kendriya vidyalaya sangathan delhi region - · pdf fileq.1 why is a production possibilities...

of 46

KENDRIYA VIDYALAYA SANGATHAN DELHI REGION

TWO DAYS WORKSHOP, PGT (ECONOMICS)

Materials prepared by Participants of different KVs

INTRODUCTION Q.1 Why is a production possibilities curve concave? Explain. Ans. The production possibility curve being concave means that MRT increases as we move

downward along the curve. MRT increases because it is assumed that no resource is

equally efficient in production of all goods. As resources are transferred from one good to

another, less & less efficient resources have to be employed. This raises cost and raises

MRT. Q. 2 Explain properties of a production possibilities curve. Ans. There are two properties of a production possibilities curve.

1 Downward sloping: It is because as more quantity of one good is produced some

quantity of the other good must be sacrificed.

2. Concave to the origin : It is because the marginal rate of transformation increases

as more of one good is produced. Q. 3 Explain the problem of ‘what to produce’. Ans. An economy can produce different possible combinations of goods & services with given

resources. The problem is that, out of these different combinations, which combination is

produced. If production of one good increases then less resources will be available for

other goods. Q. 4 What is ‘Merginal Rate of transformation’? Explain with the help of an example. Ans. MRT is the rate at which the units of one good have to be sacrificed to produce one more

unit of the other good in a two goods economy.

Suppose an economy produces only two goods X and Y. Further suppose that by

employing these resources fully and officiently, the economy produces 1X + 10Y. If the

economy decides to produce 2X, it has to cut down production of Y by 2 units. Then 2Y

is the opportunity cost of producing 1X. Then 2Y:1X is the MRT. Q. 5 Explain the problem ‘How to produce’. Ans. Broadly, there are two techniques of production.

(i) Labour intensive Technique : Under this technique, production depends more on

the use of labour. Capital Intensive Technique : Under this technique, production depends more on the use of

machines (called capital) efficient technique of production is that which uses minimum possible

inputs for a given amount of output. So that, cost per unit of output is minimised

of 46

Q.6 what is impact of recently launched swach bharat mission on PPC.

Ans. Cleanliness reduces chances of people falling ill and thus can ensure better health. This is turn will

reduce forced absenters from work raise efficiency level and thus raise country’s production potential.

Rise in this potential shift PPC to right.

MAIN FORMS OF MARKET

Q.1 Explain the implication of large number of buyers in a perfectly competetive market.

Ans. The implication is that no single buyer is in a position to influence the market price on its own

because an individual buyer’s purchase forms a negligible proportion of the total purchase of the good in

the market.

Q. 2 Explain why are firms mutually interdependent in an oligopoly market.

Ans. Firms are mutually interdependent because an individual firms takes decision about price and output

after considering the possible reactions by the rival firms.

Q. 3 Explain the inplication of ‘freedom of entry and exit to the firms’ under perfect competition.

Ans. The firms enter the industry when they find that the existing firms are earning super normal profits.

Their entry raises output of the industry, brings down the market price and thus reduce profits. The entry

continues till profits are reduced to normal (or zero) The firms start leaving the industry when they are

facing losses. This reduces output of the industry, raises market price and reduces losses. The exit

continues till the losses are wiped out.

Q. 4 Explain the implication of ‘perfect knowledge about market’ under perfect competition.

Ans. Perfect knowledge means that both buyers and sellers are fully informed about the market price.

Therefore no firm is in a position to charge a different price and no buyer will pay a higher price. As a

result a uniform price prevails in the market.

Q. 5 Why is the demand curve more elastic under monopolistic competition than monopoly

Ans. The elasticity of demand is high when the product has close substitutes and that elasticity of demand

tends to be low when the product does not have close substitutes as we know in monopolistic competition

there is large number of close substitutes while in monopoly there is no close substitutes hence the

demand curve under monopolistic competition is more elastic than under monopoly.

Q. 6 Why is a firm under perfect competition a price taker while under monopoly a price maker? Explain

in brief.

Ans. A firm under perfect competition a price taker by the following reasons:

of 46

1. Number of firms : The number of firms under perfect competition is so large that no individual firm by

changing sale, can cause any meaningful change in the total market supply. Hence, market price remains

unaffected.

2. Homogenuous product : All firms in a perfectly competitive industry produce homogeneous product.

Hence, price remains same.

3. Perfect knwledge : All the buyers and sellers have perfect knowledge about market price so no firm

charge a different price than market price. Hence a uniform price prevails in the market.

A firm under monopoly a price maker by the following reasons :

1. A monopolist is a single seller of the product in the market. Hence it has full control over supply

2. There are no close substitutes of the monopoly product, hence the demand is less elastic or ‘inelastic.

3. There are legal, technical and natural barriers to the entry of new firms so that there is no fear of

increase in market supply.

Q. 7 Differentiate between price discrimination and product differentiation.

Ans. Price discrimination : Price discrimination is a situation when a monopolist charges different price

from different buyers of the same product. This is generally done to maximise profits. Product

Differentiation : Product differentitation is a situation when different producers under monopolistic

competition, try to differentiate their product in terms of its shape, size, packaging, trade mark or brand

name. This is done to attract buyers from the rival firms in the market.

1. Explain the implications of “interdependence feature of oligopoly.”

Ans-In oligopoly, the firms are interdependent regarding the decision about price and output. As there

are few firms, a change in the price and output by a firm would influence the output and price of rival

firms. The action by one firm has the reaction from other firms. This makes the firms mutually dependent

on each other in case of decisions about price and output. For e.g. the decision about price and output

between Pepsi cola and Cococola is interdependent. If pepsi reduces its price,cococola may react by

reducing more price.

2. Why the numbers of firms are small in oligopoly? Explain.

Ans-The number of firms is small because there are barriers like patents, large capital investment, control

over crucial raw material etc.which prevents new firms from entering the industry.

3. Why the price is rigid under oligopoly? Explain.

Ans.Mostly prices are stable as no firm has the courage to change the price for fear of reaction by rival

firms. Firms generally keep prices at similar levels to avoid the price war. There is no price competition

and the firms resort to other methods like advertising and better services.

of 46

4. Differentiate between collusive and non collusive oligopoly.

Collusive oligopoly Non collusive oligopoly

1. When the firms in market form a cartel and take

price-output decision collectively, it is called

collusive oligopoly.

When the firms are free to take their own decision

about price and output, it is called

Non collusive oligopoly.

2. There is non price competition among the firms. There is price competition among the firms.

Effects of Shifts in Demand and Supply on Equilibrium price

Shifts in demand/Supply means increase or decrease in demand/supply at the same price i.e.

shifts occurs due to change in factors other than the price of the commodity.

A. Effect of Demand shift on equilibrium price and quantity.

1. A rightward shift of demand curve leads to a increase in equilibrium price and quantity (i.e.

increase in the income of buyers of a normal good)

2. A leftward shift of supply curve results in decrease in price and quantity i.e. (an increase

in income of buyers of an inferior good.)

B. Effect of supply shift an equilibrium price and quantity.

1. A rightward shift of supply curve leads to a decrease in market price and increase in

quantity.(like decrease the price of raw material/factor of production)

2. A left ward shift of supply curve results in increase in market price and decrease in

quantity. .(like increase the price of raw material/factor of production)

P

P

P

1

2

OX

Y

Price

E2

E

E1

S

Q1

QQ2

of 46

Effect of simultaneous Demand & supply shifts.

A Effect of simultaneous rightward shift in demand &

supply.

1. When increase in supply is equal to increase in

Demand.

Result - No change in equilibrium price. But change in equilibrium quantity.

ii. When increase in supply is less than increase in demand.

Result-New equilibrium price (Rise) and Increase in equilibrium quantity.

P

P

P

2

1

OX

Y

Pri

ce

Q1

QQ2

E2

E

E1

SD

DS

P

X

EE

1

S

S

D

D

Q1

Q

P

P1

X

y

E

E1

S

S

D

D

Q1Q

QD / QS

of 46

iii.When increase in supply is more than increase in demand.

Result-New equilibrium price (fall) and rise in equilibrium quantity.

B. Effect of simultaneous leftward shift in demand and supply.

A When decrease in supply is equal to decrease in demand, the price will not be affected,

but the quantity will decrease in the same ratio.

B When decrease in supply is more than decrease in demand, equilibrium price will

increase and quantity will fall.

C When fall in supply is less than the fall in demand, equilibrium price will be less. The

original price. and the equilibrium quantity will fall.

A. CONTROL PRICE: When price of the commodity is fixed below its equilibrium price with a view to ensure some minimum supply of the essential commodities to a targeted group of people then it is called ‘control price’.

B. SUPPORT PRICE:- Support price is fixed by the government about the equilibrium price with a view to ensure some minimum income to the formers.

C. PRICE CEILING: The Government imposed upper limit on the price of a good or service is called Price ceiling. D. PRICE FLOOR: The Government imposed lower limit on the price that may be charged for a particular good or service is called Price Floor.

Q.1 Explain the Law of Diminishing Marginal Utility with the help of numerical example.

Ans. Law of Diminishing Marginal Utility states that as we consume more and more units of

commodity the marginal utility derives from successive units keeps on diminishing.

Units TU MU

Pri

ce

P

P1

X

y

E

E1

S

S

D

D

Q1Q

QD / QS

of 46

1 3 3

2 5 2

3 6 1

4 6 0

5 5 -1

MU

0 Units Consumed

Q.2 A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5 and 4 respectively. The prices of X and Y are Rs.4 per unit and Rs. 5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain. Ans. To attain equilibrium the consumer must fulfill the following conditions

MUX/Px = MUY/PY and MU must continuously fall.

By substituting the given values we get, 5/4 > 4/5.

The consumer is not in equilibrium because here MUX/Px > MUY/PY .

Consumer will buy more of commodity X as he get more utility from commodity X and he continues to

buy X commodity till he attains the equilibrium.

Q.3 Explain the law of demand.

Ans. The law states that keeping other factors constant there is inverse relation between price and

quantity demanded. AS the price of the commodity increases, the quantity demanded for the commodity

falls and vice versa.

Price Quantity Demanded

1 5

2 4

3 3

4 2

of 46

5 1

Price

0 Qty.

Q.4 Explain the conditions of consumer’s equilibrium with the help of indifference curve analysis.

Ans. To attain equilibrium the consumer must fulfill the following conditions

MRSXY = PX/PY and MRS must continuously fall.

When MRSXY > PX/PY the consumer is ready to pay more than the market price for commodity X

because he is getting more satisfaction from commodity X. As he consume more and more units

of commodity X then his MRS will fall and it became equal to price ratio.

When MRSXY < PX/PY the consumer is not ready to pay more than the market price for commodity

X because he is getting more satisfaction from commodity Y. As he consume more and more

units of commodity Y then his MRS will rise and it became equal to price ratio.

Q 5: What are the properties of IC?

Ans: Properties of IC:-

1. It slopes downwards from left to right

2. It is always convex to the origin due to falling of Marginal Rate of Substitution (MRS)

3. Higher IC always gives higher satisfaction

4. Two IC never intersect each other.

Q 6: Explain the effect of price of related goods.

Ans: Related goods are substitute goods or complementary goods.

Substitute goods (tea and coffee)

of 46

There is direct relationship between price and quantity demanded of substitute goods.

When price of tea increases demand of coffee increases.

When price of tea decreases demand of coffee also decreases.

Complementary goods:

There is inverse relationship between price and quantity demanded of complimentary goods.

When price of a good increases, demand of its complementary good decreases.

When price of a good decreases demand of its complementary good increases.

Question-7 Explain the effect of income on demand for a commodity.

Ans.-With increase in income the demand for normal good rises. Demand curve will shift

rightward.

With decrease in income the demand for normal good decreases. Demand curve will shift

leftward.

-With rise in income the demand for inferior good falls. Demand curve will shift leftward.

-With fall in income the demand for inferior good rises. Demand curve will shift rightward.

Question 8-Distinguish between change in quantity demanded and change in demand.

Ans- Change in quantity demanded Change in demand

Due to change in price. Due to change in factor other than

Price.

Movement will take place in Demand curve. Shift will take place in Demand

of 46

Curve.

Extension and contraction will take place. Increase and decrease will take place

Place.

Question 9 What are the factors affecting elasticity of demand?

Ans 1. Nature of commodity - If the commodity is Necessity like medicine, its demand is

inelastic and if it is luxury like car, then demand is elastic.

2. Availability of substitutes- If substitute for a commodity is not available like milk, its demand is

inelastic and vice versa.

3. Income level - if consumer is rich its demand is inelastic and vice versa.

4. Habit of consumer - if consumer is addicted towards a certain commodity like alcohol, its

demand is inelastic and vice versa.

5. Postponement of consumption - if need for commodity cannot be postponed like spectacles,

its demand is inelastic and vice versa.

Question10 : Some tips for numerical on measuring Elasticity of demand.

1. Write the formula of elasticity of demand.

2. If total expenditure is given then use its formula to find quantity or price.

3. Write the values of initial price and initial quantity in the formula (If given)

4. Any statement given by the word "by" represents change in price or quantity.

5. Any statement given by the word "to" represents new price and new quantity.

6. Use BODMAS to get the desired result.

Unit – III Theory of Producer Behaviour

Topic: Returns to Factor

Q1. Explain the law of returns to factor or Law of Variable Proportions. (6)

According to this law, if fixed factor is combined with more and more units of variable factor,

marginal product (MP) first increases, then falls and finally becomes negative.

According to this law, if fixed factor is combined with more and more units of variable factor, Total

Product (TP) increases at an increasing rate then at a decreasing rate and finally falls.

It applies in short run where one factor is variable and others are fixed.

Three stages of the law:

Stage I – Increasing returns to factor: MP increases and becomes maximum

TP rises at an increasing rate

Stage II – Decreasing returns to factor: MP decreases but remains positive

of 46

TP rises at a decreasing rate

Stage III – Negative returns to factor: MP becomes negative

TP starts falling

Schedule:

Capital Labour TP MP Stages

1 0 0 -

1 1 2 2

1 2 8 6 Stage I

1 3 10 2

1 4 10 0 Stage II

1 5 8 -2 Stage III

Ques 2 Differentiate between Returns to factor and Returns to scale.

Returns to factor applies in short run and returns to scale applies in long run

In case of returns to factor, only one factor is variable and all other factors are fixed, while in case

of returns to scale, all the factors are variable.

The three stages in returns to factor are: Increasing, decreasing and negative returns to factor and

the three stages in returns to scale are: Increasing, constant and decreasing returns to scale.

In returns to factor the factor ratio changes while it remains constant in returns to scale.

of 46

Ques 3 Give the main reasons for Decreasing returns to factor.

Use of fixed factor beyond optimum combination of fixed and variable factors

Lack of perfect substitution between the factors

Fall in the quantity of fixed inputs per unit of variable factor inputs

Scarcity of factors

Producer’s Equilibrium

Ques 4 Explain the conditions of Producer’s Equilibrium with the help of a numerical.

Producer’s Equilibrium: It refers to a state of balance where the firm is producing that quantity of output

which gives him maximum profit.

Two conditions are as follows:

MC = MR

MC must be greater than MR beyond the level of output at which MC = MR

OR

MC is rising

Schedule:

Output MR MC Condition

1 7 4

2 7 5

3 7 6 MR > MC

4 7 7 MR = MC

5 7 8 MR < MC

REVENUE

Q1.DEFINE REVENUE IN MICROECONOMICS.WHY AR IS EQUAL TO PRICE? 4 MKS

of 46

ANS.THE REVENUE OF A FIRM IS ITS SALES RECEIPTS OR MONEY RECEIPTS FROM THE SALE OF A PRODUCT.

AR=TR/Q

TR=PxQ

AR=PxQ/Q

AR=Price

Q2.EXPLAIN THE RELATION BETWEEN MR AND AR WHEN A FIRM IS ABLE TO SELL MORE QUANTITY

OF OUTPUT.(I)AT THE SAME PRICE (2) BY LOWERING THE PRICE. 6 MKS

ANS.1) AT THE SAME PRICE

A. AR=MR B. AR AND MR CURVES COINCIDE IN A HORIZONTAL STRAIGHT LINE PARALLEL TO X-

AXIS. C. AR CURVE OR DEMAND CURVE IS PERFECTLY ELASTIC.

2) BY LOWERING THE PRICE

A. AR FALLS WHEN MR<AR B. FALL IN MR IS DOUBLE THAN THAT IN AR.

C. MR FALLS TO ZERO AND BECOME NEGATIVE BUT AR IS ALWAYS POSITIVE.

Q3. EXPLAIN THE RELATION BETWEEN TR AND MR. 6 MKS

ANS. 1) WHEN PRICE IS SAME.

WHEN TR INCREASES AT SAME RATE, MR IS CONSTANT.

https://courses.byui.edu/econ_150/econ_150_old_site/Lesson_07.htm

https://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjnprS78tXQAhXHqY8KHYN0ACUQjRwIBw&url=http://www.assignmenthelp.net/assignment_help/microeconomics-forms-of-market&psig=AFQjCNEDxRMXVsyQJ3jG3vGjqpkceYPBAg&ust=1480781184479432

of 46

2) WHEN PRICE FALLS

WHEN TR INCREASES AT DECREASING RATE, MR FALLS BUT POSITIVE.

WHEN TR IS MAXIMUM, MR IS ZERO.

WHEN TR FALLS, MR BECOMES NEGATIVE.

COST

Qn.1: Define cost and difference between fixed cost and variable cost.

Ans.1 : Cost : Expenditure which are used in making any particular commodity.

Difference Sl. No.

Fixed Cost Variable Cost

1 Fixed costs are those costs which do not change with the change in output.

http://www.yourarticlelibrary.com/economics/the-relationship-between-different-revenue-concepts-economics/9138/

https://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0ahUKEwj5tbyF9dXQAhUBOo8KHbhaB28QjRwIBw&url=http://www.yourarticlelibrary.com/economics/the-relationship-between-different-revenue-concepts-economics/9138/&bvm=bv.139782543,d.c2I&psig=AFQjCNHEYtChJ7uzmkI1oPVu2UBKqqsHvA&ust=1480781999472463

of 46

Those costs which change with the change in output.

2 They remain constant at all the level of output.

As output increased, the variable costs increased and vice-versa. When the output is zero the variable cost

is zero also.

3 Example: Expenditure on building, Salary of employee etc.

Example: Expenditure on raw materials, Wages, Electricity Bill etc.

Qn. 2: Difference between explicit and implicit cost.

Ans.2: Sl. No. Explicit Cost Implicit Cost 1 It refers to that cost when a firm hires all the inputs from the

outside market. It refers to that cost when a firm uses its own inputs.

2 Example: Expenditure on rent, raw materials etc.

Example: Expenditure by the farmer

Qn.3 : Define marginal cost and explain the relationship between marginal cost and average cost.

Ans.3: Marginal Cost: It is defined as an increase in total cost when an additional unit of output is

produced.

Relationship:

i) When AC is falling, AC > MC ii) When AC is rising, AC < MC iii) When AC is constant, AC = MC iv) MC

curve cuts AC curve at its lowest point v) AC can fall even when MC is rising vi) Both AC and MC curves

are U-shaped

FORMULAE of COSTS

1. TC = TFC + TVC

2. TFC = 1st Unit of TC

3. TVC = TC – TFC

4. AC = TC

5. AC = AFC + AVC

6. AFC = TFC

7. AVC = TVC

8. MC = TCn – TCn-1

SUPPLY

Q1What will be the effect on supply curve when 1) change in price of inputs 2) change in technology

of 46

Ans.A1) increase in price of inputs- increase in cost of production- decrease profit margin – supply falls –

leftward shift in supply curve.

2) decrease in price of inputs – decrease in cost of production – increase profit margin – supply rises

– rightward shift in supply curve.

B 1) advancement in technology – decrease in cost of production – increase profit margin – supply

rises – rightward shift in supply curve.

2) degradation in technology – increase in cost of production – decrease profit margin – supply falls –

leftward shift in supply curve.

Q2. Explain the difference between change in supply and change in quantity supplied.

Change in quantity supplied Change in supply

1. It is due to price

2. It is movement along

supply curve.

3. It leads to extension in

supply and contraction in

supply.

1.It is due to other factors

2.it is shift in supply curve

3. it leads to increase in supply and

decrease in supply.

of 46

Money

Q. Define money.

Ans. Money is anything that acts as a medium of exchange, measure of value, store of value and standard

for deferred payments.

Q. What were the drawbacks of barter system?

Ans. Difficulties of Barter System of Exchange:-

i. It requires double coincidence of wants which is a rare occurrence.

ii. It lacks a common unit of exchange.

iii. It lacks the system of future payments or deferred payments.

iv. It lacks the system of storage of value.

Q.What are the functions of money?

Or

How has money solved the problem of barter system?

Ans.1: Medium of exchange

2 Store of value

3 Unit of account

4 Standard of deferred payments

Q. Explain the significance of medium of exchange function of money.

Ans. 1.It means that money acts as an intermediary for the goods and services in an exchange

transaction.

2.It facilitate to compare the value of any two goods.

3. It has helped to remove the difficulties the double coincidence of wants.

Q. Explain the significance of unit of account function of money.

Ans. Money serves as a measure of value in terms of unit of account. Unit of account means that the

value of each good or service is measured in the monetary unit.

Q. Explain the significance of store of value function of money.

of 46

Ans. Storing of value means store of purchasing power. It is convenient to store value in terms of money

Q. Explain the significance of standard of deferred function of money.

Ans. Its price remains relatively stable.

The payments can be postponed for the future.

It helps to make the credit transfer.

Q. Explain the supply of money

Ans.The supply of money means the total stock of all the forms of money (Paper money, Coins and Bank

deposits). Which are held by the public at any particular point of time. In India RBI uses four alternative

measures of money supply called as M1, M2, M3, M4.

Banking

Q. How central bank act as lender of last resort of commercial banks?

Ans. 1.Central bank provides financial help to commercial banks

2. Commercial bank can approach central bank whenever it fall short of funds.

3. Central banks provides loan and advances to commercial banks.

Q. How central bank is the banker to the government?

Ans. 1. The central bank acts as a banker to the government both central as well as state governments.

2. It carries out all the banking business of the government.

Q. How central bank is the banker of the other bank?

Ans.1. The Central Bank holds a part of the cash reserves of banks.

2. It provides loan and advances to them when required and provides centralized clearing and remittance

facilities.

Q Explain the currency issue authority as a functions of RBI.

Ans. The central Bank is the sole authority for the issue of currency in the country. All the currency

issued by the central bank is its monetary liability.

Q. Define Central Bank. Write the name of Central Bank of India.

Ans. Central Bank designs and controls the monetary policy of the country. The name of Central Bank is

Reserve Bank of India.

Q. Which institution is responsible for the monetary policy of the

country?

of 46

Ans. The Central bank is responsible for the monetary policy of the

Country.

Q. What is the meaning of Banking?

Ans. Banking is defined as the accepting for the purpose of landing or investment of deposits.

NATIONAL INCOME AND RELATED AGGREGATES

Q 1. What is the difference between stock and flow variables?

Ans. I Stock refers to that variables which can measured at a particular point of time but Flow variable

measured over a period of time.

II Stock is a static concepts but Flow is a dynamic concept.

III. Stock has no time dimension but flow has time dimension.

Examples of stock variables : capital, supply of money, national wealth etc.

Examples of flow variables: national income, GDP, production etc.

Q2. What is the difference between intermediate goods and final goods?

Ans. I Intermediate goods are used for further production or resale but final goods are used for

consumption or investment.

II Intermediate goods are within the boundary line of production but final goods crossed the

boundary line of production.

III Value of intermediate goods not included in national and domestic income but Value of final goods

included in national and domestic income.

Examples of intermediate goods : milk purchase by dairy shop.

Examples of final goods : milk purchase by house holds.

Q 3. What is capital goods and consumer goods?

Ans. Capital goods are those goods which are used for further production of other goods and resources.

Examples machine, tractor etc.

consumer goods are those goods which are finally used by the consumer . Examples fan, scooter used by

house holds etc.

Q4. What is NFIA?

Ans. It refers to the difference between factor income received from the rest of the world.

NFIA= FIFA – FITA

of 46

Components of NFIA

1. Net compensation to employee.

2. Net income from property and entrepreneurship.

3. Net retained earnings.

Q5. What is depreciation?

Ans. Depreciation is fall in value of final assets due to normal wear and tear and obsolescence.

It is also called consumption of fixed capital.

Q6. What is factor income and transfer income?

Ans Factor income:

it is received in return for rendering productive services.

It is an earned income.

It comprises rent, interest, wages and profit.

It is included in national income and domestic income.

Transfer income:

It is an unearned income.

It is unilateral payments.

It is received without providing any goods and services in return.

It comprises gift, subsidies, donations old age pension etc.

It is not included in national income and domestic income.

Q7. What is double counting and write the precautions to remove it?

Ans. When we count the value of intermediate goods in national income then problem of double counting

arises.

Precautions:

Only value of final goods included in national income.

Value of sale and purchase of second hand goods not included in national income.

Q8. What is GDP deflator (price index)?

Ans. GDP deflator is the ratio of Nominal GDP and Real GDP MULTIPLIED BY 100.

GDP deflator (price index)= (Nominal GDP/ Real GDP) x 100.

1) What is government budget? State three objectives of government budget?

Answer:

A government budget is an annual statement of the estimated receipts and estimated expenditure of the

government during a fiscal year.

Objective of the Government Budget objective that are pursued by the government through the budget are-

of 46

I. Reallocation of resources -: It means managed and proper distribution of resources.

II. II. To reduce inequalities in income and wealth-: Through budget government tries to reduce

the gap between Rich and poor

III. III. To achieve economic stability -: There may be inflation or depression in the economy.

Inflation is the situation of rise in price level whereas depression is lack of demand.

2) Differentiate between Revenue Expenditure and Capital Expenditure.

Answer:

Revenue Expenditure:-

An expenditure which do not creates assets or reduces liability is called Revenue Expenditure.

Examples are – Salaries of government employees, interest payment on loan taken by the government,

pension, subsidies, grants etc.

Capital Expenditure:-

It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure

incurred on construction of building, roads, bridges etc.

3) Differentiate between Revenue Receipts and Capital Receipts.

Answer:

Revenue Receipts:-

Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts.

Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue.

Capital Receipts: - Capital Receipts refer to those receipts of the government which i) tend to create a

liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three

categories : Recovery of loans, Borrowings and Funds raised through disinvestment .

4) Distinguish between Revenue deficit and Fiscal deficit?

Answer: Revenue deficit is the difference between revenue expenditure and revenue receipts. It indicates

that the expenditure of government towards unproductive activities is more.

Fiscal deficit-: It is the difference between total expenditure of government on one hand and total

expenditure excluding borrowings on other hand.

It determine the actual level of borrowings in the economy.

5) Distinguish between Direct tax and indirect tax. Give one example of each.

Answer: Direct tax -: The incidence and imposition lie on same person. This type of tax cannot be shifted.

Direct taxes are generally levied upon income. For example Income tax.

of 46

Indirect tax -: The incidence and imposition lie on different persons. This type of tax can be shifted. Indirect

taxes are generally levied upon goods and services. For example excise duty.

6) How can government help in reduction in income inequalities through government budget? Explain.

Answer: Through budget government tries to reduce inequalities in income distribution. This is done through:

i. Taxation. Taxes are imposed on the income of rich people as a result there purchasing power

will reduce.

ii. Subsidies: Poor people are provided with subsidies as a result there purchasing power will

increase. The gap between rich and poor is reduced through government budget.

==**==**==**==***==

of 46

(Important Questions with solution from Exam point of view for the subject Economics)

1. Define economics.

Economics is a subject matter that focuses on rational management of scarce resource in a manner

such that our economic welfare is maximized.

2. Define micro economics.

It is the study of individual economic unit of an economy.

3. Define macroeconomics.

It is the study Economic problems relating to economy as a whole.

4. State reasons why does an economic problem arises.

1) Resources are scarce .2) Resources have alternative uses.

5. What is meant by production possibility curve?

PPC show the different combination of two goods which can be produced with given and resources

and technique of production.

6. What does the slope of PPC show?

Slope of PPC shows marginal opportunity cost/ marginal rate of transformation.

7. Give one reason for rightward shift in PPC.

When resources are increased.

8. Define opportunity cost.

It is the Value of the factor in its next best alternative use.

9. Define marginal opportunity cost /Marginal Rate of Transformation.

It is defined as the units sacrificed of one good to produce an additional unit of another good.

10. Why is PPC concave to the origin?

Due to increasing marginal rate of transformation / marginal opportunity cost

11. Define Marginal utility.

It is change in total utility when an additional unit of a commodity is consumed.

MUn = TUn – TUn-1

12. What is an indifference curve?

A curve that shows various combinations of two goods that give a consumer equal level of

satisfaction.

13. Why is IC convex to the origin?

Due to diminishing marginal rate of substitution (MRS).

14. What does the law of diminishing marginal utility state?

It states that as more and more units of a commodity are consumed, marginal utility derived from

every additional unit declines.

15. What is a budget line?

of 46

It shows various combinations of two goods that a consumer can purchase with his given income

and prices of the both goods.

16. What is individual demand?

It is demand for a commodity by single consumer

17. Give two causes of rightward shift in demand curve.

(1). Decrease in price of complementary goods (2).Increase in price of substitute goods.

18. What causes upward movement along the demand curve?

Increase in price of commodity.

19. What is shape of demand curve in case of perfectly inelastic demand?

Vertically straight line parallel to Y-axis.

20. What will be shape of demand if price elasticity of demand is unitary ?

Rectangular Hyperbola

21. Name two factors affecting price elasticity of demand?

Time Period, Availability of Substitutes.

22. What is production function?

It is functional relationship between physical inputs and physical output.

23. Define marginal product?

It is change in total product when an additional unit of a variable factor is used.

24. What is marginal cost?

It is change in total cost / total variable cost when an additional unit of an output is produced.

25. Define supply.

Quantity supplied of a commodity at various price levels in a given period of time.

26. What causes downward movement along the Supply curve?

Decrease in price of commodity.

27. What is elasticity of supply?

It is ratio of percentage change in quantity supplied to percentage change in price of the commodity.

28. Supply curve is upward sloping begins from X- axis what is elasticity of Supply?

of 46

Inelastic supply (less than unitary elastic)

29. What cause in leftward shift in supply curve?

Increase in taxes by govt, increase in price of intputs.

30. Supply curve in upward sloping at 45 degree starting from origin. What is elasticity of

supply?

Unitary elastic

31. Define perfect competitive market.

It is a market in which there are large number of buyers and sellers, selling homogeneous goods,

which are perfect substitutes.

32. Define monopolistic competition market.

It is a market in which there are large number of buyers and sellers, selling differentiated goods,

which are close substitutes.

33. Define monopoly market.

It is a market where there is only one seller selling a good which does not have any substitute.

Firm is the price maker and there is restricted entry into and exit from the market.

34. What is the shape of demand curve of perfect competition market?

Horizontal straight line.

35. In which market form, a firm is price taker?

Perfectly competitive market.

36. In which market firm, there is product differentiation?

Monopolistic competition.

37. What is shape of demand curve is case of monopoly market?

Downward sloping demand curve.

38. What is oligopoly market?

A market which has a few big sellers ,selling homogenous or differentiated goods.

39. What is equilibrium price?

Equilibrium price is that price where market demand equals market supply of the commodity.

40. Why is AC/AVC/MC curve U-shaped?

Due to application of the law of variable proportions.

41. Define Marginal revenue.

of 46

It is change in total revenue when an additional unit of a commodity is sold.

42. In which market AR= MR.

Perfectly competitive market.

43. Which cost curve has Rectangular hyperbola shape?

Average fixed cost (AFC).

44. Define fixed factors.

Fixed factors refer to those factors which can’t be changed in short run, they remain fixed.

45. If TP is increasing at an increasing rate, what can you say about MP?

MP is rising

46. What is the shape of TFC curve?

TFC curve is a straight line parallel to horizontal X-axis

47. Give the meaning of involuntary unemployment.

Involuntary unemployment occurs when those who are able and willing to work at the prevailing wage rate but do not get work.

48. What is the relationship between marginal propensity to save and marginal propensity to

consume?

The sum of MPC and MPS is equal to one.

49. State the two components of money supply.

Currency held by the public and demand deposits with commercial banks.

50. What is Cash Reserve Ratio?

Cash Reserve Ratio is the ratio of bank deposits that commercial banks must keep as reserves with the Central Bank.

51. Define money.

It is anything which is generally acceptable as a medium of exchange and at the same time acts as a measure of value, store of value and means of deferred payments.

52. What is Deficient Demand or deflationary gap?

Deficient Demand is a situation, where aggregate demand is less than aggregate supply at the

full employment level. It creates deflationary gap

53. What is Excess demand or inflationary gap?

Excess demand is a situation, where aggregate demand is more than aggregate supply at the level

of full employment. It creates inflationary gap

54. What is Aggregate demand?

AD is the total amount of goods and services demanded by all the sectors in an economy during a financial year.

55. Define Revenue Deficit.

It refers to the excess of total revenue expenditure of the government over its total revenue receipts. Revenue deficit = Total Revenue expenditure - Total Revenue receipts.

56. Define Fiscal Deficit.

Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings. Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts Excluding borrowings)

57. Define Fiscal Deficit

of 46

Primary deficit is defined as fiscal deficit minus interest payments.

58. What is Foreign exchange rate?

It is the rate at which currency of one country can be exchanged for currency of another country. For example 1$ = Rs. 60

59. What is Flexible Exchange Rate/ Floating Exchange Rate?

In a system of Flexible exchange rate the exchange rate is determined by the forces demand and supply of foreign exchange.

60. What is Fixed Exchange Rate System?

It is the exchange rate which is officially fixed by the Govt. or monetary authority or central banks of a country.

61. What is devaluation of currency?

When the central monetary authority decreases value of domestic currency in terms of foreign currency.

62. What is the balance of visible items in the balance of payments account called?

Balance of trade.

63. What is the relationship between APC and APS?

APC+APS= 1

64. Define open market operations.

It refers to the process of buying and selling of securities by central bank in open market.

65. What are the components of BOP Accounts?

1. Visible Trade (Goods only) 2. Invisible Trade (Services) 3. Unilateral Transfers 4. Capital Transfers

3/4 Marks Questions

1. Explain the problem ‘how to produce’ with the help of example.

How to produce refer to choice of technique of production. There are two types of technique of

production: (i) labour intensive technique (ii) capital intensive technique. The choice between

labour intensive and capital intensive becomes a problem because the producers need to minimize

their cost and at the same time maximize their efficiency.

2. Explain the circular flow of income in a two sector model. 1. Real Flow - It refers to the flow of factor services from households to firms and the corresponding flow of goods and services from firms to households. 2. Money Flow - It refers to flow of factor payments from firms to households for their factor services and corresponding flow of consumption expenditures from households to firms for purchase of goods and services produced by the firms. It is also called nominal flow.

of 46

CIRCULAR FLOW IN A TWO SECTOR ECONOMY

Factor Payments (Rent, Wages, Interest and Profit) Factor Services (Land, Labour, Capital and Enterprise) Consumption Expenditure (On goods and services)

Purchase of Goods and Services

3. Differentiate between consumption goods and Capital goods.

Consumer goods or consumption goods Capital goods

1. These are directly used by ultimate

consumer household for satisfaction of wants.

1. These are fixed assets used by the

producers in the production process.

2. These are final goods 2. These are final goods.

3. They are not used in production by

producer.

3. They help in production of other goods.

4. They may be changed during use by

consumer like tea leaves are used to make

tea.

4. They do not change during production

process.

5.eg: Durable goods- car, washing machine 5. eg: machines ,

Plants and equipment used in production

process.

4. what is the difference between Final goods and Intermediate Goods?

Final goods Intermediate goods

Household Sec Household

sector

tor

FIRMS

of 46

1. These are ready for final use

by consumer for consumption or

By producer for investment.

1. These are not ready for use; they are for resale or used for further production.

2.These are:-

(a)Consumer goods used for satisfaction of

wants. They may change during use.

(b) Capital goods which help in production

process. Thy do not transform during use,

2. These are purchased by one firm from

another for following purpose:-

(a) Resale during the year

(b) Use as raw material in production

process. So they may change during

production process

3. Once sold these pass out of production

boundary.

3. These are inside the production

boundary.

4. These are included in national income 4. These are not included in national income.

5. Differentiate between Stocks and Flows variables.

Stocks Flows

1. Stock variables are measured at a particular point in time.

2. They do not have a time dimension, 3. Eg: Capital stock, inventory, wealth

on a particular day. 4. Stock is static concept

1. Flow variables are measured over a period of time,

2. They have a time dimension, 3. Eg: Capital formation during a

year, change in stock, national income during a year.

4. Flow is dynamic concept.

6. Differentiate between Factor income and Transfer Income.

Factor income or Factor payment

Transfer Income or Transfer payment

1. It is the income received in return for rendering factor services by the factors of production.

It is the income received without any corresponding services.

2. These are included in national income. These are not included in national income

3. Example: Rent, wages, interest, and profit. Retirement pension.

Example: old age pension, scholarship of students, unemployment allowance, charity ,gifts, expenditure on birthday / Marriage, pocket money, remittances from abroad, financial help to earthquake victims, beggars, meals to beggars, compensation given to accident victims etc.

of 46

7. Explain the relationship between AC and MC.

Relationship between AC and MC

Both AC & MC are derived from TC

Both AC & MC are “U” shaped (Law of variable proportion)

When AC is falling ,then AC >MC

When AC is rising ,then AC < MC

When AC = MC ,then AC will be minimum.

8. Why is AC curve U-shaped?

AC curve is U-shaped in short run due to operation of laws of returns to factor ( LAW OF

VARIABLE PROPORTION) Initially production is subject to law of increasing returns, then law of

constant return and ultimately to law of diminishing return. As output is increased, AC first falls,

reaches its minimum and then rises.

9. State the distinction between explicit cost and implicit cost. Give an example of each

Implicit cost is the estimated value of inputs supplied by the owner of the firm, like imputed salaries

of the owners, imputed rent of the building, imputed interest on the money invested by the owners,

etc.

Explicit cost is the actual monetary expenditure on inputs hired from outside, like expenditure on

Purchases of raw materials, on payment of wages, interest, rent, etc

10. Explain the implication of ‘homogenous product’ feature of perfect competition.

Homogenous product means that the buyers treat products of all the firms in the industry as

identical. Therefore, the buyers are willing to pay only the same price for the products of all the

firms in the industry. It also implies that no individual firm is in a position to charge a higher price

for its product. This ensures uniform price in the market.

11. Explain the implication of ‘product differentiation’ feature of monopolistic competition

Product differentiation means that the buyers of a product differentiate between the same products

produced by different firms. Therefore, they are also willing to pay different prices for the same

product produced by different firms. This gives an individual firm some monopoly power to

influence market price of its product

12. How can budgetary policy be used for reducing inequalities in income?

To reduce inequalities in income and wealth government can use progressive taxation policy. The

government puts a higher rate of taxation on rich people and lower rates of taxation on lower

income groups. This reduces disparities in income and wealth. The government can provide

subsidies and other amenities to people whose income levels are low. This increases their

disposable income and thus reduces the inequalities.

.

of 46

13. Differentiate between Micro Economics and Macro Economics.

Micro Economics Macro Economics

(i) It studies the individual units or the

economy like the study of an

individual firm

(i) Macro Economics studies the

aggregates of the economy such as

‘General price level, National

income etc.

(iii) Its main instruments are individual

demand and individual supply.

(iii) Its main instruments are aggregate

demand aggregate supply.

(iv) It is also called as ‘Price Theory’. (iv) It is also known as ‘Theory of

Income, output & employment’.

14. Difference between direct and indirect taxes.

Direct Taxes Indirect Taxes

1. They are directly paid to

government by the person on

whom it is imposed

1. They are paid to the government by

one person but their burden is

borne by another person

2. It cannot be shifted 2. Cab be shifted to other person

3. Direct taxes are generally

progressive

3. They are progressive nature (The

rate of tax decreases as Income

Increases)

4. Examples: Income Tax, Wealth

Tax and Corporation tax

4. Examples: Sales Tax and Excise duty.

15. Difference between balance of payments and balance of trade.

Balance of trade Balance of Payments

Balance of trade is a record of only

visible items i.e. export and

imports of goods.

1. Balance of Payments is a record of

both visible items (goods) and

invisible items. (Services).

of 46

It is a narrow concept as it is a

component of balance payments.

2. It is a wider concept as it is a record of

all transactions.

Deficit in balance of trade can be

met by balance of payments.

3. Deficit in the balance of payments

cannot be met by the balance of

trade.

16. Distinguish between autonomous and accommodating items.

Autonomous items Accommodating Items

Autonomous items refer to

international economic

transactions that take place due

to some economic motive such

as profit maximisation.

1. This refers to transactions that

occur because of government

financing.

These items are called above

the line items in the BOP.

2. These items are called below the

line items.

This includes all transactions of

BOP.

3. This includes only official reserve

transactions.

17. Distinguish between Changes in Quantity Demand and Change in Demand.

Change in Quantity Demanded Change in Demand

i) Other things being equal if the quantity

demanded increases with the fall in the

price of a product and decrease with the

rise in the price of commodity, it is known

as movement along a demand curve or

change in quantity demanded.

i) If more or less quantity of commodity is

demanded at the same price due to charge in

factors other than the price of the commodity

is called shift in the demand curve. Or change

in demand.

ii) The movement is either upward or

downward along the same demand curve.

ii) There is either rightward shift or leftward

shift of the demand curve itself.

iii) Downward movement along the

demand curve is called extension in

demand.

iii) Rightward shift indicates increase in

demand and leftward shift shows the

decrease in demand

of 46

18. Briefly explain any four factors affecting elasticity of demand.

1) Availability of substitute goods -Demand of a commodity will be highly elastic if it has

many substitutes.

2) Nature of commodity -Demand of necessary and essential goods are always inelastic

because consumers are restricted to buy those goods.

3) Different uses of the commodity: If the commodity has different uses, its demand will be

elastic.

4) Taste & preferences -If the consumer is bound to use particular brand of a commodity

then its demand will be inelastic because consumer will buy that particular commodity

only even at higher price.

19. What is the difference between cardinal and ordinal utility analysis.

S.No. Cardinal Utility Ordinal Utility

1 Given by Prof. Alfred Marshall Given by Prof. J.R. Hicks

2 Utility can be measured

numerically

It cannot be measured

numerically

3 Unit of measurement is ‘utils’ Possible for a consumer to scale

his preferences.

20. Explain any three determinants of demand for a commodity.

Following are the three determinants of demand for a commodity.

i) Price of the commodity:- When the price of a commodity increases the demand for

that commodity decreases and vice versa.

ii) Income of the consumer:- When the income increases the demand for that

commodity also increases and vice-versa.

iii) Price of related goods :-

a) In complementary goods demand rises with fall in price.

b) In substitute goods demand for a commodity falls with a fall in the price of other

substitute goods.

21. Distinguish between perfect competition and monopoly .

Perfect competition market Monopoly

1. Large number of buyers and sellers. 1. There is only one seller.

2. There is free entry into and exit from the

market.

2. There is restricted entry into and exit from the

market.

3. Firm is price taker and industry is price

maker.

3. Firm is the price maker

of 46

22. Explain the objectives of the Government Budget.

These below are the main objectives of the Government Budget.

a) Activities to secure reallocation of resources: - The Government has to reallocate resources

with social and economic considerations.

b) Redistributive Activities: - The Government redistributes income and wealth to reduce

inequalities.

c) Stabilizing Activities: - The Government tries to prevent business fluctuations and maintain

economic stability.

Management of Public Enterprises: - Government undertakes commercial activities that are of

the

23. Why is foreign exchange demanded?

Foreign exchange is demanded for the following purposes.

a) Payment of International loans

b) Gifts and grants to rest of the world

c) Investment in rest of the world.

d) Direct purchases abroad for goods and services as well as imports from rest of the world.

24. Why does the demand for foreign exchange rise, when it price falls?

With a fall in price of foreign exchange , the exchange value of domestic currency increases and

that of foreign currency falls. This implies that foreign goods become cheaper and their domestic

demand increases. The rising domestic demand for foreign goods implies higher demand for

foreign exchange. So there is inverse relationship between price and demand for foreign exchange.

25. What are the sources of Supply of foreign exchange?

1. When foreigners purchase home countries goods and services through exports

2. When foreigners invest in bonds and equity shares of the home country.

3. Foreign currencies flow into the economy due to currency dealers and speculators.

4. When foreign tourists come to India

5. When Indian workers working abroad send their saving to families in India.

26. What are the components of current account of Balance of payments?

a) Visible items of trade: The balance of exports and imports of goods is called the balance of

visible trade.

b) Invisible trade: The balance of exports and imports of services is called the balance of invisible

trade E.g. Shipping insurance etc.

c) Unilateral transfers: Unilateral transfers are receipts which resident of a country receive (or)

payments that the residents of a country make without getting anything in return e.g. gifts.

4. Average Revenue (AR) curve perfectly

elastic & horizontal.

4. Average Revenue (AR) curve is downward

sloping & inelastic.

of 46

27. What are the components of capital account of Balance of payments?

1. Private transactions: These are transactions that are affecting assets (or) liabilities by

individuals.

2. Official transactions: Transactions affecting assets and liabilities by the government and its

agencies.

3. Direct Investment: It is the act of purchasing an asset and at the same time acquiring and

control of it.

4. Portfolio investment: It is the acquisition of assets that does not give the particular control

over the asset.

28. Why does the demand curve slope downward?

(i) Law of diminishing marginal utility- As consumer consumes more quantity of goods, according

to the Law of diminishing marginal utility satisfaction goes on decreasing. So consumer is willing

to buy more & demand more only at lower price as satisfaction is low. & vice versa

(ii) Income effect-as price of a good decreases purchasing power of the consumer increases so

real income of consumer rises, so due to this income effect he demands more.

(iii) Substitution effect- As price of a good decrease consumer substitutes the good by relatively

cheaper substitute good so his demand decreases.

(iv) Change in Number of consumers –as price of a good falls number of consumers who were

not buying it will now be able to afford it so they demand rises.

29. Distinguish between fixed cost and variable cost.

fixed costs variable costs

Fixed costs are those which do not change when

output is increased or decrease

Variable costs are those costs which vary with

output

These are cost of fixed factor inputs These are cost of variable factors inputs.

For example Rent of Land, Insurance charges For example. Cost of raw material used in

production, wages paid to labor

30. Briefly explain determinants of a supply of a commodity?

1. Price of the commodity-There is a direct and positive relationship between supply and

price. Generally, higher the price, larger would be the supply and lower price results into

lesser supply.

2. Prices of factors of production-with the rise in prices of factors of production, cost of

production may also rise. It lowers producer’s profits, which results into a decrease in its

supply.

of 46

3. Goals of the firms –Supply of a commodity are also guided by the firm’s goal of profit

maximisation or sales maximisation. If the firm has the goal of profit maximization, it will

supply more goods at a higher price.

4. Change in

technology-If producers make use of new technology that helps in reducing its cost of

production and higher profits, it ensures a higher level of production and its supply

31. Differentiate between Perfect competition market and Monopolistic competition .

Perfect competition market Monopolistic competition market

1 .Large number of buyers and sellers. 1. There are large number of buyers and large

number of small sellers.

of 46

2. Firm is price taker and industry is price

maker.

2.Firm is the price maker

3. Average Revenue (AR) curve is perfectly

elastic & horizontal.


sloping & elastic.

4. There is no Selling cost 4. Selling costs are high.

32. Differentiate between monopoly market and Monopolistic competition

Monopoly market Monopolistic competition market

1. There is only one seller. 1. There are large number of buyers and large

number of small sellers.

2. There is restricted entry into and exit from

the market.

2. There is free entry into and exit from the

market.

3.Selling costs are low & are onetime costs 3. Selling costs are very high.

4 .Average Revenue (AR) curve is downward

sloping and inelastic.


sloping elastic.

5. Goods in this market have no close

substitutes.

5. Goods in this market have very close

substitutes.

33. Will the following be included or net in the domestic factor income of India? Give reasons for

your answer:-

i) Salaries of non-residents working in India Embassy in Russia. ii) Salaries to Indian residents working in Russian Embassy in India.

Iii) Salaries received by Indian workings in American Embassy in India. iv) Profit earned by an Indian company from its branch in Singapore.

Ans. (1) Yes it will be included because Indian embassy is a part of domestic territory of India. (2)No it will not be included in the domestic factor income as the Russian embassy is not

a part of domestic territory of India. (3)No it will not be included in the domestic factor income as the American embassy is

not a part of domestic territory of India. (4) No it will not be included in domestic factor income of India because Singapore is not a part of domestic territory of India.

34. Explain Functions of Money. (1) Medium of Exchange:- - It is generally accepted means of payment for exchange of goods and services. - Facilitates trade, widens area of market by separating act of sale and purchase. (2) Measure of Value or Unit of Value:- - All goods and services can be given one unique value (Price) by expressing them in terms of

money.

of 46

-It is common unit of measurement of all goods. Thus makes exchange easier. -Its value remains constant. (3) Store of Value -It is liquid store of value. -It comes in convenient denominations. -Value remains constant, it is not perishable easily portable, requires less place to store& there is no storage cost. (4)Standard of deferred Payments -Or future payments like salaries, pension, interest etc. -Facilitates borrowing and lending.- Itovercomes disagreements and risks that are there is Barter system regarding future payments to be made as value of money remains constant.

35. What are the various sources of non-tax revenue ?

(a) Fees-Payment received for providing certain services for public interest like Govt. college or hospital fees Fines & penalties charged for breaking of laws or disobeying rules & regulations (b)License fee & Permit - Payment received for giving privileges or permits to perform a service. Like registration and license fee for industries or automobile. (c) Escheat-income Govt. gets by taking possession of property which has no claimant or legal heir. (d) Profits of PSU’s –Profits earned by public sector enterprises or dividend received by Govt. on investment made by it.

36. Differentiate between Revenue expenditure and capital expenditure. Revenue Expenditure - It consists of those Government expenditures which neither Create

Assets nor Reduce Liabilities. EX.Borrowings,Recovery of loans

Capital Expenditure - It consists of those Government expenditures which either Create Assets

or Reduce Liabilities.Ex-Repayment of loan,Expenditure on construction & purchase of Assets.

37. Differentiate between Revenue receipts and capital receipts. Revenue Receipts: - It refers to the receipts of the govt. Which don’t create any liability and

cause any reduction in the assets of the govt. It may be divided into two, tax revenue and

non-tax revenue

CAPITAL RECEIPTS: - It refers to those receipts of the govt. which create a liability / cause

reduction in its assets. Loans raised by the govt. from the public, Loans received from foreign

govt and international financial institutions, PSU disinvestment – selling shares /securities of

PSU.

38. What is the relationship between TU and MU

Relationship between MU and TU:

i) When MU is positive TU rises.

ii) When MU is zero TU is maximum.

iii) When MU is negative, TU falls

UNITS TU MU

1 8 8

2 14 6

3 18 4

4 20 2

of 46

5 20 0

6 18 -2

Diagram:

TU/MU

6 Marks Questions

1. How is equilibrium achieved with the help of indifference curve analysis?

Consumer equilibrium refers to a situation where a consumer gets maximum satisfaction through

his scarce resources; he has no tendency to change his available budget constraint.

Conditions:-

i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py

OR

Slope of indifference curve = slope of Budget line

ii) Indifference curve must be convex to the origin.

This may be explained with the help of following diagram;-

A

p

q IC3

r IC1

O Good x B X

Diagram Explanation:

‘AB’ is the budget line. It is sure that consumer’s equilibrium will lie on some point on ‘AB’.

Indifference map (set of IC1,IC2, IC3) shows consumers scale of preferences between different

combinations of good ‘x’ and good ‘y’.Consumers equilibrium will achieve where budget line (AB)

is tangent to the IC2.

Consumers cannot achieve the following:

i) P and ‘r’ points on budget line give satisfaction, but, choosing point ‘q’ puts him on a higher IC2

that gives more satisfaction.

TU

X

Y

(-)MU

Good ‘y’

IC2

of 46

ii) He cannot move on IC3, as it is beyond his money income.

So, the consumer will be in equilibrium at point q where both of the conditions are satisfying.

2. Explain the law of variable proportions with the help of TP and MP curves.

Statement of law of variable proportion: In short period,When one variable input is increased

keeping other factor inputs constant, marginal product of variable factor increases then decreases

becomes zero & then negative. It can be explained with the help of a following schedule

Fixed factor Variable factor Total product Marginal

product Phase/stage

Land in acres Labour Units Units

1 1 5 5

I Increasing returns 1 2 15 10

1 3 30 15

1 4 40 10 II – diminishing returns to a factor

1 5 45 5

1 6 45 0

1 7 40 -5 III - Negative returns

to a factor

Units of variable factor

Phase I / Stage I / Increasing returns to a factor.

TPP increases at an increasing rate

MPP also increases.

Phase II / Stage II / Diminishing returns to a factor

TPP increases at decreasing rate

MPP decreases / falls

This phase ends when MPP is zero & TPP is maximum

MPP

X

X

TPP

MP

P/T

PP

O

Y

1st

2n

d

3rd

of 46

Phase III / Stage III / Negative returns to a factor

TPP diminishes / decreases

MPP becomes negative.

3. Differentiate between CHANGE IN QUANTITY SUPPLIED and CHANGE IN SUPPLY.

CHANGE IN QUANTITY SUPPLIED:- It is caused by a rise/fall in the price of a commodity. It is expressed either

in form of an expansion in supply or contraction in supply. Expansion and contraction in supply are represented

diagrammatically in the form of a movement along a given supply curve. Contraction is due to fall in price .(see

fig.(A))

CHANGE IN SUPPLY:- A change in supply of a commodity caused by factors other than (Income of the consumer

ii) Price of related goods and iii) Tastes and preferences of the individual/ consumer) the price of a commodity.

Change in supply is represented graphically by a rightward or leftward shift. Decrease is due to fall in other

factors than the price. Leftward shift shifting of supply curve leads to decrease the supply. .(see fig.(B))

4. Explain the following functions of central Bank:-

A. Issue of Currency B. B. Banker to Government C. C. Bankers Bank & Supervisor

Issue of Currency:The Central Bank is given the monopoly of issuing currency in order to

secure control over volume currency and credit. These notes are circulated throughout due

country as legal tender money. It has to keep a reserve in the form if gold and foreign

securities as per the statutory rules against the notes issued by it. It issues notes above Rs.2/-

. One Rupee coins and other small coins are issued by the mints of Government.

Bankers to Government: Central Bank acts as the bank of Central and State governments.

It carries out al banking business of Government. Government keep their cash balances in

the current account with Central Bank. Similarly central bank accepts receipts and makes

the payment on behalf of the Government. Also Central bank carries out exchange,

remittances and other banking operation on behalf of Government. Central Bank gives the

loans and advances for a short period to the Governments. It also manages the public debt

of the country.

Bankers Bank & Supervisor: All the scheduled banks are controlled and supervised by the Central Bank. These banks are required to keep certain percentage of their deposits with Central Bank. They can take loans from the Central Bank.

5. Using diagrams explain the concepts of excess demand and deficient demand.

OR

Using diagrams explain the concepts of inflationary gap and deflationary gap.

of 46

Excess demand refers to a situation where AD is more than AS corresponding to full

employment equilibrium level. It also means that actual AD is more than what required to

maintain full employment equilibrium level. It creates inflationary gap.

Inflationary Gap= Actual AD- AD required for full emp.

AD`

Deficient Demandrefers to a situation where AD is less than AS corresponding to full employment

equilibrium level. It also means that actual AD is less than what required to maintain full

employment equilibrium level. It creates Deflationary gap.

Deflationary Gap= AD required for full emp - Actual AD

AS=Y=C+S

AD &AS

ADF

F AD actual

G

P E

Q

O M N

Income, output & Employment

6. There is a simultaneous ‘decrease’ in demand and supply of a commodity.When it will result

in -

(1)No change in equilibrium Price.

(2)A fall in equilibrium price

C+I+G(AD)

C+I+G(AD)

F

G

Inflationary

gapgap

y

x Q

450

O Output/ employment

Agg

rega

te d

eman

d

of 46

Decrease means less quantity at the same price. Decrease in demand shift the demand curve to the

left downwards. Decrease in supply shifts the supply curve to the left upwards.

(I)If decrease in demand is equal to decrease in supply, there will be no change in the equilibrium

price .In the figure, both demand and supply decrease by E’E = Q’Q at a given price OP.

(ii)If decrease in demand is greater than decrease in supply, the equilibrium price will fall. In the

figure, decrease in DD=AE. While decrease in supply is lower i.e. BE’’. Therefore, equilibrium

price falls from OP to OP’.

7. Explain producer’s Equilibrium using MR and MC approach.

Producer’s Equilibrium:- A producer (a firm) is said to be in equilibrium when it earns maximum

profits. Profit maximization of a firm means maximizing the difference between total revenue and

total cost. When the profits of the firm are maximum, the firm is in equilibrium.

According to MC-MR approach, the conditions of producer’s equilibrium are-

1) MR= MC

2. MC Should greater MR after equilibrium level of output

8. Explain the equilibrium level of income with the help of savings and investment function. If

planned savings exceed planned investment what changes will bring about the equality between

them.

Economy is said to be in equilibrium when planned savings is equal to planned investment.

Level of Output MR MC

1 10 9

2 9 7

3 8 6

4 7 7

5 6 8

6 5 9

of 46

As we know, AD=AS

C+I=C+S

I=S

But we know savings and investment activities are generally done by different sections of the

society. Therefore very often we can see a difference between planned saving and planned

investment. It means that when S>I or S<I economy will experience disequilibrium as shown in

the fig. given below.

S

Saving

&Investment E

I

Income

0

Y P

As shown in the diagram at point E, S= I. Up to point E, S<I and after point E, S>I. Both show

situations of disequilibrium in the economy.

When S>I, it means that the households are savings more than what the firms desires to invest i.e.,

both household consumption demand and firm’s investment are less. This will induce the producers

to reduce production and this will reduce the employment opportunities. National Income will be

reduced from OP to OY and thus the economy will regain equilibrium.

MONEY AND BANKING

Q1. What is barter system? What are its drawbacks?

Ans. It is a system in which goods are exchanged for goods. Its drawbacks are:

Lack of double coincidence of wants

Lack of divisibility

Difficulty in storing wealth

Absence of common measure of value

Lack of standard of deferred payments

Q2. Explain the drawbacks of barter system.

Ans. The drawbacks of barter system are:

1. Lack of common measure of value:

There is no common measure of value under barter system when goods are of different

values.

of 46

It is difficult to decide the proportion in which two goods are to be exchanged

Difficult to settle terms of exchange

2. Lack of double coincidence of wants:

Difficult for buyers to find a seller who wants the exact commodity that the buyer wants to

exchange

3. Lack of store of value:

It is difficult to store wealth for future use

Goods deteriorate with time and have heavy store costs

4. Lack of standard of future payments:

Difficult to make payments in future due to lack of any satisfactory unit for future payments

Q3. Explain the medium of exchange function of money.

The goods and services are exchanged for money

A buyer can buy goods through money and seller can sell goods for money

It removes the difficulty of double coincidence of wants

Money helps in sale and purchase independent of each other

Q4. Explain the “measure of value” function of money.

Money measures and expresses the value of all goods and services

The value of goods and services is expressed by their price. So it becomes possible to

calculate exchange rate between them in money terms

It helps to compare value of two commodities

Q5. Explain the “store of value” function of money.

Money is most economic and easy way of storing wealth

Money can be used in future when needed

This is possible because it is most liquid asset and has purchasing power

Because money has general acceptability and is convenient to store

Q6. Explain the “standard of deferred payment” function of money.

Money helps in making future payments

It becomes possible because money has general acceptability and its value is stable

through the period of time

It has general acceptability

It is more durable as compared to other goods

Q7. Define money supply and state its components.

Ans. Money supply is the total amount of money that is available with the public of an economy

at any given point of time. Its components include:

Currency held by the public

Demand deposits of the people with the commercial banks

Other deposits (demand deposits with RBI of domestic and foreign institutions other than

that of the government of the country and commercial backs within the country.

Q.8 Explain the “Lender of Last Resort’ function of the central bank.

of 46

Central bank also lends money directly to commercial banks. Instead of rediscounting, central

bank given loans against the bill of exchange promissory notes, treasury bills, government

securities, etc.

The direct lending to commercial bank is referred to as the ‘lender of the last resort’ function

of central bank

Q.9 Explain the “Government’s Bank” function of a central bank.

A central bank conducts the banking account of government departments.

It performs the same banking functions for the government as commercial bank performs for

its customers.

It accepts their deposits and undertakes inter-bank transfers. It also gives loans to the

government.

A central bank also provides various services as agent of the government. It manages public

debt.

It also gives advice to the government regarding money market, capital market, government

loans and economic policy matters.

Q.10 What do you mean by credit/money creation?

OR

Explain the process of money creation by the commercial banks with the help of a numerical

example.

Money creation is a process in which a commercial bank creates total deposits many times the

initial deposits.

The capacity of commercial bank to create depends on two factors: 1. Amount of initial fresh

deposit 2. Legal reserve ratio LRR Money multiplier = 1 LRR Money Creation = Initial Deposit ×

Money multiplier

The Working: Suppose (i) Initial Deposit = Rs. 1000 (ii) LRR = 20% As required, the bank keeps 20%

ie Rs. 200 as cash reserve and lend the remaining Rs. 800. Those who borrow use the money for

making payments. As assumed those who receive these payments put the money back into their

bank accounts. This creates a fresh deposit of Rs. 800. The bank again keep 20% ie Rs. 160 and

lend Rs. 640. In this way the money goes on multiplying leading to total money creation of Rs.

5000.

kendriya vidyalaya sangathan delhi region - · pdf fileq.1 why is a production possibilities...

Documents