Notes of Economics 1st year

Notes of Principles of Economics 1st year

Elasticity of Demand



 There is a close connection between the quantity of a commodity purchased and its price. Changes in price are bound to affect the purchasers. The law of demand only indicates the direction of change in the quantity demanded as a result of change in prices. It does not tell the amount or the extant by which the demand will change in response to changes in prices. The concept which measures the responsiveness of quantities demanded to price changes is the elasticity of demand.

 The term elasticity expresses the degree of correlation between demand and price. It is a result at which the quantity demanded varies with change in price. It may be defined as “ The degree of responses (in the form of variations in the quantity demanded) to changes in price.

To be more exact we can say that “the elasticity of demand is a measure of the relative change in amount purchased n response to a relative change in price n a given demand curve.”

kinds of elasticity

 There are various kinds of elasticity of demand viz:

  1. Price elasticity
  2. Income elasticity
  3. Cross elasticity
  4. Substitution elasticity


Law of Demand


Introduction of Law of Demand

 Demand depends on price. Demand is always at a price. At different prices different quantitities will be purchased. The law of demand states:

 "Demand varies inversely with price not necessarily proportionally, it means that when price falls demand rises and vice versa.

 It can also be stated in these words:

 "A rise in the price of a commodity or service is followed by a reduction in demand and a fall in price is followed by increase in demand if conditions of demand remain constant."

 It can also be written in the words of S.T. Thomas as:

 "At any given time the demand for the commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at higher price and less than it would be at lower price."

 There are several factors that cause change in demand e.g. changes in weather, fashion, taste, change in population etc.


Demand Schedule

 Demand schedule is simply a statement in the form of a table given against each price the quantity of the commodity that will be demanded for a given period of time.

 The individual demand schedule is not of very great importance. It shows only the demands of an individual. Putting down against price the total quantity of commodity, which will be disposed off in the market, can prepare the market demand schedule.

 Demand Curve

 Demand curve is a geometrical presentation of the demand schedule. Demand schedule is a table and demand curve is based on this table. Thus one represents the other. The above schedule can be stated in terms of demand curve as:

Changes in Demand

 According to the law of demand the demand for a product increases due to change in its price. But there are certain other reasons that influence the demand. Some of them are as follows:

  1. Changes in the Taste and Fashion

 The changes in the taste and fashion influence the demand to a great extant. Actually a human being psychologically want continuous change in his life style so that he get maximum satisfaction .To achieve his state of satisfaction he do not consider whatever the price of commodity he has to pay. Even if the price is high and the commodity is in high fashion or matches exactly his taste he will ultimately go for purchasing it.

  1. Change in climatic conditions

 The climatic conditions tend to increase or decrease the demand for a product. In winter there a great demand for warm clothing and in summer there a demand for electric fans and cold rinks and the marketers do not usually charge , less prices in these seasons in order to sell their products.

  1. Change in Population

 A change in the composition of the population will also affect demand. Influx of new people will create a demand for the good; they are in the habit of consuming. If the population of a country is rising, the over all demands of the people increase even at the same high price.

  1. Change in the Amount of Money

 Inflation also has a significant bearing on the demands of the people. When there is inflation it causes a great deal in demand, which leads to an increase in prices. Similarly if the amount of money is decreased the demand goes down even if there is no change in its price.

  1. Change in Methods of Production

 Changes in techniques and in the use of factors will affect the demand pattern of those factors as in the case of capital equipment and labour or chemicals.

  1. Changes in the Price of the Substitutes

 If the prices of the substitutes are varied their demand will directly be affected. If the price of any commodity whose substitute is also available in the market is decreased its demand will be increased whereas the demand for its substitute despite of unaltered price will fall down.

  1. Changes in the Wealth Distribution

 The distribution of wealth also affects the demand for a product. If the wealth is distributed evenly the goods demanded by people the have acquired more wealth will increase and demand of the people who have lost wealth will decrease.

  1. Anticipated Political or Price Change

 Some time norms and general speculation about tax changes war etc or of future shortages or abundance causes the present pattern of demand to change.

  1. Changes in Conditions of Trade

 The conditions of trade are closely related with the demand of the product. Demand for every thing is greater in a boom though the prices are rising. Opposite is the case when there is depression.

 Measurment of Elasticity

 The practical purposes, it is not enough to know whether the demand is elastic or inelastic. It is more useful to find out to what extent it is so. For that purpose it is essential to measure elasticity.

 Three methods are generally used for measurement of elasticity, which are explained below:

1. Total Outlay Method

 In this method, we compare the total outlay of the purchases (or total revenue from the point of view of the seller) before and after the variations in the price. It may be expressed as:

 Unity: It is unity, when even though the price has changed, the total amount spent or total revenue remains the same.

Greater than Unity

 When with the fall in the price the total amount spent or total revenue increases on the total amount spent (total revenue) decreases when the price rise it is said to be greater than unity .

Less than Unity

 Elasticity between two prices is considered to be less than unity when the total amount spent (total revenue) decreases with the rise n the price and decreases with a fall in the price.

 Though this method is dimple it suffers from a serious drawback. It simply classifies the price elasticity in three categories and does not assist in measuring it in numerical terms.

 2. Proportional Method

 In this method we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in the price charged. Its formula is:

 Elasticity of Demand = Propotionate Change in amount Demanded / Propotionate Change in Price

 3. Geometrical Method

 We can better understand with the help of the figure:

 In the figure DD’ is the demanded curve which is a straight line. Here the demand is represented by the fraction distance from D’ to a point on the curve divided by the distance from the other to that point. Thus elasticity of demand on the points P1, P2 and P3 is.

 If the curve is not a straight line the above formula can be used by drawing a tangent at a point where the elasticity is to be measured


Theories of Population





Malthusian Theory of Population

 The Malthusian theory of population was first propounded in 1798 by a British economist Robert Malthusian. . In his own words the theory can be stated as,

“By nature human food increases in a slow arithmetical ratio: man himself increases in a quick ratio unless wants and vice stop him”

Malthus based his theory on the biological fact that every living organism tends to multiply to an unimaginable extant while on the other hand production of food increases with less than proportionate change. It is subject to law of diminishing returns. According to Malthus population tends to outstrip food supply.


Propositions of The Theory

 The theory propounded by Malthus can be reduced to the following four propositions:

  1. Food is necessary for the life of a man and therefore exercises a strong check on population. In other words, the size of population is determined by the availability of food.
  2. Human population increases faster than food production which tends to out turn the increase in food production.
  3. Population always increases when the means of subsistence increase unless prevented by some powerful checks.
  4. There are two types of checks that can keep population on a level with the means of subsistence. They are preventive and positive checks.



 The explanation of the propositions is:

Means of subsistence

 According to the first proposition, the population of a country is limited by means of subsistence i.e. the population is determined by the availability of food. The greater the food production, the greater would be the population and vice versa.

Growth or Population Outruns Food Production

 According to Malthus, there is no limit to the fertility of man. Man multiplies itself at an enormous rate. But the power of land to produce food is limited. It means that the production of land increases at a lesser rate as compared to production of man. Thus, the continued growth of the population would result in a decrease in output per worker and a decline in the amount of food available per person.

Population Increases When the Means Increase

 According to third preposition as the food supply in a country increases, the member of children per family also increases. It, therefore, would result in an increased demand for food and their food per person will diminish. Thus, according to Malthus, the standard of living of the people cannot rise permanently.


 According to Malthus, contain positive and preventive checks can control the population. Preventive checks are those that are applied by man and includes measures for bring down the birth rate. The positive checks on the other hand exercise their influence on the growth of population by increasing death rates. They are applied by nature. Epidemics, wars and famines are some examples of positive checks.

Optimum Or Modern Theory Of Population

 According to the theory, given a certain amount of resources, the state of technical know-how and a certain stock of capital, a country must have a certain size of population at which the real income (goods and services) per capital is the highest. This size of population is called optimum population. In other words, optimum population refers to a size of population at which the real income per capital is the maximum. If population exceeds the optimum size, it is said to be over populated. Such a condition develops in a country. When it’s available resources are fully exhausted and there exists no chance of their further exploitation. It is necessary at this stage that the country must practice preventive checks and to escape from the misery of positive checks.

According to this theory, there are three phases population in a country viz.

(a) Under Population

 A condition at which real per capital income rises with a rise in the size of population.

(b) Optimum Population

 A situation at which real income per capital is the highest.

(C) Over Population

 From under and optimum population, a country moves, unless preventive checks are applied, to the level of over population, at which the real income per capital diminishes.


Economics of Scale

 Professor Marshall his divided the economics arising from an increase in the scale of production of any kind of goods in the broad classes.

External Economics

 The outcomes of the general development of an industry either in a particular locality or a country are called external economics of scale. These economics do not depend upon the organizing capacity of particular business man, rather they are available to all the businessman alike. They depend on external condition and independent of any individual business or establishment and of it’s resource. Some examples are

  • Benefits of low freight rates
  • Benefits of banking facilities
  • Benefits of power development

Internal Economics

The outcomes of the expansion of a particular firm cutting down the production costs and securing increasing returns is called Internal Economics for that firm are not shared by other firms and only a particular business man or firm enjoys the benefits. There can be many casual economics for a firm when it expands itself. Some of them may be:

  • Benefit of expert services
  • Benefit of construction
  • Benefit of use of latest machinery
  • Benefit of use of division of labour.

Laws of Returns


1.  Law of Increasing Returns


 In order to increase the production, a producer has to increase the proportion of its fraction of production. However, the returns due to variations in the factors are not fixed. In some cases, return due to each successive unit is increased. This tendency is known as Law of Increasing Returns.


 This law is mostly found to be operating in manufacturing industries. This law was first propounded by Prof. Marshall, in his words, the law states that:

 “An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital.”

 According to this law whenever a new dose of labour and capital is applied it yields increasing returns. Also the cost of production diminishes.

2. Law of Diminishing Returns



 In some cases the return due to each successive additional unit, the production goes on diminishing. It is known as Diminishing Returns and is further explained by the Law of Diminishing Returns.


 This law is one of the most fundamental law of Economics. Usually it is related with agriculture and was also first enumerated by a Scottish Farmer.

 Usually an increase in any of the factor of production results in an increase in production but this change is a proportionate change. It means that if the quantity of land and labour is doubled, although there will be an increase in the production but it will not be doubled. And that is what Law of Diminishing Returns states. In the words of Marshall:

 “An increase in the capital and labour applies in the cultivation of land causes in general a less than propotionate change or increase in the amount of production raised. Unless it happens to coincide with an improvement in the art of agriculture.

3. Law of Constant Returns


 Similarly, in some of the cases, the increase in the productive unit keeps the production constant. This tendency is known as law of Constant Returns.


 When an increase or decrease in the output of an industry makes not alteration in the cost of production per unit, the law of constant returns is said to operate. In other words when fresh doses of productive resources results in an equal return, it is called constant returns.

The law of constant returns operates in those industries where the cost of raw material and manufacturing cost are half and half. In other words the law operates where man and nature dominate equally. It is also said that a point where the opposite tendencies of diminishing returns and increasing returns are in equilibrium is the Constant Returns.


 Possible examples of industries where the law applies are cane growing and sugar making, Iron-ore mining and steel making, cane growing and iron ore are subject to law of diminishing turns whereas sugar making and steel making to law of increasing turns. In these industries the advantage of increasing returns are neutralized by increasing cost of raw materials.

3. Why does Law of Diminishing Returns apply to Agriculture?

 The law of diminishing returns specially applies to agriculture and other extractive industries. One thing that is common to all these industries is the supremacy of nature. It is therefore often remarked that the part that nature plays in production corresponds to diminishing returns and the part which man plays confirms to the law of increasing returns. The reason is that, nature where it is supreme is subject to diminishing returns, while industry where man is supreme, is subject to increasing return. Besides the supremacy of nature, there are several other reasons why agriculture is subject to the law of diminishing returns.The agricultural operations are spread out over a wide area, and supervision cannot be very effective. Scope for the use of specialized machinery is also very limited. Therefore economics of large scale production cannot be reaped


4. Does it apply only to Agriculture?

 It is wrong to say that the law only applies to agriculture as agriculture is always subject to diminishing and manufacturing to increasing returns. The application of the law is universal. It applies to industries also. If the industry is expanded too much and becomes unwisely supervision will become tax and the cost will go up. The law of diminishing returns thus sets in. The only difference is that in agriculture it sets in earlier and in industry much later.



Importance of Elasticity of Demand


 The concept of elasticity is not just an abstract idea its practical importance is very great.

(1) Importance For Government

 The concept of elasticity of demand helps the finance minister of the monopolist. When it imposes a tax. When a tax is imposed the price tends to rise. But if the demand is very elastic it will considerably fall when the price has risen and thus the government will not be able to earn expected revenue. Thus this concept of elasticity of demand helps the government to impose the tax on a commodity whose demand lass elastic and hence earn valuable revenue.

(2) Importance for Businessmen

 The businessmen also take cue from the nature of demand while fixing his price. IF the demand is inelastic he knows that the people must buy such commodities. Thus he will be able to change a higher price and big profits.

(3) Importance for Monopolist

 The concept of elasticity of demand is of special importance to the monopolist. He is in a position to control the price and fix high price when demand is inelastic and low price when it is elastic will bring him the maximum profit.

(4) Application in Case of Joint Products

 In case of joint products seperate costs are not ascertainable. Hence the producer will mostly be guided by the nature of demand while fixing the price.

(5) Determinitation of Wages

 The concept of elasticity of demand influences the determination of wages of a particular type of labour. If the demand of particular type of labour is inelastic trade union can easily get their wages raised. On the other hand of the demand for labour is relatively elastic trade union trade unions may not be successful in raising wages.

(6) Importance for International Trade

 The concept of elasticity of demand is used in calculating the terms of trade. Whenever a country fees an adverse balance of payment the government considers the elasticity of demand for the countries export and imports before devaluing its currency.


Price Determines the Demand


The demand for the commodity is related to price. IT is always at a price. Prof. Beaham defines as under:

“The demand for anything at a given price is the amount of it which will be brought per unit of time at that price.”

Demand varies with price. It varies inversely with price. If the price rises the demand contracts and if the price falls the demand extends. This responsiveness depends on many factors the effective demand for necessaries generally do not change with price. In other words the effective demand for necessaries is inelastic. The may rise or fall but the effective demand for necessaries remain practically the same. The effective demand for comforts is elastic. In other words variation in for comforts is in perpotion to a change in price.



Monopoly is that market from in which the single producer controls the whole supply of a single commodity that has no close substitutes.

Two points must be noted in regard to the definition. First there must be an individual owner it seller if. There will be monopoly. That single producer may be individual owner or group of partners or a joint stock company or any other combination of producers of the state. Hence there must be a sole producer or seller in the market if it is to be called monopoly.

Secondly, the commodity produced by the producer must have no close substitutes. Competing if he is to be called a monopolist this ensures that there must no rival of the monopolist. By the absence of closer substitutes we mean that there are no other firms producing similar products or product varying only slightly from that of the monopolist.

The above two conditions ensure that the monopolist can set the price of his product and can pursue an independent price policy.


Market Price

 Market price is the actual price that prevails in the market at any particular time. It never remains constant. It changes from day to day and even from moment to moment. It can change at any time at any moment.

Determination of Market Price

 Market price is determined by the relative forces of demand and supply. The demand depends upon the satisfaction, which a consumer drives from the consumption of the commodity. Supply on the other hand depends upon the cost of production of the commodity. The consumer tries to achieve more and more satisfaction least possible expenditure. He does not pay more than the marginal utility of the commodity to him the seller on the other hand tries to maximize his profit by changing as much as he can. He will never accept the price which is less than the marginal cost of production of the commodity and thus marginal utility and marginal cost pf production are the two limits the maximum and the minimum and price is determined between these two limits, so we can say that,

“The price is determined at point where the amounts demanded and offered for sale are equal.”



National Income



Definition of National Income


The term national income has been differently defined by different authors. A very simple definition of national income can be given as :

 "The National Income for any period consists of the money value of the goods and services becoming available for consumption during the period."

 National income in the words of Pigou is:

 "That part of objective income of the community including income derived from abroad which can be measured in money."

 It is the aggregate factor of income i.e. earnings of labour and property which arises from the current production of goods and services by the nation's economy.

 Concepts of National Income


The various concepts of national income are given below:

1. Gross National Product (G.N.P)

Gross national product is defined as

“ The total market value of all final goods and services produced in a year”

Two things are important with respect to this definition:

Firstly, it measures the market value of amount output. Therefore it is a monetary measure.

Secondly, for calculating national product accurately all goods and services produced during a year must be counted only once.

G.N.P generally includes the following.

(i) Agricultural Product

 In agricultural product wheat, rice, cotton, tobacco, jute all types of vegetables pulses, fruits etc are included.

(ii) Industrial Product

 By industrial products we mean all types of machineries, means of transportation, furniture, electronic items and other electric equipments.

(iii) Mineral Product

 It includes coal, iron, petroleum, natural gas, salts and other materials like gold silver etc.

Since, G.N.P deals in market prices these market prices may be obtained by adding up:

  1. What private person spends on consumption?
  2. What businessman spends on replacement, renewal or making new investment?
  3. What the rest of the world spends on the out put of national economy.
  4. What the government spends on the purchase of goods and services.

Equalization of G.N.P can be written as:



2. Net National Product (N.N.P)

 During a year the production of gross nation al product some capital goods are consumed i.e. the plants, machinery, and other equipments are brought in use. The se capital goods due to utilization in the production expire its value, commodity known as depreciation allowances are deducted from the gross national product (G.N.P) we get the net national product (N.N.P). Its equation can be given as:


Thus the definition of the N.N.P can be properly written as, “The market value of final goods and services after deducting the depreciation charges is called net national product.


3. Personal Income (P.I)

 The some of all incomes actually received by all individuals or households during a given financial year is called personal income. Personal income is different from national income for the simple reason that some incomes such as social security contribution cooperate income taxes and distributed profits which are included in national income are not actually received by the house holds. The equation of personal income thus can be written as:


4. Disposable Income (D.I)

 After payment of personal taxes like income tax, property tax etc. What party of personal income is left for others consumption is called disposable personal income. Its equation is:



Methods of Calculating National Income


To calculate national income the following three methods are generally used:

1. Net output Method or Production Method

 For calculating national income under this method the net output or the production of various commodities is estimated and evaluated at the market prices. For this purpose we take two steps,

Firstly we estimate the monetary value of the commodities that are produced internally .The production or output of different sections of the economy i.e. agricultural, manufacturing, trade, commerce, transport etc is analyzed after deducting the depreciation charges.

Secondly; we consider the foreign business transactions that were performed during the financial year. In this regards in this regard we only consider the difference between exports and imports.

These two aggregate are then summoned up to get the gross domestic product which in turn is deducted from the total revenue earned to arrive at national income. In very simple words the contribution, which each enterprise makes to total output, is equal to its total revenue minus what is paid out to other enterprises and the depreciation of equipment used in the process of production. The production method is the most direct method for calculating national income. It s equation can be written as:


 2. Income Method

 Under this method the various factors of production are classified in a few broad categories. The incomes of various and sectors are obtained from there financial statements. Under this method the national income is also estimated by summing up the income that arrives to the factors of production provided by the national residents. Thus the rate at which the national income is distributed among the various factors of production is estimated. This method of calculating national income is quite complex. Usually the undeveloped countries where most of the people are not directly covered by direct taxation. Equation wise the method can represent national income as:




 3. Expenditure or outlay Method


This method gives national income by adding up all public and private expenditures made on goods and services during a year. It is obtained by:

  • Personal consumption expenditure of goods and services.
  • Gross domestic private investment.
  • Government purchase of goods and services.
  • Net Foreign investment.

It must however be recognized that it is the final expenditure only which must be counted and not the immediate expenditure.


Difficulties Faced while Calculating National Income

 Some of the problems or the difficulties that are usually faced while calculating national income are as follows.

1. Problem of Definition

 One of the greatest difficulties while calculating national income is that what should be included and what excluded with respect to the goods and services produced. As a general rule only those goods and services which are bought and sold i.e. enter into exchange must be only considered. For example the service of parents towards their children is not a part of national income on the ground that there is no investment of there market value. But allowances are made for some non-exchangeable goods and services e.g. the national product include the estimated value of food consume on farms. This creates a problem.

2. Calculation of Depreciation

 Another problem is the calculation of depreciation. The main reason behind it is that both the amount and the composition of jour capital change from time to time. There are no standard or concept rules of depreciation that can be applied. Since depreciation is an estimate so correct deduction can be made until and unless these accurate depreciation estimates are not deducted from the estimate of net national product the net national income is bound to wrong.

3. Treatment of the Government

 Government expenditures:

  1. Defiance and administration expenditure.
  2. Social welfare expenditure.
  3. Payment of interest on national debts
  4. Miscellaneous development expenditure.

The real problem that is faced relates to which of the above should be included in the national income.

4. Income from Foreign Firms

 One of the major problem relates to the fact that weather the income arising from the activities of the foreign firms operating in a country should be included in the countries national income or not .With the growing trend of doing business globally has increased this problem to a great extant. However the I.M.F has given the viewpoint that the production and income of these foreign forms should go to the owning country while there profit must be credited to the parent concern.

5. Danger of Double Counting

 Proper care is required for calculating national income so that double counting may not take place. This problem usually arises in those countries where proper documentation or statistics are not available.

6. Value of Inventories

 Since it is not easy to calculate the value of raw materials, semi finished and finished goods in the custody of producers there fore it creates problems.


Importance of National Income Computation in Modern Economic Analysis

 The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for there regular preparation. The following are some of the important uses of national income statistics:

Level of Economic Welfare

 The national income estimate reveals the overall performance of the country during a given financial year. With the help of this statistics the per capita income i.e. the income earned by every individual is calculated. It is obtained by dividing the total national income by the total population. With this we come to the level of economic welfare in terms of its standard of living.

Rate of Economic Growth

With the help of national income statistics we can know weather the economy is growing or declining. In simple words it helps us to know the conditions of a country economy. If the national income is growing over a period of year it means that the economy is growing and if the national income has reduced as compares to the previous it reveals that the economy is detraining. Similarly the growing per capita income shows an increasing standard o living of the people which is a positive sign of a nations growth and vice versa.

Distribution of Wealth

One of the most important objectives that is achieved after calculating national income is to check its distribution among different categories of income such as wages, profits, rents and interest. It helps to understand that how well the income is distributed among the various factors of the economy and their distribution among the people as well.

Ease in Planning

Since the national income estimates also contain the figures of saving, consumption and investment in the economy so it proves to be a valuable guide to economic policy relating to planning and active government intervention in the economy. The estimates are used as a data for future planning also.

Formation of Budget

Budget is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. Further we can asses and evaluate the achievements or otherwise of the development targets laid down in the plans from the changes in national income and its various components.


Thus we may conclude that national income statistics chart the movement of a country from depression to prosperity its rate of economic growth and its standard of living in comparison with rest of the world.




Definition of Rent

In ordinary sense the term rent refers to the hiring charges paid to the owner of an asset for using his right of ownership for a specific period of time. In economics the term rent is called economic rent. It is defined as

 “That part of the payment by the tenant, who is made only for the use of land i.e. free gift of nature”.

 In economics rent is mainly related to agriculture and is mainly distinguished as economic and contact rent.

Economic Rent and Contact Rent

 Some times the agriculturist tenant makes the payment which consist on capital made by the landlord such as drainages, wells etc. This part of the payment, which consists of the interest on capital made by the landlord, is called contact rent. Where as the part of the payment which is made for the use of land only is called economic rent.

Rent and Transfer Earnings

 The concept of the rent is also explained by the help of transfer earnings. The amount which factor can earn in its next best paid alternative use called transfer earning. In this sense if the factor is earning above its transfer earnings, the surplus or excess earnings is called economic rent.


Recardian Theory of Rent

 The British economist Devid Recardo propounded the theory of rent a century ago.


 The Recardian theory of rent is based on the following assumptions.

  1. Rent is paid to the landlord for the use of original and the indestructible power of land.
  2. Rent is a differential return due to the differences in the fertility of land as well as their locations. The more fertile land the higher will be its rent and vice versa.
  3. The Recardian theory depends on the historical order of cultivation i.e. the more fertile land is cultivated first and such rent does not pay rent in the beginning but as but as other grades of land come under cultivation it begins to pay the rent.
  4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal land.


 The Recardian theory of rent can be stated as

“Rent is that portion of the produce of earth which is paid to the land lord for the use of original and indestructible power of soil”.

Economic rent according to Recardo is the true surplus left after the expenses of cultivation as represented by payment to labour, capital and enterprise.


 Recardian theory of rent has been criticized on the following grounds.

  1. Recardo’s statement that the properties of soil are indestructible is wrong. The fertility of land often gets exhausted when it is continuously used. However it can be increased by using artificial manures but such fertility is considered to be temporary.


  1. Statement of the theory that the superior land is cultivated first is not always true. Actually in general the order of cultivation is not the same as the theory says since a cultivates that land first which is near to him.


  1. Recardo assumes that the no rent land exists in a country is also not applicable everywhere. This concept of no rent land is merely imaginary and theoretical.



Quasi Rent

The concept of Quasi rent was first introduced by Marshal according to him, quasi rent is a surplus earned by investments of production other then land. It is the income derived from appliances and machines, which are the product of human effort. Quasi rent stands for whole of the income, which some agents of production yield when demand for them is suddenly increased. It is earned during a period that their supply cannot be increased in response to increase in demand for them. Hence it is a short period concept. It has also been defined as the excess of total revenue earned in the short run over and above the total variable costs.


The concept of quasi rent can be understood with the help of an example. At the time of independence of Pakistan, the demand for houses increased due to sudden increase in population but the supply could not be increased due to the scarcity of building material. The abnormal increase in the return on capital invested in capital (building) is quasi rent.


Modern Theory of Rent

 This theory is also known as demand and supply theory of land. It is based on the following assumptions:

  1. There is always perfect competition among various cultivations.
  2. The fertility of different lands is same.
  3. The land is used for a particular job.

Explanation of the Theory

 The theory explains the concept of rent in terms of demand and supply. According to the theory rent is payment for the use of land. Demand for the use of land is actually the demand for that product which is produced on it. Demand for the land will increase with increase in demand for that particular product. Since th supply of land is fixed i.e. the supply cannot increase or decrease therefore the rise or fall of rent will be entirely governed by it’s demand. Thus on the side of demand rent of land is determined by its productivity not total productivity, but marginal productivity. And for supply, the supply of land in general is absolutely inelastic, as such in supply is independent of what it earns. From the following figure it is clear that the supply of land is fixed SS, while as demand is increasing from DD to D’D’ and to D’’ to D’’, the rent is also increasing from RR to R’R’ and to R’’R’’.







In ordinary language market means a place where things are bought and sold, but in Economics the market does not mean a particular place or bazar, it only means a commodity and a group of buyers and sellers of the same. Thus we speak of cotton market or share market etc. Same are willing to buy and others are willing to sell. The buyers and sellers can with one another by verbal, by letter, telephone, internet etc but place does not matter.

Classification of Market

 Categories of market are:

  1. Perfect market
  2. Imperfect market

Again categories are classified into:

Market on the Basis of Time

 On the basis of time market could be classified into the following kinds:

  1. Day–to-Day Market

This type of market is concerned with goods that are perishable like milk, fish, vegetable, fruits etc. The price in this market is determined by the demand of the market. If the demand expands the period is short that the supply can’t be increased immediately at all, therefore the price will increase similarly if demand decrease the time is so short that the surplus supply can’t be stored due to the perishability of the goods, obviously the price will decrease.

  1. Short Period Market

It is the market when time allows supply to adjust with the demand of the market to the extent of available size of the firm or producing units. For example: If market demand is so goods per day and particular firm of the same goods could produce max: 100 units by using its full production capacity .If demand increases from 50 to 75 units the firm can supply utilising the unused capacity, but if demand becomes 120 it can’t be satisfied by existing production capacity because total size of firm is 100 units per day.

  1. Long Period Market

When the period is so long that the supply can adjust with the demand of the market by changing the size of the firm. If the demand of the market increases immediately the prices will also increase. This increase of price will expand the margin of profits of the producers therefore the firm can increase the production through employing more labor, more machines , raw material etc. By increasing supply reduces the increased prices and they come again on the previous point. Similarly if demand falls the price also decrease and producers curtail their production due to decrease in margin of profits. As consequence of curtail in production the depressed price goes up again on the previous point.


Market on the Basis of Location

 Markets can be classified on the basis of location.

  1. Local Market

If the goods are sold and purchased in a limited area is called local market. For example: If the goods produced in Karachi are sold in Landhi or Malir, it will be the example of local market. Local market generally is concerned with the perishable good like milk, fish, bricks etc.

  1. National Market

This is the kind of the market which covers the whole of the country. For example: the textiles of Karachi are sold in all the four provinces of Pakistan. Similarly sports goods produced in Sialkot are supplied in whole the country.

  1. International Market

When the goods produced locally are sold in all the countries of the world is called International market. For example: the cars produced in Japan are sold in whole of the world. The buyers and sellers from all over the world compete with one another therefore prices are influenced by the world environment.


Market on the Basis of Nature of Goods


  1. General Market

Market is said to be general where not a specific but general goods are sold and purchased. For example: if cloth, pots, shoes, vegetable, fruit are sold at a time it will be called general market.

  1. Specialised Market

In this market special or specific goods are brought to sale in this kind of the market. For example: grains are sold in grain market similarly fruits are sold and purchased in fruit market. These markets provide facility to the buyers that they could purchase goods of their.






In very simple words, the remuneration that is made for the service of the labour is called wages. Wage payment is essentially the price paid for the particular commodity viz labour. Berham defines wages as:

"Sum of money paid under contract by an employer to a worker for the service rendered."


Forms of Wages


Broadly speaking, wages are categorized as:

1. Nominal Wages

 Nominal or money wages are the wages paid or received by the labour in terms of money . Money is the principle factor in normal or money wages. The wages are calculated in terms of money in this regard.

2. Real Wages

 Real wages refer to the income of a worker in terms of real benefits. E.g. bonuses, holidays, transport.

In other words, the value of additional income is called real wages. It is the real wages that enable us to clear that the worker really earns.


Factors Determining Real Wages

Some of the factors that determine real wages are as follows

  1. Purchasing Power of Money

The purchasing power of money has great influence on the real wages. The value of money keeps on changing constantly which varies inversely with the price level. This purchasing power of money influences the calculation how much the worker a worker earns since all the monitory calculation depends on the value of money. The places where the prices are high the real wage will be low and vice versa.

  1. Subsidiary Wages

The worker earning other than regular wages have higher real wages. In order to find the real earnings of a worker, we should not only consider his salary but also the extra earning that he may be able to make. A worker may work part time and in such case his real wage will be higher as compared to the worker working only on regular wages.

  1. Working Hours and Holidays

 Real wages to a great extant depend upon the working hours and holidays. Obviously a worker working for more time and enjoying less holidays will have higher real wages. His income will always be higher and so will be his real wages.

  1. Future Prospects

 Future prospects means opportunities for the future. A businessman viewing a good prospect for his business in the future will pay higher real wages to his workers so that they can work more willingly to make best use of the opportunities of the future. However a business not having very bright prospect may even offer higher wages.

  1. Nature of Work

 The occupation which require great amount of skills and whose nature is quite dangerous offers high wages to the labours. The work requiring more physical and mental capabilities should offer high money and benefits to the labours.

  1. Expenses

 In order to calculate the real wages the expenses must also be considered. The workers incurs certain expenditures which must be deducted in order to get the final figures.


Relative Wages

 The concept of relative wages explains the comparison between money and real wages. It explains that only the wages of labourers of different occupations employment or grades are different from each other. It tells that why some men working at the same place and at same level in different organizations receive different wages.


Causes of Differences


  1. Differences in Efficiency of Labour

 The labour to a great extant depends on its efficiency. This efficiency may include education, necessary skills to perform a job condition of work etc. As a general rule, the higher will be the wages and lower efficiency, lower will be the wages. It implies that more efficient workers are likely to earn higher wages as compared to inefficient once.

  1. Training

 Training is one of the important offers for the employees. Most of the organizations after recruiting labour provide them proper training necessary for their jobs. In this way skilled persons get a chance to groom themselves during which they receive very minimum remuneration. But as soon as they get trained they are offered respectable jobs and are absorbed easily at high wages.

  1. Regularity of Work

 Regularity of work has an important impact on the wages of the worker. Actually there are two categories of businesses viz: Seasonal i.e. for limited period of time and Non Seasonal i.e. for whole or unlimited period of time. Generally the labour workings in seasonal factories are often paid higher wages as compared to those working in non-seasonal ones. The simple reason behind it is that the organizations working seasonally hire the service of the labour for the limited period of time and thus pay them handsomely.

  1. Degree of Trust and Responsibility

 One of the major reasons of difference in the wages is the degree of trust and responsibility. As a normal course the men working at positions of high responsibility are usually highly paid. This is so because their jobs require high degree of skill; sense of responsibility and good decision-making abilities and this is what they are paid for.

  1. Hours of Work

 The working hours are also important in determinants of wages. The workers working for more time are paid more wages as compared to the workers working for less period of time even in the same organizations. This is why the working hours are classified as part-time or full time jobs.

  1. Extra Benefits

 A very interesting fact about wages is that the workers enjoying more fringe benefits are often paid low wages. Usually the wages are high in those occupations or business where such benefits are not offered. For example in a factory a worker may be earning RS 1,800 but he may be getting medical allowance, housing allowance, old age pension, bonuses etc


Barter System



Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other with out the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.

The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.


Difficulties of Barter System


Following are some of the difficulties of the barter system.

  1. Double Coincidence of Wants

 Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.

  1. Lack of Common Measures

 There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.

  1. Lack of Divisibility

 Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.

  1. Lack of Store of Value

 Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence no body could think of storing something to provide against future.

  1. Inconvenient Media of Exchange

 Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.


How Money Removed The Difficulties of Barter

With the help of money it has now become possible to over come the inconveniences of barter system.

  1. Standard of Value

 Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.

  1. No need of Double Coincidence

 Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.

  1. Sub-Division of Articles is Not Necessary

 Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.

  1. Store of Value

 Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.

  1. Large-scale Production

 Large scale of production is possible by the use of money, which was not possible under barter economy.

Summing Up

 Thus money or sale and purchase system has removed all the difficulties of barter economy.





Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.

Mr. Robertson defines money in the following words

“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.

An English economist Mr. Hawtrey observes that

“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.

n the words of Goh Cole,

“Money is purchasing power some thing that buys things”

According to Ely,

“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.

One of the simplest definitions of money is given by Mr. Walker who says that

“Money is what money does”.

In the light of the above definitions, it can be said that

“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.

Functions of Money

 Money is said to perform the following functions

  1. It serves as a medium of exchange.
  2. It is used as a store of value.
  3. It acts as an instrument of deferred payment.
  4. It is a measure of value.

These are further discussed below

  1. Medium of Exchange

 The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.

  1. Measure of value

 Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.

  1. Store of Value

 Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.

  1. Instrument of Deferred Payment

 Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.

  1. Transfer of Value

 Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.


Types of Money

 Generally the classification of money is based on the material that is being used for the purpose. According to the material used, the money can be classified as:


  1. Metallic Money

 The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:


 Classification of Metallic Money

 Full Bodied Coin

 Full bodied coin is the one, the face value of which is equal to the quantity of metal used in it. In this case the face value of the coins is equal to its intrinsic value.

 Token Coins

 A token coin or money is the one whose face value is higher than the value of the metal contained in it. It is usually as a subsidiary unit or coin. In token coin the face value is higher than the intrinsic value.

 2. Paper Money

 Paper currency refers to the currency notes issued or used in a country. These notes are made up of special kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.

In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a proportionate reserves are maintained and a good deal of the paper money rests on people’s of people’s confidence in the word of issuing authority generally the government or the central bank. Such a currency is also called fiduciary issue.


Classification of Paper Money

 Paper money may be of following types

(i) Representative Paper Money

When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the issuing authority it is known as representative money. Such notes could be exchanged for coins when needed and did nothing more then to represent coins.

(ii) Convertible Paper Money

The currency notes which can be exchanged for full bodied or standard coins is called convertible money. Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh issuing authority. It is also called fiduciary money.

(iii) Inconvertible Paper Money

The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for its conversion. It can also be called fiat money.

Advantages of Paper Money

 Following are some advantages of the paper money



  1. Economical

 Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government. It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or losses associated with metallic coins are also avoided.

  1. Convenient

 Paper money is the most convenient mean of money. A large amount can be carried conveniently in the pocket with out any body knowing about it. It possessed in very large measure the quality of portability, which a money material should have.

  1. Homogenous

 Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the substitute medium of exchange.

  1. Stability

 The value of money can be kept stable by properly regulating its issue. Managed proper currency method is therefore adopted by many countries.

  1. Cheap Remittance

 Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.

  1. Elasticity

 Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.

  1. Advantages to the Banks

 Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.


Disadvantages of Paper Money

 Its disadvantages are as follows

  1. No Value Outside the Country

 Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even by foreigners as they had no intrinsic value.

  1. Risk of Damage

 There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.

  1. Danger of Over Issue

 A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its over issue when the government is in financial difficulties. Once this course is adapted the momentum leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.

  1. Price Increase

 Some times especially when the money loses its value there is always an increase in the price of goods. As a result, labours and other people with fixed income suffer greatly. The whole public feels the pinch.

  1. Effect on Business

 During the days of monetary stringencies in a monetary economy, the business activities are affected very badly. The indirect result of price increase, shortage of currency etc, result in a fall of exports and a rise in imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of payments gets unfavourable.

  1. Bank or Credit Money

 Bank money consist of demand deposit, which is drawn by cheques. A deposit is like any other medium of exchange and being payable, on demand, serves as a standard of value or unit of an account as it is convertible into standard of value i.e. money or crash at fixed terms. In the words of J.M. Keynes.

"Bank money is simply an acknowledgment of a private debt expressed in the money of account which is used by passing from one hand to another as an alternative of money to settle transactions."



Value of Money

 The value of money refers to the purchasing power of one unit of money in terms of goods and services. It indicates the quantity of goods and services that can be had in exchange of one unit of money. If the value of money is studied in relation to the home market, it is called internal value as against external value, which gives the value of money in terms of foreign currency.

Value of Money and Price Level

The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.

From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.


Quantity Theory of Money



 The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.


The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.

  1. As Regards Demand of Money

Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.

  1. As Regards Supply of Money

According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time. For example a RS 100 note changes 10 hands in a year, its velocity will therefore be 10. It means that total payment made by this note will be .

  1. 100 * 10 = RS. 1000

 According to Fisher, supply of money is determined by the following equation.

 MV + M‘V’

 M represents the actual money and M’ the bank money where as V and V’ represent their respective velocities.

 Demand for money is represented by price multiplied by turnover i.e. total quantity of goods and services sold and therefore demand is determined as:

 Demand of money = P x T

 Where P is the price and T is the turnover.

 Since the value of money is determined at a point where its demand is equal to supply and accordingly Fisher gives the following equation of exchange:

 PT = M‘V’ + MV


 P = (M‘V’ + MV)/T

 According to the above definition / equation, the price level is determined by dividing the total supply of money by turnover.


The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.


  1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
  1. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.


  1. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.


  1. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.


  1. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.


Importance of Money

 In order to have a comprehensive idea of the importance of money, we can classify it as.

A. Importance to individuals in their daily life.

B. Importance to an economy.

 A. .Importance to Individuals in their Daily Life

 Importance to individuals in their daily life is well established under the following heads

2. Removal of Double Coincidence

 Money has removed the problems of double coincidence of wants. An individual because of money is in position to exercise his choice and can purchase or consume a commodity according to their liking.

3. Convenience in Buying and Selling

 Money being a measure of value, an individual can sell his goods for money and purchase the goods he needs through it. The sale and purchase of goods is not confined to with in the borders of a country only, but are also conducted abroad.

4. Ease in Planning

 Money has given an opportunity to an individual to plan his consumption in a way that he gets the maximum satisfaction out of his limited income. Because of money price of every thing is known to him on the basis of which he can ascertain that what he can afford and what he cannot.

5. An Option for Saving

 Money being a store of value helps the individual to make provision for rainy days. During the period of his earning, he may have some thing, which he can use in his old age when his earning has reduced.

6. Recovery Options

 Money also helps an individual to cover the gap between income and expenditure intervals, which is done either by withdrawing the past saving or by borrowing. Saving and borrowing have become common and a part of our economic activities.

7. Possibilities of Specialization

 Money has made possible the regional specialization of production on the basis of the most favorable condition principle, which has given birth to international division of labour have reduced the cost, improved the quality and increased the verities of products. Individuals are in a position to consume superior goods at a cheaper price.

8 .Transfer of Value

 Money being a measure of value helps the individuals to transfer the value of their fixed assets from one places to another in the country or out side the country. In other words even the immoveable assets have become mobile.

9.  A Source of Income

 Because of lending and borrowing practices facilitated by money, the individuals saving become a source of income. The individuals make savings, invest them in productive activities and receive a regular income, which increases their welfare by improving their standard of living.


 B. Importance to Economy

The economy of a country is however, benefited by money in more than one-way:

1. Enhancing Exchange Facility

Money enhances the exchange facility and extends the market for goods and services produced in the economy. The extension of market creates demand for goods and services and consequently the resources are fully exploited to increase the output so that the inc4reased demand may be adequately met.

2. Economies of scale

Money oriented demand provides economics of scale. The economy in such a situation produces goods at a cheaper cost because of the reason that input and output ratio rises.

3. Increased Opportunities of Employment

 Increased volume of production increases the level of employment and income level follows suit. Raised income level stimulates saving and investment and consequently the investment rate in the economy rises.

4. Facilitate International Trade

 Through money international trade is facilitated, which makes the resources of an economy more mobile and such resources are exploited to the maximum extent.

5. Introduction of Lending and Borrowing

 Because of money lending and borrowing have become a common practice among the nations of the world. The surplus resources o fan economy moves to another economy, which is deficient in such resources. Flow of resources helps an undeveloped to venture into her development plan. Lending and borrowing practices developed through money, exchange saving and stimulate investment n the economy. As a result the economic growth is accelerated.



Dangers of Money


Money has proved dangers in several ways

  1. Economic Instability

 Some economists of the view that money is responsible for economic instability. When there was no money, saving was not divorced from investment. Those who saved also invested. But in a monetised economy, saving is done by certain people and investment by some other people. Hence, it does not follow that saving and investment should be equal. When savings in a community exceeds investments, then national income output and employment decrease and the economy is engulfed in depression.

  1. Danger of Over-Issue

 The main danger of money lies in its liability of being aver issued. The over issue of money may result in inflation. Excessive rise in prices hits hard the consuming public. It endangers speculation and inhibits productive enterprises. It adversely effect distribution of income and wealth in the community so that the gulf between the rich and poor widens.

  1. Economic Inequalities

 Money has proved to be a very continent tool for amassing wealth and exploitation of the poor by the rich. The misery and degradation has gone to a great extant after the existence of money.

  1. Moral Depravity

 Money has weakened the moral fiber of the man. The social evil like corruption has proved to be a soul-killing weapon. As said by an eminent German economist Von Mises

“Money is regarded as the cause of theft and murder”.

Money is itself is not bad, but its possession or debt facilitates corruption and crime.


Gresham's Law



 Gresham’s law can be stated, as

“Bad money tends to drive good money out of circulation when both of them are full legal tender”.

Thus when two kinds of money good and bad circulate together, other things remaining constant, bad money will remain in circulation and good money will go out of circulation.

Classification of Good and Bad Money


Good and bad money may be classified as:

  1. Good money is full valued coins of standard wealth and fineness while bad money is the one, which is debased or worn out.
  2. Good money may be superior money of higher substance while bad money will be inferior money of less intrinsic value.


In the light of the first classification the law may be stated as:

“Whenever legal tender coins of the same face value but of different weight or degree of fineness are in continuous circulation, the light weight or bad coins tend to drive out the full weight fine coins out of circulation”.

Marshal states the law in the light of second classification as:

“ Money which is inferior in respect to exchange or substance value, commonly shows greater tendency in circulation than those which are superior in this respect”.


The law is applicable in three cases:

Under Mono – Metallism

When coins of same metal but of varying weight or fineness or both circulate together at the same face value, it will be the human tendency to keep a brand new coin and give out the depreciated one. Thus the old and worn out coins will tend to drive newly minted full weight fine coins out of circulation.

Under Bi – Metallism

When gold and silver coins are freely circulated as legal tender, then the over valued coin will drive the under value coin out of the game.

Under Paper Currency

When paper money and metallic money circulate together as standard, however paper money being inferior tends to drive metallic money out of circulation.

The reasons for this are:

  • Good money is exported to earn profits.
  • Good money is hoarded for later adjustments.
  • Good coins are melted and sold as bullion.


The law does not operate when:

  • There is a shortage of currency.
  • When there is strong public opinion against bad money.


Bi Metallism


 Bimetallism is a system of currency under which the price of the monitory unit is regulated with reference to any two metals (generally gold and silver). Both the metals act as a medium of exchange and the standard of value. The two metals remain in circulation side by side. The ratio between their values is fixed and maintained by the currency issuing authority.

Essential Features

The essential features of bimetallism are:

  1. Standard coins of two metals, generally gold and silver remain in circulation side by side.
  2. Coins of each of the metals remain unlimited legal tender.
  3. Generally free coinage of both metals is considered as legal and allowed. But some times free coinage of only one metal is allowed. If it is so then the system is called limping standard.
  4. There is a fixed legal ratio of exchange between the two metals e.g. if an American silver coin has 16 g. of silver for every gram of gold in gold coins, the ratio of exchange between the two would be 16:1. Any payment that would be made it would be made keeping in view the ratio between them.