The term fiscal has been derived from the greek word fisc, meaning a basket to symbolize the public purse. Fiscal policy thus means the policy related to the treasury of the government. Fiscal policy is a part of general economic policy of the government which is primarily concerned with the budget receipts and expenditures of the government. All welfare projects are completed under this policy .It also suggests measures to control economic fluctuations which may become violent and create great upheavals in the socio-economic structure of the economy. It also outlines the influence of resource utilization on the level of aggregate demand through affecting the level of aggregate consumption and investment expenditure. Definitions of Fiscal Policy According to U. Hicks “Fiscal policy is concerned with the manner in which all the different elements of public finance, while still primarily concerned with carrying out their own duties, may collectively be gearedContinue reading
Economics Principles
The Law of Diminishing Marginal Utility
The law of diminishing marginal utility was first developed by a German economist Hermann Heinrich Gossen. This law is also known as the first law of Gossen. The law of diminishing marginal utility states that the marginal utility derived from the consumption of every additional unit goes on diminishing, other thing remaining the same. The law of diminishing marginal utility is based on two important facts : Though human wants are unlimited, each single want is satiable. Commodities are not perfect substitute for each other. Therefore, as a consumer consumes more and more units of a commodity, intensity of his/her want for the commodity goes on falling and reaches a point where a consumer do not want any more units of the commodity. That is, when saturation point is reached marginal utility of a commodity becomes zero. Thus, as the amount of consumption of a commodity increases, marginal utility decreases.Continue reading
Income Elasticity of Demand – Concept and Types
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as the ratio of the percentage change in the demand for a commodity to the percentage change in income. Income elasticity of demand can be expressed as follows: Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income For example, consumer’s income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is: ey = 5/25 x 100/2 = 10. It means that 1 percent increase in income results 10 percent increase in demand and vice versa. The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As aContinue reading
Opportunity Cost – Definition, Advantages and Disadvantages
Opportunity cost analysis is an important part of a company’s decision-making processes, but is not treated as an actual cost in any financial statement. While the term opportunity cost has its roots in economics, it’s also a very important concept in the investment world. It’s a model that can be applied to our everyday decisions, as we’re faced with making a choice between the many options we encounter each day. It is a very powerful concept when someone has to make a decision to select a particular product or making a choice. In simple words, opportunity cost means choosing or making a best decision from different option. When one has to make a decision in between various actions to select only one particular work at a time is called opportunity cost. When faced with a decision, the opportunity cost is the value assigned to the next best choice. TheContinue reading
Trade-Off Between Equity And Efficiency
In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity (sense of fairness). If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed. When the resources are distributed we will be faced with a trade-off between efficiency and equity. This trade off is a central principle in economics. The best example of trade-off between equity and efficiency can be explained with environmental policy of the government. Who gets the mostContinue reading
International Trade Theories – Absolute, Comparative and Competitive Advantage
Absolute advantage theory was first presented by Adam Smith in his book “The Wealth of Nations” in 1776. Smith provided the first concept of a nation’s wealth. Adam Smith is a grandfather of economics because he introduced two important concepts that many of the new trade theories are based on these two main concepts, which are specialization and free exchange. However, many arguments were made and many economists thought there was a problem with the theory of absolute advantage after David Ricardo published the theory of “comparative cost” (aka “comparative advantage”) in the early 19th century. Even though Smith and his followers introduced many important points for the thoughts of economic, it is too complicated with this simple version of trade theory in today’s global economy. In 1990, Michael Porter introduced the diamond model of new competitiveness theory. These three trade theories are important in order to make a countryContinue reading