R.D.S.K.V. No. 1 - Delhi Directorate of...

1 XII – Economics

Sl. No. Name Designation

1. Dr. M.L. Kaushik Principal(Team Leader) Rajkiya Pratibha Vikas Vidyalaya

Nand Nagari, Delhi-110093

2. Sh. Narendra Chandra Vice PrincipalG.B.S.S.S. (Kamdhenu)Plot-II, Mangol Puri,Delhi-110083

3. Sh. Ram Kishan Chauhan P.G.T. (Economics)Rajkiya Pratibha Vikas VidyalayaNand Nagari, Delhi-110093

4. Sh. Sanjeev Kumar P.G.T. (Economics)G.B.S.S.S. No. 2,Ghonda, Delhi-110053

5. Mrs. Neelam Vinayak P.G.T. (Economics)Rajkiya Pratibha Vikas VidyalayaLink Road, Karol Bagh,New Delhi

6. Mrs. Balwinder Kaur P.G.T. (Economics)R.D.S.K.V. No. 1Kidwai Nagar,New Delhi-110023

2 XII – Economics

Time : 3 hours Maximum Marks : 100

The weightage to marks over different dimensions of the question paper shall be as under.

A. Weightage to Current/Subject units

S.No. Content Unit Mark

Part A : Introductory Micro Economics

1. Introduction 4

2. Consumer Behaviour and Demand 18

3. Producer Behaviour and Supply 18

4. Forms of Market and Price Determination 10

5. Simple applications of Tools of demand and supply curves

Total 50

Part B : Introductory Macro Economics

1. National Income and Related Aggregates 15

2. Determination of Income and Employment 12

3. Money and Banking 8

4. Government Budget and the Economy 8

5. Balance of payments 7

Total 50

Grand Total 100

3 XII – Economics

S.No. Forms of Questions Marks for each No. Totalquestion question Mark

1. Very short answer type (VSA) 1 10 10

2. Short answer type (SAI) 3 10 30

3. Short answer type (SAII) 4 6 24

4. Long answer type (LA) 6 6 36

Total 32 100

C. No. of Sections

The questions paper will have two section A and B.

D. Scheme of Option

There will be no overall choice. However, there is internal choice in one question of 3 marks andone question of 4 marks and one question of 6 marks in each section.

E. Weightage to forms of Questions

S.No. Estimated Difficulty Level of Questions Percentage

1. Easy 30%

2. Average 50%

3. Difficult 20%

F. Typology of Questions

In order to asses different abilities related to the subject, the question paper is likely to include open-ended questions and numerical questions.

4 XII – Economics

• Study of Economics is divided into two branches Micro Economics and Macro Economics.

Micro economics is that branch of economics in which economic problems are studied at individuallevel and in Macro economics we study economy as a whole or as its aggregates.

• Economy is a system by which people get their livelihood.

• Market Economy is market oriented economy in which all economic activities are organised bythe free forces of market.

• A centrally planned economy is one in which all important economic activities one planned anddecided by the central planning authority or by the government.

• Positive economic analysis deals with the things as ‘they are’. It tells about the processes howthey work.

• Normative economic analysis deals with the things as ‘they ought to be’. It tells how the economicproblems should be solved.

• Economic problem is the problem of allocation of limited resources available in the economy.

• Causes of economic problems are :

Unlimited wants Limited resources alternative usesof resources

• Scarcity refers to the situation in which supply of resources is less than their demand.

• Central problems of an economy are :

Allocation ofresources

Efficient use ofresources

Growth ofresources

What to produce? How to produce? For whom to produce?

5 XII – Economics

• Opportunity cost is defined as the value of the benefit that is forgone by choosing one alternativerather than the other.

• Production Possibility Frontier (PPF) shows different combinations of a set of two goods whichcan be produced with given resources and production technology.

• Production possibility curve (frontier) slopes downward and is concave to the point of origin.

• Right ward shift of PPF indicates increase in resources and leftward shift indicates decrease isresources.

• Marginal rate of transformation (MRT) is the ratio of one good sacrificed to produce one more unit

of the other good. YMRTX

1. Define Micro economics.

2. What is meant by scarcity?

3. What is the collective name of all economic institutions providing employment?

4. Give two examples of under utilisation of resources.

5. Write two characteristics of resources.

6. Define macro economics.

7. What is the main cause of economic problem?

8. What is the name of the branch of economics in which the whole economy and its aggregatesare studied?

9. What do you understand by positive economic analysis?

10. What is normative economic analysis?

11. Define market economy.

12. In which type of economy, main stress is given on social welfare?

13. What does the right ward shift of production possibility frontier (curve) express?

14. Why is the slope of PP Frontier downward?

15. What does a point express located below the PP Frontier?

16. What will be the shape of PP Frontier in the following conditions :

(a) When the marginal opportunity cost is increasing.

(b) When the marginal opportunity cost is constant.

17. Define the marginal opportunity cost.

6 XII – Economics

18. What does the production on a point on PP Frontier represent?

19. In which direction the PP Frontier shift due to the severe earthquake in a country.

20. What is meant by the economising of resources.

21. Cotton Industry is a subject matter of mirco economics, give reason.

22. What is marginal rate of transformation?

23. Unemployment in India is a subject matter of micro economics or macro economics, give reason.

1. State three differences between micro economics and macro economics.

2. In which manner the market economy is different from centrally planned economy?

3. Differentiate between positive and normative economic analysis.

4. Write three characteristics of centrally planned economy.

5. What is production possibility frontier (curve) explain it with the help of an imaginary schedule anddiagram.

6. What do you understand by economic problem? Why does it originate?

7. Explain the central problem of ‘What to produce’ with the help of an example.

8. Taking appropriate example explain the central problem of ‘to whom to produce’.

9. Explain the central problem of ‘How to produce’ with the help of an example.

10. Draw a production possibility frontier (curve) and show the following situations on it.

(a) Under-utilisation of resources.

(b) Fuller-utilisation of resources.

(c) Growth of resources.

11. Why is the PP curve concave towards the origin?

12. What do you understand by marginal rate of transformation? Explain with the help of schedule.

13. Explain the assumptions of PP curve.

14. How do the market economy and planned economy solve their central problems.

7 XII – Economics

1. Micro economics is that branch of economics which studies economic problem or economicissues at individual level.

2. Scarcity refers to a situation in which demand for a factor is more than its supply.

3. Economy.

4. Unemployment, unused land.

5. Resources are scarce and resources have their alternate uses.

6. Macroeconomics refers to the study of economy as a whole and its aggregates.

7. Main cause of economic problem is the scarcity of resources and their alternative uses.

8. Marco Economics.

9. Positive economic analysis deals with what is or how an economic problem facing a society, isactually solved.

10. Normative economic analysis deals with what ought to be or how an economic problem shouldbe solved.

11. Market economy is a political economic system based on private property and private profit.

12. Centrally planned economy.

13. Right ward shift of PP Frontier (curve) shows increase in resources.

14. PP Frontier slopes downward because production of x commodity can be increased only bydecreasing the production of Y commodity.

15. Any point below PPC shows under utilisation of resources and use of inefficient technology.

16. (i) When marginal opportunity cost increases, PPC will be concave to the point of origin.

(ii) If marginal opportunity cost is constant, PPC will be straight line (Downward sloping).

17. Marginal opportunity cost is the rate of sacrifice of one good for producing one additional unit ofother good.

18. The point on PPF shows fuller utilisation of resources.

19. It will shift to left hand side.

20. Economising of resources means to avoid misuse of resources so that the level of production maybe maximum to satisfy the maximum wants.

21. Cotton industry is a subject matter of microeconomics because it is only a unit of industries.

22. Marginal rate of transformation is the ratio of units of one good sacrificed to produce one moreunit of the other good.

23. Unemployment in India is a subject matter of macro economics because it relates to wholeeconomy.

8 XII – Economics

• Consumer : The economic agent who consumes final goods and services.

• Total Utility : It is the sum of satisfaction from consumption of all the units at a given time.

• Marginal Utility : It is a net increase in total utility by consuming an additional unit of a commodity.

• Law of Dimishing Marginal Utility : As consumer consumes as more and more units of acommodity, the utility derived from the last unit goes declining.

• Consumer’s Bundle : is a quantitative group of two goods which can be afforded by a consumerwith his given income.

• Budget Set : It is quantitative combination of those bundles which a consumer can buy with hisincome at prevailing market prices.

• Consumer Budget : States the real income or purchasing power of the consumer in which hecan afford to buy given quantity at given price.

• Budget Line : Shows those combinations of two goods which a consumer can buy from hislimited income.

• Change in Budget Line :

(i) There can be parallel shift (left wards or right wards) due to change in income.

(ii) Rotation of budget line (leftward or rightwards on one axis) due to change in price of anyone good.

• Consumer’s Equilibrium : Consumer is in equilibrium when he gets maximum satisfaction fromhis limited income.

• Conditions of Consumer’s Equilibrium :

(A) In terms of utility :

(i) In case of one good (MUx = Px)

(ii) In case of two goods yx

mx y

MUMUMU .

P P

9 XII – Economics

(B) In terms of Indifference Curve :

(i) Falling MRS

(ii)x

xyy

PMRS

P

(iii) Budget line should be tangent to Indifference curve.

Determinants of Demand

Extension in Demand

Decrease in price

Downward movement along a Demand curve

Other Factors

Consumer Income

Taste and Preference

Change in price of related good

Future expectation to change in price

Change in number of consumer.

Contraction in Demand

Increase in price

Upward movement along a Demand curve

Change in price

Change in Quantity Demanded

Change in Demand

Increase in Demand

Rightward shift of Demand curve

Causes(i) Increase in consumers income(ii) Increase in price of substitute good(iii) fall in price of complementary good.(iv) Increase in number of consumer(v) Future expectation of Increase in price.

Decrease in Deand

Leftward shift of Demand

Causes(i) Decrease in income of consumer(ii) Decrease in price of substitute good(iii) Increase in price of complementary good.(iv) Decrease in number of consumer(v) Future expectation of Decrease in price.

• Demand : It is that quantity which a consumer is willing to buy to given price.

• Market Demand : It is the sum total quantity purchased by all the consumers at given price inthe market.

• Demand Function : It is the functional relationship between the demand of a good and factorseffecting demand.

• Change in Demand : When price remain constant demand of a commodity increases or decreasesdue to change in any one of its other determinants.

10 XII – Economics

• Price Elasticity of demand measures the degree of responsiveness of demand to change in priceof the commodity.

Methods of measuring price elasticity of demand

Percentage method Total expenditure method Geometric method

Total expenditure method measures price elasticity of demand on the basis of change in totalexpenditure incurred on the commodity by a house-hold as result of change in its price.

• Percentage method,

Q PEdP Q

Percentage change in QuantityEd .Percentage change in Pr ice

1. Define utility.

2. Write definition of marginal utility.

3. Giver the meaning of law of diminishing marginal utility.

4. Under what situation marginal utility will be zero?

5. State condition of consumer’s equilibrium in respect of one good.

6. What do you mean by consumer’s equilibrium?

7. What do you mean by consumer’s budget?

8. Define consumer’s bundle.

9. Define budget set.

10. What do you mean by Indifference curve map?

11. Define budget line.

12. Why does higher indifference curve give more satisfaction?

13. What is the impact of diminishing marginal rate of substitution on indifference curve?

14. What will be the impact on the equilibrium due to increase in income in case of normal good?

15. What will be the impact on consumer’s equilibrium due to Decrease in price of any one good fromthe combination of two goods.

16. Define normal good.


17. How does availability of substitute affect elasticity of demand.

18. Demand of good ‘X’ falls due to increase of the consumer. What type of good ‘X’ is?

19. What will be the impact on demand of the substitute good due to increase in price of the good?

20. A rise in price of a good results in an increase in expenditure on it. Is its demand elastic orinelastic?

21. Define market demand.

22. Define demand schedule.

23. What causes an upward movement along a demand curve?

24. In which direction will the demand curve shift due to increase in number of firms.

25. What will be elasticity of demand on a mid point of straight line demand curve?

26. What will be the elasticity of demand when slope of the demand curve is parallel to ox-axis?

27. When does a consumer buy less at a given price. State two reasons?

28. Why is elasticity of demand negative?

29. Why does total utility increases at diminishing rate due to continuous increase in units of a goodconsumed?

30. When does budget line shift leftwards?

31. Under what situation does the slope of changed budget line be flatter?

32. What change should take place in the price of the combination of two goods so that slope ofbudget line becomes steeper?

33. Why does demand curve slope downward due to fall in price?

34. What will be the behaviour of total utility when marginal utility curve lies below x-axis?

1. Explain the relationship between total utility and marginal utility with the help of schedule.

ORWhat changes will take place in total utility when :

(a) marginal utility curve lies above x-axis.

(b) marginal utility curve touches x-axis.

(c) marginal utility curve lies below x-axis.


2. What do you mean by budget line? What are the reasons of change in budget line?

3. Explain consumer’s equilibrium with utility approach when consumer is consuming one good.

4. State two features of Indifference curves.

5. Why does two indifference curves do not touch each other?

6. Under what situation there will be parallel shift in budget line?

7. What do you mean by budget set? Explain with the help of numerical example.

8. What do you mean by marginal rate of substitution? Explain with the help of numerical example.

9. Explain negative relationship between price and demand.

10. What will be the impact on market demand due to change in following factors :

(a) Change in number of consumers?

(b) Change in price of related goods.

11. Why does demand of a normal good increases due to increases in consumer’s income?

12. What do you mean by demonstration effect?

13. Distinguish between change in demand and change in quantity demanded.

14. State the factors of rightward shift of demand curve. Explain any one.

15. State the factors of leftward shift of demand curve. Explain any one.

16. Explain with the help of an example that what change will be in price that :

(a) decrease in demand of a complementary good.

(b) increase in demand of a substitute good.

17. What do you mean by price elasticity of demand?

18. What will be the effect of following on elasticity of demand :

(a) time factor

(b) Nature of the product.

19. What will be the impact on demand if elasticity of demand is same :

(a) fall in price of good ‘x’ by 5%

(b) Increase in price of good ‘y’ by 15%.

20. What will be elasticity of demand if :

(a) Total expenditure increases due to increase in price.

(b) Total expenditure increases due to fall in price.


21. Measure price elasticity of demand on the following point of a straight line demand curve :

(a) Centre point of the demand curve

(b) Demand curve intercepting y-axis

(c) Demand curve intercepting x-axis

22. What will be the slope of demand curve under following situations :

(a) Perfectly elastic demand

(b) Perfectly inelastic demand

(c) Unit elastic demand.

23. State elasticity of demand of followings :

(a) Luxurious goods

(b) Goods of alternate use

(c) Necessity goods

24. How does ‘a portion of income spent on a good’ effect elasticity of demand.

25. Elasticity of demand is (–)2. Consumer buys a certain quantity of a good at price Rs. 16/- per unit.Due to fall in price, a consumer buys 40% more. Find out new price.

26. Elasticity of demand of a good is (–2). Due to change in price, quantity demand falls from 400units to 300 units. Find out new price when previous price was Rs. 40/-.

27. Find out change in demand due to increase in price by 20% if elasticity of demand in 2 and initialdemand is 120 units.

28. A consumer demands 800 units at price of Rs. 40/- per unit. Due to change in price, demandincreases by 120 units. Find out change in price if elasticity of demand is one.

29. A consumer demands 50 units at price of Rs. 4/- per unit. When price falls to Rs. 2/- per unit, hisexpenditure is Rs. 100. Find out elasticity of demand by expenditure method.

30. Elasticity of demand of good ‘X’ and ‘Y’ is same. If price of good ‘X’ falls by 10% and price of good‘Y’ increases by 10% than what changes will take place in demand of good ‘X’ and good ‘Y’.

1. Why the indifference curve should be convex to its origin at point of consumer’s equilibrium?

2. For a consumer to be in equilibrium, why must marginal rate of substitution be equal to the ratioof price of two goods.

3. Why the indifference curve should be tangent to the budget line at the point of consumer’sequilibrium?


4. How does change in income of a consumer, change the budget line.

5. Explain the reasons of following changes in budget line :

(a) Leftward rotation on x-axis.(b) Leftward parallel shift.

6. Why does marginal rate of substitution decreases in respect of indifference curve?

7. Why does consumer stop consumption in case marginal utility is less than price of a good.

8. Why consumer’s equilibrium is not attained when marginal utility is greater than price of a good.

9. Why is budget line called as income line or price line.

10. On what basis a good is categorised as inferior or normal good.

11. Distinguish between rightward shift of demand curve and downward movement along the demandcurve.

1. Explain the determination of consumers equilibrium with help of schedule and diagram, in caseof single commodity.

2. Explain the role of budget line in determination of consumer’s equilibrium.

OR

Explain the determination of consumers’ equilibrium with the help of a diagram is case of twocommodity.

3. Explain the law of demand and state its exceptions.

4. Explain the cause of increase in demand (Rightward shift of demand curve).

5. Explain total expenditure method to measure price elasticity of supply.

6. Draw a straight line downward sloping demand curve touching both the axis. Mark the points onthis curve indicating different degrees of price elasticity

7. Why does demand curve slope downward.

8. Explain the determinants of elasticity of demand.

9. With the help of Numerical example measure price elasticity of demand in following conditions bytotal expenditure method.

(i) Demand falls while price is constant.


(ii) Price falls while demand is constant.

10. Following statements are true or false, give reason.

(i) Increase in number of consumer’s shifts to demand curve rightward.

(ii) The demand of a commodity becomes elastic of its substitute good is available in themarket.

(iii) The price elasticity of demand is equal to unity at a point situated in the middle of astraight line demand curve.

11. Explain followings

(i) Two indifference curves never intersect each other.

(ii) Income effect of inferior good in negative.

(iii) Change in quantity demanded is the explanation of law of demand.

1. Utility is the quality of goods of satisfying human wants.

2. Marginal utility is the net change in total utility when an additional unit of a commodity is consumed.

3. Law of diminishing marginal utility states that as more and more standard units of a commodityare consumed continuously marginal utility must decline.

4. When total utility is maximum.

5. MUx = Px

6. Consumer’s equilibrium refers to a situations in which a consumer gets maximum satisfactionfrom his given income and market price.

7. It states the real income or purchasing power of the consumer by which he can afford to buy givenquantity at given price.

8. Combination of the amount of two goods will be called as consumption or consumer bundle.

9. The set of Bundles available to the consumer with his given income at prevailing market price iscalled the budget set.

10. A family of indifference curves indicating different levels of satisfaction called indifference map.

11. Budget line is a line showing all different possible combinations of two goods which a consumercan buy given his budget and the price of both goods.

12. Higher difference curve shows a higher level of satisfaction. It shows the various combination ofexcess quantity of two goods than lower indifference curve.

13. Indifference curve become convex towards the origin.


14. Equilibrium will be shifted on a higher indifference curve.

15. Equilibrium will shift on a higher indifference curve.

16. These are the goods the demand for which increases as income of the buyer rise. There is apositive relation between income and demand of these goods.

17. The demand of a good becomes elastic if its substitute good is available in the market.

18. Good X is a inferior good.

19. The demand of substitute good will increase.

20. Inelastic.

21. Market demand is the sum of total demand of all the consumers in the market at a particular timeat a given price.

22. Demand schedule express the relation between different quantities of the commodity demandedat different prices in form of table.

23. Increase in price while other factors are constant.

24. Rightward

25. Equal to unit.

26. Perfectly elastic

27. (i) Decrease in income;

(ii) future expectation to decrease in price.

28. Due to inverse relation between price and demand.

29. As more and more units of commodity are consumed marginal utility derived from each successiveunit tends to diminish, so total utility increases at diminishing rate up.

30. When the income of consumer decreases.

31. When there’s decrease in price of good showing on X axis while price of good showing on Y axisis constant.

32. When there is increase in price of good showing on X axis while price of good showing on Y axisis constant.

33. The purchasing power of the consumer will increase due to decrease in price of commoditybecause of that he can purchase an excess quantity at decreased price. Thus there a downwardmovement along a demand curve.

34. Total utility start to decline.


• Production is transformation of input into output. It includes not only physical but also productionof non-physical goods (services).

• Production function is the functional relationship between physical input and output of a firm.Mathematically it can be expressed as Ox = f {i1, i2 ... in} i.e. output of good ’X’ is the functionof number of inputs (i1, i2 ... in).

• Production function can be categorised as

(a) Short-run production function.

(b) Long-run production function.

Production Function

Short-run production function Long-run p roduction function

• Short run production function explain the behaviour of output when one input is varied and otherinputs used in production of a good are kept fixed. It is also called as returns to a factor.

• Short period refers to a time period in which increase in supply of a good is possible but up toa given capacity because fixed factors of production do not change.

• Long run refers to a time period in which increase in supply of a good is possible to any extentdepending upon availability of input because all factors of production can increase or decrease.

C oncepts of Production

Tota l p roduction(T.P )

M arg inal production(M .P)

Average p roduction(A .P)

• Total product refers to the total quantity of goods and services produced by a firm with the giveninput during a specified period of time.

TP = AP × L

TP = MP

• Marginal product is addition in total product resulting from employing additional unit of variableinput (Labour).


Change in total product TPMP

Change in labour L

• Average product is the per unit output of variable factor (labour) employed.

TPAPVariable input

• Returns to a factor has been categorised in three phases.

First Phase : So long as marginal product rises, total product increases at increasing rate andmarginal product reaches to its maximum point. The shape of TP curve is convex to the origin.

Second Phase : Marginal product starts falling but remains positive, total product rises at diminishingrate. The shape of TP curve is concave to the origin.

Third Phase : When marginal product becomes negative, total product starts falling.

• Reasons for operation of the law :

1. Increasing returns to a factor :

(i) Realisation of optimum combination of factors.

(ii) Full utilisation of fixed factors.

2. Diminishing Returns to a factor :

(i) use beyond optimum capacity.

(ii) Lack of perfect substitution between factors.

• Average product and marginal product both are inversely ‘U’ shaped.

• Marginal product can be zero but average product can never be zero therefore, never touches‘X’–axis.

• Cost : Sum of direct (explicit cost) and indirect expenditure (implicit cost ) is treated as cost.

• Economic Cost : Sum of explicit, implicit cost and normal profits is called economic cost.

• Explicit cost is the expense incurred by the producer for payments for goods and factor servicesowned by others. This is an accounting cost.

• Implicit cost is the cost of self owned resources of producer.

• Normal profit is the minimum profit which a producer must get in the long run to continue toproduce the given good.

• Based on time period, cost can be categorised as


Short run costs

Cost

Total FixedCost (TFC)

Total VariableCost (TVC)

Total Cost(TC)

Average Cost(AC)

Marginal Cost(MC)

Average FixedCost (AFC)

Average VariableCost (AVC)

Long-run costs

Long-run Average Cost(LAC)

Long-run Marginal Cost(LMC)

• Total fixed cost remains constant at all levels of output, therefore, total fixed cost curve is parallelto ‘X’–axis. Fixed costs are incurred even when output is zero. Examples, Machines, Buildings.

TFC TC TVC or TFC AFC Q

• Total variable cost is the cost which vary with the quantity of output produced. It is zero at zerolevel of output and increases with increase in output. It is also cumulative sum of marginal cost.Example : Raw material, Casual labour, power and fuel.

TVC TC TFC or AVC QTVC MC

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

TC TFC TVC or TC ATC Q

• Total cost curve and total variable cost curves are parallel to each other. The vertical distancebetween these two is total fixed cost because total fixed cost is constant at all levels of output.

• At zero level of output, total cost is equal to total fixed cost because at zero level of output totalvariable cost is zero.

• Average fixed cost is per unit total fixed cost of producing a good.

AFC TFC / Q. or AFC ATC AVC.

Average fixed cost curve is rectangular hyperbola. It is so because rectangles formed at all pointsof the curve is same.

• Average variable cost is per unit of total variable cost.

AVC TVC / Q. or AVC ATC AFC.

With increase in output it falls in the beginning and then rises. Therefore, it is ‘U’ shaped.


• Average cost or average total cost is per unit of total cost. It is also the sum of average fixed costand average variable cost.

ATC AFC AVC

• Marginal cost is the net addition to total cost or total variable cost of producing one additional unitof output.

n n 1TVCMC TVC TVC or MC .

Q

• Revenue is the money receipts from sale of product or in other words, the expenditure on a goodby the buyer which is received by a producer is called revenue.

• Total revenue is the total receipts from sale of given units of a commodity over a particular periodof time. It can be calculated as

TR Price Q or TR MR

• Average revenue is per unit revenue or price

TR P QAR PriceQ Q

Hence average revenue equals price.

• Marginal revenue is the net addition to total revenue with one additional unit of output sold.

MR TR / Q

• When price remains constant or there is perfect competition in the market then :

(i) Average revenue and marginal revenue remains constant at all levels of output and areequal to price.

(ii) Total revenue curve is a straight positively sloping line from the origin.

(iii) Total revenue is also equal to the area under price line for a given level of output.

• Behaviour of total revenue, average revenue and marginal revenue when per unit price falls orthere is monopoly or monopolistic competition in the market :

(i) Average revenue and marginal revenue curves both slopes downwards and MR curve liesbelow AR curve.

(ii) Marginal revenue falls twice the rate of average revenue.

(iii) Total revenue curve initially increases, then reaches maximum and finally falls with increasein output sold.

• Supply refers to the amount of the commodity that a firm or seller is willing to offer to sell in agiven period of time at various prices.

• Market supply is total quantity of a commodity that all the producers are willing to sell at a givenprice during a period of time.


• Supply schedule is a tabular form showing various quantities of a commodity which a firm is readyto sell at different prices during a given period of time. It is of two types.

(i) Individual supply schedule.

(ii) Market supply schedule.

• Law of supply states that assuming other things remaining constant, supply is positively relatedto its price i.e. when price of a commodity rises, its supply also rises and when price of thecommodity falls, supply also falls.

• Individual supply curve and market supply curve are graphic presentation of individual supplyschedule and market supply schedule. Both the curve indicate positive relationship between priceof a commodity and its quantity supplied. Both curves are positively sloped.

• Supply function refers to functional relationship between supply and determinants of supply.Mathematically it can be represented as

Sx = F (Px, T, Nf, Pf, Gp, future exp.)

Determinants of Supply

E xtension in Supply

R ise in price of com m odity

U pw ard m ovem ent a long a S upply curve

O ther Factors

N um ber of firm s

C hange in technology

Tax policy

P rice of Inputs

Fu ture E xpecta tion

P rice of other goodsC ontraction in S upply

Fa ll in P rice o f C om m odity

D ow nw ard m ovem en t a long a S upply curve

P rice of C om m odity

C hange in Q uan tity S upplied

C hange in Supply

Increase in S upply

R ightw a rd shift o f Supply cu rve

Causes(i) Increase in N o. of firm s(ii) Im provem en t in technology(iii) fa ll in price of Inputs(iv) D ecrease in tax rates(v) E xpected fa ll in p rice o f com m odity in near fugu re

D ecrease in S upply

Leftw ard shift o f S upply curve

Causes(i) D ecrease in no. of firm s(ii) O utdated and obsolete Technology(iii) Increase in price of Factor inputs(iv) Increase in tax rates.(v) E xpected rise in p rice of com m odity in nea r futu re


• The price elasticity of supply of a good measures the degree of responsiveness of quantitysupplied to change in the price of the good.

Percentage change in quantity suppliedPrice elasticity of supply Es

Percentage change in price

• If the tangent to the supply curve passes through the point of origin, es at that point is equal tounity; If the tangent intersects the x – axis, es at that point is less than unity; and if tangentintersects the Y – axis, es at that point is greater than unity.

• Objective of the producer is to earn maximum profits.

• Profit is excess of revenue over economic cost.

• Producer is in equilibrium when he earns maximum profits i.e. total revenue exceeds total costby maximum amount and profit falls as more output is produced.

• Two approaches of producers equilibrium are :

(A) Total revenue and Total cost approach.

(b) Marginal Revenue and Marginal cost approach.

(A) TR and TC approach : Three conditions of producers equilibrium are :

(i) Total revenue exceeds total cost by maximum amount (necessary condition).

(ii) Profit falls as more output is produced (Supplementary condition).

(ii) The tangent on TR and TC curve should be parallel.

(B) MR and MC approach : Two conditions of producers equilibrium are :

(i) Equality between MR and MC is necessary. (First profit is maximum at that level of outputwhere revenue from sale of an additional unit (MR) is equal to cost of producting anadditional unit (MC).

(ii) That MC curve should be rising at the equilibrium point (or MC curve should cut the MRcurve from below).

• Break even point is the point at which total revenue is equal to total cost i.e. TR = TC.

• It is the point where firm gets normal profits. Normal profit is the part of economic cost.

1. Define production.

2. Name the period in which scale of production cannot be altered.

3. State two causes of increase in total product at increasing rate.

4. As the variable input (Labour) is increased by one unit, total output falls. What would you sayabout marginal productivity of labour.


5. How total product is derived from average product.

6. Define production function.

7. State the law of variable proportions.

8. What happens to total output when marginal product of variable input is decreasing, but ispositive.

9. When average product is falling what will be the relation between average and marginal product.

10. Name the phase when variable factor (labour) increases from 5 units to 6 units and total outputvaries from 18 to 15 units.

11. What is the general shape of average and marginal physical product curve.

12. Give two examples of factor inputs and non factor inputs used in production process.

13. With increase in level of employment of a factor from one to two units, marginal product increasesfrom 20 to 22 units. Find out average product and total product of 2nd unit.

14. What do you mean by division of labour?

15. What do you mean by fixed factors of production?

16. Why some of the factors are called variable factors of production?

17. When is total product maximum?

18. How does fall in total product affect marginal product?

19. Can total product and average product become zero or negative?

20. What is meant by cost?

21. Define explicit cost?

22. What is supplementary or overhead cost?

23. Define implicit cost.

24. What is the shape of total variable cost curve?

25. How total variable cost is derived from marginal cost?

26. Can average cost be less than marginal cost when marginal cost is rising?

27. Why total cost curve and total variable cost curve are parallel to each other?

28. Name the short run cost which will not be zero at zero level of output.

29. Can average cost be more than marginal cost when average cost is falling’.

30. Calculate – marginal cost when average variable cost of 5 units is Rs. 20 and total variable costof 6 units is Rs. 125.

31. Calculate marginal cost – when average variable cost of 5 units is Rs. 60 and total variable costof 6 units is Rs. 400.


32. When marginal cost of second unit is Rs. 40 and MC of third unit is Rs. 20. Calculate total variablecost and average cost of 3rd unit.

33. Why average fixed cost curve does not touch X-axis or Y-axis.

34. How can you derive marginal cost from total variable cost curve.

35. Give two examples of explicit cost of a tailoring shop.

36. In which stage of law of variable proportions, average cost will be minimum.

37. A firm produces 40 units of good ‘A’. At this level average variable cost is Rs. 30 and averagetotal cost is Rs. 80 Calculate total fixed cost.

38. With increase in output from zero to one, total cost increases from. Rs. 60 to Rs. 100. Find outaverage fixed cost at unit one.

39. Define revenue.

40. How will you estimate total revenue?

41. At what rate marginal revenue falls, when price of a good falls?

42. When price of the product remains constant at all levels of output, what will be the shape of totalrevenue curve?

43. Average revenue of three units is Rs. 8 and marginal revenue of 4th unit is Rs. 4. Find out averagerevenue of 4th unit.

44. Total revenue of 4 units is Rs. 28 and marginal revenue of 5th unit is Rs. 2. Calculate averagerevenue of 5th unit.

45. What is the relationship between average revenue and marginal revenue when price does notchange at all levels of output?

46. With increase in sales from one unit to two units, average revenue falls from Rs. 10 to Rs. 9. Findout marginal revenue of 2nd unit.

47. What will be the effect on marginal revenue, when total revenue increases at constant rate?

48. Define supply.

49. What do you mean by Individual supply schedule?

50. What is meant by supply function?

51. Name two determinants of supply?

52. What is meant by change in supply?

53. What type of change in price is the cause of upward movement along a supply curve?

54. What effect does an increase in tax rates have on supply of a commodity?

55. What causes a downward movement along a supply curve?

56. What is meant by leftward shift of supply curve?


57. What effect does a decrease in price of input on supply curve of the commodity?

58. Why does a supply curve have a positive slope.

59. What is meant by Elasticity or supply?

60. What is the price elasticity of supply. If supply curve is parallel to Y axis?

61. When does the supply of commodity called equal to unity?

62. State the effect of Nature of commodity on price elasticity of supply.

63. What will be the price elasticity of supply in Market Period?

64. What will be the price elasticity of supply of perishable goods?

65. What effect does a change in number of firms on elasticity of supply?

66. When the producer increase the supply of a good at same price, give two reasons.

67. What is meant by Law of supply?

68. Write two exceptions of Law of supply?

69. What causes an extension in supply?

70. What do you mean by producer’s equilibrium?

71. State three conditions of producers equilibrium in TR and TC approach.

72. State two conditions of producers equilibrium in MR and MC approach.

73. What do you mean by profit maximisation of producer?

74. What is break even point?

75. What is the necessary condition of producers equilibrium in TR and TC approach?

76. What do you mean by normal profit?

77. Name two approaches of finding producer’s equilibrium.

78. At what rate marginal revenue falls, when price of a good falls.

79. Why total revenue has constant slope under perfect competition?

80. What is the relation between price line and total revenue?

81. At a particular level of output, a producer’s MC < MR. What should a producer do to maximisehis profit?

82. Why is TFC curve horizontal and parallel to X-axis?

83. What is the price elasticity of supply associated when the supply curve passing through tointersect to x axis?


84. Why does a producer moves downward along a supply curve due to decrease in price of commodity?

85. What is the price elasticity of supply associated when a supply curve passing on 40° anglethrough the origin?

86. When does the supply curve shifted to right ward while price remains constant. Why the supplyincreases due to increase in price?

87. What effect does an increase in price of competitive good on the supply of a commodity.

88. What effect will be on the supply of a commodity the price of its competitive good increases.

1. How does total product behave with change in marginal product?

2. Briefly explain the causes of increasing returns to a factor.

3. Why do negative returns to a factor operate?

4. In which phase a rational producer would like to operate and why?

5. What do you mean by division of labour? How do they effect returns to a factor?

6. Distinguish between total fixed cost and total variable cost.

7. Explain diagrammatically the relationship between average total cost, average variable cost andmarginal cost.

8. What does the difference between total cost and total fixed cost represent? Why total cost goeson increasing with increase in output? Show it with the help of diagram.

9. What is the nature of total cost at zero level of production? Give reasons for your answer. Canaverage fixed cost curve touch X-axis or Y-axis, why?

10. Explain the concept of short run marginal cost does fixed cost affect marginal cost.

11. Explain the relationship between total cost and marginal cost with the help of numerical example.

12. Why short run marginal cost curve is ‘U’ shaped?

13. Briefly explain features of average fixed cost. Can average cost increase when marginal cost isdecreasing.

14. Why average variable cost curve and average total cost curve come closer but do not intersecteach other. Explain.

15. Why is average cost curve in short run ‘U’ shaped?

16. What charges should take place in total revenue so that

(a) marginal revenue is positive but falling;

(b) marginal revenue is zero;

(c) marginal revenue is negative.


17. What changes will take place in marginal revenue when

(a) Total revenue increases at increasing rate.

(b) Total revenue starts falling.

(c) Total revenue is maximum.

18. What is marginal revenue and how is it related to average revenue when price remains constantat all levels of output.

19. How do change in marginal revenue affect total revenue, when more can be sold by lowering theprice.

20. Prepare imaginary schedule showing total revenue average revenue and marginal revenue suchthat equilibrium price determined by demand and supply is Rs. 10.

21. Explain meaning of producers equilibrium. Also explain necessary and supplementary conditionsof producer’s equilibrium.

22. From the given data find out

(a) Producers equilibrium level of output.

(b) Break even point level of output.

(c) Output level showing losses.

Output 0 1 2 3 4 5 6 7 8 9 10TC 5 15 22 27 31 38 49 63 50 101 123TR 0 10 20 30 40 50 60 70 80 90 100

23. Find out level of output yielding maximum profit.

Output 1 2 3 4 5AR 10 9 8 7 6AC 10 7 6 6 7

24. Find out producer’s equilibrium level of output and output level where firm earn’s normal profit.

Output 0 1 2 3 4 5 6 7

Price 11 10 9 8 7 6 5 4

MC – 3 2 3 4 5 10 13

TFC 3 3 3 3 3 3 3 3

25. Calculate average variable cost and marginal cost.

Unit 0 1 2 3

TC 40 50 60 70

26. A firm is producing 10 units. At this level of output, average variable cost is Rs. 18 and averagetotal cost is Rs. 20. Find out total cost, total fixed cost, total variable cost.


27. Complete the following table

Output 1 2 3 4 5

Average Revenue 10 – 8 – –

Marginal Revenue 10 8 – 0 –

Total Revenue 10 – – – 20

28. Find out total product and marginal product

Units of labour 1 2 3 4 5 6

AP 2 3 4 4.25 3 3.5

29. Compete the following table.

AP 0 – – 22 – – 20

MP – – 22 – – 17 –

TP 0 20 – – 88 – –

30. Explain briefly law of supply with the help of diagram.

31. Define market supply explain its two determinants.

32. Distinguish between ‘change in supply’ and ‘change in quantity supplied’.

OR

Explain briefly two causes of a rightward shift of supply curve.

34. Explain the effect of technological changes on supply of a commodity.

35. Distinguish between contraction in supply and decrease in supply.

36. How does an increase in the price of inputs affect the supply curve of a firm?

37. What is meant by elasticity of supply? What will be the price elasticity under following conditions :

(i) percentage change in quantity is greater then percentage change in price.

(ii) supply remains constant due to increase or decrease in price.

38. State the Determinants of price elasticity of supply explain any two.

39. Explain Geometrically method of measuring price elasticity of supply.

40. Price elasticity of supply for a product is 2. A firm supplies 1,000 units of this product at a priceRs. 40 per unit. If the price of product fall by 40%. How much quantity of the product will besupplied by the firm.

41. A firm supplies 800 units of a commodity at a given price. As a result of 5% rise in the price ofa commodity its supply increase by 120 units calculate price elasticity of supply.


42. Price elasticity of supply is ‘Unity’ : A firm supplies 120 units of the product. At which price firmwill supply 144 units of this product. If the initial price was 80 Rs. per unit.

43 The supply of a commodity becomes 60 units of 66 units by a 5% fall in its price calculate priceelasticity of supply?

44. From the given data explain the behaviour of average and marginal product.

Variable factor 1 2 3 4 5 6 7

Average Product 20 25 30 30 28 25 22

Marginal Product 20 30 40 30 20 10 4.

45. What cause the marginal returns of a factor to vary from increasing returns to diminishing returns.

46. What would be the shape of average revenue curve when total revenue is positively slopedstraight line passing through origin. Explain with the help of schedule and diagram.

47. Why any producer would like to operate in second stage even though TPP is increasing atdiminishing rate or MPP starts falling.

48. With the help of total Revenue and Marginal revenue curves explain the relationship between TRand MR, when per unit price is decreasing continuously.

49. Statements whether true or false-give reason.

(a) At the stage of producers equilibrium marginal cost will be decreasing.

(b) AR curve always remain above MR curve.

50. Distinguish between leftward shift to supply curve and downward movement along a supply curve.

51. Explain the change in quantity supplied is explanations of supply curve.

52. Following statements are true or false. Give reason.

(a) Supply remains constant in market period.

(b) Future expectation to increase in price increases the market supply of a commodity.

53. Statements whether true or false. Give reason.

(a) Marginal revenue falls at twice the rate at which average revenue falls.

(b) Average cost will increase only when marginal cost intersect it from below.

54. Statements whether true or false. Give reason.

(a) Diminishing returns to a factor is applicable only when average product starts falling.

(b) AC and AVC curve does not intersect each other but come closer.


1. Explain the effect on output when only one input is increased and all other input are held constant.

2. Explain briefly the law underlying the change in output as the input is changed. Also identify thevarious stages in the change in total product.

Units of labour input 1 2 3 4 5 6

Total output units 50 110 150 180 180 150

3. What are increasing returns to a factor?

4. Statement whether true or false, give reasons :

(a) Total product is the area under the marginal product curve.

(b) There is a range when average product is rising and marginal product is falling.

(c) for the first unit of output MC = AVC.

5. Explain the determinants of market supply.

6. Explain the cause of Increase in supply.

7. Explain the cause of leftward shift of supply curve.

8. Explain the geometric method of measuring price elasticity of supply with help of diagrams.

9. Explain factors determining elasticity of supply.

10. Explain the producers equilibrium with the help of diagram through TR and TC approach.

11. Distinguish between followings

(i) Perfectly elastic and perfectly inelastic.

(ii) Less than unitary elastic and greater than unitary elastic.

12. Explain followings :

(a) Why does the slope of supply curve is positive.

(b) Why producer decreases the supply due to fall in price

(c) Price elasticity of supply is numerical measurement of law of supply.

1. Production is transformation of input into output which has money value.

2. Short period.


3. Division of labour and better coordination between factors.

4. Marginal product becomes negative.

5. TP = AP × variable input (labour)

6. Production function is the functional relationship between physical input and output of a firm.

7. Law of variable proportions explain the behaviour of output when one input is varied and otherinputs used in production of a good are kept fixed.

8. Total product increases at diminishing rate.

9. Marginal product also falls but at a faster rate.

10. Third stage i.e. stage of negative returns to a factor.

11. Inverse ‘U’ shape.

12. Factor inputs : Land, labour, capital Entrepreneurship.

Non factor inputs : Cloth, thread, needles etc.

13. TP = MP AP = TP/variable factor

= 20 + 22 = 42/2

= 42 units = 21 units

14. Division of labour refers to division of work into different processes such that each process ishandled by specilised workers.

15. Those factors of production which cannot be changed during short period.

16. Some factors are called variable factors of production as they can easily be changed during shortperiod.

17. When marginal product is zero.

18. Marginal product becomes negative.

19. No, they can never become zero.

20. Cost is the sum of explicit and implicit cost.

21. Explicit cost is the actual expense incurred by the producer for outside payment for hiring inputs.

22. It remains constant at all levels. It is also called as fixed cost.

23. Implicit cost is the cost of self owned resources of producer.

24. Total variable cost is upward sloping. It is concave in the beginning and convex later.

25. TVC = MC.


26. Yes.

27. Vertical distance between TC and TVC is TFC which remains constant throughout.

28. TC and TFC.

29. Yes.

30. MC = Rs. 25.

31. MC = Rs. 100

32. TVC = Rs. 60 AVC = Rs. 20

33. Because TFC is never zero.

34. MC = TVCn – TVCn–1 or TVC/Q.

35. Thread, cloth, buttons.

36. Second stage.

37. Rs. 2,000

38. Rs. 40.

39. Revenue is money receipts from sale of product.

40. TR = Price X quantity sold.

41. Marginal revenue will be zero.

42. Total revenue curve will be positively sloped straight line.

43. Rs. 28.

44. Rs. 6.

45. Average revenue and marginal revenue both are equal to price and remain constant.

46. Rs. 8.

47. Marginal revenue remains constant throughout.

48. Supply refers to the amount of the commodity that a firm or seller is willing to offer for sale in agiven period of time at various prices.

49. Individual supply schedule is a tabular form showing various quantities of a commodity which afirm is ready to sell at different prices during a given period of time.

50. Supply function state the functional relation between supply of a commodity and determinants ofsupply.

51. (i) Number of firms.

(ii) Change in technology.


52. Change in supply refers to increase or decrease in supply of a commodity due to change infactors other than price like technology prices of inputs, Goal of producer, number of firm etc.

53. Due to decrease in price.

54. As a result of increase in tax rates production cost increases. So the profit margin of producerwill fall and producer will decrease the supply.

55. Decrease in price.

56. Due to change in other factors the supply of a commodity falls at same price then supply curveshifted to leftward.

57. As a result of decrease in price of input production cost falls than producers profit margin willincrease so producer will increase the supply of commodity.

58. Because of positive relation between price and supply.

59. Price elasticity of supply (Es) is a measure of degree of response of supply for a good to changein its price.

60. Perfectly Inelastic.

61. When percentage change in price is equal to percentage change in supply.

62. On the basis of Nature of commodity we can categorise the goods.

(i) Durable goods : These goods can be store so the supply of these goods is elastic,

(ii) Perishable goods : It is difficult to store these goods so the supply of these goods willbe inelastic.

63. Market period is a very short period in which factor of production can not be changed so supplyis perfectly in elastic.

64. Less than unity elastic.

65. Supply of a commodity becomes elastic with an increase in Number of firms and inelastic withdecrease in number of firms.

66. Due to change in other factors like improvement in technology, decrease in price of inputs.

67. Law of supply states that other things remaining constant, quantity supplied of a commodityincreases with increase in the price and decreases with a fall in its price.

68. (i) Score goods

(ii) Market period.

69. Increase in price of a commodity.

70. Producers equilibrium means when producer earns maximum profit i.e., TR exceeds TC bymaximum amount and profit falls as more output is produced.

71. Three conditions of producers equilibrium are :


(i) Total revenue exceeds total cost by maximum amount.

(ii) Profit falls as more output is produced.

(iii) The tangent on TR and TC curve should be parallel.

72. Two conditions are :

(i) Equality between MR and MC is necessary.

(ii) MC curve should be rising at the equilibrium point.

73. Profit maximisation means TR exceeds TC by maximum.

74. The point at which TR = TC.

75. Necessary condition is TR exceeds TC by maximum.

76. Normal profit when TR = TC and there is no tendency for any firm to enter or leave the industry.

77. (i) TR and TC approach.

(ii) MR and MC approach.

78. Twice the rate of average revenue.

79. Because price remains constant at all level of output.

80. Total revenue is the area under price lines.

81. Producer should increase production.

82. It remains constant at all levels of output.

83. Inelastic.

84. Profit margin of producer’s fall due to decrease in price therefore producer moves downward alonga supply curve.

85. Equal to unity elastic.

86. When the supply of commodity increases due to change in other factors.

87. The profit margin of producer’s increase due to increase in supply therefore produce increasesthe supply when price increases.

88. The supply of commodity will fall.


• Market implies a system with the help of which the buyers and sellers of a commodity or servicecome in contact with each other and complete the act of sale and purchase.

• According the number of firms, market is categorized in various forms. Some of these are

1. Perfectly competitive market

2. Monopoly

3. Monopolistic competition

4. Oligopoly,

• Perfect Competition is that type of market in which there are very large number of sellers, sellhomogenous goods at constant price without any competition to consumers who have perfectknowledge about the market.

• Under perfect competition, price remains constant therefore, average and marginal revenue curvesalso remains constant and parallel to OX–axis.

• Under perfect competition price is determined by an industry (a group of producers and consumers)with the forces of demand and supply. No individual firm or buyer can influence the price or supplyof the product.

• Monopoly is that type of market where there is a single seller, selling a product which does nothave close substitutes.

• Under monopoly, due to absence of free entry and exit, firm earn abnormal profit in the long run.

• Under monopoly, monopolist himself determines price of the product according to the elasticity ofdemand as he has full control over the supply of the product.

• Under monopoly elasticity of demand for the good is less than one therefore demand curve hassteeper slope.

• Under monopoly, average revenue and marginal revenue has negative slope as per unit price fallswith increase in output sold.

• Monopolistic competition is that type of market in which there are large number of firms, selldifferentiated product to the consumers who have imperfect knowledge about the product andthere is tough competition between firms.


• Under monopolistic completion due to lack of control over supply each firm determines the priceof their product, keeping in view the price level set by other firms.

• Under monopolistic competition elasticity of demand for the product is greater than one therefore,demand curve (AR curve) has flatter slope.

• Oligopoly is that form of market in which there are few sellers. All the firms produce a certainamount of output of total market supply.

• All the firms under oligopoly produce homogenous or differentiated product.

• Under oligopoly market there is difficult entry of firms.

• Under oligopoly demand curve is undefined.

• All the firms are interdependent in respect of price determination under oligopoly market.

• On the basis of production, oligopoly can be categorised in two categories

(i) pure oligopoly

(ii) differentiated oligopoly

• Pure oligopoly is that forms of oligopoly in which firms produce homogenous product.

• Differentiated oligopoly is that form of oligopoly in which firms produce. similar product, which areclose substitutes of each other.


COMPARATIVE FEATURES OF VARIOUS FORMS OF MARKET

Large number of buyers and sellers

Freedom of entry and exit

Differentiated product

Imperfect knowledge

Perfect mobility of factors of production

High selling cost

Cut throat competition

Perfect Competition

Monopolistic Competition

Monopoly

Single seller

Lack of close substitutes

Absence of free entry

Price discrimination

Full control over supply

Absence of competition

Price maker

Few firms

effective entry barriers

Homogenous productor differentiated product

Firms demand curve is uncertain

Interdependence in respect of determination of price and output

Price rigidity

Oligopoly

Large number of buyers and sellers

Freedom of entry and exit

Homogeneous product

Perfect knowledge

Perfect mobility of factors of production

Absence of transport cost

Industry is price maker

Firm is a price taker

MARKET - STRUCTURE

1. What do you mean by market?

2. Under which competitive market, firms demand curve is parallel to ox-axis?

3. Why average and marginal revenue curves are same under perfect competition?

4. What do you mean by homogenous product?

5. How is price determined under perfect competition?

6. What do you mean by product differentiation?

7. What is the common feature shared by perfect and monopolistic competition?


8. Define the monopoly market

9. Under which market there is no difference between firm and industry.

10. What is the relation between market price and marginal revenue of a price taking firm?

11. What is the normal profits?

12. What are abnormal profits?

13. What induces new firms to enter the industry?

14. What do you mean by price discrimination?

15. Under which market, price discrimination is possible?

16. What is the role of large number of firms, in price determination under perfect competition?

17. Under which competition, entry of new firms into the industry is prohibited?

18. What is the relationship between price and marginal cost under monopolistic competition at theequilibrium level?

19. Define oligopoly?

20. Define equilibrium price.

21. What do you mean by equilibrium quantity?

22. When does the situation of excess supply arise?

23. How will number of firms in the industry change, if firms are earning abnormal profits?

24. What will be the impact of decrease in supply on the equilibrium when demand is perfectlyinelastic?

25. What will be the effect on equilibrium price when increase in demand is more than increase insupply.

26. Under which situation equilibrium price remains unaffected when supply increases but demandremains unchanged.

27. What will be impact of fall in demand on equilibrium price under market period?

28. Under what situation does the equilibrium price remains unaffected when there is simultaneousincrease in demand and supply.

29. When market price is more them the equilibrium price, what will be its impact on number of firms.

30. What do you mean by minimum price ceiling.

31. Under which competitive market, firm has full control over supply of the product?


32. What is the relation between average revenue curve and demand curve under monopolisticcompetition.

33. Distinguish between monopoly and perfect competition in respect of elasticity of demand.

34. Under which competitive market can firm earn abnormal profits in the long run?

35. How is the success of price discrimination policy depends on elasticity of demand?

36. How perfect knowledge keeps the price level constant under perfect competition?

37. How does elasticity of demand control the freedom of determination of price in monopolisticcompetition?

38. Why does the marginal revenue curve has negative slope under monopoly?

39. What will be the impact on number of firms when market price is less than equilibrium price?

40. Why is the price line for a competitive firm horizontal?

1. Explain the determination of equlibrium price under perfect competition with the help of schedule.

2. Explain why equilibrium price is determined when demand equals supply. Why not when demandis not equal to supply?

3. What will happen if the price prevailing in the market is

(a) above the equilibrium price

(b) below the equilibrium price.

4. Explain diagrammatically the effect of simultaneous increase in both demand and supply onequilibrium output when there is no change in equilibrium price.

5. “Firm is a price taker and not price maker under perfect competition” – Explain.

6. New environmental regulations require that the drug industry use a more environment friendlytechnology, whose running cost is higher but discharges less toxic chemicals than before. Howwould it affect the price of drugs?

7. Explain the competition and monopoly on the basis of followings :

(a) Elasticity of demand

(b) Control over price

(c) Average revenue curve.

8. State two similarities and two differences of monopoly and monopolistic competitions.

9. How does normal profit change into abnormal profits in the long run under monopolistic competitiondue to free entry of firm?


10. Explain the concept of excess demand. When does this situation arise? Explain with the help ofdiagram.

11. Explain the relation between market price and equilibrium price.

12. Explain the relationship between marginal cost and price under perfect competition and monopolyat equilibrium level.

13. How does oligopoly differ from monopoly?

14. Explain merits and demerits of monopoly market?

15. In which competition the availability of close substitutes is present? How does it effect the price?

16. Why is the role of demand more significant than supply in price determination in short-period?

17. In what circumstances change in supply affect equilibrium price only and not equilibrium quantity.Explain with the help of diagram.

18. Why there are entry barriers in oligopoly?

1. Compare average and marginal revenue curves under perfect competition and monopoly market.

2. Differentiate between monopoly and monopolistic competition.

3. Explain main features of perfect competition.

4. What will be the effect on equilibrium price due to change in supply if

(a) demand is perfectly elastic.

(b) demand is perfectly inelastic.

5. Why is market price, not considered as equilibrium price in the situation of excess supply. Statehow will the equilibrium price be determined.

6. Explain two similar and two different features of perfect and monopolistic competition.

7. Explain with the help of diagram the effect of increase in demand on the equilibrium price.

8. Explain features of oligopoly.

9. How are equilibrium price and quantity affected when demand and supply curve move in oppositedirection?


10. There is simultaneous decrease in demand and supply of a commodity, when it result in

(i) no change in equilibrium price

(ii) a fall in equilibrium price.

Explain using diagram.

11. Explain ‘equilibrium price increases due to simultaneous change in demand and supply.’ Usediagram.

1. Market is a system where buyers and sellers of a product come in contact with each other forsale and purchase of the product.

2. Perfect competition.

3. Because per unit price remains constant.

4. When the product, produced by all the firms are perfect substitutes of each other i.e. colour,shape, packing etc. are same, are called homogeneous products.

5. Price is determined by an industry by the forces of demand and supply.

6. When similar product differ from each other minutely in terms of colour, shape, weight, design,packing etc. then it is called product differentiation.

7. (a) Free entry and exit of firms.

(b) Perfect mobility of factors.

8. It is a market in which there is single seller, selling a product which does not have close substitutes.

9. Perfect competition.

10. Both are equal, i.e.,

market price = MR

11. It is the minimum profit which a firm must get to stay in business.

12. Profit earned by firm over and above the normal profit is called abnormal profit.

13. Abnormal profits.

14. Price discrimination is a policy under which a seller sells a similar product at different prices todifferent buyers.

15. Monopoly market.

16. Due to large number of firms, there is no freedom to determine the price. Therefore, each firmdetermines the price, keeping in view the price determined by other firms.



18. There is inverse relationship.

19. Oligopoly is a market structure where there are few firms competing for their homogenous ordifferentiated products.

20. If is the price at which demand = supply.

21. It is that quantity of a good which can be bought and sold at equilibrium price.

22. When market price is more than equilibrium price.

23. The number of firms in the industry will increase.

24. Equilibrium price will remain unchanged.

25. When increase in demand is more than increase in supply, equilibrium price will fall.

26. When demand is perfectly inelastic.

27. During market period (very short period).

28. When proportionate increase or decrease in demand is equal to proportionate increase or decreasein supply respectively.

29. Number of firms will increase, if market price is more than equilibrium price.

30. Minimum price ceiling is that price which is determined by Govt., so that producer must get thereasonable price of the product.

31. Monopoly market

32. Both AR and MR curves have negative slope.

33. (a) Perfect competition – perfectly elastic

(b) Monopoly – less than unit elastic


35. Monopolist will sell the good at higher price to that consumer for whom elasticity of demand ofa good is inelastic, whereas he will sell the good at lower price to that consumer for whomelasticity of demand of a good is elastic.

36. If any firm determines the price more than the price determined by an industry, consumer will startpurchasing from other firms due to perfect knowledge.

37. Under monopolistic competition, demand for a good is elastic, therefore, due to slight increase inprice, fall in demand will comparatively be more.

38. Under monopoly AR and MR curves have negative slope because more can be sold by loweringthe price.

39. Number of firms will reduce.

40. Per unit price of a good is constant and firms can sell infinite quantity at given price.


• With the help of curves, these variables can be studied, which represent positive or negativerelation.

• Variables are of two types :

(a) dependent variables

(b) independent variables.

• Generally, independent variables are represented on OY-aixs, whereas dependent variables arerepresented on OX-axis.

• While plotting curves, values on OX-axis or on OY-axis should be according to reasonable proportion.

• Relationship between variables can be understood easily through curves because their effect islong lasting on our minds.

• In economics demand and supply curves are used to express following :

(a) Data relating to demand and supply.

(b) To determine equilibrium in various economic activities.

(c) To show the effect of change in demand and supply on equilibrium and market price.

(d) for graphic representation of different categories of elasticity of demand and supply.

(e) Determination of floor price and price ceiling in situation of excess demand and excesssupply.

• In practical life also curves are important. Govt. determines maximum and minimum price ceilingwith the help of demand and supply.

• Govt. determines tax rate in accordance with elasticity of demand and supply.

• Demand and supply curves are helpful to explain the impact of change in rate of taxes on demandand supply.

• Demand and supply curves explain equilibrium under following situations :

(a) Rate of interest (Demand for money and supply).


(b) Wage rate (demand for labour and supply of labour).

(c) Price determination of factors of production.

(d) Determination of foreign exchange rate.

(e) Determination of rent.

(f) Saving of consumer.


• Circular Flow : In an economy there is economic interdependence between various sectors,which generates circular flow. Circular flow of income and production refers to circular movementof goods and services or income.

• Production : Production is a human effort with which goods and services can be produced whichhas utility to fulfill human wants and has fixed money value.

• Final Goods : are those goods which are used either for final consumption or for investment. Finalproduct is not to be resold, it reaches its final use and, therefore, it is called a final product.

• Final goods are either in form of consumption goods (both durable and non durable) or capitalgoods.

• Consumer Goods : These final goods which are purchased for satisfaction of wants by ultimateconsumer are called consumer goods or consumption goods. It also include services.

• Capital Goods : Those final goods which help in production. These goods are used for generatingincome.

• Intermediate Goods : are those goods which are meant for further production or for resale in thesame year. These goods donot fulfil needs of mankind directly.

• Investment : Addition made to the stock of capital during a period is called investment. It is alsocalled capital formations.

• Gross Investment : Total addition of capital goods to the existing stock of capital during a timeperiod is gross investment.

Gross Investment = Net Investment + Depreciation

• Net Investment : is a measure of net availability of new capital or new addition to capital stockin an economy is measured by net investment or new capital formations.

Net Investment = Gross investment – Depreciation

• Depreciation : is expected fall in value of fixed capital goods due to normal wear and tear andobsolescence.

• Capital Loss : is unexpected fall in value assets due to natural calamities or due to unforeseenchanges in technology etc.

• Economic territory is the geographical territory administered by a Govt. within which persons,goods and capital circulates freely. It includes following :


(a) Political frontier, territorial water.

(b) Embassies, military establishments, consulates of the country located abroad.

(c) Ships and aircrafts operated between two countries.

• Normal Resident of a Country : is a person or an institution who ordinarily resides in a countryand whose centre of interest lies in that country.

• Domestic income : It is the factor income accruing to owners of factors of production for supplyingfactor service within domestic territory during an accounting year.

It does not include net foreign income from abroad.

Domestic Income = National Income – Net Factors

Income Earned from Abroad

• National Income : It is total factor income accruing to normal residents of country in an accountingyear.

National Income = Domestic Income + Net Factors

Income Earned from Abroad

• National Income at Current Prices : It is the money value of all final goods and services valuedat current prices produced by normal resident of a country over a particular period of time. It canbe calculated by multiplying final output of current year by prices of current year. It is also calledas Nominal National Income.

• National Income at Constant Prices : It is also called as real income. It is the money value ofall final goods and services valued at constant prices produced by normal resident of a countryover a particular period of time. During an accounting year it can be calculated by multiplying finaloutput of current year by prices of constant year.

• Value of Output : Market value of all goods and services produced by an enterprise during anaccounting year is called value of output.

• Value Added : It is the difference between value of output of a firm and value of inputs boughtfrom other firms during a particular period of time.

• Double Counting : Counting the value of a commodity more than once while estimating nationalincome is called double-counting. There are two ways to solve this problem.

1. By taking the value of only final goods.

2. By taking value added.

• Income Method of Calculating N.I. : It is the sum of factor income earned in the form of wagesand salaries, rent, interest and profit by factors of production for the services rendered.

• Its components are :

(a) Compensation of employees. (C.O.E.)


(b) Operating surplus (income from property and entrepreneurship).

(c) Mixed income of self employed.

(d) Net factor income from abroad.

• Expenditure method of measuring N.I. : is final expenditure on gross domestic product atmarket price during an accounting year.

Domestic Income (NDP )FC

+ NFIA

National Income (NNP )FC

– Income from property enterprenureship accruing of govt. administrative department– Savings of non departmental enterprises– NFIA

Domestic Factor Income Accruing to Private Sector

+ NFIA+ Interest on National debt+ Current transfers from Govt.+ Current transfers from R.O.W.

Private Income

– Corporate profit tax– Undistributed profit

Personal Income

– Direct personal tax– Misc fees and fines paid by households

Personal Disposable Income (PDI)(P.D.I. Personal EXpenditure + Personal Savings


D om estic Incom e (N D P )FC

+ N F IA

N ational Incom e (N N P )FC

+ Incom e from property enterprenuresh ip accru ing of govt. adm inistra tive departm ent+ S avings of non departm enta l enterp rises

D om estic Facto r Incom e A ccru ing to Priva te S ecto r

– N FIA– In terest on N a tional deb t– C urrent transfers from G ovt.– C urrent transfers from R .O .W .

P rivate Incom e

+ C orpo ra te profit tax+ U ndistribu ted profit

P ersonal Incom e

P ersonal D isposable Incom e (P D I)or

P ersonal E xpend itu re + P ersona l S avings

+ D irect personal tax+ M isc fees and fines paid by households

Concept of Value added of one sector or one firm.

1. Value of output [Sales + Increase in stock] or [Sales – decrease in stock].

2. Gross value added value of output – Intermediate consumptionsat market price (GVAMP)

3. Net value added at Gross value added at market price – depreciationmarket price (NVAMP)

4. Net value added at Net value added at market price – Net Indirect taxesfactor cost (NVAFC)

Note : * By adding up NVAFC of all the sector, we get NDPFC

* NVAFC is income generated in production process by factors of production. Income generated isto be distributed among factors of production as factor payments in the form of compensation ofemployees, rent, interest and profit. That is why NVAFC = sum of factor income.


Components of Final Expenditure (GDP )MP

Final C onsum ption E xpenditure

G ross D om estic C apita l form ation

N et exports of goods and serv ices

P rivate fina l C onsum ption expenditure

G ovt. fina lconsum ptionexpenditure G ross D om estic fixed

capita l form ationC hange in

stocks

E xports– Im ports

C losing stock–O pening stock

Net Domestic Product at Factor CostNDPFC

Compensation of Employees

Rent+ Interest+ Profit

M ixed Income of Self employed

(Income Method)

National Income (NNP )FC

P roduction M ethod Incom e M ethod E xpenditure M ethod

N et value added at factor cost

N et va lue added by P rim ary sector+ N et va lue added by secondary sector+ N et va lue added by Tertiary sector+ N et factor incom e from ab road.

S um of to ta l factor P aym ents

C om pensa tion o f em ployees+ R ent + Interest + profit+ m ixed incom e+ N et factor incom e from abroad

S um of to ta l fina l expenditure

P rivate fina l consum p tion expenditure+ G ovt. consum ption expenditure+ G ross dom estic capita l form ation+ N et exports– N et Indirect taxes– D eprecia tion+ N et factor incom e from ab road.

1. Give one point difference between micro and macro economics.

2. What do you mean by net exports.

3. Define intermediate consumption with the help of an example.


4. Define current transfers?

5. What you mean by real per capita income.

6. What should be added to NNPFC to get National disposable income?

7. When will NDP exceed NNP?

8. Who is considered as normal resident of a country.

9. What do you mean by economic territory?

10. What do you mean by net factor income received from abroad?

11. Name two items which are deducted from income from domestic product accruing to privatesector to get private income.

12. Name two items which are added in personal income to obtain private income.

13. When will NDPMP be less than NDPFC?

14. What is meant by gross fixed capital formation?

15. State the meaning of consumption of fixed capital.

16. Categorise the following items in intermediate or final goods.

(i) Purchase of food items by a hotel.

(ii) Paper purchased by the publisher.

(iii) Milk purchased by the households.

(iv) Purchase of machine and equipments required for installation in a factory.

17. What do you mean by leakage in income flow?

18. State the meaning of injection with the help of an example.

19. Define the concept of circular flow.

20. Define stock.

21. State whether the following are stock or flow :

(i) Income of the household

(ii) Consumption expenditure of household

22. Define ‘Nominal GNP’.

23. Define ‘Real GNP’.

24. Why is money received from sale of shares is not included in domestic factor income.


25. What aggregate do we get, when we add up the net value added of all producing sectors of aneconomy?

26. What is the impact of rise in price on calculation of National income?

27. What is meant by production of services for self consumption. Why are these not included in N.I.

28. How value added method solves the problem of double counting?

29. Why is change in Nation’s money supply a ‘Flow’?

30. Name the branch of economics which deals with national income, employment and general pricelevel.

31. Which of the two NVAFC and NVAMP is equal to sum of factor incomes.

1. What do you mean by net factor income from abroad? Explain its main components.

2. Distinguish between production for self consumption and production for exchange.

3. Explain the meaning of “Domestic Territory of a country”.

4. Explain the meaning of Net Indirect Tax. What is the effect of indirect taxes and subsidies onnational income?

5. What is the basis of distinction between intermediate and final goods?

6. Distinguish between GDPMP and NDPFC.

7. Distinguish between ‘Factor Income’ and ‘Transfer Income’.

8. Define National Disposable Income. How is it calculated?

9. Which of the following is factor income from abroad for an Indian resident and why?

(i) Interest income received by Indian residents on the bonds of companies operating inAmerica.

(ii) Remittances by Indians settled abroad to their families in India.

10. Classify the following into stock and flow.

(i) National Capital

(ii) Exports

(iii) Population of India

(iv) Investment

(v) Expenditure of food by household.


(vi) Deposits in saving account of Bank.

11. Explain circular flow of income in two sector model economy.

12. State precautions that should be kept in mind while estimating national income by production method.

13. What is meant by a normal resident? State which of the followings are treated as normal residentof India.

(a) An American working in the office of World Health Organisation located in India on temporarybasis for three months only.

(b) Indian working in U.S.A. embassy located in India.

14. What is meant by Gross National disposable income? How does it differ from national income?

15. Distinguish between net exports and net foreign income earned from abroad.

16. Show how the sum of next value added at factor cost is equal to sum of factor incomes.

17. Under what circumstances Real Gross Domestic product is less than monetary gross domesticproduct?

18. Why do we include the imputed value of goods but not services while estimating production forself consumption?

19. Under What circumstances National disposable income exceeds National Income?

20. What do you mean by Economic Welfare? Can welfare be promoted by increase in Nationalincome.

1. Explain the ‘problem of double-counting’ in estimation of national income with the help of anexample. Why should double counting be avoided. Explain one method of avoiding it.

2. Explain the concept of ‘Leakage’ and ‘Injection’ in the circular flow of income. How is circular flowof income affected if :

(i) Investments are greater than savings

(ii) Imports are more than exports.

3. Explain value added method of estimating National Income with the help of suitable example.

4. Explain the steps of measuring national income by income method.

5. Define operating surplus. Explain its components.

6. What precautions are necessary while measuring the final expenditure on gross domestic product.


7. How will you derive national income from personal income?

8. What is NFIA? Explain its components.

9. Will the following be included or not in the domestic factor income of India? Give reasons for youranswer.

(i) Wages paid to non resident Indian working in an Indian company in Singapore.

(ii) Salaries of non-residents working in Indian embassies.

(iii) Profit earned by a company in India owned by non residents.

10. Will the following be included in Gross National Product? Give reasons for your answer.

(i) Profit earned by a foreign company in India.

(ii) Salary paid to Americans working in Indian Embassy in America.

(iii) Purchase of new shares of a domestic firm.

11. Will the following be included in Domestic income or National income. Give reasons.

(i) Rent received by Indian resident on building rented out of foreign embassies in India

(ii) Purchase of books for children by parents

(iii) Scholarship received by a student.

12. Giving reasons, categorise following into transfer payment or factor payment.

(i) Financial help given to flood victims.

(ii) Old-age pension.

(iii) Imputed rent.

1. From the following data calculate value added by firm ‘A’ and firm ‘B’

Rs. in Lakh

(i) Closing stock of firm A 20

(ii) Closing stock of firm B 15

(iii) Opening stock of firm A 5

(iv) Opening stock of firm B 10

(v) Sales by firm A 300

(vi) Purchases by firm A from firm B 100


(vii) Purchases by firm B from firm A 80

(viii) Domestic sales by firm B 250

(ix) Import of raw material by firm A 50

(x) Export by firm B 30

[Ans. Value added by firm A – 165 LakhsValue added by firm B – 205 Lakhs]

2. In an imaginary economy, only the transactions show below take place. Calculate national productby value added method of A, B and C industries.

A sells for Rs. 300 to B and for Rs. 200 to C.

B sells for Rs. 100 to private final consumption and for Rs. 300 to C.

C sells for Rs. 1200 to private consumption

[Ans. : Value of National product = Rs. 1300]

3. Calculate net value added at factor cost from the following data.

Rs. in Lakh

(i) Sales 1,000

(ii) Used for self consumption 100

(iii) Decrease in stock 150

(iv) Purchase of raw material 500

(v) Electricity charges 30

(vi) Consumption of fixed capital 60

(vii) Excise duty 20

(viii) Income tax 10

[Ans. : Rs. 340 Lakh]

4. From the following data calculate net value added at factor cost and show that net value addedat factor cost is equal to the sum of factor incomes

Rs. in Lakh

(i) Purchase of raw material and other inputsfrom the domestic market 600

(ii) Increase in stock 200


(iii) Domestic sales 1,800

(iv) Import of raw material 100

(v) Exports 200

(vi) Depreciation of fixed capital 75

(vii) Salaries and wages 600

(viii) Interest payments 450

(ix) Rent 75

(x) Dividents 150

(xi) Undistributed profit 80

(xii) Corporate profit tax 20

(xiii) Indirect tax 50


5. Calculate private final consumption expenditure from the following data

Rs. in Lakh

(i) Private final consumption expenditure in domestic market 300

(ii) Direct purchase from abroad by resident household 20

(iii) Direct purchase in domestic market by non-resident household 50

(iv) Direct purchase in domestic market by extra territorial consumers 10

(v) Imputed rent of owner occupied houses 5

Hint : (i) + (ii) – (iii) – (iv) = Rs. 260 Lakh.

6. Calculate carts final consumption expenditure :

Rs. in Crores

(i) Compensation of employees 1,000

(ii) Bonus by Govt. 70

(iii) Sale of service of public 100

(iv) Intermediate consumption of Govt. 500

Hint. : (i) + (iv) – (iii) = Rs. 1400 crores


7. Calculate Gross National product at market price through expenditure method.

Rs. in Lakh

(i) Inventory investment 100

(ii) Exports 200

(iii) Net factor income from abroad. (–) 50

(iv) Personal consumption expenditure 3,500

(v) Gross residential construction investment 300

(vi) Govt. purchases of goods and services 1,000

(vii) Gross public investment 200

(viii) Gross business fixed investment 300

(ix) Imports 100


8. Calculate the following from given data.

(i) Net domestic income

(ii) Gross domestic income

(iii) Net national income

(iv) Net National product at market price

Rs. in Crores

(i) Indirect tax 9,000

(ii) Subsidies 1,800

(iii) Depreciation 1,700

(iv) Mixed income of self employed 28,000

(v) Operating surplus 10,000

(vi) Net factor income from abroad (–) 300

(vii) Compensation of employees 24,000

[Ans. : (i) Rs. 62,000 (ii) Rs. 63,700 (iii) Rs. 61,700 (iv) Rs. 68,900]


9. Calculate National Income from the following data :

Rs. in Crores

(i) National debt interest 2,000

(ii) Profit tax 3,000

(iii) Retained earnings 6.000

(iv) Personal consumption expenditure 40,000

(v) Personal savings 5.000

(vi) Savings of non-departmental enterprises 2,000

(vii) Net factor income earned from abroad 100

(viii) Current transfers from rest of the world 2,000

(ix) Current transfers from Govt. 500

(x) Income tax 3,000

(xi) Property and entrepreneurship income of thedepartmental enterprises of the Govt. 6,000

[Ans. : 68,600 Crores]

10. Calculate Gross National Disposable Income from the following data

Rs. in Lakh

(i) National income 2,000

(ii) Net current transfers from rest of the world 200

(iii) Consumption of fixed capital 100

(iv) Net factor income from abroad (–) 50

(v) Net indirect taxes 250

[Ans. : Rs. 2,550 crores]

11. From the following data, calculate

(a) Private income

(b) Personal disposable income

(c) Personal income


Rs. in Crores

(i) Income from property and entrepreneurship accruingto the Govt administrative departments 100

(ii) Savings of non-departmental enterprises 80

(iii) Factor income from NDP accruing to private sector 500

(iv) Corporation tax 30

(v) Savings of private corporate sector 65

(vi) Direct taxes paid by Households 20

(vii) Current transfers from Govt administrative departments 10

(viii) Current transfers from rest of the world 20

(ix) Factor income from abroad 5

(x) Operating surplus 150

(xi) Factor income to abroad 15

[Ans. (a) Rs. 520 crores (b) Rs. 425 crores (c) Rs. 405 crores.]

9. (i) No, because this income is earned outside the domestic economy.

(ii) Yes, because Indian embassy is treated.

(iii) Yes, because profits are earned by the company in domestic territory of India.

10. (i) No, because it is factor income to abroad.

(ii) No, because it is factor income to abroad.

(iii) No, because it does not lead to production.

11. (i) National income, as well as domestic income because it is factor income from abroad.

(ii) It is private final consumption expenditure, so it is included while calculating domesticincome as well as national income.

(iii) It is a transfer payment, so it will not be included in domestic income nor in nationalincome.

12. (i) Transfer payment – because it is not a productive activity.

(ii) Transfer payment – because it is not a productive activity.

(iii) Factor payment – because it is a productive activity.


1. Macro-economics deals with individuals whereas Macro economics deals with aggregates.

2. Net exports means the difference between exports and imports

Net exports = Exports – Imports.

3. Expenditure on intermediate consumption for production of goods and services.

4. Current transfers are those transfers which are paid from current income and are added in currentincome of the recipient.

5. That part of real national income which is received by each person on an average.

6. Current transfer from ROW plus Indirect taxes minus subsidies

National disposable income = NNPFC + indirect taxes – subsidies + Net current transfers receivedfrom rest of the world.

7. When NFIA is negative.

8. Normal resident of a country is that person or institution whose centre of economic interest liesin that country.

9. Economic territory means that geographical territory administered by a Govt. within which persons,goods and capital circulates freely.

10. Net factor income received from abroad is the difference between factor income received fromrest of the world by normal residents and factor income paid abroad.

11. (i) Income from property and entrepreneurship accruing to Govt. administrative departments.

(ii) Savings of non departmental enterprises.

12. (i) Corporate profit tax

(ii) Undistributed profits.

13. When subsidies are more than indirect taxes.

14. It is addition to stock of capital during a given period. In this consumption of fixed capital is alsoincluded.

15. It is decrease in the value of fixed capital due to normal wear and tear and foreseen absolescence.

16. (i) Intermediate goods.

(ii) Intermediate goods

(iii) Final good

(iv) Final good

17. ‘Leakage’ is that economic concept, which has negative impact on flow of income.


18. ‘Injection’ is that economic concept, which add to flow of income and goods e.g. investment,exports.

19. Circular flow is flow of goods and services or income in between various sectors of economy incircular flow.

20. Stock mean that economic variable which is measured at a particular point of time

21. (i) Flow

(ii) Stock

22. Gross Nominal GNP : It is the gross money value of National Product of current year valued atcurrent price.

23. Real GNP – It is the gross money value of (National product of current year valued at base yearprice.

24. It Is the financial transaction and does not have any impact on production.

25. NDP

26. Due to increase in price level, monetary value of N.I. will increase.

27. Those services which are produced for self consumption and not for sale in the market are treatedas production of services for self consumption. It is difficult to estimate their value therefore, theyare not included in N.I..

28. By deducting intermediate consumption from value of output, the problem of double counting canbe solved.

29. because it is measured over a period of time.

30. Macro economics.

31. NVAFC.


• Aggregate demand (AD) refers total demand for goods and services in the economy. AD representsthe total expenditure on goods and services in an economy.

• Main components of aggregate demand are :

(a) Household consumption expenditure. (C)

(b) Investment expenditure. (I)

(c) Govt. consumption expenditure. (G)

(d) Net exports (X – M).

In two sector economy AD = C + I.

• Aggregate supply (AS) is the total supply of goods and services in the economy. It is also thevalue of total output available in an economy during a given period of time. Aggregate supplyrepresents the national income of the country AS = Y.

• Major part of national income is spent on consumption and rest is saved, therefore, aggregatesupply is the sum of consumption expenditure and savings.

AS = C + S

• Equilibrium level of income is determined only at the point where AD = AS or S = I. But it canbe at full employment level or it can be at less than full employment.

• Full employment is a situation when all those who are able and willing to work at prevailing wagerate, get the opportunity to work or no one is unemployed.

• Full employment equilibrium is a situation where AD = AS at full employment level.

• Voluntary unemployment is a situation where person is able to work but not willing to work atcurrent wage rate.

• Involuntary unemployment is a situation where worker is able and willing to work at current wagerate but does not get work.

• Underemployment is a situation where AD < As at full employment level.

• Consumption (C) depends on the level of income. As income increases consumption also increasesbut rate of increase in income is more than rate of increase in consumption.

• Consumption function shows functional relationship between consumption and income C = f(Y).


Consumption Function

Average Propensityto consume (APC)

Marginal Propensity to consume (MPC)

Ratio of consumptionin income

Ratio of change inconsumption to change

in income

APC = CY MPC = C

Y

• Algebraic expression of consumption function is C C by

where C = consumption

C = Autonomous consumption (consumption at zero level income)

b = MPC

y = Income

• Saving function shows functional relationship between savings and income.

S = f(y)

Saving Function

Average Propensityto save (APS)

Marginal Propensity to save (MPS)

Ratio of savingsto income

Ratio of change insaving to change

in income

APC = SY MPC = S

YAlgebraic expression of saving function

S S sy

where S = savingsS = Fixed savings or savings when y = 0s = Marginal Propensity to savey = Income


• The sum of the APC and APS is always one.

• The sum of MPC and MPS is always one.

• Investment multiplier states that to a change in aggregate investment, national income changesin a multiple amount. Multiplier is symbolically denoted as

K = Y/I

• The points of relationship are

(a) MPC and multiplier are directly related. If MPC is more, multiplier is more and vice versa.MPC shows change in consumption as a result of change in income.

(b) If MPC = 1 (i.e., all income is spent on consumption expanditure and MPS = 0).

then 1k Infinity0

(c) MPS and multiplier are inversely related. If MPS is more multiplier is less and vice versa.

(d) If MPS = 1 then 1 1k = 1.MPS 1

It implies that national income will increase just once.

• Excess demand is when aggregate demand is more than aggregate supply at full employment level.

• Inflationary gap is the gap by which actual aggregate demand exceeds the level of aggregatedemand required to establish full employment. It measures the amount of excess of aggregatedemand.

• Deficient demand is when aggregate demand is less than aggregate supply at full employment level.

• Deflationary gap is the gap by which actual aggregate demand is less than the level of aggregatedemand required to establish full employment. It measures the amount of deficiency of aggregatedemand.

• Fiscal policy is the policy of public revenue and expenditure of the govt.

• Monetary policy is the central bank’s policy of money supply and availability of credit or creditcontrol policy.

AD = C + I AS = C + S

APC = C/Y MPC = C/Y

APS = S/Y MPS = S/Y

APC + APS = 1 MPC + MPS = 1

APC = 1 – APS MPC = 1 – MPS


APS = 1 – APC MPS = 1 – MPC

Y 1 1K or K or KI 1 MPC MPS

Y = K · I or 1Y I

MPS·

C C MPC y

S –S MPS y

1. Define aggregate demand.

2. Define following concepts.

(a) Voluntary unemployment.

(b) Involuntary unemployment.

(c) Savings.

(d) Consumptions.

3. Give the meaning of full employment equilibrium.

4. What do you mean by under employment equilibrium.

5. What is consumption function.

6. What do you mean by saving function.

7. What is the relation between marginal propensity to consume and marginal propensity to save.

8. What is the relation between average propensity to save and average propensity to consume.

9. When can marginal propensity to save be zero?

10. What can be the maximum value of marginal propensity to consume and why?

11. Find out the value of average propensity to consume when the value of average propensity tosave is zero.

12. If marginal propensity to same is 0.1 and increase in national income is Rs. 500 crore. Calculateincrease in investment.

13. By increase in investment of Rs. 100 crore national income of a country increases by Rs. 250crore. Find out the marginal propensity to consume.

14. In an economy investment increases by Rs. 600 crores. If marginal propensity to consume is 0.7.What is the total increase in national income?


15. What do you mean by investment multiplier?

16. How is investment multiplier related to marginal propensity to consume?

17. How can investment multiplier be calculated? State the formula.

18. What is the relation of investment multiplier with marginal propensity to consume and marginalpropensity to save?

19. When will the situation of deficient demand arise?

20. Can average propensity to consume be negative?

21. What can be the maximum value of multiplier?

22. What is the minimum value of investment multiplier?

*23. Why is the consumption curve is always parallel to aggregate demand curve?

*24. What is the effect of continuous increase in income on average propensity to consume?

*25. Due to what reason, the value of Investment multiplier varies from maximum to minimum?

*26. What will be the forms of income and expenditure when the average propensity to save is negative?

*27. What will be the effect on the level of income and employment if the investment decreases.

1. The consumption function is C = 20 + 0.9y. The value of income (in Rs.) is given as 100, 200,300, 400 and 500. Find out the consumption schedule and draw the consumption curve.

2. Derive the multiplier when MPS is

(i) 0.10 (ii) 0.20 (iii) 0.25

Using these multiplier values find the change in the equilibrium level of income that results fromRs. 20 crores decrease is investment.

3. If MPC is 0.9, what is the value of multiplier? How much investment is needed to increase nationalincome by Rs. 5000 crore? Calculate.

4. Given MPS equals to 0.25, what will be the increase in national income if investment increasesby Rs. 125 crores. Calculate.

5. An increase is investment by Rs. 400 crores leads to increase in National income by Rs. 1600crores. Calculate MPC.

6. Complete the given chart and determine the equilibrium level of income


AS C I S AD

100 125 25200 200 25300 275 25400 350 25500 425 25

7. Complete the following table :

Y C S I AD AS

0 60 — — 100 —— — –40 — — 100

200 — — — 260 —— — 0 — — 300

400 380 — — — —


Income Savings MPC APS

0 –2050 –10

100 0150 30200 60

9. Calculate APC, MPC, APS, MPS from the following data :

Income Y Consumption C APC MPC APS MPS

0 8001000 15002000 20003000 24004000 27005000 2900


MPC MPS K (multiplier)

0 — —— 1/2 —— — 33/4 — —

11. In a two sector economy, the savings and investment functions are

S = – 10 + 0.2Y

I = –3 + 0.1Y


What will be the equilibrium level of income?

12. Give the meaning of investment multiplier. How marginal propensity to consume influencesinvestment multiplier?

13. Explain the working of investment multiplier with the help of an example.

14. State the meaning and components of aggregate demand.

15. What do you mean by full employment equilibrium? Explain with the help of a diagram.

16. Explain with the help of a diagram the concept of under employment equilibrium.

17. What is the impact of excess demand on production, employment and price level? Show it withthe help of diagram?

18. How national income and level of employment will be affected when planned savings is less thanplanned investment?

19. Explain with the help of a diagram, how aggregate demand and aggregate supply determine theequilibrium level of income.

20. Distinguish between inflationary gap and deflationary gap.

21. Explain the role of ‘cash reverse ratio’ and ‘bank rate’ in reducing aggregate demand in aneconomy.

22. Explain two fiscal policy measures for increasing aggregate demand in an economy.

23. Why aggregate supply curve is 45° line passing through origin?

24. Why does the savings increase more than consumption due to continuous increase in income?

25. Explain with the help of diagram the concept of marginal efficiency of capital.

26. Increase in investment ultimately increases the level of income in an economy. Explain with thehelp of a numerical example.

1. Explain with the help of a diagram, the determination of equilibrium level of national income.

2. With the help of consumption schedule or curve, bring out meaning of break even point.

3. State the impact of excess demand on output, employment and prices.

4. Explain the concept of under employment equilibrium with the help of a diagram show on thesame diagram the additional investment required to reach the full employment equilibrium.

5. Explain the determination of equilibrium level of income with the help of savings and investmentapproach.


6. How quantitative and qualitative instruments of govt. monetary policy controls excess demand?

7. What do you mean by fiscal policy? How it helps in controlling deficient demand?

8. Distinguish between inflationary and deflationary gap with the help of diagram.

9. In an economy, C = 1000 + 0.5Y and I = 2000. Calculate the following

(i) Equilibrium level of income.

(ii) Savings at equilibrium level.

10. Explain the under employment equilibrium state two policy measures that the govt. can take tomake the economy reach full employment equilibrium.

11. Explain the working of investment multiplier with the help of numerical example. Explain the roleof MPC in this process.

12. In an economy, aggregate demand is less than aggregate supply. What measures should be takenby govt. to make this economy in equilibrium.

13. Why is it necessary that planned savings should be equal to planned investment at equilibriumlevel? Explain with the help of a diagram.

14. Draw a straight line consumption curve from it drive a saving curve explaining the process. Showon this diagram :

(a) The level of income at which APC equals to one.

(b) A level of income at which APS is negative.

15. What is the meaning of fiscal policy. How does the following affect aggregate demand in aneconomy :

(i) Changes in government expenditure

(ii) Changes in tax rates.

*16. Following statements are true or false explain with reason.

(a) AD may be equal to AS in under employment equilibrium.

(b) There may be unemployment in full employment equilibrium.

(c) In an economy, increase in savings affected adversely on income and employment.

*17. The savings function of an economy is S = –200 + 0.25Y. The economy is in equilibrium whenincome is equal to 2000. Calculate

(a) Investment expanditure at equilibrium level of income.

(b) Autonomous consumption


(c) Investment multiplier.

*18. What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when priceof final goods and the rate of interest are given.

19. Some statements are given below either they are true or false. Justify your answer :

(a) The value of MPC may be greater than one.

(b) There is positive relationship between. Investment multiplier and marginal propensity toconsume.

(c) Increase in bank rate is an effective measure to control the excess demand.

(d) At the zero level of income, the savings are negative.

1. Aggregate demand refers to total demand for goods and services in the economy.

2. (i) Voluntary unemployment is a situation where worker is able to work but not willing to workat prevailing wage rate.

(ii) Involuntary unemployment is a situation where worker is able and willing to work atprevailing wage rate but does not get work.

(iii) That part of income which is not spent on consumption is savings.

(iv) That part of income which is spent on consumption of goods and services to fulfill humanrequirements.

3. Full employment equilibrium is a situation where AD = AS at full employment level.

4. Under employment equilibrium is at the point where AD = AS but AD is less than AS at fullemployment level.

5. Consumption function is the functional relationship between consumption and income.

6. Saving function shows the functional relationship between savings and income.

7. There is inverse relationship between MPC and MPS because sum of MPC and MPS is one.MPC + MPS = 1.

8. Sum of APC and APS is always equal to one.

9. When MPC = 1.

10. One because MPS = 0.

11. One.

12. Increase in investment is 50 crore.

13. MPC = 0.75.


14. Increase in national income is 2000 crore.

15. Investment multiplier measures the impact of change in investment on income.

16. 1K1 MPC

17. K can be calculated by using any formula from :

1 1 YK .MPS 1 MPC I

18. 1 1K , K .1 MPC MPS

19. When AD is less then AS at full employment.

20. Yes, When consumption is more than income.

21. Maximum value of multiplier can be infinity.

22. 1

23. AD = C + I and I is considered as constant.

24. APC decreases.

25. Due to change in MPC.

26. Expanditure is more than income

27. Income and employment both decrease.


Money : Money may be defined as anything which is generally acceptable as a medium of exchangeand does the function of ‘unit of account’ and ‘measure of value.’

Barter Exchange : It is a system of exchange in which transactions are made by exchange ofgoods. It was in practice before the invention of money.

Supply of Money : total stock of money which are held by the public at any particular point of time.

Commercial Bank : Commercial bank is a financial institution who accepts deposits from thegeneral public and gives loans for investment.

Central Bank : The central bank is the apex institution of monetary and banking system of a country.

Factors Affecting Money Supply : Monetary policy of central bank, fiscal policy of Govt. capacityof credit creation and policy of commercial banks.

Difficulties involved in the Barter Exchange :

1. Absence of a common unit.

2. The lack of double coincidence of wants.

3. Lacks any satisfactory units to engage in contracts involving future payments.

4. Does not provide for any method of storing generalised purchasing power.

Functions of Money

1. A unit of value 2. A medium of exchange

3. A standard of deferred payments. 4. A store of value.

M1

Measures of Money Supply

M2 M3

Currency held by publicDemand deposits in banksOther deposits in R.B.I.

Saving depositswith banks

Saving deposits withpost office

M1 M1 Time depositsof banks

M1 Total deposits with post office saving

organisation(except NSC)

123

1

2


Bank

Central Bank Commercial BankIs the apex institution of monetary

and banking system of accountIs a financial institution which acceptsdeposits from the general public and

give loans for investment

Functions of Central Banks

1. Currency Authority

2. Banker to govt.

3. Banker’s Bank and Supervisor.

4. Lender of last resort.

5. Custodian of foreign exchange.

6. Controller of money supply and credit.

Functions of Commercial Bank

(A ) A ccep t D e pos its (B ) A gen cy Fu nc tion s (C ) G ives Lo ans

1 . S av ing accou n t d epo s its2 . C u rren t accou n t d epo s its3 . F ixed /te rm dep os its4 . R e cu rr ing dep os its

1 . P u rchase an d sa le o f sha re and secu r ities2 . A c ts as a trus tee s an d exe cu to r3 . T ran s fe r o f fund s4 . C o llec t io n o f d iv id en ds , in te re s t o f sh a res

1 . C a sh c red it2 . D e m an d loa ns3 . O ve r d ra ft4 . D iscou n ting b ills o f excha nge5 . Inves tm en t o f fun ds .

1. What do you know about barter exchange system?

2. Write any two drawbacks of barter exchange system.

3, What is overdraft facility?

4. Define money.

5. What is meant by the term money supply?


6. State two primary functions of money.

7. Write any two factors affecting money supply.

8. What do you mean by credit creation?

9. What is credit multiplier?

10. What is rationing of credit?

11. What is meant by a cheque?

12. Write two functions of central bank.

13. Write any two agency functions of commercial banks.

14. What is cash reserve ratio (CRR )?

15. What is statutory liquidity ratio (SLR).

16. What is marginal requirement of loan.

17. What is demand deposits by banks.

18. State two component of credit control by central bank.

19. What is term deposit by banks?

20. What is liquidity trap?

1. What is barter system? Explain any two problems faced in barter system.

2. Explain any three agency functions of commercial banks.

3. State three points of difference b/w central bank and commercial bank.

4. Explain the function of money as “Unit of value.”

5. How does money solve the problem of double coincidence of wants?

6. Explain “store of value’ function of money.

7. Name any three types of deposits accounts of commercial banks and also state one of theirdistinguishing feature.

8. What are open market operations? What is their effect on availability of credit?

9. Explain any two functions of commercial banks.

10. Explain the ‘lender of last resort’ function of central bank.

11. What is meant by statutory liquidity ratio (SLR). State the effect of rise in rate of SLR on creationof credit.


12. Distinguish between SLR and CRR.

13. Bank money or credit money is the most important form of money in modern time, Explain.

14. State three attributes of good money.

15. Write difference between M1 and M4 measures of money supply.

16. Explain ‘Acceptance of deposits’ function of commercial bank.

17. State the role of Central Bank as a banker of the Government.

18. Describe ‘Medium of Exchange’ and ‘Standard of Differed Payment’ functions of money.

19. ‘Central bank is the banker’s bank and also the supervisor’. Explain.

20. State any four functions of money.

21. Explain ‘Currency Authority and controller of credit’ function of central bank.

22. Explain different measures of money supply adopted by R.B.I. in India.

23. Distinguish between overdraft facility and loan.

1. It is the system of exchange in which transactions are made by exchange of goods.

2. (i) Lack of double coincidence of wants.

(ii) Difficulty in measurement of value.

3. It is a facility to a (customer) depositor for overdrawing the amount more than the balance amountin his account.

4. Anything which is generally acceptable by the people as medium of exchange and also performsthe functions of ‘Store of Value’, measure of value.

5. Total stock of money which are held by the public at a particular point of time in an Economy.

6. (i) Medium of Exchange.

(ii) Measure of Value

7. (i) Monetary policy of Central Bank.

(ii) Credit creation capacity and policy of commercial banks.

8. Credit creation means power to expand demand deposits of Commercial Banks.

9. Credit multiplier measures, number of times deposits are multiplied as credit.

10. Rationing of credit is a system under which Central Bank of a country fixes the maximum limitof credit creation by Commercial Bank for certain purposes.


11. A cheque is an instrument that instructs the bank to transfer funds from cheque issuer’s accountto the receiver of the cheque.

12. (i) Currency Authority.

(ii) Controller of Money and Credit

13. (i) Transfer of funds

(ii) Collection of dividends, interest on shares.

14. Commercial banks are required under law to keep a certain percentage of their total deposits inthe Central Bank in the form of cash reserves. This is called CRR.

15. Every Commercial Bank is required to keep a fixed percentage (ratio) of its assets in cash calledliquidity ratio.

16. Marginal requirement of loan means the difference in percentage between the amount of the loanand market value of the security offered by the borrower against the loan.

17. Demand deposits are deposits which can be withdrawn from bank at any time by the accountholder.

18. (i) Bank Rate Policy

(ii) Open Market Operation.

19. Term deposits or time deposits are payable only after the expiry of the specified period.

20. If is a situation of very low rate of interest where people are ready to hold whatever stock ofmoney is supplied expecting interest rate to rise in future and bond prices to fall.


• Budget is a financial statement showing the expected receipts and expenditure of Govt. for thecoming fiscal or financial year. In India, fiscal year is from 1st April to 31st March.

• Main objectives of budget are :

(a) Reallocation of resources

(b) Re-distribution of income and wealth.

(c) Economic stability

(d) Management of public enterprises

• There are two components of budget :

(a) Revenue Budget

(b) Capital Budget

• Revenue Budget consists of revenue receipts of Govt. and expenditure met from such revenues.

• Capital budget consists of capital receipts and payments.

• Revenue receipts :

(i) Neither create liabilities for Govt.

(ii) Nor causes any reduction in assets.

• Revenue Expenditure :

(i) Neither creates assets.

(ii) Nor reduces liabilities

• Capital Receipts :

(i) Create liabilities, or

(ii) Reduces assets

• Capital Expenditure :

(i) Creates assets

(ii) Reduces liabilities


• Revenue deficit when total revenue expenditure exceeds total revenue receipts

Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts

• Implications of Revenue deficit are :

(i) It leads to repayment burden in future without investment

(ii) It shows wasteful expenditure of Govt. on administration

(iii) It increases the burden of taxes

• Fiscal deficit = When total expenditure exceeds total receipts excluding borrowings

Fiscal Deficit = Total Expenditure – Total Receipts (Excluding Borrowings)

• Implications of Fiscal Deficit are :

(i) It leads to inflationary pressure.

(ii) A country has to face debt trap.

(iii) It reduces future growth and development.

• Primary Deficit : By deducting interest payments from fiscal deficit we get primary deficit.

Primary Deficit = Fiscal Deficit – Interest Payments

• Implications of Primary Deficit are :

(i) It shows future burden originating from past policies.

(ii) A zero or low primary deficit means that interest commitment on earlier loans havecompelled the Govt. to borrow.

(iii) It indicates how much Govt. borrowing, is going to meet expenses other than interestpayments.

• Budgetary Deficit Total Expenditure exceeds total receipts

Budgetary Deficit = Total Expenditure – Total Receipts

• Deficit Budget Estimated expenditure exceeds estimated receipts.

Deficit Budget = Estimated Expenditure – Estimated Receipts

1. Define Budget.

2. Write the meaning of revenue budget.


3. What are revenue receipts?

4. Give two examples of tax receipts.

5. Give two examples of non-tax receipts.

6. What are capital receipts?

7. Give two examples of capital receipt?

8. Define revenue expenditure of the govt.

9. Define capital expenditure of the govt.

10. Define capital budget of the govt.

11. Write any one objective of Budget. Also explain it.

12. Define Revenue Deficit.

13. Define Fiscal Deficit.

14. Define Primary Deficit.

15. Define Budgetary deficit.

16. Define Deficit Budget.

17. Define direct taxes.

18. Give two examples of direct taxes.

19. Define indirect taxes.

20. Give two examples of indirect taxes.

21. What do you mean by a tax?

22. Define a surplus budget.

23. What do you mean by a balanced budget?

24. What do you mean by budget receipts or govt. receipts or budgetary receipts?

25. What do you mean by budget or budgetary expenditure?

26. In a govt. budget deficit is primary deficit is Rs. 10,000 crs. and interest payments are Rs. 8,000crs. How much is the fiscal deficit?

27. Define an unbalanced budget.

28. Why are tax receipt not capital receipts?

29. A govt budget shows primary deficit of Rs. 4400 crs. The revenue expenditure on interest paymentin Rs. 400 crs. How much is the fiscal deficit?


30. In a Govt. budget revenue deficit is Rs. 5,00,000 crs. and borrowing are Rs. 75,000 crs. How muchis the fiscal deficit?

31. Why is repayment of loan treated as capital expenditure?

32. Why govt. depends on the receipts which lead to increase in liabilities and reduce assets.

1. Write any three/four objectives of budget.

OR

Write any 3/4 points of importance of govt. budget.

OR

Why does the Govt. need Budget?

2. Write any three/four main sources of Govt. receipts.

3. Write any three points of difference between revenue receipts and capital receipts.

4. Write any three points of difference between revenue expenditure and capital expenditure.

5. Write the difference between budgetary deficit and fiscal deficit.

6. Write the difference between direct and indirect taxes.

7. What is revenue deficit? What are its implications?

8. What is fiscal deficit? What are its implications?

9. What is primary deficit? What are its implications?

10. Giving reasons, categorise the following into revenue and capital receipts :

(a) Recovery of loans

(b) Corporate tax

(c) Dividents on investment made by govt.

(d) Sale of public sector undertaking.

11. Giving reasons categorise the following into revenue expenditure and capital expenditure.

(a) Subsidies

(b) Grants given to State Govt.

(c) Repayment of loans.

(d) Construction of school buildings.

12. Write the main items of govt. expenditure or public expenditure.


13. What is the need for fiscal deficit to be minimum? What are its implications?

14. Is a balanced budget beneficial for a country like India?

1. What is fiscal deficit? How deficit can be financed. What are the various problems that arise dueto fiscal deficit?

2. Define revenue receipts and capital receipts. What are the various sources of these receipts.

3. What are the various objectives of Govt. budget? Explain the impacts of the budget on theeconomy.

4. What do you mean by deficit financing. Explain the sources of deficit financing?

1. Budget is a financial statement showing the expected receipts and expenditure of the Govt. forcoming fiscal or financial year.

2. Revenue Budget is a financial statement showing the expected revenue receipts and the expendituremet from such receipts (i.e., revenue expenditures).

3. Govt receipts which neither (i) create liabilities nor (ii) lead to reduction in assets are calledrevenue receipts.

4. Income tax, Sales tax or VAT.

5. Interest and dividents, license fees etc.

6. Govt. receipts which either (i) create liabilities or (ii) reduce assets are called capital receipts.

7. (i) Loans raised by the govt. from the public.

(ii) Borrowings by the govt. from RBI through the sale of treasury Bills.

8. An expenditure that neither (i) results in the creation of assets nor (ii) reduces liabilities of the govt.is treated as revenue expenditure.

9. An expenditure which either

(i) creates an asset or

(ii) reduces liabilities of the govt. is called capital expenditure.

10. Capital Budget is that part of govt. budget which consists of capital receipts of the govt. andcapital expenditure.

11. Reduction in income inequalities : The govt redistributes income and wealth to reduce inequalitiesby expenditures on social security, subsidy, public works etc.


12. When total revenue expenditure exceeds total revenue receipts, it is called Revenue Deficit.

13. When total expenditure exceeds total receipts (excluding borrowings), it is called fiscal deficit.

14. By deducting interest payments from fiscal deficit, we get primary deficit.

15. When total expenditure exceeds total receipts, it is called budgetary deficit.

16. When estimated expenditure exceeds estimated receipts, it is called deficit budget.

17. The taxes which are really paid by the person on whom they are imposed are called direct taxes.

18. Income tax, corporate tax, gift tax, house tax (any two).

19. Taxes which are imposed on one person but paid partly or wholly by another person are calledindirect taxes.

20. Excise duty, VAT.

21. A tax is a compulsory payment made by an individual, household or a firm to the govt. withoutreference to anything in return.

22. When govt. receipts are more than govt. expenditure in the budget, the budget is called a Surplusbudget.

23. A govt. budget is said to be a balanced in which govt. estimated receipts (revenue and capital)are equal to govt. estimated expenditure.

24. Budget or budgetary receipts refer to estimated receipts of the govt. from various sources duringa fiscal year.

25. Budgetary expenditure refers to the estimated expenditure to be incurred by the govt. underdifferent heads in a fiscal year.

26. Rs. 18,000 crores.

27. An unbalanced budget is that budget in which govt. estimated receipts and govt. estimatedexpenditure are not equal to each other.

28. Tax receipts are not capital receipts because it neither create liabilities nor reduce assets.

29. Fiscal Deficit = Primary Deficit + Interest Payments

= 4,400 crs. + 400 crs.

= 4,800 crs.

30. Rs. 75,000 crores.

31. Because it reduces government’s liability.

32. When govt.’s current income is not enough to meet total expenditure of the Govt. then Govt. iscompelled to rely on these receipts which create liabilities for the govt. and reduce its assets.


• The balance of payment is annual record of the transactions in goods, services and assetsbetween residents of a country with the rest of the world. There are two main accounts in balanceof payment :

(i) Current account.

(ii) Capital account.

• The current account records exports and imports of goods and services and transfer payments.

• The capital account records all international purchases and sales of assets such as money-stockbonds etc.

• A country that has a deficit in its current account must finance it by selling assets or by borrowingfrom abroad. Thus any current account deficit is of necessarily is to be financed by a net capitalinflow.

• Foreign Exchange refers to all currencies other than the domestic currency of a given country.

• The exchange rate is the price of one currency in terms of the other currency.

• The epitome of the fixed exchange rate system was the gold standard in which each participantcountry committed itself to convert freely its currency into gold at a fixed price.

• In a system of flexible exchange rate (also known as floating exchange rates), the exchange rateis determined by the forces of market demand and supply of foreign exchange.

• Sources of Demand for Foreign Exchange :

(a) To purchase goods and services from the rest of world.

(b) To purchase financial assets (i.e., to invest in bonds and equity shares) in a foreigncountry.

(c) To invest directly in shops, factories, buildings in foreign countries.

(d) To send gifts and grants to abroad.

(e) To speculate on the value of foreign currency.

(f) To undertake foreign tours.

• Sources of Supply of Foreign Exchange

(a) Foreigners purchasing domestic country’s goods and services.

(b) Foreign investment in the domestic country or economy.

(c) Remittances by non-residents living abroad.


(d) Flow of foreign exchange due to speculative purchases by N.R.I.

(e) Exports of goods and services.

• In currency depreciation, there is a fall in the value of domestic currency in term of foreigncurrency. In currency appreciation, there is a rise in the value of domestic currency in term offoreign currency.

• In currency appreciation, there is a rise in the value of domestic currency in terms of foreigncurrency.

• Equilibrium flexible exchange rate is determined at a level where demand for and supply of foreignexchange are equal to each other.

• Merits of Flexible Exchange Rate :

(i) No need to hold foreign exchange reserves

(ii) Leads to automatic adjustment in the ‘balance of payments’.

(iii) To increase the efficiency in the economy by achieving optimum resources allocation.

(iv) To remove obstacles in the transfer of capital and trade.

• Demerits of Flexible Exchange Rate :

(i) Fluctuations in future exchange rate.

(ii) Encourages speculation.

(iii) Discourages international trade and investment.

• Merits of fixed exchange rate :

(i) Stability in exchange rate

(ii) Promotes capital movement and international trade.

(iii) No scope for speculation.

• Demerits of fixed exchange rate

(i) Need to hold foreign exchange reserves.

(ii) No automatic adjustment in the ‘Balance of payments.’

(iii) Enhances dependence on external sources.

• Managed floating system is a system in which the central bank allows the exchange rate to bedetermined by market forces but intervenes at times to influence the rate.


1. What do you mean by balanced of trade?

2. What is meant by balance of payment?

3. Which two transactions determine balance of trade?

4. When is there a deficit in the balance of trade?

5. The balance of trade show a deficit of Rs. 5,000 crs. and the value of imports is Rs. 9,000 crs.What is the value of exports?

6. The balance of trade shows a deficit of Rs. 300 crs. The value of exports is Rs. 500 crs. Whatis the value of imports?

7. A country’s balanced of trade is Rs. 100 crs. and the value of exports is Rs. 175 crs. Find outthe value of imports of goods.

8. What will balance of trade show a surplus.

9. What is balance of visible items in balance of payment accounts called?

10. What does balance of payment account record?

11. List two items included in the balance of trade account.

12. List two items of the capital account of balance of payments.

13. What is the difference between the value of exports of goods and imports of good called?

14. What do you mean by visible items?

15. Give two examples of visible items?

16. What is meant by invisible items?

17. Give two examples of invisible items?

18. Name two main accounts of Balance of Payments.

19. What is meant by unilateral (unequited) transfers?

20. Give any two examples of unilateral transfers?

21. What is meant by autonomous transactions?

22. What do you mean by current account of Balance of Payment?

23. What is meant by capital account of balance of payments?

24. Which of the following is a visible item and which is an invisible item.

(a) Export of Jute product

(b) Software service exports.


25. Define foreign Exchange?

26. What is meant by Foreign Exchange Rate?

27. What do you mean by Fixed Exchange Rate?

28. Define Flexible Exchange rate?

29. Name the forces that determine flexible exchange rate.

30. What is the source of information of economic stability in the economy?

31. State two merits of Flexible Exchange Rate.

32. State two demerits of Flexible Exchange Rate.

33. State two merits of fixed exchange rate.

34. State two demerits of fixed exchange rate.

35. What is the slope of demand curve of foreign exchange like?

36. What is slope of supply curve of Foreign Exchange?

37. What is meant by foreign Exchange Market?

38. Name any two functions of Foreign Exchange Market?

39. Why does demand curve of foreign exchange slope downward to the right?

40. Why does supply curve of foreign exchange slope upward to the right?

41. Why does a rise in foreign exchange rate cause a fall in its demand?

42. Why does a rise in foreign exchange rate cause a rise in the supply of foreign exchange?

43. What will be the effect on exports, if foreign exchange rate increases?

44. What will be the effect on imports if foreign exchange rate increase?

45. What will be the effect on exports if foreign exchange rate decreases?

46. What will be the effect on imports if foreign exchange rate decreases?

47. What does a change from $4 = £ 1 to $2 = £ 1 show?

48. In which circumstances, the devaluation of currency will be in favour of economy?

49. In which circumstances the appreciation of currency will be non favourable for the economy?

50. Under which circumstances, the purchasing power of foreign currency increases in comparisonto domestic currency?

51. With the help of which item BOP gets balanced?

52. Does BOP always remain balanced?


53. What is the basis of categorization of transactions from the rest of the world into current accountand capital account of BOP?

54. What do you mean by Managed floating system?

1. Write any three points of different between BOT and BOP.

2. Distinguish between current account and capital account of BOP.

3. How can deficit in BOP be financed?

4. Distinguish between positive balance of trade and negative balance of trade?

5. Explain major causes for disequilibrium in the Balance of Payment.

6. Give difference between the autonomous and accommodating items included in BOP.

7. Differentiate between visible trade and invisible trade.

8. Give three reasons why people desire to have foreign exchange.

9. Give any three/four sources of supply of foreign exchange.

10. Explain the relationship between foreign exchange rate and demand for it.

11. Explain the relationship between foreign exchange rate and supply of foreign exchange.

12. Explain the terms ‘appreciation and depreciation of currency.’

13. Distinguish between foreign exchange and foreign exchange rate.

14. Higher the foreign exchange rate, lower the demand fore foreign exchange. Explain why?

15. Lower the foreign exchange rate, higher the demand for foreign exchange. Explain why?

16. Explain the functions of foreign exchange market.

17. Explain the merit and demerits of fixed exchange rate.

18. Explain the merits and demerits of flexible exchange rate.

19. How is flexible exchange rate determined in a free market economy? Explain with the help ofdiagram.

20. What is the impact of appreciation of currency on the demand for foreign exchange?

21. What is the impact of appreciation of currency on the supply of foreign exchange?

22. What is the impact of depreciation of currency on the demand for foreign exchange?

23. What is the impact of depreciation of currency on the supply of foreign exchange?


24. BOT may be favourable, unfavourable or in equilibrium but in accounting sence BOP is alwaysbalanced. Explain.

25. ‘Should a current account deficit be a cause for alarm?’ Explain.

1. It is the difference between monetary value of exports and imports of material goods or visibleitems.

2. A balanced of payment is a statement of double entry system of all economic transactions betweenresidents of a country and the residents of foreign countries during a given period of time.

3. Exports and imports of visible items like wheat, rice, sugar etc.

4. When the value of imports is more than value of exports.

5. Rs. 400 crores

6. Rs. 800 crores.

7. Rs. 75 crores.

8. When value of exports is more than value of imports during a year.

9. Balance of trade.

10. BOP is the difference between a nation’s total payments to foreign countries and its total receiptsfrom them.

11. Import and export of all visible items.

12. (i) Foreign investment.

(ii) Loans

13. Balance of trade.

14. The visible items are all those types of physical goods which are exported and imported.

15. Watches, petrol, clothes, refrigerators etc.

16. Invisible items are all those types of services which are exported or imported.

17. Shipping, banking, insurance, tourism etc.

18. (i) Current Account

(ii) Capital Account

19. Gifts, remittances, indemnities etc. from foreigners are called unrequited or unilateral transfersbecause residents of a country receive ‘for free’. Nothing has to be paid for unilateral transfers.

20. (i) Gifts and


(ii) Grants from non-residents.

21. Autonomous items refer to international economic transactions in the current and capital accountthat are undertaken for profit.

22. The current account of BOP records exports and imports of goods and services and transferpayments.

23. The capital account of BOP records all international purchase and sales of assets such as moneystock bonds etc.

24. (a) Visible items (b) Invisible item.

25. Foreign exchange refers to all currencies other than the domestic currency of a given country.

26. The price of one currency in term of the other is known as the foreign exchange rate.

27. Fixed exchange rate is the rate which is officially fixed in terms of fold or any other currency bythe govt. or adjusted only frequently.

28. Flexible exchange rate is determined by demand for and supply fo a given currency in foreignexchange market.

29. (i) Market demand for foreign exchange

(ii) Market supply of foreign exchange.

30. Foreign Exchange Rate

31. (i) No need to hold foreign exchange reserve.

(ii) Optimum resource allocation.

32. (i) Fluctuations in figure exchange rate.

(ii) Encourages speculation.

33. ((i) Stability in Exchange rate.

(ii) No scope for speculation.

34. (i) Need to hold foreign exchange reserves.

(ii) No automatic adjustment in the ‘Balance of Payments’.

35. Negative slope.

36. Positive slope.

37. Foreign exchange market is a process in which foreign currencies are bought and sold.

38. (i) International transfer of foreign currency

(ii) Provides credit for foreign trade.

40. Because there is inverse relationship between foreign exchange rate and demand for foreignexchange.


41. Because foreign goods have become costlier for Indian so import will decrease.

42. Because Indian goods have become cheaper for foreigners so export will increase.

43. Exports will increase.

44. Imports will decrease.

45. Exports will decrease.

46. Imports will increases.

47. It shows appreciation of $(dollar) and depreciation of £(pound).

48. When we adopt the policy of Export Promotions.

49. When we adopt the policy of Import Substitution.

50. Capital account records capital transfer such as loans and investment between one country andthe rest of the world which causes a change in the asset or liability status of the residents of acountry or its government.

51. With the help of international loans.

52. They may be disequilibrium in BOP but in according sense, it is always balanced.

53. On the basis of change in assets and liabilities of the govt. in relation to other countries.

54. Managed floating system is a system in which the central bank allows the exclude rate to bedetermined by the market rate but investment at lines intervene at times to influence for rate.



3 100

General Instructions :(i) All questions in both the sections are compulsory.(ii) Marks for questions are indicated against each.(iii) Questions Nos. 1 to 5 and 17 to 21 are very short answer questions carrying one mark each. They

are required to be answered in one sentence each.(iv) Questions Nos. 6 to 10 and 22 to 26 are short answer questions carrying three marks each.

Answer to them should not normally exceed 60 words each.(v) Question Nos. 11 to 13 and 27 to 29 are also short answer questions carrying four marks each.

Answer to them should not normally exceed 70 words each.(vi) Question Nos. 14 to 16 and 30 to 32 are long answer questions carrying six marks each. Answer

to them should not normally exceed 100 words each.(vii) Answer should be brief and to the point and the above word limit be adhered to as far as possible.

1. Why does the total utility increase at a diminishing rate as a consumer consumes more units ofa commodity.

2. what is market supply?

3. Give two examples of variable cost.

4. At what rate marginal revenue falls, when price of a good falls?

5. In which type of market, a firms demand curve is less than unit elastic?

6. What will be change in total utility when

(i) Marginal utility is above the ‘X’ axis.

(ii) Marginal utility is touching ‘X’ axis.

7. State three features of Oligopoly

OR

Distinguish between monopoly and oligopoly market.


8. Following statement are True or False. Give reasons.

(i) In market period increase in supply of a commodity is not possible.

(ii) Possibility of price rise in future increases the supply in present market.

9. State three conditions of producers equilibrium in TR and TC approach.

10. Explain the relationship between Marginal cost and Average cost.

11. Distinguish between Market Economy and centrally planned economy.

OR

Distinguish between positive economics and normative economics.

12. How the price of a commodity changes when :

(i) Demand of a complementary good decrease.

(ii) Demand of a substitute good increases.

13. Price elasticity of demand of a commodity is –2. When price changes, quantity demanded reducesfrom 400 units to 300 units. Calculate change in price when existing per unit price is Rs. 40.

14. What is the effect on equilibrium price and equilibrium quantity when :

(i) proportionate increase in demand is more than increase in supply.

(ii) Proportionate increase in demand is less than increase in supply.

(iii) Proportionate increase in demand is equal to increase in supply.

15. Explain the implications of the following features of perfect competition.

(i) Homogeneous products.

(ii) Freedom of entry and exit to firms.

(iii) Very large numbers of buyers and sellers.

16. What are the different phases in the behaviour of total product in the law of variable proportions?Use diagram.

* The following question is for the Blind candidates only in lieu of Q. no. 16.

What are the different phases in the behaviour of total product in the law of variable proportions?Use schedule.

17. Define involuntary unemployment?

18. Value of multiplier is 5. Calculate the value of marginal propensity of consume.


19. What do you mean by fiscal deficit?

20. A country’s balance of trade is Rs. 110 crs. and the value of exports is Rs. 185 crs. Calculate thevalue of imports.

21. Give meaning of Money.

22. A sells to B for Rs. 400 and to C for Rs. 200. Consumer’ divides this expenditure equally betweenB and C goods. National product is Rs. 1,000. What is value added by B and C.

23. How does money eliminate the double coincidence of wants problem?

24. Categorise the following into revenue expenditure and capital expenditure. Give Reasons.

(i) Education and health services.

(ii) Repayment of loans.

(iii) Subsidy.

25. What is Balance of Payment Account? Where are ‘borrowings from abroad’ recorded in it andwhy?

26. What do you mean by Foreign Exchange Rate? Write any two causes for the demand for foreignexchange.

27. Define Primary deficit? State any three implications for primary deficit.

28. Explain the ‘Banker’s bond and supervisor’ function of the central bank.

OR

Explain the “Acceptance of Deposits” function of commercial banks.

29. What is meant by ‘investment multiplier? Explain the relationship between marginal propensity toconsume and multiplier.

OR

Define deflationary gap. Explain briefly any two measures of fiscal policy to correct it.

30. On the basis of the following information calculate (i) Private Income; (ii) Personal Income;(iii) Personal Disposable Income.

Rs. in Crores

(i) Household Expenditure 1,000

(ii) Savings 235

(iii) Direct Taxes 40

(iv) Corporate profit tax 15

(v) National debt interest 10


(vi) Savings of Private Corporate sector 25

(vii) Income from property and entrepreneurship 35

(viii) Current transfer’s from govt. 30

(ix) Savings of Non-departmental public enterprises 5

(x) Current transfers from Rest of the world 15

(xi) NFIA (–) 10

OR

From the following data-calculate :

(a) GDPMP by Income Method.

(b) NNPFC (National Income) by Expenditure Method.

Rs. in Crores

(i) Compensation of employees 13,000

(ii) Indirect taxes 3,700

(iii) Gross Domestic Capital formation 7,300

(iv) Interest 1,000

(v) Rent 1,500

(vi) Profit 2,500

(vii) Govt. final consumption expenditure 3,400

(viii) Mixed Income of self employed persons 16,000

(ix) Change in stock 1,000

(x) Imports of goods and services 1,800

(xi) Export of goods and services 1,700

(xii) Private final consumption expenditure 29,000

(xiii) Subsidies 300

(xiv) Net factor Income from Abroad (–) 250

(xv) Net Domestic capital formation 2,800

31. Will following included in Domestic income or Not, give reasons.

(i) German embassy situated in India paid rent to Indian Resident.


(ii) Income from sale of share of a new company.

(iii) The profit earned by an Indian bank situated in Singapore.

32. Explain with the help of a diagram and using savings = Investment’ approach the determinationof equilibrium of output and income level in an economy.


1. Law of diminishing marginal utility.

2. Market supply of a commodity is the total of various quantities offered for sale by all the individualfirms in the market at given price during a given period of time.

3. Cost of raw material, fuel.

4. Twice the rate of Average Revenue.

5. Monopoly.

6. (i) Total utility increases.

(ii) TU is maximum.

(iii) TU starts falling

7. (i) Few firms.

(ii) Mutual dependence of firms.

(iii) Barriers to the entry of firms.

OR

Basis Monopoly Oligopoly

Number of Sellers and Buyers One seller but large numbers of buyers Few sellers, but large number of buyersNature of Product Homogenous or differentiated Homogenous or differentiated.Price Not uniform because of price discrimination Indetermined.

8. (i) True, because market period is very short period in which factors of production can notbe changed and supply is perfectly inelastic.

(ii) False, because profit falls.

9. (i) Total revenue exceeds total cost by maximum amount.

(ii) Profit falls as more output is produced.

(iii) The tangent on TR and TC curve should be parallel.

10. (i) When AC falls, MC is less than AC

(ii) When AC is constant, MC is equal to AC

(iii) When AC rises, MC is more than AC.


11.Features Market Economy Centrally Planner Economy

1. Ownership of property Private Ownership Public Ownership2. Freedom of enterprise Exists No freedom3. Motive of production Profit motive social welfare.

OR

Positive Economics Normative Economics

1. It expresses what is It expresses what should be.2. It is based on cause and effect of facts. It is based on ethics3. It deals with actual or realistic situations It deals with idealistic situations.

12. (i) If there is increase in the price of complementary good, then the demand of commoditydecrease for example : price of petrol increases demand of car decreases.

(ii) Increase in price of substitute good takes place when the price of that commodity increases.For example when the price of tea increases the demand of coffee increases.

13. P QEd Ed 2.Q P

P = 40 Q = 400

Q1 = 300

P = ? Q = 100

40 100–2400 P

–2P = – 10

10P2

P = +5

P + P

40 + 5 = 45.

2. (A) The equilibrium price rises and equilibrium demand and supply also increases.


D 1

D 1

S 1

SD

S S 1 D

E 1

E

P 1

PPric

e

O XQ uantity dem anded /supp lied

Y

(B) The equilibrium price falls. While equilibrium demand and supply increases.

D1D

P1

P

S1

S

D1

D

E1

E

S1

S

Y

XQuantity demanded/suppliedQ

Pric

e

(C) The equilibrium price remains the same while equilibrium demand and supply increases.

YD 1

D

S 1

S

P E 1E

S 1

S D 1D

Q uantity dem anded/supplied

Pric

e

X

15. (i) All firms have to charge the same price for the product; otherwise, no one will buy fromthe firm selling at a higher price.

(ii) Each firm earns just normal profit i.e., minimum profit which is necessary to carry onbusiness.


(iii) The share of each seller in total market supply is so small that no single seller caninfluence the price. Hence, it has no option but to sell the product at the same price given(determined) by the industry. It is because of this position that each firm is said to be pricetaker in perfect competition.

16.

M P is M axim um

TP is M axim um and M P = 0

TP

P hase I P hase II P hase IIIQ units of variable in inputs

X

Y

TP

X

Y

MP

un its of variable in inputs

M

Q

The three phases of the law –

Phase I : TP increases at increasing rate. So in this phase MP increases.

Phase II : TP increase at decreasing rate, it means MP starts falling but remain positive.

Phase III : TP starts falling. MP become negative.


The Law of Variable Proportions

Variable Input (units) TP (units) MP (units) Phase

1 20 20 Phase I2 50 30

3 70 204 80 10 Phase II

5 60 – 20 Phase III

The three Phases of the Law :

Phase I : TP increases at increasing rate. So in this phase MP increases.

Phase II : TP increase at decreasing rate, it means MP starts falling but remain positive.

Phase III : TP starts falling. MP become negative.

17. A situation in which all able persons who are willing to work at the prevailing wage rate cannotget work.

18. 1K1 MPC

151 MPC

5 – 5 MPC = 1

5 – 1 = 5 MPC

5MPC = 4

4MPC .805

Ans.

19. Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowingduring a fiscal year.

20. BOT = x – m

Rs. 100 crs. = Rs. 185 crs. – m

M (imports) = Rs. 185 – Rs. 110

= Rs. 75 crs.

21. Anything which is generally acceptable by the people in exchange of goods and service or inrepayment of debts.


22.

Intermediate Product Value of output Value added

A sells to B – 400 600A sells to C – 200B 400 500 100C 200 500 300

Value added by B = 100 NI = 1,000Value added by C = 300.

23. The mediam of exchange function of money solves the problem of double coincidence of wantsinherent in the barter system of trade.

24. (i) It is revenue expenditure because it does not create any type of assets of the govt.

(ii) It is a capital expenditure because it reduces liabilities of the govt.

(iii) It is a revenue expenditure because it does not result in the creation of govt.’s assets.

25. A balance of payment account is a systematic record of all economic transactions betweenresidents of a country and rest of the world carried out in a specific period of time. Borrowing fromabroad is recorded in credit side of capital account because it increases liabilities of an economy.

26. The price of one currency in terms of the other is known as the Exchange Rate.

Reasons for demand for foreign Exchange

(a) To purchase goods and services from the rest of the world.

(b) To purchase financial assets in a foreign country.

27. Primary deficit is defined as a fiscal deficit minus interest payments on previous borrowings.

(i) It shows future burden from past policies of the govt.

(ii) A zero or low primary deficit means that interest commitment on earlier loans havecompelled the govt. to borrow.

(iii) It indicate’s how much govt. borrowing is going to meet expenses other than interestpayments.

28. (i) Bankers Bank : It is the custodian of commercial banks cash resources.

(ii) Central bank is lender of last resort.

(iii) It acts as a bank of central clearance settlements and transfers.

(iv) Supervisor : It makes rules regarding licensing, management, branch expansion, liquidationetc.

29. Investment multiplier shows a relationship between initial increment in investment and the resultingincrement in National Income. Multiplier (K) is the ratio of increase in National income (Y) dueto an increase in investment (I).


YK .I

Relationship of K with MPC :

Value of multiplier (K) depend on value of marginal propensity to consume and marginal propensityto save (MPS).

There is direct relationship between K and MPC. K varies directly with value of MPC.

Higher the value of MPC, higher will be value of multiplier. Lower the value of MPC, lower will bethe value of multiplier (K).

OR

Deflationary gap – It is the difference between the actual level of aggregate demand and the levelof aggregate demand required to establish the full employment equilibrium.

Main tools of fiscal policy :

(i) Expenditure Policy : Govt. should increase expenditure in public works.

(ii) Revenue Policy : Govt. should reduce taxes on personal incomes and taxes onexpenditures on buildings.

30. 1. Personal disposable income

PDI = 1 + 2 = 1000 + 235 = 1235.

2. Personal Income

= PDI + 3 = 1235 + 40 = 1275

3. Private Income

= PI + (IV) + (IV)

= 1275 + 25 + 15 = 1315

4. Income accurring to private sector = Pvt. Income – (v) – (x) – (viii) – (ix)

= 1315 – 10 – 15 – 30 – (–10) = 1270

NI = 1270 + (vii) + (ix)

NNPFC = 1270 + 35 + 5 = 1310.

Or

Income Method

GDPMP = (i) + (ii) + (iv) + (v) + (vi) + (viii) – (xiii) + (iii – xv)

= 1300 + 3700 + 1000 + 1500 + 2500 + 1600 – 300 + (7300 – 2800)

= 41,900


Expenditure Method

NNPFC = (vii) + (ix – x) + (xii) + (xiv) + (xv) – [(ii) + (xiii)]

= 3400 + (1700 – 1800) + 2900 + (–2500) + 2800 – (3700 + 300)

= 31,450.

31. (i) Not included because of German embassy is not a part of Indian domestic territory.

(ii) Not Included in N.I. – because it is the income from financial capital, it does not influencethe flow of Income and output.

(iii) Not included in N.I. because it is out of Indian domestic territory.

32. Equilibrium is determined where S = I. The equilibrium is at E and equilibrium level of Income isOM.

Y

O

S/IE

I

S

M XIncome/output

If S > I, inventories increase, output falls, income falls and so savings falls till S = I again (or ifS < I inventories fall, output rises, income rises and so savings rises till S = I again.



General Instructions :(i) All questions in both the sections are compulsory.(ii) Marks for questions are indicated against each.(iii) Question Nos. 1 to 5 and 17 to 21 are very short answer questions carrying one mark each. They

are required to be answered in one sentence each.(iv) Question Nos. 6 to 10 and 22 to 26 are short answer questions carrying three marks each.

Answer to them should not normally exceed 60 words each.(v) Question Nos. 11 to 13 and 27 to 29 are also short answer questions carrying four marks each.

Answer to them should not normally exceed 70 words each.(vi) Question Nos. 14 to 16 and 30 32 are long answer questions carrying six marks each. Answer

to them should not normally exceed 100 words each.(vii) Answer should be brief and to the point and the above word limit be adhered to as far as possible.

1. What do you mean by ‘Scarcity’? 1

2. As the price of a product rises by 5%, the total expenditure on it rises by 5%. What can you sayabout its price elasticity of demand. 1

3. If quantity demanded for a commodity X decreases as the household’s income increase. Whattype of good is X? 1

4. Name the period in which scale of production can not be altered. 1

5. In which type of market, the producer is only a price taker, not price maker? 1

6. Explain the difference between perfect competition and monopolistic competition on the basis ofthe followings : 3

(a) Control over price

(b) AR curve

(c) Elasticity of demand.

7. Explain the central problem, ‘How to produce’. 3

8. The coefficient of price elasticity of demand of a commodity is 5. When its price is Rs. 10 per unit,its quantity demanded is 40 units. If price falls to Rs. 5 per unit, how much will be its quantitydemanded? 3


9. What do you mean by an indifference curve? Explain the concept of indifference map with thehelp of diagram. 3

10. If TFC is Rs. 120, calculate AVC and ATC with the help of the following table :

output (units) MC (in Rs.)

1 40

2 30

3 26

11. Explain the difference between ‘Change in demand’ and ‘Change in quantity demanded. 4

12. What do you mean by ‘producer’s equilibrium? Explain the determination of producer’s equilibriumwith the help of TR and TC curves. 4

13. Explain the relationship between AR and MR with the help of a diagram when a firm is able tosell more quantity of output 4

(a) at the same price.

(b) only by lowering price.

14. Explain the law of demand with the help of a hypothetical schedule and diagram. 6

15. With the help of diagram, explain the effect on output when only one input is increased and allother inputs are held constant. 6

OR

What are the increasing returns of a factor? How do they originate? Explain.

16. Explain the situations when there is simultaneous change in demand and supply but price remainsconstant. (Use diagrams). 6

17. Give the meaning of barter exchange system? 1

18. What is the effect of rise in bank rate on money-supply? 1

19. When can MPS be zero? 1

20. What is under employment equilibrium? 1

21. What do you mean by the system of Managed Floating? 1

22. ‘Car’ purchased is always a final good. Do you agree? Give reasons for your answer. 3

23. Distinguish between current account and capital account of BOP.

24. Explain any three precautions to be taken while estimating national income by expenditure method. 3


25. Calculate NVA at factor cost from the following data : 3

in Rs.

(i) Sales 75,000

(ii) Intermediate consumption 30,000

(iii) Indirect taxes 7,500

(iv) Consumption of fixed capital 2,500

26. Write any three sources of supply of money of foreign exchange. 3

27. Why do the Govt. need budget? 3

28. What is under employment equilibrium? Explain this concept with the help of diagram. 4

29. Giving reasons categorise the following into revenue receipts and capital receipts 4

(a) Recovery of loans

(b) Corporate tax

(c) Dividend on investment made by Govt.

(d) Sale of public sector undertakings.

30. Calculate national income by (a) Expenditure method and (b) income method from the followingdata :– 6

Rs. in Crores

(i) Subsidies 5

(ii) Private final consumption expenditure 100

(iii) Net factor income from abroad – 10

(iv) Indirect tax 25

(v) Rent 5

(vi) Govt. final consumption expenditure 20

(vii) Net domestic fixed capital formation 30

(viii) Operating surplus 20

(ix) Wages and Salaries 20

(x) Net exports –5

(xi) Addition to stocks –5

(xii) Social security contribution by employers 10

(xiii) Mixed income 40


31. Explain diagrammatically the determination of equilibrium level of income and output using ADand AS approach. 6

32. Explain the following as an instrument of credit control by the central bank in case of inflationarygap in the economy. 6

(a) Margin requirements of loans.

(b) Cash reserve Ratio

(c) Bank rate.

OR

Explain broadly any four functions of commercial banks.

Date post:	06-Mar-2018
Category:	Documents
Upload:	phungtram
View:	224 times
Download:	4 times

R.D.S.K.V. No. 1 - Delhi Directorate of...

Documents