1. Factors of Production
Factors of production are resources used to produce goods and services. There are four primary factors:
a) Land
- Includes all natural resources: soil, minerals, forests, water bodies.
- Passive factor; return is called rent.
b) Labour
- Human effort, physical or mental, used in production.
- Active factor; return is called wages.
c) Capital
- Man-made resources like machines, tools, infrastructure.
- Not money per se, but assets that aid production.
- Return is called interest.
d) Entrepreneurship
- The person or group that organizes land, labour, and capital.
- Takes risk, makes decisions, innovates.
- Return is called profit.
2. Law of Demand and Supply
a) Law of Demand
“Ceteris paribus (all else constant), when the price of a good increases, its quantity demanded decreases and vice versa.”
- Demand Curve: Downward sloping.
- Exceptions: Giffen goods, Veblen goods (luxury items), necessity goods.
Factors Affecting Demand:
- Price of good
- Income of consumer
- Prices of substitutes and complements
- Tastes and preferences
- Future expectations
b) Law of Supply
“Ceteris paribus, when the price of a good increases, its quantity supplied increases.”
- Supply Curve: Upward sloping.
- Supply Schedule: Table showing price-quantity relationship.
Factors Affecting Supply:
- Price of the good
- Input costs
- Technology
- Government policy (taxes/subsidies)
- Producer expectations
Equilibrium Price
- The price at which quantity demanded = quantity supplied.
- Market clears; no shortage or surplus.
3. National Income Accounting
Definition
- Measures the total economic activity in a country over a given period (usually 1 year).
- Helps gauge economic performance.
Key Aggregates:
| Concept | Meaning | Includes |
|---|---|---|
| GDP (Gross Domestic Product) | Market value of final goods and services produced within a country in a year | Includes output by both residents and foreigners |
| GNP (Gross National Product) | GDP + Net Factor Income from Abroad (NFIA) | Only nationals’ income, regardless of location |
| NNP (Net National Product) | GNP – Depreciation | Accounts for wear and tear of capital |
| National Income (at factor cost) | NNP at factor cost | Excludes indirect taxes, includes subsidies |
| Personal Income | Income received by households | Includes transfer payments |
| Disposable Income | Personal income – direct taxes | Money available for spending/saving |
Methods of Calculating National Income:
1. Production/Output Method
- Adds value added at each stage of production.
2. Income Method
- Adds incomes earned: wages, rent, interest, profits.
3. Expenditure Method
- Adds total expenditure: C (consumption) + I (investment) + G (govt spending) + (X – M)
National Income = National Product = National Expenditure (theoretically equal)
4. Related Concepts
Inflation
- General rise in prices; measured via CPI or WPI.
- Types: Demand-pull, Cost-push.
Monetary Policy
- Controlled by RBI; involves interest rates, money supply.
Fiscal Policy
- Government revenue and expenditure.
- Tools: Taxes, subsidies, public expenditure.
5. GDP vs. HDI vs. GNP
| Indicator | Focus | Criticism |
|---|---|---|
| GDP | Economic output | Ignores income distribution, environment |
| GNP | National income | Less relevant in globalized economies |
| HDI | Health, education, income | Composite and people-centric |
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