Scope of Economics
‘Scope’ means the sphere of study. We
have to consider what economics studies and what lies beyond it. The
scope of economics will be brought out by discussing the following.
a) Subject – matter of economics.
b) Economics is a social science
c) Whether Economics is a science or an art?
d) If Economics is science, whether it is positive science or a normative science?
a) Subject – matter of economics: Economics studies man’s life and work, not the whele of it, but only one aspect of it. It does not study how a person is born, how he grows up and dies, how human body is made up and functions, all these are concerned with biological sciences, Similarly Economics is also not concerned with how a person thinks and the human organizations being these are a matter of psychology and political science. Economics only tells us how a man utilizes his limited resources for the satisfaction of his unlimited wants, a man has limited amount of money and time, but his wants are unlimited. He must so spend the money and time he has that he derives maximum satisfaction. This is the subject matter of Economics.
a) Subject – matter of economics.
b) Economics is a social science
c) Whether Economics is a science or an art?
d) If Economics is science, whether it is positive science or a normative science?
a) Subject – matter of economics: Economics studies man’s life and work, not the whele of it, but only one aspect of it. It does not study how a person is born, how he grows up and dies, how human body is made up and functions, all these are concerned with biological sciences, Similarly Economics is also not concerned with how a person thinks and the human organizations being these are a matter of psychology and political science. Economics only tells us how a man utilizes his limited resources for the satisfaction of his unlimited wants, a man has limited amount of money and time, but his wants are unlimited. He must so spend the money and time he has that he derives maximum satisfaction. This is the subject matter of Economics.
Economic Activity:
It we look around, we see the farmer tilling his field, a worker is
working in factory, a Doctor attending the patients, a teacher teaching
his students and so on. They are all engaged in what is called
“Economic Activity”. They earn money and purchase goods. Neither money
nor goods is an end in itself. They are needed for the satisfaction of
human wants and to promote human welfare.
To fulfill the wants a man is taking efforts. Efforts lead to satisfaction. Thus wants- Efforts-Satisfaction sums up the subject matter of economics.
To fulfill the wants a man is taking efforts. Efforts lead to satisfaction. Thus wants- Efforts-Satisfaction sums up the subject matter of economics.
b) Economics is a social Science:
In primitive society, the connection between wants efforts and
satisfaction is close and direct. But in a modern Society things are
not so simple and straight. Here man produces what he does not consume
and consumes what he does not produce. When he produces more, he has to
sell the excess quantity. Similarly he has to buy a product which is
not produced by him. Thus the process of buying and selling which is
called as Exchange comes in between wants efforts and satisfaction.
Nowadays, most of the things we need are made in factories. To make them the worker gives his labour, the land lord his land, the capitalist his capital, while the businessman organizes the work of all these. They all get reward in money. The labourer earns wages, the landlord gets rent the capitalist earns interest, while the entrepreneur’s (Businessman) reward is profit. Economics studies how these income—wages, rent interest and profits-are determined. This process in called “Distribution: This also comes in between efforts and satisfaction.
Thus we can say that the subject-matter of Economics is
Nowadays, most of the things we need are made in factories. To make them the worker gives his labour, the land lord his land, the capitalist his capital, while the businessman organizes the work of all these. They all get reward in money. The labourer earns wages, the landlord gets rent the capitalist earns interest, while the entrepreneur’s (Businessman) reward is profit. Economics studies how these income—wages, rent interest and profits-are determined. This process in called “Distribution: This also comes in between efforts and satisfaction.
Thus we can say that the subject-matter of Economics is
- Consumption- the satisfaction of wants.
-
Production- i.e. producing things, making an effort to satisfy our wants
-
Exchange- its mechanism, money, credit, banking etc.
-
Distribution – sharing of all that is produced in the country. In addition, Economics also studies “Public Finance”
Macro Economics
– When we study how income and employment is generated and how the
level of country’s income and employment is determined, at aggregated
level, it is a matter of macro-economics. Thus national income, output,
employment, general price level economic growth etc. are the subject
matter of macro Economics.
Micro-Economic – When economics is
studied at individual level i.e. consumer’s behavior, producer’s
behavior, and price theory etc it is a matter of micro-economics.
c) Economics, a Science or an Art? Broadly
different subjects can be classified as science subjects and Arts
subjects, Science subjects groups includes physics, Chemistry, Biology
etc while Arts group includes History, civics, sociology Languages etc.
Whether Economics is a science or an art? Let us first understand what
is terms ‘science’ and ‘arts’ really means.
A science is a systematized body of knowledge. A branch of knowledge becomes systematized when relevant facts hove been collected and analyzed in a manner that we can trace the effects back to their and project cases forward to their effects. In other words laws have been discovered explaining facts, it becomes a science, In Economics also many laws and principles have been discovered and hence it is treated as a science. An art lays down formulae to guide people who want to achieve a certain aim. In this angle also Economics guides the people to achieve aims, e.g. aim like removal poverty, more production etc. Thus Economics is an art also. In short Economics is both science as well as art also.
A science is a systematized body of knowledge. A branch of knowledge becomes systematized when relevant facts hove been collected and analyzed in a manner that we can trace the effects back to their and project cases forward to their effects. In other words laws have been discovered explaining facts, it becomes a science, In Economics also many laws and principles have been discovered and hence it is treated as a science. An art lays down formulae to guide people who want to achieve a certain aim. In this angle also Economics guides the people to achieve aims, e.g. aim like removal poverty, more production etc. Thus Economics is an art also. In short Economics is both science as well as art also.
d) Economics whether positive or normative science: A
positive science explains ''why" and "wherefore" of things. i.e.
causes and effects and normative science on the other hand rightness or
wrongness of the things. In view of this, Economics is both a positive
and. normative science. It not only tells us why certain things
happen, it also says whether it is right or wrong the thing to happen.
For example, in the world few people are very rich while the masses are
very poor. Economics should and can explain not only the causes of
this unequal distribution of wealth, but it should also say whether
this is good or bad. It might well say that wealth ought to be fairly
distributed. Further it should suggest the methods of doing it.
Importance of Economics
The importance of economics is vital in every field because
1. Economics is informative - It teaches us many interesting and instructive factors about man's behavior when he is engaged in economic activity.
2. Economics brains the minds, Economic reasoning trains our mind.
3. It helps in understanding the economic system which is in functioning today.
4. It is very useful in any professions. It is helpful in banking, marketing, agriculture, and in industry. In other words who knows economics, he can achieve success in his field, economics he can achieve success in his field.
5. It is useful in solving the problems of poverty.
6. It is helpful to house holders and labour leaders.
7. It is also useful for good citizenship.
1. Economics is informative - It teaches us many interesting and instructive factors about man's behavior when he is engaged in economic activity.
2. Economics brains the minds, Economic reasoning trains our mind.
3. It helps in understanding the economic system which is in functioning today.
4. It is very useful in any professions. It is helpful in banking, marketing, agriculture, and in industry. In other words who knows economics, he can achieve success in his field, economics he can achieve success in his field.
5. It is useful in solving the problems of poverty.
6. It is helpful to house holders and labour leaders.
7. It is also useful for good citizenship.
Basic Economic Terms and Concepts
Many terms are used in ordinary speech
are also used in economics but they are used in a different sense.
Therefore it is essential to explain those terms not only for clear
thinking but also for correct understanding of the language used in
books on Economics. Following some terms which are frequently use in
economics have been explained in what sense they are used in Economics.
Goods: Any
thing that can satisfy a human want is called a ''good" in economics.
Goods may be commodity or services; they satisfy human wants which are
the starting point of all economic activity.
Kinds of Goods: The classification of goods cans be done in different ways as discussed below.
1) Economic goods and Free Goods:
Free goods are those goods that exist in such plenty that can be used as much as we like. They are gift of nature and used without payment e.g. Air, sunshine etc. with out payment e.g. Air, sunshine etc
The economic goods, on the other hand, are scarce and can be had only on payment. They are limited and generally man made and hence those can be available only on payment. In Economics, we are concerned with economic goods. Economic goods mean wealth. Thus there would have been no science of economics if all goods had been free goods. The distinction between free goods and economic roods, of course is not permanent, for instance air is free goods but when we receive it under fan it is economic goods.
Free goods are those goods that exist in such plenty that can be used as much as we like. They are gift of nature and used without payment e.g. Air, sunshine etc. with out payment e.g. Air, sunshine etc
The economic goods, on the other hand, are scarce and can be had only on payment. They are limited and generally man made and hence those can be available only on payment. In Economics, we are concerned with economic goods. Economic goods mean wealth. Thus there would have been no science of economics if all goods had been free goods. The distinction between free goods and economic roods, of course is not permanent, for instance air is free goods but when we receive it under fan it is economic goods.
2) Consumption Goods and Capital Goods:
Consumption goods are those which yield, satisfaction directly. They are used by consumer directly to satisfy the wants e.g. food, clothing, etc. (First order goods).
Capital goods are these goods which help us to produce other goods e.g. machinery, tools etc. They are also termed as second order goods. Similarly some goods especially raw materials are called as intermediate goods. For instance machinery fixed in factory is capital gods but the cotton used as raw material is intermediate goods. Thus, the consumption goods are also referred as consumer’s good while capital goods and intermediate goods are termed as producers goods.
Consumption goods are those which yield, satisfaction directly. They are used by consumer directly to satisfy the wants e.g. food, clothing, etc. (First order goods).
Capital goods are these goods which help us to produce other goods e.g. machinery, tools etc. They are also termed as second order goods. Similarly some goods especially raw materials are called as intermediate goods. For instance machinery fixed in factory is capital gods but the cotton used as raw material is intermediate goods. Thus, the consumption goods are also referred as consumer’s good while capital goods and intermediate goods are termed as producers goods.
3) Material Goods and Non - material Goods:
Material good are concrete in nature e.g. building, furniture, books etc.
While different services a human being is using called non material services. E.g. services of teachers, Doctor, advocate etc.
Material good are concrete in nature e.g. building, furniture, books etc.
While different services a human being is using called non material services. E.g. services of teachers, Doctor, advocate etc.
4) Transferable and Non Transferable Goods:
Most of the material goods can be transferable. Here transferable means change in ownership e.g. land, vehicle etc.
On the contrary non-transferable goods referred to personal qualities like skill, intelligence etc. which never be transferred.
Most of the material goods can be transferable. Here transferable means change in ownership e.g. land, vehicle etc.
On the contrary non-transferable goods referred to personal qualities like skill, intelligence etc. which never be transferred.
5) Personal and Impersonal Goods:
Personal goods refer to personal qualities of a person and they are non material and exist inside him e.g. skill, intelligence etc. They are also called as internal goods.
The impersonal goods are generally material goods and not personal goods. For example land furniture, vehicle etc. They are external and lie outside and hence they are also called external goods.
In short, personal goods indicate “what he is” and impersonal goods” What he has”
Personal goods refer to personal qualities of a person and they are non material and exist inside him e.g. skill, intelligence etc. They are also called as internal goods.
The impersonal goods are generally material goods and not personal goods. For example land furniture, vehicle etc. They are external and lie outside and hence they are also called external goods.
In short, personal goods indicate “what he is” and impersonal goods” What he has”
6) Private Goods and Public Goods:
Private goods refer to individual property e.g. Building land, vehicle etc. which are possessed by an individual.
The public goods like railway, roads, dams etc. are owned by society. They are common to all and owned by society collectively.
Private goods refer to individual property e.g. Building land, vehicle etc. which are possessed by an individual.
The public goods like railway, roads, dams etc. are owned by society. They are common to all and owned by society collectively.
7) Necessaries, Comforts and Luxuries:
Goods can be classified as
Necessaries – like food, cloth, shelter, etc.
Comfort- table, electricity and
Luxuries – Air Condition, vehicle, T.V., Gold & Silver, Jewellery etc.
Goods can be classified as
Necessaries – like food, cloth, shelter, etc.
Comfort- table, electricity and
Luxuries – Air Condition, vehicle, T.V., Gold & Silver, Jewellery etc.
What is Utility?
The goods satisfy human wants. This
want satisfying quality in a good is called Utility. Utility is that
quality in a commodity by virtue of which it is capable of satisfying a
human want. Air, water (free goods) and food, cloth etc. (economic
goods) satisfies people’s wants and hence they possess utility.
In day to day life we use this term in different way but in Economics utility is having a specific meaning. Hence
a) Utility and usefulness are different. For example a poison when we consume it is definitely injurious and hence it never is useful but it satisfies the human want, i.e. the want of person who decides to suicide and hence it possesses utility.
b) Utility is not synonymous with pleasure. A good which possess utility may not give pleasure when. Consumed e.g. a medicine when a patient consumes does not give pleasure since mostly it is bitter. But it possesses utility because it is required to cure from sickness. Thus pleasure is different and utility is different.
c) Utility is subjective means no commodity possesses utility in itself independently of the consumer. It is a consumer’s mind which gives it utility. A literate person may find utility in books, new paper etc. as he is able to read those, but on the contrary an illiterate person never find any utility. Thus utility depends on mans mind rather than on the things itself.
d) Utility varies in different situations. Moreover the same things may possess different utilities for different purposes. For example water has different utilities when it is used for drinking, bathing and washing purposes.
a) Utility and usefulness are different. For example a poison when we consume it is definitely injurious and hence it never is useful but it satisfies the human want, i.e. the want of person who decides to suicide and hence it possesses utility.
b) Utility is not synonymous with pleasure. A good which possess utility may not give pleasure when. Consumed e.g. a medicine when a patient consumes does not give pleasure since mostly it is bitter. But it possesses utility because it is required to cure from sickness. Thus pleasure is different and utility is different.
c) Utility is subjective means no commodity possesses utility in itself independently of the consumer. It is a consumer’s mind which gives it utility. A literate person may find utility in books, new paper etc. as he is able to read those, but on the contrary an illiterate person never find any utility. Thus utility depends on mans mind rather than on the things itself.
d) Utility varies in different situations. Moreover the same things may possess different utilities for different purposes. For example water has different utilities when it is used for drinking, bathing and washing purposes.
Types of Utility:
- From Utility: Due to change in form there is change in utility, e.g. Wood when transformed into furniture, utility will increase.
-
Place utility: When goods transported from one place to another place utility can increase. For example apple will fetch more prices in other part of country than in Kashmir and Himachal Pradesh.
-
Time utility: By storing a commodity and selling it at a time of scarcity, utility can be realized more.
Concept of Value & Price
Value:
“Value” is an important term which is frequently used in Economics. But in economics it is not used in that sense as we use it in ordinary speech. For instance, when we say, education has a great value, fresh air is always valuable, and it indicates value in use (i.e. utility). But in economics the term “value” is used in the sense of value-in-exchange. Therefore it can be defined as under.
“Value” is an important term which is frequently used in Economics. But in economics it is not used in that sense as we use it in ordinary speech. For instance, when we say, education has a great value, fresh air is always valuable, and it indicates value in use (i.e. utility). But in economics the term “value” is used in the sense of value-in-exchange. Therefore it can be defined as under.
- Value of a commodity refers to the goods that can be obtained in exchange for it.
-
Value of commodity means the commodities or services that we can get in return for it.
-
It is a purchasing power of a commodity in terms of other commodities and services.
Therefore, three qualifications are essential for a good (commodity) before it can have value.
- It muse possesses utility
-
It must be scarce and
-
It must be transferable and marketable.
Price:
In Pre historic times, people did not know money and they had a barter system in which goods are exchanged with goods. Therefore, in those days value and price were used synonymously. But now days, goods are exchanged for money. The price of commodity today means its money - Value.
In Pre historic times, people did not know money and they had a barter system in which goods are exchanged with goods. Therefore, in those days value and price were used synonymously. But now days, goods are exchanged for money. The price of commodity today means its money - Value.
What is Wealth?
In ordinary language, “Wealth”
conveys an idea of prosperity and abundance. A man of wealth understood
as a rich person. But in Economics Wealth is synonymous with economic
goods.
In short, Wealth means anything which has value.
In short, Wealth means anything which has value.
Therefore, three attributes of wealth
as in the case of value are utility, scarcity and marketability. Good
which is able to satisfy human want, which is scale and must be
transferable, is wealth.
It should be noted that
It should be noted that
- Money is form of wealth. All money is wealth but all wealth is not money.
-
Income is different than wealth. Wealth yields income.
-
Wealth and welfare are closely inter-related. Wealth is the means and welfare and end.
Classification of Wealth: Wealth can be classified as
- Individual Wealth: Material possession like land, building cash etc.
-
Personal Wealth: refers to personal qualities like intelligence, skill etc.
-
Social Wealth: They are things owned by society e.g. building dams, road etc.
-
National Wealth: They are the natural resources like rivers, climate, oceans etc.
-
Cosmopolitan Wealth: It is wealth of the whole word. It is a sum total wealth of all nationals.
-
Negative Wealth: It refers debts owned by individual of Govt.
Production, Factors affecting the production and Factors of Production
Production, in Economics is one of the
important activities whatever human being is received goods as a
natural gift can not be consumed as such. It requires some processing
and then and then only it is consumed. Through processing we transform
some goods and services in to another one for example sugarcane into
sugar, Cotton into cloth etc. In economics, sugarcane or cotton are
termed as inputs factor or raw material while sugar or cloth are termed
as output or finished product. Thus the term can be defined as under.
- Production means transformation of inputs (goods and sieves) into output.
-
Production of wealth or value.
-
Production means creation (addition) of wealth or value.
It may consist not only goods but also services.
Factors affecting the production: Following factors affect production.
- Natural factors: like climatic conditions, soil type affect production. Production can be diminished due to natural calamities like flood, drought etc.
-
Technical progress: Can positively influence production. Use of improved variety, fertilizers, insecticides etc. can give us more production.
-
Political factors: also affect production positively or negatively. Decisions pertaining to taxation, investment or fiscal. Policies of Govt. influence production.
-
Infrastructure facilities: Like transport, credit, storage etc. are also equally important to have more production.
-
Character of people: determines productivity. The hard workers and sincere workers always produce more and hence it is very important factor which influences production.
Factors of Production:
For undertaking production following important factors are required
1. Land 2. Labour 3. Capital and 4. Organization or Enterprise
For undertaking production following important factors are required
1. Land 2. Labour 3. Capital and 4. Organization or Enterprise
Details of factors of production are explained in next topics
What is Distribution?
By distribution we mean “Accounts for
the sharing of the wealth produced by a community among the agents, or
owners of the agents, which have been active in its productions.
Here distribution is functional not
personal. It is distribution not among individuals but among agents of
production. A person may represent in his person all the four agents,
eg. A peasant (cultivar) may be landlord, organizer, laborer and
capital owner. Here we do riot discuss how much he earns as an
individual hut the reward that he gets separately for supplying each
factor of production. Thus, we study distribution in the form of rent,
wages, interest and profits.
What is rent?
Rent:
It means reward paid for the use of land; it is received by the
land-lord (landowner) and paid by the user of land (tenant). Rent may
be-
1) Contract Rent 2) Economic Rent
1) Contract Rent 2) Economic Rent
1) Contract Rent: It refers to the total amount of money paid for the use of land.
2) Economic Rent: It is the part of total payment which is made for the use of land; it can be estimated as follow.
a) Economic Rent: Contract Rent - Interest on the capital invested suppose a tenant paying Rs.20,000.00 per year as contract rent but the interest on capital invested is Rs.3000.00 per year, the remaining Rs.17000.00 (Rs.20,000-3000) is being for the use of land, economic rent.
b) Economic Rent: Present actual earning - Transfer earnings. Here transfer earnings represent the amount which a factor can earn in its next best alternative use. Suppose a piece of land yields in its present use Rs.5000.00 in a year and suppose further that if it is transfer to its next best use, it will yield Rs.4000.00 In its present use Rs.1000.00 (Rs.5000-4000) more than in its next best use. This sum of Rs.1000.00 is surplus is economic rent. Hence Economic rent means surplus or excess over transfer earnings.
Recardian Theory of Rent: The theory of rent was put forth by the Economist, Divid Recardo. According to the Recardian theory of Rent, rent is differential surplus and arises from the fact that land possesses certain popularities as a factor of production. It is limited area and its fertility varies, besides, its situation is fixed, thus rent results because
a) Fertility is more or less fixed in nature
b) The stock of land is fixed and can not be increased.
2) Economic Rent: It is the part of total payment which is made for the use of land; it can be estimated as follow.
a) Economic Rent: Contract Rent - Interest on the capital invested suppose a tenant paying Rs.20,000.00 per year as contract rent but the interest on capital invested is Rs.3000.00 per year, the remaining Rs.17000.00 (Rs.20,000-3000) is being for the use of land, economic rent.
b) Economic Rent: Present actual earning - Transfer earnings. Here transfer earnings represent the amount which a factor can earn in its next best alternative use. Suppose a piece of land yields in its present use Rs.5000.00 in a year and suppose further that if it is transfer to its next best use, it will yield Rs.4000.00 In its present use Rs.1000.00 (Rs.5000-4000) more than in its next best use. This sum of Rs.1000.00 is surplus is economic rent. Hence Economic rent means surplus or excess over transfer earnings.
Recardian Theory of Rent: The theory of rent was put forth by the Economist, Divid Recardo. According to the Recardian theory of Rent, rent is differential surplus and arises from the fact that land possesses certain popularities as a factor of production. It is limited area and its fertility varies, besides, its situation is fixed, thus rent results because
a) Fertility is more or less fixed in nature
b) The stock of land is fixed and can not be increased.
Thus, Recardo defines rent as that
portion of the produce of the earth which is paid to the landlord for
the original and indestructible powers of the soil. “This has been
illustrated as under”.
1) Rent in Extensive Cultivation: Let
us suppose that there are different qualities of land say ‘A’, ‘B’,
‘C’ and ‘D’ grade depending upon fertility. ‘A’ is most fertile land
and yields 35 quintals of wheat while the ‘B’ is inferior than ‘A’
yielding 30 Qts. of wheat. Further, ‘C’ is still inferior who yields 25
Qts while ‘D’ is least fertile yielding 20 Qts of wheat which Record
describes as marginal land.
Ricardo begins with a group of new settlers in a new country, the group of people will settle down in ‘A’ part of the country which is most fertile land. They will start to cultivate land. At this stage no rent is paid because ample land of first quality is available, But as the population increases and the produce from the “A” grade land is insufficient for increasing population, Naturally ‘B’ grade land will have also to be taken for cultivation. Since, this land is inferior it yields less than the land i.e. 30 quintals of wheat per plot as compared with 35 Qts of ‘A’ with the same expenditure of labour and capital. Naturally ‘A’ grade land acquires a greater value as compared with ‘B’ now a tenant will be prepared to pay up to 5 quintal of wheat in order to get a plot in the ‘A’ zone or take ‘B’ grade land free of charge. Thus, the rent arises for ‘A’ grade land which is equal to the difference between yields of ‘A’ and ‘B’ grade lands. That is 35 Qtls-30 Qts 5 Qts of wheat. Thus Ricardo considered ‘Rent’ as a surplus accruing to superior land over inferior land called “marginal land” Thus such shifting of population is occurred further on ‘C’ and ‘D’ grade lands the economic rent will still increased as indicated in the following table.
Ricardo begins with a group of new settlers in a new country, the group of people will settle down in ‘A’ part of the country which is most fertile land. They will start to cultivate land. At this stage no rent is paid because ample land of first quality is available, But as the population increases and the produce from the “A” grade land is insufficient for increasing population, Naturally ‘B’ grade land will have also to be taken for cultivation. Since, this land is inferior it yields less than the land i.e. 30 quintals of wheat per plot as compared with 35 Qts of ‘A’ with the same expenditure of labour and capital. Naturally ‘A’ grade land acquires a greater value as compared with ‘B’ now a tenant will be prepared to pay up to 5 quintal of wheat in order to get a plot in the ‘A’ zone or take ‘B’ grade land free of charge. Thus, the rent arises for ‘A’ grade land which is equal to the difference between yields of ‘A’ and ‘B’ grade lands. That is 35 Qtls-30 Qts 5 Qts of wheat. Thus Ricardo considered ‘Rent’ as a surplus accruing to superior land over inferior land called “marginal land” Thus such shifting of population is occurred further on ‘C’ and ‘D’ grade lands the economic rent will still increased as indicated in the following table.
Grade of Land |
Production ( Qts)
|
Value of Produce @ Rs 1000/ Qts
|
Cost of production
|
Surplus over 'D' (Qts)
|
Economic Rent (Rs.)
|
A
|
35
|
35000
|
20000
|
15
|
15000
|
B
|
30
|
30000
|
20000
|
40
|
10000
|
C
|
25
|
25000
|
20000
|
5
|
5000
|
D
|
20
|
20000
|
20000
|
Nil
|
No Rent
|
2) Rent in intensive cultivation: Suppose,
the settlers resided in ‘A’ grade land realize that there is another
way too of increasing the produce by applying more labour and capital
to superior lands (i.e. intensive cultivation). This is done but it is
seen that the law of diminishing returns sets in now consider that ‘A’
‘B’, ‘C’ and ‘D’ are the different doses of labour and capital (not
grades) applied to the same grade of land The first dose ‘A’ yields 35
Qts of wheat, the second dose of labour and capital — ‘B’ applied on
the some plot will almost definitely give us less than the first,
suppose 30 Qts of wheat. So we have the choice of either taking new
plots or cultivating the same lands more intensively. If we adopt the
latter course, the first unit of labour and capital (does A) will be
yielding a surplus over the second unit. (dose- ‘B’) which produces,
just enough to cover the expenses. This Surplus again is rent. Here 5
Qts surplus and it is economic rent. As more and more units of labour
and capital are applied, the return per unit will go on falling.
The rent arises from extensive cultivation and intensive cultivation together has been depicted diagrammatically as under. The shaded area represents rent and the ‘D’ land/dose yields which just cover its expenses and no more. It is described as “marginal” or ‘No—Rent land”.
The rent arises from extensive cultivation and intensive cultivation together has been depicted diagrammatically as under. The shaded area represents rent and the ‘D’ land/dose yields which just cover its expenses and no more. It is described as “marginal” or ‘No—Rent land”.
3) Rent Due to Differential advantages: Suppose,
further after some years market in ‘A’ zone and Railway in ‘B’ zones
have been started. As a result, when produce is to be disposed off the
market cost in ‘A’ zone and transport charges in ‘B’ zone will be least
or negligible compared to that of in ‘C’ and ‘D’ zone. Thus the plots
located in ‘A’ & ‘B’ zone will be advantageous. The better situated
plots, which have to bear less market transport charges, will enjoy a
surplus over the distant ones (i.e. ‘C’ & ‘D’ zones. This surplus
will be another cause of rent.
Hence, economic rent is a surplus which arises on account of natural differential advantages, whether of fertility or situation possessed by the land in question over marginal land.
4) Scarcity Rent: Suppose, all types of lands cultivated extensively and intensively too. But the price rises still further under the pressure of demand. Population is increased and no more land is available. Prices of agril produce go up and therefore, incomes from land go up. Hence, all land, including no-rent ‘D’ quality land begins to get surplus above expenses. This surplus above costs in the ‘D’ quality land, (our previous no rent land) is “scarcity rent”.
Summing up, the fertility, situation and limited total stock these qualities of land which are original and permanents give rise to rent.
The Recardian theory of Bent has been criticized on following points.
Hence, economic rent is a surplus which arises on account of natural differential advantages, whether of fertility or situation possessed by the land in question over marginal land.
4) Scarcity Rent: Suppose, all types of lands cultivated extensively and intensively too. But the price rises still further under the pressure of demand. Population is increased and no more land is available. Prices of agril produce go up and therefore, incomes from land go up. Hence, all land, including no-rent ‘D’ quality land begins to get surplus above expenses. This surplus above costs in the ‘D’ quality land, (our previous no rent land) is “scarcity rent”.
Summing up, the fertility, situation and limited total stock these qualities of land which are original and permanents give rise to rent.
The Recardian theory of Bent has been criticized on following points.
- Fertility of land is not original. The present productive capacity of land is the result of human efforts, like use of manures and improved technology.
-
The idea of indestructibility is objected. Area of land is everlasting but not fertility. Fertility can be destructed due to continuous cultivation.
-
The concept of marginal land Said to he imaginary.
What is wages?
Wages - Wages can be defined as under
- It is reward received by labourer for his labor (work)
-
It is type of reward for human exertion.
-
Sum of money paid by under contract by an em5loyer to a worker for services he rendered.
For wages, different names are
given like salary, fees commission allowance etc. but the meaning is
same i.e. reward for exertion or work. The wages are paid in different
way as cash end kind wages; time wages (i.e. per day, per month) and
task wages (contracts) Wages are two types.
1) Nominal Wages: An amount paid to a worker for his work
2) Real wages: It refers to satisfaction that a labourer gets from pending his money wages or nominal wages. Therefore, increase in nominal wages may or may not be increased in real wages. Because real wages are influenced by different factors like.
1) Purchasing power of money
2) Addition receipts in kind received by a person.
3) Supplementary income and
4) Regularity of employment.
1) Nominal Wages: An amount paid to a worker for his work
2) Real wages: It refers to satisfaction that a labourer gets from pending his money wages or nominal wages. Therefore, increase in nominal wages may or may not be increased in real wages. Because real wages are influenced by different factors like.
1) Purchasing power of money
2) Addition receipts in kind received by a person.
3) Supplementary income and
4) Regularity of employment.
Marginal productivity theory of wages: The
marginal productivity theory states that under conditions of perfect
competition, every worker of same skill and efficiency will receive a
wage equal to the value of marginal product of that type of labour. The
marginal product of any industry is the amount of which the output
would be increased, if more man was employed while the quantities of
other factors of production employed in the industry remained constant.
In short, it is the output of single worker unaccompanied by any change
in other factors of production. The value of marginal product of
labour is the price at which the marginal product can be sold in the
market. The condition of perfect competition implies that the marginal
cost of labour is always equal to the wage rate, irrespective of number
of workers the employer may engage. Every includes try being
ultimately subject to law of diminishing returns, this marginal returns
must start declining. Wages remaining the same, the employer stops
employing more workers at that point where the value of product of a
worker is equal to wage rate.
Limitations:
1) This theory has little applicability to reality. The labour is not perfectly mobile. The workers of same skill and efficiency may not receive the same wage at different places.
2) The actual world is dynamic; all factors assumed to be constant are in fact constantly changing.
3) The productivity of workers is also dependent upon other factors like quality of capital and efficient management.
4) Productivity is also dependent o wages.
1) This theory has little applicability to reality. The labour is not perfectly mobile. The workers of same skill and efficiency may not receive the same wage at different places.
2) The actual world is dynamic; all factors assumed to be constant are in fact constantly changing.
3) The productivity of workers is also dependent upon other factors like quality of capital and efficient management.
4) Productivity is also dependent o wages.
What is interest & Profit?
Interest: Interest
can be defined as the payment paid to its owner for the use of
capital. It is reward received by the capitalist (capital owner) for
the use of capital. Interest may be
1) Gross interest 2) Net interest.
1) Gross interest: It is the amount paid to creditor (capital owner) called gross interest.
2) Net interest: It can be obtained by deducting following from Gross interest. They are (i) Insurance against risk (ii) Reward for management and (iii) payment for inconvenience.
1) Gross interest 2) Net interest.
1) Gross interest: It is the amount paid to creditor (capital owner) called gross interest.
2) Net interest: It can be obtained by deducting following from Gross interest. They are (i) Insurance against risk (ii) Reward for management and (iii) payment for inconvenience.
Profit: It is defined as reward received by entrepreneur for assuming a risk.
Risk is an integral part of any business. Therefore whatever profit an organizer is obtaining it is reward for the risk he is bearing. Hence wherever risk is more the profit taken generally is also high. It is after all net income received by and organizer from the business.
Therefore, Profit = Net income = Gross income - costs
(i.e. rent, wages and interest)
OR
Profit Total Revenue (income) - Total cost of production
Peculiarities are as follow:
1) Residual income: Profit is received after meeting all the expenses and then it is residual income. 2) End result of business: an entrepreneur receives profit on1y after the sale is completed arid all obligations are discharged. Production or business process ends when product is sold. 3) Not always positive: All other factor rewards are positive. But profit may he positive, zero or negative. When negative profit is there it is termed as loss of business. 4) Fluctuating income: Business is influenced by number of factors and the profit is changing time to time. It may be high low or negative (loss) also, 5) Not contractual: Profit is organizer’s reward and depends upon business conditions. Hence it is not contractual.
Risk is an integral part of any business. Therefore whatever profit an organizer is obtaining it is reward for the risk he is bearing. Hence wherever risk is more the profit taken generally is also high. It is after all net income received by and organizer from the business.
Therefore, Profit = Net income = Gross income - costs
(i.e. rent, wages and interest)
OR
Profit Total Revenue (income) - Total cost of production
Peculiarities are as follow:
1) Residual income: Profit is received after meeting all the expenses and then it is residual income. 2) End result of business: an entrepreneur receives profit on1y after the sale is completed arid all obligations are discharged. Production or business process ends when product is sold. 3) Not always positive: All other factor rewards are positive. But profit may he positive, zero or negative. When negative profit is there it is termed as loss of business. 4) Fluctuating income: Business is influenced by number of factors and the profit is changing time to time. It may be high low or negative (loss) also, 5) Not contractual: Profit is organizer’s reward and depends upon business conditions. Hence it is not contractual.
Introduction to National Income
For understanding the concept of
national income, it is necessary to know how an economy works. In any
economy, its people are engaged in on productive activity or the other,
whereby they earn income and spend their income on goods and services
to satisfy their wants. The health and progress of an economy are to be
judged from how much they are able to produce arid spend i.e. Country’s
total output, income and expenditure. Those aggregates of the economy
are but different aspects of its national, income.
Circular Flow: The Wheel of the Wealth
Circular Flow: The Wheel of the Wealth
In every economy there are households
on the one hand and productive enterprises or firms on the other. The
function of house holds is to consume holds and services for the
satisfaction of their wants. Thus the household is the basic consuming
unit in the economy. The function of productive enterprises (forms) is
to produce goods and services for the satisfaction of the wants of
households and thus the firm or productive enterprise is the basic
producing unit in the economy. The household here may be family unit
while producing unit (firm) may be grocery shop, factory etc. Besides,
Government is another sector which occupies an important Position. It
like households, purchases goods and services arid since it runs many
public enterprises it act as, producing unit. Thus households, firms
and government are the main components of the entire economic
organization of a country which is know as an economy. Economy is the
sum total of the operations of the households, firms and government.
In every economy there is always a circular flow (movement) of resource services (i.e. services of land, labour capital and enterprise) from the household to firms and the reverse movement of goods and services from the firms to the households. This is depicted in the diagram given below.
The inner circuit shows the real flows would take place only in barter economy where goods and services are exchanged for goods and services. But in the modern economy where use of money as medium of exchange is widely adopted
Households supply the resource services or factors to firms and receive in return payments in terms of money for goods and services they want. The firms sell goods and services for money and use the money so received to pay the households for their supply of resource services. Thus labour gets Wages; capita1 gets interest land gets rent and enterprise gets profits all in terms of money, this circular flow of money also known as Wheel of Wealth. This flow of money is not continuously at steady level. It may contract or expand when depression and prosperity occur, respectively in an economy. The diagram explains circular flow of closed economy where savings and role of Govt. is totally absent.
In every economy there is always a circular flow (movement) of resource services (i.e. services of land, labour capital and enterprise) from the household to firms and the reverse movement of goods and services from the firms to the households. This is depicted in the diagram given below.
The inner circuit shows the real flows would take place only in barter economy where goods and services are exchanged for goods and services. But in the modern economy where use of money as medium of exchange is widely adopted
Households supply the resource services or factors to firms and receive in return payments in terms of money for goods and services they want. The firms sell goods and services for money and use the money so received to pay the households for their supply of resource services. Thus labour gets Wages; capita1 gets interest land gets rent and enterprise gets profits all in terms of money, this circular flow of money also known as Wheel of Wealth. This flow of money is not continuously at steady level. It may contract or expand when depression and prosperity occur, respectively in an economy. The diagram explains circular flow of closed economy where savings and role of Govt. is totally absent.
Definition of National Income
1) National Income is that part of
objective income of the community, including income derived from
abroad, which can be measured in money” - Pigou.
2) National income may be defined as the money value of the flow of commodities and services (exc1udinc imports) reckoned at current prices minus the sum of following/items, at current prices.
2) National income may be defined as the money value of the flow of commodities and services (exc1udinc imports) reckoned at current prices minus the sum of following/items, at current prices.
- Money value of diminution in stocks
-
Money value of goods and services used up in the course of production
-
Money value of goods and services used to maintain intact existing capital equipments.
-
Receipts from indirect taxation.
-
Favorable balance of trade
-
Net increase in the country’s foreign indebtedness.
In short, National Income is the
aggregate factor income (i.e. earning of labour and property) which
arises from the current production goods and services by the nation’s
economy. Here nation’s economy refers to the factors of production
Labour and property, supplied by the normal residents of the/ national
territory. The national income has three interpretations
1) It represents a receipts total.
2) It represents expenditure total.
3) It represents a total value of production.
1) It represents a receipts total.
2) It represents expenditure total.
3) It represents a total value of production.
These three - fold interpretation
arises out of fact that, every expenditure is at the same time a
receipt and f goods and services purchased (bought) are valued at their
sales prices. Thus
Value Received = Value paid = Value of goods & services
Value Received = Value paid = Value of goods & services
Measurement of National Income
Since factor incomes arise from
production of goods arid services, and since incomes are expended on
goods and services produced, three alternative methods of measuring
national income are possible.
a) Output Method: This method is also called as production Method. It consists of following three stages.
1) Estimation of the gross value of domestic output in the various sectors of production.
2) Determination of cost of materials used, services rendered to these sectors by other sectors of production and also annual depreciation value, of the plants and equipments used in these Sectors.
3) Deduction of costs and depreciation values from the gross value production which gives (derives) net value of domestic output.
b) Income Method: Under output method, the net output estimates are obtained. This estimate is regarded as the equivalent of the value of sales of the output. This is the income to producer while receipts of the factor suppliers. This income comprises-
i) Wages earned by the workers, salaries of staff, social Security, bonus etc.
ii) Earning of self employed persons, dividends of shareholders
iii) Rent of land, factories and business premises.
iv) Interest on capital and earnings of public enterprises the sum of all above gives us National Income.
c) Expenditure Method: Under this method, estimation of the disposal of income on the purchase of final goods end services has been done. It includes following.
a) Personal consumption expenditure of households.
b) Gross private domestic investment, i.e. business spending on capital goods.
c) The net foreign investment, i.e. net Spending by foreign nationals.
d) Govt. purchases of goods and services.
Method used in India: The National Income Committee used a combination of Income method and the Product (output) method for estimating nationa1 income. In the agriculture and industry sectors the output method (product method) is used. Here net value of product arc computed and incorporated in national income. But in the fields of commerce, transport, banking the income method is used. The National income involves the value of products and income earned by the people engaged in service sector.
Difficulties In measurement: In, under-developed countries like India many difficulties are to be faced in estimating national income. They are:
a) Output Method: This method is also called as production Method. It consists of following three stages.
1) Estimation of the gross value of domestic output in the various sectors of production.
2) Determination of cost of materials used, services rendered to these sectors by other sectors of production and also annual depreciation value, of the plants and equipments used in these Sectors.
3) Deduction of costs and depreciation values from the gross value production which gives (derives) net value of domestic output.
b) Income Method: Under output method, the net output estimates are obtained. This estimate is regarded as the equivalent of the value of sales of the output. This is the income to producer while receipts of the factor suppliers. This income comprises-
i) Wages earned by the workers, salaries of staff, social Security, bonus etc.
ii) Earning of self employed persons, dividends of shareholders
iii) Rent of land, factories and business premises.
iv) Interest on capital and earnings of public enterprises the sum of all above gives us National Income.
c) Expenditure Method: Under this method, estimation of the disposal of income on the purchase of final goods end services has been done. It includes following.
a) Personal consumption expenditure of households.
b) Gross private domestic investment, i.e. business spending on capital goods.
c) The net foreign investment, i.e. net Spending by foreign nationals.
d) Govt. purchases of goods and services.
Method used in India: The National Income Committee used a combination of Income method and the Product (output) method for estimating nationa1 income. In the agriculture and industry sectors the output method (product method) is used. Here net value of product arc computed and incorporated in national income. But in the fields of commerce, transport, banking the income method is used. The National income involves the value of products and income earned by the people engaged in service sector.
Difficulties In measurement: In, under-developed countries like India many difficulties are to be faced in estimating national income. They are:
- Prevalence of non monetized transactions in agriculture still lot of product does not come into the market, It consumed at farm level.
-
Illiteracy - Due to illiteracy it is not possible to keep regular account.
-
Occupational specialization is incomplete.
-
Lack of adequate statistical data.
-
Estimation of value of inventories i.e. raw material is very difficult.
-
Estimation of depreciation on capital goods and avoiding double counting is too much difficult.
Use of National Income data:
It is very useful to measure economic welfare, determine standard of
living of a community, similarly to assess economic development and for
comparison purpose the national income is must.
Public Finance
Every Government has to perform
different functions and for this purpose it requires funds. These funds
however are contributed by the every citizen of the country. The
contribution may be less or more but it is necessary. Thus Public
Finance deals with “Why Government takes money how it gets money and
where it spends money?”
Distinction between Public and Private Finance:
Individual and states are similar in that they
1) Both require resources
2) Both have to maximum results from their resources.
3) Both attempts to get the best out of all items of expenditure.
There are, however, some important differences between private and public finance: They are
Distinction between Public and Private Finance:
Individual and states are similar in that they
1) Both require resources
2) Both have to maximum results from their resources.
3) Both attempts to get the best out of all items of expenditure.
There are, however, some important differences between private and public finance: They are
Public Finance
|
Private Finance
|
|
1
|
State’s proposed expenditure determines its income. | Income determines its expenditure |
2
|
A public authority can vary the amount of its income and expenditure within limits | An individual can not change his income and expenses easily. |
3
|
A state is always repay its funds to people in services and does not save the funds. | After meeting the needs, individual prefers for saving the income. |
4
|
State budgets are generally for one year | For individual there is no fixed period of time. The income expenditure is continuous. |
5
|
The state budget is public | It is kept a secret. |
6
|
State can issue paper Currency to meet its Expenditure. | It is not possible for individual |
Importance of Public Finance
Every body realizes necessity of
money. The importance of money is too much not only for individual but
for state (Govt.) also. The state has to perform number of functions
for which money (funds) is required. In under developed countries like
India, Govt. is performing many important functions like education,
industrial and agricultural developments but lack of funds is one of
the constraints. For beginning of any function funds (finance) is must
and in view of this the public finance nowadays has vital importance.
Its importance can be easily understood from the functions of public
finance. They are
1) Allocative Function: It refers to the process by which total resource use is divided between private and social goods by which the mix of social goods is chosen, this is done by the budgetary policy.
2) Distributive function: The budgetary policy also affects the distribution of income in the community. The tax and expenditure measures are adopted to modify the existing distribution with a view to reducing economic inequalities.
3) Stabilization function: The budgetary policy can also be used to maintain a high level employments reasonable degree of price level stability, an appropriate rate of economic growth and stability in the balance of payment.
Apart from these, public finance is important because it is an effective instrument of state control over the economy. The study of public finance is especially important for the under developed countries as management of state finances is essential to break the vicious circle of poverty.
1) Allocative Function: It refers to the process by which total resource use is divided between private and social goods by which the mix of social goods is chosen, this is done by the budgetary policy.
2) Distributive function: The budgetary policy also affects the distribution of income in the community. The tax and expenditure measures are adopted to modify the existing distribution with a view to reducing economic inequalities.
3) Stabilization function: The budgetary policy can also be used to maintain a high level employments reasonable degree of price level stability, an appropriate rate of economic growth and stability in the balance of payment.
Apart from these, public finance is important because it is an effective instrument of state control over the economy. The study of public finance is especially important for the under developed countries as management of state finances is essential to break the vicious circle of poverty.
Sources of public finance – Taxes (Direct & Indirect)
As discussed above functions of
modern Governments are very important and extensive which require heavy
expenditure. Govt. has to undertake important functions like defense
(internal and external), Social welfare, education, health, industry,
agriculture. For all of these a huge amount of funds is required. There
are four main sources from which this fund or income is obtained, they
are.
- Taxes, direct & indirect.
-
Process, earnings of state’s commercial and industrial undertaking.
-
Fees and assessments.
-
Loans
Similarly Govt. can raise funds through fines, penalties, gifts etc.
a) Taxes: It has been defined as a compulsory contribution of the wealth of a person or a body of persons for the services of the public powers.
Thus it implies:
i) Tax is compulsory payment.
ii) A particular tax is not a price for any particular service performed by the State (Govt.) One can not refuse to pay the tax on the ground that he does not use a service. Govt. does not promise to provide a specific in return for the payment of a particular tax.
Tax may be – i) Direct ii) Indirect.
1) Direct tax: It is generally imposed on income. E.g. Income tax It is really paid by a person on whom it is legally imposed. 2) Indirect tax: The taxes on goods are indirect taxes. Indirect tax is imposed on one person but it is paid partly or wholly by another.
Suppose a tax is imposed on house owners. Being it is compulsory they have to pay it or in other words the impact of the tax on them. Here impact means burden. But owners will not pay it quietly, they will raise house rent charges and tenants have to bear it. But tenants will try to obtain this burden from their offices where they are working. If they get it the employer will increase the price of his product to recoup the burden. Thus, finally the weight of the tax or “incidence” falls on people.
a) Taxes: It has been defined as a compulsory contribution of the wealth of a person or a body of persons for the services of the public powers.
Thus it implies:
i) Tax is compulsory payment.
ii) A particular tax is not a price for any particular service performed by the State (Govt.) One can not refuse to pay the tax on the ground that he does not use a service. Govt. does not promise to provide a specific in return for the payment of a particular tax.
Tax may be – i) Direct ii) Indirect.
1) Direct tax: It is generally imposed on income. E.g. Income tax It is really paid by a person on whom it is legally imposed. 2) Indirect tax: The taxes on goods are indirect taxes. Indirect tax is imposed on one person but it is paid partly or wholly by another.
Suppose a tax is imposed on house owners. Being it is compulsory they have to pay it or in other words the impact of the tax on them. Here impact means burden. But owners will not pay it quietly, they will raise house rent charges and tenants have to bear it. But tenants will try to obtain this burden from their offices where they are working. If they get it the employer will increase the price of his product to recoup the burden. Thus, finally the weight of the tax or “incidence” falls on people.
Thus impact means burden which is
shifted to another and who is bearing it finally is known a incidence
Therefore Shifting starts with impacts and ends in incidence.
The direct tax is one whose impact and incidence are on the same person i.e. tax payer is also tax bearer.
In case of indirect tax, the impact and incidence are on different persons, i.e. there is shifting of tax.
Advantages of Direct taxes:
1) Equitable: Equality of sacrifice can be attained through progression. 2) Economical: Cost of collection is low as it is generally collected at source. 3) Certain: Both tax payer and authorities know how much tax is there. Hence the amount of revenue is certain. 4) Elastic: Suddenly tax can be increased and in emergency period funds can be increased eg. Death duties
Disadvantages to Direct tax:
1) Inconvenient: It pinches the tax payer as a lum-sum amount is taken out of his pocket and hence it is inconvenient. 2) Evadable: The tax payer (assessee) can submit a false return of income and thus avoid the tax. 3) Arbitrary: If taxes are progressive, the rate of progression is arbitrary and if it is proportional. The poor person has to bear more tax. Thus, both are bad. 4) Disincentive: If taxes are too heavy, it will result in discourage saving and investment.
Advantages of Indirect taxes :
1) The poor can contribute: They are the only means of reaching the poor. 2) Convenient: It is convenient both, for tax payer and state. Tax payers do not feel much burden, as these taxes are paid in small amount and secondly when purchases are there tax payment will be there. 3) Broad based: These taxes are spread over wide range. Large number of population can be covered. 4) Easy collection: Automatically taxes collected easily. 5) Non-evadable: Means non avoidable. 6) Elastic: If imposed on necessaries it will yield huge amount. 7) Equitable: Irrespective of income group, tax is collected from all. 8) Check harmful consumption: The harmful commodities like tobacco drugs are heavily taxed to check the consumption.
Disadvantages of indirect tax:
1) Regressive: Rich & poor both have to pay a equal price and hence poor are more suffered than rich. 2) Uncertain: These taxes are collected in the form of prices of the commodity. If that commodity is not purchased tax amount will be reduced. Hence it is uncertain. 3) Uneconomical: For collecting the tax, large administrative staff is required. 4) Harmful to industry: If more taxation is there, the rise in prices will occur which result in less purchase and thus it is harmful to the industry involved in production.
Advantages of Direct taxes:
1) Equitable: Equality of sacrifice can be attained through progression. 2) Economical: Cost of collection is low as it is generally collected at source. 3) Certain: Both tax payer and authorities know how much tax is there. Hence the amount of revenue is certain. 4) Elastic: Suddenly tax can be increased and in emergency period funds can be increased eg. Death duties
Disadvantages to Direct tax:
1) Inconvenient: It pinches the tax payer as a lum-sum amount is taken out of his pocket and hence it is inconvenient. 2) Evadable: The tax payer (assessee) can submit a false return of income and thus avoid the tax. 3) Arbitrary: If taxes are progressive, the rate of progression is arbitrary and if it is proportional. The poor person has to bear more tax. Thus, both are bad. 4) Disincentive: If taxes are too heavy, it will result in discourage saving and investment.
Advantages of Indirect taxes :
1) The poor can contribute: They are the only means of reaching the poor. 2) Convenient: It is convenient both, for tax payer and state. Tax payers do not feel much burden, as these taxes are paid in small amount and secondly when purchases are there tax payment will be there. 3) Broad based: These taxes are spread over wide range. Large number of population can be covered. 4) Easy collection: Automatically taxes collected easily. 5) Non-evadable: Means non avoidable. 6) Elastic: If imposed on necessaries it will yield huge amount. 7) Equitable: Irrespective of income group, tax is collected from all. 8) Check harmful consumption: The harmful commodities like tobacco drugs are heavily taxed to check the consumption.
Disadvantages of indirect tax:
1) Regressive: Rich & poor both have to pay a equal price and hence poor are more suffered than rich. 2) Uncertain: These taxes are collected in the form of prices of the commodity. If that commodity is not purchased tax amount will be reduced. Hence it is uncertain. 3) Uneconomical: For collecting the tax, large administrative staff is required. 4) Harmful to industry: If more taxation is there, the rise in prices will occur which result in less purchase and thus it is harmful to the industry involved in production.
Cannons of Taxation
The following cannons or principles of taxation are used.
1) Cannon of Equality: According to this principle of taxation, equality and ability to pay the taxes are taken into account, while imposing taxes. This means rich person must bear the heavy burden. The tax is paid in proportion of the respective abilities of the tax payer.
2) Canon of certainty: The tax payer should know exactly what, when and how he has to pay the tax. The state should also know how much, it will receive from tax.
3) Canon of convenience: The time and method of payment should be convenient to the tax payer. E.g. land revenue in India is conveniently paid after harvest of crops.
4) Canon of Economy: This principle states that the cost of collection of taxes should be as small as possible. If large amount of the tax is paid on its collection, it will take much out of the people’s pocket, but bring very little into the state’s pocket.
5) Canon of productivity: It is much better to have a few taxes which yield good revenue instead of many taxes yielding a little.
6) Canon of Elasticity: This cannon points out that a tax should automatically bring in more revenue as the countries income increases. In emergency period tax may be increased.
7) Canon of Simplicity: As for as possible tax system of a country should be diversified and broad based, It should cover large number of commodities and large number of persons.
8) Canon of Flexibility: This principle states that the tax system should not be rigid. A Flexible tax quickly adjusts to the new conditions. Lack of flexibility in a tax can cause financial troubles to a state.
1) Cannon of Equality: According to this principle of taxation, equality and ability to pay the taxes are taken into account, while imposing taxes. This means rich person must bear the heavy burden. The tax is paid in proportion of the respective abilities of the tax payer.
2) Canon of certainty: The tax payer should know exactly what, when and how he has to pay the tax. The state should also know how much, it will receive from tax.
3) Canon of convenience: The time and method of payment should be convenient to the tax payer. E.g. land revenue in India is conveniently paid after harvest of crops.
4) Canon of Economy: This principle states that the cost of collection of taxes should be as small as possible. If large amount of the tax is paid on its collection, it will take much out of the people’s pocket, but bring very little into the state’s pocket.
5) Canon of productivity: It is much better to have a few taxes which yield good revenue instead of many taxes yielding a little.
6) Canon of Elasticity: This cannon points out that a tax should automatically bring in more revenue as the countries income increases. In emergency period tax may be increased.
7) Canon of Simplicity: As for as possible tax system of a country should be diversified and broad based, It should cover large number of commodities and large number of persons.
8) Canon of Flexibility: This principle states that the tax system should not be rigid. A Flexible tax quickly adjusts to the new conditions. Lack of flexibility in a tax can cause financial troubles to a state.
Sources of public finance – Prices, Fees and Assessment & Loan
Prices:
When Govt. engages in a business enterprise, it sells the service to
the consumer at fixed price Govt. is not running these enter prices for
profit, but it can increase the prices to minimize shortage of funds.
Thus nowadays many activities like rail, road transport, shipping,
electricity supply etc. are undertaken by Govt. By fixing the prices
Govt. can earn income.
c) Fees and assessment: A fee is a payment made by a person to the Govt. on account of a special benefit received by him. E.g. patent fee, court fee, registration fee etc. Similarly, special assessment i.e. a particular fee charged from persons by the Govt. e.g. for new canal, or a new rail-road etc.
d) Loans: Loans are also raised by Govt. in emergencies like wars or to finance economic development plant. It may be raised from public or obtained from international financing agencies.
c) Fees and assessment: A fee is a payment made by a person to the Govt. on account of a special benefit received by him. E.g. patent fee, court fee, registration fee etc. Similarly, special assessment i.e. a particular fee charged from persons by the Govt. e.g. for new canal, or a new rail-road etc.
d) Loans: Loans are also raised by Govt. in emergencies like wars or to finance economic development plant. It may be raised from public or obtained from international financing agencies.
Natural Resources and Economic Development
“Natural resources determine the
course of development and constitute the challenge which may not be
accepted by the human mind.”- E. Arthur Lewis.
Natural Resources in the Process of Economic Development:
The process of economic development
involves the growth of national output. To achieve an expansion of
national output, it is essential to combine natural resources, human
resources and capital. (i.e. Land, Labour & Capital). Therefore, to
facilitate the process of economic development the existence of
favorable natural resources is must. Otherwise it will retard the
process of development. However, natural resources only are not
sufficient for development but it requires following aspects also.
- A location of country
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Accessibility (availability) to raw materials and markets in other countries.
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The present state of knowledge
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Growth of technology
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Attitudes of the people towards material things, saving and investment.
Natural Resources Include Following:
1) Land 2) Water resource 3) Marine resource 4) Fisheries
5) Mineral resource 6) Forests 7) Climate, rainfall and topography
1) Land 2) Water resource 3) Marine resource 4) Fisheries
5) Mineral resource 6) Forests 7) Climate, rainfall and topography
The above natural resources, of course, can be classified on the basis of following criteria.
A) Renewable and Exhaustible Resources: Some resources like cultivable land, water, fisheries, forest etc are renewable while some resources like minerals, mineral oil are exhaustible. Therefore in the process of development the renewable resources should have to maintain carefully.
Similarly the exhaustible resources have to be used economically as those can be used only once.
B) Know and Unknown Resources:
A) Renewable and Exhaustible Resources: Some resources like cultivable land, water, fisheries, forest etc are renewable while some resources like minerals, mineral oil are exhaustible. Therefore in the process of development the renewable resources should have to maintain carefully.
Similarly the exhaustible resources have to be used economically as those can be used only once.
B) Know and Unknown Resources:
Many resources we are using in the
process of economic development are known for example topography, size
of land, forests, climate etc. These resources are known because the
people of the country possess knowledge about them. Sometimes the
discovery of the use of a resource can immediately increase its
use-value e.g. Monazite sand on the beaches of Kerala & Tamil-Nadu
had been knowing for several decades, but recent advance in science of
nuclear energy have made these resources most valuable and they are now
called as “rare earths” But still number of resources which human being is not knowing called “Undiscovered Resources”
are there. These can be used in the process of economic development
but it is necessary to develop techniques. These can be alternatively
in development process.
Plan Outlay
In line with the priority attached to
the agricultural sector and the approach and strategy adopted for
achieving rapid increase in agricultural production and employment the
financial out lays for the seventh plan had been fixed at a much higher
level than those for sixth plan. The total outlay for agriculture and
allied programme for the seventh plan was Rs. 10573.62 crores as against
Rs 7318.42 crores expenditure of Sixth plan. For the seventh plan the
total target for a forestation (including distribution and seedlings)
was 10 million hectare
Farm Management Decision
Farm management is basically decision
making science. On farm every day decisions are required to be taken
keeping in view the profitability. These decisions are generally:
1) What to produce? - Selection of enterprise
2) How much to produce? - Enterprise mix
a) Product - mix b) Resource - use
3) How to produce? - Selection of least cost/efficient method
4) When to produce? - Timing of production.
1) What to produce? - Selection of enterprise
2) How much to produce? - Enterprise mix
a) Product - mix b) Resource - use
3) How to produce? - Selection of least cost/efficient method
4) When to produce? - Timing of production.
Thus to achieve the objective of farm management the answers of above mentioned questions are very important.
Those answers can be obtained by understanding the principles used in farm management. They are -
Those answers can be obtained by understanding the principles used in farm management. They are -
- The law of diminishing marginal returns.
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The law of Equi-marginal returns.
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The law of substitution (Least cost principle)
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The principle of combining enterprises.
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Cost concepts and principles
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The law of opportunity cost.
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The law of comparative advantages.
Farm Planning
All planning is a matter of
forecasting. It is an attempt to state logically in conformity with the
economic principles as to what will happen in the future. Evidently
planning is to serve as a blue print for the future. All business
undertakings plan their production and marketing operations consciously
in respect of what how much, how to produce and when and where to buy
and sell. The planning of operations and their execution is secret of
their success. In agriculture also planning is must. Therefore farm
planning has been defined by different farm economists as under.
- Farm planning is a process to allocate the scare resources of the farm to organize the farm production in such a way as to increase the resource use efficiency and the income of the farmer.
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Farm planning is process of deciding in the present what to do in the future about the best combination of crops and live stock to be raised through rational use of resources.
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Farm planning is mainly a process of choice making or choosing from among competitive alternatives. It is concerned with various adjustments the farmer makes in the existing organizations with the purpose of making the most profitable USC of scarce resources.
Objective of Farm Planning:
- The immediate objective of farm planning is to maximize the annual net income sustained over a long period of time.
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The maximization of net income through improved resource use planning.
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The ultimate objective of farm planning is improvement in the Standard of living of the farmer.
Importance of Farm Planning: If
necessity is the mother of invention, scarcity of resources is the
mother of farm planning. The fact of scarcity makes it necessary for
the farmer to make the most what he has in their efficient utilization.
Farmer can make optimum utilization of scarce productive resources.
The farm planning, of course, may be annual or long range planning.
Annual planning obviously is meant for ensuing agril year. In case of
long range planning, long range objectives are involved, covering a
longer period over the next 5 to 10 years.
The importance of farm planning can
be examined through its helpfulness (or usefulness). In view of this
following things are very important (Advantages).
- It enables the farmer to achieve his objectives in relation to his farm and family in a more organized manner.
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Farm planning enables a careful examination of the existing resources and their best allocation.
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It helps farmer to take decisions in relation to selection of crops, hectarage under different crops and kind and number of live-stock to be maintained.
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It helps the farmer to identify the input and credit needs.
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It helps in estimating future cost and returns.
To have a best farm plan, some steps are needed to follow while farm planning is prepared. They are
1) Preparing the farm map: The general lay out of the farm, number and shape, irrigation channels can be shown in the farm map.
2) Recording the History of the Farm: It is very important to obtain the information pertaining to utilization of resources and their efficiency. What was the crop rotations followed previously, etc on the basis of this information planning in respect of crops to be grown, crop rotations to be followed; requirement of credit along with their sources etc can be possible.
3) Planning Bullock and Human Labour Requirement: Next a calendar of farm operations should be prepared and bullock and human labour requirements determined for different months. A labour schedule should be developed as to guide a farmer to appraise the amount of labour need in relation to the availability.
4) Planning the Land Use and Soil Conservation practices: When a full picture of the resources and their appraisal is obtained, the next step in farm planning is to adopt such practices which would lead to the best use of land. While planning the cropping scheme, due importance should be given for soil conservation. Therefore purposively crops and crop rotations need to be introducing a plan which will enhance soil conservation.
5) Planning Live stock Programme: Live stock and crop production is having supplementary relationship. The size of live stock depends upon size of farm, cropping intensity, availability of irrigation etc. If irrigation water is ample naturally cultivator can grow fodder crops through out year and he can maintain milch animals more.
6) Planning the Marketing of Produce: Only production is not sufficient to maximize the returns, good price for the produce is also important. Therefore, study of market conditions, prices etc. are essential to decide the time of selling. Similarly the agency through which marketing is to be done must be identified in view of getting maximum shares in consumers price.
1) Preparing the farm map: The general lay out of the farm, number and shape, irrigation channels can be shown in the farm map.
2) Recording the History of the Farm: It is very important to obtain the information pertaining to utilization of resources and their efficiency. What was the crop rotations followed previously, etc on the basis of this information planning in respect of crops to be grown, crop rotations to be followed; requirement of credit along with their sources etc can be possible.
3) Planning Bullock and Human Labour Requirement: Next a calendar of farm operations should be prepared and bullock and human labour requirements determined for different months. A labour schedule should be developed as to guide a farmer to appraise the amount of labour need in relation to the availability.
4) Planning the Land Use and Soil Conservation practices: When a full picture of the resources and their appraisal is obtained, the next step in farm planning is to adopt such practices which would lead to the best use of land. While planning the cropping scheme, due importance should be given for soil conservation. Therefore purposively crops and crop rotations need to be introducing a plan which will enhance soil conservation.
5) Planning Live stock Programme: Live stock and crop production is having supplementary relationship. The size of live stock depends upon size of farm, cropping intensity, availability of irrigation etc. If irrigation water is ample naturally cultivator can grow fodder crops through out year and he can maintain milch animals more.
6) Planning the Marketing of Produce: Only production is not sufficient to maximize the returns, good price for the produce is also important. Therefore, study of market conditions, prices etc. are essential to decide the time of selling. Similarly the agency through which marketing is to be done must be identified in view of getting maximum shares in consumers price.
Characteristics (Attributes) of a Good Farm Plan
The main objective of farm plan is to
obtain maximum returns; therefore following attributes are required to
possess the farm plan
- Good farm plan provides a cropping scheme that includes a most profitable crop as well as some legumes to maintain fertility of soil.
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It offers balanced combination of crops and live-stock enterprise leading to profit maximization.
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The plan must be able to fulfill the farm and family requirement of the farmer.
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The farm plan provides a regular employment and income to farm family and bullock labour, through the development of sounds crop rotations.
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It is flexible enough to take advantage of any new technology or source of power.
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The plan when it is practically implemented should be resulted into least cost. (i.e. minimum cos
System of Book Keeping
There are two systems of farm accountancy.
a) Double Entry system
b) Single Entry system
a) Double Entry System: It is a method of recording each transactions in the books of accounts in its two fold aspects1 i.e. two entries are made for each transaction in the same set of books, one being a debit entry and other a credit entry.
Every business transaction involves two parties one, for receiving the goods or services and other for giving them. Every transaction, therefore, is entered at two places, for credit and for debit. For example
i) Sale of Wheat for Rs. 2400/-
Two accounts involved will be cash account and wheat account. The cash account will be receiving account hence the amount will be written on the debit side. The wheat account will be giving account, and hence the amount will be written on the credit side of it.
ii) Receipt of Money from Mr. Ram RS. 2500/-
Here Rs.2500/ have again been received in the cash account. The cash account is therefore debtor for the amount received. Mr. Ram has paid the amount and therefore Mr. Ram’s account will be the creditor. Cash account will be debited and Mr. Ram’s account will be credited.
b) Single Entry System: This is the system which ignores the double effect of transactions. Only personal account of debtors and creditors are kept and the impersonal accounts are ignored completely.
Difference between Double & Single Entry system
| Sr. No. | Double Entry system | Single Entry System | |
| 1 | Double Entry system is perfect in its arrangement and mathematically accurate. | 1 | Single Entry system is faulty incomplete & unscientific |
| 2 | Record of both personal and impersonal accounts are kept | 2 | Only personal accounts are kept |
| 3 | Trial and balance account is possible under double entry | 3 | It can not possible |
| 4 | It is perfect, accurate and result are more reliable | 4 | It is imperfect, less accurate and unliable. |
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