Demo Quesition

Question description

1-Functional Distribution of Income
Example: In a closed completely labor based economy total $40000 income has
been produced in the last year. The income has been distributed in the
following ways.

Functional distribution of total income
of $40000.

 

Economic Wages = $30000
Economic Profit = $10000
2-Diminishing Returns
Example: Diminishing of labor after 15 units labor

Labor Input

Output

Marginal
Output

10

23

0

11

26

3

12

32

6

13

39

7

14

48

9

15

59

11

16

67

8

Diminishing Return

17

74

7

18

79

5

19

84

5

20

88

4

Figure: Diminishing of labor after 15 units labor

3-Wages
Example: An entrepreneur has opened a business.
In this business, he has hired a person to which monthly $500 is paid. Here,
$500 is the economic wages (return for labor). 

Figure: Economic Wage (Determined by labor demand
and labor supply)

 

Labor

 

 

 

4-Rents
Example: An entrepreneur has opened a business.
In this business, his 2 hector land has been used for business purpose and he
is provided $50000 monthly for the use of his land. Here, $50000 is the
economic rent (return for land).
Figure: Economic Rent (Shaded Area)

 

Land

 

 

 
5-Zero-Rent Land
A has two land. Two workers are needed to work on
the land and grow crops. But A has only one worker available. Due to labor
shortage there is no production and no return from the land. Here, the land of
A is a zero rent land.
6-Profits
Example: An entrepreneur has opened a business
from which he has received $400000 as annual income. Here, $400000 is the
economic profit (return to the proprietor for undertaking the risk).
7-Income distribution
Example: Distribution from the Income of $10000 of a car business is as
follows.
Rent for land:  $2000
Wage for Labor: $7000
Profit for Capital: $1000 
8-Extensive Margin Rent
Example: Suppose, from a 1000 decimal land total
50 kg rice if produced. Now if due to extraordinary fertility of a hand of 1000
decimal 60 kg rice is is produced then Extensive Margin Rent will be 20%
[(60-50)/50].
9-Intensive Margin Rent
Example:Suppose,
usually from a 1000 decimal land total 50 kg rice if produced. Then 55 kg is
produced from a land of 1000 decimal by intensively and productively, intensive
margin rent will be 10% [(55-50)/50].
10-Falling Rate of Profit
Example: In India, population is continuously rising. This causes to
increase the value of the land continuously even though the fertility of the
land is deteriorating. Thus return to the wage earner is decreasing and return
to the land owner is increasing.
11-Steady State
Example: Sweden is an example of Steady State
Economy where population growth rate is zero and there is slightly increasing
stock of physical wealth.
12-Main Issue in Economics

Answering of some questions to ensure
efficient allocation of scarce resources

 

Example: What to produce: Personal Computer
(PC)
  How to produce: By using
technology and labor
  For whom to produce: Who can
effort necessary
  price for Personal Computer
(PC). 
13-Theory of Value
Example: For a mongo, if A pays $5, then as per
‘Theory of Value’ the value of the mango to A is $5.
14-Labor Theory of Value
Example: Socially Necessary labor to produce a
car = 300 labor hours and socially necessary labor to produce 10 karat gold =
300 labor hours. Then as per Labor Theory of Value, 10 karat gold and a car
will have same value.
15-Trade: Law of Comparative
Advantage
Example: M and N both country produces rice and
car. M takes 3 labor hours to produce 1 kg of rice and 5 labor hours to
manufacture 1 car. On the other hand, N takes 5 labor hours to produce 1 kg of
rice, and 3 labor hours to manufacture 1 car. Here, for country M, the
opportunity cost of producing 1 kg of rice is lower as compared to that of
country N. Thus, M has comparative advantage in the production of rice. On the
other hand, for country N, the opportunity cost of manufacturing 1 car is lower
as compared to that of country M. Thus, N has comparative advantage in the
production of rice. As M has comparative advantage in rice production, it
should concentrate on rice production, and as N has comparative advantage in
car manufacturing, it should concentrate on car manufacturing as per Law of
Comparative Advantage theory.
16-Comparative Advantage
Example: M and N both country produces wood
chips. M is located in fertile land where lumber is abundant. On the other
hand, N is located in death valley where lumber is not abundant. In this case,
N country will require to spend more time and resources in producing wood chips
as compared to M country. Thus, M has comparative advantage in terms of
location and resource.
17-Public Finance: Ricardian
Equivalence
Example: As per Public Finance: Ricardian
Equivalence theory, it does not matter whether the US government raise the
necessary funds though tax or debt to meet the public expenditure. US
Government spending can be both – Tax-Financed Government Spending and
Debt-Financed Government Spending.
18-Tax-Financed Government Spending
Example: The US government imposes tax of the
income of the individuals and businesses. In a particular year if $5000 million
tax is collected, and then the amount is spent on infrastructure development of
the country, $5000 million will be said Tax-Financed Government Spending.
19-Ricardian Equivalence
The Portugal government has increased debt
financed government spending to increase the aggregate demand. But people of
the Portugal are not increasing their spending or demand by considering the
fact that the government will raise tax in future to pay off debt undertaken to
finance the spending, and thus they have to pay more tax in future.
20-Deductive Analysis
Example:
Gather information to read and know law of demand. Based on the reading,
knowledge is gathered on the underlying basic relationship in between price and
demand. After understanding the basic relationship in between price and demand,
observe the underlying relationship in market for a product (example TV,
Fridge, Shirt etc).