Economics Concepts

The Principle of Opportunity Cost

The opportunity cost of a decision means the sacrifice of alternatives required by that decision. The concept of opportunity cost can be best understood with the help of a few illustrations, which are as follows:

  • The opportunity cost of the funds employed in one’s own business is equal to the interest that could be earned on those funds if they were employed in other ventures.
  • The opportunity cost of the time as an entrepreneur devotes to his own business is equal to the salary he could earn by seeking employment.
  • The opportunity cost of using a machine to produce one product is equal to the earnings forgone which would have been possible from other products.
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Abey Francis

Law of Returns to Scale

The law of returns to scale examines the relationship between output and the scale of inputs in the long-run when all the inputs are increased in the same proportion.

This law  of returns to scale in economics is based on the following assumptions;

  • All factors are variable but the enterprise is fixed.
  • There is no change in technology.
  • Perfect competition prevails in the market.
  • Returns are measured in physical terms.

Three Phases of the Law of Returns to Scale

Depending on whether the proportionate change in output exceeds, equals or decrease in proportionate to the change in both the inputs, the production is classified as increasing returns to scale, constant returns to scale and decreasing returns to scale.… Read the rest

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Gross National Product (GNP)

Gross National Product (GNP)  may be defined as the aggregate market value of all final goods and services produced during a given year. The concept of final goods and services stands for finished goods and services, ready for consumption of households and firms, and exclude raw materials, semi-finished goods and such other intermediary products. More clearly, all sales to households, business investment expenditure, and all government expenditures are obviously regarded as final goods. In an open economy (an economy which has economic relationship with the rest of the world in the form of trade, remittances, investment etc-all economies are open economies),  Gross National Product (GNP) may be obtained by adding up:

  1. The value of all consumption goods which are currently produced
  2. The value of all capital goods produced which is defined as Gross Investment.
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Fiat Money – Meaning, Characteristics and Working

The term fiat money is used to define as any money declared by a government to be legal tender with no commodity backing. Legal tender simply means that there is a law requiring everyone to accept the currency in commerce. Besides, fiat money was state-issued money which is neither fixed in value in terms of any objective standard, nor legally convertible to any other thing that was demanded by someone else. In other word, fiat money is money without intrinsic value. In ancient times when money was not invented trade as a whole was on barter system. “Barter” basically means to pay for something you want with products or services instead of paying for what you want with money.… Read the rest

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Effects of Inflation on Different Groups of Society

It is true that in times of general rise in the price level, if all groups of prices, such as agricultural prices, industrial prices, prices of minerals, wages, rent and profit rise in the same direction and by the same extent, there will be no net effect on any section of people in the community. For example, if the prices of goods and services, which a worker buys rises by 50 per cent and if the wage of the worker also rises by 50 per cent then there is no change in the real income of the worker, ie., his standard of living will remain constant.… Read the rest

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Keynesian View of Inflation

John Maynard Keynes, one of the most influential economists of the 20th century, relates inflation to a price level that comes into existence after the stage of full employment. While, the quantity approach emphasizes the volume of money to be responsible for rise in the price level. Keynes distinguishes between two types of rise in prices (1) rise in prices accompanied by increase in production, and (2) rise in prices not accompanied by increase in production. If an economy is working at a low   level, with a large number of unemployed men and un-utilized resources then expansion of money or some other factors leading to an increase in demand will result not only in a rise in the price level but also rise in the volume of goods and services in an economy.… Read the rest

Abey Francis