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DEFINITION
NATURE
AND
SCOPE OF ECONOMICS

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DEFINITION OF ECONOMICS
Economics is social science, which is concerned with the efficient use of scarce resources
to achieve the maximum satisfaction of economic wants. A basic understanding of
economics is essential for well-informed people. Most of today’s political problems have
important economic aspects. What level of taxes should we have? How can we make
social security retirement program financially secure? How can we increase rate of
economic growth? How can we reduce poverty? How can we ensure that companies
directors act in the long-run interest of their shareholders and not just for themselves? As
citizens & voters we can influence decisions of our elected politicians in responding to
such questions, therefore, a sound grasp of economics is very helpful to all of us.

An understanding of basics of economic decision-making and the operation of economic

system enables businessmen to increase profit. The businessman who understands when
to use new technology, when to merge with another firm, when to expand employment,
and so on, will be in a position to earn more profit. Economics helps consumers and
workers make better buying and employment decisions. How can we spend our limited
income to maximize our satisfaction? Is it more economical to buy a car on cash or to
take it on lease? Should we use credit card or pay cash; and which occupation we should
adopt that pays us well?

Economics is part of social sciences, which include sociology, psychology and political
science. It is a study of how people make choices to satisfy their wants. Whenever an
individual, a firm, or a nation faces alternatives, a choice must be made and economics
helps us to study how those choices are made, for example, if we have to choose how to
spend our limited income, how much of our firm’s limited funds to spend on advertising
and how much to spend on new product’s research. In economics we examine situations
in which individuals can choose how to do things, when to do things and with whom to
do them. Ultimately the purpose of economics is to understand choices.

ADAM SMITH
Adam Smith was a professor at University of Glasgow. He wrote his book, ‘An enquiry
into the Nature and Causes of Wealth of Nations’ in 1776 (231 years ago). Adam Smith
argued that if producers were free to seek profits by providing goods and services then
the‘ invisible hand’ of market forces would ensure that right goods services were
produced. He explained concept of Price System. He divided this book into four main
chapters, production, consumption, exchange and distribution. To him Economics is a
science of wealth and one of the great objects of political economy of every country is to
increase wealth and power of that country. According to Adam Smith rights of private
property and wealth are natural and moral rights. He emphasized on profit motive and
said that ‘it is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner but from their regard to their own interest’ and that interest is profit.
Adam Smith was in favor of accumulation of wealth and free trade policy. He finally
defines economics as: Economics is a study of causes of Wealth of Nations.

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Adam Smith’s main task was to develop a framework for understanding the
mechanism through which the seemingly chaotic hubbub of daily trading actually
resulted in a natural order. He believed that trade in unregulated markets would
maximize wealth of nations.

ALFRED MARSHALL
Alfred Marshall was a professor at University of Cambridge. He wrote his book
‘Principles of Economics’ in 1890 (117 years ago). Marshall has emphasized on material
welfare of an individual. He says that ‘Economics is a study of mankind in ordinary
business of life. It examines that part of individual and social action which is most closely
connected with attainment and with use of material requirements of well-being.’ It
enquires how man gets his income and how he uses it. Thus to him economics is mainly
concerned with material welfare of an individual. Marshall was able to show how value is
partly determined by marginal utility of a good and how intensity of want decreases with
the units acquired. He was able to explain how luxuries like diamonds have a higher price
than essential goods like water, because consumers have few diamonds while water is
plentiful. He gave concept of consumer’s surplus, elasticity of demand and laws of return
He said that industries would experience reducing costs and prices due to Economies of
Scale by greater specialization.

Supply, demand, elasticity, utility, equilibrium, short run, and long run reflect on the
astonishing fact that these concepts originally were presented by Alfred Marshall.

LIONEL ROBBINS
Lionel Robbins was a professor at University of London. He wrote his book ‘Essay on
Nature and Significance of Economic Sc ience’ in 1932 (75 years ago). According to him
economics is science, which studies human behavior as a relationship between ends and
scarce means, which have alternative, uses. Ends means wants of human beings, which
are unlimited whereas resources to satisfy them are limited. Scarce resources have
alternative uses; therefore, choice making becomes essential. A person fulfills that desire;
first, which is more important to him. Robbins emphasized that, ‘Economics is a science
which studies human behavior as a relationship between ends and scarce means which
have alternative uses’. His main emphasis is on the following points: -

1 Human desires are unlimited.

2 All desires are not equally important.
3 One desire can be fulfilled by alternative means.
4 Resources are limited.
5 Resources can be utilized for different purposes.
6 Economics is a scientific subject

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J. M. KEYNES
Keynes was a professor at University of Cambridge. He wrote his book ‘General Theory
of Employment, Interest and Money” in 1936. The Depression of 1930 had affected
national economies of the world. In United States, real GDP declined by 40 percent and
unemployment rate rose to 25%. Other nations experienced similar impacts and cyclical
unemployment continued for a decade. Keynes explained why cyclical unemployment
could occur in a market economy. He pointed out that not all income is spent in the same
period that it is produced. Investment expendit ure is volatile. A substantial decline in
investment will lead to insufficient total expenditure. Unsold goods will accumulate in
firm’s warehouses and firms will reduce their output and remove workers. A depression
will result and widespread cyclical unemployment will occur. He said that recessions or
depressions are not likely to correct themselves. He argued that government should play
an active role in stabilizing economy. Keynesian economics is macro economic analysis
that leads to the conclusion that a capitalistic economy is characterized by macro
economic instability for which fiscal policy and monetary policy can be used to promote
full employment, price level stability and economic growth.

Classical economists said that laissez-faire policy of govt. is best. Keynes said laissez-
faire capitalism brings widespread unemployment. In his view active govt. policy is
required to stabilize economy and to prevent valuable resources from standing idle.

ECONOMIC GOALS
Economic policies are made to achieve following economic goals.

1----ECONOMIC GROWTH
It means to produce more better goods and services and to develop a higher standard of
living of the people.

2----FULL EMPLOYMENT
To provide suitable jobs for all citizens who are willing and able to work.

3----ECONOMIC EFFICIENCY
To achieve maximum fulfillment of wants, using available productive resources .

4----PRICE LEVEL STABILITY

To avoid large upswings and downswings in general price level that is, avoid inflation
and deflation.

5----ECONOMIC FREEDOM
To guarantee that businesses, workers and consumers have a high degree of freedom in
their economic activities.

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6----EQUITABLE DISTRIBUTION OF INCOME

To ensure that no group of citizens faces poverty while most others enjoy abundance of
wealth.

6----EQUITABLE DISTRIBUTION OF INCOME

To ensure that no group of citizens faces poverty while most others enjoy abundance and
prosperity.

7----ECONOMIC SECURITY
To provide for those who are disabled, chronically ill, aged, laid off from jobs or
otherwise unable to ear minimum levels of income.

8----BALANCE OF TRADE
To seek reasonable overall balance with countries of the world, in international trade and
financial transactions.
ECONOMIC POLICY
Economic policy and economic analysis are closely related. All economic policies are
adopted on the basis of economic theories. The creation of policies to achieve specific
goals is not a simple matter. Therefore following points should be kept in mind before
framing any economic policy.

1----STATE THE GOAL

First step is to make a clear statement about economic goal. If we say that we want full
employment, do we mean that everyone between, 16 & 65 years of age should have a
job? Or do we mean that everyone who wants to work should have a job? Or should we
allow for some unemployment caused by inevitable changes in structure of industry and
workers voluntarily changing job? Therefore goal must be specific.

2----DETERMINE POLICY OPTIONS

Next step is to formulate alternative policies to achieve the goal and determine the
possible effects of each policy. This requires a detailed assessment of economic impact,
benefits, costs and political feasibility of alternative policies. For example, to achieve full
employment, should govt. use fiscal policy (which involves changing govt. spending and
taxes), monetary policy (which entails changing interest rates), an education and training
policy that enhances worker-employment or a policy of wage subsidies to firms, which
hire disadvantaged workers?

3-----IMPLEMENT AND EVALUATE POLICY THAT WAS SELECTED

After implementing policy, we need to evaluate how well it worked. Only through
unbiased evaluation we can improve on economic policy. Did a specific change in taxes
or money supply alter level of employment to the extent predicted? Did deregulation of a
particular industry (for example, electricity) yield the required beneficial results? What
were harmful side effects? How might the policy be altered to make it work better
Economic Policy is the strategies and measures adopted by govt. to manage economy as a

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means of achieving its economic objectives. In general terms, govts are concerned with at
macro level, securing full employment, price stability, economic growth and balance of
payments equilibrium and at micro level an efficient use of resources. In practice, given
complexities of economy and its exposure to international influences, the simultaneous
achievement of all these objectives is virtually impossible, so that a degree of prioritizing
is required. Inevitably, political and economic considerations will influence this process.

In nutshell at macroeconomic policy level, Govts can use various general measures,
operating in mixed economies to achieve their objectives, including Fiscal Policy (the
change in tax rates and govt. expenditure), Monetary Policy (control of money supply
and interest rates), Prices and Incomes Policies (controls on costs & prices) and
management of Exchange Rate which influences country’s external trade & payments
position. These policies are augmented at a more specific level by measures designed for
industrial investment, research and development and to protect consumers’ interests.

ECONOMIC METHODOLOGY
Economics like other social sciences has two aspects, firstly theoretical aspect, which is
concerned with the framing of economic laws and principles, and secondly, practical
aspect which is concerned as to how principles of economics can be implemented and
how these theories can be made useful in practical life of a man. Economic theories are
developed in somewhat the same way as theories are developed in other sciences.
Economists observe economic events, attempt to find patterns in them, formulate theories
about them, test their theories and finally apply them. These steps are discussed below: -

1---OBSERVATION OF FACTS
First job of an economic theorist is to observe events about which a theory is to be made.
In natural sciences such observations may be made easier through use of controlled
experiments in laboratories but in economics collecting relevant data or facts is difficult.
Economists would not create a depression in economy just to understand causes and
effects of depression. The historical data regarding economic phenomena are collected by
govt. agencies and are available to economic researchers. Some data are available from
business firms and chambers of commerce and industry.

2----FORMULATING THEORY
Economists try to find consistent relationships in data, which they collect. They might
ask for example, Does a decline in price of a product usually increase in quantity
purchased of that good? The facts surrounding any single economic event are so
numerous that it is virtually impossible to list all of them. For example we cannot analyze
all facts connected with a single depression..

Economic theorists try to cope with this situation by first analyzing facts that they believe
are most likely to be relevant to a specific economic event. They then look for patterns in
data. For example they might see that people’s consumption expenditures usually

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increase when their income increases. From such patterns, economists formulate an
economic theory, which explains a certain type of economic event. An economic theory
is a generalization based on a variety of facts about why or how an economic event
occurs. Theory is a generalization because it explains how economic variables generally
behave when certain conditions exist.

3----TESTING THEORY
Once a theory has been formulated it must be tested to see if additional data are
consistent with it. Testing process is frequently most difficult aspects of economic
theorizing because it is hard to set up controlled experiments in laboratories. Law of
demand states that if price of a product falls, quantity of its demand will increase, as long
as all other things remain the same. But even in case of a price decrease for a specific
product it is often difficult to keep other things constant. For example, price of a
competing product may also fall or personal incomes of consumers may fall at the time
when price decrease is in itiated. In either case the effect of both changes may actually be
a decrease in quantity purchased.

4----APPLICATION OF ECONOMIC THEORY

Once an economic theory has been accepted as valid we can use it to predict outcomes of
specific economic events .For example, law of demand states that as price of a product
falls quantity demanded of the product rises. We would presume that if price of shoes
falls, people would buy more shoes.
DEDUCTIVE METHOD
Ricardo, Malthus, and Marshall used deductive method in their theories. This method is
less time consuming and less expensive. In this method reasoning precedes from ‘general
behavior’ to ‘particular behavior’ for example a generally perceived truth or principle
forms the beginning point of reasoning and then an Economist considers particular facts.
If result of his finding is against his primary assumed facts, he declares it as False and if
it agrees with his primary facts then he declares it as True. Suppose if we accept general
proposition that man prefers a greater gain to a lesser gain, then we can conclude that Mr.
Atta, will work for a maximum profit or gain because he is a human being.

If we observe that with increase in price of a good, many sellers are producing and
supplying that product in the market for having a greater profit, it is a general phenomena
therefore, we can conclude from this general situation to a particular and specific law that
is, law of supply, which says with increase in price of a product, there will be more
supply of goods and wit h fall in price there will be less supply of goods. Main steps,
which are adopted for deductive method, are:

1 Perception of problem to be investigated

2 Defining terms and making assumptions
3 Deriving generalizations
4 Verification of hypothesis (a theory which is to be proved)

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INDUCTIVE METHOD
In inductive method, economic generalizations are derived on the basis of experiences
and observations. It insists on examination of facts and then laying down general
principles. In it we move from ‘particular’ to ‘general’, for example if we observe that
Mr. Atta is buying more mangoes because the price of mangoes has gone down, Mr.
Karim is buying more mangoes due to fall in price and Mr. Fareed is also buying more
mangoes due to fall in price of that good, all these activities of buying mangoes in the
market are general phenomena and after observing this situation in the market, we can
draw a conclusion that with fall in prices of a product its demand increases and with rise
in price its demand decreases. This makes a famous law of demand of economics.

Inductive means to proceed from general observation towards law.

Deductive means to proceed from law towards general observation.
In nutshell inductive & deductive both methods are needed for economic
analysis as right and left feet both of them are needed for walking.

ECONOMICS AS A SCIENCE
Economics, like other social sciences, make little use of laboratory methods in which
changes in variables can be explained in controlled conditions. Economists usually have
to examine what has already happened in the past in the real world in order to test their
theories. If a simple model can explain observed behavior repeatedly, it has some value,
for example, law of demand explains cause and effect relationship between price and
demand for a good. With the fall in price (cause), demand of a good increases (effect) and
with rise in price of good, its demand decreases. All economic laws have similar cause
and effect relationships.

Economics is not an exact science because it depends upon economic behavior of a man
and behavior of a person is very complex and unpredictable. Economics is a social
science, which is concerned with proper use and allocation of resources for the
achievement and maintenance of growth with stability. In Economics for analyzing facts
we move step by step. We firstly, collect facts, (secondly), we very analyze these
collected facts, (thirdly), we put these facts under suitable classif ications and (fourthly),
we discover general theories governing these facts.

ECONOMICS AS AN ART
Science is a theoretical aspect whereas Art is a practical aspect. In economics we study
consumption, production, public finance etc, which provide practical solutions to our
daily economic problems. Study of cause and effect of inflation or deflation falls within
the purview of science but framing appropriate and suitable monetary and fiscal policies
to control inflation and deflation is an art.

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Lionel Robbins used the word science for Economics. He says Economics is a science,
which studies human behavior as a relationship between ends and scarce means that have
alternative uses. Economists on Continent of Europe have emphasized Art side of
economics and have pointed out the great practical utility of Economics. According to
Keynes study of fiscal & monetary measures and their application to solve problems of
unemployment, depression, and inflation etc for promoting welfare of human being
makes economics an art.

Economics is a science light-giving in its methodology

and an Art, fruit-bearing in its application.

POSITIVE ECONOMICS
Positive Economics or positive science or positive analysis describes facts of an economy.
It describes theories and laws to explain observed economic phenomena. It avoids value
judgment, tries to establish scientific statements about economic behavior and deals with
what the economy is actually like. It is the analysis of facts and behavior in an economy or
‘the way things are’ for example, there is inequality of income in economy of Pakistan.
This simple statement is called Positive Economic analysis. Robbins said that functions of
Economics are to explore and explain and not to advocate and condemn the things.

NORMATIVE ECONOMICS
Normative economics or normative analysis in volves value judgments about what, how
and for whom of an economy. It looks at the desirability of certain aspects of economy. It
embodies subjective feelings about what ought to be. In nutshell we can say that positive
economics describes facts while normative economic s evaluates facts. There is general
unemployment in Pakistan. It is a fact and therefore it is positive analysis. There should
not be general unemployment in Pakistan. It is a value judgment/opinion and tells what
ought to be, hence, it is a normative analysis. Whenever words such as ‘ought’ or
‘should’ appear in a sentence there is a chance that normative economics is being
discussed.
MICRO ECONOMICS
Microeconomics is that part of economic analysis which studies decisions of individuals
and firms in economy. It is microeconomics that tell us how a free market economy with
its millions of consumers and producers work to decide about allocation of productive
resources among thousands of goods and services. It tells us how goods and services
produced are distributed among various people for consumption through price
mechanism. It is like looking through a microscope to focus in small parts of economy. In
it we study demand of one consumer for a good and from there we go to derive market
demand for that good. In microeconomics we study following issues.

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1 Individual consumer’s behavior.

2 One product’s price
3 One individual consumer’s demand and his income
4 Study of individual firm’s location, cost, revenue, and profit
5 Remuneration of individual factors of productions

While conducting economic analysis on micro basis we assume that in economy there is
full employment. Microeconomics explains how consumers and producers take their
decisions regarding allocation of productive resources among various goods and services.
How through market mechanism goods and services produced in economy is distributed
and how prices of goods and remuneration of factors of production is determined.

MACRO ECONOMICS
It is primarily concerned with the behavior of economic system as a whole and in its
totality. In using aggregates, it seeks to obtain an overview or general outline of the
structure of economy and the relationships of major aggregates. It deals with economy-
wide phenomena such as changes in unemployment, general price level & national
income etc. Macro analysis is helpful in understanding the functioning of economic
system because one individual’s economic study is not helpful for framing any policy,
hence whole economy’s study and its analysis is important. It deals with the following: -

1 National income and national output.

2 Balance of Trade and Balance of payments.
3 External value of money (Foreign exchange).
4 Savings and Investment relationship.
5 Employment and economic growth
6 Fluctuations in national income /Trade cycles in economy
7 Fiscal & Monetary policies.
8 General Price level
9 Aggregate output & aggregate supply of goods & services

BLENDING MICRO AND MACRO ECONOMICS

There is blending of microeconomics and macroeconomics in modern economic theory.
Modern economists are increasingly using microeconomic analysis—the study of
decision-making by individuals and by firms--- as the basis of macroeconomic analysis.
They do this because even though in macroeconomic analysis aggregates are being
examined, those aggregates are made up of individuals and firms. Consider an example.
Some economists believe that reducing income tax rates will lead to greater total output.
Why? Because, using microeconomic analysis, they predict that individuals will respond
to lower income tax rates by working longer, taking fewer vacations and taking on
second jobs and using the extra take-home pay to buy more goods and services.

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In Microeconomics we examine the sand, rocks and shells and not the beach.
In Macroeconomics we examine the beach, not the sand, rocks, and shells.
Microeconomics is concerned with choice making processes of individuals & firms,
whereas Macroeconomics focuses on performance of economy of country as a whole.

SCARCITY AND CHOICE

Scarcity is not a shortage. Scarcity occurs among poor and rich alike. Economics is a
study of how scarce resources can be used to satisfy our wants. Scarce resources are raw
materials, energy and labor etc. that can be used to produce goods and services in the
economy to satisfy human wants and needs. Scarcity is a relative term. A product may be
available in small quantity but if no one has any use of this product then it is not scarce.
In the same way there may be too much stock of sugar, wheat, rice and clothes in the
country even then these items are called scarce because demand for sugar, wheat, rice and
clothes is greater than their supply. It is demand in relation to supply of a good and not its
quantity alone that determines whether a particular product is scarce or not.

Scarcity means limited means and resources to satisfy human wants. Since resources
/means are limited at the disposal of an individual or nation, choices are necessary.
Economic activity lies in individuals’ utilization of scarce resources that have alternative
uses for satisfaction of individual or nation’s wants. As all demands cannot be met with
limited resources, an individual will make a choice and will fulfill that demand first
which is more important to him. So is the case with a nation as a whole. An easy
example of the problem of choice is a person’s decision about how to allocate his time.
As the old saying goes. There are only 24 hours in a day, if we take off 8 hours for a
night’s sleep this leaves 16 hours to be allocated among all other possible activities that is
(1) working at job (2) studying course books (3) playing cricket (4) watching TV etc.
Each person must make choices as to how much of his limited available time, 16 hours,
will be spent on his each possible activ ity.

Scarcity means that we do not and cannot have enough income or wealth to satisfy our
every desire. Scarcity exists because human wants always exceed what can be
produced with the limited resources and time that nature makes us available

PRICE MECHANISM
Price Mechanism or price system or market economy is an economic system in which
relative prices constantly change to reflect changes in supply and demand of different
goods. Prices of commodities are signals to every one within the system as to what is
relatively scarce and what is relative abundant. It is the signaling aspect of price system
that provides information to buyers and sellers about what should be bought and what
should be produced.

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CHARACTERISTICS OF PRICE MECHANISM

1 What and how much should be produced?

2 How should it be produced?
3 For whom goods are to be produced?
4 Determination of money income.

1----WHAT AND HOW MUCH TO PRODUCE?

In a price system interaction of demand and supply for each good determines as to what
and how much to produce. If highest price that consumers are willing to pay for a good is
less than the lowest cost of production, then output will be negligible or zero.

2---HOW TO PRODUCE?
A firm can use various combinations of labor and capital to produce the same amount of
output. In price system, the least cost combination technique is chosen because it
maximizes profit. Firms using this technique will be able to offer for sale their goods at a
lower price and will make profit. Lower price will induce consumers to shift their
demand from high priced goods to low priced goods. Inefficient firms will be forced to
go out of business and firms will close their inefficient business and will induce
consumers to shift their demand from high priced goods to low priced goods.

3----FOR WHOM GOODS ARE PRODUCED?

In a market system, choices about what is to be produced are made by individual firms,
but their this choice is determined by distribution of money incomes in the society. Those
people who will have higher income , they would demand different commodities than
those who have less income. Those consumers who are able to pay the price of good can
obtain it, otherwise poor people like Mr. Atta who cannot afford, will not have burgers of
McDonald’s. The only thing that he can do is a Window- shopping.

4---DETERMINATION OF MONEY INCOME

When a person is selling his labor services then his money income is based on his wages,
which he can get in labor market. If a person owns land and capital then rent of land and
interest of his capital will determine his ability to buy consumer goods. If his income
from wages, interest and rent is less then his demand for goods will be less.

ECONOMIC WANTS
Economic wants means desire for goods and services. The attempt to satisfy wants forms
the basis of all economic activity. Wants are expressed in market not by desire but by
willingness and ability to actually purchase goods and services. A desire of a person
cannot become want unless and until he has money to purchase and is also willing to give
away money for that good. Economic wants are fulfilled by consumptions of goods and
services. These wants are classified into the following:

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1---Necessities of life are basic needs of a person, without out which life is not possible.
These include ordinary food, clothing and shelter.
2---Comforts of life make life easy and comfortable. These wants increase efficiency of a
person. These wants include vitaminized food, comfortable bed & transport facilities.
3---Luxuries of life are neither necessary nor they increase efficiency of a person. These
wants are for pomp and show and for mental satisfaction of a consumer. These wants
include an expensive car, a big bungalow, and costly jewellery etc.

CHARACTERISTICS OF ECONOMIC WANTS

1---WANTS ARE UNLIMITED

Economic wants are unlimited, after fulfilling one want another want comes up, hence
there is no end to them.

2---WANTS ARE REPEATED

Wants once fulfilled, never ends, they are repeated again and again. Wants to fulfill
hunger, thirst and clothing keeps on repeating.

3--WANTS COMPETE WITH EACH OTHER

Some wants are felt urgently than others. Some of them cannot be postponed while others
can be postponed. An individual will fulfill his that want first, which is more pressing and
important to him.

4---WANTS CAN BE FULFILLED BY ALTERNATIVES

Some wants can be fulfilled with the use of alternative goods, for example eating rice;
bread or fruits can satisfy our want of hunger.

PUBLIC GOODS
Public goods have zero marginal cost i.e. they could be provided or their benefit could be
extended to additional consumers without incurring further cost. These are those goods to
which principle of rival consumption does not apply. These goods can be consumed by
many individuals simultaneously at no additional cost and with no reduction in quality or
quantity of good. National defense, police protection and legal system for example are
public goods. If you partake of them, you do not take away any one else’s share of those
goods. A Smallpox vaccine, a drop of polio, street light & similar Govt. projects are
examples of public goods.

CHARACTERISTICS OF PUBLIC GOODS

1-----Public goods cannot be produced or sold very easily in small units. More and more
people at no additional cost can use public goods. Once money is spent on national
defense, the defense protection received by one person does not reduce the amount of
protection of another person.

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2-----Additional users of public goods do not deprive other peoples right of any of the
services or the goods. If one person turns on his television set, his neighbors do not get
weaker reception of TV program.

3-----No one can be excluded from benefits of a public good, even though a person has
not paid for it. A very poor person does not pay any tax, yet he cannot be denied benefits
of Govt. hospitals and police protection. Public goods cost of extending the service to an
additional person is zero and it is impossible to exclude individuals from enjoying them.

4-----Public goods are ones whose benefits are indivisibly spread among the entire
community, whether the individuals desire to purchase the public good or not.

QUASI RENT
Alfred Marshall gave this concept. According to him some factors of production may be
in relatively price-inelastic supply in short-run but more ela stic supply in long-run and
thus may earn temporary economic rents until supply is able to adjust fully to meet the
demand. Economic rent accruing to such factors of production is called Quasi rent and it
tends to disappear in long-run as supply catches up with demand. For example, in the
case of particular types of work where a lengthy training period is required, a sudden
increase in demand for such work would enable persons already possessing appropriate
skills to secure large quasi rents through high wage rates.

Quasi Rent arises on land whose supply is fixed, it also arises on building, machinery and
highly technical labor and whose supply become short for the time being but in long run
supply of which can be increased. Quasi rent is a temporary surplus and with the increase
in supply of these factors, rent becomes normal.

GIFFEN GOOD
It is a good for which quantity demanded increases as its price increases. It only applies
in highly exceptional case of a good, which accounts for such a high proportion of
household’s budgets that an increase in price produces a large negative income effect,
which completely overcomes the normal substitution effect. Sir Robert Giffen said that a
rise in price of bread makes so large a drain on resources of poor laboring families that
they are forced to curtail their consumption of meat and other more expensive food items
and bread being still the cheapest food item which these poorer families can get and will
take, they consume more and not less of it (that is bread). When price of bread rose, poor
people bought more bread and less more expensive foodstuffs.

Giffen goods are special type inferior goods. It absorbs a large proportion of consumer’s
income. Giffen good has two properties. Firstly it is an inferior good and secondly a
consumer is bound to spend a greater share of his income on such an inferior good. For
example a labor who is earning Rs.500 per month and if he spends Rs.300 on wheat,
when wheat is not only an inferior good as compared with rice but it is also a Giffen good

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because Rs.300 out of Rs.500 is major share of income which is being spent on wheat.
When the price of a Giffen good falls consumer purchase less of it.

Giffin goods are those goods for which demand decreases when their
prices decrease and demand increases when their prices increase.

INFERIOR GOOD
It is a good for which income elasticity of demand is negative that is as income increases
consumer purchases less of this good, because they can now afford to replace them with
other more desirable goods, for example people may reduce demand of potatoes and may
increase demand of mutton burgers. Likewise people may reduce demand of old/used
televisions and increase demand of brand new TV sets with the increase in their income.

Most goods for which demand rises when income rises are called Normal
goods but for some goods demand falls as income rises. These are called
inferior goods. In Pakistan demand for Dal-chana and other pulses falls
with increase in the income of consumer.

TRANSFER PAYMENTS
Transfer payments are expenditures of Govt. for which it receives no goods or services in
return. Such payments involve ‘transfer’ of income from one group of individuals (tax
payers) to other groups of individuals in the form of welfare provisions, for example,
unemployment allowance, social security benefit, old-age pensions to the retired govt.
servants etc Transfer payments are not made in return for goods and services therefore
they are not added in national income.

TRANSFER EARNINGS
It is a payment that a factor of production must earn to prevent its transfer to its next best
alternative use. Earnings that a factor of production receives over and above its transfer
earnings are called its Economic Rent. Suppose a Lecturer is presently earning Rs.5000
per month. In case he has to give up teaching and the next best alternative employment is
an accountant in a firm, which provides him Rs.4000 per month. Therefore, this amount
of Rs.4000 is transfer earnings. This is the remuneration that he will get on transfer to his
next best alternative employment as an accountant. This means that in his present
position as a lecturer, he must at least get Rs.4000 (his transfer earnings), otherwise the
lecturer will give-up his present position and will join the next best alternative
employment as an accountant. Transfer earnings are the minimum payments to be paid to
workers to induce them to stay in present jobs.
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