UNIT 3 • No sense of responsibility • Conditions of work

7) “Demand for labor reflects marginal productivity”- Discuss Jan 10 / Nov/ Dec 2009/ • Loss of skill • Social prestige
May/Jun 2012/
• Worker is reduced in application of mind • Future prospects
Labour
• peacefulness of labour
• Labor signifies the contribution of human elements in production. Discuss the business cycle in detail Jan 2010 / Jan 2012/ Nov / Dec 2009
Demand for labour
• Labour refers to any exertion physical or mental undertaken in expectation of a reward, the BUSINESS CYCLE
reward usually begins the payment of money ( the payment of wages) • The demand for labour is determined by its output.
• Business cycle or trade is a part of the capitalist system. It refers to boom & depression.
Characteristics of labour • The labour demand curve shifts up & out over time with capital, technological &
improvements in labour quality. • In business cycle there are wave like fluctuations in aggregate income, employment, output
• Labour is inseparable from labourer (skill is used but not himself) & price level.
• At a given time with a given state of technology there exists relationship between the quantity
• Labour has poor bargaining power of labour inputs & the amount of output. • Fluctuations in economic activity have been occurring periodically in a more or less regular
fashion. These fluctuations have been called business cycle. It may be noted that calling there
• Labour is perishable • By law of diminishing returns each additional unit of labour input will add a smaller & smaller
fluctuations as cycle means they are periodic & occur regularly.
slab of output.
• Labour is less mobile (sentimental attachments)
• The duration of a business cycle has not been of the same length, it has varied from a
Division of labour minimum of two years to a maximum of 10 to 12 years.

Division of labour refers to dividing & sub dividing labour into a number of groups each • Some business cycle have been very short lasting for only 2 to 3 years, while others have
performing only one complete process of production, if the making of an article is split up into lasted for several years.
several processes & each process is entrusted to a separate set of workers is called division of
Definition
labour
1. The business cycle in the general sense may be defined as “alternation of periods of
Advantages of division of labour
prosperity & depression of good and bad trade”.
• Increase in productivity
2. “A trade cycle is composed of periods of good trade characterised by rising prices & low
• Increases in skill unemployment percentages altering with periods of bad trade characterised by falling
prices & high unemployment percentages”.
• Inventions are possible
Phases of business cycle
• Saving timings
• Capitalist countries such as USA & Great Britain have rapid economic growth during the
• Improvements in quality of products last two years. But economic growth in there countries has not followed steady & smooth
upward trend.
• Large scale production
Factors determining wages • Periodically there have been large fluctuation in economic activity (i.e.) change in output,
• Reduction in cost of production
income, employment & prices.
• Price level
• Right man in right place
• The period of high income, output & employment has been called the period of expansion,
• Regularity of work
• Diversification of employment opportunities upswing or prosperity & the period of low income, output and employment has been
• Nature of work described as contraction, recession, downswing or depression.
Disadvantages of division of labour
• Trade expenses • The period of expansion alternates (occur repeatedly) with the period of contraction.
• Monotony ( same job over & over again)

• These alternating period of expansion & contraction in economic activity has been called • In its expansion phase (the expansion of business activity takes place), both output & b) Psychological theory
business cycle. They are also known as trade cycle. employment increases till we have full employment & production at the highest level.
c) Hawtrey’s theory or monetary theory
The four phases of business cycles have been shown • The level of production is at maximum level.
d) Keyen’s theory or trade cycle
• We start from depression or through when the level of economic activity (i.e.) level of • A good amount of net investment is occurring & demands for durable goods are also high.
production and employment is at the lowest level. e) Von Hayek’s theory (or) over investment theory
• Prices also generally rise during the expansion phase but to high level of economic activity
f) Over savings (or) under- consumption theory
• With the revial of economic activity the economic moves into the expansion phases. people enjoy a high standard of living.
g) Schumpeter’s innovation theory
• The expansion cannot continue, where contraction (or) downswing starts. The important features of upswing are

• When the contraction gathers we have depression. Money wage raise, rising prices, high level of employment, Job opportunities, expansion of credit
and borrowing, rise in profits and income. (e.g.) IT Industries
• The downswing continues till the lowest turning point which is also called trough is reached.
3. Recession a) Sun spot theory
The following phases of business cycle have been distinguished
• The turning point from boom condition is called recession. • This is oldest theory of business cycle.
5. Expansion (Boom, upswing or prosperity)
• The failure of a company or a bank bursts the boom & brings a phase of recession. • Sun spot theory was developed in 1975 by Stanley Jevons.
6. Peak (upper turning point)
• Investment are reduced, production comedown, & income & profits decline, business • Sun spots are storms on the surface of the sun caused by violent nuclear explosion there.
7. Contraction (downswing, recession or depression) activity shows sign of dullness.
• Since economies are the older world were heavily dependent on agriculture, changes in
8. Trough (lower turning point) • During recession, not only there is a fall in GNP but also level of employment reduces. The climate condition due to sun spots produced fluctuations in agricultural output.
agricultural class and wage earners would be worst hit.
• The climate variations are due to spots in the sun. Hence the theory is called sun spot
• At times of depression prices also generally fall due to fall in aggregate demand. theory.
• Depression occur when banks start reducing credit (i.e.) contraction in bank credit may • Whenever there is good harvest, the economies enjoy prosperous boom period. There
cause downswing. (e.g.) like low rate of interest for banks, other investment reduces goods periods are intercepted bad period due to bad harvest and we call them depression.
injection of money.
b) Psychological theory
4.Trough
• The psychological feeling of optimism (success) (good must always happen) and
• There is a limit to which level of economic activity can fall. (i.e.) it may last for sometime. pessimism (no confident, thinking everything in wrong) in business are responsible for
boom and depression.
• After a period of depression, recovery sets in. This is the turning point from depression to
revival towards upswing. • This theory is only partially true. The psychological factors may help in gathering
momentum in the upswing or bring the downswing suddenly.
• Expansion of money and credit is injected in the economy and the income of the people
goes up. (i.e.) if the banking system starts expanding credit and because of new technology • This theory does not explain how the booms or slump is initiated.
coming into existence.
• The theory fails to explain as to how a depression starts and how a recovery begins.
Theories of business cycle
c) Monetary theory (Talks about money supply)
• Trade cycle is a highly complex phenomenon and it can’t be explained by a single factor.
• According to Hawtrey “Trade cycle is purely a monetary phenomenon” and he strongly
Explanation • However several theories have been put forward to explain the causes of trade cycle. advocated that changes in the flow of money are exclusively responsible for the changes
1. Expansion or boom ( 1st 2 points are same) in economic activity which in turn creates boom or depression.
a) Sun spot theory or Climate theory
 • The basic cause of boom or depression to Hawtrey is • According to Hayek business cycle, it is the result of over issue of credit at an artificially
low rate of interest. The market rates begin lower than the natural rate.
a) Increasing in the quantity of money raises the availability of bank credit for investment. Characteristics of business cycle
• A fall in the market rate of interest below the natural rate will lead to more investment and
b) Thus, by increasing the supply of credit expansion in money supply causes rate of interest therefore an upward swing takes place. 1. It occurs periodically.
to fail.
• A rise in the market rate of interest over the natural rate will lead to fall in investment and 2. It is all embracing (hold closely in your arms or include).
• Lower rate of interest induces businessmen to borrow more for investment in capital goods downswing takes place. • The business cycle implies that the depression will affect all industries in the entire
and also for investment in keeping more inventories of goods.
• Change in money supply which causes a change in market failure of the banking system to economy and also affecting the economies of other countries.
• If the rate of interest is increased, borrowing gets reduced and as such the business keep the supply of money is constant is responsible for the business cycle.
activities gets reduced. 3. It is wave like patterns (business cycle has set of patterns)
f) Over savings (or) under- consumption theory: • Rising prices, production, employment which will become the features of the upward
In short, Hawtrey’s theory is nothing but inflation and deflation created by the rate of interest.
movement.
According to this theory the business cycle is the result of over saving by which the richer class
d) Keyen’s theory: and under consumption by the poor classes. • Falling prices, employment will become the features of the downward movement.
• According to Keyen, the primary cause of cyclical fluctuations is marginal efficiency of • In a free capitalist society, rich have larger incomes. They save the income and
capital (i.e.) changes in rate of profits on current investment outlay and also due to 4. International in character
automatically invest them as the richer class is unable to spend all income. This leads to
changes in the rate of interest. • Once if it is started in one country it spreads to other countries through TRADE
over- production of goods.
• According to him MEC forms the vital factor in guiding investment (more or less) RELATIONS between them.
• In the free capitalistic economy, majority of people are poor with low income and low
decisions of businessmen. • (e.g.) if there is a recession in USA which is a large importer of goods from other
prosperity to consume. Hence, there is a glut (excess supply) in the market leading to
depression. (i.e.) supply will be there but low consumption. countries, will cause a fall in demand for the imports of other countries.
• But this factor depends on business men psychology.

• This theory approaches very near to psychological theory. • It assumes that all savings are automatically invested. But practically it is not. 5. Profits fluctuate more than any other type of income.

• The rate of interest is a function of quality of money while the MEC depends upon • Mere saving will not lead to investment. • Business cycle causes a lot of uncertainty for business man and makes it difficult to
forecast the economic condition.
a) The supply price of capital assets • This theory is inadequate to explain business cycles.
• During the period of depression, profit may even become negative and many businesses go
b) The expected profits (i.e.) from such capital assets. g) Schumpeter’s innovation theory bankrupt.

• Investment outlay will generate multiple amounts of income and employment. • The theory stresses the role of aggressive businessmen who come along with new ideas, 6. Inventories of goods
investment and innovation.
Weakness of the theory • When depression sets in, the inventories start beyond (i.e.) increase the desired level. This
• Innovation should not be confused with inventions. leads to cuts in production of goods.
• The theory does not throw away any light on the aspects of trade cycle.
• It is only the application of new techniques of production, new materials or new methods of • (When we stock more goods would be wasted, so they cut the production at certain level).
• A sizable fall in the rate of interest will do helpful in investment. But in actual practice, rate doing business.
of interest does not have any influence on investment. • When recovery starts, the inventories go below the desired level
• Innovation may consist of:
• According to Keynes, MEC from the essential factor in guiding the investment decision of • (i.e.) where all the stock will be sold and no stock would be available.
entrepreneurs. But this factor depends o the final analysis of the entrepreneurs (i.e.) the a) Introduction of new product
• This encourages business man to place more orders for goods whose production picks up
psychology of the investors.
b) Introduction of some new method. and stimulates investment in capital goods.
SEE PAGE NO 235 AUJHA for extra notes
c) Opening of a new market for the product. 7. Consumption of durable goods (cars, houses, refrigerators)
e) Von Hayek’s theory (or) over investment theory
• Consumption of durable goods is affected mostly by the cyclical fluctuations.

• Expectations of entrepreneurs change quite often in making investment.

8. Consumption of non durable goods

• Consumption of non durable goods does not vary much during different phases of business
cycle (even if loss people have to eat)

9. The cycles will be similar, but not identical (same)

10. It affects the whole economy

• Generally depression will affect all industries in the entire economy

11. It is a cumulative process

• The movements are cumulative in process.

• Once the upward movement starts, it creates future movements in the same direction by
feeding on itself.

• Similarly, when downward movement starts, it persists (continue) in the same direction,
leading to the worst depression till it is to gain an upward movement.

Control of trade cycle

• The trade cycle creates havoc (a great destruction or disorder) in the economy by

making fluctuations & instability.

• It has become the duty of the government to control the fluctuations caused by trade cycle
& to ensure smooth economic activity.

The trade cycle cannot be controlled by a single operation. It consists of many sided

activities which are as follows

a) Monetary policy

b) Fiscal policy

c) Anti – cyclical budgeting

d) Economic activity

e) Tax rates

f) Government involvement

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UNIT 4