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The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established in 1968 by the Bank of Sweden, and it was first awarded in 1969, more than 60 years after the distribution of the first Nobel Prizes. Although not technically a Nobel Prize, the Prize in Economic Sciences is identified with the award; its winners are announced with the Nobel Prize recipients, and it is presented at the Nobel Prize Award Ceremony. It is conferred by the Royal Swedish Academy of Sciences in Stockholm.

• The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2011 was awarded jointly to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy".
• Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.
• Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.
• Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates’ seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.

Self Regulatory Organization (SRO) means, an organization of intermediaries or an entity promoted by a stock exchange, as may be recognized by the Board.

SRO is the first level regulator that performs the crucial task of regulating intermediaries representing a particular segment of securities market on behalf of the regulator. An SRO would be seen as an extension of the regulatory authority of SEBI and would perform the tasks delegated to it by SEBI. The role of an SRO is developmental, regulatory, related to grievance redressal and dispute resolution as well as taking disciplinary actions. Therefore, it is crucial that SEBI, after due diligence, recognizes such entity/entities which is/are capable of carrying out responsibilities of an SRO.

Central problems of an economy-

Production, exchange and consumption of goods and services are among the basic economic activities of life. In the course of these basic economic activities, every society has to face scarcity of resources and it is the scarcity of resources that gives rise to the problem of choice. The scarce resources of an economy have competing usages. In other words, every society has to decide on how to use its scarce resources.

The problems of an economy are very often summarised as follows:

• What is produced and in what quantities? Every society must decide on how much of each of the many possible goods and services it will produce. Whether to produce more of food, clothing, housing or to have more of luxury goods. Whether to have more agricultural goods or to have industrial products and services. Whether to use more resources in education and health or to use more resources in building military services. Whether to have more of basic education or more of higher education. Whether to have more of consumption goods or to have investment goods (like a machine) which will boost production and consumption tomorrow.
• How are these goods produced? Every society has to decide on how much of which of the resources to use in the production of each of the different goods and services. Whether to use more labour or more machines. Which of the available technologies to adopt in the production of each of the goods?
• For whom are these goods produced? Who gets how much of the goods that are produced in the economy? How should the produce of the economy be distributed among the individuals in the economy? Who gets more and who gets less? Whether or not to ensure a minimum amount of consumption for everyone in the economy. Whether or not elementary education and basic health services should be available freely for everyone in the economy.

Thus, every economy faces the problem of allocating the scarce resources to the production of different possible goods and services and of distributing the produced goods and services among the individuals within the economy. The allocation of scarce resources and the distribution of the final goods and services are the central problems of any economy.

Law of Demand: If a consumer’s demand for good moves in the same direction as the consumer’s income, the consumer’s demand for that good must be inversely related to the price of the goods.

Normal and Inferior Goods

• The demand function is a relation between the consumer’s demand for a good and its price when other things are given. Instead of studying the relation between the demand for a good and its price, we can also study the relationship between the consumer’s demand for the good and the income of the consumer. The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good.
• For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods. Thus, a consumer’s demand for a normal good move in the same direction as the income of the consumer.
• However, there are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods. As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferior good rise.
• Examples of inferior goods include low-quality food items like coarse cereals. A good can be a normal good for the consumer at some levels of income and an inferior good for her at other levels of income. At very low levels of income, a consumer’s demand for low-quality cereals can increase with income. But, beyond a level, any increase in income of the consumer is likely to reduce her consumption of such food items.

Substitutes and Complements

• The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods that are consumed together are called complementary goods.
• Examples of goods which are a complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements.
• In general, the demand for good moves in the opposite direction of the price of its complementary goods. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes.
• Hence, when decrease in the price of one good causes the demand for another good to decrease, the goods are Substitutes.

Law of Demand: If a consumer’s demand for good moves in the same direction as the consumer’s income, the consumer’s demand for that good must be inversely related to the price of the goods.

Complementary Goods-

• Complementary goods are products which are used together.
• Examples of goods which are a complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements.
• In general, the demand for good moves in the opposite direction of the price of its complementary goods. Hence, a fall in the price of complementary good is not a cause of a decrease in demand.

Substitute Goods

• Substitute goods are two alternative goods that could be used for the same purpose.
• In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes.

ELASTICITY OF DEMAND

The demand for good moves in the opposite direction of its price. But the impact of the price change is always not the same. Sometimes, the demand for good changes considerably even for small price changes. On the other hand, there are some goods for which the demand is not affected much by price changes.

• Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes.
• Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.
• Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. Price elasticity of demand for a good-
• eD = percentage change in demand for the good percentage change in the price of the good
• Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
• In the give question, the demand is rising from 100 units to 120 units, it means there is 20 percent increase in quantitative demand. On the other hand, the price is fallen by 10 percentage. According to the formula Price Elasticity of Demand = 20/10 is equal to 2.
• Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy.
• For instance, some goods are very inelastic, that is, their prices do not change very much given changes in supply or demand, for example, people need to buy gasoline to get to work or travel around the world, and so if oil prices rise, people will likely still buy just the same amount of gas.
• On the other hand, certain goods are very elastic, their price moves cause substantial changes in their demand or its supply.

ELASTICITY OF DEMAND

• The demand for good moves in the opposite direction of its price. But the impact of the price change is always not the same. Sometimes, the demand for good changes considerably even for small price changes. On the other hand, there are some goods for which the demand is not affected much by price changes.
• Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes.
• Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.
• Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price.

Cross elasticity of demand

• The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for other good changes. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.
• The measure of the responsiveness of the demand for a good towards the change in the price of a related good is called cross-price elasticity of demand. It is always measured in percentage terms.
• With the consumption behavior being related, the change in the price of a related good leads to a change in the demand for another good. Related goods are of two kinds, i.e. substitutes and complementary goods.
• In case the two goods are not related, the Coefficient of Cross Elasticity is zero.
• In case the two goods are substitutes for each other like tea and coffee, the cross-price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases.
• On the other hand, in case the goods are complementary in nature like pen and ink, then the cross elasticity will be negative, i.e. demand for ink will decrease if prices of pen increase or vice-versa.

The correct answer is Price effect is positive and income effect is negative.

Key Points

• Giffen goods are inferior goods for which demand increases when price rises and decreases when price falls.
• This unusual behavior occurs because the negative income effect is stronger than the substitution effect.
• When price rises, the consumer becomes poorer in real income terms and buys more of the cheap staple good.
• Thus, for a Giffen good, the overall price effect is positive (price rises → quantity demanded rises).
• The income effect is negative because it is an inferior good.

Additional Information

• Normal Goods:
• Income effect is positive; demand rises with income.
• Inferior Goods:
• Income effect is negative; demand falls as income rises.
• Giffen Goods:
• A special case of inferior goods where negative income effect outweighs substitution effect.

Important Points

• Giffen goods violate the law of demand.
• Price effect = Positive for Giffen goods.
• Income effect = Negative because they are inferior goods.
• Examples often cited: staple foods like bread, rice, or potatoes under poverty conditions.

Production Possibility Curve

• A production possibilities curve (PPC) shows the maximum amount of one good that can be produced given a production level for some other good, and given the total amounts of inputs available for the production of both goods, and given the technology of production.

• The PPC shows the limits on outputs of goods because society does not have unlimited resources. And it shows the trade-off society must bear if more of a good is to be produced.

• The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services.

• The production possibility curve represents graphically alternative production possibilities open to an economy.

• The productive resources of the community can be used for the production of various alternative goods.

• In other words, the production possibility curve can be defined as a graph that represents different combinations of quantities of two goods that can be produced by an economy under the condition of limited available resources. It is also known as the production possibility frontier(PPFs) or transformation curve.

• The PPCs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions.

• In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods (Wheat & Cloth) which the economy can produce with a given amount of resources.

• The Curve shows all of the possible combinations of 2 goods or services that can be produced within a specified time with all its resources fully and efficiently employed.

• The economy can produce at any combination on or inside the curve (C and H).

• Point outside the curve is not attainable (F).

A production possibilities curve (PPC) shows the maximum amount of one good that can be produced given a production level for some other good, and given the total amounts of inputs available for the production of both goods, and given the technology of production. 

The PPC shows the limits on outputs of goods because society does not have unlimited resources. And it shows the trade-off society must bear if more of a good is to be produced.

What creates growth?

• When using a PPC, growth is defined as an increase in potential output over time and illustrated by an outward shift in the curve.
• A PPC will shift inwards when an economy has suffered a loss or exhaustion of some of its scarce resources. This reduces an economy’s productive potential.
• An outward shift of a PPC means that an economy has increased its capacity to produce all goods. This can occur when the economy undertakes some or all of the following:

a. Employs new technology

b. Employs a division of labour, allowing specialization

c. Employs new production methods

d. Increases its labour force

e. Discovers new raw materials: Discoveries of key resources, such as oil, increase an economy’s capacity to produce.

Hence, when the availability of resources increases, the production possibility curve will Shift towards the right.