Economics Two Marks

K.ANANDAKUMAR/LECTURER/DOMS/ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING

A Ready Reckoner of Two Marks

1) What is economics?

The word economics is derived from the ancient Greek word “Oiks” which means household

and “Nemein” which means management. Thus it refers to managing of a household using

the limited funds.

Economics is a social science which deals with human wants and their satisfaction.

It is mainly concerned with the way in which a society chooses to employ its scarce resources

which have alternative uses, for the production of goods for present and future consumption.

2) What is economic circle?

3) Give Adam Smith’s definition of Economics.(Wealth definition)

Adam Smith defined economics as “Economics is the sciences of wealth”

4) Give Alfred Marshall’s Definition of Economics ( Welfare definition)

According toAlfred Marshall Economics is defined as “a study of mankind in the ordinary

business of life”

5) Give Lionel Robbins’ definition of Economics (Scarcity definition).

Economics is the science which studies human behaviour as a relationship between ends and

scarce means which have alternative uses.

6) What are the main division of economics?

Consumption

Production

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Exchange

Distribution

Public Finance

7) What is micro economics?

Micro means small. Micro economics deals with problems such as the output of a single firm,

price of a single commodity and spending on goods by a single household.

8) What is macroeconomics?

Macroeconomics studies the economic system as a whole. In it, we get the complete picture

of the working of the economy. It is a study of economic aggregate such as total employment,

savings, and investment.

9) What is wealth?

Wealth has been defined as “stock of goods existing at a given time that have money value”.

10) Give the classification of wealth.

Personal wealth(individual wealth)

Social wealth( collective wealth)

National wealth (a+b)

Cosmopolitan wealth (e.g. ocean)

11) What are goods? Classify.

Anything that satisfies a human want can be considered as “good” in economics.

Goods can be classified into free goods and economic goods.

Goods like air and sunlight which are the gifts of nature are the gifts of nature are free

goods. They are not scarce. So they do not command a price in the market.

Economic goods command a price in the market. In other words, they have value-in-

exchange. For, they are scarce in relation to demand.

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12) What is income?

In economics, when we refer to income, generally we mean money income. According to

Seligman “income in the economic sense, is the flow of satisfactions from economic

goods”. The main source of income is wealth. There are two kinds of income-(1) money

income or nominal income and (2) real income.

13) What is real income?

Real income refers to the command of a person over actual commodities and services. Real

income is price adjusted money income.

14) What is National income?

National income refers to the value of commodities and services produced by a country

during a year.

15) What is Per capita income?

We get per capita income [income per person per year] by dividing national income by the

population of the country.

Per capita income= national income/population.

16) Value:

The term value refers to the exchange qualities of a good. According to Marshall, “the term

value is relative and expresses the relation between two things ata particular place and time”.

Value is of two kinds

Value –in-use and

Value-in-exchange.

Value is generally measured in money and it is a relative term. The value of a thing changes

according to time and situation. For example, ice has more value in summer than in winter.

17) What is an economic system?

An economic system refers to how the different economic elements will solve the central

problems of an economy: what, how and for whom to produce.

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18) Define managerial economics.

Managerial economics refers to the application of economic theory and methods of decision

sciences to arrive at the optimal solution to the various decision-making problems faced by

managers of business firms.

19) What is firm?

A firm can be considered as a combination of people, physical and financial resources and a

variety of information.

The firm is an agent in the economy that produces goods and services to satisfy wants of the

people.

In its productive activity, it transforms inputs such as labour, raw materials, capital, and

natural resources into useful products which are demanded by consumers.

Firms exist to use scarce resources of the society efficiently and thus help the economy to

cope with the basic problem of scarcity.

20) Why does firm exist?

Business firm exists for three main resources.

They exploit the economies of mass production.

They raise funds to finance its productive activities and

They organise the production process

21) What is meant by boundaries of the firm?

By boundaries of firm we mean what parts of a product or what services a firm itself will

produce and what parts of a product or what services it will get from outside using the market

mechanism from other firms.

22) What is value of the firm?

Value of the firm is measured by calculating present value of cost flows of profits of the firm

over a number of years in the future.

Value of the firm=present value of expected future profits

23) What is demand?

Demand for a commodity refers to the desire backed by ability to pay and willingness to buy

it. If a person below poverty line wants to buy a car, it is only a desire but not a demand as he

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Demand means

A desire to buy.

A decision to pay.

The ability to pay or purchasing power


cannot pay for the car. If a rich man wants to buy a car, it is demand as he will be able to pay

for the car. Thus desire backed by purchasing power is demand.

24) What is demand function?

The demand function for a commodity describes the relationship between the quantity

demanded for it and the factors that influence it

Dx=F (Px, Ps, Y, T, W)

Dx represents demand for good X

Px represents price of good X.

Ps is price of related goods.

Y is income

T refers to tastes and preferences of the consumers

W refers to wealth of the consumer.

25) State the Law of demand:

Law of demand states that there is a negative or inverse relationship between the price and

quantity demanded of a commodity over a period of time. Thus law of demand states that

people will buy more at lower prices and buy less at higher prices, other things remaining

the same.

26) State the assumptions of the law of demand.

No change in the consumer’s income.

No change in consumer’s tastes and preferences.

No changes in the prices of other goods.

No new substitutes for the goods have been discovered.

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People do not feel that the present fall in price is prelude to a further decline in price.

27) Why does demand curve slope downwards?

The demand curve slopes downwards to the right due to the following reasons:

Operation of the law of diminishing marginal utility.

Price effect

Substitution effect

Income effect

Different uses and

Entry of new consumers.

28) What are the factors determining demand?

Tastes and preferences of the consumer

Income of the consumer

Price of substitutes

Number of consumers

Expectations of future price changes

Distribution of income

Climate and weather conditions

State of business

Consumer innovativeness

29) What are the types of demand?

Price demand

Income demand

Cross demand

Direct and indirect demand

Joint and composite demand

Alternative demand

30) What is price demand?

Price demand refers to the various quantities of the commodity which the consumer will buy

per unit of time and at certain price (other things remaining the same). The quantity

demanded changes with the change in price. In other words, we can say that quantity

demanded and price has a negative correlation as

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DA=F (PA)

DA = demand of commodity A.

PA = price of the commodity A.

P ↓ D ↑

P ↑ D ↓

31) What is Income demand?

The income demand shows how much quantity a consumer will buy at different levels of his

income. Generally, there is positive relationship between income and demand of the

consumer.

DA=F (YA)

DA = demand of commodity A.

YA = income of the commodity A.

Y ↓ D ↓

Y ↑ D ↑

32) What is cross demand?

Cross demand refers to the relationship between quantity demanded of good A and price of

related good B, other things being equal. In simple words, from cross demand we mean the

change in the quantity demanded of a commodity without any change in its price but due to

change in the price of related goods.

33) What is direct and indirect demand?

The demand for consumer’s goods which satisfies human wants is called as direct demand.

For instance, let us take the case of food for which demand is direct. On the contrary when

same good satisfies human wants indirectly, is known as indirect demand. The demand for

factors of production is an indirect demand.

34) What is joint and composite demand?

The demand for one commodity leading to the demand for another commodity is known as

joint demand. For example, demand for ink and paper is joint demand. On the other hand,

demand is said to be composite when a thing is demanded for two or many other purposes.

The demand of coal and rubber is composite as they are used for several purposes.

35) What is alternative demand?

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Demand is known as alternative when it is satisfied by alternative ways. Let us consider the

demand for light. It has an alternative demand; one can get light either from electricity,

kerosene or gas etc.

36) What is utility?

The utility means the amount of satisfaction which an individual derives from consuming

a commodity.

It is also defined as want-satisfying power of a commodity.

37) What are the types of Elasticity of Demand?

There are three types of elasticity of demand

1. Price elasticity of demand;

2. Income elasticity of demand; and

3. Cross-elasticity of demand

38) What is price elasticity of demand?

‘’The degree of responsiveness of quantity demanded to a change in price is called price

elasticity of demand’’

Price elasticity of demand= Percentage change in quantity demanded

_________________________________________

Percentage change in price

39) What are the methods of measurement of price elasticity of demand?

Important methods for calculating price elasticity of demand are

1) Percentage method

2) Point method or slope method

3) Total outlay method

4) Arc method

40) What is Income elasticity of demand?

Income elasticity of demand is the degree of responsiveness of demand to the change in

income.

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41) What is Cross-elasticity of demand?

The responsiveness of demand to changes in prices of related goods is called cross-elasticity

of demand (related goods may be substitutes or complementary goods). In other words, it is

the responsiveness of demand for commodity X to the change in the price of commodity Y.

42) Factors determining elasticity of demand

The elasticity of demand depends on

1. Nature of the commodity

2. Uses of commodity

3. Existence of substitutes

4. Postponement of demand

5. Amount of money spent

6. Habits and

7. Range of prices of commodity

43) State Law of supply

The law of supply establishes a direct relationship between price and supply. Firms will

supply less at lower prices and more at higher prices. ‘’ Other things remaining the same, as

the price of commodity rises, its supply expands and as the price falls, its supply contracts’’.

44) What are the Factors determining supply?

1. Production technology

2. Prices of factors

3. Prices of other products

4. Number of producers or firms

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5. Future price expectations

6. Taxes and subsidies

7. Non- economic factors

45) What is meant by Elasticity of Supply?

The law of supply tells us that quantity supplied will respond to a change in price. The

concept of elasticity of supply explains the rate of change in supply as a result of change in

price. It is measured by the formula mentioned below

Elasticity of supply = proportionate change in quantity supplied

________________________________________

Proportionate change in price

46) What are the types of elasticity of supply?

There are five types of elasticity of supply.

1. Perfectly elastic supply

2. Relatively elastic supply

3. Unitary elastic supply

4. Relatively inelastic supply

5. Perfectly inelastic supply

47) What are the factors determining elasticity of supply?

The following factors will influence the elasticity of supply

1. Changes in cost of production

2. Behaviour pattern of producers

3. Availability of facilities for expanding output.

4. Supply in the short and long period.

48) What is Veblen effect?

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Thorstein Veblen explained that rich people buy certain luxurious goods (i.e. ornaments made

of gold or diamond or platinum) because they give them more psychic satisfaction or psychic

income. They buy these goods not for their use value but for their prestige value. Normally, if

price of such goods increases, rich people have a tendency to buy more of them. This is called

Veblen effect. The demand curve moves upwards to the right due to this effect.

49) What is Giffon Paradox?

Giffengoods can be classified into two categories-(a) superior goods and (b) inferior

goods.

Superior goods are those goods where, when their prices increase, their demand also

increases. For example, when the French Intimate Scent Company advertised ‘intimate

Scent is the costliest in the world’, its sales shot up.

Inferior goods are those goods where their demand falls with a fall in price. For example,

when the price of ragi falls, traditional consumers of ragi, give up ragi consumption and

start buying rice because, ragi has now become an inferior good.

50) What is supply?

Supply means the goods offered for sale at aprice during a specific period of time. It is the

capacity and intention of the producers to produce goods and services for sale at a specific

price.

51) Draw the graph of demand curve, supply curve and equilibrium price curve.

52) What is demand forecasting?

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It refers to the prediction or estimation of future demand at a given point of time under

given constraints.

53) What is the need and importance of demand forecasting?

To reduce the uncertainty in planning for future production levels, for launching a new

product, for expanding production capacity and for entering an industry, demand

forecasting is essential.

54) What are the types of demand forecasts?

There are two types of demand forecast:

i. Short term forecasts are usually made for a period up to one year such as for a

month, a quarter or a whole year.

ii. Long term forecasts which relates to the production for a year or more.

55) What are the methods used to estimate demand?

i. Consumer surveys

ii. Consumer clinics

iii. Market experiments

iv. Statistical technique or regression analysis.

56) What are the methods of demand forecasting?

i. Consumer survey method

ii. Expert opinion method

iii. Market experiments

iv. Time series analysis

v. Econometric method

vi. Statistical methods- correlation and regression analysis and trend projection

57) What are the components of time series?

i. Trends

ii. Seasonal variation

iii. Cyclical variation

iv. Erratic trend

58) What is meant correlational and regression analysis?

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Correlation analysis: It refers to degree of association between two variables such as sales

and advertisement expenditure.

Regression analysis: it refers to predicting the value of unknown variable by using the value

of known variable.

59) What is Delphi technique?

In this method, opinion of a number of experts about future demand is first

obtained.

Then, each expert is told about the prediction of other experts and asked in the light

of other’s views whether he would revise his prediction about future demand.

The experts are again shown each other’s’ revised forecasts and asked to reconsider

their forecasts till a consensus is reached.

60) What is Test marketing?

Test marketing is a method of introducing a new product in a particular area (may

consists of several cities and towns) which represents the whole market and the

responses of consumers will be judged.

For example, price, advertising, packaging, product model can be different in various

market areas. Sales (demand for the product) can be compared at different levels of

price, advertising and different models of the product.

61) What is production function?

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The production function shows how a certain amount of inputs will result in the

production of a certain amount of output of a commodity.

It explains how the output can be maximized with the help of given inputs.

The production function is given as

Q= f (X1, X2, X3,…………,Xn)

Q →Quantity produced during a given period of time

Xn→quantities of different factors used in production.

62) Classify production function.

Short run production function which is studied through law of variable

proportions.

Long run production function which is explained by returns to scale.

63) State the law of variable proportion.

As the proportion of one factor in a combination of factors s is increased, after a point,

first the marginal and then the average product of that factor will diminish.

64) What is return to scale? What are the three phases of returns to scale?

Returns to Scale refers to the magnitude of the change in the rate of output relative to

the changes in scale.

Returns to scale studies the changes in output when all factors or inputs are changed.

The changes in output as a result of changes in the scale can be studied in 3 phases.

Increasing returns to scale.

Constant returns to scale.

Decreasing returns to scale.

65) Differentiate short run (laws of returns) and long run (returns to scale) production function.

S.No Laws of returns Returns to scale

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1 Short run production function Long run production function

2 Only one factor is varied and all

other factors are kept constant.

All the factors are varied.

3 Law does not apply when the factors

must be used in fixed proportions to

produce a product.

Law does not apply when the factors

must be used in fixed proportions to

produce a product.

4 Increasing returns are due to the

indivisibility of factors and

specialization of labour.

Diminishing returns are due to non-

optimal factor proportion and

imperfect elasticity of substitution of

factors.

Increasing returns to scale are due to

economies of scale while diminishing

returns to scale are due to

diseconomies of scale.

5 Factors proportions are changed Factors proportions are not changed.

The scale changes.

66) What is meant by economies of scale?

Economies mean advantage. Scale refers to the size of unit. Economies of scale

refer to the cost advantages due to the larger size of production.

As the volume of production increases, the overhead cost will come down. The

bulk purchase of inputs will give a better bargaining power to the producer which

will reduce the average variable cost too. All these advantages are due to the

larger scale production and these advantages are called economies of scale.

67) What are the two types of economies?

Internal economies of scale.

External economies of scale.

68) What are internal economies of scale? Mention its types.

Internal economies of scale are the advantages enjoyed within the production unit.

These economies are enjoyed by a single firm independently of the action of the other

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firms. For instance, one firm may enjoy the advantage of good management; another

may have the advantage of more up-to-date machinery.

There are five kinds of internal economies

Technical economies

Financial

Managerial

Labour

Marketing

Economies of survival

69) What are external economies of scale?

When many firms expand in a particular area- i.e. when the industry grows-they enjoy

a number of advantages which are known as external economies of scale. This is not

the advantage enjoyed by a single firm but by all the firms in the industry due to the

structural growth.

They are

Increased transport facilities

Banking facilities

Development of townships

Information and communication development.

All these facilities are available to all firms in an industrial region.

70) What is meant by diseconomies of scale?

The diseconomies are the disadvantages arising to a firm or a group of firms due to

larger scale production. There are two types of diseconomies. They are

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Internal diseconomies of scale

External diseconomies of scale.

71) What is isoquant?

In economics, an isoquant (derived from quantity and the Greek word iso [meaning

equal]) is a contour line drawn through the set of points at which the same quantity of

output is produced while changing the quantities of two or more inputs. The isoquant

deals with the cost-minimization problem of producers.

72) What is isoquant curve? Draw it.

In Latin, "iso" means equal and "quant" refers to quantity. This translates to

"equal quantity".

The “isoquant curve” is, therefore, also known as “Equal product curve” or

“Production Intelligence Curve”.

An isoquant curve is locus of point representing various combinations of two

inputs – capital and labour – yielding the same output.

The isoquant curve helps firms to adjust their inputs to maximize output and

profits. At some point, the returns of adding another worker or piece of

equipment will start to hurt output.

73) What is isocost line? Draw it.

An isocost line is defined as locus of points representing various combinations of

two factors, which the firm can buy with a given outlay.

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Higher isocost lines represent higher outlays (total cost) and lower isocost lines

represent lower outlays.

o For the two production inputs labour and capital, with fixed unit costs of the

inputs, the equation of the isocost line is

Where w represents the wage rate of labour, r represents the rental rate of capital, K is

the amount of capital used, L is the amount of labour used, and C is the total cost of

acquiring those quantities of the two inputs.

74) What is isoquant map?

A set of isoquants which represents different levels of output is called “isoquant

map”. In the isoquant map, the isoquants on the right sides represent higher levels of

output and vice versa.

75) State Cobb-Douglas production function.

The Cobb-Douglas production function can be stated as follows:

Q=ALaKb

Q= output

L=labour

K=capital

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A=state of technology

a=exponent of labour

b=exponent of capital.

76. What is meant by production?

Production in Economic refers to the creation of those goods and services which have

exchange value. It means the creation of utilities.

77. What is meant by Form Utility?

If the physical form of a commodity is changed, its utility may increase. For instance, the

utility of cotton increases, if it is converted into clothes. The other examples are processing

of paddy into rice, wheat into flour and butter into ghee.

78. What is meant by Place Utility?

If the commodity is transported from one place to another, its utility may increase. For

instance, of rice is transported from Tamil Nadu to Kerala, its utility will be more.

79. What is meant by Time utility?

If the commodity is stored for future usage, its utility may increase. During rainy season,

water is stored in reservoirs and it is used at a later time. This increases the utility of that

stored water. Agricultural commodities like paddy, wheat, oilseeds, and pulses are stored for

the regular uses of consumers throughout the year.

80. What is meant by Possession Utility?

Commodities in the transaction process, change from one person to another person.

Commodities in the hands of producers have some utility and by the time they reach

consumers through the traders their utility is increased. Such utility due to possession or

transfer of ownership of the commodity is called, possession utility. For example, paddy in

the hands of producers, i.e. farmers has less utility compared to that of the rice in the hands

of consumers.

81. What is meant by Factors of production?

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Factors of production refer to those goods and services which help in the productive

process. They are Land, Labour, Capital and Organisation (entrepreneurship).

82. What is meant by Division of Labour?

Division of Labour means dividing the process of production into distinct and several

component processes and assigning each component in the hands of a labour or a set of

labourers, who are specialists in that particular process.

For example, a tailor stitches a shirt in full. In the case of garment exporters, cutting of cloth,

stitching of hands, body, collars, holes for buttons, stitching of buttons, etc., are done

independently by different workers. Therefore, they are combining the parts into a whole

shirt.

83. What is meant by Capital?

Capital is the man made physical goods used to produce other goods and services. In the

ordinary language, capital means money. In Economics, capital refers to that part of man-

made wealth which is used for the further production of wealth. According to Marshall,

‘’Capital consists of those kinds of wealth other than free gifts of nature, which yield

income’’.

84. What are the Forms of Capital?

1. Physical Capital or Material Resources

2. Money Capital or Monetary Resources, and

3. Human Capital or Human Resources

85. What is meant by Organisation or Entrepreneurship?

An entrepreneur is a person who combines the different factors of production (land, labour

and capital), in the right proportion and initiates the process of production and also bears

the risk involved in it. The entrepreneur is also called ‘organiser’. Entrepreneurship is risk

taking, managerial, and organizational skills needs to produce goods and services in order to

gain a profit. In modern times, an entrepreneur is called ‘the changing agent of the society’.

He is not only responsible for producing the socially desirable output but also to increase the

social welfare.

86. What is meant by Cost?

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The term ‘cost of production’ means expenses incurred in the production of a commodity.

This refers to the total amount of money spent on the production of a commodity. The

determinants of cost of production are: the size of plant, the level of production, the nature

of technology used, the quantity of inputs used, managerial and labour efficiency. Thus the

cost of production of a commodity is the aggregate of prices paid for the factors of

production used in producing a commodity.

87. What is the cost of function?

The cost function expresses a functional relationship between costs and input that

determine it. Symbolically, the cost function is

C = f (Q)

Where

C = Cost

Q = Output

88. What is meant by Money Cost and Real Cost?

Money cost or nominal cost is the total money expenses incurred by a firm in producing a

commodity.

It includes

(i) Cost of raw materials

(ii) Wages and salaries of labour

(iii) Expenditure on machinery and equipment

(iv) Depreciation on machines, buildings and such other capital goods

(v) Interest on capital

(vi) Other expenses like advertisement, insurance premium and taxes

(vii) Normal profit of the entrepreneur.

89. What is meant by Opportunity Cost?

The opportunity cost of any goods is the next best alternative good that is sacrificed. For

example a farmer who is producing wheat can produce potatoes with the same factors.

Therefore the opportunity cost of a quintal of wheat is the amount of output of potatoes

given up.

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90. What is meant by Accounting cost or explicit cost?

Accounting costs or explicit costs are the payments made by the entrepreneur to the

suppliers of various productive factors.

The accounting costs are only those costs, which are directly paid out or accounted

for by the producer i.e. wages to the labourers employed, prices for the raw

materials purchased, fuel and power used, rent for the building hired for the

production work, the rate of interest on the borrowed capital and the taxes paid.

91. What is meant by Economic cost?

The economic cost includes not only the explicit cost but also the implicit cost. The money

rewards for the own services of the entrepreneur and the factors owned by himself and

employed in production are known as implicit costs or imputed costs. The normal on money

capital invested by the entrepreneur, the wages or salary for his own services and rent of the

land and buildings belonging to him and used in production constitute implicit cost. Thus

Economic cost = Explicit cost + Implicit cost.

92. What is meant by private cost and social cost?

Private cost is the cost incurred by a firm for production. It includes both implicit

costs and explicit costs.

Social costs are those costs, which are not borne by the producing firm but are

incurred by others in society. For example, when an oil refinery discharges its waste

in the river causing water pollution, such a pollution results in tremendous health

hazards which involve costs to the society as a whole

93. What is meant by fixed cost and Variable cost?

Fixed costs are those which are independent of output, that is, they do not change

with changes in output. These costs are a ‘fixed’ amount, which must be incurred by

a firm in the short run whether the output is small or large. E.g. contractual rent,

interest on capital invested, salaries to the permanent staff, insurance premium and

certain taxes.

Variable costs are those costs, which are incurred on the employment of variable

factors of production whose amount can be altered in the short run. Thus the total

variable costs change with the level of output.

94. What is meant by Total cost?

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Total cost is the sum of total fixed cost and total variable cost.

TC = TFC =TVC where

TC = Total cost

TFC = Total Fixed cost

TVC = Total Variable cost

It should be noted that total fixed cost is the same irrespective of the level of output.

Therefore a change in total cost is influenced by the change in variable cost only.

95. What is meant by Average Fixed Cost (AFC)?

The average fixed cost is the fixed cost is the fixed cost per unit of output. It is obtained by

dividing the total fixed cost by the number of units of the commodity produced.

Symbolically AFC = TFC / Q

Where AFC =Average fixed Cost

TFC = Total Fixed cost

Q = Number of units of output produced

96. What is meant by Average Variable Cost (AVC)?

Average variable cost is the variable cost per unit of output. It is the total variable cost

divided by the number of units of output produced.

AVC = TVC /Q

Where AVC = Average Variable Cost

TVC = Total Variable Cost

Q = Number of units of output produced

97. What is meant by Average Total Cost or Average Cost?

Average total cost is simply called average cost which is the total cost dividend by the

number of units of output produced.

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AC = TC /Q where

AC = Average Cost

TC = Total cost

Q = number of units of output produced

Average cost is the sum of average fixed cost and average variable cost. I.e. AC =AFC + AVC

98. What is meant by Marginal Cost?

Marginal cost is defined as the addition made to the total cost by the production of one

additional unit of output.

99. What is revenue?

The amount of money, which the firm receives by the sale of its output in the market, is

known as its revenue.

100. What is meant by Total Revenue?

Total Revenue refers to the total amount of money that a form receives from the sale of its

products.

Mathematically TR =PQ where TR = Total Revenue; P = Price; Q =Quantity sold. Suppose a

firm sells 1000 units of a product at the price of Rs 10 each, the total revenue will be 1000 X

Rs 10 =Rs 10,000/-

101. What is meant by Average Revenue?

Average revenue is the revenue per unit of the commodity sold. It is calculated by dividing

the total revenue by the number of units sold.

AR =TR /Q where

AR =Average Revenue

TR = Total Revenue

Q = Quantity sold

Thus average revenue means price of the product.

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102. What is meant by Marginal Revenue?

Marginal Revenue is the addition made to the revenue by selling one more unit of a

commodity.

For example, if 10 units of a product are sold at the price of Rs 15 and all units are sold at Rs

14 /-, the marginal revenue will be:

MRn =TRn– TRn -1

= Rs (11 x 14) – Rs (10 x 15)

= Rs 154 -150

= Rs 4 /-

103) what do you mean by perfect competition?

If a market satisfies the following conditions, it is a perfect competition.

Large number of buyers and sellers.

Homogeneous product

Absence of artificial restrictions.

Free entry and free exist of firms.

Perfect knowledge on the part of buyers and sellers.

Perfect mobility of FOP.

Perfect knowledge about the market condition.

Absence of transport costs.

No government interference.

Absence of collision.

104) Distinguish between a firm and industry.

A firm is a production unit producing for sale; selling at a profit; with the objective of

maximising the profit. It is a single unit of production and is a legal person. A group of firms

producing similar or identical goods are known as industry.

105) The demand curve of a firm under perfect competition is a horizontal line. Why?

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Under the perfect competition the firm can sell any amount of product at the prevailing

price only. A single firm cannot influence the prize; a firm is a price taker. Therefore the

demand curve of the firm will be a horizontal straight line parallel to X-axis.

106) what does monopoly refer to?

Monopoly is a market structure in which there is a single seller only. There are no close

substitutes for the commodity it produces and there are barriers to entry. Monopoly exists

where there is a single producer and seller of a product. The single producer seller may be

an individual or a partnership company or a joint stock company or state.

107) Why does the demand curve slope downwards under monopoly?

The average revenue curve of a monopoly firm is also the demand curve. The demand

curve is sloping downwards because larger quantities can be sold by reducing the

price.

108) Define the term market.

In economics, market is a concept referring to a grouping of buyers and sellers, who

involve in the transaction of commodities and services.

109) Classify market according to competition.

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110) what do you mean by pure competition?

When the following four conditions are satisfied, it is called pure competition.

Large number of buyers and sellers.

Homogeneous product.

Absence of artificial restrictions

Free entry and exist of firms.

111) what is price discrimination?

It is also known as discriminating monopoly. A monopolist sells the same commodity at

different prices to different buyers and this act is known as price discrimination. Price

discrimination may be defined as “the sale of technically similar products at prices which are

not proportional to marginal cost”.

112) what is monopolistic competition?

It refers to a market situation in which many producers produce goods that are those close

substitutes for one another. Their products are similar but not identical. They are competing

with each other. For example, in India, there are various manufacturers of bathing soap. They

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produce different brands such as “Lifebuoy, Hamam, Lux and so on. But the buyers are

attached to their favourite brand.

113) write a short note on Oligopoly.

Oligopoly is an important form of imperfect competition. Oligopoly is said to prevail when

there are a few firms producing a product. The number of firms may be more than two. It

means competition among a few.

114) write a short note on duopoly.

Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both

the sellers are completely independent and no agreement exists between them. A seller may

assume that his rival is unaffected by what he does. In that case he takes only his own direct

influence on the price.

115) What is meant by Ratio Analysis?

Ans: - Ratio is an expression of one number in relation to another. Ratio analysis is the process

of determining and interpreting the numerical relationship between figures of financial

statements. A ratio is a mathematical relationship between two items expressed in a

quantitative form.

116) What are all the objectives of ratio analysis?

Ans: - The objectives of using ratios are to test the profitability, financial position (liquidity and

solvency) and the operating efficiency of a concern.

117) What are all the Advantages of Ratio Analysis?

Ans:-

It is an useful device for analysis the financial statements.

It simplifies, summarizes the accounting figures to make it understandable.

It helps in financial forecasting.

It facilitates interfirm and intrafirm comparisons.

118) What is mean by Liquidity Ratios?

Ans: - Liquidity Ratios measure the firm’ ability to pay off current dues i.e., repayable within a

year. Liquidity ratios are otherwise called as Short Term Solvency Ratios. The important ratios

are

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1. Current Ratio

2. Liquid Ratio

3. Absolute Liquid Ratio

119) What is mean by Current Ratio?

Ans: - This ratio is used to assess the firm’s ability ti meet its current liabilities. The

relationship of current liabilities is known as current ratio. The ratio is calculated as:

Current Assets

Current ratio = _____________________

Current Liabilities

120) What is meant by Current Assets?

Ans: - Current Assets are those assets, which are easily convertible into cash within one year.

This includes cash in hand, cash at bank, sundry debtors, bills receivable, short term investment

or marketable securities, stock and prepaid expenses.

121) What is meant by Current Liabilities?

Current Liabilities are those liabilities which are payable within one year. This includes bank

overdraft, sundry creditors, and bills payable and outstanding expenses.

122) What is meant by Liquid Ratio?

Ans: - This ratio is used to assess the firm’s short term liquidity. The relationship of liquid

assets to current liabilities is known as liquid ratio. It is otherwise called as Quick ratio or Acid

Test ratio. The ratio is calculated as:

Liquid Assets

Liquid Ratio = ______________________

Current Liabilities

Liquid assets mean current assets less stock and prepaid expenses.

123) What is Absolute Liquid Ratio?

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Ans: - It is a modified form of liquid ratio. The relationship of absolute liquid assets to liquid

liabilities is known as absolute liquid ratio. This ratio is called as ‘Super Quick Ratio’. The ratio is

calculated as:

Absolute Liquid Assets

Liquid ratio = _________________________

Liquid Liabilities

124) What is meant by Solvency Ratio?

Ans: - Solvency refers to the firms ability to meet its long term indebtedness. Solvency ratio

studies the firms ability to meet its long term obligations. The following are the important

solvency ratios:

1. Debt – Equity Ratio

2. Proprietory Ratio

125) What is meant by Debt Equity Ratio?

Ans: - This ratio helps to ascertain the soundness of the long term financial position of the

concern. It indicates the proportion between total long term debt and shareholders funds. This

also indicates the extent to which the firm depends upon outsiders for its existence. The ratio is

calculated as:

Total long term Debt

Debt-Equity Ratio = ________________________

Shareholders funds

126) What is meant by Proprietory Ratio?

Ans: - This ratio shows the relationship between proprietors or shareholders funds and

total tangible assets. The ratio is calculated as:

Shareholders funds (Proprietors funds)

Proprietory Ratio = _____________________________________

Total tangible assets

Tangible assets will include all assets except goodwill, preliminary expenses etc.

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127) What is meant by Profitability Ratios?

Ans: - Efficiency of a business is measured by profitability. Profitability ratio measures the

profit earning capacity of the business concern. The important profitability ratios are discussed

below:

1. Gross Profit Ratio

2. Net Profit Ratio

3. Operating Profit Ratio

4. Operating Ratio

128) What is meant by Gross Profit Ratio?

Ans: - This ratio indicates the efficiency of trading activities. The relationship of Gross Profit

to Sales is known as gross profit ratio. The ratio is calculated as:

Gross Profit

Gross Profit Ratio = _______________ X 100

Sales

Gross profit is taken from the Trading Account of a business concern. Otherwise Gross profit can

be calculated by deducting cost of goods sold from sales. Sales mean Net sales.

Gross profit = sales - cost of goods sold

Cost of goods sold = opening stock + purchases – closing stock

(Or)

Sales – Gross Profit

129) What is meant by Net Profit Ratio?

Ans: - This ratio determines the overall efficiency of the business. The relationship of Net

profit to Sales is known as net profit ratio. The ratio is calculated as:

Net Profit

Net Profit Ratio = __________________ X 100

Sales

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Net profit is taken from the Profit and Loss Account of the business concern or the gross profit of

the concern less administration expenses, selling and distribution expenses and financial

expenses.

130) What is meant by Operating Profit Ratio?

Ans: - This ratio is an indicator of the operational efficiency of the management. It

establishes the relationship between Operating Profit and Sales. The ratio is calculated as:

Operating Profit

Operating Profit Ratio = ___________________ X 100

Sales

Where operating profit is Net profit + Non- operating expenses – Non-operating income.

Where, Non-operating expenses are interest on loan and loss on sale of assets.

Non-operating incomes are dividend, interest received and profit on sale of asset. (Or) Operating

profit = Gross profit – Operating expenses.

Operating expenses include administration, selling and distribution expenses. Financial expenses

like interest on loan are excluded for this purpose.

131) What is meant by operating ratio?

Ans: - This ratio determines the operating efficiency of the business concern. Operating

ratio measures the amount of expenditure inurred in production, sales and distribution of

output. The relationship between Operating costs to Sales is known as Operating Ratio. The ratio

calculated as:

Cost of goods sold + operating expenses

Operating Ratio = ________________________________________ X 100

Sales

132) What is meant by Activity Ratios?

Ans: - activity ratios indicate the performance of the business. The performance of a

business is judged with its sales (turnover) or cost of goods sold. These ratios are thus referred

to as turnover ratios. A few important activity ratios are discussed below:

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1. Capital turnover ratio

2. Fixed assets turnover ratio

3. Stock turnover ratio

4. Debtors turnover ratio

5. Creditors turnover ratio

133) What is meant by Capital Turnover Ratio?

Ans:- This shows the number of times the capital has been rotated in the process of

carrying on business. Efficient utilisation of capital would lead to higher profitability. The

relationship between sales and capital employed is known as capital turnover ratio. The is

calculated as:

Sales

Capital turnover ratio = ____________________

Capital employed

Where sales means sales less sales returns and capital employed refers to total long term funds

of the business concern i.e., Equity share capital, preference share capital, reserves and surplus

and long term borrowed funds.

134) What is meant by Fixed Assets Turnover Ratio?

Ans:- this shows how best the fixed assets are being utilised in the business concern. The

relationship between sales and fixed assets is known as Fixed Assets Turnover Ratio. The ratio is

calculated as:

Sales

Fixed Assets Turnover Ratio= __________________

Fixed assets

Fixed assets mean Fixed Assets less depreciation.

135) What is meant by Stock Turnover Ratio?

Ans: - This ratio is otherwise called as inventory turnover ratio. It indicates whether stock

has been efficiency used or not. It establishes a relationship between the cost of goods sold

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during a particular period and the average amount of stock in the concern. The ratio calculated

as:

Cost of goods sold

Stock Turnover Ratio = ____________________

Average stock

136) What is meant by Debtors Turnover Ratio?

Ans: - this establishes the relationship between credit sales and average accounts

receivable. Debtors’ turnover ratio indicates the efficiency of the business concern towards the

collection of amount due from debtors. The ratio is calculated as:

Credit Sales

Debtors turnover Ratio = ___________________________

Average Accounts Receivable

Accounts receivable includes sundry debtors and bills receivable.

Opening (debtors + bills receivable) +

Closing (debtors + bills receivable)

Average accounts receivable = _______________________________

2

In case credit sales are not given, total sales can be taken as credit sales.

137) What is meant by Creditors Turnover Ratio?

Ans: - this establishes the relationship between credit purchases and average accounts

payable. Creditor’s turnover ratio indicates the period in which the payments are made to

creditors. The ratio is calculated as:

Credit Purchases

Creditors turnover ratio = _____________________

Average Accounts Payable

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Accounts payable include sundry creditors and bills payable.

Opening (creditors + bills payable) +

Closing (creditors + bills payable)

Creditors turnover ratio = ________________________________

2

In case a credit purchase is not given total purchases can be taken as credit purchases.

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Economics Two Marks

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