Islamic Economic System

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 distinguish 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, lotery, music, dance etc.
• Lending and borrowing on interest
• Black marketing, Smuggling etc.

4. Distribution of Wealth
Islamic Economics System favour fair (not equal) distribution of wealth in the sence 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 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 necassity 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 Sahib-e-Nisab Muslim.
2. Exposed and Unexposed Wealth
Zakat is paid from two types wealth i.e. exposed (e.g. Bussiness, Salary, and goods) and Unexposed (e.g. gold, silver, cash money etc)
3. The Rate of Zakat
If paid on atleast 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.
Beneficiares of Zakat
Beneficiares 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, unemployees person.
3.The Converts. Those who convert to Islam have right to get Zakat.
4. The Debtors. Those who heavily indebbed 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.
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 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 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.

Consumption Function and the Multiplier

Qs. What is Consumption function? How is it determined? OR
Explain the term “Propersity to consume” Bring out the functional between Consumption and Income.
OR
Distinguish between average propersity to consume and marginal propersity to consume and show that A. MPC < 1 B. MPC declines as income rises and C. Propersity to consumeis generally stable.
In the Keynession System, employement 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 propersity to consume is favourable to employment.
Meaning
Consumption function is also called propersity to consume. Consumption means amount spent on consumption at a given level of income. Consumption function or propersity to consume means the whole of schedule showing consumption expenditure at various level of income.
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 incourage some people save more to earn a higher rate of interest.
Average and Marginal Propersity to Consumer
The r/s between income and consumption is measured by the average and marginal propersity to consume.
APC = C / Y [Where C --> Consumption and Y --> Income]
APC is the ratio of consumption and income where
MPC = /\ C / /\Y
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 Propersity 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 icrease 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 necassarily be constant. Keyness ignor the possibility of leakager. In dynamic economy MPC or MPS never be constant.
2. Debit Concellation
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 coutries.
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?
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 nation’s 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 shortrun 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
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 Labour 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 equilibirium level of income and employment.
Keynessian emphasise 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 propersity to consume investment demand is determind 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 Equilibirium level of income and employment
OY —> level of income at Equilibirium point E.
Equilibirium Not Necassary at Full Employment
It is clear that this equilibirium E between AS and AD may not be achieved at full employment and income. The equilibirium will established at full employment income only when investment demand is suffeciently 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 equilibirium level of national income is determined? Prove.
OR
Equilibirium level of national income is determined by the intersaction of savings and investment schedules. Discuss

Equilibirium 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 equilibirium. Discuss
OR
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 machinary, equipment, factories etc.
It also include Inventories that why term Investment 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 equlibirium 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 realised or actual saving and investment always equal but intended or expected savings and investment may differ. But it also equal at equilibirium level of income.

National Income

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 Dispossible 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 labour and property) which aries from the current production of goods and services by the nation’s economy.
The concept of national income has three interpretations:
1. Reciept Total
2. An expectiture 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. Dispossible 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 wefare some problems.
1. Stress on final output
The value of only those good are added in GNP which are in their 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 excluded 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 include.
iv. Net exports
Differnce 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 dective years by year Defortion of the machinary 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, Labour, 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 royalities.
4. Net interest (excess of interest payments of domestic bussiness system over its interest reciept and net interest reieved from abroad)
D. Personal Income (PI)
Personal income is the sum total of all incomes actually recieved 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.
E. Dispossible Personal Income (DPI)
DPI is the amount whihc 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 divide 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. Exluding non market goods and services like father teaching his sons.
2. Depreciation allowances to be set. Depreciation is substracted 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 recieved from copyrights etc.
ii. Wages include income of employees.
iii. Net Interest get from bussiness.
iv. Profit get by the firm.
v. Depreciation is a cost of production.
vi. Indirect bussiness taxes.
Precautions
We do not include the such thing whihc have no meanings like father giving his son money for education but we include a labour 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 spendings 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)
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 recieved from abroad should be included in GNP.
Difficulties in the Measurement of National Income
These difficulties are,
1. Non-Availibility of statistical material For some services it is difficult to know the exact amount recieved 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, accidential damages, repair and replacement charges. If need higher level of Judgement to asses depreciation allowance.
4. Non-Market Service Like tution centre, exclude from GNP.
5. Housing
Rent of House —-> Include from GNP
Purchase of House —-> Exclude from GNP
6. Transper 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 coutries like Pakistan cannot be measured accuratly 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 acounts 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. Bussiness Sector
i. The bussiess 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 bussiness sector.
iii. Bussiness Sectors sells entire output to house hold sector.
iv. There are no saving and investment in the economy.
v. House hold earn income from bussiness sector.
vi. Bussiness sector earn income from house hold sector.
vii. The economy is closed economy means no international trade.
viii. No inter-action of Government.
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, labour capital and organization.
2. labour
Size of national income depends on quantity and quantity of labour 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 whos 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 giffed than other so they do work hardered efficiently than other and makes the inequality.
4. Difference In Acquired Talents
A child may born intelligent but if he is not lucky enough to recieve 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, capital gain tax.
5. High Taxes on luxuries
Govt may put high taxes on luxuries of life which poor person can 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.

Micro and Macro Economics

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 theoritical and practical importance. From the theoritical 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 consfussion of billions of facts by constructing simplified model of behaviours.
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.
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.

Indifference Curve

Indifference Curve

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 said we prefere or indifference A to B similarly if we prefere C and D than we indifference C to D.
Utility derived by the combination of these goods rather in this combination we prefere 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 prefere mangoes to apples or if he like apples than mangoes he will prefere apples to mangoes.
The consumer abtains as 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 prefere 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 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.
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 sacrified 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 componsate 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 foryo 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)
Consumer Equilibirium
Qs. How Consumer reaches equilibirium?
OR
Explain how a consumer can maximise his total satisfaction out of his limited resources.?
OR
Analyse the equilibirium 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 equilibirium when the MRS between two commodities becames equal to their price ratio
The Consumer is said to be in equilibirium 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 equilibirium position we have to consider following assumption.
Our consumer indifference map or scale of preference remain same throughout the analysis.
Price of goods in the market are 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 maximuze his satisfaction.
His income and the relative prices of the two goods for purchasing so equilibirium 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 equilibirium at this point he buy 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 necassary conditions for equilibirium are

• Price line must be tangent to indifference curve.
• Indifference must be convex to origin.

Consumer Behaviour

The Cardinal Utility Analysis of Consumer Behaviour The Theory of consumer behaviour can be explained with basic approaches.
1. The Cardinal Approach
2. The ordinalist approach
Cardinal believes that utility can be measured. While believes that utility is not measurable.
The Theory of Consumer Behaviour
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 equilibirium point.
A point from where consumer is not like to change his decision unless the price of the commodities or his income change.
Utility Analysis
Meaning of utilitys
The power of a commidity of satisfy a human want is called its utility. For Example Clothes has 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
A. 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)
B. 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.
C. 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.
D. Introspection Method
The Cardinalist school assumes that the behaviour 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 behaviour.
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 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. Hie goes to market and buy a glass of sweet water. The glass of water gives him immense pleasure or say 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 moro use of product the lesser will be the utility.
Assumption of the law
Assumption of law of diminishing utility are:
1. Rational behaviour 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 does 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 Equilibirium 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 equilibirium a firm under conditions of monopolistic competition.
Monopolistic Competition is a market situation in which there are relatively large number of small firms which produce or sell similar but not identified commodities to the customers. It is different than perfect and monopoly market therefore refer as imperfect market. (e.g. soal 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.
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 Equilibirium Price and Output
In short run monopolist firm may get super normal profit or may be in losses.
Equilibirium 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 are a few or small number 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 return
3. law of Increasing return
4. Law of Diminishing return
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 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 be exaclty double then we said we got a Constant Return to Scale.
For Example: Suppose we increase one labour and on knitting machine from one labour 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 labour and two knitting machine from two labour 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 diseconomics to scale.
For Example Suppose we increase Z labour and Z knitting machine from 2 labour 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.

Monopoly

Monopoly

Qs. What is Monopoly? Explain how prices is 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 Discremination
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 fix 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 equilibirium. When MR = MC
Similarly, Monopoly firm get equilibirium when there MR = MC and they set there price when MR = MC.
E —-> Equilibirium 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 equilibirium
OPP’M —-> Total revenue
OTLM —-> Total cost
Profit = OPP’M – OTLM = TPP’L
Monopoly Price and Elasticity of Demand
A very important point about equilibirium of monopolist is that the equilibirium 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 equilibirium of firm is determined under monopoly?
As we knows 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 equilibirium exist when MR = MC = AR but under monopoly for equilibirium MC = MR < AR price.
Equilibirium is MR = MC < AR shows Monopoly charges higher prices and less output. In short run under Monopoly there are three possible cases.
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 have certain preferences or prejudice mean get higher from upper classes. Price discrimination also occur if one consumer do not known that other consumer pay less than him.
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.
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 elasticities of demand in different market must be different monopolist divide these buyer into two categories in two different market. T
hese 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 equilibirium?
Price Determing 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 produced 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 equilibirium following condition must be satisfied. Marginal cost of total output combined revenue marginal MR1 in MR + A = MR2 in MKT B
= CMR