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Economics
Introduction to Economics ECONOMICS: Uses of scare resources in order to get maximum satisfaction is said to be Economics. OR An Economics is a mechanism that allocates scare resources among competing uses. SCARCITY: Scarcity is defined as we looking for more as the resources available now. Economics is arising when we have following things. 1. What 2. How 3. Whom What goods and services will produce and what quantity to produce. How will be various good and services be produce. for Whom will the various goods and services be produce. Distribution of Economics benefit depends on the distribution of income and wealth. Economics has two types. A. Decision Maker. B. Coordination Mechanism. Any Person or organizations of person that make choices are deals in decision market. Decision Maker fall in to three groups. i. House ii. Firms iii. Government Economy is change country to country. Advance countries go for capital but some have limitation of qualified labor. OPPORTUNITY COST: Economist use the term opportunity cost of emphasis that making choice in the fact of Scarcity implies a cost OR We go for best in order to forgone other upon them. Economics other divided into two parts. 1. Micro Economics 2. Macro Economics Micro Economics: Micro Economics deals with single, individual or a particular firm, consumer or producer. Macro Economics: Macro Economics deals as whole or over all performance of economy like national income. According to the Adam Smith: Economics is the study of wealth and according to him wealth is for man but not man is for wealth. According to Robbins: Economics is the study of human behaviors as a relation between ends and scare moons which have alternate uses. CONSUMER: 1. To get the maximum satisfaction from producer (House Hold Sector) supplier of loan. 2. They are lender of loan. They purchase their bonds. PRODUCER: 1. To get profit from consumer pockets. (Business Sector) Desire the borrowed the loan. 2. Demand the loan. They print new loan to borrow the loan. The Theory of Supply: Supply is of the Scare goods. It is the amount of a commodity that seller are able and willing to offer for sale at different prices per unit of time. OR FAM Star Photo Shop Pakora Stop Qasimabad

Economics
Supply is a Schedule of the amount of a good that would be offered for sale at all possible prices at any period of time. e.g. a dog, a week and so on. Supply: It refers to that quality of the commodity which is actually brought into the market for sale at given price per unit of time. Stock: Stock means that total quantity of a commodity which exists in market but cannot be offered for sale at a short notice. The Law of Supply: Sellers supply more goods or high price than they are writing at lower prices. Keeping other factor constant. If the price of a commodity rises seller, supply more goods while if the price decreases than they will supply less keeping other factor constant. It is formed that the direct relation between quantity and supply and we can easily understand by supply schedule and supply curve. From the Supply curve and Schedule we observed that the supply curve is positively sloped means that is direct relation between price and supply of the commodity. The Supply function can also be explained it. Qxs = f(Px, Tech, Si, Fn, X, .....) Where Qxs = Quantity Supplied by commodity of x by the producer. Px = Price of commodity X Tech = Technology Si = Supplies of Import.................. These are constant fact of production. Fn = Feaditer of machine X = Taxes / Subsidies We can say supply is a function of Qxs = f(Px) Movement / Shift In Supply: According to the law of Supply that If the price increases supply increases so we can say that change in price curve change in Quantity Supply so movement along the curve happen at different price level while keeping other factor remain constant or we can say that there is movement along the curve is only price change and other factors remain constant. When price is Pi Supplier offer Qi quality for sale while when price increases to P2 the offer Q2 which slow there is movement along the curve shift in Supply curve. Where Ss = Actual Supply Curve When price level Decrease due to other factors (Tech, Si, Fn, X, ....) the Actual Supply curve (Ss) shift upward to the left (Ss) When price level increase due to other factor (Tech, Si, Fn, X, ....) the Actual Supply curve (Ss) Shift downward to the right (S2S2) Non-Price Factor which can shift in Supply. These factors are 1. Change in Factor Prize: The rise or fall in supply may take place due changes in cost of production. If the input prizes which is used for making the commodity increases the cost of production. 2. Change in Technique: If there is improvement in technology then it will come reduction in cost of production. 3. Improvement in the Means of Transport: If there is improvement in communication in transport then if leads to minimize the cost of production. 4. Political Changes: The increase or decrease in supply also occurs due to political changes. FAM Star Photo Shop Pakora Stop Qasimabad

Economics
If there is war in between two countries then it will decrease the Supply. 5. Taxation: If Government received heavy taxes on the Import of a commodity then the Supplies of these goods is reduced at each price. 6. Good of Firm: If firm expect higher price the future they produce in large scale. The Theory of Demand | The Meaning of Demand: Demand in economics means a desire to possess a good supported by willingness and ability to pay for it. Like for example if we have a desire to certain commodity, but we do not have the adequate means to pay for it, it will simply be a wish, a desire or a want and not demand. Demand is effective desire which is backed by willingness and ability to pay for a commodity in order to obtain it. Characteristics of Demand in economics: 1. Willingness and ability to pay. 2. Demand is always at a price. 3. Demand is always per unit of time. The Law of Demand: The law of demand states that people will buy more at lower prices and by less at higher price, other thing meaning the same. When a price of a commodity increase quantity demanded is decreases and as the price decreases quantity demanded increases keeping other things constant. Functionally Demand is defined as Qd(x) = F(Px, M, Po, T, ....) Px = Price of commodity M = Money Income of the household Po = Price of other commodities T = Taste of household Assumption of the Law: There are three main assumption of the law. 1. No change in the taste of Consumer (T) 2. Purchasing power must remain constant (M) 3. Price of all commodities remain constant (Po) Exceptions to the Law of Demand: This law may be not valid for few cases like 1. Prestige Goods Some luxuries items are purchases as a mark of destination in Society. If the Price of these goods rises, the demand for them increases instead of falling. 2. Price Expectation If peoples expect rise in the price in future they may be violet this law. 3. Giffen Goods If the price of Giffen goods falls its demand also falls. There is the price effect in case of giffen goods. The Individual's Demand For A Commodity: The individuals demand for a commodity is the amount of commodity which the consumer is willing to purchase at any given price over a specified period of time. Demand Schedule: The Demand Schedule of a individual for a commodity is list or table of the different amounts of the commodity that are purchased in the market at different price per unit time. Individual Demand Schedule for Trouser Price per Trouser (P) | 800 | 600 | 500 | 450 | 400 Quantity Demand (Q) | 006 | 010 | 016 | 020 | 030 Demand Curve: Demand Curve shows the relation between the price of a commodity and the amount of that commodity that consumer wishes to purchase. The Market Demand For A Commodity: The Market demand for a Commodity is obtained by adding up the total quantity demanded at various prices by the entire individual over a FAM Star Photo Shop Pakora Stop Qasimabad

Economics
specified period of time in the Market. Market Demand Schedule Price Per (KG) .....Demand of the Buyers RS. ................... A | B | C | D | Total 20 ..................... 3 | 4 | 5 | 6 | 18 18 ..................... 4 | 5 | 6 | 7 | 22 16 ..................... 5 | 6 | 7 | 8 | 26 14 ..................... 6 | 7 | 8 | 9 | 30 12 ..................... 7 | 8 | 9 | 10 | 34 10 .................... 6 | 7 | 10 | 11 | 38 Market Demand Curve: Market demand Curve is also = very sloped like individual demand curve. By analyzing the demand curve we note that when price fall the demand for the goods increase therefore the demand curve slopes from left to right 1. Law of diminishing marginal utility. 2. New Buyers. 3. Increase in Real Income. 4. Substitution Set. 1. Law of Diminishing Marginal Utility: The Law of demand is bases on the law of diminishing marginal utility. According to which, when a consumer purchase more units of a commodity, its marginal utility decline. The consumer therefore will purchase more units of that commodity only if its price falls. 2. New Buyers: When the prices of a commodity falls those peoples also become capable to purchase who were not able before. The Demand increase due to entry of new buyers in the market and so demand curve slopes from left to right. 3. Increase in Real Income: Due to fall in price people purchasing power increases for that good so due to which demand curve is slopes rightward. 4. Substitution Set: Suppose two substitutes commodity like tea and coffee and if the price of one commodity is decrease then people felt that other is expensive so they bye cheapest one. If price of coffee decrease than tea seems to be expensive so people go for coffee. Movement of Shifting of Demand Curve: There are two ways to show demand curve 1. Movement along the demand curve. 2. Shifting of demand curve. 1. Movement along the Demand Curve: If only change in price of commodity and keeping other factors remain constant (Income etc) than we more along demand curve it is technically called extension and constriction in demand. Extension ====> Increase in Demand Constriction ====> Decrease in Demand 2. Shifting of Demand Curve: Demand Curve shift upward or downward due to change in demand, due to change in one or more factors other than price. If there is increase in demand than curve moves upward. If there is decrease in demand curve moves downward. Elasticity of Demand: The Law of Demand Indicates the direction of change in the quantity demanded of a result of change in price. It does not fell in the extend by which the demand with change in response to change in price of the product economist here ease and measure the responsiveness of quantity demanded to a change in price by the concept of elasticity of FAM Star Photo Shop Pakora Stop Qasimabad

Economics
demand. Elasticity of demand shows the expansion and contraction in demand with respect to change in price. * 1 Price Elasticity of Demand * 2 Degree Of Price Elasticity Of Demand * 3 Measurement of Prize Elasticity of Demand * 4 Types of Elasticity * 5 Factors Determining Elasticity of Demand * 6 Conclusion Price Elasticity of Demand: Price Elasticity of demand response the expansion or contraction in demand is response to change in price. Mathematically Ep = Proportionate change in quantity demand / Proportionate change in price Ep = D f/q / Dp/p Degree Of Price Elasticity Of Demand: Degree of elasticity of demand falls into five categories. 1. Perfectly elastic demand 2. Perfectly Inelastic demand 3. Unitary elasticity 4. Relatively elastic demand 5. Relatively Inelastic demand 1. Perfectly Elastic Demand: A demand is properly elastic demand when amount demanded of a good at the ruling price is infinite. Imperfectly elastic demand when ruling price fall the consumer by much good while when price level increase the consumer leave the use of product or says demand is equal to zero. 2. Perfectly Inelastic Demand: Perfectly Inelastic demand shows that there is no change in demand is response to change in prize. It refers the elasticity of demand is equal to zero. 3. Unitary Elasticity of Demand: Such demand in which percentage change in price is equal to percentage change in quantity we said the demand is unitary elastic. 4. Relatively Elastic Demand: Relatively elastic demand shows the percentage change in quantity demanded is higher is response to percentage change in price like suppose the 10% change in price leads the 20% change in quantity then. 5. Relatively Inelastic Demand: Relatively Inelastic shows that % change in quantity is less in response to % change in prize. When, Ed < 1, we said Relatively inelastic demand. Measurement of Prize Elasticity of Demand: There are three methods of measuring elasticity of demand. 1. Revenue Method 2. Proportional Method 3. Graphic Method 1. Revenue Method: According to this method elasticity of demand can be measured from the change in the total revenue of the firm as the increase or decrease the prices of the goods. Elasticity is expressed in three ways. A. Unit elastic demand B. Elastic demand C. In elastic demand A. Unit Elastic Demand: When the increase or decrease in the price of goods leads to firm FAM Star Photo Shop Pakora Stop Qasimabad

Economics
total revenue remain the same we said this is Unit Elastic Demand. B. Elastic Demand: A Negatively r/s small changes in price of the good and the total revenue of the firm. When a firm lowers the prize its total revenue rises and when it increases the price of a good its total revenue falls. C. Inelastic Demand: In case of Inelastic demand a relation exist between change in price of a good and the total revenue of the firm. When a firm raise the price of a good its total revenue goes up and when its lower the prize the total revenue of the firm goes down. Price of Per Dozens (Rs) P | Quantity Demanded Q | Total Revenue TR = PxQ | Elasticity 1.50 ................................. 3 ........................... 4.50 ...................... > 1 1.25 ................................. 4 ........................... 5.00 1.00 ................................. 5 ........................... 5.00 ...................... = 1 0.75 ................................. 6 ........................... 4.50 0.60 ................................. 7 ........................... 4.20 ...................... < 1 0.50 ................................. 8 ........................... 4.00 2. The Proportional Method Or Percentage Method: This method relates to point elasticity we compare the % change in price with the % change in demand. The elasticity of demand is the ratio of % change in quantity demanded of a product to the % change in price. Elasticity of Demand = Proportionate change in demand / Proportionate change in price Elasticity of Demand always Negative but we taken positive value between we noted fallen price in followed by rise in demand means demand is always Negatively Sloped. 3. Geometric Measurement of Elasticity OR the Point Method: The price elasticity of demand also be measured at any point on the demand curve. It is noted that demand is unitary at mid point of demand curve the total revenue is maximum at this point. Any point above unitary point shows elasticity is greater than 1 (means price relation in this point leads to an increase in the total revenue. Any point below midpoint below midpoint shows elastic is less than 1 means price relation in these point lead to reduction in the total revenue. Qs. Define Elasticity of Demand and distinguish between point Elasticity and are elasticity? The point elasticity regresses to elasticity of demand at a point of demand curve. The change in price and resultant changed in demand are very Small. We use are of demand curve to measure elasticity when price changed are big we use the average of the two prices. Are elasticity is a measure of the measure responsiveness to price changes exhibited by a demand curve over same finite stretch the curve. Where, PM is which measures elasticity over a certain range of prices and quantities. We noted from the fig. that elasticity is difference of different point. Now suppose at point P on the demand. These results show that the point method of measuring elasticity at two Points on a demand curve gives different elasticity Coefficient. In order to avoid this problem, we use an average of the two values is calculated on the basis of following formula Q1 - Q2/Q1 + Q2 divided P1-P2/P1+P2 This result is more satisfactory then the two different elasticity coefficient arrived at by the point elasticity Method. FAM Star Photo Shop Pakora Stop Qasimabad

Economics
The closer the two points P and M are the more accurate will be the measure of elasticity on the basis of are elasticity. Are elasticity is the elasticity of mid-point of P and M Types of Elasticity: The demand depends upon various factors such as the price of a commodity, the money income of consumer the prices of related good the taste of the people etc. The elasticity of Demand measures responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. There are three major types of elasticity. 1. Price elasticity 2. Income elasticity 3. Cross elasticity 1. Price Elasticity of Demand: If measures the responsiveness of demand to small changes in price. Mathematically: Ep = Proportionate change in quantity demand / Proportionate change in Price 2. Income Elasticity: It measures the changes in Demand due to change in income. Mathematically: Income Elasticity = Proportionate change in Quantity Demand / Proportionate Changes in Income Measurement of Income Elasticity: Its measure in same way as price elasticity measure. For Example: If the income of a consumer increases by 5% the prices of all other goods remain constant, the purchase of the consumer for good X increases by 10%. If Income increase 5% and demand increases 5% is result than. 3. Cross Elasticity of Demand: It measures a change in price of one good cause a change in demand for another. OR Change in price of substitutes goods result change in Demand for the goods. Cross Elasticity of Substitutes: When such goods who are substitute to each other. Like Tea and Coffee, Butter & Jam etc. An increase in the price of one good result the increase in quantity demands for other. Factors Determining Elasticity of Demand: There are several factors which determine the elasticity of demand. 1. For Necessary the Demand is Inelastic Or Less Elastic: For necessities of life demand do not effect much as response to change in price like (Salt, Wheat etc) 2. Demand for Luxuries is Elastic: When the price falls consumer buy more when price raise no one can purchase. These are the luxuries of life. Like we have to purchase a Flat in Clifton buy a Car like BMW etc. 3. Demand for Substitutes is also elastic: When the price of one commodity increase demand for its substitutes increase. 4. Demand for Goods having Several Uses is Elastic: Coal is such a good which is cheap and use for several purpose so demand for it is elastic. 5. Elasticity also depends on the Price Levels: If the price is either too high or low the demand will be less elastic. 6. Has If and Fashion: The demand for those goods which are habitually consumed or which are in fashion is elastic. 7. Future Expectation about Price Changer: If people think that price level includes in future demand for it increases. Conclusion: As we analyze these conditions and sort that elasticity does not depend on a particular thing if changer time to time and place to place. FAM Star Photo Shop Pakora Stop Qasimabad

Economics
Elasticity of Supply: Price elasticity of supply is a measure of the degree to which the quantity supplied in the responds to changes in price. Mathematically: Es = % change in Quantity supplied / % change in price. Elasticity of supply represents the extent of change in supply in response to a change in price. If the amount supplies rise as compete to rise in price supply said to be elastic. If the amount supplies rise but not must as compose to rise in price than supply is said to Inelastic. Categories of Price Elasticity of Supply : There are five degrees of price elasticity of Supply. 1. Infinitely elastic or perfectly elastic. 2. Elastic 3. Unitary elastic 4. Inelastic 5. Perfectly inelastic 1. Perfectly Inelastic: In Perfectly elastic supply amount supplied at the ruling price is infinite. 2. Elastic Supply: When the % change in the amount of a good Supplied is greater than % change in price we said supply is elastic. 3. Unitary Elasticity: When the % change in the quantity supplied is exactly equal to % change in price than elasticity of supply is unitary. 4. Inelastic Supply: When % change in amount supplied less than % change in price supply is said to be Inelastic. 5. Perfectly Inelastic Supply: When there is no change in amount supplied in response to change in price we said supply is perfectly inelastic. Measurement of Elasticity of Supply: Like demand, elasticity of Supply has three types. 1. Equal to unity 2. Greater than unity 3. Less than unity 1. Equal to Unity: If % change in quantity supplied is equal to % change in price elasticity is equal to 1 or unity. 2. Greater than unity: If % change in quantity supplied is great than % change in price, elasticity will be great than unity 3. Less than Unity: If the % change in amount supplied is less than % change in price than supply elasticity will be less than unity. Qs. What do you understand by Market Equilibrium? A price you which both buyer and seller agree is called Market Price. As we know the consumer want cheaper price for the commodity and seller want higher price. But at a price for which both consumer and seller agree is said to be Equilibrium in the market. E ----> Shows market Equilibrium. Po ---> is the Equilibrium price for which both consumer and seller agree. Consumer agrees to buy at this price and seller agrees for sale at this price. Qo ----> is the quantity demanded by consumer at this price and quantity supplied by the supplies. Simply we define market Equilibrium at that both consumer and producer are satisfied for a fixed price. FAM Star Photo Shop Pakora Stop Qasimabad

Economics
Qs. Show the effects of change in Demand and Equilibrium Market? Find we assume that there is no change in supply schedule. Now we analyze the effect of changes in demand or Equilibrium considering following type of Supply curve. 1. Relatively Elastic Supply 2. Relatively Inelastic Supply 3. Perfectly Elastic Supply 4. Perfectly Inelastic Supply 1. Relatively Elastic Supply: E ------> Initial Equilibrium Pt in the market. Po -----> Initial Equilibrium Pt for which both consumer and produce agreed. DD -----> Initial Demand Curve. Now Suppose demand Increase then DD will shift upward to the right D,D then as the market demand Increase in result producer increase the price and also increase the quality then new Equilibrium Pt arise E. D,D, ------> Shows Increase in Demand E' ---------> New Equilibrium Pt achieve when demand increases Pi --------> New Price when Demand increase. Qi --------> Quantity Supplied at E' As we see that due to elastic supply curve the Extension in supply is higher than % Extension in price. Similarly, If demand curve shift downward to the left due to decrease in demand Equilibrium Pt achieve E. Where E -------> Eq Pt when demand decreases P2 --------> Price at new Eq Pt E Q2 --------> Quantity Supply at new Eq.Pt E The contrastive in supply is greater in response to % change in price. 2. Relatively Inelastic Supply: In Inelastic Supply the % change in price is higher than % change in supply due to increase in demand. OR Contraction or Extension in supply is less than the % change in price. 3. Perfectly Elastic Supply: When increase in demand in perfectly elastic supply there is no effect on price but quantity supply is increase from QQo to QQ1 and new Eq Pt are is E when demand decrease quantity supply decreases QQo to QQ2. 4. Perfectly Inelastic Supply: In Perfectly Inelastic Supply there is no effect on quantity supplied on change in demand but if increase from DD to D2D2 the price increased from Po to P2 if demand decrease the price decrease P1. Qs. Analyze the shifts in supply on Market Equilibrium? OR What effect of shift in Supply on Market Equilibrium? First we suppose the demand curve is constant and only change in supply take place. Now we always analyze the effect of shift in supply and Market Equilibrium on demand curve. 1. Elastic Demand Curve: When supply increase from SS to S1S1 the Equilibrium point shift to E' and new price and quantity demanded achieve when supply decreases from SS to S2S2 Eq Pt E shift to E and price increases to P2 when quantity demanded decreases to Q2. Inelastic demand % change in quantity demand is increase or decrease is higher is response to % change in price. FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
2. Inelastic Demand Curve: Inelastic demand curve % change in quantity demanded is less than % change in price as result of shift in supply curve. 3. Perfectly Elastic Demand Curve: There is no change in price in perfectly elastic demand curve in response to change in supply. 4. Perfectly Inelastic Demand Curve: If supply increase in the Market in perfectly inelastic demand. Supply increased than the quantity required in the market. So the price decreases in order to get new Eq Pt E' but quantity demand remain constant. Qs. Discuss the effect of shift in both supply and demand on Equilibrium Market? As the demand (DD) increase to (D1D1) the new Eq Pt E' achieve with supply (SS1) but if supply also increase from SS to S1S1 then new Eq Pt achieve. Where both new demand and supply curve intersect each other E and new price P2 will be set for quantity Q2. When supply is greater than rise in demand. If supply is higher than demand the price automatically be decreases. If DD shift to DD1 and SS shift to S1S1 the intersect point of D1D1 and S1S1 shows now Eq Pt and we see the price decreases as result. Increase in Demand and Decrease in Supply : If demand increase to DD1 from DD and supply decrease from SS to S1S1 then new Eq Pt achieve E' where both new demand and supply intersect out after and we see price is higher in this case price increase from P0 to P1. Qs. Distinguish between internal economics and external economics how do they arise? Scale of production means size of plant; the number of plants and the technique of production adopted by the producer Scale of production are 1. Small Scale Production 2. Large Scale Production Economics of large scale production can be grouped as A. Internal Economics: The Internal Economics arise within a firm as a result of its own expansion, independent of the size and expansion of the industry. OR Internal economics are those economics in production those reduction in cost which occur by firm itself when it expand its output or enlarge the scale of production Internal Economics have following types. 1. Technical Economics 2. Risk-Bearing Economics 3. Managerial Economics 4. Commercial Economics 5. Financial Economics 1. Technical Economics: They arise when production is carted on a large scale, a firm can afford to install up-to-date and costly matching and have its own repairing arrangements. As result cost percent is decrease due to large scale of production from the new set up. Like for e.g. A bigger butter or a bigger finance, cloth, embroidery machine. 2. Risk-Bearing Economics: Some of huge firms take the big risk on manufacturing by taking the supply on credit. These are said risk bearing Economics. These Economics make the average cost curve a downward sloping curve as the level of output increased. B. External Economics: As a result of expansion in industry size as whole the member of FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
firm get benefits these are said to be external economics. Some types of external economics are 1. Economics of Concentration: These are the advantages of local industry when a firm have skilled worker they got better transport and other benefits. Those firms get these Economics. 2. Economics of Information: Publication of Technical Journals and Central research Institute will the engagement of all firm make Economics of Information. 3. Economics of Disintegration: When an Industry grow it split there some process to Specialized department like for e.g. A number of cotton mills located in a particular area may have also the benefits of making plant. Production Function and Laws of Production Short Run: Short Run is a period of time in which the quantities of some inputs are fixed and they can be varied. Long Run: Long Run is a period of time in which the quantities of all inputs can be worried. Qs. What are production functions? How does it help in the understanding of producer equilibrium? It refers to a allow of input's resulting in a flow of output over a period of time, leaving prices a side. It shows the maximum amount of output can be produced from a given set of input in existing state of technology the output change when input quantity changed. Factors Effecting Production Function It depends on A. Quantity of resources used. B. State of Technical Knowledge. C. Possible Process. D. Size of the Firms. E. Nature of Firm's organization. F. Relative prices of the Factors of Production. As these factors change production function also change Production plant size can be change in Long run but not in Short run. X = f (a,b,c,d,.....) Where X = output per unit time a,b,c,d = are input used for making goods. In order to understand production function we have few things in mind. i. There is a technical relationship the input or output of product without considering price factor. ii. Combination of factor of production gives output. Output increases as the factor of production organized in a good number. iii. Productively depends on the nature of technology used, like labor, intensive firm depend on their quantity of labor. A change in technology will can shift to another production function. According to Cub Dougler production function Q = KLaC Where Q ----> Quantity Manufactured L ----> Labor Employed K and a ----> lue constants and (a < 1) FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
C ----> Capital Used. Conclusion: The study of the theory of production is the study of production function itself. It helps to understand the law of proportion where keeping on a factor of production we increase the other factors. Qs. State and explain the law of variable proportion Illustrate diagrammatically? OR Discuss the law of variable proportion and explain the conditions of its applicasity? Lain of Variable Proportions: If we know that the outputs depend on the quantity and quantity of the factors of production. So in order to increase output we must have to change some factor production, keeping other factor constant. The law of variable proportion studies the effect of output of variation in factor proportion. As the proportion of one factor is combination of one factor increased after a point find the marginal and then the average product of that factor will diminish. OR An Increase in some inputs relative to other comparatively fixed inputs will cause outputs to increase but after a point the extra output relating from the some addition of input will become less and less. Assumption i. Technology remains constant other wise marginal and the average carver vise instead diminishing. ii. Only one point is verbiage other being be constant. iii. It assumes a short run between in long run and all inputs can be changed. Stage 1: As we see that from 1 to 4 workers work on 40 acres gives the higher output and Marginal product increase. Stage 2: We see when increase the number of worker from 5 to 8 the total product increase but marginal product remain same. Stage 3: After increasing more work we see still total product increased but marginal product decrease. Conclusion: So if analyze if we increase more worker we got increase in TP and MP but as we increase so much worker TP may be increase and MP decline and it is fact so many worker spoil the good or made the quantity difference. Qs. Write notes on Laws of Diminishing Returns? Law of Diminishing Returns: Diminishing Returns occur in all when labor input increases. There is a change in output as we increase any one variable factor keeping offers constant. Returns to Scale: A change in scale occurs when there is an equal % change in the use of all firms input. If we increase 1 worker and one machine for knitting sweater from 4 worker and 1 machine. we double scale of production. There are three types of possible cases. 1. Constant Returns to Scale: Constant returns to scale occur when the % increase in firms output is equal to the % increase in its inputs. It means when a firm doubles all its input its output exactly double. Example (Put yourself) 2. Increasing Returns to Scale OR Economics of Scale: Increasing return to scales occur when the % increases in output exceeds the % increase in output. It means when a firm doubles its input the output will be move then double. Economics of scale occur in production process. Where increased output excises a firm to use a more productive technology. Example (by yourself) FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
3. Decreasing Returns to Scale OR Diseconomies of Scale: When the % increases in output is less than % increase in inputs then we say Decreasing Return to Scale occur. It means when a firm double its input and output increases 50% it means diseconomies of scale are present. Example (By yourself) Example: Suppose a knitting firm with one worker and 1 knitting machine gives 4 sweater. * If he doubles the firm's input to 2 knitting machine and 2 workers and they gives 15 sweaters a day. We said increasing return to scale or Economics of scale. * If the increase 4 knitting machine and 4 workers and then gives 25 sweaters a day, it means decreasing to return to scale of diseconomies of scale. Qs. What do you understand by Perfect Competition? State and explain the essential conditions or Characteristics of Perfect Competition? Perfect Competition: A market is a set of condition in which buyers and sellers exist involves exchanging goods. A market is said to be perfect competition of following characteristics exist in the market. 1. Large number of buyers and sellers. 2. Homogenous products. 3. Free entry on exit. 4. Perfect Knowledge. 5. Absence of Transport. 6. Perfect Mobility of the factor of production. Price is fixed in the market due to large no sellers. If any one low their price all have must to low their price but if any high their price will alone himself and consumer do not go to him. Qs. Distinguish between Perfect and Imperfect Competition? Perfect Competition: If in any market the large number of seller and buyers free entry and exist in the market, Homogenous product, the market is called Perfect Competition Market. Imperfect Competition: It is different then perfect competition market in this market * the number of sellers are few * the product are not homogenous * same price do not exist in the market. Monopoly: Characteristics of monopoly market . * Single Seller * Price Discrimination * Homogenous Product * No entry of New Seller Monopolistic Competition: Monopolistic competition exist when following characteristic found. * Many Seller * Free entry in the market * Prize change to capacity of seller * Differentiate Product. Oligopoly: Following are the Characteristics of Oligopoly. * Few seller (may be three, four etc). * Homogenous product (Cement). * Free entry in the Market. In Oligopoly market only 2 sellers in the market and Homogenous product with price FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
differentiate. Qs. Explain with the help of diagram a Firm's Equilibrium condition in short run under perfect competition. OR What do you understand by Firm's Equilibrium? What are the conditions of this equilibrium? OR A firm is in equilibrium where its marginal revenue is equal to its marginal cost. Explain? A firm is at equilibrium when there marginal cost (MC) is equal to Marginal revenue (MR). At this point they are not able to change there level of output. At equilibrium position firm gets maximum profit. Firm's Equilibrium in the Short Run Under Perfect Competition As we see that under perfect competition demand curve is perfectly elastic due to fixed price. The firm's changes the variable factors in order evaluates extra cost incurred on producing extra unit (MC) and also looking for the scale of extra unit of production (MR) MC curve must cut MR curve from below: These conditions shows the firms maximum profits or minimum losses, but they do not shows firms absolute profit and loss position. In short run under perfect competition there are three possibilities. A. When a firm is making super normal profits in the short run. B. The firm making just normal profits in short run. C. The firms incurring losses in the short run but does not close down. D. A firm minimizes losses by shutting down. 1. Profit Maximizing Position: In short run when market price exceeds the short run average total cost (SATC) the firms got maximum profit. Under Perfect Competition firms can not be able to influence the price that is why effect price takes. Therefore AR or demand curve and MR would coincide with each other under perfect competition. OP ----> Price Prevailing in the market. PD ----> Both AR and MR curve. MC ----> Marginal cost curve. Firms get maximum profit where MC cuts MR (<= MR = MC) and MC cuts the MR from below. Now we see that MC cuts MR at two points T and R. Where at T, MC cuts from the above so it is not our equilibrium point while at R,MC cuts from the above so that is our equilibrium position. Hence, MC = MR = Price Where, OP ----> Market Price R -----> Firms equal point Where MR = MC ON ----> Quantity produce at eq. The inter section of MR and MR, set the quantity of good the firm will produces. OPRN ----> The total revenue at equal position. OKMN ----> The total cost of producing ON at eq. FAM Star Photo Shop Pakora Stop Qasimabad

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KPRM ----> The firm earning super normal profit. 2. Zero Profit of a Firm: In short run a firm may be making zero profit are economic profit. OP ----> Market Price PD ----> AR and MR curve R -----> Break even Point at Break even Point (R) MR = MC = ATC OPRM ----> Revenue and cost of the firm At break even firm get economic profit mean zero profit at this point firms suffer in the market. 3. Loss Minimizing Case: The firm in short runs is minimizing losses if the market price is smaller than ATC but large than AVC. OP ----> Market Price N -----> Firms eq. point where MR = MC OPNK ----> Total Revenue OTSK ----> Total Cost PTSN ----> Firm is suffering a net loss equal to shaded area. 4. Short-Run Shut Down: In short run price takes firm minimizes losses by closing it down if the market price is smaller than AVC. Where, OP ----> Market Price Z -----> Eq.Pt where MR = MC OK ----> Output produced by firm at Z OPZK ----> Total Revenue OTFK ----> Total cost PTFZ ----> The firm suffering net loss of total fixed cost. If price is falls below Z, firm is minimize it losses or better to closing down in short run. Qs. Examine the Equilibrium of a firm under perfect competition in the long run. OR Explain why a firm earns maximum profit when MR = MC OR What is perfect competition? Show how in a perfectly competition equilibrium the price of a commodity is equal it its marginal and average cost of production. Firms Equilibrium in the Long Run: The long run is a period during which firms can be able to change there fixed cost as well as variable cost. In long run there is a possibility of entry of new sellers. In this regard the long run refers to a situation where free and full scope for adjustment has been allowed to economics forces. In long run all cost are variable AC and MC curves makes the decision for output. * Under Perfect Competition a firm is in equilibrium when price is equal to MC and AC. * If P> AC firm will get supernormal profit, so there is a chance of entry of new firm in this case due to extra ording profit. Due to entry of new firm output increase so price will be decline until all firms earning normal profit. There are two conditions must have to satisfy under perfect competition long run equilibrium. Price = Marginal Cost FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Price = Average cost. i.e. P = MC = AC Where, R ----> Shows firms equilibrium in long run at Price P ----> MR = AR = P M ----> Best level of Output at equilibrium OPRM ----> Total Revenue At price P, there is no tendency for the new firms to enter or leave the industry. If Price increase from P to P1 the firm will get more than normal profits and new firms attract due to higher price. So price will go down again. Similarly of price goes down so due to which firms get loss and some of them quit from the market there for supply decreases and therefore price rise up to P.again. Qs. What do you mean by equilibrium of an industry. State and explain the condition of this equilibrium under perfect competition? OR Can a firm earn more than normal profit in the long run? Explain? Meaning of Equilibrium of Industry: An industry is said to be equilibrium when there is no tendency for its output to increase or decrease. This equilibrium helps to determine price. In equilibrium there is no tendency to entry or exit of the firm Conditions of Equilibrium: A industry is in equilibrium if they satisfied with two conditions. 1. All firms in the industry should be in equilibrium. A firm gives output at which where MC = MR and MC curve cuts MR curve from below. 2. Whole industry in equilibrium means there is no tendency for the firms entry or exit. It occurs when all firms get normal profits which are enough to stay in the market. An industry will be earning normal profit if the price (AR) is equal to average cost (AC) if P > AC firms get super normal profits, so the new firm offered in the industry. If P < AC, the profit is less than normal profit so many be some firm leaves the industry. So we get two necessary condition for equilibrium in the industry. i MR = MC and ii AR = AC Equilibrium in short run is really possible in industry but in long run they should have to achieve equilibrium. Hence, only in long run an industry affair equilibrium because all factors of production have full scope for adjustment. Qs. What are the salient features of perfect competition? How is price determined under perfect competition? OR Explain the term "Equilibrium". How are prices determined under perfect competition.? Cost of production is very important for determining price. The demand of all consumers and supply of all firms together determines the prices. In perfect competition market their is importance of force of demand (MU) and the force of supply (i.e. lost of production) Equilibrium Price: As we know demand curve is normally slopes downward to the law of demand if price decreases demand increases or if prices increases demand decreases. While the supply curve is normally sloped means supplier supply more at higher price. FAM Star Photo Shop Pakora Stop Qasimabad

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Equilibrium occurs in the market when demand and supply are equal. Equilibrium is not occur suddenly it takes some time and up and downs in price. From equilibrium of price falls the quantity demanded increases but supply falls. Similarly of price rise the demand decrease and supply increase. We analyze that price is determine in the market when market is in equilibrium means demand and supply are equal. Equilibrium price charges if demand or supply change. Thus we analyze that factors like cost of production incomes of the consumers and size of the population take point in determining price they all shows by supply and demand. Qs. What is Monopoly? Explain how prices are determined under Monopoly? A market is which a single producer exist. Who control whole market and making bearers for the entry of new firm and there is no close substitute of its commodity. We said there is Monopoly in the market if we see following characteristics. 1. Single Producer 2. Homogenous product 3. Price Discrimination 4. No entry of new producer or say bearer in the market So in this regard we can say monopoly is price market and he can charge higher price. But if he fixes the higher price may be his amount sold is lesser so in order to increase consumer he should have to decline the price. That is why monopoly firm change two prices by making price discrimination. Price Output Determination Under Monopoly: In Monopoly the demand curve AR is downward sloped shows that as mono output sold MR decreases. Which is always less than AR curve? A firm is in maximum level of profit or in equilibrium. When MR = MC Similarly, Monopoly firm get equilibrium when there MR = MC and they set there price when MR = MC. E ----> Equilibrium point where MR = MC OP ----> Price set by Monopoly firm when MR = MC and the point at which they set at P' in AR OQ ----> output produced at equilibrium OPP'M ----> Total revenue OTLM ----> Total cost Profit = OPP'M - OTLM = TPP'L Monopoly Price and Elasticity of Demand: A very important point about equilibrium of monopolist is that the equilibrium of monopolist will always lie at that level of output where the elasticity of demand for his product is greater than one. As we see that MC = O the price set at which Ed is unity. MC is increase the price set at the point where Ed > 1. Qs. Explain how the equilibrium of firm is determined under monopoly? As we know that under perfect competition firm demand curve is perfectly elastic. But in Monopoly demand curve is downward sloped therefore MR is smaller than AR. In Perfect Competitive market equilibrium exist when MR = MC = AR but under monopoly for equilibrium MC = MR < AR price. Equilibrium is MR = MC < AR shows Monopoly charges higher prices and less output. In short run under Monopoly there are three possible cases. FAM Star Photo Shop Pakora Stop Qasimabad

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1. Super Normal Profit. 2. Zero Profit. 3. Losses Qs. What is a Discriminating Monopoly? Under What conditions is price discrimination possible, profitable and socially describe? OR Write Short note on price discriminating? Price Discrimination: When Monopoly firms gives different prices for different types of market this is known as price discrimination. Like for example KESC charges two prices for same good one for commercial use and second for home KESC. Some time monopoly firm make their product differentiate for different market. These differences may be special, wrapper, packing etc. Conditions of Price Discrimination: There are three main condition on which monopolist discriminates prices. A. When consumer has certain preferences or prejudice mean get higher from upper classes. Price discrimination also occurs if one consumer does not know that other consumer pay less than him. B. When the nature of the good is such as make it possible for monopolist to change different prices like hair cut price are different in different areas. C. When consumers are separated by distance or tariff barriers, the monopolist can charge different prices. Example (DO your self) Condition Making Price Discrimination Possible and Profitable: The elasticitys of demand in different market must be different monopolist divide these buyer into two categories in two different market. These should be complete agreement among the sellers. Discrimination is possible when goods are sold on special orders because than the purchaser cannot know what is being charged from others Qs. Explain how prices are determined in the case of discriminatory monopoly? OR What is prices discrimination explain how a discriminating monopolist reaches equilibrium? Price Deterring Under Price Discriminating : In discriminating monopoly different prices are charged for the for the commodity while in simple monopoly single price charged for whole output. So it should have to decide how much output will produce to discriminate the monopoly price. Monopoly firms divide his market in sub-market we know suppose they divide the market is two types is market A and B. We see that market B has elastic demand curve than market A. Where AR1 , AR2 ----> are Average Revenue of Market A and B. MR1 and MR2 ----> are Marginal Revenue of Market A and B Hence for the discriminating monopolist to be in equilibrium following condition must be satisfied. Marginal cost of total output combined revenue marginal MR1 in MR + A = MR2 in MKT B= CMR FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Consumer Behavior: The Cardinal Utility Analysis of Consumer Behavior The Theory of consumer behavior can be explained with basic approaches. 1. The Cardinal Approach 2. The ordinals approach Cardinal believes that utility can be measured. While believes that utility is not measurable. The Theory of Consumer Behavior: Problem of choice arises when we have limitation to some thing. We try to satisfy the most urgent wants for and less urgent afterward. We can say that a consumer when faced with limited means and unlimited wants consciously or unconsciously utilities his resources in such a manner that he at the highest level of satisfaction. This is consumer equilibrium point: A point from where consumer is not like to change his decision unless the price of the commodities or his income changes. Utility Analysis: Meaning of utilities: The power of a commodity of satisfy a human want is called its utility. For Example Clothes have a utility for us because we can wear it. Utility analysis based on cardinal measurement of utility. The main assumption are A. Cardinal measurement of utility B. Independent utilities C. Marginal Utility of money remain constant D. Introspection method Cardinal Measurement of Utility: Utility is measured and quantifiable entity. The utility of goods expressed in cardinal numbers tell us a great deal about the preference of the consumer like (10 Units, 20 Units) Independent Utilities: According to the cardinal school the utility is a function of the quantity of those goods and of that good alone. It does not depend at all upon the quantity consumed of that good. Marginal Utility of Money Remain Constant: The marginal utility of money with the purchase remains constant but as the more of its purchased or consumed the marginal utility of commodity diminishes. Introspection Method: The Cardinality school assumes that the behavior marginal utility in the mind of another person can be self observation. Total Utility (TU) And Marginal Utility (MU): This is the sum total of the units of utility which can derives from consumption of all the units of commodity during a specified period of time. TU = F(x1, x2, x3, .......xn) Where x1, x2, x3, .....xn) quantities of goods. MU = Change in TU that results from adding one units change in consumption of commodity per unit of time. Law of Diminishing Marginal Utility: This law describes a familiar and fundamental tendency of human behavior. The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stocks that he already has. OR The Marginal utility of a commodity diminishes as the consumer gets larger quantities of it. This law based upon two facts 1. Total wants of a man are unlimited but each single want can be satisfied. As a man gets more and more of a commodity the desire of his want for that good goes on failing. A point is reached when consumer no longer want any more units of that good. 2. Different goods are not perfect substitutes for each other in the satisfaction of various FAM Star Photo Shop Pakora Stop Qasimabad

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particular wants. As such marginal utility will decline as the consumer gets additional units of a specific good. Explanation of the Law: Suppose a man is very thirsty. Hoe goes to market and buy a glass of sweet water. The glass of water gives him immense pleasure or says first glass of water is great utility for him. If he takes second glass utility is than first one. And if he increases the glass of water will reach at the stage where he feel negative increase or say utility is declined. Simply we say in a given span of time the moor use of product the lesser will be the utility. Assumption of the law: Assumption of law of diminishing utility is: 1. Rational behavior of consumer 2. Constant marginal utility of money 3. Diminishing marginal utility 4. Utility is additive 5. Consumption to be continuous 6. Suitable quantity of a commodity 7. Characteristics of the consumer do not change 8. No change of fashion, customer, tastes 9. No change in the price of commodity Consumer Surplus Concept: The theory of consumer surplus is also based on the law of diminishing marginal utility. A consumer while purchasing the commodity compares the utility of the commodity with that of the price which he has to pay. In most of the cases he is willing to pay more than what be actually to pay. The excess of the price which he would be willing to pay rather than to go without the thing over that which he actually does pay is the economic measure of this surplus satisfaction. Qs. How Equilibrium of a firm is determined under monopolistic competition. Explain? Why in this condition the demand curve facing firms is more elastic than under monopoly? OR Distinguish between monopoly and monopolistic competition and explain why the demand curve under monopolistic competition. Discuss the equilibrium a firm under conditions of monopolistic competition. Monopolistic Competition is a market situation in which there are relatively large numbers of small firms which produce or sell similar but not identified commodities to the customers. It is different than perfect and monopoly market therefore refers as imperfect market. (e.g. soil market, tooth paste market) Characteristics of Monopolistic Competition : The main characteristics of monopolistic competition are 1. Large number of seller 2. Differentiable goods 3. Advertisement and propaganda 4. Nature of demand curve 5. Freedom of entry and exit of the firms If we found these conditions in any market we simply say it is imperfect market or monopolistic market. Price-Output Determination Under Monopolistic Competition : In perfect competition demand curve is perfectly elastic due to large number of sellers and homogeneous good. While in monopoly the demand curve is downward sloped and which is relative in elastic due to single sellers. FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
But in Monopolistic competition these is large number of sellers but goods are differentiate. So they can make there sell more by advertising and make them self. Prominent but not able to change much higher price due large number of seller. i.e. Why the demand curve is downward sloped in Monopolistic market and relatively elastic. Firm's Equilibrium Price and Output: In short run monopolist firm may get super normal profit or may be in losses. Equilibrium Price and Output In Long run under Monopolistic Competition In Monopolistic market all firm shows no profit and no loss in order to avoid the entry of new seller. If they show profit in long run new seller may losses. Qs. What is Oligopoly? What are the causes of oligopoly? How do price and output determined oligopoly? Oligopoly: Oligopoly is the market which there is a few or small numbers of firms an industry and they produce the major share of the market. Characteristics of Oligopoly are 1. Few or small number of seller (may be 4,3,2) 2. Homogenous good (like cement) 3. Bearer to entry. Causes of Oligopoly: Due to some causes oligopoly are 1. Economics of Scale: If some firm have potential of improved technology and getting economics of its production than other who use old techniques to suffer in the market and may exit so many firms left due to economics of scale. 2. Barrier to Entry: Some firms have control over the raw material used in production or they get ownership for the raw material so there is a bearer created for new firms. Merger: If few firms merge with each other. Mutual Interdependence: Firms watch each other price and mutually decide or set the prices. Price and Output Determination Under Oligopoly: There is not a single theory which exactly explains the pricing and output divisions under oligopoly. The reason for that are: 1. Goods Produced may not be standardized 2. Oligopoly firms sometime mutually fire there price but some times at independently. 3. There is some bearer to entry of new firm which is impossible some times. Qs. Differentiate between Laws of Return and Laws of return to scale? Laws of Return: When we generally talk about change in input and as result or in return output will also change we deal in Laws of Return. There are few laws of returns 1. Law of variable proportion 2. Law of Constant returns 3. law of Increasing return 4. Law of Diminishing returns 5. Law of cost 1. Law of Variable Proportion: As we change the variable factor of production and keeping the factors constant than first average and marginal output will increase but after more addition of that factor marginal output will tries to decline and we rich at the stage where marginal output is at maximum while marginal output is equal to zero and further increase in FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
output cost a negative impact (marginal output will negative) 2. Law of Constant Return: When the percentage output is equal to percentage change return to output is called constant marginal return. 3. Law of Increasing Return: When the percentage change in input is less than percentage change in return to output is called increasing marginal return. 4. Law of Diminishing Return: When the percentage change in input is greater than percentage change in return to output is called diminishing marginal return. 5. Law of Cost: If we increase the cost of production output will may increased and if we decrease the cost of production output will may decreased. Laws of Return to Scale: When we consider only our change of scale (means change all factor of production) and got a return as an output. These are called Return to Scale. There are three laws of return to scale: 1. Constant return to scale 2. Increasing return to scale 3. Decreasing return to scale 1. Constant Return to Scales: When we double our scale of input and as result or in return scale of output will also is exactly double then we said we got a Constant Return to Scale. For Example: Suppose we increase one labor and on knitting machine from one labor and one knitting it means we double our scale of production while in return output goes to four from two means we got a constant return to scale because scale of input = scale of output. 2. Increasing Return to Scale: If we double our scale of input and as result or in return output will be more than double that is called increasing return to scale. Due to increase in scale of output from got economics to scale. Suppose we increase two labor and two knitting machine from two labor and two knitting it means we double our scale of input as in return output goes to 10 from 4 means we got on increasing return to scale because Scale of Input < Scale of Output 3. Decreasing Return to Scale: When we double our scale of input and as result or in return we got increase in output less than double and that is called decreasing return to scale. Due to less that double scale of output our cost will increase and that is called diseconomies to scale. For Example Suppose we increase Z labor and Z knitting machine from 2 labor and 2 knitting. It means we double our scale of input as in return output goes to T from A means we got on decreasing return to scale. Qs. Define Indifference Curve? OR Explain the main characteristics or properties of Indifference Curve? OR What are the consumption of Indifference Curve? Give their properties? The concept of ordinal utility implies that a consumer is able to compare the different level of satisfaction. He can judge satisfaction derived from a good or a combination of these is equal to greater than or less than another we can simply say. He is in position to rank his preferences the difference curve analysis is based upon what is called preference indifference hypothesis. The consumer is assumed to be in a position to indicate his preference or indifference between various combination of goods. Suppose we go in the market to purchase A,B,C, and D and we like A more than B that is FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
said we prefer or indifference A to B similarly if we prefer C and D than we indifference C to D. Utility derived by the combination of these goods rather in this combination we prefer A to B or B to A. Now consider a consumer who wants to buy apples and mangoes. He does not purchase them as bifarily. If he likes mangoes than apples than he prefer mangoes to apples or if he like apples than mangoes he will prefer apples to mangoes. The consumer obtains much total satisfaction (total utility) from 11 apples and one mango and from 8 apples and 2 mangoes and other combinations. But that satisfaction is same in a combination. Properties of Indifference Curve: We note the few properties of indifference curve. 1. An Indifference Curve Slopes downwards to the right It is because when consumer decides to have more units of one of the two goods he will reduce the number of the units of the other goods. If he will remain on the same indifference curve than his level of satisfaction remain same. If we see that preference of mangoes increase which shows indifference curve sloping downwards from left to right. As our hypothesis that consumer is at the same level of satisfaction because he is on the same indifference curve. Now if we see at point A, B, C we see from A to B consumer increase quantity of both good which is not possible so indifference curve never be sloped upward to right. Indifference Curve is always sloped. Which show prefer of consumer at one good to another. 2. Two Indifference Curve Never cut Each Other Our hypothesis is that consumer is at same level of satisfaction that is IC, Now suppose two Indifference curve intersect each other. As we see that Point A is at higher Indifference Curve IC2 which shown he get higher satisfaction. Similarly at point he is cut lower Indifference Curve IC1 which shows he get less satisfaction point he get same satisfaction of IC1 and IC2 which is practically not possible because our hypothesis is that consumer get same level of satisfaction. It is proved that Indifference curve never intersect each other. Indifference Curve are convex to the origin: Convexity means we use more and more of good X and Y less and less of good Y. The marginal rate of substitution of x for y goods falling. As we see that the marginal rate of substitution (MRS) of many for apples falls while the MRS of mangoes for apples remains constant and MRS of mangoes for apples increase which is not happen in general. Hence it is proved that Indifference Curve is convex to the origin. Qs. Write short notes on Marginal Rate of Substitution OR What is Marginal Rate of Substitutions? Explain the Law of Diminishing Marginal Rate of Substitution? Marginal rate of Substitution (MRS) shows how much of one commodity is substituted for how much of another MRS is an important tool of indifference curve. As we see that when our consumer has 15 apples and no mangoes he will prepared to forgot 4 apples for 1 mango and yet remain at the same level of satisfaction. FAM Star Photo Shop Pakora Stop Qasimabad

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In his second combination he will be prepared to accept 4 apples for the loss may be defined as the amount of apples that is scarified for obtaining one mango or it may also be defined as the amount for the loss of one mango so that he may remain at the same level of satisfaction. In Hick's Word We may define Marginal rate of Substitution of X for Y as the quantity of Y. Which would just compensate the consumer for the loss of the marginal unit of X. It's a common observation that as we come to have more and more of one good, we shall be prepared to forgo less and less of the other. It is simply says that MRS of good X for good Y will falls as we have more of x and less of Y which we see clearly in other combination and get ratios (3 : 1, 2 : 1, 1 : 1) Qs. How Consumer reaches equilibrium? OR Explain how a consumer can maximize his total satisfaction out of his limited resources.? OR Analyze the equilibrium of a consumer spending a given amount of money income on two commodities with a fixed price ratio? OR Explain the law of diminishing marginal rate of Substitution? OR Show that a consumer is in equilibrium when the MRS between two commodities becomes equal to their price ratio? The Consumer is said to be in equilibrium when he affairs the maximum possible satisfaction from his purchases given the prices in the market and amount of money he has for making purchase for consumer equilibrium position we have to consider following assumption. our consumer indifference map or scale of preference remains same throughout the analysis. Price of goods in the market is give and constant. He has a given and constant amount of money to spend on the goods and if he does not spend it on one goods be must spend it on the other. Each of the goods is homogenous and divisible. The consumer acts rationally means he tries to maximize his satisfaction. His income and the relative prices of the two goods for purchasing so equilibrium must on same at same point. Price Income line AM contains all the possible opportunities of combining the two goods that are opportunities to our hypothetical consumer that why this line also called price opportunity line. At point P consumer reaches at equilibrium at this point he buys OP of mangoes and OH of apples. Point p lies in Il3 which shows consumption highest indifference curve he can't go more. Any point other than P gives less satisfaction to consumer. Thus at point P So the necessary conditions for equilibrium are Price line must be tangent to indifference curve.

Indifference must be convex to origin.

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Qs. Explain the Macro and Micro analysis in Economics? OR Distinguish between Micro and Macro Economics and show their inter-dependence? OR Define Micro Economics and discuss its importance and limitations Economics? Allocations of scar resources in order to get maximum satisfaction is called economics. Economics is further divide into two parts. 1. Micro Economics 2. Macro Economics Micro deals with individual single or particular consumer, producer, firm, industry or Market. While Macro deals with as whole like National income, employment level etc. Micro Economics is called Price Theory and Macro Economics is called Income theory. Price theory explains the composition or allocation of total production. Qs. Income theory explain the level of total production and why the level of total production and why the level rises and falls. Micro Economics: In economics micro means single, individual or particular. Micro Economics means deals with single, Individual or particular consumer produce or Market etc. In conducting economics analysis, micro economics approach is on micro basis, generally an assumption of full employment in the economy as whole is made. Importance of Micro Economics: Micro Economics has both theoretical and practical importance. From the theoretical point of view it explain the function of a free intense economics it tells as how consumer and producer take the decision for million of goods and services to consume and produce. It tells us how goods and services distributed among them. It explain the determination of the relative prices of various goods and services. For Practical importance micro economics helps in the formulation of economics policies calculated to promote efficiency in production and welfare of the masses. In professor Lerner's words Micro Economics theory facilities the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified model of behaviors. Limitation of Micro Economics: Micro Economics has same limitations. A. It cannot give an idea of the functioning of the economy as whole. B. It assume fall employment which is rare phenomena, it is therefore, an unrealistic assumption. Macro Economics Or the Theory of Income and Employment: Macro Economics deals as whole such as National Income employment, saving investment, total consumption, price level. Macro Economics deals also with how an economy group. It determines the chief economic development and the various stages and process of economics growth. Study of macro economics is very important to get proper view of an economy. Limitation of Macro Analysis: If has limitation of its own: A. Individual is ignored altogether. B. The Macro analysis over looks individuals difference for instance the price level may be stable but the prices of food grains may have gone up. FAM Star Photo Shop Pakora Stop Qasimabad

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C. While speaking of the aggregate it is also essential to remember the nature compound and structure of the components. Need for Integrating Macro and Micro Economics: Micro and Macro Economics can't give adequate way to analysis the working of the economics system. So if we wish to get solutions of our main economics solution we should have to integrate the two approaches. We apply proper Integration of the Micro and Macro approaches because there are few macro problems which have no micro elements involved and few micro problems that are without macro aspects. Conclusion: Thus if proves that subject matter of economics includes price theory (or micro economics), income and employment theory (macro economics) and growth theory. Simply we can say economics is a study of economics system under which men work and live. Qs. Define National Income. OR Distinguish Between Following 1. Gross national Income and Net National Income. 2. National Income at Market Price and National Income at factor cost. 3. Net National Income at factors cost and Net Domestic Income at factor cost. 4. Personal Income at factor cost. 5. Personal Income and Disposable Income. National Income According the can economist Colin Clark: The national income for any period consists of the money value of the goods and services becoming available for consumption during that period. According to Pigou. National Income is that part of the objective income of the community including income derived from abroad which can be measured in money. Thus, National Income is the aggregate factor income (i.e. earnings of labor and property) which arise from the current production of goods and services by the nation's economy. The concept of national income has three interpretations: 1. Receipt Total 2. An expectative Total 3. A Total Value of Production over the course of one year. The various concepts of national income are given below. A. Gross National Product (GNP) B. Net National Product (NNP) C. Personal Income (PI) D. Disposable Income E. National Income at factor Cost Gross National Product (GNP) According to Camsell GNP is defined as the total value of all final goods and services produced in a country in one year. We can say that GNP represents the total market value of all final goods and services produced by factors of production located with in nation's border during a year. Problem in Measuring (GNP) In calculating GNP welfare some problems. 1. Stress on final output: The value of only those good are added in GNP which are in their FAM Star Photo Shop Pakora Stop Qasimabad

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final stage of production and are available for consumption for e.g. Table made of wood is the final product while w and is primary good. 2. Value added method: In order to avoid pitfall of double or multiple counting is to calculate only the added value of a particular commodity at its every stage of production. (Suppose the price of your note book is 20Rs, but this include the cost of paper, printing and sending GNP will be same in both case but if we include again the cost of paper and sending etc it will double. 3. Non-Productive Transactions are excluded from GNP: We should exclude non-productive transaction like a student got money from his father. 4. Other Transactions: There are few other transaction which are not included in GNP. for example A person working in their own house holds without any payment through the market. Using the expenditure approach the main components of GNP are as under. i. Consumption Expenditure. (C): All goods and services bought by house holds are grouped together consumption. ii. Gross Private Investment. (I): This includes investment expenditure by firms or sole properties on capital goods. iii. Government Expenditure. (G): Government Expenditure on durable and non-durable goods and services is including. iV. Net exports: Difference between export and import (X-M) Mathematically GNP Can be Defined as GNP = C + I + G + (X-M) B. Net National Product (NNP):Net National product or national income at market prices is the net market money value of all the final goods and services produced in a country during a year GNP at market price depreciation = NNP at market price Mathematically NNP = C + G + (Net I) + (X-M) OR NNP = GNP - Depreciation Depreciation means value of goods deceive years by year Defloration of the machinery is named as depreciation. C.National Income at Factor Cost: National Income (NI) or National Income at factor cost is the aggregate earnings of the four factor of production (Land, Labor, Capital and Organization) which arise from the current production of goods and services by nation's economy. The major component of NI are 1. Compensation of employees (wages, salaries, commission etc) 2. Proprietors income 3. Net income from rentals and royalties. 4. Net interest (excess of interest payments of domestic business system over its interest receipt and net interest relieved from abroad) D. Personal Income (PI): Personal income is the sum total of all incomes actually received by all individuals or house holds during a year. IF consists of wages, salaries, Interest and rent etc by all household. Mathematically, PI = NI - (corporate profits, social security, tax corporate taxes) + transfer payment. Transfer Payment, A payment for which no productive service is made like old age pension, social security payment etc. FAM Star Photo Shop Pakora Stop Qasimabad

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E. Disposable Personal Income (DPI): DPI is the amount which is left will the individuals after paying the taxes to a government i.e. DPI = Personal Income - Personal Taxes OR DPI = Consumption + Saving. Qs. What are the different methods of measuring National Income or Gross National Product (GNP)? Point out the difficulties facing the measurements of GNP? Method of Measuring National Income: Production of goods and services give rise to income and income gives rise to demand for goods and services. Demand gives rise to expenditure and expenditure give rise to further production of goods. Thus there is a certain flow of product income and expenditure. National Income cane be measured by three ways. 1. Product Method (value added method) 2. Income Method 3. Expenditure Method 1. Product Method (Value Added Method): Product method is also called value added method or national income at market price method. Which is measure in two ways? i. Final Product approach. ii. Value added approach i. Final Product Approach: If represents the flow of production or value of all final goods over a one year with in the country. ii. Value Added Approach: Under this method the economy is dividing into different sectors such as Agriculture, manufacturing, commerce, transport, banking etc. So the GNP is measured by adding net value at each stage. Precautions: The precautions to be avoided are 1. Excluding non market goods and services like father teaching his sons. 2. Depreciation allowances to be set. Depreciation is subtracted from GNP. 3. Deduction of indirect taxes, Govt Charges, which is on commodity for sale. 2. Income Method: It measures the total payments made to house holds in the production of final goods and services during a year. GNP is the sum of following types of income. i. Rental Income earned by individuals for the use of their real effects such as land, building, royalties received from copyrights etc. ii. Wages include income of employees. iii. Net Interest get from business. iv. Profit get by the firm. v. Depreciation is a cost of production. vi. Indirect business taxes. Precautions: We do not include the such thing which have no meanings like father giving his son money for education but we include a labor wages in GNP. 3. Expenditure Method: In this method GNP is measured as total spending on final goods and services produced within a country during a year. The spending are i. Consumption Expenditure (C): The households spend their income on consumer durables such as Car, furniture. ii. Non-Durable Goods: Such as foods, clothing and services. iii. Investment (I) FAM Star Photo Shop Pakora Stop Qasimabad

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iv. Government Expenditure (G) Net Export (X-M) So GNP is GNP = G + I + G + (X-M) Precautions: 1. Final expenditure only include not intermediate expenditure. 2. Property Income received from abroad should be included in GNP. Difficulties in the Measurement of National Income : These difficulties are, 1. Non-Availability of statistical material For some services it is difficult to know the exact amount received like tutors, income services given in spare time. These are difficult to find out so not include in GNP. 2. The Danger of Double countings The cost of the commodity is likely to counted twice or multiple of it is not taken carefully. 3. Difficulty in assessing the depreciation allowance, accidental damages, repair and replacement charges. If need higher level of Judgment to asses depreciation allowance. 4. Non-Market Service Like tuition centre, exclude from GNP. 5. Housing Rent of House ----> Include from GNP Purchase of House ----> Exclude from GNP 6. Transfer earning exclude from GNP like relief allowance, pensions. 7. Self Consumed Production Like we use other or friends goods. 8. Income from foreign firms (foreign firms invest in the country) Problems of Measurement Under-Developed Countries : The national income under developed courtiers like Pakistan cannot be measured accurately due to. i. Self Consumed bartered consumption Some transaction which is not include money like exchange of goods. (Agriculture) are not add in National Income. ii. No systematic accounts maintained. iii. No occupational Classification iv. Unreliable data. Qs. Define Circular flow of income in a two sector economy. What factors influence the size of National Income. Circular Flow of Income In a Two Sector Economy: We suppose that there are only two sectors in the economy. A. House Hold B. Business Sector i. The business sector hire the factors of production owned by the household sectors and it is the sole producer of goods and services in the economy. ii. House hold sector are buyer and purchase from business sector. iii. Business Sectors sells entire output to house hold sector. iv. There are no saving and investment in the economy. v. House hold earn income from business sector. vi. Business sector earn income from house hold sector. vii. The economy is closed economy means no international trade. viii. No inter-action of Government. FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Determinants of National Income: There are many factor which influence the size of national income. 1. The stock of factors of Production: GNP depends on quantity and quantity of the country's stock of production. The factors of production are land, labor capital and organization. 2. labor: Size of national income depends on quantity and quantity of labor in the country. 3. Capital: Its very important that how much capital is on for a firm if firm is large and capital is less than GNP is decline. 4. State of Technical Knowledge: Its technology and technical workers are good, than national income increase. 5. Political Stability: GNP increase if a country have political stability. Qs What are the main causes of inequalities of income? Suggest measures to reduce inequality? OR What are the main causes of inequality of income in a modern society? Discuss role of taxation policy in reducing this inequality? Inequality of Income Distribution: A country much have to ensure that its income evenly distributed not only increase. Inequality of income is main feature of capitalist economics. The socialist countries like communist china have established system whose aim is to reduce inequalities of incomes. Causes of Inequality: Causes of inequality of income are 1. Inheritance: Some person born with a silver spoon and they got lots of money and property after death of their parents. While some are born in poor family and they got burden of payback of his parents after death so this system of inheritance causes inequality. 2. System of Private Property: Under this system a person is free to earn, free to save and free to own property. First a men earns and acquires property and then his property starts earnings (Rent from house) 3. Difference in Natural Qualities: Some peoples are gifted than other so they do work hardened efficiently than other and makes the inequality. 4. Difference In Acquired Talents: A child may bear intelligent but if he is not lucky enough to receive proper education then his ability remain undeveloped. 5. Family Influence: Here in Pakistan and India family contacts make a lot of difference to what people earn. Unskilled person got a good job from the contacts of relative, friends and other. 6. Luck and Opportunity: Some people luckily got good chance and they avail it. Measures To Reduce Inequality: In order to reduce inequality of income we have some suggestions. 1. Fixing Minimum Wages : Fixing minimum wages will level up the incomes from below. 2. Social Security: By giving social security person get large benefits whose income low. These are free education, free medical, pension, insurance etc. 3. Equality of Opportunity: Some thing may be to done to eliminate the family influence in the matter of choice of profession (example Govt give scholarship) 4. Steeply Gradded Income Tax: By including taxes way may prevent some extent from rich persons. These taxes are super taxes, excess profit tax, and capital gain tax. 5. High Taxes on luxuries: Govt may put high taxes on luxuries of life which poor person can FAM Star Photo Shop Pakora Stop Qasimabad

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be afford. 6. Sleep Death Duty, Succession Taxes and Estates Duty: Government should have to impose taxes on generation to switching of estate. Conclusion: We can reduce inequality but cannot remove. Consumption Function and the Multiplier Qs. What is Consumption function? How is it determined? OR Explain the term "Propensity to consume" Bring out the functional between Consumption and Income? OR Distinguish between average propensity to consume and marginal propensity to consume and show that A. MPC < 1 B. MPC declines as income rises and C. Propensity to consumes generally stable? In the Keynession System, employment depends on effective demand which in the form of consumption demand and investment demand. If demand increase for consumption of commodity the investment increase and so employment level increase. A high propensity to consume is favorable to employment. Consumption function is also called propensity to consume. Consumption means amount spent on consumption at a given level of income. Consumption function or propensity to consume means the whole of schedule showing consumption expenditure at various level of income. * 1 Factors Influence Consumption * 2 Average and Marginal Propensity to Consumer * 3 Limitation of the Multiplier Concept * 4 Autonomous and Induced Investment * 5 Concept of Marginal Efficiency of Capital (MEC) * 6 Factors On Which Investment Depends. * 7 Factors Effecting MEC * 8 Equilibrium Not Necessary at Full Employment * 9 Investment * 10 Saving * 11 Saving and Investment Equality * 12 Are Savings and Investment Always Equal Factors Influence Consumption : These factors are 1. The real income of the individual. 2. His Past savings. 3. Rate of interest. Income play a major role in order to influence consumption function. Past saving are very small and for specific purpose like contributions to social security (Pension etc). Rate of interest encourage some people save more to earn a higher rate of interest. Average and Marginal Propensity to Consumer: The r/s between income and consumption is measured by the average and marginal propensity to consume. APC = C / Y [Where C --> Consumption and Y --> Income] APC is the ratio of consumption and income where MPC = /\ C / /\Y FAM Star Photo Shop Pakora Stop Qasimabad

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MPC is the rate of change in consumption to the change in income. The normal r/s between income and consumption is such that income rises, consumption also rises, but by less than the rise in come. Qs. Examine the meaning, working and importance of the multiplier in keynession theory of income and employment OR What is "Marginal Propensity to Consume"? Show how multiplier depends on the magnitude of the MPC? MPC shows r/s between a given rise in investing and the resulting change in income. Suppose we invest 100Rs, so we expect more than that as additional income. We spend some amount from additional income and save the rest income. Additional spending depends on their MPC. Now we suppose MPC is 3/4. Then they will spend 75 Rs and save 25 Rs. If the MPC is stable the series of consecutive expenditure becomes. /\(income) Y = 100 + 100 x (3/4) + 100 x (3/4)2 + 100 x (3/4)3 => /\Y = 100 [1 + (3/4) + (3/4)2 + (3/4)3 + ......] We see that an initial primary investment of 100 Rs gives rise to an increase of 40 Rs in the National Income. The investment Multiplier measures the r/s between an increase in income caused by a primary increase in investment Investment Multiplier = /\Y / /\I In our case, Multiplier = 400/100 = 4 Multiplier is given by the following formula Multiplier = I / I - MPC * If MPC = 4/5 than Multiplier is 5 * If MPC = 9/10 than Multiplier is 10 But * If MPC = 1 than Multiplier is infinite this shows a little increase of investment will load automatically a full employment. * If MPC = 0 than Multiplier = 1 shows increase in investment is equal to increase in total income. Limitation of the Multiplier Concept: The factors which tends to reduce multiplying effect are called "Leakage". The various limitation of multiplier are 1. MPC Not Constant: MPC is assumed constant in keyness concept of multiplier so that mps will necessarily be constant. Keyness ignore the possibility of leakage. In dynamic economy MPC or MPS never be constant. 2. Debit Cancellation: If people use a part of new increment in income to repay their add debts instead of spending on further consumption. 3. Purchase of Old Stock and Securities: If new income is spent on buying on buying old stock, shares and securities, consumption will be less and multiplies in respect will be low. 4. Net Imports: If import is greater than export than if means outflow of funds to foreign courtiers. 5. Price Inflation: If the price of goods increase mpc will automatically increase. Instead of all above problem, Multiplier have very importance in economics and for economics policy. Its play a vital role as an instrument of income. Qs. Distinguish between autonomous and introduced investment on what factors investment depend? FAM Star Photo Shop Pakora Stop Qasimabad

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OR What is meant by "Investment"? and what do you understand by introduce to invest. Discuss the factors which govern the inducement to invest in a capitalist economy? In the keynessian system employment depends upon effective demand. Effective demand should be constitute of investment and consumption. Investment mean addition to stock of capital to the nations like building of new factories, new machines etc. Autonomous and Induced Investment: Autonomous Investment is done by Govt. for promoting peoples welfares as under plan developed. Induced investment is made by the people as a result of change in income level or consumption. Concept of Marginal Efficiency of Capital (MEC): It has very importance in macro economics. When ever an enterprise makes a certain investment in his business, he first looks into the marginal efficiency of capital. What return he is going to certain from the given investment. MEC is the expected rate of profit of a new capital asset. Lets suppose, we invest 10,000 Rs on purchase of new machine. The net return of this machine is expected to Rs. 1000 per annum, The MEC will be 1000/10000 x 100 = 10% Show the ratio of expected annual return. Factors On Which Investment Depends: Investment depends on 1. MEC 2. Rate of Interest 1. MEC: The MEC is the expected annual rate of return on an additional unit of a capital good. According to Keynels The MEC is the rate of discount which makes the present value of the prospective field from the Capital asset equal to its supply price. MEC is -vely shoped. 2. Rate of Interest: As the investment increases the rate of interest also increase so MEC decline. Factors Effecting MEC: MEC is influenced by short run as well as long run factors. These are A. Short Run Factors i. Demand for the Product. ii. Liquid Assets. iii. Sudden changes in income. iv. Current rate of investment. B. Long Run Factors i. Rate of Growth of Population ii. Technological Development iii. Rate of Taxes.

Qs. What is "Effective Demand"? How it influence the determination of level of employment and income in an economy? Discuss OR FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Explain the Keynessian Theory of Income and Employment. According to Keynessian employment is a function of income, the greater the level of national income the volume of employment keeping other factors constant in short run. i.e. Capital, Technology, Quality of Labor are constant. So in the absence of changes in these constant the total output of goods and services cannot be expanded without increasing employment. The level of both income and employment depends on the Aggregate Demand and Aggregate Supply. The intersection of Aggregate Demand curve and Aggregate supply curve shows equilibrium level of income and employment. Keynessian emphasize on Aggregate Demand (AD) which is depends upon the total expenditure of the consumer on consumption goods and of enterprise on investment goods. Consumption depends upon the size of the consumer income and propensity to consume investment demand is determined by the MPC and the rate of interest. It depends upon fixture expectations of enterprise regarding the future yields from the goods. Investment Demand = Distance between C and C + I C + I ---> Aggregate Demands E ---> Shows the Equilibrium level of income and employment OY ---> level of income at Equilibrium point E. Equilibrium Not Necessary at Full Employment : It is clear that this equilibrium E between AS and AD may not be achieved at full employment and income. The equilibrium will established at full employment income only when investment demand is sufficiently large to fill the saving gap between the income and consumption correspondence to full employment. Qs. When Aggregate Demand equals Aggregate Supply or Saving equals investment equilibrium level of national income is determined? Prove? OR Equilibrium level of national income is determined by the intersection of savings and investment schedules. Discuss? Equilibrium level of income and employment is established at that level at which AD = AS. It has also been seen that AD = AS when the investment spending is equal to then amount savings. If Income Investment < Saving It means AD would not be sufficient to take the AS of output of the market so bringing reduction in output income and employment at level in which investment spending. If Given Level of Income Intended Investment < Intended Savings The enterprise will not be able to sell the entire output at given prices. So they intend to reduce output so the level of income and employment will reduced. Qs. According to Keyness, Saving-Investment Equality is a basic condition of equilibrium. Discuss? OR FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Are Saving and investment in an economy always equal? If not how can this condition be brought about? OR What do you mean by Saving and Investment? Investment: According to Keyness Theory, Investment means not addition to the stock of capital goods like machinery, equipment, factories etc. It also include Inventories that why Investment term is different from Capital. Saving: Saving means that amount which a man saves out of income after his expenditure so, saving means the income which is not consumed. Saving and Investment Equality: A controversial question always in mind that is Saving and Investment are equal? According to Keyness No, but it only possible when they reach in equilibrium position. According to Keyness The national Income is derived from the production and Scale of A. Consumer's good and B. Investment goods. i.e. Income = Consumption + Investment => Y = C + I ...... i Another look at income is Income = Consumption + Saving Y = C + S ...... ii So, By comparing these two eq. we get C+S=C+I => SC saving > I (investment) Are Savings and Investment Always Equal According to Keyness Economics: They must be always equal But we got that is not happen always. By realizing all of there we get realized or actual saving and investment always equal but intended or expected savings and investment may differ. But it also equal at equilibrium level of income. Qs. Describe the Salient Feature of Islamic Economic System? * 1 Islamic Economic System * 2 Salient Features of Islamic System * 3 Conclusion * 4 The Concept of Zakat * 5 Assessment of Zakat * 6 Beneficiaries of Zakat * 7 Economic Significance / Importance of Zakat * 8 Comparison of Islamic Economic System with other Economic System * 9 Conclusion FAM Star Photo Shop Pakora Stop Qasimabad

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Economics
Islamic Economic System: Capitalism, Communism and Mixed Economics system has purely a materialistic approach in which human social life has no importance. But in Islamic System The followers of Islam are required to lead a material life in such way that it becomes a source of happiness and respect of others in this world for making secure himself for next world. Islamic Economic System consist of institutions, organizations and the social values by which natural, human and man made resources are used to produce, exchange, elistribute and consume wealth? goods and services under the guiding principles of Islam to achieve "FALAH" in this world and also other it. Salient Features of Islamic System: Main characteristics of Economic System of Islam are. 1. The Concept of Private Property 2. Consumption of wealth 3. Production of wealth 4. Distribution of wealth 5. The concept of Zakat 6. Interest free Economy 7. Economic Growth 8. Responsibilities of the Government. 1. The Concept of Private Property: Basic Principles in Islam for Consumption or Investment of private property are * Concept of "HALAL" and "HARAM" for earning or in production and consumption of wealth. * A property cannot be used against public interest. * Show much as you have something. * Real/money Capital cannot be used for gain. * Payment of Zakat is compulsory. 2. Consumption of Wealth: In Islamic System uses of luxuries are not allowed because it against the concept of "TAQWA" should have distinguished between "HALAL" and "HARAM"."BUKHAL" and "ISRAF" are to be avoided. 3. Production of Wealth: Price mechanism plays a key role in carrying out the production process in an Islamic Society. As Price system results in the expectations of workers and consumers the Govt. Interferences with the price mechanism to over come the problem. These things are not allowed in Islamic System. * Production of drugs, gambling, lottery, music, dance etc. * Lending and borrowing on interest * Black marketing, Smuggling etc. 4. Distribution of Wealth: Islamic Economics System favor fair (not equal) distribution of wealth in the since that it should not be confined to any particular section of the society. For fair distribution of wealth Islam gives following steps * "BUKHAL" and "ISRAF" are to be avoided. * Payment of Zakat * Interest not allowed * Monopoly of Private firm not allowed * Earning from Black Market. 5. The Concept of Zakat: Zakat is a major source of revenue the government in an Islamic state. It levy on all goods and money or on wealth if have to pay yearly on the month of FAM Star Photo Shop Pakora Stop Qasimabad

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RAJAB or RAMADAN. 6. Interest free Economy: The whole financial system the bank structure in particular is run on the basis "SHARAKAT" and "MUZARABAT" in Islamic state. Therefore, Islamic economics is an interest free economy. 7. Responsibility of the Government: Responsibility of the Islamic Government are 1. Should Check un Islamic activity like gambling, smuggling, black marketing etc. 2. Should secure poor people by giving them necessity of life i.e. food, clothing, health etc. 3. Should provide equal employment opportunity. 4. Social and Economic Security is required to guaranteed by the Govt. Conclusion: An Islamic Setup provides a graceful economic and social life. it distribute the wealth in all family. Qs. Explain the importance of Zakat in the process of Distribution of wealth in Islamic State? The Concept of Zakat: Zakat has two meanings in Arabic i. That which purifies ii. That which causes growth. i. That Which Purifies: This indicates that Zakat purifies the human soul by keeping a person away from illegal source of earning, eliminating the love for materialism and overcoming the sense of pride for being wealthy. ii. That Which Causes Growth: This means that ALLAH protected the wealth from which Zakat had been paid and in the way the peace of mind of the person who pay Zakat. In economics technically Zakat defined as: Zakat is a "transfer payment" which Sahib-e-Nisab Muslim pay to poor given rate in the month of RAJAB. Assessment of Zakat: 1. Sahib-e-Nisab Muslim: A Muslim who owns and keeps his/her possession at least 7 1/2 total gold of 52 1/2 total silver or cash money to the equivalents value is considered a Sahibe-Nisab Muslim. 2. Exposed and Unexposed Wealth: Zakat is paid from two types wealth i.e. exposed (e.g. Business, Salary, and goods) and Unexposed (e.g. gold, silver, cash money etc) 3. The Rate of Zakat: If paid on at least 7 1/2 total golds or 52 1/2 total silver or the equivalents value of cash, goods, salary etc. i. The rate of Zakat is 2 1/2 of total value of (cash, goods, salary, building etc) ii. The rate of Zakat is 10% for the Agricultural Produce of land. Beneficiaries of Zakat: Beneficiaries of Zakat are 1. The Poor. Those people who are below than Sahib-e-Nisab. 2. The Needy. They are the people who are unable to earn their living e.g. handicapped disabled, unemployed person. 3.The Converts. Those who convert to Islam have right to get Zakat. 4. The Debtors. Those who heavily indebted can get zakat to repay their Zakat. 5. Mujahideen. Zakat can also be given to Mujahideen. It is clear that Zakat is a source of financial assistance to the poor and needy to become economically independent. Economic Significance / Importance of Zakat: 1. Fair Distribution of Wealth: Islam does not permit that the wealth is distributed in few hands. Therefore people have to pay 2 1/2 % Zakat to poor. FAM Star Photo Shop Pakora Stop Qasimabad

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2. Elimination of Class Conflict: Zakat makes the poor obliged and thus the problem of class conflict does not arise at all. 3. Economic Stability: Zakat promotes the velocity of Calculation of money due to which aggregate demand for goods and services increases. This determines the lives of investment, income and employment on stable footing. Hence an Islamic economy is always stable. 4. Social Security: Zakat fund not only covers the poor and the disabled but it also provides social security to the unemployed who may later on prove to be valuable assets of the nation. 5. Discouragement of Anti-Social Activities: Zakat which is paid from (rizq-e-halal) stop Muslims from anti social activities like smuggling etc. 6. Social Welfare: Hospitals, schools, and handicrafts for the poor can be constructed by making use of the zakat fund. 7. Self Reliance: Zakat enables peoples to take care of each others needs. 8. Control of Crimes: The Major causes of crimes particularly the poverty of people. This can be overcome by paying Zakat regularly. Zakat decrease the crime rate. Qs. In what respect Islamic Economic System is superior to Capitalism and Socialism. Discuss? OR Discuss the basic principles of Islamic Economic System and compare it with Capitalism? Comparison of Islamic Economic System with other Economic System : Islamic Economic System possesses the character of both capitalism and socialism and it is free from their evils. Following are the comparison of Islamic state with others. 1. Distinguishing Characteristics: Capitalist says "Economic Freedom" to producers and Consumers. Communism says Economic Equality achieved through state ownership of the means of production. The distinguish characteristics of an Islamic System is "Economic and Social Justice" so that every body gets his / her due. 2. The Concept of Private Property: In a Capitalist system unlimited liberty and right of ownership for private property is given which has resulted in the capitalist exploitation of workers. Islam allows the right of private ownership and freedom of enterprise in limited capitalism but not leave the property for the long period. 3. Consumption of Wealth: In Capitalism any thing can be consumed while a communist society only consumer goods and services which are allowed to be produced in the country. In Islamic Country only "HALAL" are allowed to be produced and consumed "HARAM" goods and services are not allowed to be produced and consumed. 4. Production of Wealth: Capitalism motive is only profit they produced goods for only profit. In communist society central plan authority made decision what to produce and how much to produce. But in Islamic System only have to produce "HALAL" goods and "HARAM" goods like alcohol drink, drug etc are not allowed. 5. Distribution of Wealth: In Capitalism concentration of wealth is goes on few hand due to unlimited right of ownership and free competition. In communism system dicta for ship is created due to concept of private property. In Islamic System, Due to "ZAKAT" and "SADQAT" automatically wealth transfer to poor from rich. 6. The Role of Interest: The interest made brings equal between saving and investment to FAM Star Photo Shop Pakora Stop Qasimabad

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promote, capital formation in a capitalist society. In communism, interest does not pay any role for saving and investment. In the Islamic system interest based economic activities are strictly banned. Hence interest is not a source of capital formation in an Islamic. Conclusion: We conclude that Capitalist and communist are materialistic in nature and they only looking for to satisfy the material wants of the people. But Islamic economic system provides a fine blend of materialism and spiritualism.

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