quality Control, Quality Circles, Total Quality
Management – KAIZEN, Benchmarking, Six Sigma; ISO 9000 Series Standards
Operation Research – Transportation, Queuing Decision Theory, PERT / CPM
Unit –IX
International Business – Managing Business in Globalization Era; Theories of International

Trade; Balance of payment
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Foreign Direct Investment – Benefits and Costs
Multilateral regulation of Trade and Investment under WTO International Trade Procedures
and Documentation; EXIM Policies Role of International Financial Institutions – IMF and
World Bank
Information Technology – Use of Computers in Management Applications; MIS, DSS

Artificial Intelligence and Big Data
Data Warehousing, Data Mining and Knowledge Management – Concepts Managing

Technological Change
Unit – X
Entrepreneurship Development – Concept, Types, Theories and Process, Developing

Entrepreneurial Competencies
Intrapreneurship – Concept and Process
Women Entrepreneurship and Rural Entrepreneurship

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Innovations in Business – Types of Innovations, Creating and Identifying Opportunities,

Screening of Business Ideas
Business Plan and Feasibility Analysis – Concept and Process of Technical, Market and
Financial Analysis
Micro and Small Scale Industries in India; Role of Government in Promoting SSI Sickness in
Small Industries – Reasons and Rehabilitation
Institutional Finance to Small Industries – Financial Institutions, Commercial Banks,

Cooperative Banks, Micro Finance.
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PREFACE
I am glad indeed to place this title 3RD EDITION NTA MANAGEMENT in the hands of those
students who are preparing for NTA exam.
This book is written strictly according to the prescribed syllabus. In preparing this book, I
have freely drawn the material both from the books of Indian & foreign authors.
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The book is divided into 11 units.
I request every teacher and the taught to bring such mistakes to the notice of the author so
that they can be redressed in the next edition.
I welcome every constructive suggestion that goes in improving the quality of the work and
the utility of the book.
2020
Srinagar-J&K
190001
HILAL AHMED
EMAIL-AHMADHILAL850@GMAIL.COM
9906837425 / 7006246674
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STAY CONNECTED WITH MY YouTube CHANNEL
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CONTENTS
UNIT
No.
TITLE
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1 MANAGEMENT (REFERENCE)
2 MANAGERIAL ECONOMICS
(REFERENCE)
3 ORGANISATION BEHAVIOUR
(REFERENCE)
4 HUMAN RESOURCE
MANAGEMENT (REFERENCE)
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5 ACCOUNTING (REFERENCE)
6 FINANCIAL MANAGEMENT
(REFERENCE)
7 STRATEGIC MANAGEMENT
(REFERENCE)
8 MARKETING MANAGEMENT
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(REFERENCE)
9 STATISTICS (REFERENCE)
10 INTERNATIONAL BUSINESS
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(REFERENCE)
11 ENTREPRENEURSHIP
DEVELOPMENT (REFERENCE)
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10 | P a g e SESSION-2020
UNIT-1
MANAGEMENT
 Management is an important element in every organization. It is the element that coordinates
currents organizational activities and plans for the future.
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 The management adapts the organization to its environment and shapes the organization to
make it more suitable to the organization.
MANAGEMENT FUNCTIONS OR THE PROCESS OF MANAGEMENT
 Planning, Organizing, Leading & Controlling (Newman & Summer)

 Planning, Organizing, Commanding, Coordinating and Controlling (Henri Fayol)
 ‘POSDCORB’: Planning, Organizing, Staffing, Directing, Coordinating, Reporting & Budgeting
(Luther Gulick)
 Decision Making, Organizing, Staffing, Planning, Controlling, Communicating & Directing
(Warren Haynes & Joseph Massie)
 Planning, Organizing, staffing, directing & Controlling (Koontz O’Donnell)
Functions of Management
Planning:- It is a process of deciding the business objectives and charting out the plan/ method for
achieving the same. This includes determination of what is to be done, how, and where it is to be
done, who will do it and how result are to be evaluated. This function expected to be carried out
throughout the organization. It should be performed by the manager at all levels.
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Organizing. According to Allen, the organizing refers to “the structured which results from identifying
and grouping the work, defining and delegating responsibility and authority and establishing
relationships.”
To organize a business is to provide it with everything useful to its functioning i.e. personnel, raw
materials, machineries, capital etc. Once objectives are established, manager has to develop plan to
achieve them with help of human resources as well as material resources.
Directing. Directing involves communication, leadership and motivation. Communication is the

process of passing the information and understanding it from one person to other person. Leadership
is the function whereby the person or manager guides and influences the work of his subordinates.
Motivation is to motivate the employee to give their best to the organization.
Controlling
The controlling involves-
 Establishing standards of performance.

 Measuring current performance and comparing it against the established standard.

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Taking corrective action that does not meet the standard. Control compels the events to
confirm to plans.
Management theories. Management theories are the set of general rules that guide the managers to
manage an organization. Theories are an explanation to assist employees to effectively relate to the
business goals and implement effective means to achieve the same.
GENERAL MANAGEMENT THEORIES
1. Frederick Taylor – Theory of Scientific Management
2. Henri Fayol – Administrative Management Theory

3. Max Weber - Bureaucratic Theory of Management
4. Elton Mayo – Behavioral Theory of Management (Hawthorne Effect)
What is Scientific Management?
• Scientific management, is a theory of management that analyses and synthesizes workflows. Its main
objective is improving economic efficiency, especially labour productivity. It was one of the earliest
attempts to apply science to the engineering of processes and to management.
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• Its development began with Frederick Winslow Taylor in the 1880s and 1890s within the
manufacturing industries. Its peak of influence came in the 1910s, by the 1920s, it was still influential
but had begun an era of competition and syncretism with opposing or complementary ideas.
• Although scientific management as a distinct theory or school of thought was obsolete by the 1930s,
most of its themes are still important parts of industrial engineering and management today. These
include analysis, synthesis, logic, rationality, empiricism, work ethics, efficiency and elimination of
waste, standardization of best practices, disdain for tradition preserved merely for its own sake or to
protect the social.
A bit about F.W. Taylor
• Frederick Winslow Taylor (March 20, 1856 – March 21, 1915) was an American mechanical engineer
who sought to improve industrial efficiency and then a management consultant in his later years. He
is often called "The Father of Scientific Management." His approach is also often referred to, as
Taylor's Principles, or Taylorism.
• His influential monograph laid out the principles of scientific management, which is a seminal text
of modern organization and decision theory and has motivated administrators and students of
managerial technique. The monograph was published in year 1911.
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3 goals of F.W. Taylor
• First. To point out, through a series of simple illustrations, the great loss which the whole country is
suffering through inefficiency in almost all of our daily acts.
• Second. To try to convince the reader that the remedy for this inefficiency lies in systematic
management, rather than in searching for some unusual or extraordinary man.
• Third. To prove that the best management is a true science, resting upon clearly defined laws, rules,
and principles, as a foundation. And further to show that the fundamental principles of scientific
management are applicable to all kinds of human activities, from our simplest individual acts to the
work of our great corporations, which call for the most elaborate cooperation. And, briefly, through a
series of illustrations, to convince the reader that whenever these principles are correctly applied,
results must follow which are truly astounding.
PRINCIPLES OF SCIENTIFIC MANAGEMENT
 Replacement of old rule of thumb method.

 Scientific selection and training of workers.
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 Cooperation between labour and management.

 Maximum output.
 Equal division of responsibility.
Techniques of Scientific Management
1. Scientific Task Setting. It is essential to set the standard task which average worker should do during
a working day. Taylor called it a fair day’s work.
2. Work Study. It implies an organized, systematic, analytical and critical assessment of the efficiency
of various operations. It includes following techniques.
• Method Study.
• Motion Study.
• Time Study.
• Fatigue Study.
3. Planning the Task. Planning the task should be separated from the executive function. The detailed
planning should be done by the planning department.
4. Standardization. Taylor advocated the standardization of tools and equipment, cost system and
several other items. Efforts should be made to provide standardized working environment.
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5. Scientific Selection and Training. Management should design scientific selection procedure so that
the right men are selected for the right job.
6. Differential Piece-Wage Plan. This plan was suggested to attract highly efficient workers. There are
two piece work rates, one is lower and another is higher. Standard of efficiency is determined either
in terms of time or output based on time and motion study.
7. Specialization. Taylor advocated functional foremanship to introduce specialization. He

recommended eight foremen in all to control the various aspects of production.
Benefits of Scientific Management
• Replacement of traditional rule of thumb method by scientific techniques.

• Proper selection and training of the workers.
• Establishment of harmonious relationship between the workers and the management.
• Detailed instructions and constant guidance of the workers.
• Incentive wages to the workers for higher production.
• Better utilization of various resources.
• Satisfaction of the needs of the customers
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Extra Points in Scientific Management Theory:
1. Scientific Management needs the cooperation of the workers and the management at various
stages.
2. The workers should understand the point of view of the management in increasing the
production and the profitability of the company.
3. Taylor advocates group harmony by eliminating the dissatisfaction amongst the works.
4. The movement of material within the company should be scientifically done.
5. Taylor emphasized the scientific selection of people and the need for appropriate training. He
developed the concept of work: “one best way of doing a job”
6. He gave the concept of functional foremanship. As per this concept, he explained the division
of functional authority. The supervisors were delegated the authorities in their specialized fields.
Pig Iron Experiment: Taylor is best known for his pig iron experiments Workers loaded pigs of iron
onto rail cars. Their daily average output was 12.5. Taylor believed that output could be 48 tons by
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applying Scientific Management approach. After scientifically applying different combination of

procedure, techniques and tools, Taylor succeeded in getting that level of productivity.
The theory was extended by Henry Grant, Frank Gilberth and Lillian Gilberth. Henry Grant had
defined new payment system and flow chart for work. While Lillian couple had catalogued seventeen
different hand motions such as “grasp”, “hold” for work.
Henry Gantts’s Contribution in Scientific Management:
Henry Gantt was a consulting engineer who specialized in control systems for shop scheduling. Grantt
saw the importance of the human element in production and introduced the concept of motivation
as used in industry today. He introduced two new features in Taylor’s pay incentive scheme. First,
every worker who finished a day’s assigned work load was to win a 50 cent bonus for that day. Second
even the foreman was rewarded with a bonus for each worker who reached the daily standard, plus
an extra bonus if all the workers reached it. Gantt felt that this would motivate a foreman to teach his
worker to do ‘he job well. Gantt also developed the idea of rating an employee publicly. Gantt
developed the Gantt Charts that provides a graphical representation of the flow of work required to
complete a give task. The chart represent each Planned stage of the work, showing both scheduled
times and actual time. This chart is precursor of modern day control techniques like Critical Path
Techniques (CPM) and Programme Evaluation and Review Technique (PERT).
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Frank Gilbreth and Lillian Gilbreth’s contribution to Scientific Management Theory: Frank and Liilian
Gilbreth made their contribution to the scientific management movement as a husband –wife team.
The Gilbreths turned motion study into an exact science. They used motion pictures for studying and
streamlining work motions. They catalogued seventeen different hand motions such as ‘grasp’, ‘hold’
thereby paving the way for work simplification. These they called ‘therbligs’. Thus, they focused more
on the production system along with taking care of the human side of management. Gilbreths had 12
children. Frank and Lillian Gilbreth were so dedicated to the idea of finding the one best way to do
every job that two of their children wrote Cheaper by the Dozen, a humorous recollection of scientific
management and motion study applied to Gilbreth household. The use of the camera in motion study
stems from this time and the Gilbreths used micro-motion study in order to record and examine
detailed short-cycled movements as well as inventing cyclographs and chronocycle graphs to observe
rhythm and movement.
HENRI FAYOL-Administrative Management Theory
 Henri Fayol was born in 1841 at Istanbul Turkey.

 He was a French management theorist.
 Fayol was one of the most influential contributors to modern concepts of management.
 Fayol has been described as the father of modern operational management theory
 The nineteen-year old engineer started at the mining company ultimately acting as its
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managing director
 Based largely on his own management experience, Fayol developed his concept of
administration.
Major Contributions of Henri Fayol
First recognized that successful managers had to understand the basic managerial functions and
believed specific management skills could be learned and taught
He mentioned six activities of an enterprise:
 Technical (production, manufacture, adaptation)

 Commercial (buying, selling, exchange)
 Financial (search for an optimum use of capital)
 Security (protection of property and persons)
 Accounting (Stock taking, balance sheets, cost statistics)
Fayol’s universal management functions:
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1. Planning 2.Organizing 3.Commanding 4.Coordinating 5.Controlling
 Developed a set of 14 general principles of management.

 Provided 16 managerial duties that a manager has to perform
Fayol’s General Principles of Management
 Division of work
 Authority and responsibility
 Discipline
 Unity of command
 Unity of direction
 Subordination of individual interest to the common good
 Remuneration of personnel
 Centralization
 Scalar chain
 Order
 Equity
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 Stability
 Initiative
 Esprit de corps
Division of work: Specializing encourages continuous improvement in skills and the development of
improvements in methods.
Authority: The right to give orders and the power to exact obedience.
Discipline: No slacking, bending of rules. The workers should be obedient and respectful of the
organization.
Unity of command: Each employee has one and only one boss.
Unity of direction: A single mind generates a single plan and all play their part in that plan.
Subordination of Individual Interests: When at work, only work things should be pursued or thought
about.
Remuneration: Employees receive fair payment for services, not what the company can get away
with.
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Centralization: Consolidation of management functions. Decisions are made from the top.
Scalar Chain (line of authority): Formal chain of command running from top to bottom of the
organization, like military
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Order: All materials and personnel have a prescribed place, and they must remain there.
Equity: Equality of treatment (but not necessarily identical treatment)
Personnel Tenure: Limited turnover of personnel. Lifetime employment for good workers.
Initiative: Thinking out a plan and do what it takes to make it happen.

Esprit de corps: Harmony, cohesion among personnel. It's a great source of strength in the
organization. Fayol stated that for promoting esprit de corps, the principle of unity of command should
be observed and the dangers of divide and rule and the abuse of written communication should be
avoided.
MAX WEBER: Bureaucratic Theory of Management
Weber made a distinction between authority and power. Weber believed that power educes
obedience through force or the threat of force which induces individuals to adhere to regulations.
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According to Max Weber, there are three types of power in an organization:-
 Traditional Power
 Charismatic Power
 Bureaucratic Power Or Legal Power
Bureaucracy refers to a specialized system and process of maintaining uniformity or authority within
an organization.
Principles of Bureaucratic theory
 Job specialization
 Authority hierarchy
 Formal selections
 Formal rules and regulations
 Impersonality
 Career orientation
Job specialization: Jobs are divided into simple, routine and fixed category based on competence and
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functional specialization.
Authority Hierarchy: Officers are organized in hierarchy in which higher officer controls lower position
holders i.e. superior controls subordinates and their performance of subordinates and lower staff
could be controlled.
Formal selection: All organizational members are to be selected on the basis of technical qualifications
and competence demonstrated by training, education or formal examination.
Formal rules and Regulations: To ensure uniformity and to regulate actions of employees, managers
must depend heavily upon formal organizational rules and regulations. Thus, rules of law lead to
impersonality in interpersonal relations.
Impersonality: Rules and controls are applied uniformly, avoiding involvement with personalities and
preferences of employees. Biasness and favoritism are not preferred.
Career orientation: Career building opportunity is offered. Promotions and salary hikes are strictly
based on technical competence. They work for a fixed salaries and pursue their career within the
organization.
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Criticism of Bureaucratic Organization
Bureaucratic organization is criticized because of the following reasons:-
• Bureaucratic organization is a very rigid type of organization. It does not give importance to human
relations. It is suitable for government organizations. It is also suitable for organizations where change
is very slow.
• Too much emphasis on rules and regulations. The rules and regulations are rigid and inflexible.
• There will be unnecessary delay in decision-making due to formalities and rules.

• Bureaucracy involves a lot of paper work. This results in lot of wastage of time, effort and money.
ELTON MAYO: Behavioral Theory of Management
Scientific Management Approach was concerned with physical mechanical aspects of work. Human
element is absent in it. Behavioral approach to management is concerned with human element and
human behavior. The behavioral management theory is often called the human relations movement
because it addresses the human dimension of work. They believed that a better understanding of
human behavior at work such as motivation, conflict, and expectation will improve productivity.
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Behavioral science is concerned with the social and psychological aspects of human behavior in
organization. Behavioral Approach proves that people working in an organization have their needs
and goals, which may differ from the organization’s needs and goals. It also proves that individual
behavior is closely linked with the behavior of the group to which he belongs. Informal leadership,
rather than the formal authority of supervision is more important for group performance.
Hugo Munsterbeg (1863-1916) is known as the “Father of Industrial Psychology” and is as important
for psychology students as F.W. Taylor is for management students.
He focused to provide a view of psychology’s practical applications. Munsterbeg believed that industry
can be benefited by psychologists in three major areas:
 Seeking modern ways to hire the right person for the right job.
 Achieving optimum efficiency by identifying the psychological conditions.
 Finding methods to direct behavior of individual employees to be in harmony with the
management’s objectives
The Hawthorne Studies
A number of experiments done in Western Electrical Company, situated in Cicero that are known as
“Hawthorne Studies.” It is considered as the best historical contribution to the field of Organizational
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Behavior that provided a clear view of relation of working conditions to efficiency of employees and
productivity. Industrial engineers at Western Electric started these studies in 1924 as an experiment
of scientific management and the studies continued till 1930’s. They tried to identify that how
different illumination levels affect worker productivity. Two groups were created, control group and
experimental group. The engineers examined the experimental groups working in different lighting
intensities; however, the control group was examined under a constant lighting intensity.
The Western Electric Company, in 1927, invited Elton Mayo, professor at Harvard for consultation
on the studies.
The Hawthorne studies provided different findings:
 Initially, studies did not provide any evidence of correlation between work performance of
individuals and change in lighting. In fact, work performance almost increased with any
change in illumination lighting.
 After that in the second phase, the studies become apparent. They revealed that workers’
performance can be improved by just giving them the required attention not because of the
factors that the study aimed to examine.
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 In the third phase of studies, the focus was on group productivity and motivation of
individuals.
 Ultimately, the Hawthorne studies provided a concept that the organization also has social
aspects that, if given proper attention, can contribute to better performance or workers
System Approach to Management
System Approach is the most acceptable approach in the modern management. The major
contributories are Herbert A. Simon. George Homons, Philip Selznick etc. This approach considers
organization as a unified, directed system of integrated parts. It emphasized that every organization
is composed of different parts and one part affect all other parts in a varying degree. System approach
to management advocates that manager should not accept limited view of responsibility. They should
not consider their units / departments as an individual and isolated units. Subordinate, Manager and
individual department should try to maximize their performance and contribution to all departments
of organization.
Contingency Approach to Management
According to this theory, there is no best way to manage all situations. In other words, there is no one
best way to manage. The contingency approach was developed by managers, consultant and
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researchers. Paul Hersey and Ken Blanchard developed the contingency of leadership. The
contingency approach to management emerged from the real life experience of managers who found
that no single approach worked consistently in every situation.
Universal Approach to Management
This approach considered management as a process. The process of management consists of several
functions like planning, organizing, directing, controlling. The pioneering work was done by Henry
Fayol. According to this approach, authority originates at top and flows downwards in unbroken
manner.
Quantitative Approach
This approach primarily focuses on the use of mathematical models. This approach strived to resolve
the problems amenable for quantitative analysis like transportation problems, linear programming
etc. It provides an objective base for decision making.
Explain Schools (thoughts) of Management.
The schools of management thought are theoretical frameworks for the study of management. Each
of the schools of management thought are based on somewhat different assumptions about human
beings and the organizations for which they work. Disagreement exists as to the exact number of
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management schools. Different writers have identified as few as three and as many as twelve. Those
discussed below include (1) the classical school, (2) the behavioral school, (3) the quantitative or
management science school, (4) the systems school, (5) and the contingency school.
THE CLASSICAL SCHOOL
The classical school is the oldest formal school of management thought. Its roots pre-date the
twentieth century. The classical school of thought generally concerns ways to manage work and
organizations more efficiently. Three areas of study that can be grouped under the classical school are
scientific management, administrative management, and bureaucratic management.
(1) SCIENTIFIC MANAGEMENT. Scientific management was introduced in an attempt to create a

mental revolution in the workplace. It can be defined as the systematic study of work methods in order
to improve efficiency. Frederick W. Taylor was its main proponent. Other major contributors were
Frank Gilbreth, Lillian Gilbreth, and Henry Gantt.
(2) ADMINISTRATIVE MANAGEMENT. Administrative management focuses on the management

process and principles of management. Henri Fayol is the major contributor to this school of
management thought. Fayol argued that management was a universal process consisting of functions,
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which he termed planning, organizing, commanding, coordinating, and controlling. Fayol believed that
all managers performed these functions and that the functions distinguished management as a
separate discipline of study apart from accounting, finance, and production. Fayol also presented
fourteen principles of management.
(3) BUREAUCRATIC MANAGEMENT. Bureaucratic management focuses on the ideal form of

organization. Max Weber was the major contributor to bureaucratic management. Based on
observation, Weber concluded that many early organizations were inefficiently managed, with
decisions based on personal relationships and loyalty. He proposed that a form of organization, called
a bureaucracy, characterized by division of labor, hierarchy, formalized rules, impersonality, and the
selection and promotion of employees based on ability, would lead to more efficient management.
Weber also contended that managers' authority in an organization should be based not on tradition
or charisma but on the position held by managers in the organizational hierarchy.
THE BEHAVIORAL SCHOOL
The behavioral school of management thought developed, in part, because of perceived weaknesses
in the assumptions of the classical school. The classical school emphasized efficiency, process, and
principles. Some felt that this emphasis disregarded important aspects of organizational life,
particularly as it related to human behavior. Thus, the behavioral school focused on trying to
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understand the factors that affect human behavior at work. It includes:
(1) Human Relations (Hawthorne Experiments)
(2) Behavioral Science
THE QUANTITATIVE SCHOOL
The quantitative school focuses on improving decision making via the application of quantitative
techniques. Its roots can be traced back to scientific management. It includes:
(1) Management Science
(2) Operations Management
(3) Management Information Systems
SYSTEMS SCHOOL
The systems school focuses on understanding the organization as an open system that transforms
inputs into outputs. This school is based on the work of a biologist, Ludwig von Bertalanffy, who
believed that a general systems model could be used to unite science. Early contributors to this school
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included Kenneth Boulding, Richard Johnson, Fremont Kast, and James Rosenzweig. The systems
school began to have a strong impact on management thought in the 1960s as a way of thinking about
managing techniques that would allow managers to relate different specialties and parts of the
company to one another, as well as to external environmental factors. The systems school focuses on
the organization as a whole, its interaction with the environment, and its need to achieve equilibrium.
CONTINGENCY SCHOOL
The contingency school focuses on applying management principles and processes as dictated by the
unique characteristics of each situation. It emphasizes that there is no one best way to manage and
that it depends on various situational factors, such as the external environment, technology,
organizational characteristics, characteristics of the manager, and characteristics of the subordinates
CONTEMPORARY "SCHOOLS" OF MANAGEMENT THOUGHT
Management research and practice continues to evolve and new approaches to the study of
management continue to be advanced. This section briefly reviews two contemporary approaches:
total quality management (TQM) and the learning organization. While neither of these management
approaches offer a complete theory of management, they do offer additional insights into the
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management field.
MANAGER
A Manager is responsible for planning and directing the work of group of individuals, monitoring their
performance and taking corrective action when necessary for the accomplishment of organizational
goals and objectives.
Who Are Managers?
Someone who works with and through other people by coordinating their work activities in order to
accomplish organizational goals.
Types of Managers
First-line Managers: Are at the lowest level of management and manage the work of non-managerial
employees
Middle Managers: Manage the work of first-line managers
Top Managers: Are responsible for making organization-wide decisions and establishing plans and
goals that affect the entire organization.
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Managerial Concerns
Efficiency:
 “Doing things right”

 Getting the most output for the least input
Effectiveness
 “Doing the right things”

 Attaining organizational goals
ROLES OF A MANAGER
Henry Mintzberg in his book, “The Nature of Managerial Work” published in 1973, highlighted the
roles of managers in an organization. He conducted a study of five executives, the way they spend
their time in the organization. He conducted a study of five executives, the way they spend their time
in the organization for serving the organization. He classified three major managerial roles each with
sub-classification of ten roles. He classified such roles as under:
Interpersonal roles: Figurehead, leader, liaison

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Informational roles: Monitor, disseminator, spokesperson
Decisional roles: Entrepreneur, disturbance handler, resource allocator, negotiator
1. The interpersonal roles link all managerial work together. The three interpersonal roles are
primarily concerned with interpersonal relationships.
Figurehead Role: The manager represents the organization in all matters of formality. The top level
manager represents the company legally and socially to those outside of the organization. The
supervisor represents the work group to higher management and higher management to the work
group.
Liaison Role: The manger interacts with peers and people outside the organization. The top level
manager uses the liaison role to gain favors and information, while the supervisor uses it to maintain
the routine flow of work.
The leader Role: It defines the relationships between the manger and employees.
Direct and motivate subordinate, training counseling and communicating with subordinates. (As a
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leader, he leads his division through motivating and encouraging the employees under his span of
control)
2. Informational Roles. The informational roles ensure that information is provided. The three
informational roles are primarily concerned with the information aspects of managerial work.
Monitor Role: The manager receives and collects information about the operation of an enterprise.
Disseminator Role: The manager transmits special information into the organization. The top level
manager receives and transmits more information from people outside the organization than the
supervisor.
Spokesperson Role: The manager disseminates the organization’s information into its environment.
Thus, the top level manager is seen as an industry expert, while the supervisor is seen as a unit or
departmental expert.
3. Decisional Roles. The decisional roles make significant use of the information and there are four
decisional roles.
Entrepreneur Role: The manager initiates change, new projects; identify new ideas, delegate idea
responsibility to others.
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Disturbance Handler Role: The manager deals with threats to the organization. The manager takes
corrective action during disputes or crises; resolve conflicts among subordinates; adapt to
environmental crisis.
Resource Allocator Role: The manager decides who gets resources; schedule, budget set priorities
and chooses where the organization will apply its efforts.
Negotiator Role: The manager negotiates on behalf of the organization. The top level manager makes
the decisions about the organization as a whole, while the supervisor makes decisions about his or her
particular work unit.
TYPES OF MANAGER. The functions performed by mangers can also be understood by describing
different types of management jobs.
(1) Functional Managers: Functional managers supervise the work of employees engaged in
specialized activities such as accounting, engineering, information systems, food preparation,
marketing, and sales. A functional manager is a manager of specialists and of their support team, such
as office assistants.
(2) General Managers: General Managers are responsible for the work of several different groups that
perform a variety of functions. The job title “Plant General Manager” offers insight into the meaning
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of general management. Reporting to the plant general manager are various departments engaged in
both specialized and generalized work such as manufacturing, engineering, labor relations, quality
control, safety, and information systems. Company presidents are general managers. Branch
Managers also are general manager if employees from different disciplines report to them.
(3) Administrator: An administrator is typically a manager who works in a public (government) or

nonprofit organization, including educational institutions, rather than in a business firm. Managers in
all types of educational institutions are referred to as administrators. An employee is not an
administrator in the managerial sense unless he or she supervises others.
(4) Entrepreneurs: An entrepreneur is a person who founds and operates an innovative business.
Michael H. Morris defines entrepreneurship along three dimensions: innovativeness, risk taking and
reactiveness. After the entrepreneur develops the business into something bigger than he or she can
handle alone or with the help of only a few people, that person becomes a general manager.
PLANNING. Planning is the conscious, systematic process of making decisions about goals and
activities that an organization will pursue in the future. A plan is a pre-determined course of action.
Planning is essentially a process to determine and implement actions to achieve organizational
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objectives.
Planning involves the task of deciding in advance –
What to do?
How to do?
When to do it?
Who will do it?
A manager has to answer four basic questions while formulating a plan –
 Where are we now realistic assessment of current situation?

 Where do we want to be?
 Gap between where we are and where we want to be?
 How do we get there?
Nature of Planning
 Planning is goal oriented – Plans arise from objectives. Objectives provide guidelines for
planning.
 It is a primary function – Planning provides the basis foundation from which all future
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management functions arise.

 It is persuasive – It is required at all levels of management. It is not an exclusive function of
any management level or department. Managers have to plan for every change that occurs in an
organization. However, the scope of planning differs at all levels and among different department.
 It is mental activity – Planning is a mental process involving – imagination, foresightedness
and sound judgment. Plans are based on careful analysis of internal and external factors influencing
business activities. It is carried out in a logical and systematic manner.
 It is a continuous process – It is an ongoing process of adapting the organization with the
changes in business environment. Since a business exist in a dynamic environment it is necessary to
continuously plan based on changing business needs and situations.
 It involves choice – it is essentially a choice among various alternative course of action. A
manager has to select the best alternative after careful analysis and evaluation.
 It is forward looking – Planning means looking ahead and preparing for the future. It involves
analysis of the future needs and requirements of the business and preparing for it.
 It is flexible – Planning is based on future forecast of events and situations. Since future is
uncertain, plans are flexible enough to adapt with future change of events.
 It is an integrated process – Plans are structured in a systematic and logical sequence where
each plan or step is highly inter-dependent and mutually supportive.
 It includes effective and efficient dimensions – Plans aim at optimum utilization of resources
to be efficient and are based on predetermined objectives to measure effectiveness of the plan.
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Elements of a Plan
Objectives – Objectives are goals established to guide the activities of the enterprise.
Policies – A policy is a basic statement that guides action and decision making. It sets behavioral limits
on managers.
Procedures and Methods – A procedure is a well thought out course of action. It prescribes the specific
way to do a particular job. Methods are sub units of procedure. They indicate the techniques to be
used to make the procedure effective.
Rules – A rule specified necessary course of action in respect of a situation. It prescribes restriction
and a definite and rigid course of action.
Strategy – It is a plan of action designed to achieve long term or overall aim.
Programs – Programs are precise plans of action followed in proper sequence in accordance with
objectives, policies and procedures.
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Budgets – A budget is an estimate of men, money, material and machine required for successful
implementation of plans.
Projects – A project is a particular job that needs to be done in connection with the general
programme.
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UNIT- 2
MANAGERIAL ECONOMICS
Business economics is, an applied economics. Economics is the study of human beings (e.g.,
consumers, firms) in producing and consuming goods and services in the midst of scarcity of resources.
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Managerial or business economics is an applied branch of organizing and allocating a firm’s scarce
resources to achieve its desired goals.
Managerial economics or business economics is economics applied in decision-making. Business

economics, thus, interweaves economic principles and business. Business managers apply economic
laws and principles while presenting business problems and their ways of solutions. Thus, business
economics can be defined as the application of economic analysis to business problems faced by an
enterprise. It provides a link between economic theory and the decision sciences in the analysis of
managerial decision--making. It relies heavily on traditional economics and decision sciences.
Identification of the problems and the solving of the problems are the two crucial elements of
decision-making of a business firm. Business economists help business managers in making sound
business decisions. Business success, in fact, greatly depends on appropriate business decisions.
However, appropriate decision-making is not an easy job in this changing world.
PROFIT MAXIMSATION:
Profit earning is the main aim of every economic activity. A business being an economic institution
must earn profit to cover its costs & provide funds for growth. No business can survive without earning
profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a protection
against risks which cannot be ensured. The accumulated profits enable a business to face risks like fall
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in prices, competition from other units, adverse government policies etc. thus profit maximization is
considered as the main objective of business.
Following arguments are advanced in favor of profit maximisation as the objective of business:
 Profitability is a barometer for measuring efficiency and economic prosperity of a business

enterprise, thus profit maximization is justified on the grounds of rationality.
 When profit- earning is the aim of business then profit maximization should be the obvious
objective.
 Economic & business conditions do not remain serve competition etc. there may be adverse
business conditions like recession, depression, severe competition etc. A business will be able to
survive under unfavorable situation, only if it has some past earnings to rely upon. Therefore, a
business should try to earn more & more when situation is favorable.
However, profit maximization objective has been criticized on many grounds. A firm pursuing the
objective of profit maximization starts exploiting workers & the consumers. Hence, it is immoral &
leads to a number of corrupt practices. Further it leads to big inequalities & lower human values which
are an essential part of an ideal social system.
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Theories of Profits
Innovation theory of profits – Joseph Schumpeter---
• The main function of an entrepreneurs is to introduce innovations in the economy. Profits are the
reward for making innovations.
• What is an Innovation? Two Types
 First: TO reduce the cost of production. Ex – introduction of a new machinery, cheaper

technique of production, exploitation of new raw material etc.
• Second Type of innovation – Increasing the demand for the product. Ex-Introduction of a new
design to the product, new method of advertisement, discovery of new markets, superior method of
advertisement.
• Thus profits emerge and are retained by the entrepreneur if he can get a patent without
others imitating him. Ex- Bill Gates making huge profits (windows operating system).
Uncertainty bearing theory of Profit:

• It is propounded by American Economist Prof Knight: Profit is regarded not for risk taking, but for
uncertainty bearing
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• Risk is of two kinds. 1) Foreseen risk, 2) unforeseen risk, which cannot be foreseen by the
entrepreneur.
• Unforeseeable risk is uncertainty according to Prof Knight, and profit is reward for it and profits and
uncertainty are directly related.
What are uncertainties?

They are non-insurable risks such as
1. Competitive risk with the entry of new firms,
2. Technical risk, adoption of new technique by competitors,
3. Risk of Government intervention such as administered prices, tax policy, and import and export
restrictions.
4. Business cycle risk – the demand for the product may fall due to business recession and depression.
Wage theory of Profit

 Propounded by Prof Taussig and Devenport
 Profits are a form of wages.
 Profits accrue to the entrepreneur on account of his special ability.
 As laborers receive wages for their service, entrepreneur receives profits for his service.
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 Entrepreneur is as good as any other workers like doctors, teachers who render intellectual
labor, but they get wages which are part of cost of production.
 Entrepreneur gets profits for his special mental ability which is the surplus after meeting all
the expenses of production that is over and above cost of production.
Dynamic theory of profits

1) J.B Clark propounded the dynamic theory of profits.
2) Profits arise due to continuous generic changes that happen in the dynamic economy.
3) Increase in population, increase in capital, and improvement in production techniques, changes in
the forms of business organization, increase and multiplication of consumer wants give rise to pure
profits.
4) Pure profit is over and above normal profit. These are only short term in nature due to competitive
firms imitating the leaders
5) The result is disappearance of pure of pure profits in the long run.
6) After emergence, disappearance, reemergence will take place if managers are dynamic enough to
take the advantage of the continuously changing generic changes.
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Risk-Bearing Theory of Profit:

The main proponent of this theory is Prof. Hawley. According to Hawley, one of the major functions
of an entrepreneur is to bear risk that is associated first with the setting up of the business and then
with the management of the business.
Rent Theory of Profit:

An American economist, Francis A. Walker (1840-97), is the exponent of the rent theory of profit.
Walker says that an entrepreneur acquires profit because of his ability to perform. Walker argues like
this. In a certain production process, if an entrepreneur uses land, labour and capital owned by his
own self, then the residual part of his revenue, after payment is made to all these factors of
production, is profit.
Now, at any particular price of the product, some entrepreneurs may have this profit equal to zero.
They are called the marginal entrepreneurs. Any such mar-ginal entrepreneur can have nothing in
excess of the wage, interest and rent earned by his own labour, capital and land.
Therefore, if an entrepreneur’s ability to perform is more than that of a marginal entrepreneur, then
his cost of production would be smaller, and he would be able to earn a positive profit. In fact, the
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greater the efficiency of a particular entrepreneur than that of a marginal entrepreneur, the more
would be the amount of profit earned by him.
There is some similarity between profit and rent. For, in the Ricardian theory of rent also, we have
seen that rent is zero on marginal land and the less the cost of production and more the productivity
on a plot of land, the more would be the rent enjoyed by its owners. Because of this similarity between
profit and rent, Walker’s theory is called the rent theory of profit.
Labour Exploitation Theory of Profit:

According to the great philosopher and classical economist, Karl Marx (1818-1883), labour is the only
factor of production which can produce surplus value. The capitalists acquire profit by expropriating
this surplus value. Marx has said that labour is the only productive factor.
WEALTH MAXIMIZATION: wealth maximization is the appropriate objective of an enterprise. Financial

theory asserts that wealth maximization is the single substitute for a stockholders utility. When the
firm maximizes the stockholders wealth, the individual stockholder can use this wealth to maximize
his individual utility. It means that by maximizing stockholders wealth the firm is operating consistently
towards maximizing stockholders utility.
Stockholders current wealth in the firm is the product of the number of shares owned, multiplied
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with the current stock price per share. Higher the stock price per share greater will be stockholders
wealth.
ARGUMENTS IN FAVOR OF WEALTH MAXIMISATION
 It serves the interests of owners as well as other stakeholders in the firm.

 It takes into consideration the risk factor and the time value of money.
 The effect of dividend policy on market price of shares is also considered as the decisions are
taken to increase the market value of the shares.
In the light of modern and improved approach of wealth maximization, a new initiative called
“Economic Value Added (EVA)” is implemented and presented in the annual reports of the
companies. Positive and higher EVA would increase the wealth of the shareholders and thereby create
value.
Economic Value Added = Net Profits after tax – Cost of Capital.
Net Present Value– It is the difference between the present value of benefits realized and the present
value of costs incurred by a business.
A Positive NPV creates wealth and therefore is desirable.

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A Negative NPV brings losses wealth and therefore it acts as a contra indicator.
OBJECTIVES OF BUSINESS FIRM
Baumol’s Sales Maximisation Hypothesis

W.J. Baumol examines what happens if the firm adopts an alter-native objective—the maximisation
of the value of its sales (total revenue) under the requirement that the firm’s profits should not fall
below a mini-mum acceptable level. Sales maximisation implies maximisation of total revenue not
obtaining the largest possible physical volume, because at a zero price physical value may be infinite
but rupee sales volume zero. In fact, there is a well-determined output level which maximizes rupee
sales.
In short, total revenue is maximum where marginal revenue = 0, i.e., elasticity of demand = 1.
Marris’s Model of the Managerial Enterprise

The goal of the firm in Marris’s model is the maximisation of the balanced rate of growth of the firm,
that is, the maximisation of the rate of growth of demand for the products of the firm, and of the
growth of its capital supply.
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Williamson's model of managerial discretion

Oliver E. Williamson hypothesized (1964) that profit maximization would not be the objective of the
managers of a joint stock organisation. This theory, like other managerial theories of the firm, assumes
that utility maximisation is a manager’s sole objective. However it is only in a corporate form of
business organisation that a self-interest seeking manager maximize his/her own utility, since there
exists a separation of ownership and control. The managers can use their ‘discretion’ to frame and
execute policies which would maximize their own utilities rather than maximizing the shareholders’
utilities. This is essentially the principal–agent problem. This could however threaten their job security,
if a minimum level of profit is not attained by the firm to distribute among the shareholders.
The basic assumptions of the model are:
 Imperfect competition in the markets.

 Divorce of ownership and management.
 A minimum profit constraint exists for the firms to be able to pay dividends to their
shareholders.
Behavioural Theory of Cyert and March
Cyert and March have put forth a systematic behavioral theory of the firm. In a modem large
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multiproduct firm, ownership is separate from management. Here the firm is not considered as a
single entity with a single goal of profit maximisation by a single decision-maker, called the
entrepreneur. Instead, Cyert and March regard the modem business firm as a group of individuals
who are engaged in the decision-making process relating to its internal structure having multiple goals.
Demand and Elasticity of Demand

Concept of Demand and Supply:
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the
backbone of a market economy. Demand refers to how much (quantity) of a product or service is
desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a
certain price; the relationship between price and quantity demanded is known as the demand
relationship. Supply represents how much the market can offer. The quantity supplied refers to the
amount of a certain good producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is supplied to the market is known as
the supply relationship. Price, therefore, is a reflection of supply and demand
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Demand: The demand for any commodity at a given price is the quantity of it which will be bought
per unit of time at that price.
Elements of Demand: According to the definition of demand here are three elements of demand for
a commodity:-
1. There should be a desire for a commodity.

2. The consumer should have money to fulfill that desire.
3. The consumer should be ready to spend money on that commodity.
Thus we can define demand as the desire to buy a commodity which is backed by sufficient purchasing
power and a willingness to spend.
There are many economic, social and political factors which greatly influence the demand for a
commodity. Some of these factors are discussed below:
1. Price of the Commodity.

2. Price of Related Goods:
(i) Complementary Goods
(ii) Substitute Goods
(3) Level of Income and Wealth of the Consumer:

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(i) Necessaries
(ii) Inferior goods
(iii) Luxuries
(1) Tastes and Preference
(2) Government Policy
(3) Other Factors :
(i) Size and Composition of Population
(ii) Distribution of Income and Wealth
(iii) Economic Fluctuations
Law of Demand:
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The Law of Supply

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Equilibrium
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POINTS TO REMEMBER
Demand is the willingness to purchase plus ability to pay for it at a particular price and at a
particular point of time.
Demand backed by adequate purchasing power.
Demand is multivariate relationships i.e. it is determined by many factors simultaneously.
There is an inverse relationship between the price of the goods and the quantity demand of
that goods.
Partial Equilibrium Analysis- given by Alfred Marshall.
Ceteris paribus it means other things being equal or constant.
Factors affecting demand-
Price of the product: It is the most important factor affecting demand for the given
commodity. Generally, there exists an inverse relationship between price and quantity demanded. It
means, as price increases, quantity demanded falls due to decrease in the satisfaction level of
consumers.
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Income: Demand for a commodity is also affected by income of the consumer. However, the
effect of change in income on demand depends on the nature of the commodity under consideration.
i. If the given commodity is a normal good, then an increase in income leads to rise in its demand,
while a decrease in income reduces the demand.
ii. If the given commodity is an inferior good, then an increase in income reduces the demand, while
a decrease in income leads to rise in demand.
Relative price of product: Demand for the given commodity is also affected by change in
prices of the related goods. Related goods are of two types:
 Substitute Goods: Substitute goods are those goods which can be used in place of one another
for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to
an increase in the demand for given commodity and vice-versa.
 Complementary Goods: Complementary goods are those goods which are used together to
satisfy a particular want, like tea and sugar. An increase in the price of complementary good leads to
a decrease in the demand for given commodity and vice-versa.
Consumer expectations: If the price of a certain commodity is expected to increase in near
future, then people will buy more of that commodity than what they normally buy. There exists a
direct relationship between expectation of change in the prices in future and change in demand in the
current period.
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Advertisement effect.
Fashions, climate, customs etc.
Demand schedule-A Demand schedule is a list of the different quantities of a commodity which
consumes purchase at different period of time. It expresses the relation between different quantities
of the commodity demanded at different prices.
(i) Individual Demand Schedule: It is defined as the different quantities of a given commodity which
a consumer will buy at all possible prices:-
PRICE (Rs.) QUANTITY DEMANDED
1 5
2 4
3 3
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(ii) Market Demand Schedule: Market demand schedule is defined as the quantities of a given
commodity which all consumer will buy at all possible prices at a given moment of time:-
PRICE (Rs.) A’s DEMAND (1) B’s DEMAND (2) MARKET DEMAND (1+2
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
Demand curve-Demand Curve is simply a graphic representation of demand schedule. It expresses

the relationship between different quantities demanded at different possible prices of the given
commodity.
> Characteristics of demand curve are as follows-
 Downward sloping.
 From left to right.

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Negative slope.
 Inverse relationship between price and quantity demand.
Why do Demand Curve slopes downwards?
Reasons are:-
(i) Law of Diminishing Marginal Utility: The law of demand is based on the law of diminishing marginal
utility which states that as the consumer purchases more and more units of a commodity, the
satisfaction derived by him from each successive unit goes on decreasing. Hence at a lesser price, he
would purchase more. Being a rational human beings the consumer always tries to maximize his
satisfaction and does so equalizing the marginal utility of a commodity with its price i.e. Mux = px. It
means that now the consumer will buy additional units only when the price falls.
(ii) New Consumers: When the price of a commodity falls many consumers who could not begin to
purchase the commodity e.g. suppose when price of a certain good „x‟ was Rs. 50 market demand
was 60 units now when the price falls to Rs. 40, new consumers enter the market and the overall
market demand rises to 80 units.
(iii) Several Use of Commodity: There are many commodities which can be put to several uses e.g.
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coal, electricity etc. When the prices of such commodities go up, they will be used for important
purpose only and their demand will be limited. On the other hand, when their price fall they are used
for varied purpose and as a result their demand extends. Such inverse relation between demand and
price makes the demand curve slope downwards.
(iv) Income Effect: When price of a commodity changes, the real income of a consumer also undergoes
a changes. Hence real income means the consumer’s purchasing power. As the price of a commodity
falls the real income of a consumer goes up and he purchases more units of a commodity eg. Suppose
a consumer buys units wheat at a price Rs. 40/kg now, when the price falls to Rs. 30/kg. His purchasing
power or the real income increase which induces him to buy more units of wheat.
(v) Substitution Effect: As the price of a commodity falls the consumer wants to substitute this good
for those good which now have become relatively expensive e.g. among the two substitute goods tea
and coffee, price of tea falls then consumer substitutes tea for coffee. This is caused the „Substitution
effect‟ which makes the demand curve sloped downwards. In a nutshell, with a fall in price more units
are demanded partly due to income effect and partly due to substitution effect. Both of these are
jointly known as the „price effect‟. Due to this negative price effect the demand curve slopes
downwards.
Exceptions to the law of demand- Exceptions to the law of demand refers to such cases where the
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law of demand does not operate, i.e., a positive relationship is established between price and quantity
demanded.
1. Articles of distinction or Veblon goods: Veblon goods (Named after American economist T.
Veblen) are articles of distinction or luxury goods like jewellery, diamonds, costly carpets etc. Articles
of distinction according to Veblon, command more demand when their prices are high.
2. Giffen goods- It is given by Robert Giffen. It is such a inferior goods in which consumer reduces
its consumption when price decreases and increases the consumption when its price increases. For
example, ‘Bajra’ is an inferior good for a consumer ordinarily. As the price of ‘Bajra’ falls, real income
of the consumer rises. With increased real income a consumer may, demand more of ‘wheat’ and thus
his demand for ‘Bajra’ may fall. In this way, fall in the price of inferior goods is accompanied by fall in
their demand and vice versa.
3. Expectation of Rise or fall in price in future. If prices are likely to rise in the future then even
at the existing higher price people may demand more units of the commodity in the present.
Contrarily, if prices are likely to fall further in the future then even at the existing lower price may
demand less units of the commodity in the present, in the hope of buying more in the future. This
situation renders the slope of demand curve positive. However, this exception to the law of demand
holds well only if it has earlier not been specified as assumption of the law.
4. Consumer’s psychological bias or illusion. When the consumer is wrongly biased against the
quality of a commodity with the price change, he may contract his demand for that commodity with
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a fall in price, sometimes sophisticated consumers do not buy when there is a stock clearance sale at
reduced price, thinking that the good may be of bad quality.
5. Necessaries of life. Those goods which are necessaries of life such as wheat, gas, rice, salt,
kerosene oil, sugar, are not affected by the application of the law. Whatever may be the price,
consumers have no option but to buy it.
TYPES OF DEMAND
1. Demand for Consumers’ Goods and Producers’ Goods. Goods and services for final
consumption are called consumers goods. Producers’ goods refer to the ones used for production of
other goods such as plant and machinery, raw materials etc.
2. Demand for perishable goods and durable goods. Perishable or non-durable goods are those
goods which can be consumed only once. On the other hand, durable goods are those goods the utility
from which accrues over a period of time. For example, the durable goods like the ceiling fan,
refrigerator, car, furniture etc. are used over a number of years. While perishable goods like bread,
milk, fish, paper cup and vegetables are consumed once and their utility is over.
3. Autonomous demand and derived demand. Spontaneous demand for goods which is based
on the urge to satisfy some wants directly is called autonomous demand. Demand for consumer’s
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goods is autonomous or direct. For example, bathing soap is required for cleanliness. It is a final
demand. Autonomous demand for consumption goods depends on the utility of the products.
Derived demand represents the demand for a product which is required for producing another
product and depends on the quantity demanded of the final product. For example, steel is required
for producing water pipes, fans, steel furniture etc. similarly, demand for car’s battery or petrol is a
derived demand, for it linked to the demand for a car.
4. Joint demand and composite demand. When two goods are demanded in conjunction with
one another at the same time to satisfy a single want, they are said to be joint or complementary
demand. Examples are pens and ink, camera and film, car and petrol etc.
A commodity is said to be in composite demand when it is wanted for several different uses. Steel is
needed for manufacturing cars, buildings, construction of railways etc.
5. Price demand, Income demand, Cross demand. Price demand refers to the various quantities
of a product purchased by the consumer at alternative prices. In price demand, the demand function
is based on a single variable price. Thus, D = f (p); where, D refers to demand, f shows functional
relationship and p denotes price of the product. Usually, price demand function has inverse functional
relationship between the price and the demand. The law of demand pertains to consumer behavior
regarding price demand.
Income demand. Income demand refers to the various quantities of a commodity demanded by the
consumer at alternative levels of his changing money income. In income demand, the demand
function is based on the income variable (y). Thus, D = f (Y). The income demand function is usually a
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demand function. It indicates that demand extends with the rise in income and vice versa.
Cross demand. Cross demand refers to the various quantities of commodity (say coffee) purchased by
the consumer in relation to change in the price of a related commodity (say tea) which may either be
a substitute or a complementary product. Thus, cross demand function may be stated as follows: Da =
f (Pb). Whereas Da = the demand for commodity ‘a’ and Pb = the price of the commodity ‘b’. Generally
rise in the price of one commodity say ‘a’ or coffee brings a rise in the demand for its related
commodity say ‘b’ or tea and vice versa.
DETERMINANTS OF DEMAND
1. PRICE OF COMMODITY. Ordinarily, the demand for a god is governed by its price. Other
determinants remaining constant, or ceteris paribus, change in the price of a good causes an inverse
change in its demand as well. Normally, rise in price is accompanied by contraction in demand and fall
in price is accompanied by extension of demand. This relationship between price and demand is called
law of demand.
HILAL AHMED
2. PRICES OF RELATED GOODS. Demand for a commodity depends not only on its own price, but
also upon the prices of related goods. Related goods are broadly classified as substitute goods and
complementary goods.
a. Substitute goods. Substitute goods are those goods which can be substituted for each other,
such as tea and coffee or Pepsi or coke. Demand for coke is related to the price of Pepsi. If price of
Pepsi is raised people may shift to coke and vice-versa. In other words, in case of substitute the
quantity demanded of one good is positively related to the price of the other good. If the price of one
good for example Pepsi increases the demand for its substitute coke will also increase. Contrary to it,
if the price of Pepsi decreases, the demand for its substitute coke will also decrease.
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b. Complementary goods. Complementary goods are those which complete the demand for
each other, such as car and petrol or pen and ink. There is an inverse or negative relationship between
the demand for first good and price of the second which happens to be complementary to the first.
Thus, following increase in the price of pens, demand for ink is likely to go down. Contrary to it, if the
price for pens decreases, the demand for its complementary good increases. In other words, if two
commodities are complements and the price of one increases, the demand for the other commodity
will decline. Contrary to it, if the price of one decreases, the demand for the complement commodity
will increase.
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3. INCOME OF THE CONSUMER. Experience shows that numerically there is a positive

relationship between income of the consumer and his demand for a good. In other words, an increase
in income would cause an increase in demand and economists therefore call such goods as normal
goods. Thus relationship between income of the consumer and demand for a commodity is discussed
with reference to Normal goods, Inference goods and Necessaries of life and inexpensive goods.
Normal Goods. Normal goods are those goods the demand for which tends to increase following
increase in consumer’s income and tends to decrease following decrease in his income. So there is a
positive relationship between consumer’s income and quantity demanded.
HILAL AHMED
Inferior goods. Inferior goods are those goods the demand for which tends to decline following a rise
in consumer’s income and tends to increase following a fall in his income. So, there is an inverse
relationship between income of the consumer and demand for a commodity.
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Necessaries of life and inexpensive goods. One may also study the relationship between income of
the consumer and his demand for the necessaries of life and inexpensive goods. In case of such goods,
as salt and match box, for example, the demand remains almost constant irrespective of the level of
income, though it may slightly stretch in the initial stages of a rise in consumer’s income.
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POINTS TO REMEMBER
Goods whose demand rises when income rises are called Normal Goods.
Goods whose demand falls when income rises are called Inferior Goods.
Substitute goods – It is those goods which are an alternative to one another in consumption
example tea and coffee. When price of tea rises, demand of coffee rises. There is a positive relations
between price & quantity demand. Increase in the price of the substitute goods, the demand curve
shifts rightward.
Complementary goods- those goods which are jointly used or consumed together to satisfy
want. It is also known as jointly demanded goods. Example is car and petrol. If the price of one goods
rises then the quantity demand of other goods reduces. There is a negative relationship between price
HILAL AHMED
& quantity demand. If there is decrease in the price of complementary goods the demand curve shifts
leftward.
Change in quantity demand- when a movement along a demand curve is caused by change in
price of the goods other things remain constant it is known as change in quantity demand. Movement
along a same demand curve brings about expansion and contraction of demand curve. Expansion
occurs when the price of goods is less and the quantity demand is more. Contraction occurs due to
increase in price the quantity demand of the goods decreases.
Change in demand- A shift in the demand curve is caused by the change in other factors than
price of the goods. Others factors such as income, price of other goods like substitute &
complementary or consumer taste. There is increase and decrease in the demand curve. When
income rises consumers buy more product in the same price so demand curve move rightward or
outward. When the income decline consumers buy less products at the same price so demand
curve moves left ward or inward.
The absolute value of the coefficient of elasticity of demand ranges from zero to infinity.
Law of demand- originator of law of demand is Alfred Marshall. It states that other things
being constant, the higher the price of a commodity the smaller is the quantity demand for a
commodity and lower the price of a commodity, higher will be the quantity demand of a commodity.
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Elasticity of demand-
The elasticity of demand measures the responsiveness of the quantity demanded of a good to change
in its quantitative determinant. In other words, the degree of responsiveness of change in quantity
demanded due to a change in price or change in its determinants is called elasticity of demand.
Elasticity of demand, indicates how much quantity demanded of a good will change with change in its
price or income of the consumer or price of related goods.
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞𝐝
Ed = ( – ) 𝐏𝐞𝐫𝐜𝐡𝐚𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞
DEGREES OF PRICE ELASTICITY OF DEMAND
1. PERFECTLY ELASTIC DEMAND. A perfectly elastic demand is one in which a little change in
price will cause an infinite change in demand. In this case, a very little rise in price causes the demand
to fall to zero and a very little fall in price causes the demand to extend to infinity.
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2. PERFECTLY INELASTIC DEMAND. A perfectly inelastic demand is one in which a change in price
produces no change in the quantity demanded.
HILAL AHMED
3. UNITARY ELASTIC DEMAND. Unitary elasticity of demand is one in which a percentage change
in price produces an equal percentage change in demand.
4. GREATER THAN UNITARY ELASTIC OR ELASTIC DEMAND. Greater than unitary elastic demand
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is one in which a given percentage change in price produces relatively more percentage change in
demand.
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> On the basis of factors whether the things are elastic or inelastic-
Luxury- elastic ep >1

Necessities- inelastic
Close substitute- elastic
No substitute- inelastic
High income- inelastic
High cost- elastic
More uses- elastic
Few uses- inelastic
More time period required to find substitute- inelastic
Durable- elastic
Perishable- inelastic
Habits- inelastic
MEASUREMENT OF PRICE ELASTICITY OF DEMAND

HILAL AHMED
Whether price elasticity of demand is unitary or Greater than unitary or less than unitary, is known by
its measurements.
There are five methods of measuring price elasticity of demand:
1. TOTAL EXPENDITURE METHOD. Total expenditure method of measuring elasticity of demand
was evolved by Dr. Marshall. According to this method, in order to measure the elasticity of demand
it is essential to know how much and in what direction the total expenditure has changed as a result
of change in the price of a good.
 Elasticity of demand is unity, when due to rise or fall in the price of a good, total expenditure
remains unchanged.
 Elasticity of demand is greater than unity, when due to fall in price, total expenditure goes up
and due to rise in price total expenditure goes down, that is, when total expenditure moves in opposite
direction compared to change in price.
 Elasticity of demand is less than unity, when due to fall in price, total expenditure goes down
and due to rise in price total expenditure goes up, that is, when total expenditure moves in the same
direction as change in price.
Measurement of elasticity of demand by total outlay (expenditure) method can be explained with
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the help of table 1 and 2 below:
Table -1: Total Expenditure Method
ELASTICITY OF DEMAND PRICE TOTAL EXPENDITURE
GREATER THAN RISE DOWN
UNITY FALL UP
UNITY RISE UNCHANGED

FALL UNCHANGED
LESS THAN RISE UP
UNITY FALL DOWN
Table 2 shows the effect of change in price on elasticity of demand.
Table 2 Total Expenditure Method

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PRICE OF QUANTITY TOTAL EFFECT ON TOTAL ELASTICITY OF

COMMODITY
EXPENDITURE EXPENDITURE DEMAND
2 4 8 SAME TOTAL
4 2 8 EXPENDITURE UNITY ELASTIC
1 8 8
2 4 8 LESS TOTAL GRETAER THAN

EXPENDITURE
UNITY
4 1 4
1 10 10
MORE TOTAL EXP.
2 3 6 MORE TOTAL EXP. LESS THAN UNITY
4 2 8
1 4 4
HILAL AHMED
LESS TOTAL EXP.
Above table signifies the following:
 Unitary elastic demand. First part of table 2 indicated that when price of the good is Rs 2.00,
total expenditure on it is Rs. 8.00. When price rises to Rs. 4.00 or falls to Rs. 1.00, the total expenditure
remains the same that is Rs. 8.00. In other words, change in price has no effect on total expenditure.
 Greater than unitary elasticity. Second part of table 2, shows that when price of the good is
Rs 2.00, total expenditure on it is Rs 8.00. When price rises to Rs. 4.00, total expenditure comes down
from Rs 8.00 to Rs 4.00 and when price falls to Rs 1, total expenditure goes up from Rs 4.00 to Rs.
10.00. In other words, change in price results into change in total expenditure in the opposite
direction.
 Less than unitary elasticity. Third part of table 2 indicates that when price of the good is Rs
2.00 total expenditure on it is Rs 6.00. when price rises to Rs 4.00, total expenditure goes up to Rs 8.00
and when price falls to Re 1.00, total expenditure comes down to Rs 4.00. In other words, change in
price leads to change in total expenditure in the same direction.
2. PERCENTAGE METHOD. As per this method proportionate change in demand is divided by

proportionate change in price. Its formula is as under:
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𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒅𝒆𝒎𝒂𝒏𝒅 𝒇𝒐𝒓 𝒈𝒐𝒐𝒅−𝑿

Ed = 𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒈𝒐𝒐𝒅−𝑿
Measurement of price elasticity of demand by percentage or proportionate method is explained by
an example. Supposing, price of ice cream is Rs 4.00 and demand is for 1 unit of ice cream. When price
of ice cream falls to Rs 2.00, demand extends to 4 units of ice cream. Thus, P = Rs 4.00; P1 = Rs 2.00;
ΔP = Rs 2.00 (Rs 4.00 – Rs. 2.00) Q = 1 unit of ice cream; Q1 = 4 units of ice cream; ΔQ = 4 – 1 = 3 units
of ice cream.
𝑷 𝜟𝑸 4 3
𝐄𝐝 = ( − ) 𝑸 + 𝜟𝑷 = ( − ) 1 × 2 = 6 OR Ed < 1
3. POINT ELASTICITY OF METHOD. Point elasticity refers to price elasticity of demand at any
point on the demand curve. According to Leftwitch, “Elasticity computed at a single point on the curve
for an infinitely small change in price, is point elasticity.’’
Price elasticity of demand is different at different points on a given demand curve. Accordingly, price
elasticity at every point on a given demand curve is measured separately.
a. LINEAR DEMAND CURVE.
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P 𝛥𝑄
Ed = ×
𝑄 𝛥𝑃
It is evident from Fig. that
P = OP (= AQ); Q = OQ (AP)
ΔP = PP1 (=AB); ΔQ = QQ1 (=BC);
𝐴𝑄 𝐵𝐶
Therefore Ed = 𝐴𝑃 × 𝐴𝐵 since ΔABC and ΔAQN are similar triangles, so the ratio of their sides will also
be equal.
HILAL AHMED
𝐵𝐶
𝑄𝑁
That is =
𝐴𝐵𝐴𝑄
𝑄𝑁 𝐵𝐶
By putting𝐴𝑄 𝑖𝑛 𝑝𝑙𝑎𝑐𝑒 𝑜𝑓 𝐴𝐵 𝑖𝑛 𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛 (𝑖), we have
𝐴𝑄 𝑄𝑁 𝑄𝑁 𝑄𝑁
Ed = 𝐴𝑃 × 𝐴𝑄 = 𝐴𝑄 = 𝑂𝑄 (𝐴𝑃 = 𝑂𝑄)
Since ΔAQN and ΔMPA are similar triangles, so the ratio of their sides will also be equal.
𝑄𝑁 𝑄𝑁 𝐴𝑁 𝑳𝒐𝒘𝒆𝒓 𝒑𝒐𝒓𝒕𝒊𝒐𝒏 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
Ed = = = =
𝑂𝑄 𝐴𝑃 𝐴𝑀 𝑼𝒑𝒑𝒆𝒓 𝒑𝒐𝒓𝒕𝒊𝒐𝒏 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
Price elasticity at different points of a straight line shown in Fig, can also be known, (i) At point P which
is located in the middle of demand curve MN, lower segment PN is equal to upper segment PM. Hence
Ed = PN/PM=1. In other words, elasticity at point P will be unity. (ii) At point A, which is located above
the mid-point P on MN demand curve, lower segment AN is larger than upper segment AM. Hence,
Ed = AN / AM >1. In other words, elasticity of demand at point A will be greater than unity. (iii) At point
B, which is located below the mid-point P on MN demand curve, lower segment BN is smaller than
upper segment BM. Hence Ed = BN / BM <1. In other words, elasticity of demand at point B will be
less than unity.
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b. Non-linear demand curve. When demand curve is non-linear, then to know the elasticity of
demand at any point located on it, a tangent is so drawn as to touch this point. Consequently, this
point will divide the tangent into two parts. Lower segment of the tangent is then divided by the upper
segment. The resultant dividend will indicate price elasticity of demand.
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What are the factor affecting Elasticity of Demand?
 Nature of Commodity: Ordinarily, necessaries like salt, Kerosene, oil, match boxes, textbooks,
seasonal vegetables, etc. have less than unitary elastic demand. Luxuries like air conditioner, costly
furniture, fashionable garments etc. have greater than unitary elastic demand. The reason being that
change in their price has a great effect on their demand. Comforts like milk, transistor cooer, fans etc
have neither very elastic nor very inelastic demand. Jointly Demanded Goods like car & petrol, pen &
ink, camera & films etc. have ordinarily in elastic demand for example rise in price of petrol will not
reduce its demand if the demand for cars has not decreased.
 Availability of Substitutes: Demand for those goods which have substitute are relatively more
elastic. The reason being that when the price of commodity falls in relation to its substitute, the
consumer will go in for it and so its demand will increase. Commodities have no substitute like
cigarettes, liquor etc. have inelastic demand.
HILAL AHMED
 Different Uses of Commodity: Commodities that can be put to a variety of uses have elastic
demand, for instance, electricity has multiple uses. It is used for lighting, room-heating, air
conditioning, cooking etc. If the tariffs of electricity increase, its use will be restricted to important
purpose like lighting. It will be withdrawn from important uses. On the other hand, if a commodity
such as paper has only & a few uses, its demand is likely to be inelastic.
 Postponement of the Use: Demand will be elastic for those commodities whose consumption
can be postponed for instance demand for constructing a house can be postponed. As a result demand
for bricks, cement, sand etc. will be elastic. Conversely goods whose demand cannot be postponed,
their demand will be inelastic.
 Income of Consumer: People whose incomes are very high or very low, their demand will
ordinarily be inelastic. Because rise or fall in price will have little effect on their demand. Conversely
middle income groups will have elastic demand.
 Habit of Consumer: Goods to which a person becomes accustomed or habitual will have in
elastic demand like cigarette, coffee tobacco. Etc. It is so because a person cannot do without them.
 Proportion of Income Spent on a Commodity: Goods on which a consumer spends a very
small proportion of his income, e.g. toothpaste, needles etc. will have an inelastic demand. On the
other hand goods on which the consumer spends a large proportion of his income e.g. cloth etc. their
demand will be elastic.
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 Price Level: Elasticity of demand also depends upon the level of price of the concerned
commodity. Elasticity of demand will be high at higher level of the price of the commodity and low at
the lower level of the price.
 Time Period: Demand is inelastic in short period but elastic in long period. It is so because in
the long run, a consumer can change his habits more conveniently in the short period.
INCOME ELASTICITY OF DEMAND

Income elasticity of demand means the ratio of the percentage change in the quantity demanded to
the percentage change in income.
Measurement of Income Elasticity
Income elasticity can be measured by the following formula:

𝑃𝑅𝑂𝑃𝑂𝑅𝑇𝐼𝑂𝑁𝐴𝑇𝐸 𝐶𝐻𝐴𝑁𝐺𝐸 𝐼𝑁 𝑄𝑈𝐴𝑁𝑇𝐼𝑇𝑌 𝐷𝐸𝑀𝐴𝑁𝐷𝐸𝐷
Ey = 𝑃𝑅𝑂𝑃𝑂𝑅𝑇𝐼𝑂𝑁𝐴𝑇𝐸 𝐶𝐻𝐴𝑁𝐺𝐸 𝐼𝑁 𝐼𝑁𝐶𝑂𝑀𝐸
𝛥𝑄/𝑄 ΔQ Y 𝑌 ΔQ
Ey = = × = ×
𝛥𝑌/𝑌 𝑄 𝛥𝑌 𝑄 𝛥𝑌
Here, Ey = Income elasticity of demand; ΔQ = change in the quantity demanded; Q = Initial demand;
ΔY = change in income; Y = initial income)
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Income elasticity of demand can also be explained by an example. When your monthly income (Y) is
Rs. 3000, your demand (Q) if for 10 units of ice cream. If your monthly income increases (Y1) to Rs
6000, your demand increases (Q1) to 30 units of ice cream. Income elasticity of demand for ice cream
can be measured as follows:
𝒀 𝜟𝑸
𝐄𝐲 = 𝑸 × 𝜟𝒀
Here Y = Rs 3000; Y1 = Rs 6000; ΔY – Y = Rs. 6000 – Rs 3000 = Rs 3000; Q = 10 Units of ice cream; Q1=
30 units of ice cream; ΔQ – Q = 30 – 10 = 20 units of cream)
𝟑𝟎𝟎𝟎 𝟐𝟎
Ey = 𝟏𝟎
× 𝟑𝟎𝟎𝟎 = 𝟐 (Greater than unity).
DEGREES OF INCOME ELASTICITY OF DEMAND
Income Elasticity of demand is of three kinds:

1. POSITIVE INCOME ELASTICITY OF DEMAND.
HILAL AHMED
POSITIVE INCOME ELASTICITY OF DEMAND CAN BE OF THREE TYPES:

I. Unitary Income Elasticity of Demand. Positive income elasticity of demand is unitary when a
given percentage change in income is followed by equal percentage change in demand. For
example, if income increases by 100% and demand also increases by 100%.Thus,
𝟏𝟎𝟎%
𝐄𝐲 = = 𝟏 (𝒖𝒏𝒊𝒕𝒂𝒓𝒚)
𝟏𝟎𝟎%
II. Less than unitary income elasticity of demand. Positive income elasticity of demand is less
than unitary when percentage change in demand is less than percentage change in income.
For example if income increases by 100% but demand increases by 50%, then
𝟓𝟎% 𝟏
𝐄𝐲 = 𝟏𝟎𝟎% = 𝟐 (𝒍𝒆𝒔𝒔 𝒕𝒉𝒂𝒏 𝒖𝒏𝒊𝒕𝒂𝒓𝒚)
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III. More than unitary income elasticity of demand. Positive income elasticity of demand is more
than unitary when percentage change in demand is more than percentage change in income.
For example, if income increases by 100% but demand increases by 200%, then
𝟐𝟎𝟎%
𝐄𝐲 = 𝟏𝟎𝟎% = 𝟐 (𝑮𝒓𝒆𝒂𝒕𝒆𝒓 𝒕𝒉𝒂𝒏 𝒖𝒏𝒊𝒕𝒂𝒓𝒚)
2. NEGATIVE INCOME ELASTICITY OF DEMAND.

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3. ZERO INCOME ELASTICITY OF DEMAND. Income elasticity of demand is zero when change in
the income of consumer evokes no change in his demand.
CROSS ELASTICITY OF DEMAND
There is a mutual relationship between change in price and quantity demanded of two related goods.
Change in the price of one good can cause change in the demand for the related good. For example,
change in the price of tea ordinarily causes change in demand for coffee. Mutual relationship between
quantities demanded of a good due to change in the price of another good can be measured by cross
elasticity of demand.
MEASUREMENT OF CROSS ELASTICITY OF DEMAND

Cross elasticity of demand can be measured with the help of following formula:
HILAL AHMED
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞𝐝 𝐨𝐟 𝐆𝐨𝐨𝐝−𝐗

𝐄𝐜 = 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐩𝐫𝐢𝐜𝐞 𝐨𝐟 𝐆𝐨𝐨𝐝−𝐘
DEGREES OF CROSS ELASTICITY OF DEMAND

Cross elasticity of demand can be of three types:
1. Positive: When goods are substitutes of each other, then a given percentage rise in the price
of good will lead to a given percentage increase in the demand for the other goods. In other words,
cross elasticity of demand is positive in case of substitutes. For example, rise in the price of coffee will
lead to increase in demand for tea, because the two are close substitutes of each other. It can be
explained with an example. Supposing, when price of coffee is 50 paise per cup, then demand for tea
is 50 cups. If price of coffee rises 70 paise per cup, then demand for tea goes up to 100 cups. Thus,
cross elasticity of demand for tea can be calculated as:
Qx = 50 cups; Qx1 = 100 cups; ΔQx = Qx1 – Qx = 100 – 50 = 50 cups of tea.
Py = 50 Paise; Py1 = 70 paise ; ΔPy = 70- 50 = 20 paise.
𝑃𝑦 𝛥𝑄𝑥 50 50 5
Ec = 𝑄𝑥 × 𝛥𝑃𝑦 = 20 × 20 = 2 = 2 − 5 𝑬𝒄 > 𝟏
Thus, cross elasticity of demand for tea is greater than unity.
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2. Negative. In case of complementary goods, percentage rise in the price of one leads to
percentage fall in the demand for the other. Consequently, cross elasticity of demand is negative and
the same is indicated by putting a minus ( – ) sign before the number of cross elasticity of demand. It
is explained with the help of an example. Supposing, bread and butter are complementary goods.
When price of bread is 80 Paise per piece, then demand for butter is 10 Kg. With the rise of price of
bread to Rs 1.20, demand for butter falls to 5 kg. In this situation, cross elasticity of demand for butter
is calculated as under:
Py = 80 paise, Py1 = 120 paise
ΔPy = 120 – 80 = 40 paise
Qx = 10 Kg; Qx1 = 5 kg;
ΔQx = 5 – 10 = - 5 kg
𝑃𝑦 𝛥𝑄𝑥 80 5
Ec = × = × − = −1
𝑄𝑥 𝛥𝑃𝑦 10 40
Here, X stands for butter; and Y for bread.
HILAL AHMED
3. Zero cross elasticity of demand. Cross elasticity of demand is zero when two goods are not
related to each other.
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CARDINAL UTILITY ANALYSIS

UTILITY
Utility is the quality in goods to satisfy human wants. Thus, it is said that “Wants satisfying capacity of
goods or services is called Utility.” In this way utility is measured in terms of money and it is relative.
There is difference between utility and usefulness. A useful commodity may not here utility of goods
depend upon the intensity of wants. A consumer buys or demands a particular commodity he derives
some benefit from its use. He feels that his given want is satisfied by the use or consumption of the
commodity purchased. Utility is the basis of consumer demand. A consumer thinks about his demand
for a commodity on the basis of utility derived from the commodity.
Utility depends upon the intensity of want. When a want is unsatisfied or more intense, there is a
greater urge to demand a particular commodity which satisfies a given want. In modern time utility
has been called as ‘expected satisfaction.’ Expected satisfaction may be less or equal to or more than
the real satisfaction.
According to this analysis, utility can be measured in cardinal or definite numbers like 1, 2, 3, 4, etc.
Cardinal numbers are those definite numbers which can be added or subtracted. Thus in terms of
cardinal utility analysis it can be said that one gets from a cup of tea 10 utils and from a cup of coffee
5 utils worth of utility.
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FEATURES:
1. Utility is subjective. Utility is subjective because it deals with the mental satisfaction of a man.
A thing may have different utility for different persons. Liquor has utility for a drunkard but for a
person who is teetotaler, liquor has no utility.
2. Utility is relative. Utility of a commodity never remains the same. It varies across time and
place. Cooler has utility in the summer but not during the winter season.
3. Utility is not essentially useful. A commodity having utility need not be useful. Liquor and
cigarette are not useful, but if these things satisfy the want of an individual then they have utility for
him.
4. Utility is independent of morality. Utility has nothing to do with morality. Use of liquor may
be immoral, but as these intoxicants satisfy wants of the drunkards, they have utility.
CONCEPT OF UTILITY
There are two concepts of utility
1. Total Utility: Total utility refers to the entire amount of satisfaction obtained from consuming
various quantities of a commodity. Supposing you eat 8 apples at a sitting. The aggregate of the
utilities obtained from the consumption of these 8 apples will be called total utility.
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2. Marginal Utility. The concept of marginal utility was put forward by eminent economist
Jevons. It is also called additional utility. The change that takes place in the total utility by the
consumption of an additional unit of a commodity is called marginal utility. Supposing, by the
consumption of first piece of bread you get 15 utils of utility and by the consumption of second piece
of bread your total utility goes up to 25 utils. It means, the consumption of second piece of bread has
added 10 utils (25 – 15) of utility to the total utility. Thus the marginal utility of the second piece is 10
utils.
DIFFERENCE BETWEEN TOTAL UTILITY & MARGINAL UTILITY
QUANTITY TOTAL UTILITY MARGINAL UTILITY DESCRIPTION
0 0
1 9 8–0=8 POSTIVE MU
TU IS INCREASING
2 14 14 – 8 = 6
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3 18 18 – 14 = 4
4 20 20 – 18 = 2
5 20 20 – 20 = 0 ZERO MU
TU IS MAXIMUM
6 18 18 – 20 = - 2 NEGATIVE MU
TU IS DECREASING
1. Total utility is the sum total of utility derived from all the units of a commodity consumed.
Marginal utility on the other hand, is additional utility corresponding to the consumption of an
additional unit of a commodity.
2. Total utility is the sum total of marginal utilities corresponding to various units of the
commodity consumed. Marginal utility on the other hand, refers to change in total utility
corresponding to a unit change in the consumption of a commodity. It is the difference between two
successive total utility figures.
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3. Total utility generally remains positive while marginal utility may be zero or even negative.
4. Total utility becomes maximum when marginal utility is zero.
RELATIONSHIP BETWEEN TOTAL UTILITY & MARGINAL UTILITY
 Table 1 shows that, as more and more units of a commodity are consumed, the marginal utility
derived from each successive unit goes on diminishing. But the total utility increases up to a limit.
 Marginal utility of the first four units being positive, the total utility goes on increasing. Thus
as long as the marginal utility of the commodity remains positive, total utility goes on increasing.
 Marginal utility of the fifth unit is zero. In this situation total utility (20) will be maximum. This
situation represents point of saturation. Consequently, where marginal utility is zero, total utility is
maximum.
 Marginal utility of the sixth unit is negative ( - 2). As a result, total utility of six units of the
commodity falls from 20 to 18 units. When marginal utility is negative, total utility begins to fall.
HILAL AHMED
LAWS OF UTILITY ANALYSIS
Utility Analysis has two main laws: 1. LAW OF DIMINISHING MARGINAL UTILITY (2). LAW OF EQUI-
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MARGINAL UTILITY.
1. LAW OF DIMINISHING MARGINAL UTILITY. Law of Diminishing Marginal Utility is the

foundation stone of utility analysis. The law of diminishing marginal utility states that, other things
being equal, the marginal utility of a good diminishes as more of it is consumed in a given time period.
It is also called Gossen’s First Law.
ASSUMPTIONS
I. Utility can be measured in the cardinal number system.

II. Marginal utility of money remains constant.
III. Utility of one commodity is independent of the other.
IV. There is a continuous consumption of the commodity.
EXPLANATION
This law can be explained with the help of table and Fig.
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HILAL AHMED
EXCEPTIONS of Law of Diminishing Marginal Utility
1. Curious and Rare things. It is said that the law does not apply to rare and curious things. Those
persons who collect old and rare coins, postage stamps, rare portraits etc. derive increasing marginal
utility as the stock of these rare articles goes on increasing. They are always keen to obtain more and
more units of them. But this exception is not true. When a stamp collector comes to possess large
number of stamps of a given kind then marginal utility definitely diminishes.
2. Misers. It seems as if the law does not apply to misers who are out to acquire more and more
number of wealth. Their desire for money seems to be insatiable. But according to Meyers even this
exception is not very true. The amount of money that a miser spends on food and clothing, he cannot
spend it on gold and silver. It proves that even for miser, who has large stock of gold and silver, the
utility of gold and silver diminishes and that of food and clothing, whose stock is limited, increases.
3. Good book or poem. It is said that by reading a good book or listening to a melodious song or
beautiful poem again and again, one gets more utility than before. So good books or poems are
considered exceptions to this law.
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4. Drunkards. It can be said that when a drunkard takes liquor as intoxicant, then as he takes
more and more pegs of liquor his desire to have more of it goes on increasing. So a drunkard is
regarded as an exception to this law.
IMPORTANCE of Law of Diminishing Marginal Utility

1. Basis of the laws of consumption. Law of diminishing marginal utility is the basis of all laws of
consumption. There are three laws of consumption: (1). Law of equi-marginal utility (2). Law of
demand and (3). Concept of consumers’ surplus. According to law of equi-marginal utility a
consumer does not spend all his income on one commodity. It is so because the consumer knows that
if he buys more and more units of the same commodity then the marginal utility of each successive
unit will go on diminishing. Hence, to get the maximum satisfaction of consumer spends his income in
such a way that the last unit of money spent on different commodities yields equal marginal utility.
According to law of demand, a consumer will demand more units of a commodity at low price. It is so
because more units yield diminishing marginal utility. The consumer will therefore buy more units only
if their price also goes down. It also explains why demand curve slopes downward. The concept of
consumer’s surplus is also based on the above law. According to this concept units prior to the
marginal unit yield more utility. This extra utility is called consumer’s surplus.
2. Difference between Value-in-Use and Value-in-Exchange. Eminent economist Adam Smith
could not precisely explain why the value of diamond is more than that of water although the utility
of diamond is far less than that of water. To explain this paradox he divided value into two parts: (1).
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Value-in- Use (2). Value-in-Exchange. According to him, goods having more value in use command
low price and those having more value-in-exchange command high price. But he would not give any
reason for it. Neo-classical economists explained this paradox on the basis of diminishing marginal
utility. According to them, there is abundant supply of water, air etc. and the same are used in large
quantity. Consequently, their marginal utility falls rapidly and so also their price. Thus goods having
more value-in-use have less marginal utility. On the contrary, expensive goods like gold, silver,
diamond etc. having more value-in-exchange are available in short supply and so their marginal utility
falls slowly. Consequently, prices of such articles remain very high.
3. Price determination. Price of every commodity is determined by its demand and supply.
Demand for a commodity depends upon its marginal utility. If a seller wants to sell more units of a
commodity, he will have to reduce the price per unit of that commodity. It is so because more units
yield less marginal utility. The consumer, therefore buys more units only when price per unit falls. On
the other hand, if high price is fixed for a commodity, less of it will be demanded.
LAW OF EQUI-MARGINAL UTILITY
Law of equi-marginal utility is the second important law of Utility Analysis. This law points out how a
consumer can get maximum satisfaction out of his expenditure on different goods. This law
concerning the expenditure of a consumer was first propounded in 19th century by French engineer
Gossen. It is therefore also known as ‘Second Law of Gossen’. This law states that in order to get
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maximum satisfaction, a consumer should spend his limited income on different commodities in such
a way that the last rupee spent on each commodity yields him equi marginal utility.
EXPLANATION OF LAW OF EQUI-MARGINAL UTILITY
The law can be explained with the help of Table and Fig. Suppose the income of a person is Rs. 5.00
only. He wants to spend it on two goods say mangoes and milk. Let us suppose that price of both the
goods is Re 1 per kg/ltr. Marginal utilities of different units of mangoes and milk are shown in table.
This mode of distribution of his income will yield the consumer maximum satisfaction. Utility from
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mangoes = 12 + 10 + 8 = 30 utils. Utility from milk = 10 + 8 = 18 utils. Total utility = 48 utils. In case the
consumer spends his income in other manner then he will get less total utility.
Suppose, the consumer spends one rupee more that is Re. 4.00 on mangoes and one rupee less that
is Re. 1.00 only on milk. By spending one rupee more on mangoes the consumer will gain 6 utils of
utility but by spending one rupee less on milk he will lose 8 utils of utility.
In this mode of distribution of income, the consumer by spending Re. 4.00 on mangoes gets 12 + 10 +
8 + 6 = 36 utils of utility and by spending Re 1.00 only on milk he gets 10 utils of utility. Expenditure of
Rs. 5.00 in this manner, will get the consumer total utility of 36 + 10 = 46 utils. This total utility is less
by 2 utils as compared to the total utility (48) derived from the earlier distribution of income. Thus, no
other distribution of income will yield the consumer as much satisfaction as the one in which the last
unit iof rupee spent on different commodities gives equal marginal utility.
The law can be explained with the help of diagram as shown below.
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In Fig (A) and (B) above, units of rupees are shown on OX-axis and marginal utility on OY-axis. In Fig
(A) is shown marginal utility of mangoes in Fig (B) that of milk. The figure indicates that if the income
of the consumer is Re. 5.00, he will spend Rs. 3 on mangoes and Rs. 2.00 on milk, because third rupee
spent on mangoes and second rupee spent on milk yield him equal marginal utility that is 8 utils.
Dotted line in the figure represents equal marginal utility derived from the last unit of rupee spent on
both the goods. By distributing his income on mangoes and milk in this manner the consumer gets
total utility of 48 utils. It will be the maximum total utility derived by the consumer out of his
expenditure of Rs. 5.00. Only by so spending his income, the consumer will get maximum satisfaction.
If the consumer spends his income on mangoes and milk in any other manner, then his total utility will
be less than the maximum; as is shown in Fig. below:
HILAL AHMED
It is evident from the above Fig. that by spending one rupee more on mangoes the consumer gains 6
utils of marginal utility as shown by ABCD area. Similarly by spending one rupee less on milk the
consumer loses 8 utils of marginal utility as shown by EFGH area. In this distribution the consumer will
get 2 units of total utility less. The consumer now gets only 46 utils of total utility while in the earlier
distribution of income he was getting 48 utils of total utility.
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IMPORTANCE OF THE LAW OF EQUI MARGINAL UTILITY
1. Consumption. Every consumer wants to get maximum satisfaction from his limited means. If
a consumer spends his income as suggested by this law, on different commodities in such a way that
the last unit of money spent on them yields him equal marginal utility, then he will be getting
maximum satisfaction out of his income.
2. Production. Every producer aims at earning maximum profit. To achieve this objective he must
utilize factors of production that is land, labour, capital etc. in such a way that the marginal
productivity of each factor is equal. Producer must go on substituting one factor for the other till such
time as the marginal productivity of each factor is equal. It is by this adjustment of limited resources
that a producer can succeed in his aim of getting maximum profit.
3. Distribution. It refers to the distribution of national income among the factors of production
i.e. land, labour, capital etc. Distribution is done in such a way that in the long-run every factor gets
his share out of national income according to his marginal productivity. To have such a distribution,
factors are to be mutually substituted in a manner that the marginal productivity of each factor is
equal to its remuneration and the marginal productivity of different factors becomes equal to each
other.
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CONSUMER’S EQUILIBRIUM
Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction out of
his limited income and he has no tendency to make any change in his existing expenditure. In other
words consumer’s equilibrium is a situation in which a consumer chooses quantities of goods that
maximize total utility given budget constraint.
Assumptions
1. Rational consumer. Consumer is assumed to be rational. A rational consumer is one who is

keen to get maximum satisfaction out of his limited income.
2. Cardinal Utility. Utility of every commodity can be measured in terms of cardinal numbers,
such as 1, 2, 3 etc.
3. Independent utility. It is assumed that the utility that a consumer gets from a commodity
depends upon the quantity of that very commodity. It is not affected by the utility derived from other
goods.
4. Marginal utility of money is constant. It is assumed that money measures the marginal utility
of a commodity; as such, its own marginal utility should remain constant so as to serve as an ideal
measure.
5. Fixed income and price. Another assumption of this analysis is that the income of the
consumer and the price of the commodity remain fixed.
HILAL AHMED
Points to remember:
 A Consumer attain his equilibrium when he maximizes his total utility given his income and
market price of goods and services that he consumes.
 Equilibrium is said when there is a tangency between the budget line and the indifference
curve.
 Consumer equilibrium is a point where a consumers get maximum satisfaction.
 Slope of consumer equilibrium= slope of indifference curve= slope of budget line
𝑀𝑈𝑥 𝛥𝑦 𝑃𝑥
 MRS xy = 𝑀𝑈𝑦 = 𝛥𝑥 = 𝑃𝑦
CONSUMER AND PRODUCER SURPLUS
Consumer surplus is a measure of the welfare that people gain from consuming goods and
services
Consumer surplus is defined as the difference between the total amount that consumers are
willing and able to pay for a good or service (indicated by the demand curve) and the total amount
that they actually do pay (i.e. the market price).
Consumer surplus is shown by the area under the demand curve and above the price.
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POINTS TO REMEMBER
Alfred marshal has given the concept.
Consumer surplus is the difference between what a consumer is willing to pay for a good and
what the consumer actually pays. It is an area below an individual demand curve and above the price
line.
Producer surplus- It is the difference between the amount actually received by the producers
and the amount required to induce them to sell. It is area above the supply curve and below the
market price.
INDIFFERENCE CURVE
The Indifference Curve shows the different combinations of two goods that give equal satisfaction and
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utility to the consumers. It means all the points located on an indifference curve represent such
combinations of two commodities as yield equal satisfaction to the consumer. Since the combination
represented by each point on the indifference curve yields equal satisfaction, the consumer becomes
indifferent about their choice. In other words, the indifference curve is the graphical representation
of different combinations of goods (generally two), for which the consumers are indifferent, in terms
of the overall satisfaction and the utility.
Features of indifference curve are as follows-
Downward sloping to the right.

Convex to the origin due to decreasing slope.
Never intersect each other.
Higher indifference curve shows higher level of satisfaction.
Indifference curve should generally not touch x-axis or y-axis.
It may not be parallel to each other.
Assumptions of Indifference Curve:
Only two goods are taken into the consideration. It is assumed that the customer has to make
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a choice between two goods, provided their prices remains constant.

It is assumed that the customer is not saturated with both the commodities and look for more
benefits from these two, to have a higher curve to have more satisfaction.
The satisfaction level cannot be measured; thus, the customer ranks his preferences.
It is assumed that the marginal rate of substitution diminishes, as more units of one good have
to be set off by the reduction in the units of the other commodity. Thus, the indifference curve is
convex to the origin.
It is assumed that the consumer is rational and will make his choice objectively to have an
increased utility and the satisfaction.
The concept of Indifference curve can be further comprehended through an illustration below:
COMBINATION PRODUCT –A PRODUCT-B
L 1 10
M 2 9
N 3 8
O 4 7
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P 5 6
INDIFFERENCE MAP
An indifference curve indicates different combinations of two commodities which yield a given level
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of satisfaction to the consumer. In order to indicate higher or lower levels of satisfaction of different
combinations of two goods, one makes use of different indifference curves. When these different
indifference curves or a family of indifference curves are shown in a diagram, it is called indifference
map.
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LAW OF DIMINISHING MARGINAL RATE OF SUBSTITUTION
Law of diminishing marginal rate of satisfaction is the undercurrent of the concept of indifference
curves. To understand the law, it is essential to know the meaning of marginal rate of substitution.
What is Marginal Rate of Substitution?
One learns from the study of an indifference curve that when a consumer gets one more unit of ‘X’
commodity his satisfaction increases. If the consumer wants that his level of satisfaction may remain
the same, that is, if he wants to remain on the same indifference curve, he will have to give up some
units of ‘Y’ commodity. In other words, in exchange for the satisfaction obtained from the additional
unit of apple he will have to give up that many units of oranges whose satisfaction is equal to the
additional satisfaction obtained from an additional apple. In other words-
Satisfaction gained of Apples = Satisfaction loss of Oranges
If, in order to get one more unit of apple a consumer gives up three units of oranges, that is, he
substitutes one apple for 3 oranges, then it will be said that satisfaction derived from one apple is
equal to the satisfaction derived from 3 oranges. Thus, marginal rate of substitution of apple for
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orange is 1:3. In this way, it can be pointed out that the marginal rate of substitution of apple for
orange is the number of units of oranges that will be given up for obtaining each additional unit of
apple, so that the satisfaction of the consumer remains the same. In other words, marginal rate of
substitution (MRS) is the rate at which the consumer can substitute one good for another without
changing the level of satisfaction. It determines the slope of indifference curves.
In other words, the marginal rate of substitution is the ratio of the amount of Y that must be sacrificed
per unit of X gained if the consumer is to remain at the same level of satisfaction. The ratio is of course
negative since the change in Y associated with an increase in X is negative.
1. Constant Marginal Rate of Substitution. The marginal rate of substitution is constant if to

obtain one more unit of X, only one unit of Y is sacrificed to maintain the same level of satisfaction. In
other words the rate of substitution remains constant. The marginal rate of substitution of perfect
substitutes is constant. The constant marginal rate of substitution can be explained with the help of
the table and diagram.
COMBINATION APPLES ORANGES MARGINAL RATE OF
SATISFACTION
A 1 10
B 2 9 1:1
C 3 8 1:1
D 4 7 1:1
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2. Increasing Marginal Rate of Substitution. The increasing marginal rate of substitution implies
that as the stock of a commodity increases with the consumer he substitutes it for the other
commodity at an increasing rate to maintain the same level of satisfaction. For example if to obtain
one more unit of X two units of Y are sacrificed and to obtain another additional unit of X, 3 units of Y
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are sacrificed. In such cases, the slope of indifference curve is concave to the origin as shown in Fig
below.
SATISFACTION
A 1 10
B 2 9 1:1
C 3 7 1:2
D 4 4 1:3
Table shows that the consumer will give up 1 orange for getting second apple, 2 oranges for getting
the third apple and 3 oranges for getting the fourth apple. In other words, marginal rate of substitution
of apples for oranges goes on increasing.
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3. Diminishing Marginal Rate of Substitution. The diminishing marginal rate of substitution

implies that as the stock of a commodity increases with the consumer he substitutes it for other
commodity at a diminishing rate to maintain the same level of satisfaction. In such cases the slope of
indifference curve is convex to the origin. It is the basic assumption of indifference curve as shown in
Fig. it is a normal feature and has been explained in the form of a law.
SATISFACTION
A 1 10
B 2 7 1:3
C 3 5 1:2
D 4 4 1:1
Table indicates that the consumer will give up 3 oranges for getting the second apple, 2 oranges for
getting the third apple and 1 orange for getting the fourth apple. In other words, marginal rate of
substitution of apples for oranges goes on diminishing.
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Some important points-

 Cournot Duopoly Model- 1838
 Bernard Duopoly Model- 1880
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 Edge Worth Duopoly Model- 1897

 Stackeel Duopoly Model- 1933
 Chamberlin Duopoly Model- 1934
 Sweezy Duopoly Model- 1939
 Neumann Morgenstern Game Theory Model- 1944
 Baumaul Duopoly Model- 1959
 Father Of Economics- Adam Smith
 Originator Of Law Of Demand- Alfred Marshall
 Revealed Preference Theory- Paul Samuelsson
 Cardinal Utility/ Neo Classical Approach- Alfred Marshall
 Ordinal utility/ indifference curve- F Y edge worth, vilfredo Pareto, EE Slustky, J R Hicks and
RGD Allen.
 Indifference curve analysis is also known as iso utility curve or equal utility curve and for
producer it is iso quant curve.
 Budget Line is also called Price Line, Consumption Possibility Line and Iso Cost Line.
 Consumer equilibrium is said when there is a tangency between the budget line and the
indifference curve.
 Price discrimination- A C Pigou.
 Free entry & exit/ factor mobility concept- Adam Smith.
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 Exception of Law Of Demand- Beham

 Perfect competition is known as Myth.
 Imperfect competition- John Robinson.
 Kinked Demand Curve- Paul Sweezy In 1939.
 Consumer & Producer Surplus- Alfred Marshall
 Material requisites well-being- A C pigou
 Positive impact of monopoly- Joseph Schumpeter.
 Wealth of nations- Adam Smith.
 Composite demand- the demand of commodities or goods that provides multiple uses.
 Demand- willingness to purchase+ ability to pay
 Substitute goods like tea and coffee
 Complementary goods is also known as jointly demand goods. Such as car petrol.
NATIONAL INCOME:
National Product. National product is the total market value of the final goods and services currently
produced by a nation in one year. Whenever, output is produced somebody receives an income for
producing it. Thus, corresponding to every flow of output there is an equivalent flow of factor income.
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The aggregate of factor incomes that is earned by the owners of the factors of production in producing
national product in one year is called National Income.
National income is the sum of factor’s income – wages, interest, rent and profit received by the
owners of factors of production, labour, capital, land and entrepreneurship of a nation during one
year.
Thus National Product and National Income are two different measures of the level of economic
activity of an economy. National income measures factors incomes that are earned by owners of
factors of production. While National Product measures market value of the goods and services
produced on account of the use of factor services rendered by the owners of the factors of production.
CONCEPTS RELATED TO NATIONAL INCOME
1. GROSS DOMESTIC PRODUCT. Gross Domestic Product is the market value of the final goods
and services produced during a year by domestically located resources.
GDP = P×Q
(GDP = GROSS DOMESTIC PRODUCT; P= MARKET PRICE; Q= FINAL GOODS & SERVICES PRODUCED
BY GIVEN YEAR).
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2. GROSS NATIONAL PRODUCT AT MARKET PRICE. Gross national product at market price is the
market value of final goods and services produced during a year by the normal residents of the country
in domestic territory as well as the rest of the world.
Gross National Product at Market Price = Gross Domestic Product at Market Price + Net Factor
Income from Abroad
3. NET NATIONAL PRODUCT AT MARKET PRICE. Net National Product at market price measures
the value of new final goods and services produced by the normal residents in the domestic territory
and abroad in an accounting year after worn out capital goods have been replaced. Some capital goods
are used up in the production process through natural wear, obsolescence and accidental destruction.
The cost to replace these capital goods is called the capital consumption allowance or depreciation.
Replacing depreciated capital does not actually represent new production, therefore we reduce the
value of total production by this amount to show net production of the year.
Net National Product at Market Price= Market value of final goods and services produced during a
year + Net factor Income from Abroad – Depreciation or capital consumption.
4. NET DOMESTIC PRODUCT AT MARKET PRICE. Net domestic product at market price is the
difference between market value of final goods and services produced in the domestic territory of a
country during an accounting year and consumption of fixed capital.
Net domestic product at market price = value of currently produced final goods & services – capital
consumption or depreciation.
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5. NET DOMESTIC INCOME or NET DOMESTIC PRODUCT AT PACTOR COST. In every economy,
the production during an accounting year is the result of the cooperative efforts of owners of factors
of production viz. land, labour, capital and enterprise. The payment made to these factors for their
contribution to the production process is called factor cost and the result of production is called
product at factor cost. On one hand, the factor cost is the cost for the firms while on the other hand
it is the income for the factors. Net Domestic Product at factor cost is also called net domestic income.
Net domestic income measures the income earned by the suppliers of all factors of production used
to produce the economy’s total output of final goods and services for the year.
6. GROSS DOMESTIC PRODUCT AT FACTOR COST OR GROSS DOMESTIC INCOME. Gross
domestic product at factor cost or gross domestic income is the sum total of the compensation of
employees, operating surplus and mixed income earned by the factors of production in an accounting
year and depreciation or consumption of fixed capital.
Gross domestic product at factor cost = wages + interest + profit + consumption of capital.
7. NET NATIONAL PRODUCT AT FACTOR COST OR NATIONAL INCOME. Net national product at
factor cost is total earning of all factors of production in the form of interest, wages, rent and profit
and net factor income from abroad. It is this concept which is popularly called National Income. Net
national income or net national product at factor cost is equal to sum total of net domestic product at
factor cost (Compensation of Employees + Operating Surplus + Mixed Income) and net factor income
from abroad.
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NET NATIONAL PRODUCT AT FACTOR COST OR NATIONAL INCOME = Net Domestic Product at factor
cost (Rent + Wages + Interest + Profit) + Net factor income from abroad.
8. GROSS NATIONAL PRODUCT AT FACTOR COST OR GROSS NATIONAL INCOME. The gross
national product at factor cost is also called gross national income. Gross national product at factor
cost is the sum total of compensation of employees, operating surplus, mixed income, depreciation
and net factor income from abroad.
Gross national product at factor cost or gross national income = wages + rent + profit + interest +
depreciation + net factor income from abroad.
9. INCOME FROM NET DOMESTIC PRODUCT ACCRUING TO PRIVATE SECTOR. There are two
sectors in every economy: I. private sector: it includes all corporate and unincorporated enterprises
owned and controlled by the private individuals. Income from this sector is known as income from Net
domestic product accruing to private sector. II. Government or public sector. It includes administrative
departments, departmental enterprises and non-departmental enterprise of the government. Income
from domestic product accruing to the government sector comprising of: Property and
Entrepreneurial income of the government administrative departments and saving of non-
departmental undertaking.
Thus, income from domestic product accruing to private sector is the income earned by the private
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sector only.
10. PRIVATE INCOME. Private income is the income of the private sector obtained from any
source, productive or otherwise. It includes both the factor income of the private sector as well as
transfer income.
Private income = Factor Income From Domestic Product Accruing To The Private Sector + Net Factor
Income From Abroad + Transfer Payments From The Government + Interest On National Debt +
Current Transfers From Abroad.
11. PERSONAL INCOME. Personal income is the total of all current income received by households
from all sources. It is the sum total of all types of factor income actually received by the households
and current transfers.
Personal income = Private income – corporate tax – corporate saving (less net retained earnings of
foreign companies)
STRUCTURE & MEASUREMENT of NATIONAL PRODUCT or NATIONAL INCOME.
National product or National income of a country can be measured at three different levels:
1. Income method. Income method is that method, which measures national income from the
side of payments made in the form of wages, rent, interest and profit to the primary factors of
production i.e. land, labour, capital and enterprise respectively for their productive services in an
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accounting year. This method is also called Distributed share method or Factor payment method.
Structure of National Product in Terms of components of income. Conceptually national income is the
sum of all income wages, interest, rent and profit received by owners of factors of production i.e.
labour, capital, land and entrepreneurship. In fact, however, limitations of accounting data cause
national income to be measured as the sum of five slightly different categories (a). Wages & salaries,
(b) rental income, (c). Interest, (d). Corporate profits and (e). Non-corporate proprietors or self-
employed income or mixed income. Thus, the main components of factor income are as follows:
a. Wages & salaries or compensation of employees: work is the principal source of income for
most of people in the world. In order to earn income, individuals work for others. Income earned by
working for others is called wages or salaries. The income from work for others is also known as
compensation of employees.
b. Rental income. Rental income is income derived solely form the ownership of land or building.
Thus, the owners of land and buildings receive rental-income for allowing others the use of their
property for a specific period of time. It may be noted that rent of self-occupied houses, that is
imputed rent, is also a part of rental income and therefore included in national income.
c. Interest. Interest includes income that is earned on bank deposits on loans to firms and other
investment income. In national income only net interest is included.
d. Profit. The income earned for entrepreneurship is known as profit, here b an entrepreneur
means a corporation. As entrepreneur or corporation does not distribute all the profits of the
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enterprise among the shareholders, some part of the profit is distributed (called dividend) and some
remained undistributed. While some of the profits goes to the government by way of corporate profit
tax.
e. Mixed income. Mixed income of the self-employed like that of doctor, engineers, retailers is
the total income of own account workers as well as profits generated in the unincorporated
enterprises. Mixed income includes income from work as well as income from property and
entrepreneurship.
2. Product method or value added method. Product method is that method, which measures
the national income by estimating the contribution of each producing enterprise, in the domestic
territory of the country in an accounting year. It is also known as value added method, industrial
origin method or net output method. According to this method national income is estimated by
finding the market value of final goods and services produced in an economy in an accounting year.
As far as enterprise is concerned its sales are treated as final sales or sales of final goods and services.
For example, a farmer produces one ton of wheat and sells it for Rs. 400 in the market to a flour mill.
As far as the farmer is concerned, the sale of wheat is a final sale and he gets Rs 400 for it. If he does
not have to incur any expenditure on the cultivation of wheat Rs. 400 becomes the value of his
contribution. The purchase of wheat by the flour mill is an intermediate goods. It converts wheat into
flour and sells it at Rs 600 to a baker. The flour mill treats the flour as a final product, but the baker
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uses it as an intermediate good and manufacturer’s bread. The baker sells the bread to the shopkeeper
at Rs. 800. For the baker, the baker is a final good but, for the shopkeeper, it is an intermediate good.
The shopkeeper sells the entire bread for Rs. 900. Thus, value of output = Rs 400 + Rs 600 + Rs 800 +
Rs 900 = Rs 2700.
PROBLEMS OF DOUBLE COUNTING. Now we know that every producer treats the commodity he sells
as final. He is not concerned as to what happens to it after he sells it. But, we know that the value of
flour contains the value of wheat and the value of bread manufactured contains the value of wheat
and the value of services of the miller, baker and shopkeeper. Now the value of the wheat is counted
four times, the value of services of the miller thrice, and the value of services by the baker twice. In
other words the value of wheat and value of services of the miller and baker has been counted more
than once. The counting of the value of a commodity more than once is called double counting. This
leads to over estimation of the value of goods and services produced. Thus, in order to avoid the
problem of double counting the value of intermediate goods is deducted from the value of output.
In other words the value of final goods and services only is included in national income. In the above
example the bread sold to the consumer is the final output. Only the value of final output i.e. 900 will
be included in national income. The value of wheat, flour and bakery i.e. Rs. 400, Rs 600 and Rs 800
respectively are the values of intermediate goods. The value of the final output can be calculated by
deducting the value of intermediate goods from the value of output. In other words:
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Value of final output = value of output – value of intermediate goods. (Rs 2700 – Rs 1800 = Rs 900)
In order to avoid the problems of double counting we use the ‘value added technique’.
VALUE ADDED. Value added is the excess of output over and above the value of intermediate goods
and services used in the process of production. In the previous example, the farmer has added value
of Rs 400; flour mill of Rs 600 – Rs 400 = Rs 200 and the baker making breads of Rs 800 – Rs 600 = Rs
200. The shopkeeper selling the bread of Rs 900 – Rs 800 = Rs 100. The total value added is Rs. 400 +
Rs. 200 + Rs 200 + Rs 100 = Rs 900. This is equal to the market price of breads which are a final product
or the sum total of vale added at different stages of production. By using the value added method,
one can avoid the problem of double counting.
Value added = value of output – cost of intermediate goods
3. Expenditure method. Expenditure method is the method which measures the final
expenditure on gross domestic product at market price during an accounting year. It is also called
income disposal method or consumption investment method. This method calculates the final
expenditure or expenditure on gross domestic product. In expenditure method we try to add up all
expenditure in the country which accounts for or induces the production of goods and services in the
domestic territory of the country in an accounting year.
Structure of National Product in terms of components of Final expenditure:
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A. Private final consumption expenditure. To measure private final consumption expenditure,

the volume of final sale of the durable goods, semi-durable goods, non-durable goods and services to
the consumer household and nonprofit institutions serving households in multiplied by retail prices.
The direct purchases of non-resident households in the domestic market is deducted from it and the
direct purchases of resident households made abroad are added. The resultant figure will be equal to
private final consumption expenditure. The production for self-consumption is also a part of private
final consumption expenditure. The volume of production for self-consumption has to be multiplied
with the prices prevailing in the neighborhood market of the producer. The imputed rent of owner’s
occupied houses is also included in private final consumption expenditure in the domestic market.
B. Government final consumption expenditure. To measure government final consumption
expenditure the total volume of sales to the government by the enterprises is multiplied by retail
price, compensation of employees is added to it, purchases from abroad is also added.
C. Gross domestic capital formation. It includes the investment of the following types:
I. Gross domestic fixed capital formation. In includes the following two types of capital
formation:
a. Expenditure on construction. To measure the expenditure on construction, the volume of
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material inputs like steel, cement, bricks and labour is multiplied by the price paid by the builders. This
way of calculating expenditure is called commodity flow approach.
b. The final expenditure on machinery and equipment. The expenditure on machinery and
equipment is calculated in two ways: 1. the volume of their final sales is multiplied by the retail prices
prevailing in the market, 2. following commodity flow approach, the volume of machinery and
equipment produced in the current year is found and it is multiplied with the prices paid by the
purchasers. From both methods, we get the same total. Own account production of machinery and
equipment is added to it.
II. The expenditure on change in stock. The change in stock or inventories is measured by
multiplying the volume of physical change with the market price of the stock. We must include in GNP
any of the products which are produced but not sold this year.
D. Net exports. Finally, the value of net exports (Export – Import) is calculated. It refers to the
difference in the value of goods and services exported and imported. Exports are produced with
factors of production owned by a particular country. The fact that the output is sold abroad does not
affect the rewards paid to the factors of production. It is for this reason that the value of exports is a
part of national income. Exactly the opposite reasoning tells us why expenditure on imports although
undertaken by domestic residents is not included in calculation of national income. Such expenditure
provides rewards for factors of production abroad. The value of imports is subtracted to avoid an
overstatement of total production in the country. Rather than treat these two items separately,
national income accountants merely take the difference between the two. If the value of total imports
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is more than the value of total exports, or net exports is negative, it will be deduced in the estimation
of gross national expenditure. On the other hand of the value of total exports is more than total
imports or net exports is positive, it will be added in the estimation of national income.
Thus, Gross domestic product at market price = private final consumption expenditure +
government final consumption expenditure + gross domestic capital formation (gross fixed capital
+ change inventories) + net exports (exports – imports).
POINTS TO REMEMBER
o Net product = gross product – depreciation.

o Schumpeter in 1917, suggested the measurement of national income at the three level
methods.
o Intermediate goods. Intermediate goods are those which are purchased by the producers for
use as raw materials.
𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒
o Per capita income = 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
o Factor cost. Factor cost refers to the cost of factors of production viz, rent of land, interest on
land, interest of capital wages for compensation of employees for labour and profit for
entrepreneurship. FC = MP – Indirect taxes + subsidies
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o Market price. Market price is the price that consumers actually pay. It includes the component
of indirect taxes and of subsidies. Accordingly, when indirect taxes are deducted and subside added
to the market price, we get values of national income at factor cost.
MP = FC + indirect taxes – subsidies.
o Normal GDP. It is the market value of all final goods and services produced within the country.
o Real GDP. The adjustment transforms the nominal GDP into an index for quantity of total
output. It is measured of the value of output economy, adjusted for price changes.
o Real national income. It is the value of national income adjusted for inflation and calculated
from some reference point (base year). Real national income = NNP at current prices × 100/price
index.
o Disposable income. It is the income of individuals at their disposal after paying direct tax
liability. Disposable income = personal income – direct taxes.
o Hindu growth rate. It refers to the low annual growth rate of the socialist economy of India
before the liberalization of 1991. From 1950s to 1980s stagnant around 3.5% and per-capita income
growth was 1.3%.
o Green economy. In this economy, which deals with environment risks and ecological scarcity
and also an economy that aims for sustainable development without degrading the environment.
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o Green GDP. It is the calculation of net natural consumption (i.e. resource depletion,
environmental degradation, protective and restorative environmental initiatives).
o Green GNP. GNP means that there has to be an adjustment for the depletion of the country’s
physical assets.
o Black money. Illegal activities like smuggling and unreported income due to tax evasion and
corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate
GDP estimates.
o Non-monetization. In most of rural economy considerable portion of transaction occurs
informally and they are called as non-monetized economy. This keeps the GDP estimates at lower level
than the actual.
o Central statistical office (CSO). CSO was set-up in 1949. It is one of the two wings of the
national statistical organisation along with national sample survey office, responsible for coordination
of statistical activities in the country and for evolving and maintaining statistical standards.
o National sample survey office (NSSO). NSSO was set-up in 1950, for conducting large scale
sample surveys to meet the data needs of the country, for the estimation of national income and other
aggregates.
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Page1 HILAL AHMED WHATSAPP-9906837425 1|Page

UNIVERSITY GRANTS COMMISSION NET BUREAU

Subject: Management Code No. : 17

Functions – Planning, Organizing, Staffing, Coordinating and Controlling. Communication –

Decision Making – Concept, Process, Techniques and Tools

Organization Structure and Design – Types, Authority, Responsibility,

Managerial Economics – Concept & Importance

Ethical Issues & Dilemma Corporate Governance Value Based Organization

Organizational Behaviour – Significance & Theories

Individual Behaviour – Personality, Perception, Values, Attitude, Learning and Motivation

Organizational Culture & Climate

Organizational Justice and Whistle Blowing

Human Resource Management – Concept, Perspectives, Influences and Recent Trends

Human Resource Planning, Recruitment and Selection, Induction, Training and

Job Analysis, Job Evaluation and Compensation Management

Strategic Role of Human Resource Management Competency Mapping & Balanced

Organization Development, Change & OD Interventions Talent Management & Skill

Employee Engagement & Work Life Balance

Trade Union & Collective Bargaining

International Human Resource Management – HR Challenge of International Business

Accounting Principles and Standards, Preparation of Financial Statements

Financial Management, Concept & Functions

Leverages – Operating, Financial and Combined Leverages, EBIT–EPS Analysis, Financial

Capital Budgeting – Nature of Investment, Evaluation, Comparison of Methods; Risk and

Dividend – Theories and Determination

Mergers and Acquisition – Corporate Restructuring, Value Creation, Merger Negotiations,

Portfolio Management – CAPM, APT

Working Capital Management – Determinants, Cash, Inventory, Receivables and Payables

International Financial Management, Foreign exchange market

Strategic Management – Concept, Process, Decision & Types

Strategy Formulation – SWOT Analysis, Corporate Strategy – Growth, Stability,

Strategy Implementation – Challenges of Change, Developing Programs Mckinsey 7s

Market Segmentation, Positioning and Targeting

Customer Relationship Marketing – Relationship Building, Strategies, Values and Process

Retail Marketing – Recent Trends in India, Types of Retail Outlets.

Emerging Trends in Marketing – Concept of e-Marketing, Direct Marketing, Digital

Statistics for Management: Concept, Measures Of Central Tendency and Dispersion,

Hypothesis Testing – Procedure; T, Z, F, Chi-square tests Correlation and Regression Analysis

Operations Management – Role and Scope

Enterprise Resource Planning – ERP Modules, ERP implementation Scheduling; Loading,

Operation Research – Transportation, Queuing Decision Theory, PERT / CPM

International Business – Managing Business in Globalization Era; Theories of International

Foreign Direct Investment – Benefits and Costs

Information Technology – Use of Computers in Management Applications; MIS, DSS

Data Warehousing, Data Mining and Knowledge Management – Concepts Managing

Entrepreneurship Development – Concept, Types, Theories and Process, Developing

Intrapreneurship – Concept and Process

Women Entrepreneurship and Rural Entrepreneurship

Innovations in Business – Types of Innovations, Creating and Identifying Opportunities,

Institutional Finance to Small Industries – Financial Institutions, Commercial Banks,

The book is divided into 11 units.

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 Planning, Organizing, Leading & Controlling (Newman & Summer)

Directing. Directing involves communication, leadership and motivation. Communication is the

The controlling involves-

 Establishing standards of performance.

GENERAL MANAGEMENT THEORIES

1. Frederick Taylor – Theory of Scientific Management

2. Henri Fayol – Administrative Management Theory

4. Elton Mayo – Behavioral Theory of Management (Hawthorne Effect)

What is Scientific Management?

A bit about F.W. Taylor

3 goals of F.W. Taylor