Name: Taher H

Roll No: 110188

Enrolment No: MBA1/JUN18N/211301528456839F
National Institute of Business Management
Chennai - 020

FIRST SEMESTER EMBA/ MBA

Subject : Principles of Economics

Attend any 4 questions. Each question carries 25 marks

(Each answer should be of minimum 2 pages / of 300 words)

1. Write an essay on the main purposes of how economics work, and the relations
between the main economic players and institutions.
2. Describe developed, undeveloped and developing Economies.
3. All economies face three fundamental or basic central economic problems. What are
they. Explain.
4. Define price elasticity of demand and explain the formula for calculating price
elasticity?
5. Describe the advantages of a Socialist Economy.
6. Explain the defects of Capitalism.
3.All economies face three fundamental or basic central economic problems. What are
they. Explain.
Fundamental Problems of an Economy
From the investigation of the basic procedures of an economy, doubtlessly some principal issues
emerge whatever the kind of the economy.
An economy exists in view of two fundamental certainties: Firstly, human needs for goods and
services are unlimited; and besides, beneficial assets with which to deliver products and
enterprises are scarce.
Needs being boundless and our assets being restricted, we can't fulfil full scale needs. That being
in this way, an economy needs to choose how to utilize its rare assets to give the most extreme
conceivable fulfilment to the individuals from the general public.
In doing as such, an economy needs to take care of some essential issues called Central
Problems of an economy, which are:
• What to produce.
• How to produce.
• For Whom to produce.
Whatever the type of the economy or economic system, these problems have to be solved
somehow. Whether it is a capitalist economy of the U.S.A. or a socialist economy of the U.S.S.R.
or a mixed economy of India, every economy has to make decisions in regard to what, how and for
whom to produce. These problems are basic and fundamental for all economies. However,
different economies may solve these problems differently. For instance, the socialist economy of
Soviet Russia tackles these problems in a different way from that of capitalist America. We shall
now explain each of the above three problems in some detail.
• What to produce:
The issue 'what to produce' can be isolated into two related inquiries. To start with, which products
are to be delivered and which not; and second, in what amounts those goods, which the economy
has chosen to create, are to be created. In the event that beneficial assets were boundless, we
could deliver the same number of quantities of merchandise as we loved and, thusly, the inquiry
"What products to be created and so forth" would not have emerged. But since assets are in
certainty rare in respect to human needs, an economy must pick among various elective
accumulations of merchandise and ventures that it should deliver.
On the off chance that the Society chooses to create specific goods in a bigger amount, it should
pull back assets from the generation of some different products. Further, an economy needs to
choose how much assets ought to be designated for the creation of purchaser good and how
much for capital products. At the end of the day, an economy needs to choose the individual
amounts of customer merchandise and capital products to be delivered.
The decision between buyer goods and capital products includes the decision between the
present and what's to come. In the event that the general public chooses to deliver more capital
merchandise, a few assets should be detracted from the generation of purchaser products and.
along these lines, the generation of customer products would need to be chopped down. Be that
as it may, more noteworthy measure of capital goods would make conceivable the generation of
bigger amounts of purchaser products later on. Consequently, we see that some present utilization
must be relinquished for more utilization later on.
• How to produce:
The issue of 'how to produce' implies which mix of assets is to be utilized for the generation of
merchandise and which innovation is to be made utilization of underway. When the general public
has chosen what products and ventures are to be delivered and in what amounts, it should then
choose how these goods will be created. There are different elective strategies for creating a
decent and the economy needs to pick among them.
For example, cloth can be produced either with automatic looms or with power looms or with
handlooms. Fields can be irrigated (and hence wheat can be produced) by building small irrigation
works like tube-wells and tanks or by building large canals and dams. Therefore, the economy has
to decide whether cloth is to be produced by handlooms or power looms or automatic looms.
Similarly, it has to decide if the irrigation has to be done by minor irrigation works or by major
works. Obviously, it is a problem of the choice of production techniques.
Different methods or techniques of production would use different quantities of various resources.
For instance, the production of cloth with handloom would make use of more labour and less
capital. Production by handloom is, therefore, called labour-intensive technique of production.
Production of cloth with power loom or automatic loom would utilise less labour and more capital.
Production with power looms is, therefore, called capital-intensive technique of producing cloth.
Thus, the economy has to choose whether it wants to use for production labour-intensive methods
or capital-intensive methods of production.
Obviously, the choice between different methods would depend on the factor-supply situation and
the prices of the factors of production. The criterion, it is obvious, must be the cost of production- It
is well known that the resources are scarce. But some resources are scarcer than others. It is in
society’s interest that those methods of production are employed that make the greatest use of the
relatively plentiful resources or, conversely, economies are much as possible on the relatively
scarce resources.
(iii) For whom to produce:
Once the problems of ‘what’ and ‘how’ to produce are solved, the goods are then produced.
Because the resources and the resulting output of goods are limited, the third basic economic
decision, which must be taken, is ‘for whom to produce’. ‘For whom to produce’ means how the
national product is to be distributed among the members of the society. In other words, for whom
to produce means that should get how much of the total amount of goods and services produced
in the economy.
Thus, the third problem is the problem of sharing of the national product. Distribution of the
national product depends on the distribution of national income. Those people who have larger
incomes would have larger capacity to “buy goods and hence will get greater share of goods and
services
Problems of Efficiency and Growth:
Besides the three fundamental problems explained above, there are two other problems of an
economy to which economists of today attach considerable importance. They are the problems of
efficiency and growth of the economy. Now a word about each of them.
Efficiency of Resource-use:
A very important question that can be asked about the working of an economy is: Are the
resources being used efficiently? Since resources are scarce, it is obviously desirable that they
should be most efficiently used, i.e., the production and distribution of the national product should
be efficient. Production is said to be efficient, if it is not possible to produce more of one good
without reducing the output of any other goods in the economy. Similarly
the distribution is efficient if it is not possible to make any one person/persons better off without
making any other person/persons worse off through any redistribution.
Growth of Productive Capacity:
It is also important to know whether the productive capacity, of an economy is increasing,
static or declining. The increase in productive capacity of an economy over time is called
economic growth. Obviously, for under-developed economies, their basic problem is how to
accelerate the pace of their economic growth.
Even developed countries would not like to rest on their oars. In fact, it has been observed
that they are able to achieve higher annual rate of growth than the under-developed ones. The
problem of growth is thus not peculiar to the under-developed countries, but is of importance to all
countries, whether developed or undeveloped, whether free-market or centrally planned.
Solution of the Fundamental Economic Problems in a Capitalist Economy:
It is the price mechanism that helps in the solution of the fundamental problems of the
economy. Price mechanism means a set of equilibrium price of individual commodities and factors
of production determined through the forces of demand and supply in the various markets.
The main problems, are what to produce, how to produce and for whom to produce. In all
these cases, price is the indicator of the direction of profitable investment. Those commodities will
be produced for which demand prices are high and are therefore profitable to produce; those
techniques or factors of production will be employed which cost less as indicated by the prices of
factors and the commodities will be produced for those sections of the people who have good
incomes and are in a position to pay their price.
Hence, in a free capitalist economy, it is the price mechanism which solves the central
problems of the economy. Price-mechanism establishes an equilibrium price ‘both in the
commodity market and in the factor market. Equilibrium prices in the commodity markets and fact
markets are determined through the forces of demand and supply in the various markets.
4.Define price elasticity of demand and explain the formula for calculating price elasticity?
Price elasticity of demand (PED or Ed) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its
price, ceteris paribus.
When the price elasticity of demand for a good is relatively inelastic (-1 < Ed < 0), the percentage
change in quantity demanded is smaller than that in price. Hence, when the price is raised, the
total revenue increases, and vice versa.
We could comprehend the connection among interest and cost. Reiterating the dialog quickly, The
Law of Demand expresses that Other things continuing as before the interest for an item
increments when its cost falls and it diminishes when its cost increments. Along these lines as
indicated by the law of interest there is an opposite connection among cost and amount requested,
different things continuing as before. These different things which are thought to be steady are
taste or inclination of the shopper, wage of the purchaser, costs of related merchandise and so on.
If these elements experience a change, at that point the opposite relationship may not hold great.
Anyway, we likewise see that for wares like salt or rice we don't see quite a bit of an adjustment
sought after while in the event of products like Air conditioners, Cars and so on even with a little
change there is significant increment popular. The Law of interest while expressing the connection
among interest and value makes reference to just the course of progress sought after yet does not
make reference to anything about the extent of the change which is extremely fundamental in
basic leadership process for the maker and Government. For instance
"If I lower the price of my product, will the sale increase?"
"If I raise the price, will it affect my profit?"
“If sales tax rate is increased will it have an effect on the revenue collection?"
are questions that need to be answered. This information as to how much or to what extent the
quantity demanded of a good will change as a result of a change in its price is provided by the
concept of Elasticity of Demand.
Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes
in the determinants of demand.
There are mainly three quantifiable determinants of demand: -
1. Price of the Good
2. Income of the Consumer
3. Price of the Related Goods
Types of Elasticity of Demand
As we have seen above there are three quantifiable determinants of demand, hence elasticity of
demand can be of three types
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Price elasticity of Demand
Concept of Elasticity of demand Alfred Marshall introduced the concept of elasticity in 1890 to
measure the magnitude of percentage change in the quantity demanded of a commodity to a
certain percentage change in its price or the income of the buyer or in the prices of related goods.
In this section we look at the sensitivity of demand for a product to a change in the product's own
price. Since Price Elasticity of Demand is predominantly used in economic analysis it is
alternatively referred to as Elasticity of Demand. Definition
Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In
technical terms it is the ratio of the percentage change in demand to the percentage change in
price. Thus,
Ep = Percentage change in quantity demanded/Percentage change in price
In mathematical terms it can be represented as: Ep =(∆q/∆p) (p/q)
From the definition it follows that
1. when percentage change in quantity demanded is greater than the percentage change in
price then, price elasticity will be greater than one and, in this case, demand is said to be elastic.
2. when percentage change in quantity demanded is less than the percentage change in price
then, price elasticity will be less than one and, in this case, demand is said to be inelastic.
3. when percentage change in quantity demanded is equal to the percentage change in price
then price elasticity will be equal to one and in this case, demand is said to be unit elastic.
Since the Elasticity of Demand is less than one Demand is inelastic. In other words, we can say
that for a 14% increase in price, demand has declined only by 4%. The negative sign indicates the
inverse relationship between demand and price.
Diagrammatic representation Of Price Elasticity of Demand

Determinants of Price Elasticity of Demand

4. There are number of factors which determine the price elasticity of demand. Let us consider
some of these factors.
5. Firstly, if close substitutes are available then there is a tendency to shift from one product to
another when the price increases and demand is said to be elastic. For example, demand for two
brands of tea. If the price of one brand A increases then the demand for the other brand B
increases. In other words, greater the possibility of substitution greater the elasticity.
6. Secondly how much of the income is spent on a commodity by the consumer. Greater the
proportion of income spent on the commodity greater will be the elasticity.
7. Thirdly the number of uses to which the commodity can be put is important factor
determining elasticity. If the commodity can be put to many uses then the elasticity will be greater.
8. Fourthly if two commodities are consumed jointly then increase in the price of one will
reduce the demand for both.
9. Fifthly time element has an important role to play in determining the elasticity of demand.
Demand is more elastic if time involved is long. In the short run, it is difficult to substitute one
commodity for another.
10. Sixthly Cost of switching between different products and services. There may be significant
transaction costs involved in switching. In this case demand tends to be relatively inelastic. For
example, mobile phone service providers may include penalty clauses in their contracts.
11. Seventhly Who makes the payment, Where the purchaser does not directly pay for the
good, they consume, such as perks enjoyed by employees, demand is likely to be more inelastic.
12. Finally, Brand Loyalty, an attachment to a certain brand either out of tradition or because of
propriety barriers can override sensitivity to price changes, resulting in more inelastic demand.
Measurement of Elasticity of Demand
• Percentage Method.
• Point Elasticity Method.
• Total Outlay Method.
• Arc Elasticity.

5.Describe the advantages of a Socialist Economy.

A socialist economic system is characterized by social ownership and democratic control of the
means of production, which may mean autonomous cooperatives or direct public ownership;
wherein production is carried out directly for use.
Merits and Demerits of Socialist Economy
Merits of Socialist Economy:
• No Labour Exploitation:
There is only one class in a socialistic economy hence there is no question of exploitation. There
are no concept of strikes and lock-outs. Everybody works in a well-knit family way.
• Proper Utilisation of Resources:
Under this economy, all types of natural resources are utilized in a most organized manner. Its
main objective is to exploit these resources for the welfare of society.
• No Wasteful Advertisement:
The government is virtually the owner of almost every sector. Hence, all the individual producers
are also more according to the plan targets. Therefore, the competition among the producers is
almost nil. Hence, very less money is spent on wasteful advertisement.
• Proper Planning:
In order to solve various problems, which arise from time to time, there is proper economic plan in
this type of economy. Thus, with the help of economic plans socialist economy will adopt the
balanced development strategy.
• No Cyclical Fluctuations:
Under socialist economy, no cyclical fluctuations are found. It means economy faces no boom,
depression, unemployment or over production etc. Economic stability is maintained by the
government on the basis of economic planning.
• Social Welfare:
The aim of socialist economy is to maximize social welfare of the society. It provides equal
opportunities of employment to all individual according to their abilities.
• Rapid Economic Development:
The Central Planning Authority is the main figure in a socialist economy. It coordinates the natural,
human and physical resources to attain economic progress of the country. In turn it accelerates
the path of tremendous progress and people enjoy higher standard of living.
• Most Suitable to Developing Countries:
This type of economic system is most suitable to the needs of developing countries as all means
of production are controlled by the government.
Demerits of Socialist Economy:
Economists like Robbins, Maurice Dobb, Georg Halm etc. have criticised the socialist economy on
the following grounds:
• Loss of Consumer Sovereignty:
A consumer has no choice of his own, he acts as a mere slave under this system. Government
produces goods and services keeping in view the needs of the people.
• Less Democratic:
Socialist economy is always less democratic as it possesses no element of freedom. It is also like
government dictatorship.
• No Automatic Functioning:
Under this system, no automatic function in system exists at all. It is the Central Authority, i.e.,
government, that governs the country according to its own interest.
• Evils of Bureaucracy
In socialist economy, all economic activities are controlled by the government. Thus, they develop
all evils of bureaucracy like favouritism, delay, corruption and other sue evils,
• Rigid Economy:
Socialist economy is very rigid and not susceptible to change according to requirements. Hence
people work like a machine and never get any incentive to work.
• Burden on Government:
All the economic activities are performed by the Central Authority on behalf of the government.
Hence, it is overburdened with daily activities and, therefore, it gets very less time to think and
plan for the economic prosperity of the economy.
• Expenditure on Planning:
In fact, planning is a long process in a socialist economy. This expenditure is unnecessarily
wasteful and a burden on the national economy.

6.Explain the defects of Capitalism.

 Defects of Capitalism
Introduction
Capitalism is a financial framework in which capital merchandise are possessed by private people
or organizations. The generation of merchandise and ventures depends on free market activity in
the general market (showcase economy), instead of through focal arranging (arranged economy
or order economy). The most flawless type of capitalism is free market or free enterprise
capitalism, in which private people are totally allowed to figure out where to contribute, what to
deliver or offer, and at which costs to trade products and ventures, without check or controls. Most
current nations practice a blended entrepreneur arrangement or something to that affect that
incorporates government control of business and industry.
Turbo Capitalism
Refers to an unregulated form of capitalism with financial deregulation, privatisation and lower tax
on high earners. Turbo capitalism involves:
• Absence of regulation for banking /finance system. This encourages banks to take risks and
pursue profit through complex financial derivatives rather than basic principles of attracting
deposits and lending.
• Less regulation on abuse of monopoly power.
• Lower income tax and lower capital gains tax giving greater rewards to high income
earners.
• An unregulated labour market, where it is easy to hire and fire workers, and very limited
regulation about working conditions.
The term ‘turbo capitalism’ was coined in 1989 by Edward Lattwak, a senior fellow at the Centre
for Strategic and International Studies, in his book “Turbo-Capitalism: Winners and Losers in the
Global Economy “, (New York, 1999). It reflected on the changes to capitalist societies such as US
and UK since 1980. The 1980s were a period of financial deregulation, privatisation and tax cuts
for the wealthy. Arguably, this led to rising income inequality and also the financial deregulation
played a key role in the unsustainable credit bubble of 2001-2007. Turbo capitalism could also be
referred to as:
Unrestrained capitalism or free market capitalism
Responsible Capitalism
Responsible capitalism is essentially a free market economy, but with a degree of government
regulation to avoid the excesses and inequalities of capitalism. Responsible capitalism would
involve:
• An extensive welfare state to protect those who are unemployed or on low incomes.
• A progressive tax system with high earners paying a higher % of their income to fund
government spending.
• Most industries would be in the private sector, but the government might take responsibility
for areas with substantial positive externalities and social benefits like health care, education,
public transport.
• A willingness to regulate monopolies and protect rights of workers.
• Responsible capitalism is similar to concepts of social market economy
Popular Capitalism
Recently, the Conservative leader David Cameron, spoke about his wish for ‘popular capitalism’.
Presumably this is to take benefits of capitalism, but to make sure everyone benefits from
economic growth. This would involve a degree of redistribution and guarantees of a certain social
welfare safety net. Presumably popular capitalism would be willing to impose greater regulation on
the finance sector to prevent excess risk taking and growing inequality.
But, when politicians use such terms, there is always a degree of ‘vagueness’. As much as
anything it is an attempt to appeal to a wider political audience. ‘Popular capitalism’ could really
mean whatever you want it to.
Crony Capitalism
A term used to refer to the situation where business success is related to strategic influences with
civil servants, politicians and those in authority. It could be used to refer to situations in early
twentieth century US where business leaders had to buy off politicians in return for favours (e.g. in
popular media: Citizen Kane). Arguably a degree of ‘crony capitalism occurs in countries like
China, South Korea and Latin America. The power of the Mafia in Italy is also an example of
‘crony capitalism’
Advanced Capitalism
A term used to refer to societies where capitalism is firmly established. There is widespread
acceptance of status quo, and little political activism over fundamental political issues. In
advanced capitalism, consumerism is important. There is likely an established welfare state to
overcome the worst of the excesses of capitalism.
State Capitalism
State capitalism occurs when state owned industries play a key role within the market economy.
Under state capitalism, the government also plays a key role in planning, for example deciding to
invest in transport and communication. To some extent, China has become a model of state
capitalism. Private firms play a key role, but the government also plays a key role in planning
energy, transport and the Chinese government influences monetary policy and exchange rate
policy. The difference between state capitalism and state socialism is that under state socialism
there is no room for private enterprise and competition.
Merits and Demerits of Capitalistic System
Merits of Capitalistic System:
The main merits of this system are:
• Economic Freedom:
The foremost advantage of this system is that everybody enjoys’ economic freedom as one can
spend one’s income according to one’s wishes. Producers have complete freedom to invest in any
business or trade.
• Automatic Working:
Another advantage according to classical economists is an automatic system. Equilibrium point is
automatically come with the forces of demand and supply.
 • Variety of Goods and Services:
All the basic decisions of what to produce, how to produce and for whom to produce are taken by
producers. Every producer gives attention to consumers’ taste and preferences. Hence, there are
large variety of goods and services; produced in the economy.
• Optimum Use of Resources:
All-natural resources are used to their optimum level as production is undertaken with a sole
purpose: of earning profit and no scope for wastages at all.
• Efficient Producer:
There is very tough I competition among entrepreneurs. They always encouraged to produce best
quality of products. Thus, technical development will lead to increase in higher productivity as well
as efficiency.
• Incentive to efficient:
In this system, incentives are given to the efficient workers in cash or kind. This means every
worker should get reward according to his ability. Hence, workers will try to work more and more,
therefore, total output will also increase.
• New Inventions:
In this type of economy, there is ample scope of new invention. To get more profit every producer
takes initiative to develop new techniques in production.
Demerits of Capitalistic System:
According to Karl Marx, “Capitalism contains the seeds of its own destruction.”
The main demerits of this system are given below:
• Labour Exploitation:
The main defect of capitalism is the exploitation of labour. Labourers get less wages in
comparison to their working hours. The wages less than their marginal productivity are not
sufficient for their livelihood.
• Class Struggle:
A lion’s share of income and resources is controlled by the upper sections of the society, while
others remain deprived of the basic amenities of life. Thus, the entire society is divided between
‘haves and ‘have not’. Hence, the continuous class struggle spoils the health environment of the
economy.
• Wasteful Competition:
Capitalism is a wasteful competition. A lot of money is spent on advertisement and publicity for
pushing the sale of the commodity. Its burden ultimately is borne by the poor consumers in the
form of increased price.
• Threat of Over-Production:
The production is made on a large scale which cannot be changed in a short period. Therefore,
under capitalism, fear of over-production always exists. The Great Depression of 1930s in USA is
an example of it.
 • Economic Fluctuations:
Being automatic in nature, capitalist economy always faces the problem of economic fluctuations
and unemployment. This means the state of instability and uncertainty,
• Unbalanced Growth:
All the resources are put only to those channels where there is maximum profit. Other sectors of
the economy are neglected. As there is no check on the economic system, the growth is
unbalanced in nature.
• No Welfare Activities:
In capitalism, the sole motive is maximum profit, but not the public welfare. Variety of goods are
produced according to market demand, not for any welfare activity.