Fundamental of Economics

Cost of production of the firm will change with the changes in its output. The relation between cost and output is called “cost function”. The cost function of the firm depends upon the production function and the prices of the factors used for production. How much costs the firm will incur on production depend on the level of output. Moreover, the quantity of a product that will be offered by the firm for supply in the market will depend to a great degree upon the costs of production incurred on the various possible level of output. Short Run and Long Run Costs (Variable and Fixed Costs) Short run is a period of time within which the firm can vary its output by varying only the amount of variable factors, such as labor and raw materials. In the short run, fixed factors such as capital, equipment, building, top management personnel etc. cannot be varied. The short run is a period of time in which only variable factors can be varied (if level of output increases, the costs of var...

Definition of National Income: Traditional Approach: According to Marshall , “National income is the labor and capital of a country, acting on its natural resources; produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.” According to Fisher, “The national income consists solely of services as received by ultimate consumers, whether from their material or from their human environments.” According to Pigou, “National income is that part of the objective income of the community, including income from abroad which can be measured in money.” Modern Approach: According to Siman Kuznets, “National income is the net output of commodities and services flowing during the year from the country’s productive system in the hands of ultimate customers.” According to Lipsey, “National income refers to the total market value of all goods and services produced in the economy during some specified period of time...

The consumption function or propensity to consume refers to income-consumption relationship. It is a functional relationship between two aggregates, i.e., total consumption and gross national income. Symbolically, the relationship is represented as: C = f(Y) Where, C = Consumption Y = Income f = Functional Relationship. Thus the consumption function indicates a functional relationship between C and Y, where C is the dependent and Y is independent variable, i.e., C is determined by Y. In fact, consumption function or propensity to consume is a schedule of the various amounts of consumption expenditure corresponding to different levels of income. Assumption of Consumption Function 1. It is assumed that habit of the people regarding spending does not change or that the propensity to consume remains the same. Normally, the propensity to consume does remain the same; it is more or less stable. This means that we assume that only income changes, whereas the o...