MBA – 0903 – MANAGERIAL ECONOMICS

Two Mark questions with Answers

1.Explain the meaning of Production.

Production is an activity that transforms inputs into output. Production is

any activity that increases consumer usability of goods and services thus

production consists of producing , storing and distributing tangible of goods

and services

For example : A sugar mill uses such inputs as labour, raw material like

sugarcane and capital invested in machinery, factory building to produce

sugar.

2. Explain short run and long run production .

Short run production.

The short run is that period of time in which some of the firm’s inputs

are fixed – these fixed inputs act as a limiting factor on change in output. In

the short run at least one of the inputs remains constant , while the other

inputs are vary in nature. Simply, if the firm uses more then two inputs but

only two of them are variable and other is fixed is said to be short run

Long run.

The long run term is that period of time in which there are no limiting

factors on output change. In long run all the variables are variable in nature

and there is no fixed input like short run . Simply, if the firm uses only two

inputs and both of them variable in nature is said to be long run.

3. Define Production function with its assumptions.

The production function is purely a technological relationship which

expresses the relation between output of a good produced and the

1

different combinations of inputs used in its production. It means the

maximum Amount of output that can be produced with the help of each

possible combination of inputs. The production function can be

mathematically written as

Q= F(L,N,K…..)

Assumptions :

1. technology is invariant

2. Production function includes all the technically efficient methods of

production

4. Define law of variable propositions .

The law of variable propositions states that as more and more of one

factor input is employed , all other input quantities held constant , a point

will eventually be reached where additional quantities of the varying input

will yield diminishing marginal contributions to total product

This law is also called as law of diminishing marginal returns

5. Define Iso-quant with its types .

An Iso-quant is a curve representing the various combination of two

inputs that produce the same amount of output . An Iso-quant is defined

as curve which shows the different combinations of the two inputs

producing a given level of output.

Types :

1. Linear Iso-quant

2. Input- output Iso-quant

3. Kinked Iso-quant

4. Smooth convex Iso-quant

6. What is Economies of Scale?

Economies of scale simply denote that per unit cost of production will

goes down if the firm involves in mass production. The cost benefit

secured by the firm at the time of large scale production is simply called as

2

economies of scale . Simply , If a firm expands its size of production by

increasing all the factor . These economies of large scale production have

been classified into

Internal Economies

External Economies

7.Define cost and cost of production .

Cost.

The term cost refers to “ the amount of expenditure , notional or

actual , attributable to a thing or a product . Cost is the main factor with

which the profit maximizing firms need to deal carefully.

Cost of production.

Business decisions are generally taken on the basis of money

values of the inputs and outputs. Inputs multiplied by their respective

prices and added together give the money value of the inputs, i.e., the cost

of production . The cost of production is an important factor in almost all

business analysis and decisions.\

8. Explain Sunk cost .

Sunk costs are the cost that are not altered by a change in quantity

and cannot be re covered . Sunk costs are a part of outlay costs. However,

most business decisions require cost estimates that are essentially

incremental and not sunk in nature .

9. Define short run & Long run cost function

Short run

In short run one input has to be kept constant and there is no

other way for the manufacturer to change his plant size. He has to keep

the plant size as constant and he has to manufacture all the things by

using the existing plant

3

Long Run.

In the long – run , by definition , all factors are variable so that the

entrepreneur has the before him a number of alternative plant sizes and

levels of output which he can adopt

10.Why a long run average cost curve is likely to be L – shaped?

The basis of argument as to why long run average cost curve is likely

to be L shaped rather then U shaped . Production costs falls continuously

with increase in output, while managerial costs may rise at very large

scales of output. The fall in production costs more then offsets the increase

in the managerial costs, so that the long run average cost continuously

falls with increase in scale

11. Write short notes on Market Structure?

Market structure shows the relationship between various buyers

and sellers in the market. An analysis of the market structure leads to an

understanding of the nature of competition in the market and nature of

pricing in the market.

Characteristics of Market Structure

The degree of seller concentration

The degree of Buyer concentration

The degree of product differentiation

The entry condition to the market

12. What is Monopoly?

Monopoly market is the market where there is only one supplier in the

market. Hence it is known as ‘one firm industry’. The product of the firm

has no close substitute in the market. There are considerable barriers to

the entry of new firms to the market.

In the monopoly market structure, market power and profitability for

the firm will be high. In practice, monopoly exists today only in certain

4

products like medicine and public utilities. In monopoly, there is no

difference between the firm and the industry. It is the only firm producing

the commodity.

13. What is Oligopoly?

Oligopoly is a term derived from the Greek words ‘oligos’ meaning a

few and ‘pollenin’ meaning to sell. Oligopoly refers to only few producers in

the market. If the producers are selling identical commodity, we will call it a

case of pure or perfect oligopoly. But if they are selling different

commodities, it will be a case of imperfect oligopoly. In oligopoly market

the sellers are few in number. Each seller knows his competitors

individually in each market. Any change in price and advertising policy of

an oligopolist will lead its competitors to change their products.

14. What is Monopolistic Competition?

The most important type of competition is the monopolistic

competition. In such competition, there are many buyers and sellers but

they are not producing identical commodities though all are producing the

same commodity.

In this market, the product of each company has a specific feature

to differentiate it with the product of other companies. Thus in Monopolistic

competition there is product differentiation and hence each company

charges different price. E.g. Soaps, tooth pastes, blades, radios etc..,

15. What is Perfect Competition?

Under perfect competition, there exists homogeneity of the

product, there are large number of dealers and buyers. Free entry or exit is

possible in this market. In perfect competition, there is only one price in the

market. This price cannot be altered by one individual seller because he is

selling a very small quantity of the total supply.

Price can be only affected when the supply is significantly changed.

This change can only be brought about by a change in the total supply of

5

the industry. Hence, in perfect competition, an individual seller or a firm

cannot affect the price.

16. Explain the main features of perfect competition.

The perfectly competitive market is characterized by

A very large number of relatively small buyers and sellers. A single

buyer’s or seller’s actions cannot therefore have any perceptible

influence on market price.

All sellers are selling homogenous products

The firms are free to enter or leave the industry. That is, in the long

run in efficient firms would have left the industry and new but

efficient firms would enter, so that ultimately the firms in the industry

have almost similar levels of efficiency.

The firms in the industry do not collude with each other that is

independent action

Each buyers and seller operates under conditions of uncertainity.

17. What is Pure Monopoly?

A pure monopoly exists if one and only one firm produces and sells

a particular commodity in the market. No other seller can enter the market,

else monopoly would cease to exist. Thus, in case of pure monopoly, the

single firm producing the product is itself both the firm and the industry.

There are no direct competitors or rivals.

18. Explain the main features of Pure Monopoly.

The main features of pure monopoly was

Only one firm sells the commodity having no rivals or direct

competitors

Monopolist is a price maker. He tries to take the best of whatever

demand and cost conditions exist without the fear of new firms

entering to compete away his profits.

Indirect rivalry or competition may exist in the form of

6

i. Existence of substitutes

ii. The monopolist’s product competing with all other goods

and services in the general struggle for the consumer’s

rupee

19. What is Monopoly Power?

In practice no monopolist will have absolute monopoly power. The

monopoly power or control enjoyed will be limited and partial. Even in state

monopolistic control, we cannot say that monopoly power is absolute. It will

be limited and the limitation may vary from producer to producer

depending upon the method by which they have to enjoy monopoly power.

Usually the producer will gets a monopoly control or power in the following

ways

Power given by government

Legal power

Technical Power

Combinations

Bias of the consumer

20. What is Simple Monopoly and Discriminating Monopoly?

Simple Monopoly

It is a situation where the single producer produces a

commodity having only a remote substitute. Here the product of the firm

may have some substitute. But in economic analysis, we take that the

monopoly firm produces a commodity having no close substitutes.

Discriminating Monopoly

The Monopolists may charge different prices for different

consumers or markets. He has not only the power to fix the price of the

commodity but also charge different prices from different consumers.

The Monopolists will discriminating between the markets.

7

21. What are the main features of Monopolistic competition?

The main features of the Monopolistic Competition are

Existence of large number of firms

Product Differentiation

Selling costs

Freedom of entry and exit of firms

22. How the Price is determined under Monopolistic Competition

Price – output determination under monopolistic competition is

governed by the cost and revenue curves of the firm. The cost curves are

governed by laws of production. The revenue curves of the firm will not be

very elastic. It will not be very steep falling down curve as in monopoly.

The average revenue of the firm under monopolistic competition will be a

slopping down curve, the slope neither too steep nor flat. It will not be flat

or parallel straight line because the firm may not very elastic demand for its

products.

23. Explain the defects or wastes of Monopolistic Competition.

The Main defects of Monopolistic or imperfect competition are

referred to as wastes of competition. They are

Unemployment

Excess capacity

Cross Transport

Failure to specialize

Advertising

51. Define Oligopoly.

Oligopoly is a term derived from the Greek words ‘oligos’

meaning a few and ‘pollenin’ meaning to sell. It is also referred as

“competition among the few”

8

Definition:-

Prof. Stigler defines oligopoly as that “situation in which a firm bases

its market policy in part on the expected behavior of a few close rivals”.

According to Prof.Leftwhich “An oligopolistic industry is one in which the

number of sellers is small enough for the activities of a single seller to

affect the other firms and for the activities of other firms and for the

activities of other firms to affect him”.

24. Explain the types of Oligopoly.

The following are the main types of oligopoly

Pure or Perfect Oligopoly

Open and Closed Oligopoly

Collusive and Competitive Oligopoly

Partial and Full Oligopoly

Syndicated and Organized Oligopoly

25. Explain the characteristics of Oligopoly.

The following are the main features of Oligopolistic Market,

Interdependence

Importance of Selling costs

Indeterminate demand curve

Group Behavior

Element of Monopoly

Price Rigidity

26. How the Pricing is done under Oligopoly?

Price Rigidity under oligopoly is explained with the help of Kinked

Demand Curve used by Prof.Paul M.Sweezy. The kinked demand model

represents a condition in which the firm has no incentive either to increase

the price or to decrease the price but keep the price rigid at a particular

level. The firm believes that the rival firms will not follow suit if it raises the

9

price. But if cut downs the price the rival firms will follow suit. Acting on this

belief the firm maintains the present price.

27. What is Bilateral Monopoly?

A Bilateral Monopoly is a situation in which monopolist faces a monopsonist i.e.., a single seller faces a single buyer in the market. The commodity is a distinct product which has no close substitute. If a tea estate owner could supply the raw material to a tea manufacturer in the area, it is a situation of Bilateral Monopoly. The buyer has no competitor to buy raw tea and the seller has no competitive producers.28. What is Normal and Super-Normal profit?

Normal Profit:-

Normal Profits are like wages to labour, which accrue to the

entrepreneur, in the long run, for his work as an organizer and manager of

the enterprise. Normal Profit is the profit which will not attract the new firms

to get into an industry. At the same time it will not compel the existing firms

to go out of the industry.

Super Normal Profit:-

Super Normal Profits are the excess profits earned by the

entrepreneur over and above what is earned by marginal entrepreneurs.

Hence it does not enter into cost of production

29. What is Duopoly?

DUO means two and duopoly refers to a market situation in which

there are only two sellers. Each seller tries to guess the rival’s motives and

actions. The two firms may either resort to competition or collusion.

Under Duopoly, there is no product differentiation and goods are

identical. The consumers are indifferent between the two producers and

the same price must be charged by both in the long run, otherwise a seller

charging a higher price may not be able to sell more. They must fix the

price as it they were a single monopolist. Only by this method they can

maximize their profits.

10

30. Explain the assumptions of Duopoly.

The following are the main assumptions of duopoly

There are two independent sellers, each producing and selling the

homogenous products.

The cost of production of two sellers is identical

Each seller is rational in the sense that it aims at maximizing the

profit.

The number of buyers are large

Each firm has a complete knowledge about the demand conditions

The duopolies accept the price at which he can sell his total output.

31. Explain the types of Monopoly.

There are various kinds of Monopoly which are as follows

Natural Monopoly

Social Monopoly

Private Monopoly

Legal Monopoly

Service Monopoly

Simple Monopoly

Fiscal Monopoly

Discriminating Monopoly

Voluntary Monopolies

32. Explain the causes of Monopoly.

The following are the main causes of monopoly,

Strategic Raw materials

Patent’s over Inventions

Market Franchise

Cost of establishing an efficient plant in relation to the market

Fiscal Monopolies

11

Control of secret process

Restricted Market for a Product

Deliberate policy to exclude competitors

Transport cost, Reputation

33. Explain the concept of National Income.

The concept of national income occupies an important place in

economic theory. National income is the flow of goods and services which

became available to a nation during a year. To be more precise, national

income is the aggregate money value of all goods and services produced

in a country during one year, account being taken of the deductions made

due to wear and tear, and depreciation of plants and machineries used in

the production of goods and services. It is distributed among the factors of

production in the form of rent, interest, wages and profits. The larger the

national income, other things remaining the same, the larger will be the

share of the each factor.

34. What is meant by Aggregate Demand?

Aggregate Demand is the total expenditure which at given fixed

prices all households and business firms want to make on goods and

services in a period at various levels of national income. Thus by

aggregate demand means how much expenditure the households and the

entrepreneurs are undertaking on consumption and investment. Therefore

Aggregate Demand = Consumption demand + Investment

demand.

AD = C + I

Aggregate Demand consists of two components 1. There is

consumption demand 2. There is demand for capital goods which is called

as Investment Demand.

12

35. What is Aggregate Supply?

The aggregate supply means the total money value of goods and

services produced in an economy in a year. There are two important

constituents of aggregate supply. They are

The supply or output of final consumer goods and services in a year

and

The output of capital goods which are also called investment goods

or producer goods because they help in producing further goods.

The aggregate supply of goods of an economy depends upon the stock

of capital, The amount of labour used and the state of technology.

36. Explain the major factors which determine the National Income.

There are number of influences which determine the size of the

national income in a country. The following are the main influences of

national income

Quantity and Quality of factors of production – The quantity and

quality of land, the climate, the rainfall, etc.., determine the quantity

and quality of agricultural production and hence the size of national

income

The state of Technical Know how – A country with poor technical

knowledge cannot have a large sized national income, because it

will not be in a position to make the best possible use of its

resources.

Political Stability – Political Stability is the main factor which

determines the national income. The economic development of

several countries, particularly the South American republics, has

been hindered in the past by political instability.

13

37. Explain the difficulties or hindrances faced by the under

developed countries in calculating the National Income.

The calculation of the National Income of a country is a task full of

difficulties and complexities. The main difficulties in calculating the National

Income

The available statistics in these countries are not only inadequate

but also unreliable.

The existence of a large non-monetized sector in underdeveloped

countries also makes the computation of national income difficult.

The majority of the small producers in the under developed countries

are illiterate and ignorant and they are not in a position to keep any

account of their productive activities.

There is little of occupational specialization on the part of the people

in underdeveloped countries.

38. What is Disposable Income?

The part of personal income which is left behind after payment of personal direct taxes is called as Disposable Personal Income. In fact it is the disposable income which is spent by the individual or the household on consumption. Therefore, Disposable Personal Income = Personal Income – Personal Direct

Taxes

Sometimes the individuals will allot some of his income for savings.

At that time,

DPI = Consumption + Saving

39. What do you mean by Multiplier Model?

The name Multiplier comes from the finding that each dollar

change in exogenous expenditures (such as investment) leads to more

than a dollar change (or a multiplied change) in GDP. The Multiplier Model

explains how shocks to investment, foreign trade, and government tax and

spending policies can affect output and employment in an economy.

14

The key assumption underlying in these model are the wages and

prices are fixed and that there are unemployed resources. In addition, we

are suppressing the role of monetary policy and assuming that there are

no financial market reactions to changes in the economy.

40. What is Gross National Product and Gross Domestic Product?

Gross National Product

The GNP is defined as the value of all final goods and services

produced during a specific period, usually one year, plus incomes earned

abroad by the nationals minus incomes earned locally by the foreigners.

The GNP so defined is identical to the concept of gross national income.

Gross Domestic Product

The GDP is defined as the market value of all final goods and

services produced in the domestic country during a period of one year,

plus income earned locally by the foreigners minus income earned abroad

by the nationals

41. What do you mean by Static Multiplier?

The Static multiplier is essentially a theoretical concept. It is

based on the assumption that ∆I results instantly in ∆y. There is no time

lag between ∆I and ∆y. It implies that when ∆I takes place, the equilibrium

of national income shifts instantly from one point to another, at a higher

level of income.

42. Explain the limitations of Multiplier.

The following are the main limitations of Multiplier

The Multiplier formula, i.e., m- 1/(1-mpc) imples that the higher

the mpc the higher the multiplier. The actual Multiplier does not

depend upon on the mpc alone. It depends on number of other

factors also.

The working of Multiplier assumes that those who earn income as

a result of certain autonomous investment, would continue to

15

spend a certain percentage of their newly earned income on

consumption. This assumption may not be hold in reality.

The working Multiplier is based on the assumption that the goods

and services are available in adequate supply. Thus this is not

suitable for the scarce supply.

43. What is Business Cycle?

The fluctuations in economic activity have been occurring

periodically and regularly and these fluctuations are popularly called as

Business Cycle. This is also called as Trade Cycle. As per J.M.Keynes,

“A Trade cycle is composed of periods of good trade characterized by

rising prices and low unemployment percentages with periods of bad trade

characterized by falling prices and high employment percentages. The

duration of Business Cycle has not been of the same length; it has varied

from a minimum of two years to a maximum of ten to twelve years.

44. What do you mean by Economic Growth?

Economic Growth means sustained increase in per capita national

output or net national product over a long period of time. It implies that the

rate of increase in total output must be greater than the rate of population

growth. That is Economic growth is defined as increase in an economy’s

real national income or gross national product over a period of time. Simply

we can say that economic growth means the annual increase in percapita

income of a country. Economic Growth describes the growth of output per

head of population.

45. Explain the concept of Economic Development.

Economic development is the development of economic wealth of

countries or regions for the well-being of their inhabitants. From a policy

perspective, economic development can be defined as efforts that seek to

improve the economic well-being and quality of life for a community by

creating or retaining jobs and supporting or growing incomes and the tax

16

base. The term "economic development" is often used in a regional sense

as well (e.g., a mayor might say that "we need to promote the economic

development of our city"). In this sense, economic development focuses on

the recruitment of business operations to a region, assisting in the

expansion or retention of business operations within a region or assisting

in the start-up of new businesses within a region. (See section 'regional

policy' below.)

46. Explain the three major areas where we can encompass the economic development.

The Economic development can be encompassed in the following areas

Policies that governments undertake to meet broad economic

objectives such as price stability, high employment, and sustainable

growth. Such efforts include monetary and fiscal policies, regulation

of financial institutions, trade, and tax policies.

Policies and programs to provide infrastructure and services such as

highways, parks, affordable housing, crime prevention, and K-12

education.

Policies and programs explicitly directed at job creation and

retention through specific efforts in business finance, marketing,

neighborhood development, small business development, business

retention and expansion, technology transfer, and real estate

development. This third category is a primary focus of economic

development professionals.

47. Explain the three major areas where we can encompass the policies of economic development

17

The policies of an economic development can be framed in the following areas

Governments undertaking to meet broad economic objectives such

as price stability, high employment, and sustainable growth. Such

efforts include monetary and fiscal policies, regulation of financial

institutions, trade, and tax policies.

Programs that provide infrastructure and services such as highways,

parks, affordable housing, crime prevention, and K-12 education.

Job creation and retention through specific efforts in business

finance, marketing, neighborhood development, small business

development, business retention and expansion, technology

transfer, and real estate development. This third category is a

primary focus of economic development professionals.

48. What is Balance of Payments?

The Balance of Payments is a systematic record of economic

transactions of the residents of a country with the rest of the world during a

given period of time. The record is so prepared as to provide meaning and

measure to the various components of a country’s external economic

transactions. Thus, the aim is to present an account of all the receipts and

payments on account of goods exported, services rendered and capital

transferred by residents of the country. The main purpose of keeping these

records is to know the economic position of the country and help the

government in reaching decisions on monetary and fiscal policies

49. What is Inflation?

By inflation generally means a general rise in prices. Inflation is measured

as the growth of the money supply in an economy, without a commensurate

increase in the supply of goods and services. This results in a rise in the general

price level, as measured against a standard level of purchasing power. There are

18

a variety of measures of inflation in use, related to different price indices,

because different prices affect different people. Two widely known indices for

which inflation rates are commonly reported are the Consumer Price Index

(CPI), which measures nominal consumer prices, and the GDP deflator, which

measures the nominal prices of the goods and services produced by a given

country or region.

50. How we can measure the Inflation?

The following way clearly explains the way which is used for measuring the inflation

Consumer price indices (CPIs) - Which measures the price of a

selection of goods purchased by a "typical consumer."

Cost-of-living indices (COLI) - which often adjust fixed incomes

and contractual incomes based on measures of goods and services

price changes.

Producer price indices (PPIs) - which measure the price received

by a producer.

Wholesale price indices , which measure the change in price of a

selection of goods at wholesale, prior to retail mark ups and sales

taxes. These are very similar to the Producer Price Indices.

Commodity price indices - which measure the change in price of a

selection of commodities

GDP Deflator - Measures price increases in all assets rather than

some particular subset. The term "deflator" in this case means the

percentage to reduce current prices to get the equivalent price in a

previous period. The US Commerce Department publishes a deflator

series for the U.S. economy.

Capital goods price Index - The growth in money supply has

remained fairly constant through since the 1970's however

19

consumption goods price inflation has been reduced because most

of the inflation has happened in the capital goods prices.

Regional Inflation - The Bureau of Labor Statistics breaks down

CPI-U calculations down to different regions of the US.

Historical Inflation - It is used to adjust for the differences in real

standard of living for the presence of technology. This is equivalent

to not adjusting the composition of baskets

51. Explain the types of Inflation.

There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":

Demand-pull inflation - Inflation caused by increases in aggregate

demand due to increased private and government spending, etc.

Cost-push inflation - Presently termed "supply shock inflation,"

caused by drops in aggregate supply due to increased prices of

inputs, for example. Take for instance a sudden decrease in the

supply of oil, which would increase oil prices. Producers for whom oil

is a part of their costs could then pass this on to consumers in the

form of increased prices.

Built-in inflation - Induced by adaptive expectations, often linked to

the "price/wage spiral" because it involves workers trying to keep

their wages up (gross wages have to increase above the CPI rate to

net to CPI after-tax) with prices and then employers passing higher

costs on to consumers as higher prices as part of a "vicious circle."

Built-in inflation reflects events in the past, and so might be seen as

hangover inflation.

20

52. Explain the major problems of Inflation.

If inflation is high in an economy there are three main problems it can cause:

People on a fixed income (e.g. pensioners, students) will be worse

off in real terms due to higher prices and equal income as before;

this will lead to a reduction in the purchasing power of their income.

This has a great effect on the GDP of a country

Rising inflation can encourage trade unions to demand higher

wages, as wages have to be adjusted to keep up with inflation. In

the case of collective bargaining the wages will be set as a factor of

price expectations (Pe). Pe will be higher when inflation has an

upward trend. This can cause a wage spiral. Also if strikes occur in

an important industry which has a comparative advantage the nation

may see a decrease in productivity and suffer.

If inflation is relatively higher in one country, and that country

maintains fixed exchange rates with other countries, then the

country's exports will become more expensive for other countries to

purchase, creating a deficit on its current account.

53. What do you mean by Inflation Accounting?

Inflation accounting is a financial reporting process that

considers the effects of inflation on financial statements. Accounting

assumes a stable monetary unit. Financial statements that are not

adjusted for changes in the purchasing power of the currency become

economically irrelevant. In certain countries experiencing high inflation

or hyperinflation, laws or accounting standards require corporate

21

financial statements to be adjusted for changes in purchasing power

using a price index

54. How to control Inflation?

There are a number of methods that have been suggested to stop

inflation, although a 0% inflation rate has never been achieved over any

sustained period of time in the past

High interest rates and slow growth of the money supply are the

traditional ways through which central banks fight or prevent

inflation, though they have different approaches

Keynesians emphasize reducing demand in general, often through

fiscal policy, using increased taxation or reduced government

spending to reduce demand as well as by using monetary policy is a

way to control Inflation

Supply-side economists advocate fighting inflation by fixing the

exchange rate between the currency and some reference currency

such as gold. This would be a return to the gold standard. All of

these policies are achieved in practice through a process of open

market operations.

Another method attempted in the past has been wage and price

controls ("incomes policies"). Wage and price controls have been

successful in wartime environments in combination with rationing.

Temporary controls may complement a recession as a way to fight

inflation: the controls make the recession more efficient as a way to

fight inflation (reducing the need to increase unemployment), while

22

the recession prevents the kinds of distortions that controls cause

when demand is high

55. What is Deflation?

Deflation is a decrease in the general price level over a period

of time. Deflation is the opposite of inflation. For economists especially, the

term has been and is sometimes used to refer to a decrease in the size of

the money supply (as a proximate cause of the decrease in the general

price level). During deflation the demand for liquidity goes up, in

preference to goods or interest. During deflation the purchasing power of

money increases. Deflation is generally regarded as a negative in modern

currency environments, because a deflationary spiral may cause large falls

in GDP and purchasing power, and may take a very long time to

correct .Deflation is considered a problem in a modern economy because

of the potential of a deflationary spiral and its association with the Great

Depression, although not all episodes of deflation correspond to periods of

poor economic growth historically.

56. Explain the causes of Deflation.

From a monetary perspective deflation is caused by a reduction in

the velocity of money and/or the amount of money supply per

person.

Capitalism (when sufficient competition exists) is also an engine of

deflation: as capital stocks improve, and there are more competitors,

the supply of goods goes up, which means prices must fall until they

23

balance demand. Capitalism also drives efficiency and innovation

which has a downward pull on prices.

In modern credit-based economies, a deflationary spiral may be

caused by initiating higher interest rates (i.e., to 'control' inflation),

thereby possibly popping an asset bubble or the collapse of a

command economy which has been run at a higher level of

production than it could actually support.

In a credit-based economy, a fall in money supply leads to markedly

less lending, with a further sharp fall in money supply (since debt is

money), and a consequent sharp fall-off in demand for goods.

Demand falls, and with the falling of demand, there is a fall in prices

as a supply glut develops.

In unstable currency economies, barter and other alternate currency

arrangements are common, and therefore when the 'official' money

becomes scarce, commerce can still continue (e.g., most recently in

Russia and Argentina). Since in such economies the central

government is often unable, even if it were willing, to adequately

control the internal economy, there is no pressing need for

individuals to acquire official currency except to pay for imported

goods.

57. Explain the effects of Deflation.

In more recent economic thinking, deflation is related to risk, where

the risk adjusted return of assets drops to negative

In an open economy it creates a carry trade and devalues the

currency producing higher prices for imports without necessarily

stimulating exports to a like degree.

24

Deflation is related to a sustained reduction in the velocity of money

or number of transactions.

Deflation discourages investment and spending, because there is no

reason to risk on future profits when the expectation of profits may

be negative and the expectation of future prices is lower,

The available amount of hard currency per person falls, in effect

making money scarcer; and consequently, the purchasing power of

each unit of currency increases.

Since deflationary periods favor those who hold currency over those

who do not, they are often matched with periods of rising populist

sentiment,

Deflation raises real wages which are both difficult and costly for

management to lower. This frequently leads to layoffs and makes

employers reluctant to hire new workers, increasing unemployment.

58. What do you mean by Balance of Trade?

Balance of Trade refers to the difference in value of imports

and exports of commodities only, i.e., visible items only. During the given

period of time, the exports and imports may be exactly equal, in which

case, the balance of payments of trade is said to be balanced. If the value

of its imports exceeds the value of its exports, the country is said to have a

deficit or an adverse balance of trade. Balance of Trade in other words, will

not balance. During any period a country may experience a favorable or

adverse balance of trade

59. Explain the causes of Inflation.

25

The following are the main causes of Inflation,

Increase in Money supply

Increase in Disposable Income

Increase in public expenditure

Increase in consumer expenditure

Cheap Monetary policy

Deficit Financing

Expansion of the private sector

Black Money

Repayment of Public Debt

Increase in Exports

60. What are the measures that are adopted for controlling Inflation?

The following are the methods adopted for controlling the Inflation

Monetary Measures

Credit control

Demonetization of currency

Issue of new currency

Fiscal Measures

Reduction in unnecessary expenditure

26

Increase in savings

Increase in taxes

Surplus Budgets

Public Debt

Other Measures

To increase production, Rationing

Rational Wage policy, Price control,

61. What do you mean by Economic Indicators?

An economic indicator (or business indicator) is a statistic

about the economy. Economic indicators allow analysis of economic

performance and predictions of future performance. Economic indicators

include various indices, earnings reports, and economic summaries, such

as unemployment, housing starts, Consumer Price Index (a measure for

inflation), industrial production, bankruptcies, Gross Domestic Product,

retail sales, stock market prices, and money supply changes. Economic

indicators are primarily studied in a branch of macroeconomics called

"business cycles". The term economic indicator is also described as

business indicator.

62. Explain the types of Economic Indicator.

The economic Indicators are divided into three types. They are

1. Coincident indicators – These indicators which occur at the same time as the economic activity.

Example

Payroll Personal income less transfer payments and overall change in GDP

27

2. Leading indicators – These economic indicators which tend to change before the general economic activity, and so may sometimes be used as a predictor.

Example:

Stock prices Average work hours in manufacturing sector Housing Markets Inflation Interest rates

3. Lagging indicators – These indicator trail behind the general economic activity.

Example:

Unemployment rate Percentage change in CPI GDP (sometimes) The time difference between the indicator and the economic activity is

called lead time or lag time.

63. How Correlation is used in economic indicators

An indicator can also move in the same or opposite direction of the

general economic activity. Pro-cyclical indicators move in the same

direction as the general economic activity. Counter-cyclical indicators

move in the inverse direction of the general economic activity.

Unemployment is an example of a counter-cyclical indicator. Statistically,

correlation can be used to determine whether an indicator is pro- or

counter-cyclical.

64. Explain the stages of economic growth.

The stages of Economic growth are as follows

Pre-Take Off stage

Take- Off Stage

Stage of Self Sustaining Growth

28

Stage of High Mass Consumption

65. Explain the list of Indicators.

Gross Domestic Product (GDP) (nominal and real) (for the entire

nation or per individual)

Index of Leading Indicators

Gross national happiness (GNH), a new concept relating happiness

with economic growth

Population

Labor Force: Employment, Unemployment rate, Average Weekly

earnings

Public Expenditure, Revenues, Budget Surplus and Deficit, National

Debt

Personal Income, Expenditure, Savings

International: Balance of Payments (Current Account & Balance of

Trade)

Productivity Survey

Manufacturing output, Capacity Utilization, Inventories

Money Supply , Interest Rates, Yield on various financial Instruments

and Yield Curves.

Stock Market Indices

Inflation , CPI, Producer Price Index

New Home Sales

Retail Sales, Auto Sales

66.Define resale price maintenance and its types

The manufacturer of such products fix and stipulate the price of the

products at which the product is to be resold by the individual retailer. This

29

is done to maintain a uniform selling price of the branded products at all

the outlets of their sale .

Types :

1.Collectivre resale price maintenance

2.Individual resale price maintenance

67.Define Discretionary fiscal policy and non discretionary fiscal

policy .

Discretionary fiscal policy : Deliberate change in the government

expenditure and taxes to influence the level of national out put and prices .

Fiscal policy generally aims at managing aggregate demand for goods and

services

Non Discretionary Fiscal policy : Non – discretionary fiscal policy of

automatic stabilizers is a build- in tax or expenditure mechanism that

automatically increase aggregate demand when recession occurs and

reduces aggregate demand when there is inflation in the economy with out

any special deliberate actions on the part of the Government

68.List out the tools of monetary policy .

1.Open market operation

2.Changing the bank rate

3.Changing the cash reserve ratio and

4.Undetaking selective credit controls

69.Objectives of monetary policy>

1. To ensure economic stability at full employment or potential level of

output

2.To achieve price stability by controlling inflation and deflation

30

3.To promote and encourage economic growth in the economy

70. What is liquidity trap ?

A liquidity trap occurs when under conditions of depression of economy

finds itself in a situation where people hold all the increments in the stock

of money and money demand curve takes a horizontal shape .

ESSAY TYPE QUESTIONS

1.Explain in detail about cost function

2.Discuss about Economies of scale

3.Explain various cost concepts

4. How the price has been determined under oligopoly and Duopoly

Competition?

5. How the price has been determined under perfect Competition?

6. How the price has been determined under Monopoly Competition?

7. How the price has been determined under Monopolistic Competition?

8. Explain the types of oligopoly.

9. Explain oligopoly with kinked demand curve

10. What is Non Price Competition? Discuss detail.

31

11. What did you understand from Market Structure?

12..Explain the methods available for calculating the National Income.

13.What is National Income? Explain the concept of National Income.

14.Explain the National Income determination under Three Sector

economy.

15..How the National Income has to be determined under Four Sector

Economy.

16.What is Inflation? Explain the causes for Inflation.

17.Explain the methods available for calculating the Inflation rate.

18.What is Deflation? Explain the causes for Deflation.

19.What is Business Cycle? Explain the Phases of Business Cycle. Also

discuss the features of Trade Cycle.

20..Write about the Theories of Business Cycle.

21.Explain the determinants and stages of Economic growth.

22.Explain the role of Inflation in an economy.

23.Explain the effects of inflation.

24.Explain the government policies and regulations with regard to

economic growth and development.

25.Explain the role fiscal policy in overcoming recession and achieving

economic stability at full employment level

26.Distinguish between Discretionary fiscal policy and non discretionary

fiscal policy

27.Briefly explain the instruments of monetary policy .

28.Explain the mechanism through which tight monetary policy works to

control inflation

29.Explain crowding out and effectiveness of fiscal policy

30.Monetary policy for its success depends on fiscal policy – Explain and

critically examine this statement

32