Chapter-5

Economic Theory

1*. If peoples income of a country is denoted in a curved line spacethat it has increased, then what does it denote?a) the income is increasingb) the income is decreasingc) dissimilarity is decreasing in income distributiond) dissimilarity in income distribution is increasing

2*. Multiplier process in economic theory is conventionally takento meana) the manner in which prices increaseb) the manner in which banks create creditc) income of an economy grows on account of an initial investmentd) the manner in which government expenditure increases

3*. A financial instrument is called a primary security if it repre-sents the liability ofa) some ultimate borrowerb) the Government of Indiac) a primary cooperative bankd) a commercial bank

4*. Personal disposable income isa) always equal to personal incomeb) always more than personal incomec) equal to personal income minus direct taxes paid by householdd) equal to personal income minus indirect taxes

5*. Which of the following most closely approximates our defi-nition of oligopoly?a) The cigarette industry b) The barber shopsc) The gasoline stations d) Wheat farmers

6. Who said Supply creates its own demand?a) Adam Smith b) J B Sayc) Marshall d) Ricardo

7*. One of the essential conditions of perfect competition isa) product differentiationb) multiplicity of prices for identical products at any one timec) many sellers and a few buyersd) Only one price for identical goods at any one time

8*. The theory of distribution relates to which of the following?a) The distribution of assetsb) The distribution of incomec) The distribution of factor/paymentsd) Equality in the distribution of the income and wealth

9*. If an industry is characterised by economies of scale thena) barriers to entry are not very largeb) long-run unit costs of production decreases as the quantity the

firm produces increasesc) capital requirement are small due to the efficiency of the large

scale operationd) the costs of entry into the market are likely to be substantial

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10*. Says Law of Market holds thata) supply is not equal to demandb) supply creates its own demandc) demand creates its own supplyd) supply is greater than demand

11*. Movement along the same demand curve is know asa) Extension and Contraction of Demandb) Increase and Decrease of Demandc) Contraction of supplyd) Increase of supply

12*. When there is a change in demand leading to a shift of theDemand Curve to the right, at the same price as before, thequantity demanded willa) decrease b) increasec) remain the same d) contract

13*. The income elasticity of demand being greater than one, thecommodity must bea) a necessity b) a luxuryc) inferior goods d) None of these

14*. Marginal efficiency of capital isa) expected rate of return on new investmentb) expected rate of return of existing investmentc) difference between rate of profit and rate of interestd) value of output per unit of capital invested

15*. When there is one buyer and many sellers then, that situationis calleda) Monopoly b) Single buyer rightc) Down right d) Double buyers right

16*. The measure of a workers real wage isa) The change in his productivity over a given timeb) His earnings after deduction at sourcec) His daily earningsd) The purchasing power of his earnings

17*. Average Revenue meansa) the revenue per unit of commodity soldb) the revenue from all commodities soldc) the profit realised from the marginal unit soldd) the profit realised by sale of all commodities

18*. Economic rent refers toa) Payment made for the use of labourb) Payment made for the use of capitalc) Payment made for the use of organisationd) Payment made for the use of land

19*. If the price of an inferior goods falls, its demanda) rises b) fallsc) remains constant d) can be any of the above

20*. The Marginal Utility Curve slopes downward from left to rightindicatinga) A direct relationship between marginal utility and the stock of

commodityb) A constant relationship between marginal utility and the stock

of commodity

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c) A proportionate relationship between marginal utility and thestock of commodity

d) An inverse relationship between marginal utility and the stockof commodity

21*. Capital output ratio of a commodity measuresa) its per unit cost of productionb) the amount of capital invested per unit of outputc) the ratio of capital depreciation to quantity of outputd) the ratio of working capital employed to quantity of output

22*. In equilibrium, a perfectly competitive firm will equatea) marginal social cost with marginal social benefitb) market supply with market demandc) marginal profit with marginal costd) marginal revenue with marginal cost

23*. An economy is in equilibrium whena) planned consumption exceeds planned savingsb) planned consumption exceeds planned investmentc) intended investment equals intended savingsd) intended investment exceeds intended savings

24*. What is book-building?a) Preparing the income and expenditure ledgers of a company (book-

keeping)b) Manipulating the profit and loss statements of a companyc) A process of inviting subscriptions to a public offer of securities,

essentially through a tendering processd) Publishers activity

25*. The method of calculating the national income by the productmethod is otherwise known asa) Income method b) Value added methodc) Expenditure method d) Net output method

26*. Entrepreneurial ability is a special kind of labour thata) is hired out to firms at high wagesb) organises the process of productionc) produces new capital goods to earn interestd) manages to avoid losses by continual innovation

27*. What is narrow money?a) The sum of currency in circulation and the demand deposits in

banksb) The sum of M1 money and the time depositsc) The sum of currency in circulation with the public and the cash

reserves held by banksd) The market value of the stocks held by all the holders excluding

the promoters28*. Transfer earning or alternative cost is otherwise known as

a) Variable cost b) Implicit costc) Explicit cost d) Opportunity cost (economic cost)

29*. Which of the following concepts are most closely associatedwith J M Keynes?a) Control of money supplyb) Marginal utility theoryc) Indifference curve analysisd) Marginal efficiency of captial

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30*. Devaluation of money meansa) decrease in the internal value of moneyb) decrease in the external value of moneyc) decrease in both internal and external values of moneyd) the government takes back currency notes of any denominations

31*. Demand of commodity mainly depends upona) Purchasing will b) Purchasing powerc) Tax policy d) Advertisement

32*. Basic infrastructure facilities in Economics are known asa) Human capital b) Physical capitalc) Social overheads capital d) Working capital

33*. Evaluating all the options to find out most suitable solution tobusiness problems is inter-disciplinary activities. It is calleda) Professional research b) Management researchc) Operational research d) Commercial research

34*. A seller or buyer protects his business or holdings from changingprices and takes action against it. It is known asa) defence b) bettingc) inter-trading d) mortgage

35*. Devaluation usually causes the internal prices toa) fall b) risec) remain unchanged d) None of the above

36. According to Keynesian theory of income determination, at fullemployment, a fall in aggregate demand causesa) a fall in prices of output and resourcesb) a fall in real gross national product and employmentc) a rise in real gross national product and investmentd) a rise in prices of output and resources

37*. When aggregate supply exceeds aggregate demanda) unemployment falls b) prices risec) inventories accumulate d) unemployment develops

38*. Equilibrium price meansa) Price determined by demand and supplyb) Price determined by cost and profitc) Price determined by cost of productiond) Price determined to maximise profit

39*. When marginal utility is zero, the total utility isa) Minimum b) Increasingc) Maximum d) Decreasing

40*. Which unit of valuation is known as Paper Gold?a) Eurodollar b) Petrodollar c) SDR d) GDR

41*. Dear Money meansa) low rate of interest b) high rate of interestc) depression d) inflation

42*. Sellers market denotes a situation wherea) commodities are available at competitive ratesb) demand exceeds supplyc) supply exceeds demandd) supply and demand are evenly balanced

43*. Legal Tender Money refers toa) Cheques b) Draftsc) Bill of exchange d) Currency notes

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44*. The sum total of incomes received for the services of labour,land or capital in a country is calleda) Gross domestic product b) National incomec) Gross domestic income d) Gross national income

45*. Greshams Law meansa) Good money replaces bad money in circulationb) Bad money replaces good money in circulationc) Good money promotes bad money in the systemd) Bad money promotes good money in the system

46*. Bull and bear are related to which commercial activity?a) Banking b) E-commercec) International trade d) Stock market

47*. The share broker who sells shares in the apprehension of fallingprices of shares is calleda) Bull b) Dog c) Bear d) Stag

48*. The fixed cost on such factors of production which are neitherhired nor bought by the firm is calleda) social cost b) opportunity costc) economic cost d) surcharged cost

49*. The break-even point is wherea) marginal revenue equals marginal costb) average revenue equals average costc) total revenue equals total costd) None of these

50*. One of the essential conditions of Mono-polistic competitioni sa) Many buyers but one sellerb) Price discriminationc) Product differentiationd) Homogeneous product

51*. In a Laissez-Faire economya) the customers take all the decisions regarding production of all

the commoditiesb) the Government does not interfere in the free functioning of

demand and supply forces in the marketc) the private-sector takes all the decisions for price-determination

of various commodities producedd) the Government controls the allocation of all the factors of

production52*. A firm is in equilibrium when its

a) marginal cost equals the marginal revenueb) total cost is minimumc) total revenue is maximumd) average revenue and marginal revenue are equal

53*. Given the money wages, if the price level in an economyincreases, then the real wages willa) increase b) decreasec) remain constant d) become flexible

54*. The outcome of devaluation of currency isa) increased export and improvement in balance of paymentb) increased export and foreign reserve deficiencyc) increased import and improvement in balance of paymentd) increased export and import

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55*. What is referred to as Depository Services?a) A new scheme of fixed depositsb) A method for regulating stock exchangesc) An agency for safe-keeping of securitiesd) An advisory service to investors

56*. The Interest Rate Policy is a component ofa) Fiscal Policy b) Monetary Policyc) Trade Policy d) Direct Control

57*. A mixed economy works primarily through thea) market mechanismb) central allocative machineryc) market mechanism regulated by Government policyd) market mechanism guided by Government participation and

planning58*. In Economics, production means

a) manufacturing b) makingc) creating utility d) farming

59*. According to modern thinking, the Law of Diminishing Returnsapplies toa) agriculture b) industryc) mining d) all fields of production

60*. The concept that under a system of free enterprise, it isconsumers who decide what goods and services shall be producedand in what quantities, is known asa) Consumer Protection b) Consumers Decisionc) Consumer Preference d) Consumers Sovereignty

61*. Seawater, fresh air, etc are regarded in Economics asa) Giffen goods b) Inferior goodsc) free goods d) normal goods

62*. If the price of tea falls, demand for coffee willa) increase b) decreasec) remain same d) None of these

63*. Which of the following does not determine supply of labour?a) Size and age-structure of populationb) Nature of workc) Marginal productivity of labourd) Work-leisure ratio

64*. Prime cost is equal toa) Variable cost plus administrative costb) Variable cost plus fixed costc) Variable cost onlyd) Fixed cost only

65*. The practice of selling goods in a foreign country at a pricebelow their domestic selling price is calleda) diplomacy b) discriminationc) dumping d) double pricing

66*. Who propounded the market law?a) Adam Smith b) J B Sayc) T R Malthus d) David Recardo

67*. The national income consists of a collection of goods andservices reduced to common basis by being measured in termsof money. Who says this?

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a) Samuelson b) Kuznetsc) Hicks d) Pigou

68*. Capital-Output Ratio measuresa) its per unit cost of productionb) the amount of capital invested per unit of outputc) the ratio of capital depreciation to quantity of outputd) the ratio of working capital employed to quantity of output

69*. Engels Law states the relationship betweena) quantity demanded and price of a commodityb) quantity demanded and price of substitutesc) quantity demanded and tastes of the consumersd) quantity demanded and income of the consumers

70*. The demand curve for Giffen goods isa) upward risingb) downward fallingc) parallel to the quantity axisd) parallel to the price axis

71*. All of the goods which are scarce and limited in supply arecalleda) Luxury goods b) Expensive goodsc) Capital goods d) Economic goods

72*. Which is the most essential function of an entrepreneur?a) Supervision b) Managementc) Marketing d) Risk bearing

73*. Knowledge, technical skill, education etc in economics, areregarded asa) social-overhead capital b) human capitalc) tangible physical capital d) working capital

74*. Purchasing Power Parity theory is related witha) Interest rate b) Bank ratec) Wage rate d) Exchange rate

75*. Imputed gross rent of owner-occupied buildings is a part ofa) capital formation b) final consumptionc) intermediate consumption d) consumer durable

76*. Economies of Scale means reduction ina) unit cost of prouction b) unit cost of distributionc) total cost of production d) total cost of distribution

77*. With which form of economy is the term Laissez-faireassociated?a) Capitalist economy b) Socialist economyc) Mixed economy d) Command economy

78*. The supply of agricultural products is generallya) elastic b) inelasticc) perfectly elastic d) perfectly inelastic

79*. Who among the following is not a classical economist?a) David Ricardo b) John Stuart Millc) Thomas Malthus d) John Maynard Keynes

80*. The process of curing inflation by reducing money supply iscalleda) Cost-push Inflation b) Demand-pull inflationc) Disinflation d) Reflation

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81*. The main determinant of real wage isa) extra earning b) nature of workc) promotion prospect d) purchasing power of money

82*. A refrigerator operating in a chemists shop is an example ofa) free goods b) final goodsc) producers goods d) consumers goods

83*. When average cost production (AC) falls, marginal cost ofproduction must bea) Risingb) Fallingc) Greater than the average costd) Less than the average cost

84*. Production function expressesa) technological relationship between physical inputs and outputb) financial relationship between physical inputs and outputc) relationship between finance and technologyd) relationship between factors of production

85*. Interest is a reward for parting with liquidity is according toa) Keynes b) Marshallc) Haberler d) Ohlin

86*. Extension or contraction of quantity demanded of a commodityis a result of a change in thea) unit price of the commodityb) income of the consumerc) tastes of the consumerd) climate of the region

87*. Cross elasticity of demand between petrol and car isa) infinite b) positivec) zero d) negative

88*. The Law of Demand expressesa) effect of change in price of a commodity on its demandb) effect of change in demand of a commodity on its pricec) effect of change in demand of a commodity over the supply of its

substituted) None of the above

89*. A situation where we have people whose level of income is notsufficient to meet the minimum consumption expenditure isconsidered asa) Absolute Poverty b) Relative Povertyc) Urban Poverty d) Rural Poverty

90*. Full convertibility of a rupee meansa) purchase of foreign exchange for rupees freelyb) payment for imports in terms of rupeesc) repayment of loans in terms of rupeesd) determination of rate of exchange between rupee and foreign

currencies freely by the market forces of demand and supply91*. An exceptional demand curve is one that moves

a) upward to the right b) downward to the rightc) horizontally d) vertically

92*. Production function explains the relationship betweena) initial inputs and ultimate outputb) inputs and ultimate consumption

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c) output and consumptiond) output and exports

93*. The term stagflation refers to a situation wherea) growth has no relation with the change in pricesb) rate of growth and prices both are decreasingc) rate of growth is faster than the rate of price increased) rate of growth is slower than the rate of price increase

94*. In Economics the Utility and Usefulness havea) same meaning b) different meaningc) opposite meaning d) None of the above

95*. If two commodities are complements, then their cross-priceelasticity isa) zero b) positivec) negative d) imaginary number

96*. Opportunity cost of production of a commodity isa) the cost that the firm could have incurred when a different

technique was adoptedb) the cost that the firm could have incurred under a different method

of productionc) the actual cost incurredd) the next best alternative output

97*. Surplus earned by a factor other than land in the short period oftime referred to asa) economic rent b) net rentc) quasi-rent d) super-normal rent

98*. Price theory is also known asa) Macroeconomics b) Development Economicsc) Public Economics d) Microeconomics

99*. A want becomes a demand only when it is backed by thea) Ability to purchase b) Necessity to buyc) Desire to buy d) Utility of the product

100*. The terms Microeconomics and Macro-economics were coinedbya) Alfred Marshall b) Ragner Nurksec) Ragner Frisch d) J M Keynes

101*. Economics is what it ought to be, This statement refers toa) Normative economics b) Positive economicsc) Monetary economics d) Fiscal economics

102*. The excess of price a person is to pay rather than forego theconsumption of the commodity is calleda) Price b) Profitb) Producers surplus c) Consumers surplus

103*. When the price of a commodity falls, we can expecta) the supply of it to increaseb) the demand for it to fallc) the demand for it to stay constantd) the demand for it to increase

104*. The most distinguishing feature of oligopaly isa) number of firmsb) interdependencec) negligible influence on priced) price leadership

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105*. Which of the following cost curve is never U-shaped?a) Marginal cost curveb) Average variable cost curvec) Average fixed cost curved) Average cost curve

106*. Kinked demand curve is a feature ofa) Monopoly b) Oligopolyc) Monopsony d) Duopoly

107*. Demand for complementary goods is known asa) Joint demand b) Derived demandc) Direct demand d) Cross demand

108*. Plant and machinery area) Producers goods b) Consumers goodsc) Distributors goods d) Free goods

109*. The addition to total cost by producing an additional unit ofoutput by a firm is calleda) Variable cost b) Average costc) Marginal cost d) Opportunity cost

110*. In a perfectly competitive market a firmsa) Average Revenue is always equal to Marginal Revenueb) Marginal Revenue is more than Average Revenuec) Average Revenue is more than Marginal Revenued) Marginal Revenue and Average Revenue are never equal

Answers1. c 2. c 3. a 4. c 5. a 6. b7. d 8. d 9. b 10. b 11. b 12. b13. b 14. a 15. b 16. d 17. a 18. d19. a 20. d 21. b 22. d 23. c 24. c25. d 26. b 27. a 28. d 29. d 30. b31. b 32. c 33. c 34. a 35. c 36. a37. c 38. a 39. c 40. c 41. b 42. b43. d 44. c 45. b 46. d 47. c 48. a49. b 50. c 51. b 52. a 53. b 54. a55. c 56. b 57. d 58. c 59. d 60. d61. c 62. b 63. c 64. a 65. c 66. b67. c 68. b 69. d 70. a 71. d 72. d73. b 74. d 75. b 76. a 77. a 78. b79. d 80. c 81. d 82. b 83. d 84. a85. a 86. a 87. d 88. a 89. a 90. d91. b 92. a 93. d 94. b 95. c 96. d97. c 98. d 99. a 100. c 101. a 102. c103. d 104. b 105. c 106. b 107. a 108. a

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109. c 110. a

Explanatory Notes1. It shows inequality in income distribution. Inequality indices can

also be derived directly from the Lorenz curve. Perhaps the mostcommonly used inequality index is the Gini coefficient, whichranges from 0 (perfect equality) to 1 (perfect inequality). It is theratio of the area enclosed by the Lorenz curve and the perfect equal-ity line to the total area below that line.

2 . In economics, a multiplier is a factor of proportionality that measureshow much an endogenous variable changes in response to a changein some exogenous variable. For example, suppose a one-unit changein some variable x causes another variable y to change by M units.Then the multiplier is M. In monetary macroeconomics and banking,the money multiplier measures how much the money supply increasesin response to a change in the monetary base. The multiplier mayvary across countries, and will also vary depending on what measuresof money are considered.

3. Instruments (certificates) issued by the ultimate borrower are calledprimary securities. Instruments issued by intermediaries on behalfof the ultimate borrower are called indirect securities. The marketfor instruments (also called securities) issued for the first time, iscalled the primary market. Primary security is the asset createdout of the credit facility extended to the borrower and/or which aredirectly associated with the business/project of the borrower forwhich the credit facility has been extended.

4. Disposable income is total personal income minus personal currenttaxes. In national accounts definitions, personal income minuspersonal current taxes equals disposable personal income.Subtracting personal outlays (which includes the major category ofpersonal (or, private) consumption expenditure) yields personal (or,private) savings.

5. An oligopoly is a market form in which a market or industry isdominated by a small number of sellers (oligopolists). Because thereare few sellers, each oligopolist is likely to be aware of the actionsof the others. The decisions of one firm influence, and are influ-enced by, the decisions of other firms. Businesses that are part ofan oligopoly, share some common characteristics: they are less con-centrated than in a monopoly, but more concentrated than in acompetitive system. This creates a high amount of interdependencewhich encourages competition in non-price-related areas, like ad-vertising and packaging. The tobacco companies, soft drink compa-nies, and airlines are examples of an imperfect oligopoly.

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7. The fundamental condition of perfect competition is that there mustbe a large number of sellers or firms. Homogeneous Commodity isthe second fundamental condition of a perfect market. The productsof all firms in the industry are homogeneous and identical. In otherwords, they are perfect substitutes for one another. There are notrademarks, patents etc to distinguish the product of one sellerfrom that of another. Under perfect competition, the control overprice is completely eliminated because all firms produce homogeneouscommodities. This condition ensures that the same price prevailsin the market for the same commodity.

8. In economics, distribution theory is the systematic attempt to accountfor the sharing of the national income among the owners of thefactors of productionland, labour and capital. Traditionally,economists have studied how the costs of these factors and the sizeof their returnrent, wages, and profitsare fixed. The theory ofdistribution involves three distinguishable sets of questions. First,how is the national income distributed among persons? Second,what determines the prices of the factors of production? Third,how is the national income distributed proportionally among thefactors of production?

9. In microeconomics, economies of scale are the cost advantages thatan enterprise obtains due to expansion. There are factors that causea producers average cost per unit to fall as the scale of output isincreased. Economies of scale is a long run concept and refers toreductions in unit cost as the size of a facility and the usage levelsof other inputs increase.

10. Says Law, or the Law of Market, is an economic principle ofclassical economics named after the French businessman andeconomist Jean Baptiste Say (1767-1832), who stated that supplycreates its own demand. Supply creates its own demand is theformulation of Says Law by John Maynard Keynes.

11. A shift in the demand curve is caused by a factor affecting demandother than a change in price. If any of these factors change thenthe amount consumers wish to purchase changes whatever the price.The shift in the demand curve is referred to as an increase ordecrease in demand. A movement along the demand curve occurswhen there is a change in price. This may occur because of a changein supply conditions. The factors affecting demand are assumed tobe held constant. A change in price leads to a movement along thedemand curve and it referred to as a change in quantity demanded.

12. In economics, the demand curve is the graph depicting therelationship between the price of certain commodity and the amountof it that consumers are willing and able to purchase at that givenprice. The shift of a demand curve takes place when there is achange in any non-price determinant of demand, resulting in a

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new demand curve. There is movement along a demand curve whena change in price causes the quantity demanded to change. Whenthere is a change in an influencing factor other than price, theremay be a shift in the demand curve to the left or to the right, as thequantity demanded increases or decreases at a given price. Forexample if there is a positive news report about the product thequantity demanded at each price may increase as demonstrated bythe demand curve shifting to the right.

13. In economics, income elasticity of demand measures theresponsiveness of the demand for the goods to a change in theincome of the people demanding the goods, ceteris paribus. It iscalculated as the ratio of the percentage change in demand to thepercentage change in income. For example, if in response to a 10%increase in income, the demand for the goods increased by 20%,

the income elasticity of demand would be 2%10%20

. A positive income

elasticity of demand is associated with normal goods; an increasein income will lead to a rise in demand. If income elasticity ofdemand of a commodity is less than 1, these are necessity goods. Ifthe elasticity of demand is greater than 1, these are luxury goods orsuperior goods.

14. The volume of investment depends upon the following two factors:(a) rate of interest; and (b) marginal efficiency of capital. Beforeinvesting the money businessman compares interest with the rateof marginal efficiency capital. If they expect that rate of profit willbe greater than the rate of interest, then they invest the moneyotherwise not. The expected rate of return on capital is called themarginal efficiency of capital. In other words, marginal efficiencyof capital is a return on investment which is based partly onexpectations of future yields and partly on the actual price of thecapital goods concerned.

15. In economics, a monopsony (mono: single) is a market form inwhich only one buyer faces many sellers. It is an example of imperfectcompetition, similar to a monopoly, in which only one seller facesmany buyers. As the only purchaser of goods or services, themonopsonist may dictate terms to its suppliers in the same mannerthat a monopolist controls the market for its buyers. It is also knownas Single Buyer Right. A single-payer universal health care system,in which the government is the only buyer of health care services,is an example of a monopsony. Another possible monopsony coulddevelop in the exchange between the food industry and farmers.

16. A real wage rate is a nominal wage rate divided by the price ofgoods and is a transparent measure of how much of the goods anhour of work buys. It provides an important Indicator of the livingstandards of workers, and also of the productivity of workers. Whiledifferences in earnings or incomes may be misleading indicators ofworker welfare, real wage rates are comparable across time andlocation. Nominal wages are not sufficient to tell us if workers gain

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since, even if wages rise, the price of one of the goods also riseswhen moving to free trade. The real wage represents the purchasingpower of wages that is, the quantity of goods the wages willpurchase

17. Average revenue is the revenue per unit of the commodity sold.Since the demand curve shows the relationship between price andthe quantity demanded, it also represents the average revenue orprice at which the various amounts of a commodity are sold, becausethe price offered by the buyer is the revenue from sellers point ofview. Therefore, average revenue curve of the firm is the same asdemand curve of the consumer.

18. Rent refers to that part of payment by a tenant which is made onlyfor the use of land, ie, free gift of nature. The payment made by anagriculturist tenant to the landlord is not necessarily equals to theeconomic rent. A part of this payment may consist of interest oncapital invested in the land by the landlord in the form of buildings,fences, tube wells, etc. The term economic rent refers to that partof payment which is made for the use of land only, and the totalpayment made by a tenant to the landlord Is called contract rent.Economic rent is also called surplus because it emerges withoutany effort on the part of a landlord.

19. Some goods are known as inferior goods. With inferior goods, thereis an inverse relationship between real income and the demand forthe goods in question. If real incomes rise, the demand for inferiorgoods will fall. If real incomes fall (in a recession, for instance), thedemand for inferior goods will rise. For example, bus travel. Aspeople get richer, they are more likely to buy themselves a car, oruse a taxi, rather than rely on the more inferior bus, so the demandfor bus travel falls as real incomes rise.

20. The Marginal Utility Curve is a curve illustrating the relationbetween the marginal utility obtained from consuming an additionalunit of goods and the quantity of the goods consumed. The negativeslope of the marginal utility curve reflects the law of diminishingmarginal utility. The marginal utility curve also can be used to derivethe demand curve. Marginal Utility is the utility derived from thelast unit of a commodity purchased. One of the earliest explanationsof the inverse relationship between price and quantity demanded isthe law of diminishing marginal utility. This law suggests thatas more of a product is consumed the marginal (additional) benefitto the consumer falls; hence consumers are prepared to pay less.

21. Capital Output Ratio is the ratio of capital used to produce anoutput over a period of time. This ratio has a tendency to be highwhen capital is cheap as compared to other inputs. For instance, acountry with abundant natural resources can use its resource inlieu of capital to boost its output; hence the resulting Capital OutputRatio is low. The Capital Output Ratio tends to increase if the capitalavailable in country is cheaper than the other inputs. Therefore the

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countries that are rich in natural resources have a low capital outputratio. This is because they can easily substitute the capital withnatural resource in order to increase the output. When countriesuse their natural resources instead of capital then Capital OutputRatio (COR) reduces.

22 . A perfectly competitive firms supply curve is that portion of itsmarginal cost curve that lies above the minimum of the averagevariable cost curve. A perfectly competitive firm maximises profit byproducing the quantity of output that equates price and marginalcost. In that price equals marginal revenue for a perfectly competitivefirm, price is also equal to marginal cost. In other words, the firmproduces by moving up and down along its marginal cost curve. Themarginal cost curve is thus the perfectly competitive firms supplycurve.

23. In economics, economic equilibrium is a state of the world whereeconomic forces are balanced and in the absence of externalinfluences the (equilibrium) values of economic variables will notchange. The condition of equilibrium of income is the equality ofintended savings and intended investment. An economy is inequilibrium when total savings equals total investment.

24. Book-building refers to the process of generating, capturing, andrecording investor demand for shares during an IPO (or othersecurities during their issuance process) in order to support efficientprice discovery. Usually, the issuer appoints a major investmentbank to act as a major securities, underwriter or book-runner. Thebook is the off market collation of investor demand by the book-runner and is confidential to the book-runner, issuer, andunderwriter. Book-building is a process of price discovery used inpublic offers. The issuer sets a base price and a band within whichthe investor is allowed to bid for shares.

25. Primarily there are three methods of measuring national income.Which method is to be employee depends on the availability of dataand purpose. The three methods are Product Method, Income Methodand Expenditure Method. According to Product Method the totalvalue of final goods and services produced in a country during ayear is calculated at market prices. According to this method onlythe final goods and services are included and the intermediary goodsand services are not taken into account. In this method, NationalOutput National Expenditure (Aggregate Demand) = NationalIncome.

26. In economics, factors of production are the inputs to the productionprocess. Factors of production may also refer specifically to theprimary factors, which are stocks including land, labour (the abilityto work), and capital goods applied to production. Many economiststoday consider human capital (skills and education) as the fourthfactor of production, with entrepreneurship as a form of human

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capital. In markets, entrepreneurs combine the other factors ofproduction, land labour and capital, in order to make a profit. Oftenthese entrepreneurs are seen as innovators, and developing newways to produce new products. In a planned economy, centralplanners decide how land, labour and capital should be used toprovide for maximum benefit for all citizens.

27. The four main monetary aggregates of measures of money supplywhich reflect the state of the monetary sector are:(i) M1 (Narrow money) = Currency with the public + demand depositsof the public, (ii ) M2 = Ml + Post Office Savings deposits;(iii) M3 (Broad money) = Ml + time deposits of the public with banksand (iv) M4 = M3 + Total post office deposits. So Narrow Money issimply a category of money supply that includes all physical moneylike coins and currency along with demand deposits and other liquidassets held by the central bank. This category of money is consideredto be the most readily available for transactions and commerce.

28. Opportunity cost is the cost of any activity measured in terms ofthe value of the next best alternative forgone (that is not chosen). Itis the sacrifice related to the second best choice available to someone,or group, who has picked among several mutually exclusive choices.When economists refer to the opportunity cost of a resource, theymean the value of the next-highest-valued alternative use of thatresource. If, for example, we spend time and money going to a movie,we cannot spend that time at home reading a book, and we cannotspend the money on something else. If our next-best alternative toseeing the movie is reading the book, then the opportunity cost ofseeing the movie is the money spent plus the pleasure we forgo bynot reading the book.

29. The Marginal Efficiency of Capital (MEC) is that rate of discountwhich would equate the price of a fixed capital asset with its presentdiscounted value of expected income. The term marginal efficiencyof capital was introduced by John Maynard Keynes in his GeneralTheory, and defined as the rate of discount which would make thepresent value of the series of annuities given by the returns expectedfrom the capital asset during its life just equal its supply price.

30. Devaluation refers to a decline in the value of a currency in relationto another, usually brought about by the actions of a Central Bank orMonetary Authority. Devaluation is sometimes used more generallyto describe any significant drop in a currencys internationalexchange rate, although usually a decline caused by market forceswith no government intervention is termed depreciation.Devaluations are most often associated with developingcountries that dont allow their currency prices to float freelyon the open market.

31. The demand of commodity mainly stems from the consumptioncapacity of the buyer. Demand is equal to desire plus ability to pay

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plus will to spend. Demand for a commodity depends upon numberof factors called determinants.

32. Social overheads capital is the capital spent on social infrastructure,such as schools, universities, hospitals, libraries. They are capitalgoods of types which are available to anybody, hence social; and arenot tightly linked to any particular part of production, henceoverhead. Because of their broad availability they often have to beprovided by the government. Examples of social overhead capitalinclude roads, schools, hospitals, and public parks.

33. Operational research is a discipline that deals with the applicationof advanced analytical methods to help make better decisions.Employing techniques from other mathematical sciences, such asmathe-matical modeling, statistical analysis, and mathematicaloptimisation, operation research arrives at optimal or near-optimalsolutions to complex decision-making problems. In a nutshell,operation research (OR) is the discipline of applying advancedanalytical methods to help make better decisions.

34. It is known as defence. It is a type of resistance against danger,attack, or harm to business or holding. A seller or buyer resorts todefence as a means of protection.

35. Devaluation reduces the export price in term of foreign currenciesin the world market. As a result the exports are increased so as toincrease the revenue of the country. When the exports are increasedall efforts are made to increase the production of the country.However, devaluation of currency is in relation to external currenciesand external trade. It has effects on a countrys international tradeby alluring traders. But, internal prices remain unaffected.

37. Deflation and recession set in when aggregate supply exceedsaggregate demand. This will lead to a buildup in stocks (inventories)and this sends a signal to producers either to cut prices (to stimulatean increase in demand) or to reduce output so as to reduce thebuildup of excess stocks. Either way, there is a tendency for outputto move closer to the current level of demand.

38. Equilibrium price is a state in economy where the supply of goodsmatches demand. When a major index experiences a period ofconsolidation or sideways momentum, it can be said that the forcesof supply and demand are relatively equal and that the market is ina state of equilibrium. In short, it is the market price at which thesupply of an item equals the quantity demanded.

39. Marginal utility measures the extra utility (or satisfaction) fromconsuming an additional unit of a product. Total utility is the totalsatisfaction from the consumption of the product. According to theLaw of Diminishing Marginal Utility, total utility increases at adiminishing rate. When marginal utility is 0 this means there is noincrease in total satisfaction from the consumption of that unit. So

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the total unit is at maximum.

40. Paper Gold is a measure of a countrys reserve assets in theinternational monetary system. It is also called Special DrawingRights (SDRs) which is an international reserve asset, created bythe IMF in 1969 to supplement its member countries official reserves.Its value is based on a basket of four key international currencies,a n dSDRs can be exchanged for freely usable currencies. SDRs mayactually represent a potential claim on IMF member countries non-gold foreign exchange reserve assets which are usually held inthose currencies.

41. Dear Money, also Known as tight money, is money which has tobe borrowed at a high interest rate, and so restricts expenditure bycompanies. This situation can be a result of a restricted moneysupply, causing interest rates to be pushed up due to the forces ofsupply and demand. Businesses may have a tough time raising capitalduring a period of dear money.

42. Sellers market is a market which has more buyers than sellers.High prices result from this excess of demand over supply. Theopposite of the sellers market is the buyers market, where supplygreatly exceeds demand.

43. Legal Tender is a medium of payment allowed by law or recognisedby a legal system to be valid for meeting a financial obligation. Papercurrency and coins are common forms of legal tender in manycountries. Legal Tender Money is a type of payment that is protectedby law. A legal tender, also known as the forced tender, is a verysecured and it is impossible to deny the legal tender while subsidinga debt which is assigned in the same medium of exchange. Theterm legal tender does not represent the money itself; rather it is akind of status which can be bestowed on certain types of money.

44. The Gross Domestic Income (GDI) is the total income received byall sectors of an economy within a nation. It includes the sum of allwages, profits, and taxes, minus subsidies. Since all income isderived from production (including the production of services), thegross domestic income of a country should exactly equal its grossdomestic product (GDP).

45. Greshams Law is an economic principle that states: When agovernment compulsorily overvalues one type of money andundervalues another, the undervalued money will leave the countryor disappear from circulation into hoards, while the overvaluedmoney will flood into circulation. It is commonly stated as: Badmoney drives out good. More exactly, if coins containing metal ofdifferent value have the same value as legal tender, the coinscomposed of the cheaper metal will be used for payment, whilethose made of more expensive metal will be hoarded or exportedand thus tend to disappear from circulation.

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46. Both the terms are related to stock market. Investors who take abull approach purchase securities under the assumption that theycan be sold later at a higher price. A bear is considered to be theopposite of a bull. Bear Investors believe that the value of a specificsecurity or an industry is likely to decline in the future.

47. A bear market is a market condition in which the prices of securitiesare falling, and widespread pessimism causes the negative sentimentto be self-sustaining. As investors anticipate losses in a bear marketand selling continues, pessimism only grows. Bear investors believethat the value of a specific security or an industry is likely to declinein the future.

48. Social cost is defined as a sum of the private cost and externalcosts. The social cost is generally not borne by an individual. It maybe borne by entire society, city or even country. This is not a one-time cost like private cost. This cost is recurrent and it is verydifficult to calculate due to the inclusion of external costs. The costmay result from an event, action, or policy changes. Social costs arenot calculated whenever a seller sells any product or item to buyer.This cost is added up from the use of that product.

49. The Break-Even Point (BEP) is the point at which cost or expensesand revenue are equal there is no net loss or gain, and one hasbroken even.

50. Monopolistic competition is a type of imperfect competition suchthat many producers sell products that are differentiated from oneanother as goods but not perfect substitutes (such as from branding,quality, or location). In monopolistic competition, a firm takes theprices charged by its rivals as given and ignores the impact of itsown prices on the prices of other firms. In a monopolisticallycompetitive market, firms can behave like monopolies in the short-run, including by using market power to generate profit. In thelong-run, however, other firms enter the market and the benefits ofdifferentiation decrease with competition; the market becomesmore like a perfectly competitive one where firms cannot gaineconomic profit.

51. Laissez Faire is an economic theory from the 18th century that isstrongly opposed to any government intervention in business affairs.Sometimes it is referred to as let it be economics. It is an economicenviron-ment in which transactions between private parties arefree from tariffs, government subsidies, and enforced monopolies,with only enough government regulations sufficient to protectproperty rights against theft and aggression.

52. A consumer is in a state of equilibrium when achieves maximumaggregate satisfaction on the expenditure that he makes dependingon the set of conditions relating to his tastes and preferences,income, price and supply of the commodity etc. Producers equilibriumoccurs when he maximises his net profit subject to a given set of

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economic situations. A firms equilibrium point is when it has noinclination in changing its production. In short-run Marginalrevenue = Marginal cost is the condition of equilibrium.

53. If workers receive a higher nominal wage and the price level doesnot change, then the real purchasing power of their wages is higherand they are inclined to increase the quantity of labour supplied. Ifthe workers receive the same nominal wage, but the price levelincreases, then the real purchasing power of their wages is lowerand they are inclined to decrease the quantity of labour supplied.Any combination of changes in nominal resource prices or the pricelevel that changes the purchasing power of resource price enticesresource owners to change quantities supplied.

54. Devaluation is a reduction in the exchange value of a countrysmonetary unit in terms of gold, silver or foreign currency. Bydecreasing the price of the home countrys exports abroad andincreasing the price of imports in the home country, devaluationencourages the home countrys export sales and discouragesexpenditures on Imports, thus improvising its balance of payments.

55. It is a service offered by a securities depository under which thedepository maintains book accounts recording the ownership ofsecurities held on behalf of the depositorys participants, for eligiblesecurities.

56. Monetary policy is the process by which the monetary authority ofa country controls the supply of money, often targeting a rate ofinterest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and lowunemployment. The contraction of the monetary supply can beachieved indirectly by increasing the nominal interest rates.Monetary authorities in different nations have differing levels ofcontrol of economy-wide interest rates.

57. Mixed economy is an economic system in which both the Stateand Private Sector direct the economy, reflecting characteristics ofboth market economies and planned economies. The basic idea ofthe mixed economy is that the means of production are mainly underprivate ownership; that markets remain the dominant form ofeconomic coordination; and that profit-seeking enterprises and theaccumulation of capital remain the fundamental driving force behindeconomic activity. However, unlike a free-market economy, thegovernment would wield considerable indirect influence over theeconomy through fiscal and monetary policies designed to counteracteconomic downturns and capitalisms tendency towards financialcrises and unemployment, along with playing a role in interventionsthat promote social welfare.

58. All factors of production like land, labour, capital and entrepreneurare required in combination at a time to produce a commodity.

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Production means creation or an addition of utility. Factors ofproduction (or productive inputs or resources) are any commoditiesor services used to produce goods and services.

59. The Law of Diminishing Returns (also Law of DiminishingMarginal Returns or Law of Increasing Relative Cost) states thatin all productive processes, adding more of one factor of production,while holding all others constant (ceteris paribus), will at somepoint yield lower per-unit returns. The law of diminishing returnsdoes not imply that adding more of a factor will decrease the totalproduction, a condition known as negative returns, though in factthis is common.

60. Consumer Sovereignty means that buyers ultimately determinewhich goods and services remain in production. While businessescan produce and attempt to sell whatever goods they choose, if thegoods fail to satisfy the wants and needs, consumers decide not tobuy. If the consumers do not buy, the businesses do not sell and thegoods are not produced.

61. Free goods are what are needed by the society and are availablewithout limits. The free goods is a term used in economics to describethe goods that are not scarce. Free goods are available in as great aquantity as desired with zero opportunity cost to society.

62. Tea and coffee are substitutes to each other to a great extent. Hence,the rise in price of one causes the increase in demand of the otherand vice-versa.

63. The term supply of labour refers to the number of hours of agiven type of labour which will be offered for hire at different wagerates. Usually, it is found that higher the wage rates larger is thesupply indicating a direct relationship that exists between the wagerate ie the price of labour and labour hours supplied. The supply oflabour is very much affected by the work leisure ratio which in turnis affected by the changes in wage rates. The supply of labour in aneconomy depends on various economic and non-economic factorssuch as population, sex composition, age composition of thepopulation, willingness to work, wage rates, migration andimmigration, working hours, social attitude and standard, legalbarriers, education and training, employers attitude, laboursupply and leisure, efficiency of workers, etc. In economics, theMarginal Product of Labour (MPL) is the change in output thatresults from employing an added unit of labour. It has nothing to dowith the supply of labour.

64. The Prime Cost refers to a Businesss expenses for the materialsand labour it uses in production. Prime cost is a way of measuringthe total cost of the production inputs needed to create a givenoutput. By analysing its prime costs, a company can determine howmuch it must charge for its finished product in order to make aprofit. Variable costs are expenses that change in proportion to theactivity of a business. Variable cost is the sum of marginal costs

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over all units produced. It can also be considered normal costs.Fixed costs and variable costs make up the two components oftotal cost. Prime Cost = Direct Materials + Direct Labour + DirectExpenses. This comes to Variable cost + Administrative cost.Administrative cost is the cost associated with the generalmanagement of organisation in accounting.

65. In economics, dumping is a kind of predatory pricing, especiallyin the context of international trade. It occurs when manufacturersexport a product to another country at a price either below the pricecharged in its home market, or in quantities that cannot be explainedthrough normal market competition.

66. Says Law, or the Law of Market, is an economic principle ofclassical economics named after the French businessman andeconomist Jean-Baptiste Say (1767-1832), who stated that productsare paid for with products and a glut can take place onlywhen there are too many means of production applied to onekind of product and not enough to another.

67. Brit ish economist John Hicks said that National income is acollection of goods and services reduced to a common basis by beingmeasured in terms of money. Hicks was one of the most importantand influential economists of the twentieth century. The most familiarof his many contributions in the field of economics were hisstatement of consumer demand theory in micro-economics, and theIS/LM model (1937), which summarised a Keynesian view ofmacroeconomics. His book Value and Capital (1939) significantlyextended general-equilibrium and value theory.

68. Capital-Output Ratio (COR) is the ratio of capital used to producean output over a period of time. This ratio has a tendency to be highwhen capital is cheap as compared to other inputs. For instance, acountry with abundant natural resources can use its resources inlieu of capital to boost its output; hence the resulting Capital-OutputRatio is low.

69. Engels Law is an observation in economics stating that as incomerises, the proportion of income spent on food falls, even if actualexpenditure on food rises. In other words, the income elasticity ofdemand of food is between 0 and 1. Engels Law doesnt imply thatfood spending remains unchanged as income increases. It suggeststhat consumers increase their expenditures for food products (in %terms) less than their increases in income.

70. The Giffen goods are the goods whose consumption increases asits price increases. (For normal goods, as the price increases,consumption decreases.) Thus, the demand curve will be upwardinstead of downward sloping. The Giffen goods have an upwardsloping demand curve because these are exceptionally inferior. Ithas a strong negative income elasticity of demand such that when aprice changes the income effect outweighs the substitution effect

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and this leads to perverse demand curve.

71. In economics, the goods are something that are intended to satisfysome wants or needs of a consumer and thus has economic utility.The economic goods are consumable items that are useful to peoplebut scarce in relation to their demands, so that human effort isrequired to obtain them. In contrast, free goods (such as air) arenaturally in abundant supply and need no conscious effort to obtainthem.

72. An entrepreneur performs a series of functions necessary rightfrom the genesis of an idea up to the establishment and effectiveoperation of an enterprise. The functions of an entrepreneuras risk bearer are specific in nature. The entrepreneur assumesall possible risks of business which emerges due to the possibilityof changes in the tastes of consumers, modern techniquesof production and new inventions. Such risks are not insurableand incalculable. In simple terms such risks are known asuncertainty concerning a loss.

73. Human capital is the stock of competencies, knowledge, socialand personality attributes, including creativity, embodied in theability to perform labour so as to produce economic value.It is an aggregate economic view of the human being acting withineconomies, which is an attempt to capture the social, biological,cultural and psychological complexity as they interact in explicitand/or economic transactions.

74. Purchasing Power Parity (PPP) is an economic theory and atechnique used to determine the relative value of currencies,estimating the amount of adjustment needed on the exchange ratebetween countries in order for the exchange to be equivalent to (oron par with) each currencys purchasing power. It asks how muchmoney would be needed to purchase the same goods and services intwo countries, and uses that to calculate an implicit foreign exchangerate. Using that PPP rate, an amount of money thus has the samepurchasing power in different countries.

75. The figure of final private consumption expenditure includes theimputed gross rent of owner-occupied dwellings, consumptionof own-account production and payment by households of wagesand salaries in kind valued at cost, eg, provision for food, shelterand clothing to the employees, wherever they exist. Production forself-consumption is a part of production and hence an income andis also a part of final consumption expenditure.

76. In microeconomics, economies of scale are the cost advantagesthat an enterprise obtains due to expansion. Economies of scale isa long-run concept and refers to reductions in unit cost as the sizeof a facility and the usage levels of other inputs increase.

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77. In economics, laissez-faire means allowing industry to be free ofstate intervention, especially restrictions in the form of tariffs andgovernment monopolies. The growth of industry in England in theearly 19th century and American industrial growth in the late 19thcentury both occurred in a laissez-faire capitalist environment. Thelaissez-faire period ended by the beginning of the 20th century,when large monopolies were broken up and government regulationof business became the norm.

78. In the conditions of a free market, the terms of trade are constantlychanging. The supply of agricultural products is generallyinelastic in the sense that a rise in prices cannot call forth, beforea year has passed, a commensurate increase in sales. At the sametime, demand is inelastic, in the sense that a rise in prices offoodstuffs does not cause purchases to be reduced proportionately.

79. Classical economics is widely regarded as the first modern schoolof economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John StuartMill. John Maynard Keynes was a British economist whose ideashave profoundly affected the theory and practice of modernmacroeconomics, and formed the economic policies of governments.He built on and greatly refined earlier work on the causes of businesscycles and is widely considered to be one of the founders of modernmacroeconomics and the most influential economist of the 20thcentury. His ideas are the basis for the school of thought known asKeynesian economics, as well as its various offshoots.

80. Disinflation is a decrease in the rate of inflationa slowdown inthe rate of increase of the general price level of goods and servicesin a nations gross domestic product over time. It is the opposite ofreflation. Disinflation occurs when the increase in the consumerprice level slows down from the previous period when the priceswere rising. Disinflation is the reduction in the general price levelin the economy but for a very short period of time. Disinflationtakes place only when an economy is suffering from recession.

81. The term real wages refers to wages that have been adjusted forinflation. This term is used in contrast to nominal wages orunadjusted wages. Real wages provide a clearer representation ofan individuals wages. The real purchasing power of income ormoney is the key determinant of real wages. It is an indication of anindividuals actual purchasing power. Real wages are a usefuleconomic measure, as opposed to nominal wages, which simplyshow the monetary value of wages in that year. However, real wagesdoes not take into account other compensation like benefits or oldage pensions.

82. Final goods are goods that are ultimately consumed rather thanused in the production of another goods. For example, a car sold toa consumer is an example of the final goods; the components suchas tires sold to the car manufacturer are not; they are intermediategoods used to make the final goods.

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83. Average cost is the total cost per unit of output. Marginal cost, onthe other hand, is the addition to the total cost by producing onemore units of output. Economies of scale are said to exist if anadditional unit of output can be produced for less than the averageof all previous unitsthat is, if long-run marginal cost is belowlong-run average cost, so the latter is falling. Conversely, there maybe levels of production where marginal cost is higher than averagecost, and average cost is an increasing function of output.

84. Production involves transformation of inputs into outputs. The outputis a function of input. The functional relationship between physicalinputs and physical outputs of a firm is called production function.The word function in mathematics means the precise relationshipthat exists between one dependent variable and a number (or one) ofindependent variables. The production function states the maximumquantity of output that can be produced from any given quantities ofvarious inputs during a given period of time.

85. In macroeconomic theory, liquidity preference refers to the demandfor money, considered as liquidity. The concept was first developedby John Maynard Keynes in his book The General Theory ofEmployment, Interest and Money (1936) to explain determinationof the interest rate by the supply an demand for money. The demandfor money as an asset was theorised to depend on the interestforegone by not holding bonds. Interest rates, he argues, cannot bea reward for savings as such because, if a person hoards his savingsin cash, keeping it under his mattress say, he will receive no interest,although he has nevertheless refrained from consuming all hiscurrent income. Instead of a reward for savings, interest in theKeynesian analysis is reward for parting with liquidity.

86. Demand for a commodity refers to the quantity of the commoditythat people are willing to purchase at a specific price per unit oftime, other factors (such as price of related goods, income, tastesand preferences, advertising, etc) being constant. Demand includesthe desire to buy the commodity accompanied by the willingness tobuy it and sufficient purchasing power to purchase it. So changesin the unit price of a commodity leads to either extension orcontraction in demand. The law of demand states that there is aninverse relationship between quantity demanded of a commodityand its price, other factors being constant. In other words, higherthe price, lower the demand and vice versa, other things remainingconstant.

87. In economics, the cross elasticity of demand or the cross-priceelasticity of demand measures the responsiveness of the demandfor the goods to a change in the price of another goods. It is measuredas the percentage change in demand for the first goods that occursin response to a percentage change in price of the second goods.For example, if, in response to a 10% increase in the price of fuel,the demand of new cars that are fuel inefficient decreased by 20%,the cross elasticity of demand would be 2. A negative cross elasticitydenotes two products that are complements, while a positive cross

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elasticity denotes two substitute products.

88. The Law of Demand states the inverse relation that comes to existof between price in one hand and quantity demanded on the other.The law of demand portrays that demand is the function of price.Price is the key determinant of demand. Fluctuations in price leadsto changes in the quantity demanded. In other words, the higherthe price of a product, the lower the quantity demanded.

89. Absolute poverty is defined as a situation in which the individualsbasic needs are not covered. In other words, there is a lack of basicgoods and services (normally related to food, housing and clothes).This concept of poverty is strongly linked to destitution which isan inability to meet the minimum consumption expenditure. It is alevel of poverty as defined in terms of the minimal requirementsnecessary to afford minimal standards of food, clothing, health careand shelter. According to a UN declaration that resulted from theWorld Summit on Social Development in Copenhagen in 1995,absolute poverty is a condition characterised by severe deprivationof basic human needs, including food, safe drinking water, sanitationfacilities, health, shelter, education and information. It dependsnot only on income but also on access to services.

90. The Full Convertibility of the Indian Currency means that therupee would be made freely exchangeable into other currencies andvice versa. The rupee was made partially convertible in 1994.Currently, it can be changed freely into foreign currency for businessand trade expenses but not freely for activities like acquiring overseasassets. Full converted of the currency means the local currency canbe exchanged to foreign currency without any governmental control.Presently, the issue of capital account convertibility is in thediscussion stage.

91. A Demand Curve that violates the law of demand is termed as anexceptional demand curve. If a household expects the price of acommodity to increase, it may start purchasing a greater amount ofthe commodity even at the presently increased price. Similarly, ifthe household expects the price of the commodity to decrease, itmay postpone its purchases. Thus, law of demand is violated insuch cases. In this case, the demand curve does not slope downfrom left to right; instead it presents a backward slope from the topright to down left. This curve is known as an exceptional demandcurve.

92. Production function explains the relationship between factor inputand output under given technology. It explains as to for increasingthe output, in which proportion of various inputs or factors may beemployed under given technological conditions. In short, productionfunction may be defined as a technological relationship that tellsthe maximum output producible from various combinations of inputs.Production function explains the physical relationship betweeninput and output under given technology.

93. In economics, stagflation is a situation in which the inflation rate

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is high, the economic growth rate slows down, and unemploymentremains steadily high. Stagflation occurs when the economy is notgrowing but prices are, which is not a good situation for a countryto be in. This happened to a great extent during the 1970s, whenworld oil prices rose dramatically, fueling sharp inflation indeveloped countries. For these countries, including the USA,stagnation increased the inflationary effects.

94. In economics, utility is a representation of preferences over someset of goods and services. Preferences have a utility representationso long as they are transitive, complete and continuous. Usefulnessrefers to which extent something is useful and the utility is thequality of that piece in practical use. Both are inter-related terms.Utility is a factor of usefulness term. Usefulness means havingpractical utility of a piece which is beneficial, pertinent andfunctional.

95. In economics, the cross elasticity of demand or cross-priceelasticity of demand measures the responsiveness of the demandfor the goods to a change in the prices of another goods. It is measuredas the percentage change in demand for the first goods that occursin response to a percentage change in price of the second goods. Anegative cross elasticity denotes two products that are complements,while a positive cross elasticity denotes two substitute products.

96. The concept of opportunity cost is based on scarcity and choice.The opportunity cost of a commodity is the next best alternativecommodity sacrificed. In other words, opportunity cost of a commodityis forgoing the opportunity to produce alternative goods and services.If one commodity is produced another commodity is sacrificed. Soopportunity cost of producing the goods is equal to the cost of notproducing another commodity.

97. Quasi-rent is the surplus which is received in the short periodbecause of demand exceeding the supply by the man made factorsbesides land. It is an analytical term in economics, for the incomeearned, in excess of post-investment opportunity cost, by a sunkcost investment. In general, an economic rent is the differencebetween the income from a factor of production in a particular use,and either the cost of bringing the factor into economic use (Classicalfactor rent), or the opportunity cost of using the factor, whereopportunity cost is defined as the current income minus the incomeavailable in the next best use.

98. Price theory is also known as micro-economics and is concernedwith the economic behaviour of individual consumers, producersand resource owners.

99. Need, Want and Demand are the three key concepts ofmarketing. Needs are the basic human requirements. These needsbecome wants when they are directed to specific objects that mightsatisfy the need, though these wants in themselves are not essentialfor living. Wants are therefore shaped by ones society andsurroundings. The third concept, demands, are wants for specific

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products backed by an ability to pay.

100. The terms microeconomics and macroeconomics were coined byProfessor Ragnar Frisch of Oslo University for the first time in1933 and since then they gained popularity and were widely usedby other economists. Now they have become an integral part ofeconomic terminology.

101. Normative economics (as opposed to positive economics) is thatpart of economics that expresses value judgements (normativejudgements) about economic fairness or what the economy ought tobe like or what goals of public policy ought to be. It is the study orpresentation of what ought to be rather than what actually is.Normative economics deals heavily in value judgements andtheoretical scenarios.

102. Producers Surplus is an economic measure of the differencebetween the amount that a producer of the goods receives and theminimum amount that he or she would be willing to accept for thegoods. The difference, or surplus amount, is the benefit that theproducer receives for selling the goods in the market.

103. In economics, the Law of Demand is an economic law, whichstates that consumers buy more of goods when its price is lowerand less when its price is higher. The Law of Demand states thatthe quantity demanded and the price of a commodity are inverselyrelated, other things remaining constant. That is, if the income ofthe consumer, prices of the related goods, and preferences of theconsumer remain unchanged, then the change in quantity of goodsdemanded by the consumer will be negatively correlated to the changein the price of the goods.

104. An oligopoly is a market form in which a market or industry isdominated by a small number of sellers, (oligopolists). Because thereare few sellers each oligopolist is likely to be aware of the actions ofthe others. The decisions of one firm influence, and are influencedby, the decisions of other firms. Some of its characteristics are:Profit maximisation conditions. Number of f irms; Productdifferentiation: Interdependence. Non-Price Competition, etc Thedistinctive feature of an oligopoly is interdependence. Oligopoliesare typically composed of a few large firms. Each firm is so largethat its actions affect market conditions. Therefore, the competingfirms will be aware of a firms market actions and will respondappropriately. This means that in contemplating a market action, afirm must take into consideration the possible reactions of allcompeting firms and the firms countermoves.

105. Average fixed cost curve is never U-shaped. Since total fixed costsare unchanged as output rises, the average fixed cost curve fallscontinuously as output is increased.

106. The kinked demand curve theory is an economic theory regarding

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oligopoly and monopolistic competition. Kinked demand was aninitial attempt to explain sticky prices.

107. Demand for complementary goods is called Joint Demand. JointDemand is the demand in which goods are related in such a waythat an increase in the demand for one causes an increase in thedemand for the other.

108. Plant and machinery are Producers goods. Together with stocksand work in progress, these goods are collectively termed Capital.

109. The addition to total cost by producing an additional unit of outputby a firm is called marginal cost. Average cost is the total cost ofproducing a given output divided by that output.

110. Average Revenue is the amount of money received by a firm perunit of output sold. Marginal Revenue is the change in total revenueresulting from a small change in the quantity sold. In a perfectlycompetitive market, a firms Average Revenue is always equal toMarginal Revenue.