Economics

Reading Time: 94 minutes

2nd eco in eng – EVENING COLLEGE.pdf

Page – 1 of 106 :

VEVEYANG PULI COLLEGE OF ARSAND COMMER 1 CHAPTER – 1 MICRO ECONOMICS I ] Choose the correct answer:

1.

The scare resources of an economy have a ) Competing usages b ) Single usage c ) Unlimited usages d ) None of the above 2.

Which of the following is an example of micro economic study?

a.

National income b.

Consumer behavior c.

Unemployment d.

foreign trade 3.

Which of the following is a macroeconomic variable?

a.

Individual demand b.

Aggregate demand c.

Firms output d.

Price of a good 4.

Central problems of an economy includes a.

what to produce b.

How to c.

For whom to produce 5.

Traditionally, the subject matter of econom s has been studied under the following broad branches.

a.

micro & Macro economics ositive & Normative c.

Deductive & Inductive None of the above II Fill in the blanks ( each tion carries 1 mark ) 1.

Scarcity of resources gives raise to Problem of Choice 2.

In a centrally planned conomy all important decisions are made by govt 3.

In reality, all economies are Mixed economy III.

Match the llowing ( each question carries 1 mark ) a.

Private b.

Skill 3.

Centrally planned economy c.

Government d.

functioning of Mechanism 5.

Normative economics e.

Evaluate the Mechanism IV.

ONE Marks questions:

1.

Why does the problem of choice arise?

Ans:

Because of limited resources and unlimited wants.

2.

What is market economy?

Ans:

Economic activities under the controlled and operated by private sector.

Page – 2 of 106 :

2 3.

What do you mean by centrally planned economy?

Ans:

Economic activities under the controlled and operated by government sector.

4.

Give the meaning of micro economics.

Ans:

The study of economic behavior of individual agents such as, particular price, a commodity, a market, individual income, etc.

, 5.

What do you mean by positive economics?

Ans:

Positive economics explains the study of ‘ what is?

‘ & ‘ what was?

under the given set of circumstances.

6.

What is normative economics?

Ans:

Normative economics Explains ‘ what ought to be ‘ or what should be done or not done, which is right or wrongness in economic activities.

V.

TWO Marks questions:

1.

Mention the central problems of an econom Ans:

– What to Produce?

Full employment – How to Produce?

Efficient use of resources – For Whom to Produce?

2.

Distinguish between Micro and Macro Economics.

Features Macro Economics Scope Study Aggregate units Method Lumping method Equilibrium artial equilibrium General equilibrium para entrec, ME BLUEGĚ OF ARTS AIUD COMMERCE Wider scope 3.

between positive and normative economics.

Positive economics Normative economics It deals with what is?

& what was?

It deals with what ought to be?

It is descriptive It is prescriptive It is objective and fact based It is subjective and value based 4.

What do you mean by production possibility set?

Ans:

The production of all possible combination of goods and services that can be produced from given amount of resources and a given technological knowledge is called a production possibility set.

Page – 3 of 106 :

‘ 3 5.

What is opportunity cost?

Ans:

‘ It is a cost for next best alternative to sacrifice, in order to produce another good ‘ are known as opportunity cost.

6.

What is production possibility frontier?

Ans:

It is a graphical representation of the combination of two commodities that can be produced when the resource of the economy fully utilized.

It is also called PPC and transformation curve.

AMERCE VI.

FOUR Marks:

1.

Briefly explain the production possibility frontier.

Ans:

“ Production possibility frontier is a collection of all possible cot of goods & services produced, from given amount of resources and technological knowledge in an economy.

Ex:

Consider in an economy which can produce a cotton or wheat by using its resources, it can shown in table, Possibilities Cotton Wheat A 0 10 9 С 7 D 4 E 0 The above table shows, if all resou are used to produce cotton, the maximum amount of cotton produce 4 units, either wheat can be produced 10 units.

Apart from this combination B, C, D shows many other possibilities of production Diagram:

B D E Wheat O -PPC curve have a shape of Concave – PPC explains a graphical representation of combinations of 2 goods that can be produce, when resources of economy fully utilized.

2.

Briefly explain the central problem s of economy.

Ans:

There is 3 basic problems arise in an economy due to the scare resources as follows,

Page – 4 of 106 :

4 i ) What to produce?

The very first problem for any economy is to decides what goods are to be produce and in what quantity with limited resources.

There is a lot be decided, whether to produce consumer goods or capital goods, agriculture goods or investment good.

ii ) How to produce?

This problem relates to the choice of technique in process of production.

i.

e .

.

, -Labour intensive – use of more labour – Capital intensive – use of more machinery iii ) For whom to produce?

This is the problem refers to selection of category people who will ultimately consume the goods i.

e.

, the distribution of final goods and services.

It is the problem deciding whether to produce for low income group or high income group.

It depends on the level of distribution of income and wealth.

3.

Write a short note on a centrally planned economy.

Ans:

The economic activities operate and controlled by government are known as centrally planned economy.

Ex:

Russia, China, Cuba, North Korea, Vie Features:

i ) In this system all important decisions regarding economic activities are taken by government.

ii ) Government seeks to control what to produce and how to allocate the resources.

iii ) Main objective to attainin maximum social welfare.

iv ) Profit maximization a main motive in this economy.

v ) Government the goods preferably for poor people with less prices.

vi ) Government sol all economic problems.

PEL VENING DREAM LEGE OF MEES ARE COMMERCE 4.

Write a short note on market economy.

Ans:

If economic activities operate and controlled by private sector are known as market i ) Private individual own the factor of production ii ) In this economic system Profit is the sole motive iii ) There are no inferences of the government in the economic activities iv ) Private people solves the basic problems v ) The price of the goods determine by Market force.

vi ) Private sector fixed the high price to get more profit.

Page – 5 of 106 :

5 CHAPTER – 2 THE THEORY OF CONSUMER BEHAVIOUR I.

Choose the correct answer:

1.

Utility is, a ) Objective b ) subjective c ) Both a and b d ) None of the above 2.

The shape of an indifference curve is normally, a ) Convex to origin b ) concave to origin c ) Horizontal d ) vertical 3.

The consumption bundles that are available to the consumer a ) Color & shape b ) price & income c ) Income & quality d ) none of the above 4.

The equation of budget line is, a ) Px + Py = M b ) M = POXO + Px c ) PIX1 + P2X2 = M d ) Y = Mx + c 5.

The demand for these goods is increase as income increases, a ) Inferior goods c ) Giffen goods 6.

A vertical demand curve is, a ) Perfectly elastic c ) Unitary elastic Perfectly inelastic d ) none of the above SEWENINČEPU COLLEGE GIRARTS AND COMMERCE 7.

Ordinal utility analysis expresses utility in, a ) Numbers b ) Returns c ) Ranks d ) None of the above capacity of a commodity is Utility 2.

Two indifference curves never intersect each other.

3.

As income increases, the demand for normal goods shifts towards Right 4.

The demand for good moves in the opposite direction of its price.

5.

Method of adding two individual demand curve is called horizontal summation 6.

An equation XY = C gives us Rectangular hyperbola III ) Match the following:

1.

Demand curve 2.

Linear demand curve 1.

Downward sloping 2.

D ( p ) = a – b ( p )

Page – 6 of 106 :

6 additional units of a commodity is 3.

Unitary elasticity demand 3.

Ed = 1 4.

Complementary goods 4.

Pen & ink 5.

Indifference map 5.

A family of indifference curve IV.

ONE Marks questions:

1.

What is budget line?

Ans:

A graphical representation of all possible combinations of two goods which can be purchased with given income and prices called budget line.

2.

What do you mean by cardinal utility Analysis?

Ans:

If utility can be measured by numbers like, 1,2,3,4 are known as cardinal utility Analysis.

3.

Give the meaning of marginal utility?

Ans:

The utility derived from consumption of an called marginal utility.

4.

What is utility?

Ans:

Want satisfying power of goods and services is called utility.

5.

Expand MRS.

Ans:

Marginal Rate of Substitution.

6.

What do you mean by Indifferer nce curve?

Ans:

An indifference curve that represents all those combinations of two goods which give equal satisfaction to the consumer.

7.

What is Demand?

Ans:

The quantity goods that can be purchases in a market at a particular price, at a particular e is called demand.

V.

questions:

1.

What hat is MRS?

Ans:

When consumer increase consumption of Goods X, he need to sacrifice same quantity of goods Y, it’s called MRS.

2.

What are the difference between budget line and budget set?

Budget line Budget set A graphical representation of all A collection of all bundles available to a possible combinations of two goods consumer at the prevailing market price which can be purchased with given and given level of income is called income and prices called budget line.

budget set.

Page – 7 of 106 :

а Čed 7 3.

What do you mean by inferior goods?

Give examples:

Ans:

When consumer income increases demand for goods decreases and income decreases demand for goods decreases are known inferior goods.

Ex:

Ragi, navane, sajje, arka, etc.

, 4.

What is monotonic preference?

Ans:

A rational consumer always select higher level indifference curve to satisfaction is known as monotonic preference.

5.

Sate the law of demand.

Ans:

When other things are constant when price of goods goods decrease and fall in price leads to increase in demand.

AMERCE 6.

Mention two approaches which explain consumer Ans:

– Diminishing marginal utility Indifference curve equilibrium 7.

What do you mean by price elasticity of demand?

Ans:

A responsiveness change in price leads to responsiveness change in demand is known as price elasticity of demand.

Formula, ped = 49+ Ду 9 VI.

FOUR Marks:

1.

Write the difference between total utility and marginal utility.

SI.

SI.

MARGINAL UTILITY no no 1 The total satisi stion obtains from 1 The utility derived from the consumption of all possible consumption of an additional unit of a good.

2 increases as more of a 2 MU decreases as more of a good consumed 3 Ty express as, 3 MU express as, TU = U1 + U2 + U3 .

.

.

.

.

Un MU = TUN – TUn – 1 4 After total utility reach maximum 4 Marginal utility will be it does not rise, further, it starts continuously decline & become falling negative.

2.

Breiflyexplain the budget set with the help of a diagram?

Ans:

“ A collection of all bundles available to a consumer at prevailing market price at a given level of income is called budget set ”.

Page – 8 of 106 :

8 Ex:

let us assume, suppose a consumer has a limits of budget Rs.

20 to be spent on two commodities, is priced at Rs.

4 and Rs.

2 each, than consumer can determine various combinations which form of budget line, combinations A Goods x ( Rs.

4 ) 5 4 Amount spent ( 5×4 ) + ( 0x2 ) = 20 B с D 20 Goods y ( Rs.

2 ) 0 2 4 6 8 10 3 2 E F Diagram, 1 0 Y Goods y M / P2 PO.

COLLÈGE OF ARTS AND CÓRMUDA O X In above the ox axis access goods x, and oy axis access goods y, PQ represent budget Budget line can be expressed as, P1X1 + P2X2 SM 3.

Explain the indifference map with a diagram.

Ans:

“ A group or set of indifference curves for two goods showing different level of satisfactions is called a indifference map ”.

Page – 9 of 106 :

AROMIPLEMENTARY G 9 Diagram:

goods y goods y Goods xX -Above the diagram there are 4 indifference curves and higher level indifference curve shows higher level of satisfaction, so it can be denote as IC1 < 102 < IC3 < IC4.

-A rational consumer always prefer higher level indifference curve to get more satisfaction, is called monotonic preference.

4.

Write a difference between substitute goods and Si.

SUBSTITUTE GOODS GOODS no 1 The goods which have alternative goods to satisfying consumer wants are known as substitute goods It’s have competitive demand Price of substitute positive relation with Ex:

Coffee & tea, Diesel & Gas The goods which can be consumed together to satisfying consumer wants are known as complementary goods.

It is have joint demand.

Price and demand is have inverse relation for complementary goods Ex:

Pen & ink, Bike & petrol 2 3 2 3 4 4 5.

Mention the difference between normal goods and inferior goods with example?

SI.

RMAL GOODS SI.

INFERIOR GOODS no no rmal goods refer those goods 1 Inferior goods refer those goods demand increases with increases demand decreases with in in income.

increases in income.

Income effect is positive incase of 2 Income effect is negative incase normal goods of inferior goods 3 There is a direct relationship 3 There is a inverse relationship between price and demand for between price and demand for normal goods inferior goods 4 Ex:

vegetables, cloth, fruits, etc 4 Ex:

fagi, navane, sajje, arka, etc.

,

Page – 10 of 106 :

10 V ] SIX marks questions:

1.

Explain the law of diminishing marginal utility with the help of table and diagram?

Ans:

diminishing marginal utility concept introduced by H.

H.

Gossen and popularized by Alfred Marshall.

Meaning:

“ If a consumer increases a consumption of any particular good, keeping constant of other goods, the marginal utility derived by him from additional goods goes on decline ”.

It can be explained by table and diagram as follows, Units Total utility 1 12 2 18 6 3 22 4 4 24 2 5 24 0 6 22 -2 Above the table shows that the consumption of accessive unit of a good from 1st unit to 6th unit, the marginal utility will be decline and reach to negative.

( 12 units to -2 ).

Diagram:

Y ( highest utility ) APSEVENINGPU COLLEGE OHARTS AND COMMERČI TU Satiety X No.

of units MU Negative Utility -Above the diagram shoes MU tends to diminish as consumption increases and TU Increases only Diminishing rate.

Page – 11 of 106 :

11 -When TU is Constant ( 5th unit ) Mu Reach to Zero.

After consumption of 6th unit TU Will be Decline and MU Becomes to negative slope.

2.

Explain the features of indifference curves with help of Diagrams?

Ans:

i ) Indifference curve slopes from left right downward:

Goods y ( X1, X2 ) Ax2 ( x1 + AX1, X2 + Ax2 ) Indifference curve has negative slope from left to right as shown in the digram, it means, if a consumer wants more ‘ x ‘ goods, he have to sacrifice goods vice versa, ii ) Higher indifference curve give higher satisfaction:

Y Mango 10 IC3 IC2 IC1 3 Banana X As shown in the consumer gets maximum satisfaction at a point ‘ D ‘.

Because ICI < IC2 < iii ) Indifference curve cannot be intersecting each other:

a ) explained with the help of diagram.

APS EVENINO DU COLLEGESOF ARTSAND EDIMMERCE Mango e IC2 IC1 0 a banana In this diagram at point ‘ A ’ consumer gains satisfaction.

But two indifference curves give different level of satisfaction by 2 goods.

So it is Un realistic.

Page – 12 of 106 :

12 iv ) Indifference curve cannot touch either ‘ x ‘ axis or “ y ‘ Axis.

When IC touches any axis a consumer can buy only one goods to get satisfaction.

So it is not applicable to our law of MRS.

v ) Indifference curve cannot be Bulge.

MRS is not diminishing constantly.

It is Unrealistic.

3.

Explain the optimal choice consumer with the help Ans:

meaning:

In order to achieve consumer equilibrium, that max consumer utility, we have to combine indifference curve with budget line, in which consumer can purchase different combinations of two goods with prevailing price and certain amount of income.

Assumption:

i.

Price and income of consumer is constant.

ii.

Consumer is have aware about indifference map iii.

Higher level indifference give higher level of satisfaction.

iv.

Consumer is rational and tries to get maximum satisfaction.

Diagram, COLLRCE OF ARTS ANER COMMERCE ( x1, x2 ) APS EVENĮNG PALIO IC3 IC2 IC X Goods x In above the diagram ox axis shows goods ‘ x ’ and oy axis shows goods ‘ y ‘ and PQ line represents the budget line.

The diagram also shows there is a four indifference curve which lies as IC.

Page – 13 of 106 :

13 Point ‘ E ‘ is a only point which intersect indifference curve with budget line, this point is known as consumer equilibrium.

Any other point a, b, c, d cannot be consider an optimum point because its lie lower IC or higher IC compare to consumer budget line.

4.

Explain the movement along the demand curve and shift in demand curve with the help of two diagrams.

Ans:

Movement along the demand curve The change in quantity demand curve for a commodity its, only due to the in its prices is leads to movement along the demand curve either extension or contraction of demand curve.

When other things remain constant, a fall in price leads to increase in demand for goods, it is called expansion of demand curve.

Similarly, when other things remain constant, a se in price leads to decreasing demand.

it’s called contraction of demand curve.

Diagram:

( a ) Price APS BUTA NING PU COLLEGE OF ARTS AND COMMER X Shift in demand curve:

Except price change in other determinants of demand ( Income, Price related goods, Taste ) leads to shift in demand curve either Right or left form original demand

Page – 14 of 106 :

14 0 When price chamkir range in price leads to a responsiveness changes in Diagram:

YD D ( b ) Price D D quantity x Ex:

* Income changes:

i ) Normal goods:

When consumer income increases demand for normal goods increases, that situation demand curve shift to ‘ Right ‘.

ii ) Inferior goods:

When consumer income increases ad for inferior goods decreases, that situation demand curve shifts to ‘ Left * change in price related goods:

i ) Substitute goods:

When the price of substitute goods increases demand for another good increases, as it DD curve shift ii ) Complementary goods:

When the price of complementary goods increases demand for another good will be decrease, and has it DD curve shift to ‘ left ”.

5.

Give the meaning and formula of price elasticity of demand and explain the elasticity along with linear demand curve.

Ans:

A responsiveness demand of a goods is I a price elasticity demand.

Formula, ped = orPed = percentage change in demand percentage change in price ges the quantity demand will change.

There is a different points of demand of ela occurs as follows, elastic demand ( ped = 0 ) inelastic demand ( Ped = 0 ) Relatively elastic demand ( Ped > 1 ) Relatively inelastic demand ( Ped 1 ) Unitary elastic demand ( Ped = 1 )

Page – 15 of 106 :

15 Diagram, Y a / b led Price Ved < 1 Jedl = 1 a / 2b Jed > 1 Jedl = 0 a / 2a quantity x VIII ] Project oriented questions:

1.

A consumer wants to consume two goods the price of bananas is Rs.

4 and The price of mangoes is Rs.

5.

the consumer income is Rs.

a ) How much bananas she can consume if she spends entire income on that good?

Ans:

5 Bananas b ) How much mangoes can she consumes if she spends her entire income on that good?

Ans:

4 Mangoes c ) Is the slope of budget line down ward or upward?

Ans:

Downwards d ) Are the bundles on the budget line equal to the consumers income or not?

Ans:

Equal to consumer income e ) If you want to have more of bananas you have to give up mangoes.

Is it true?

Ans:

True APS EVENING PUCALLE CHOPARTS ALL COMMERCE *****

Page – 16 of 106 :

WENANCES COLLEGE OF ARTS AND COMMER ) 16 CHAPTER – 3 PRODUCTION AND COSTS I.

Choose the correct answer:

1.

The formula of production function is, a ) Q = f ( 1, k ) b ) q = d ( p ) c ) Y = f ( x ) d ) None of the above 2.

in the short run, a firm a ) Can change all inputs c ) Can keep the inputs fixed b ) cannot vary all inputs d ) none of the above 3.

The change in output per unit of change in the input is called, a ) Marginal input b ) Average input c ) Total input d ) Product 4.

Cobb – Douglass production function is, a ) = ( x, x ) b ) q = ( x1, x2 ) c ) q = ( xla, X2B ) d ) q = ( 0 ) 5.

TC = a ) TVC c ) TFC + TVC II.

Fill in the blanks:

1.

In the long run, all inputs 2.

Average product is define|

as the output per unit of variable input.

3.

Marginal product and product curves are U in shape.

4.

SMC curve cuts the AV curve at the minimum point of AVC curve from below.

5.

Isoquant product curve is the set of all possible combinations of the two inputs that yield same maximum possible level of output.

III.

Match the following:

1.

CRS 2.

SAC 3.

LRAC 4.

TFC + TVC 5.

SMC 1.

Constant returns to scale 2.

Short run average cost 3.

Long run average cost 4.

TC 5.

ATC / AQ IV.

One marks questions:

1.

What do you mean by total product?

Ans:

Total product is a total volume of goods and services produced with using all inputs in process of production.

TP = EMP

Page – 17 of 106 :

17 Ans:

” It is an all possible combinations of two inputs which is yield same levels of 2.

What is average product?

Ans:

Average product is per unit of production by variable factor.

AP = TP / L 3.

Give the meaning of marginal product?

Ans:

Marginal production is an additional goods production by employment of additional unit of factors in process of production.

MP = TPn – TPn – 1 4.

Write the meaning of cost of function of firm?

Ans:

It is a expenses incurred by a firm to produce goods and service.

Ex:

payment for factor of production:

rent, wages, interest, capital.

5.

What is total fixed cost?

Ans:

Fixed cost is a payment made for fixed factor in of production.

6.

What is average fixed cost?

Ans:

It is a per unit fixed cost of production.

V.

Two marks questions:

1.

What is Isoquant?

output are known as Isoquant productie 2.

Give the meaning of concept of short run and long run.

Ans:

i ) Short run:

In short run a firm cannot vary all inputs.

It means if a firm wants to produce more goods it can change variable factor remain constant of fixed inputs.

ÁRS EVENJINGPU.

COLLEGE OF ARTS AND COMMERCE ii ) Long run:

can vary all inputs.

It means there is no fixed factor, all inputs process of production.

3.

Mention the types of returns to scale.

Ans:

– Increasing returns to scale Constant returns to scale Diminishing returns to scale.

4.

Name the short run costs.

Ans:

– Total fixed cost Average fixed cost Total variable cost Total cost Average variable cost – Average cost

Page – 18 of 106 :

18 5.

What are long run costs?

Ans:

– Long run average cost [ LRAC ] -Long run marginal cost [ LRMC ] VI.

Four marks questions:

1.

Explain Isoquant with the help of the diagram.

Ans:

“ It is an all possible combinations of two inputs which is yield same levels of output are known as Isoquant production ”.

• This can be explains with help of diagram:

Y Capital K KI Li X LANG PUVULLEGE OFWARTS AND COMMERCE curve.

– In above the diagram ox axis represents lobour and oy axis represents the capital.

IQ1, IQ2, IQ3 shows – IQ2 curve gives higher of output than IQ1, IQ3.

– IQ2 represents different combinations of two inputs that yield same level of output.

2.

Explain TP, AP and MP with the help of examples.

Ex:

It indicates total volume of goods and services produced during a given period of time.

In short run it is the sum of MP.

TP = EMP x:

let us assume the total product produced by using 4 units of labour and capital are 70 units.

This is the sum of MP First, second, third, fourth, units production.

ii ) Average product:

Average product is per unit of production by variable factor.

AP = TP / L Ex:

If there is a total production is 70 by using 4 units of factors, average product 70 ion can be calculate as follows, AP = = 17.

5 4

Page – 19 of 106 :

19 iii ) Marginal product:

Marginal production is an additional goods production by employment of additional unit of factors in process of production.

MP = TPn – TPn – 1 Ex:

If in the total products produce 70units with using 4 units of labour and capital and 75 units with using 5 units of capital and labour.

The MP can be calculated as follows, MP = 75 – 75 = 5 3.

Write a brief note on returns to scale.

Ans:

The law of returns to scale explains the relationship between all physical inputs and output of the firm in long run.

In the long run a be varying all the inputs to increase his production.

• Stages of Returns to scale:

i ) Increasing returns to scale:

The output increases in greater proportion than the IRS.

Ex:

f ( tx 1, tx2 ) > t.

f ( x1, x2 ) in inputs is known as ii ) Constant returns to scale:

When the given output is increases same of proportion as it increases in given inputs are known as CRS.

Ex:

f ( tx1, tx = t.

f ( x1, x2 ) BALI NCRÚ COSLEGE OF ARTS AND CÒMMERCE iii ) Diminishing returns to scale.

When the output increases in smaller proportion as it increases in given inputs are known as DRS.

Ex:

f ( tx1, < t.

f ( x1, x2 ) 4.

Explain long rung Ans:

In long run all factors are variable.

Hence, there is no TFC and TVC in the long run.

So, here we includes the long run costs are LAC and LRMC [ long run average cost & Lo run marginal cost ] – LAC curve derive U shaped because of operating law of returns to scale in long run period of time.

-LMC curve cuts LAC curve its minimum point.

– Both LAC and LMC Curve is initially decreases and later increases and again their center would be more flat.

Diagram:

Page – 20 of 106 :

20 LRMC Cost LRAC M 91 X output LAC and LMC decreases initially due to the operating of IRS.

In the middle it flat due to the operation of CRS.

And finally LAC and LMC increases due to the operation of DRS.

5.

The following table gives the TP schedule of labour.

Find the corresponding average product and marginal product schedules.

Labour ТР MP AP 0 0 0 1 1 1 2 35 34 3 50 15 4 40 10 5 48 ABBASTRU COLLEGE OF ARTS HAUD CAMMERCE VII.

Six marks questions:

1.

Explain the law of variable proportion with the help of a diagram.

Ans:

In the short of time if a firm wants expand its production, it can change only variable factor remain constant of fixed input.

This situation is known as law of varia proportion.

* There are two stages in law of variable proportion:

i ) Increasing returns ii ) Diminishing returns * This law can be explaining by following table:

Labour ТР MP = TPn – TPn – 1 AP = TP / L 0 0 0 0 1 10 10 10 2 24 14 12 3 40 16 13.

33

Page – 21 of 106 :

produck the ICES 21 9.

5 4 50 10 12.

5 5 56 6 11.

2 6 57 1 -In above the table when we are using first 3 unit of labour input TP, AP, MP are increases on increasing rate.

-after 4th unit to 6th unit of labour input, TP continues to increase and both MP and AP is decreases.

Diagram ТР Output Labour From above the diagram ‘ ox’axis measures units of labour and ‘ oy ’ axis represents output.

TP curve increases as labour input increases, and MP curve increases beginning and after started to fall.

Sawery BOLL BOSO PARTS AND COMMERCE AP curve also slightly increases and after it falls.

2.

Explain the shapes PP, AP, MP curves.

Ans:

” An increase the amount of the inputs keeping constant of all other inputs, results in an inctease in output ”.

– When the amount of labour increases the total product also increases.

So, total curve is positively sloped as shown in the diagram.

Page – 22 of 106 :

22 Y Output TPL 91 Labour X – in above the diagram ‘ ox ‘ axis shows units of labour and ‘ oy ‘ axis measure total product.

With L unit of labour a firm can produce Q1 unit of output.

ii ) Marginal product & Average product:

-According to law of variable proportion marginal tis initially rises and then after certain level of employment, it starts falling.

So, Mp curve derive the shape of inverse U shape.

– At the same time, when we employ the of labour both AP & MP same, and after certain level of employment MP starts falling, but AP continues the rises above MP -AP curve also derive the shape of i U shape.

As follows, Diagram:

APS EVENING DU COLLÉGE OF ARTS AND COMMERCE Output MPL APL 0 L Labour X 3.

Explain the various short run costs with the help of table.

Ans:

i ) Total fixed cost:

It is the payment made for fixed factors in the short run.

It doesn’t changes with the change in the level of output.

TFC = TC – TVC ii ) Total variable cost:

Page – 23 of 106 :

23 It includes payment made to the variable factors of production.

It changes along with quantity of output.

TVC = TC – TFC iii ) Total cost:

It includes both TFC and TVC in process of production.

TC = TFC + TVC iv ) Average fixed cost:

It refers to the per unit fixed factor cost of production of a commodity.

AFC = TFC / Q v ) Average variable cost:

It refers to per unit variable cost of production of a commodity.

AVC = TVCI vi ) Short run average cost:

It is the per unit total cost of production.

SAC = TC / Q vii ) Short run marginal cost:

It refers to the additional cost to SMC = TCn- TCn – 1 unit of a commodity.

Example:

Table Q 0 1 2 3 CAPŠ KUSERTİNG BÚTOLLEČE_OF ARTS AND COMMERCE 4.

AFC 0 20 10 6.

66 5 4 3.

83 2.

85 2.

5 2.

22 2 20 30 38 44 49 53 59 67 80 95 115 24 29 33 39 47 60 75 95 AVC 0 10 9 8 7.

25 6.

6 6.

5 6.

71 7.

5 8.

33 9.

5 SMC 20 10 8 6 5 4 6 SAC 0 30 14 14.

66 12.

25 10.

6 9.

83 9.

57 10 10.

55 11.

5 20 20 20 20 8 13 15 20 10 4.

A Firm SMC schedule is shown in the following table.

TFC is Rs.

100.

Find TVC, TC, AVC & SAC schedule of the firm.

Page – 24 of 106 :

24 0 0 1 2 3 4 5 6 SMC 100 500 300 200 300 500 800 TFC 100 100 100 100 TC 100 600 900 1100 1400 1900 2700 TVC 0 500 800 1000 1300 1800 2600 SAC 0 600 450 366.

66 350 380 450 AVC 0 500 400 333.

33 325 360 433.

33 100 100 100 5.

Explain the shape of long run costs.

Ans:

In the long run all inputs are variable.

There are no fixed cost and variable cost.

Hence there is only available of, Long run average cost:

It’s a cost per unit of output.

Long run marginal cost:

Total cost per unit of Shapes of Long run cost curve:

i ) According to law of returns to scale a firm increase its production in long run period of time, it can get 3 stages of production.

Such as, – Increasing returns to scale – Constant returns to scale – Diminishing returns to scale ii ) In all 3 stages a firm can increase production by increasing of its inputs.

As well as cost of production also increases.

iii ) So, according to law of returns to scale, Both LRAC & LRMC curve initially increases and in the center flat, finally rises.

And it derive U – shaped curve.

P Output APS EVENING PUSCOLLEGE OF ARTS AND COMMERCE MPL APL 0 L Labour

Page – 25 of 106 :

25 -In above the diagram ‘ ox ‘ axis tends cost of production and ‘ oy ‘ axis measures output.

Both LRAC & LRMC curve drive as U shaped and LRMC curve touch the LRAC curve at minimum point and after it rises.

VIII.

Project oriented questions:

1.

Find the missing products in the following table.

Factor 1 ТР MP AP 0 0 0 0 1 10 10 10 2 24 14 12 3 40 16 13.

33 4 50 10 12.

5 5 56 6 11.

2 6 57 1 9.

5 ********** APS EVENING PU COLLEGE OF ARTS AND COMMERCE

Page – 26 of 106 :

26 CHAPTER – 4 THE THEORY OF FIRM UNDER PERFECT COMPETATION I.

Choose the correct answer.

1.

In a perfect competition each firm produces and sells, a ) Heterogeneous products b ) Homogeneous products c ) Luxury goods d ) Necessary goods 2.

The increase in total revenue for a unit increase in the output is, a ) Marginal Revenue b ) Average Revenue c ) Total Revenue d ) Fixed Revenue 3.

The firm’s profit denoted by, a ) Σ b ) A c ) 4.

When the supply curve is vertical the elasticity of supply is, a ) es = 1 b ) es > 1 d ) es = 00 5.

The revenue per unit of output of a firm is called, a ) TR b ) MR d ) none of the above II.

Fill in the blanks:

1.

Price taking behavior is the single most distinguish characteristic of perfect competitive Market.

2.

Unit tax is a tax that the government imposes per unit sale of output.

3.

For a price ng firm marginal revenue is equal to Market price.

f minimum AVC where the SMC curve cuts the AVC curves is APA ARVIEN CPU COLLECROP ARTS AND COMMERCE 5.

Opportunity cost of some activity is the gain forgone from the second best.

III.

Match the following:

1.

TR = 2.

= 3.

AR = 4.

Normal profit 5.

Perfect competition 1.

PxQ 2.

TR – TC 3.

TR / Q 4.

Zero profit 5.

Perfect information

Page – 27 of 106 :

27 Ans:

The Market supply curve shows the output level of firms in the market IV.

One marks questions:

1.

Define marginal revenue.

Ans:

Marginal revenue is a additional revenue received by firm by selling its additional output.

MR = TRn – TRn – 1 2.

To which side does supply curve shift due to the technological progress?

Ans:

‘ Right Side 3.

Write a formula to calculate average revenue?

Ans:

AR = TR / Q 4.

What is Normal profit?

Ans:

The minimum level of profit that keep a firm in the existing business is defined as normal profit.

5.

Give the meaning of super normak Ans:

Profit that a firm earns over and above the normal profit is called super normal profit.

6.

What does market supply curve shows?

ARTS AND COMMERCE PALING PACOLLIER.

FI produce in with different value of market price.

conditions needed for profit by firm under perfect competition.

Ans:

MC must be none decreasing at QO iii ) PAVC ( short run ) & P > AC ( long run ) 2.

Give the meaning of shut down point.

Ans:

The point of minimum AVC where the SMC curve cuts the AVC curve is called shut down point.

Below the AVC point a firm cannot produce any output.

Page – 28 of 106 :

28 3.

Write the meaning of opportunity cost with the help of example.

Ans:

Opportunity cost is a cost for some activity is the gain forgone from the second best activity.

Ex:

Suppose, if we save Rs.

1000 in a bank it get the gain of interest or if we invest the same in business it gain a profit.

The same amount can’t be used with both activities.

4.

Mention the two determinants of firm’s supply curve.

Ans:

i ) Technological progress ii ) Input price iii ) Tax effect 5.

Give the meaning of price elasticity of supply and write i formula.

Ans:

The proportional change in supply is leads by change in price are called a price elasticity of supply.

Percentage change in supply PES = AQ or PES = Percentage change in price VI.

Four marks questions:

1.

Explain the features of perfect competitive market.

Ans:

i ) this market existence a large number of sellers and buyers.

ii ) Each firm produces and sells homogenous goods.

iii ) Free entry and exist of firm in iv ) Producers have perfect owledge about market.

v ) Uniform price for all vi ) A firm is a vii ) There is no transport cost.

viii ) Free mobility of factor of productions.

APSYEMINALCOLM GEOFA ARTS AND COMMERCE 2.

Explain the average revenue or price line of a firm under perfect competition with the help of diagram.

Ans:

Average revenue is defined as the revenue per unit of output sold.

It is expressed as, AR = TR / Q In a perfect competitive market each firm is price taker and they sell their produce with uniform price.

Thus the market price and average revenue are same in perfect competitive market.

Page – 29 of 106 :

29 Diagram:

price P Price line 0 Output – in above the diagram ‘ ox’axis shows output and ‘ oy ‘ axis shows price of goods.

And “ p ” represents price line.

Its shows the relationship between market price and firms output.

– AR & price line derive a shape of horizontal line 3.

Write a short note on profit maximization firm under the following conditions, a ) P = MC b ) MC must be none decreasing at Q0.

Ans:

Note:

Each firm is produce and services with a goal of profit maximization.

For profit to be Maximum, it should hold 3 conditions as follows, • Condition 1:

-A profit of firm defined difference between total revenue and total cost.

So it can be expressed as, n = according to conditi 1 is conclude as long as marginal revenue is greater than marginal cost, firm profit were increases, – so, in a perfect competitive market profit were maximizing at the level for which A NIENINGOM COLLECT OF ARES AND COMMERCE – – In other word, Marginal revenue is equal to market price, thus it can be expressed Condition 2:

Consider the second condition that a must hold profit maximizing output level is positive.

it means, – MC = Qo must be none decreasing, as shown in the diagram.

Page – 30 of 106 :

30 MC P Price and Marginal cost Dlower than marginal 0 qi 42 43 44 45 46 Output X In above the diagram clearly shows the market cost.

All the output level slightly to the left of Q1, as In this case a firm cannot be achieving as MC = Q1 4.

Explain the determinants of a firms sup curve.

a ) Ans:

Technological Progress:

e organizational innovation by the firm leads to more production of output.

That means, to produce a given level of output, the organizational ation allows the firm to use fewer units of inputs.

It is expected this will lower the firm’s marginal cost at any level of output, i.

e.

, there Prightward shift of the MC curve.

As the firm’s supply curve is a segment of the MC curve, technological progress shifts the supply curve of the firm to the right.

At any given market price, the firm now supplies more quantity of output APSIWENANG RUCOLLEGE LE ARTS AND COMMERCE prices:

A change in the prices of factors of production ( inputs ) also cinfriences a firm’s supply curve.

If the price of input ( eg.

wage ) increases, the cost of production also increases.

The consequent increase in the firm’s average cost at any level of output is usually accompanied by an increase in the firm’s marginal cost at any level of output which leads to upward shift of the MC curve.

That means, the firm’s supply curve shifts to the left and the firm produces less quantity of output.

VII.

Six marks questions:

1.

Explain the short run supply curve of a firm with the help of diagram.

Page – 31 of 106 :

31 Ans:

Note:

In a short run supply curve is a part of SMC curve.

A firm can achieve a profit maximizing level at P > AVC.

A short run supply curve categorized into 2 types, Case 1:

price is greater than or equal to the minimum of AVC [ P > AVC ] Price, costs SMC SAC AVC P1 P2 0 41 X – Suppose the market price is P1 as shown in diagram, which exceeds the minimum of AVC, – We start the output by equating pl with SMC on the rising part of the SMC curve; it leads the output level Q1.

– At the same stage AVC at Q1 does not exceed the market price [ P1 ], hence a firm can achieve profit maximization.

APS EVENING NI COLLEGE OFE_ARES AND COMMERCE • Case 2:

Price is less than minimum of AVC Suppose the market price is P2 as shown in the diagram, which less than or t be supplies positive output or firm produce Zero output, and a firm cannot be achieve profit maximization.

Page – 32 of 106 :

32 Supply Curve ( SMC ) Price, costs SAC AVC O output 2.

Explain the long run supply curve of a firm with the help of diagram.

Ans:

Note:

A firms profit maximizing output level can be achieved in long run when the market price is greater than or equal to minimum of AC.

[ P > AC ] In long run a firm consist only LRAC & LRMC curves, A supply curve is a part of LRMC curve.

Case 1:

Market price is greater than or equal to minimum of LRAC [ P > LRAC ] Y Price, LRMC costs LRAC P PSEVENING PU COLLEGE OF ARTS AND COMMERCE 91 output X the market price is P1 as shown in the diagram, which exceed the Minimum of LRAC, Up on equating the P1 with the LRMC on the rising part of LRMC curve, we obtain output level is Q1.

Note also that the LRAC at ql does not exceed the market price [ P LRAC ), a firm can achieve a profit maximizing in long run.

• Case 2:

Market price is less than minimum of LRAC [ P < LRAC ]

Page – 33 of 106 :

33 Supply Curve ( LRMC ) Price, costs LRAC 0 Suppose the market price is p2 as shown in the which less than minimum of LRAC, A firm cannot be produce positive output or the firm produces zero output.

Thus, it cannot be achieve profit maximizing 3.

Explain the market supply curve with the help of diagram.

Ans:

Ans:

The market supply curve shows the output levels that firms in the market produce in aggregate corresponding to different values of the market price.

For example, there are firm firm 2, firm3 in the market.

Suppose the price is fixed at p.

Then the output oduced by these firms in aggregate will be supply of firm 1 + supply of firm2 + supply of firm 3.

So, the market supply at price p is the summation of supplies of individual firms at that price.

The supply car with two firms in the market i.

e.

, firm 1 and firm 2 is below.

The two firms have different cost structures.

Firm 1 will anything if the market price is less than P, while firm 2 will not anything if the market price is less than P2.

This can be represented in PENING RUA COLLECEU ARTS AND COMMERCE not

Page – 34 of 106 :

34 Y ( a ) ( b ) ( c ) S S2 Sm P P P 0 91 O 42 o In the above diagram, output is measured in X axis and Price is me axis.

The diagram ( a ) is the supply curve of firm 1 ( S1 ), supply curve of firm 2 ( S2 ) and the diagram ( C ) is the market supply curve ( Sm ).

When the market price is below P1, both the firms do not produce the goods.

Hence the market supply will be zero.

If the market price is greater than or equal to P.

, but less than P2, only firm 1 will produee the goods.

In this range, the market supply curve coincides with the supply curve of firm 1.

If the market price is greater than or equal P2, both firms will have positive output levels.

If the price is P3, the firm 1 will supply q units of output and firm 2 supplies 42 units of output.

So, the market price P3 is qm, where qm = q1 + 22.

The market supply curve Smis taking a horizontal summation of the supply curves of the two firms the market Sy and S2.

VIII ] Project oriented questions:

1.

Compute the total ue, marginal revenue and average revenue schedules in the following table when market price of each unit of goods is Rs.

10.

Price TR = PxQ MR = TRn – TRn – 1 AR = TR / Q 10 0 10 10 10 10 10 20 10 10 10 30 10 10 10 40 10 10 10 50 10 10 10 60 10 10 APSEVERANG PREOCLIGE OF ARTS AND CONNERCE 0 0 4 5 6 *********

Page – 35 of 106 :

35 CHAPTER – 5 MARKET EQUILIBRIUM I.

Choose the correct answer.

1.

In perfect competition, buyers and sellers are a ) Price makers b ) Price takers c ) Price analyst d ) none of the above 2.

A situation where the plans of all consumers and firms in market match, a ) In equilibrium situation b ) equilibrium situation c ) Maximization situation d ) Partial equilibrium sit 3.

As results in increase in the number of firms there is an ase in supply, than, a ) Shift towards left b ) Shift towards Right c ) Shift towards both Right and left 4.

The firms earn super normal profit as long as the price is greater than the minimum of, a ) Marginal cost c ) Average cost limit on the price of goods and service is 5.

The Government imposing called, a ) Price ceiling c ) Price floor RS KENING PU COELEGESE ARTS AND COMMERCE b ) Selling price d ) none of the above 6.

The government I lower limit on the price of goods and service called, b ) Service floor d ) none of the above II.

Fill in the blanks:

1.

In perfectly competitive market, equilibrium occurs when marker demand Is Equal in market supply.

2.

If the supply curves shifts right ward and demand curve shift left ward equilibrium price will be decreasing 3.

Wage rate is determined at the point where the demand for labour and supply of labour curves intersect.

Page – 36 of 106 :

36 4.

in labour market House hold are the suppliers of labour.

5.

Due to right ward shift in both demand and supply curves the equilibrium price remains Same 6.

It is assumed that, in perfectly competitive market an Equilibrium price is at play.

III.

Match the following:

1.

Adam smith 2.

Price ceiling 3.

Market equilibrium 4.

Possibility of super normal profit 5.

Price floor 1.

Operation of invisible hand 2.

Upper limit of price 3.

QD = QS IV.

One marks questions:

1.

Define market equilibrium.

Ans:

Market equilibrium is a situation where market demand is equal to market supply.

Here the plans of all consumers and producers in the market match and market clears.

2.

What is equilibrium price?

Ans:

The price at which Dis reached is called equilibrium price.

PSAUNG RECOLLEGE OF ARTS AND COMMERCE 3.

When do we say that, there is an excess demand in market?

Ans:

When market demand exceeds market supply at particular price is known as exceed demand.

Ans:

The government imposed upper limit on the price of goods or services is 5.

What is price floor?

Ans:

The government imposed lower limit on the price of goods or services is called a price ceiling.

6.

through which legislation, the government ensures that the wage rate of the laborers does not fall below a particular level?

Page – 37 of 106 :

37 Ans:

Through the minimum wage legislation, the government ensures the wage rate of the laborers does not fall below a particular level.

V.

Two marks questions:

1.

Define equilibrium price and quantity.

Ans:

Equilibrium price:

The price at which equilibrium is reached is called equilibrium price.

Equilibrium quantity:

The quantity which is bought and sold at known as equilibrium quantity.

• Therefore price and quantity will be at equilibrium when Qd ( p ” ) = q * ( p ) 2.

How price is determined, when fixed number of firms exist in perfect competition.

Ans:

Based on market force the price of goods and services determined when fixed number of firms exists in perfect competitive mark 3.

Write any two possible ways in which ultaneous shift of both demand and supply curves.

Ans:

a ) Both supply and demand cur shift rightwards.

b ) Both supply and demand irves shift leftwards.

SEVENUNC PALEOLIM DE ORARY SA NIECOMMERCE 4.

What is marginal revenue product of labour ( MRP1 )?

Ans:

For each additional unit of labour, we get additional benefits equal to marginal revenue tim of marginal product it’s called a marginal revenue product.

Formula, x – MPL MR – Marginal Revenue:

MPL – Marginal productivity of Labour.

5.

Distinguish between excess demand and excess supply.

Excess Demand Excess supply When market demand exceeds market When the market supply exceeds supply at particular price is known as market demand at particular price is exceed demand.

known as exceed supply.

6.

How wage is determined in the labour market?

Ans:

The wage rate is determined at the point where the labour demand and supply curves intersect.

Page – 38 of 106 :

38 VI.

Four marks questions:

1.

What is the implication of free entry and exist of firm on market equilibrium.

Briefly explain.

Ans:

In perfect competitive market, it is assumed that there will be free entry and exit of firms.

This assumption implies that in equilibrium, no firm earns super normal profit or incurs loss by remaining in production.

Here, the equilibrium price will be equal to the minimum average cost of the firms.

a ) Case of super normal profit:

Suppose, at the prevailing market price, each firm is earning super normal profit.

The possibility of earning supernormal profit will attract somen a new firms.

As new firms enter the market supply curve shifts rightward.

However, demand remains same.

This causes ice to fall.

As prices decrease, super normal profits will eventually extin b ) Normal profit:

When firms are not getting super normal profit, it can earn normal profit.

At this point no more firms have incentive to enter market.

c ) Case of Loss:

Similarly, if the firms are incurring loss ( less than normal profit ) at the prevailing price, some firms will exit.

This will lead to an increase in price.

Then the profits of each firm will increase to the level of normal profit.

At this point, no firm will want to leave since the ill be earning normal profit.

Therefore, with prevailing mar e entry and exit, each firm will always earn normal profit at the price.

2.

table to show the impact of simultaneous shifts on equilibrium.

Shift in Shift in Quantity Price Demand Supply May increase, Leftward Leftward Decreases decrease or remain constant May increase, Rightward Rightward Increases decrease or remain constant May increase,

Page – 39 of 106 :

LEGFO pulated amount of a product sold 39 Leftward Rightward Decreases decrease or remain constant May increase, decrease or remain constant Rightward Leftward Increases 3.

Write a note on price ceiling and price floor.

Ans:

i ) Price Ceiling:

The Government imposed upper limit on the price of a good or service ist price ceiling.

Price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed below the market determined prid It is fixed below the market price because; at market determined price some sections of the population will not be able to afford these good Here, though the intention of the Government is to help consumers, it could end up creating shortage of products.

In order to solve solve the scarcity of products, the Government may issue ration coupons and through ration shops are called Fair Price ii ) Price Floor:

The Government imposed lower limit on the price that may be charged for a particular good or service is called price floor.

For certain goods and service fall in price below a particular level is not desirable and hence the Government sets minimum prices for these goods and services.

Example:

roducts minimum support price and the minimum wage legislation.

The may impose a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a level higher than the market determined price for these goods.

Similarly, through the minimum wage legislation, the Government ensures that the wage rate of the labourers does not fall below a particular level and here again the minimum wage rate is set above the equilibrium wage rate.

VII.

Six marks questions:

1.

Explain the market equilibrium with the fixed number of firms with help of diagram.

Page – 40 of 106 :

40 Ans:

Under perfect competition, market is said to be in equilibrium when quantity demanded is equal to the quantity supplied.

Here, with the help of market demand curve and market supply curve we will determine where the market will be in equilibrium when the number of firms is fixed This can be illustrated with the help of the following diagram:

SS Price P2 P P1 DD 0 41 42 9 43 44 Quantity a ) The above diagram illustrates equilibrium for with a fixed number of firms.

SS is market supply curve.

competitive market and DD is market demand b ) At point E, the market supply curve intersects the market demand curve which denotes that quantity demanded is to quantity supplied.

At any other point, either there is excess supply or there is excess demand.

So, OP is the equilibrium price and OQ is the equilibrium c ) If the price decreases OP1, the market supply is decreases to Oqı and the market demand is increa to Oq4 which leads to excess demand.

d ) If the price is increases to OP2, the market supply also increases to Oq3 and the market demand were decreases to Oq2 which leads to excess supply.

DENINOU.

CO LICEOE AŘESTAND COMMERCE 2.

EX he simultaneous shifts of demand and supply curve in perfect competition with help of diagrams.

Ans:

The simultaneous shifts can happen in four possible ways:

a ) Both supply and demand curves shift rightwards.

b ) Both supply and demand curves shift leftwards.

c ) Supply curve shifts leftward and demand curve shifts rightward d ) Supply curve shifts rightward and demand curve shifts leftward.

The simultaneous shifts of demand and supply curve in perfect competition can be represented in the following table:

Page – 41 of 106 :

41 Shift in Demand Quantity Price Shift in Supply Leftward Leftward Decreases May increase, decrease or remain constant May increase, decrease or remain constant Rightward Rightward Increases Leftward Rightward May increase, decrease or remain constant May increase, decrease or remain constant Rightward Leftward In the above table, each row of the table describes the direction in which the equilibrium price and quantity will change for each possible combination of the simultaneous shifts in demand and supply curves.

The following diagrams depict the second and third cases of the above table:

( b ) ( a ) Y Price SS.

SS PSÉVEKING|

COLLEGE OF ARTS ANDAÇOMMERCE P Ро Pi 0 9 0 9 DD DDO DD1 quantity quantity above diagram ( a ) initially, the equilibrium is at E where the demand rye DD, and supply curve SS, intersect.

Here, both supply and demand shift rightward where the price remains constant at P but the equilibrium quantity moves from q to qı.

Similarly, in diagram ( b ), the supply curve shifts rightward and demand curve shifts leftward where the equilibrium quantity remains same but the equilibrium price decreases from P to Pl.

Page – 42 of 106 :

42 p = 3.

Suppose the demand and supply curves of wheat are given by, Qd = 200 – p and Qs = 120 + p a ) Find the equilibrium price b ) Find the equilibrium quantity demand and supply.

c ) Find the quantity demand and supply When P > equilibrium price d ) Find the quantity demand and supply When P < equilibrium price i ) Qd = Qs 200- p = 120 + p 200 – 120 = 1p + 1p 80 = 2p 80 = 40 Equilibrium price is Rs.

40 ii ) When Price is Rs.

40 Qd = 200 – p Qs = 120 + Qd = 200 – 40 Qd = 160 Quantity demand antity supply = 160 ji ) When price is increases to Rs.

42 Qd = 200 – p Os = 120 + p Qd = 200 – 42 Qs = 120-42 Qd = 162 Qs = 158 When price is increases to Rs.

40 QD > QS iv ) When price decreases to Rs.

38 Qd = 200 – p Qs = 120 + p APS ÉVÊNI NILABAL COLLEE_OPEXRİS AND COMMERCE Qs = 120-38 Qs = 162 When price decreases to Rs.

38 QS < QD %%%%%%%

Page – 43 of 106 :

43 CHAPTER – 6 NON COMPETITIVE MARKETS I.

Choose the correct answer.

1.

A market which produces heterogeneous products is called, a ) Monopoly b ) Monopolistic competition c ) Perfect competition d ) none of the above.

2.

The change in TR due to the sale of an additional unit is called a ) Total revenue b ) Average Revenue c ) Marginal Revenue d ) Revenue 3.

When the price elasticity of demand is more than one, MR a ) Negative value b ) Decreasing value c ) Constant Value d ) Positive Value 4.

Profit a ) PxQ c ) TFC + TVC b ) TRỮ TC d ) TR / Q II.

Fill in the blanks:

1.

The monopoly firm’s decision to sell a larger quantity is possible only at Lower Prices 2.

Competitive behavior and competitive market structure are in general Inversely related.

3.

In the monopoly market, the goods which are sold have no Substitutes 4.

TR = PXQ 5.

The revenue received by firm per unit of commodity sold is called Average RS EVELING PUNCOLLEGE OF ARTS AND COMMERCE zero production cost, when the total revenue of monopoly firm is maximization, the profit isMaximum III.

One marks questions:

1.

What is monopoly?

Ans:

A single seller or a firm is selling goods in market are known as monopoly.

2.

Write the equation of demand function.

Page – 44 of 106 :

44 Ans:

Q = 20 – 2P or Q = a – b ( p ) 3.

Give the meaning monopolistic competition.

Ans:

A large number of sellers selling heterogeneous goods with various prices are known as monopolistic market.

4.

Give the meaning of oligopoly market.

Ans:

There is a Few Firms or sellers producing and sell a products in a market are called a oligopoly market.

5.

What is Duopoly?

Ans:

Duopoly is a market situation where there is only two the market.

rs or firms exist in IV.

Two marks questions:

1.

Mention the requirements of monopoly market structure.

Ans:

i ) Existence of a single producer of a partici commodity.

ii ) No other commodity works as a substitute for this commodity.

iii ) The monopoly situation has top rsist over a time.

iv ) Restrictions to prevent other the market and selling the commodity.

EVENLIG PICOLLEGE OF ARTS AND EQMMERCE 2.

State the meaning of average revenue and marginal revenue.

Ans:

Marginal Revenue of a firm is defined as the increase in total revenue for a unit increase in the i’s output.

It is obtained by dividing the Change in Total Revenue in quantity ( Aq ).

Thus, Average Revenue:

We calculate Average Revenue, by dividing Total revenue by the quantity sold.

The following formula used:

AR = TR / 3.

State the relationship between marginal revenue and price elasticity of demand.

Ans:

The values of Marginal Revenue have a relation with the price elasticity of demand.

Price elasticity of demand is more than 1 when the Marginal Revenue has

Page – 45 of 106 :

45 a positive value and becomes less than the unity when Marginal Revenue has a negative value.

4.

Write the meaning of monopolistic competition and give example.

Ans:

When the market structure has large number of firms, free entry and exit of firms and differentiated goods, then it is called monopolistic competition.

For example, there is large number of soaps producing firms.

But many soaps being produced are associated with some brand name and are distinguishable from the other companies.

.

5.

Write the features of monopoly Ans:

* Existence of single seller or firm.

• No close substitutes.

Barriers on entry of new firms.

• Firm is a Price maker and buyers are price takers.

Uniform price or price discrimination.

No difference between firm and industry.

• Perfect knowledge.

.

.

V.

Four marks questions:

1.

What is market demand curve?

Draw a market demand curve for monopoly firm.

Ans:

The market demand curve shows the quantities that consumers as a whole are willing to purcha at difference prices.

APS EVENING POGOLLEGE UMĄRTS AND COMMERCE The market demand curve for a monopoly firm can be explained with the help of Price D PO P1 D q1 quantity O 90 X

Page – 46 of 106 :

46 In the above diagram, price is measured in Y axis and quantity is measured X axis.

If the market price is at P, consumers are willing to purchase the qo quantity.

If the market price is less i.

e.

, P1, consumers are willing to buy more quantity i.

e.

, 91.

That means, price in the market affects the quantity demanded by the consumers.

Therefore, monopoly firm’s decision to sell a larger quantity is possible only at a lower price.

If the monopoly firm brings a smaller quantity of the commodity into the market for sale it will be able to sell at a higher price.

Thus, for the monopoly firm, the price depends on the quantity of the commodity sold.

This idea is reflected in the statement that the monopoly firm faces the downward sloping market demand curve, 2.

Calculate TR and MR from the following table.

Q 1 2 3 4 5 6 P 100 90 80 70 60 50 9 20 10 10 Q P TR MR 1 100 100 5 60 2 90 180 80 3 80 240 60 4 70 280 40 8 30 240 -40 9 20 180 -60 10 10 100 -80 280 -20 3.

Briefly explain the competitive market.

Ans:

When the market structu has large number of firms, free entry and exit of firms and differentiated go then it is called monopolistic competition.

ARTS AND COMMERCE TENING ROCONLEČE OF ARTS AND For example, there is large number of biscuits producing firms.

But many of the biscuits being pro ced are associated with some brand name and are rom the other companies.

The consumer develops a taste for a and of biscuits over time or becomes loyal to a particular brand and he may not immediately be willing to substitute it for another biscuit.

However, if the price difference becomes large, the consumer would be willing to choose a biscuit of of another brand which is of lower price.

Therefore, the demand curve faced by the firm in monopolistic competitive market is not perfectly elastic.

The demand curve faced by the firm is also not market demand curve.

In monopolistic competition, the firm expects increase in demand if it reduces the price.

Page – 47 of 106 :

47 So, the demand curve ( AR curve ) is downward sloping.

The Marginal Revenue curve will be less than Average revenue and is downward sloping.

The monopolistic competitive firm is also a profit maximiser.

So it will increase production as long as the addition to its total revenue is greater than the addition to its total costs.

In other words, the firm under monopolistic competition will produce the quantity that equates its marginal revenue to its marginal cost.

But, here, the firm produces less than the perfectly competitive firm.

This is because, given the lower output, the price of the commodity becomes higher than the price under perfect competition.

The above situation exists in the short run.

But in the long run, new firms may enter the market.

If the firms in the industry are receiving supernormal profit in the short run, this will attract new firms.

As new firms enter, some customers shift from existing firms to these new firms.

So, existing firms find that their demand curve has shifted leftward.

This reduces firm’s profits.

This continues till supernormal profits are wiped out and firms are king only normal profits.

On the other hand, if firms in the industry are facing losses in the short run, some firms would stop producing ( exit ).

The demand curve for existing firms would shift leftward.

This would lead to a higher price and higher profit.

Entry or exit would stop once supernormal profits become zero and this will be long run equilibrium under monopolistic 4.

Show the relationship between average revenue and marginal revenue of a monopoly market with help of diagrams.

Ans:

Marginal Revenue of a firm is defined as the increase in total revenue for a unit increase in the firm’s output.

It is obtained by dividing the Change in Total Revenue ( ATR ) by Change in quantity ( Aq ).

Thus, Average Revenue:

We calculate Average Revenue, by dividing Total revenue by the quantity sold.

The following formula used:

ARE TR / The relationship between AR and MR of a monopoly market can be shown with the help of following diagrams:

Page – 48 of 106 :

48 AR, MR ( a ) AR, MR ( b ) AR output Output MR The above diagram shows that the MR curve lies below the AR curve.

That means, if the AR curve is falling steeply, the MR curve is the AR curve.

If the AR curve is less steep, the vertical distance between the AR and MR curves is smaller.

The diagram ( a ) shows a flatter AR curve while diagram ( b ) shows a steeper AR curve.

Therefore, for the same units of the commodity, the difference between AR and MR in diagram ( a ) is than the difference in diagram ( b ).

VI.

Six marks questions:

1.

Explain the short run equil orium of monopoly firm with the help of the simple case of zero cost.

Ans:

Every monopolist at maximizing profit.

Here, we try to analyze the profit maximizing bior to determine the quantity produced by a monopoly firm and price at which it is sold.

SEHENING PL COLLEĆE DA ARTS AND – COMMERCE Let us imagine that there exists a village situated far way from other villages.

In there is exactly one well from which water is available.

All residents are completely dependent for their water requirements on this well.

The well is owned by one person who is able to prevent others from drawing water from it except through purchase of water.

The person who purchases the water has to draw the water out of the well.

The well owner is thus a monopolist firm which bears zero cost in producing the good.

We shall analyse this simple case of a monopolist bearing zero costs to determine the amount of water sold and the price at which it is sold.

Page – 49 of 106 :

49 The short run equilibrium of the monopolist with zero cost can be explained with the help of the following diagram:

TR AR, MR, Price TR 10 AR = D Output MR In the above diagram, TR, AR and MR curves are revenue curves.

The profit received by the firm equal the revenue received the firm minus the cost incurred.

Since TC is zero, profit is maximum when TR is maximum.

This occurs when output is of 10 units.

This is e level when MR equals zero.

The amount of profit is given the length of the vertical line segment from ‘ a ’ to the horizontal axis.

2.

Explain the short run monopolistic firm, when the cost of production is positive by using TR and TC curves with the help of a diagram.

Ans:

The short run equilibrium of a monopolist firm, when the cost of production is positive by using TR and 1 Curves can be explained with the help of diagram as follows:

TC Revenue, cost, profit TR APS EVENINGPŮ COLEWE OPARTS AND COMMERCE TC B 42 42 90 43 output Profit In the above diagram Total Cost, Total Revenue and Profit curves are drawn.

The profit received by the firm equals the total revenue minus the total cost.

In the diagram, if quantity q1 is produced, the Total Revenue is TR1 and Total cost is TC1.

The difference TR1 – TC1 is the profit received.

The same is depicted by the

Page – 50 of 106 :

50 length of the line segment AB ie.

, the vertical distance between the TR and TC curves at q1 level of output.

If the output level is less than 92, the TC curve lies above the TR curve, i.

e.

, TC is greater than TR and therefore profit is negative and the firm makes losses.

The same situation exists for output levels greater than qz.

Hence, the firm can make positive profits only at output levels between 22 and q3 where TR curve lies above the TC curve.

The monopoly firm will chose that level of output which maximizes its profit.

This would be level of output for which the vertical distance between TR and TC is maximum and TR is above the TC ie.

, TR – TC is maximum at the output level qo.

3.

Explain how the firms behave in oligopoly.

Ans:

If the market of a particular commodity consists of a few numbers of sellers, the market structure is termed oligopoly.

Given there are a few firms, each firm is relatively, when compared to the size of the market.

As a result each firm is in a affect the total supply in the market and thus influence the market price.

occurs For example, if a firm decides to double output, the total supply in the market will increase, causing the price to fall in price affects the profits of all firms in the industry.

Other firms respond to such a move in order to protect their own profits, by taking decisions regarding how much to produce.

Therefore, the level of output in the industry, the level of prices, and the profits are outcomes of how firms are interacting with each other.

Case – 1:

Firms could decide to collude with each other to maximize profits.

Here the firms form a cartel ( an association ) that acts as a monopoly.

The quantity supplied collectively by the industry and the price charged are the same as a single monopo EVENING ROY COLLEGE OF ARTS ANDO Case – 2:

The firms could decide to compete with each other.

For example, a firm may lower its price a little below the other firms, in order to attract away their customers.

Certainly, the other firms would retaliate by doing the same.

So the market price keeps falling.

Page – 51 of 106 :

51 In reality, cooperation of the kind that is needed to ensure a monopoly outcome is often difficult to achieve in the real world.

The firms may realize that competing fiercely by continuous price cuts is harmful to their own profits.

4.

The market demand curve for a commodity and total cost for a monopoly firm producing the commodity is given by the schedules below.

Use the information to calculate the following.

Q 0 1 2 3 4 5 6 7 8 P 52 44 37 31 26 22 19 16 13 Q TC 0 10 1 60 2 90 3 100 4 102 5 105 6 109 7 115 125 A ) The MR and MC schedules.

B ) The quantity for which the MR and MC C ) The equilibrium quantity output and the equilibrium price of the commodity.

D ) The total revenue, total cost and total profit in equilibrium.

TR ( p * MR MC TC 10 Price 52 44 37 31 50 60 90 74 Quantity 0 1 2 3 4 5 6 30 PS EVÉNKOG PRI COLLE CHE CE AKUSANDE COMMERCE 100 10 102 44 30 19 11 6 4 -2 -8 2 22 105 3 19 109 4 115 6 16 13 104 125 10 Quantity where MR and MC are equal is 6 Equilibrium quantity is 6 and Equilibrium price is 19 c ) Total Revenue is 114 and Total cost is 109 d ) Profit = TR – TC i.

e.

, 114-109 = 5; therefore Profit = 5.

*******

Page – 52 of 106 :

52 PART – B CHAPTER – 1 MACRO ECONOMICS I ] Choose the correct answer:

1.

The individual or institutions which take economic decisions are, a ) Economic variable b ) Economists c ) Economic agents d ) none of the above 2.

In 1936 British economist J.

M.

Kenynes published his celebrated book, a ) Wealth of Nations b ) Theory of Employment c ) Theory of interest d ) General theory of employment, interest & money YCOMMERCE 3.

All the laborers who are ready to work will find employment and all the factories will be working at their full capacity, this school of thought is known as, a ) Modern thought b ) Contemporary thought c ) Classical thought d ) none of the abovec 4.

The year of great depression is, a ) 1920 b ) 1889 c ) 1929 d ) 2018 5.

In capitalist country production activities are mainly carried out by, a ) Private enterprises Government authority c ) Planning authority y none of the above II Fill in the blanks ( each question carries 1 mark ) 1.

Macro economicstries tries to address situation facing the economyas a whole 2.

A part of the revenue is paid out as Rentfor service rendered by land.

3.

The domestic country may sell goods to the rest of the world these are 4.

The production unitwill called as firms.

5.

Macro Economic policies are pursued by the state itself or statutory bodies like the RBI SEBI etc.

, III ONE Marks questions:

1.

Who are economic agents?

Ans:

The individual or institutions which take economic decisions are called a economic agents.

Page – 53 of 106 :

53 2.

What does classical school of thought say?

Ans:

The classical economic thought is, all the laborers who are ready to work will find employment and all the factories will be working at their full capacity.

3.

Give the meaning of imports.

Ans:

Economies which buy the goods from rest of the world are called as imports.

4.

Name the well – known work of adman smith.

Ans:

‘ An enquiry into the nature and causes of the wealth of nations ‘ 5.

What do you mean by wage rate?

Ans:

Wage rate refers to the price at which the sale and purchase o of labour services in the process of production.

VI.

TWO Marks questions:

1.

What are the features of capitalist economy?

Ans:

The important features of a capitalist of economy are as follows:

► There is private ownership of jeans of productions.

► There is sale and purchase of labour services at a price which is called wage rate.

A Production takes place for selling the output in the market.

► The entrepreneurs may themselves supply the capital needed or they ÁRS EVENINE PIACOLLEGE OF ARTS AND’EOMMERCE 2.

Name and the meaning of two kinds of trade in external sector.

Ans:

There are two kinds of Trade in external sector, as follows, country may sell goods to the rest of the world – Exports.

A country may buy goods from other countries – Imports ho are macroeconomic decision makers?

Ans:

The macroeconomic decisions makers are State itself or statutory bodies like the Reserve Bank of India, Securities and Exchange Board of India and similar institutions.

* Each such statutory body will have one or more public goals to pursue as defined by law or the constitution of India itself.

V.

FOUR Marks questions:

Page – 54 of 106 :

54 1.

Explain the working of economy of a capitalist country.

Ans:

If economic activities operate and controlled by private sector are known as capitalist economy • Features of capitalist economy are, as follows, a ) There is private ownership of means of production.

b ) Production takes place for selling the output.

c ) There is sale and purchase of labour service at a price called wage rate.

• Process of capitalist economy:

In a capitalist country production activities are mainly carried out by capitalist enterprises.

They may themselves supply the capital needed to run the enterprise or they may borrow the capital.

– To carry out the production they also need natural resources.

They need the most important element of human labour to carry out production.

This is called as labour.

After producing output with the help of land labour and capital, the entrepreneur sells the product in the marke earn money called revenue.

Part of the revenue is paid out as rent for land, interest for capital and wage for labour and keeps the rest of the revenue as profit.

– Profits are often used by the producers in the next period to buy new machinery or to build new so that production can be expanded.

These expenses which raise oductive capacity are examples of investment expenditure.

what way macroeconomics is different from micro 2.

Briefly economics.

Sl.

no Sl.

no Macro economics Micro economics Micro Economics study in individual units, so it has a narrow scope Scope 1.

ÁPS EVENUE PUBOLARCE.

ONÁRIS AND COSMERCE Macro Economics study in aggregates, so it has a scope of wider.

2.

2 slicing method Method of study lumping method In this economy there is a existence of individual units, In this economy there is an existence economic agents are government 3.

Economic 3.

Page – 55 of 106 :

55 Agents and they thinks about own interest and welfare partial equilibrium and RBI and statutory bodies, they thought social welfare.

general equilibrium 4.

Equilibrium 4.

Domain Consumer behavior, production and cost, Rent, Wages, Interest, etc.

Theory of income, output and employment, Consumption Function, Investment function, Inflation, etc.

5.

5.

3.

Explain the role of government ( state ) and house hold sector in both developed and developing countries.

Ans:

i ) Role of Government:

In both the developed and eloping countries, apart from capitalist sector, there is the institution of Sta • The role of the state includes, a ) Framing laws, enforcing them and delivering justice.

b ) The State here refers to the Governme which performs various developmental functions for the jety as whole.

c ) It undertakes production, apart from imposing taxes.

d ) Spending money on building public infrastructure, running schools, providing health service Iqawwo2 dinya.

La La Lanto, MONNAS Role of Household seeto By household we mean a single individual who takes decisions relating to rown consumption or a group of individuals for whom the decisions relating to consumption are jointly determined.

a ) • The role of household is as follows, consist of people.

These people work in firms as workers and earn wages.

They are the ones who work in government departments and earn salaries or they are the owners of firms and earn profits.

c ) Therefore, the market in which the firms sell their products could not have been functioning without the demand coming from the households.

*****

Page – 56 of 106 :

56 CHAPTER – 2 NATIONAL INCOME AND ACCOUNTING I ] Choose the correct answer:

1.

The Study of national income is related to, a ) Micro economics b ) Macro economics c ) Both Micro & macro d ) none of the above 2.

NNP = GNP a ) Deduction c ) Investment b ) Depreciation d ) none of the above 3.

The value of GDP at the current prevailing price is, a ) Real GDP b ) Personal income c ) Private income d ) NDP 4.

By deducing undistributed profit from national income, we get, a ) Personal disposable income c ) Private income 5.

measuring the sum total of all factor payments will be called, a ) Product method method c ) Income Method d ) none of the above II Fill in the blanks ( each question carries 1 mark ) 1.

Stocksare defined at a particu point of time.

2.

Final Goods will not pass through any more stages of production.

3.

Depreciationis an ann allowance for wear and tear of capital goods.

4.

Inventory is a stock of variable.

5.

Pollution is an e ople for Negativeexternalities.

6.

The net contribution made by a firm is called is Value added.

PAVLE MAGDA COLEGÉURARE AND COMMERCE III.

Match the following ( each question carries 1 mark ) 1.

Wages 2.

Gross domestic product 3.

Stock variable 4.

Personal disposable income 5.

Domestic service 5.

Non monetary exchange 4.

PDI IV.

ONE Marks questions:

Page – 57 of 106 :

57 6.

Give the meaning of Intermediate goon ARTS ANO.

1.

What do you mean by final goods?

Ans:

The goods that will not pass any more stages to pass or transformations is called a final goods.

2.

Expand CPI.

Ans:

Consumer price index 3.

Expand GNP.

Ans; Gross National product 4.

How do you get value added?

Ans:

Deduction the value of depreciation from gross value of goods we get value added.

5.

Give the meaning of GDP.

Ans:

Gross domestic product Ans:

Those goods used as raw materials or inputs for production of other commodities are known as intermediate goods.

7.

What is depreciation?

Ans:

It is a deduction made from the value of gross investment in order to accommodate regular ear and tear of capital goods.

8.

How do you get personal disposable income?

Ans:

The personal Disposable Income is obtained by deducting personal tax payments and non tax payments from Personal Income.

9.

Write the question of GVA at market prices.

Ans:

GVA at Market prices = GVA at basic prices + Net product taxes.

10.

What is GDP deflator?

Ans:

GDP deflator is the ratio of nominal GDP to real GDP.

Its formula, Nominal GDP GDP deflator = Real GDP

Page – 58 of 106 :

58.

.

V.

TWO Marks questions:

1.

What are the four factor of production?

Mention their rewards.

Ans:

The four factors of production are Land, Labour, Capital and Organization.

The rewards of these factors of production are as follows:

• Land gets Rent • Labour gets wages Capital gets Interest.

Organization gets profit.

2.

Distinguish between stock and flow.

Give example.

Sl.

no Stock Sl.

no Flow It is that quantity of It refers to that economic variable which economic varia measured 1.

is measured at a particular 1.

over a of time.

point of time.

Example capital, Example net investment, 2.

inventory, wealth, foreign 2.

National Income etc.

exchange reserves etc.

antity of Sl.

no 3.

What is difference between consumer goods and capital goods?

Consumer Goods Sl.

no Capital Goods The Goods which are purchase These are the durable goods for consumption are known as which are used in the 1.

consumer good.

1.

production process.

Example food, clothes, Examples are machinery, 2.

like recreation.

2.

tools, implements etc.

MENING RU COLLÉGKOL ARTS AND COMMERCE ices 4.

Mention three methods of measuring GDP ( national income ).

Ans:

a ) Product or Value Added Method b ) Expenditure Method and Income Method.

5.

What do you mean by externalities?

Mention its two types.

Ans:

Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid or penalized.

They do not have any market in which they can be bought and sold.

The two types of externalities are Positive Externalities and Negative Externalities.

6.

What is equation of GDPmp and GDPfc.

Ans:

i ) GDPmp = C + I + G + X – M

Page – 59 of 106 :

59 Similarly most of the items that enter our kitchen are transformed through C- Consumption expenditure 1 – Investment expenditure G – Government consumption and expenditure X – Export M – Import ii ) GDPfc = GDPmp – NIT ( net direct tax ) 7.

Write the difference between nominal and real GDP.

Ans:

SL Nominal GDP SL Real GDP If the GDP is measured based on If the GDP is measure 1 current year price are known as 1 on base year price nominal GDP Real GDP.

2 It is not reliable 2 It does not give clear picture of 3 economic development of a 3 country VI.

FOUR Marks questions:

1.

Write a short note on the concept of finał good.

Ans:

The final goods are those goods which are meant for final use and will not pass through any more stages of production or transformations.

They are called final goods.

Because, once they have been sold they pass out of the active economic flow.

However, they may undergo transformation by the action of the ultimate + In fact, many goods are transformed during their consumption.

For instance, Tea leaves purchased by the consumer are not they are used to make drinkable tea, which is the process of cooking.

But cooking at home is not an economic activity, even though the product involved undergoes transformation.

Home cooked food is not sold to the market.

However, if the same cooking or tea was done in hotel where the cooked product would be sold to customers, then the same items are not considered as final goods and would be counted as inputs to which economic value addition can take place.

FERIENANG DU COUL EROLARIS VAND COMMERCE

Page – 60 of 106 :

60 Thus, it is not in the nature of the good but in the economic nature of its usage that a good becomes a final good.

2.

Explain the circular flow of income of an economy.

Ans:

The circular flow of income of an economy can be explained with the help of following assumptions:

a ) Existence of two sectors viz.

, household sector and producers.

b ) Households are the owners of the factors of production.

c ) Households receive income by selling the factor services.

d ) There are no savings.

e ) The firms produce goods to the households.

f ) The economy is a closed economic system ( where no external trade or savings ) The circular flow of income in a simple economy can be illustrated with the help of following chart.

Factor services Factor services ( A ) HOUSE HOLD FIRM EVENING PU COLLEGE ÖF ARTS AND COMMERCE Spending ( B ) Goods and Services ( C ) In Above the diagram, at point A House hold sector sells a factor of production like land labour, capital, organization to firm sector by collecting factor payment this method is known as income method of calculating national income.

At point b, household sector spend entire income they earn to purchase goods and services produced by firm sector this method is known as expenditure method.

And finally at point C, firm sector supplies the goods produced to household sector this method called a product method of calculating national income.

Page – 61 of 106 :

61 3.

Write a note on externalities.

Ans:

Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid or penalized.

• There are two types of externalities viz.

, i.

Positive Externalities and ii.

Negative Externalities.

For example, let us imagine that there is oil refinery which refines crude petroleum and sold in the market.

The output of the industry is taken for counting GDP of an economy.

This is positive externality.

While carrying out the production the oil refinery industry polluting the nearby river.

This may cause harm to the people who who use the water of the river.

Hence their health will be affected.

Pollution also may kill fish and other organisms of the river.

As a result, the fishermen of the river may lose their livelihood.

Such harmful effects that the industry is on others, for which it will not bear any cost are called negative externalities, 4.

Illustrate unplanned accumulation decumulation of inventories with an example.

Ans:

The unsold goods, unused raw materials or semi – finished goods which a firm carries from a year to the next year are known as inventories.

OS ANUNC EU COLLEGMOP MRTSANDS COMMERCE If there is unexpected increase or decrease in the sales there will be unplanned This can be explained with the help of following illustration:

Suppose a firm produces T Shirts.

It starts the production year with an inventory of r Shitts.

During the coming year it expects to sell 1000 T shirts.

Hence, it produces 1000 T shirts, expecting to keep an inventory of 100 T Shirts at the end of the year.

# However, during the year, the sales of T Shirts became low unexpectedly.

The firm is able to sell only 600 T Shirts.

This means that the firm is left with 400 unsold T Shirts.

The firm ends the production year with 400 + 100 = 500 T shirts.

The unexpected increase of inventories by 500 T shirts is an example for unplanned accumulation of inventories.

Page – 62 of 106 :

62 # On the other hand, if the sales had been more than 1000 we would have unplanned decumulation of inventories.

For instance, if the sales had been 1050, then not only the production of 1000 T shirts will be sold, the firm will have to sell 50 T shirts out of the inventory.

This 50 ( Tshirts ) unexpected reduction in inventories is an example of unexpected decumulation of inventories.

5.

Explain the examples of planned accumulation and decumulatione inventories.

Ans:

The unsold goods, unused raw materials or semi – finished which a firm carries from a year to the next year are known as inventories.

A planned change in inventories is the change in the stock of inv inventories which has occurred in a planned way.

The planned accumulation and decumulation of inventories are explained with example as follows:

Suppose a firm wants to increase the inventories from 100 T shirts to 200 T shirts during the year.

Expecting sales of 1000 T shirts during the year, the firm produces 1000 + 200 = 1200 T shirts.

# If the sales are actually 1000 T shirts, the firm ends up with a rise of inventories.

The new stock of inventories is 200 T shirts, which was planned by the firm.

This is accumulation of inventories.

ADULWADZANESLI LO Houtto On the other hand, if the firm had wanted to reduce the inventories from 100 to 25, it would be produce only 925 T shirts instead of selling expecting sell of 1000 T irts during the year.

And remaining 75 T shirts would be used by initia ventories of the year.

Then, firm left with planned reduced inventory of 75 T Shirts.

VII.

SIX Marks questions:

1.

the macroeconomics identities.

a ) Ans:

Gross Domestic Product ( GDP ):

Gross Domestic Product measures the final value of all goods and services produced in a country and include foreign national staying in the country.

Formula, GDPMP = C + I + G + NET X b ) Net Domestic Product ( NDP ):

NDP is the final value of all goods and services produced in a countryduring a year and less depreciation cost.

Page – 63 of 106 :

63 NDP = GNP – Depreciation c ) Gross National Product:

GNP is the final value of all goods and services produced in the country during a year and include the income from abroad.

Formula:

GNP = C + I + G + ( X – M ) + ( R – P ) OR GDPFC = GDPMP – NIT.

( Net income from abroad ) d ) Net National Product ( NNP ) at factor cost:

If we less gross national product we can get net national product.

Formula, NNP = GNP – DC e ) Personal Income ( P ) It refers to the part of me ( NI ) which is received by households.

It is obtained as follows:

PI = NI – Undistributed Profits – Net interest paymen nents made by the households – Corporate tax + Transfer payments to the households from the Government and firms.

f ) Personal Disposable Income It we deduct the personal tax payments ( income tax ) and Non – tax payment fines, fees ) from Personal Income, we get PDI.

Therefore, PDI = PI – Personal tax payments – Non – tax payments.

IS EVENING IN COLD QF ARTS ANDAÇOMMERCE 2.

Briefly explain the nditure method of measuring GDP.

Ans:

Expenditure method is the alternative way to calculate the GDP by looking at the demand side In this method we add the final expenditures that each firm makes.

Final part of expenditure which is undertaken not for intermediate the concept of expenditure methods includes all the final expenditure made by individuals, firms, institutions, and government of the country.

Example:

If the baker buys Rs.

50 worth of wheat from the farmers is considered as intermediate good and the final expenditure received by the baker is 200.

Then the aggregate value of output of the economy is Rs.

200 + Rs.

50 = Rs.

250.

Let us assume that firm imakes the final expenditure on the following accounts:

Page – 64 of 106 :

64 > Final consumption expenditures on the goods and services by households, denoted as C; > Final investment expenditure incurred by the firms on capital goods, denoted as I ► The expenditure that the Government makes on the final goods and services produced by the firm, denoted as G ► The export revenues that firm iearns by selling its goods and services abroad, denoted aXi.

Now GDP according to the expenditure method is expressed as follows:

GDP = { N – 1 RV = C + I + G + X – M 3.

Explain the numerical example to show that all the three methods of estimating GDP give us the same answer.

Ans:

The three methods of calculating GDP viz.

, Product or Value Added Method, Expenditure method, Income Method, give us the same answe – * This can be explained with the help of numerical example as follows:

Let us imagine, there are two firms X and Y.

Suppose X use no raw material and produces cotton worth Rs.

5 X sell its cotton to firm Y, who uses it to produce cloth.

Y sells the cloth produced to consumers for Rs.

200.

GDP in the product method:

Here the value added = Sales – Intermediate goods.

Thus VA 200 – 50 = 150.

Thus P = VAx + VA Y = 50 + 150 = 200.

GDP distribution for firms X and Y Particulars Firm X Firm Y Sales 50 200 Intermediate goods 50 Value added 50 250 PSPVEKING AL COLLECKOKARTS AND COMMERCE 0 ► GDP in the phase of Expenditure Method:

Under this method, GDP is the sum of final expenditure / s on goods and services for end use.

In the above

Page – 65 of 106 :

65 case, final expenditure is expenditure by consumers on cloth.

Therefore, GDP = 200.

> GDP in the phase of Income Method:

Under this method, GDP is obtained by adding factor payments.

Let us imagine firm X, from Rs.

50 received gives Rs.

30 as wages and keeps the remaining Rs.

20 as its profits.

Similarly, firm Y gives Rs.

100 as wages and keeps Rs.

50 as profits.

It can be stated in the following table:

Particulars Firm X Firm Y Wages 30 200 profits 20 50 Total 50 250 Now the GDP of the country in income method also Rs.

250, thus all 3 methods of calculating National income give us same answer.

4.

Write down some of the limitations of using GDP an index of welfare of an economy.

a ) Distribution of Gross Domestic Product ( GDP ), Generally, the rise in GDP will not represent increase in the welfare of the count intry.

If the GDP of the country is rising, but it may be concentrated in the hands of very few individuals or firms.

For the remaining, the income may in fact mig have decreased.

In such a situation the welfare of the entire country cannot said to have improved.

EVENTATE PAU CALLER DE ARTISANYCOMMERCE b ) Non – monetary exchanges:

me of the activities in a country are not evaluated in terms of money.

For instance, the domestic services of housewife, Services of N.

S.

S students, charitable trust, and NGO’s works are not paid.

The exchanges which take place in the informal sector without the help of money are called barter exchanges.

In barter exchanges goods are directly exchanged against In India, cause of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP.

Therefore, Gross Domestic Product cald in the standard manner may not give us a clear indication of welfare of a country.

c ) Externalities:

Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid or penalized.

They do not have any market in which they can be bought and sold.

The two types of externalities are Positive Externalities and Negative Externalities.

Page – 66 of 106 :

66 d ) Production of harmful goods:

A productions of, tobacco, illicit brewing of liquor, cigarettes, etc, may be rise the income of a economy but this all injurious to health of people in a society may not achieve social welfare.

f ) Manner of production:

The economic welfare also depends on the manner of production of goods and services.

If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

****** APS EVENING PU COLLEGE OF ARTS AND COMMERCE

Page – 67 of 106 :

67 CHAPTER – 3 MONEY AND BANKING I ] Choose the correct answer:

1.

The main function of a ) Saving b ) Expenditure c ) Medium of exchange d ) Investment money is, 2.

The bank which acts as monetary authority of India.

a ) RBI b ) NABARD c ) RRB d ) IDBI 3.

The banks which are part of the money creating system of the economy are, a ) Bankers b ) Commercial Bank c ) RBI d ) none of the above 4.

The rate at which the RBI lends money to commercial banks against securities a ) Bank rate b ) Repo rate c ) Reserve Repo Rate d ) none of the abo 5.

The important tool by which RBI influences money supply is, a ) Open market operation Closed market operation c ) Money operation none of the above II Fill in the blanks ( each carries 1 mark ) 1.

Economic exchanges without the use of money are referred to as Barter system 2.

RBI is the only institution which can issue currency in India.

3.

Government of Indi issues coins in India.

4.

The principal motive for holding money is to carry outTranasaction 5.

M1 and M2 are nown as Narrow money SEVERING COLLEGE OF AMIS PAND CƠMMERCE III.

Match e following ( each question carries 1 mark ) 1.

SLR 1.

Statutory liquidity ratio 2.

Circulation of Coins 2.

Government of India 3.

Money 3.

Medium of exchange 4.

M3 and M4 4.

Broad money 5.

Repurchase agreement 5.

Repo IV.

ONE Marks questions:

1.

What do you mean by Barter system?

Ans:

The economic exchanges without the mediation of money, is called Barter system.

Page – 68 of 106 :

68 Ans:

Fiat Money is the money which does not have any intrincMMERO 2.

Give the meaning of money.

Ans:

Money is the commonly accepted medium of exchange.

According to F.

A.

walker ‘ Money is what money does ‘.

3.

What is time deposit?

and cannot be withdrawn before stipulated time.

High rate of interest is Interest rate depends on the duration of money.

of time 4.

What is fiat money?

yalue.

Intrinsic value is the value of metal or paper which is equal to face value of coin or currency note.

5.

Write the meaning of high powered money?

Ans:

The total liability of the monetary authority of the country – RBI, is called high powered money.

– It consists of currency ( coins and in circulation with the public and vault cash of commercial banks ) and held by the Government of India and commercial banks with RBI.

6.

Expand CRR.

Ans:

Cash Reserve Ratio.

7.

What is bank rat Ans:

Ans:

Bank Rate is the rate at which the RBI gives loans to the commercial banks.

V.

TWO Marks questions:

1.

Mention two functions of money.

Ans:

The two functions of Money are • Medium of exchange • Measure of value 2.

Give the meaning of CRR and SLR.

Sl.

no Cash reserve ratio Sl.

no Statutory liquidity ratio

Page – 69 of 106 :

69 1.

1.

Each commercial bank is need to save a portion of its deposits in RBI it’s called a Cash Reserve ratio.

As per the Direction of RBI each commercial bank save a portion of its deposit in itself in bank it’s known as Statuary liquidity ratio.

3.

State the credit control instruments of RBI.

Ans:

There are two instruments of RBI to control credit viz.

, Quantitative techniques Bank rate Open market operations Cash reserve ratio Statutory liquidity ratio Qualitative techniques Margin requirements Direct action Credit rationing Moral suasion, etc 4.

Mention the two motives of demand for money.

Ans:

The two motives of demand for money are as • The transaction Motive • The Speculative Motive.

• Precautionary Motive 5.

How does bank rate influences money supply.

Ans:

:

The RBI can influence mo by changing the rate at which it gives loans to the commercial banks.

This rate is called as Bank Rate.

EVENWA PIL.

COLLEGE OF ARTÍANË COMMERCE i ) By increasing the bank rate, loans taken by commercial banks become more expensive which redu the reserves held by the commercial bank and hence decreases money ii ) A fall in the bank rate can increase the money supply.

6.

What RBI is known as Lender of last resort.

Ans:

Wi commercial banks need more funds in order to be able to create more credio, they may go to market for raising such funds or go to the RBI.

The RBI provides them funds through various instruments.

This role of RBI, that of being ready to lend to banks at all times is said to be the lender of last resort.

VI.

FOUR Marks questions:

1.

Briefly explain the functions of money.

Ans:

The functions of money are as follows:

Page – 70 of 106 :

70 i ) Medium of Exchange:

Money is the commonly accepted medium of exchange.

It facilitates exchange of goods and services for money.

It has solved the problems of barter system.

As well as money also helps to measures the value of goods and services.

ii ) Store of value:

People can save part of their present income and hold the same for future.

Money can be stored for precautionary motives needed to overcome financial stringencies.

Money solves one of the deficiencies of barter system difficulty to carry forward one’s wealth under the barter system.

person and iii ) Transfer of value:

Money acts as a transfer of value from person from place to place.

As a transfer of value, money helps us to buy got properties or anything from any part of the country or the world.

iv ) Digital transaction:

At present through the help of money modern economy can be operated by with digital transactions.

Even our government also people use the digital transaction while exchange goods and services.

2.

Briefly explain the functions of RBI.

Ans:

Reserve bank of India is established located in Mumbai.

The functions of RBI as follows, 1935 April 15.

its head quarters • Issuing currency:

RBI is having a monopoly power of issuing currency notes in a country.

Such as Rs.

5, 10, 20,50,100,200,500,2000.

• Government ink:

RBI is act as government bank, it means it’s borrow the loans, accepting deposits and revenue behalf of Government.

• Bankers Bank:

if any commercial bank in India is establish and expand the branches they need to take permission by RBI.

APS EVENINGERUCOLLEGE OF ARTS ANDE Credit control:

RBI implements both Quantitative and qualitative techniques to control the credit generated by commercial banks.

The Quantitative measures to control credit are Bank rate policy, Open market operations, Repo and Reverse Repo rates, Cash reserve ratio and Statutory liquidity ratio.

• Controller of money market:

Page – 71 of 106 :

71 RBI is the leader of money market.

All the activities and components of money market like commercial banks and financial institutions are controlled and directed by RBI.

3.

Write a note on legal definition of money.

Ans:

The total stock of money in circulation among the public at a particular point of time is called money supply.

The legal definitions of money are defined as follows:

• M1 = CU + DD ( CU currency notes held by the public; DD is net demand of the public held by the banks.

• M2 = M1 + Savings deposits with Post office savings banks • M3 = M1 + Net time deposits of commercial Bank M4 = M3 + Total deposits with post office savin organizations.

M1 and M3 are narrow money.

M3 and M4 are broad money.

4.

Write the meaning transaction motive and speculative motive of demand for money and liquidity trap.

Ans:

i ) Transaction Motive:

Transaction motive demand for money refers to holding money to carry out transactions, Formula, M = k.

T Where, T is the total value of transactions in the economy our unit period and k is a position fraction.

Example:

If we receive our income weekly and make payments on the first day of every week, we need not any cash balance throughout the rest of the week.

But our atterns do not normally match our receipts.

People earn incomes at discrete points in time and spend it continuously throughout the interval.

EVENING PUCOLLEGEDE ARISA NOVOMMERCE ii ) Speculative Motive:

Some people hold cash to invest on shares, debentures; gold, immovable properties etc are called a speculative motive for money.

Its formula, M ° = Imax – r r – I’min Example:

Usually people hold as idle cash to speculate the money with the aim of earning capital gains and profits.

VII.

SIX Marks questions:

Page – 72 of 106 :

72 1.

Explain the functions of money.

How does money overcome the short comings of a barter system?

Ans:

Exchanging goods for goods are known as Barter system.

This system has many short comings as follows, ► Difficulties to storing of wealth > Difficulties to transfer value > Lack of common measure Lack of double coincidence To overcome these defects money was invented as commonly accepted medium of exchange in society.

Primary Function Secondary Function Contingent function – Medium of exchange Store value – Measures of value Transfer Value – Future payment & producers satisfaction Explanations:

i ) Primary Function:

– Medium of Exchange:

Money is the commonly accepted medium of exchange.

It facilitates exchange of goods and services for money.

It has solved the problems of barter system.

– Measures of value:

The money acts as a common measure of value.

The values of all goods and services can be expressed in terms of money.

It helps to Facilitates the maintenance of Ex:

If the cost of pencil is Rs.

2 and Pen is Rs.

10, the 5 pencil are equals to relative MENING – PVCOLLEGHOEARTASIND.

COMMERCE value:

People can save part of their present income and hold the same for future.

Money can be stored for precautionary motives needed to overcome financial stringencies.

Whatever the money can be saved in bank it get interest or profit.

Money solves one of the deficiencies of barter system i.

e.

, difficulty to carry forward one’s wealth under the barter system, – Standard of deferred payments:

All the credit transactions are expressed in terms of money.

The payment can be delayed or postponed.

So, money can be used for delayed settlement of dues or financial commitments.

Ex:

Loans, Salary, etc.

,

Page – 73 of 106 :

73 – Transfer of value:

Money acts as a transfer of value from person to person and from place to place.

As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world.

iii ) Contingent Functions of Money:

– Basis of Credit:

Money serves as a basis of the credit.

The modern credit system exists only because of existence of money.

– Distribution of National Income:

Money helps in distribution of nationa income.

The reward paid to factors of production in the form of rent, wages, interest and profit are nothing but the distribution of National Income at factor prices.

– Helps in consumers ‘ and producers ‘ equilibrium:

All goods and services are expressed in terms of money.

The consumer get by purchasing goods with lesser prices and a producer get satisfaction by selling goods higher prices.

2.

Write the story of gold smith LaLa on the process of deposit and loan ( credit ) creation by commercial banks.

Ans:

– Once there was a goldsmith named Lala in a village.

In this village, people used gold and other precious metals in ord buy goods and services.

These metals were acting as money.

– People in the village started their gold with Lala for safe keeping.

In return for keeping their gold, Lala issued paper receipts to people of the village and charged a small fee from them A NEVESTU COLLEGE OF ARTS AND COMMERCE – Slowly, over time, the per receipts issued by Lala began to circulate as money.

This means that instead of giving gold for purchasing wheat, some would pay for wheat or shoes or xother good by giving the paper receipts issued by Lala.

Thus, the paper receipts started acting as money since everyone in the village accepted these as a medium of exchange.

Let us imagine that Lala had 100 kgs of gold, deposited by different people and he had issued receipts corresponding to 100 kgs of gold.

At this time Ramu comes to Lala and asks for a loan of 25 kgs of gold.

Now Lala can decide that everyone with gold deposits will not come to withdraw their deposits at the same time and so he may as well give the loan to Mr.

Ramu and charge him for it.

Page – 74 of 106 :

74 If Lala gives the loan of 25 kgs of gold, Ramu could also pay Mr.

Ali with these 25 kgs of gold and Ali could keep the 25 kgs of gold with Lala in return for a paper receipt.

In effect, the paper receipts, acting as money, would have increased to 125 kgs now.

It seems that Lala has created money out of thin air.

The modern banking system works precisely the way Lala behaves in this example.

3.

Explain the open market operation.

Ans:

The open market operations as one of the tools of RBI to control money supply, refers to buying and selling of bonds issued by the Government in the open market.

This purchase and sale is entrusted to the RBI on behalf Government.

When RBI buys a Government bond in the open market, it pays for it by giving a cheque.

This cheque increases the total amount of reserves in the economy and thus increases the money suppl Similarly, selling of a bond by RBI to ate individuals or institutions leads to reduction in quantity of reserve and money supply There are two types of open market ations.

They are as follows:

a ) Outright:

Outright open market operations are permanent in nature.

When the RBI buys the securities, it is with any promise to sell them later.

Similarly, when the RBI sells these securities, it is without any promise to buy them later.

As a result, the injection / abs ption of the money is of permanent nature.

b ) Repo:

This is ano her type of operation in which the RBI buys the security with agreement of purchase on particular date and price.

This is called repo.

The interest rate at which the money is lent in this way is called repo rate.

conducts repo and reverse repo operations at various maturities like overnight, 7 days, 14 days etc.

4.

Requirement of reserve acts as limit to money ( credit ) creation.

Explain.

Ans:

i ) Cash reserve ratio:

As per the Direction of RBI Each commercial bank is need to save a portion of its deposits in RBI it’s called a Cash Reserve ratio.

ii ) Statutory liquidity ratio:

Page – 75 of 106 :

75 As per the Direction of RBI each commercial bank save a portion of its deposit in itself in bank it’s known as Statuary liquidity ratio.

* The both CRR and SLR act as limit to money ( credit ) creation as follows:

For example, let us assume there is only exist one bank in economy.

And its start s with a deposit of Rs.

100 made by Mr.

X.

The reserve ratio is 20 %.

Thus Bank has Rs.

80 ( 100 – 20 = 80.

i.

e.

, 20 % of 100 is deducted ) to lend and the bank lends out of Rs.

80 to Mr.

Y.

This is shown in the bank’s deposits in the next round as liabilities, maki a total of Rs.

180 as deposits.

Now bank is required to keep 20 % of 180 i.

e.

, 36 as cash reserves.

The bank had started with Rs.

100 as cash.

Since it is required to keep only Rs.

36 as reserves it lends Rs.

64 ( 100-36 = 64 ).

The bank lends out Rs 64 to Mr.

Z.

This in turn shows up in the bank, as deposits.

The process keeps repeating itself till all the reserves become Rs.

100.

The required reserves will be Rs.

100 only when the total deposits become Rs.

500.

This is because, for deposits of Rs.

500, cash reserv would have to be Rs.

100 ( 20 % of 500 = 100 ) The process is illustrated in the following table:

Round Deposit in Bank Required Reserve Loan made by Bank 80 64 APS EVENING PUCOLICE UN AUTES ANDLES MERCE 1 2 100 180 – Last 500 100 400 In the above table, the first column lists each round.

The second column depicts the total deposits with the bank at the beginning of each round.

20 % of these deposits need to be deposited with the RBI as required reserves ( 3rd column ).

What the bank lends in each round gets added to the deposits with the bank in the 2nd round.

4th column indicates the loans made by the banks.

Page – 76 of 106 :

76 VIII ] Project oriented questions:

1.

Write a note on demonetization.

Ans:

-Demonetisation was a new step taken by the Government of India on 8th November, 2016.

As per the regulations Old currency notes of Rs.

500 and Rs.

1000 were no longer legal tender.

New currency notes in denomination of Rs.

500 and Rs.

2000 were introduced.

– The public were advised to deposit old currency notes in their bank account 31st of March 2016 without any declaration and up to31st March 2017 with the RBI with declaration.

til – In order to avoid a complete breakdown and scarcity of cash, Government allowed exchange of Rs.

4000 old currency notes with new currency restricting to a person per day.

Further till 12th December 2016, old currency notes were acceptable as legal tender at petrol pumps, Government hospitals and for paym of Government dues like taxes, power bills etc.

– This initiative had both appreciation and cism.

There were long queues outside banks and ATM centers.

There was acute shortage of currency notes and had adverse effect on economic activities.

But now, normalcy has returned.

* The demonetization also has positive effects.

a ) It improved tax compliance as a large number of people were bought in the tax APE EVENING PUCQALEBIDRARTS AND COMME ambit.

b ) The savings of individual were channelized into the formal financial system.

c ) As a result, banks have more resources at their disposal which can be used to provide more loans at low rate of interest.

d ) Demonetization helps in curbing black money, reducing tax evasion and corruption will decrease.

e ) Demonetization also helps to shifting transaction out of the cash economy into the formal payment system.

Now a days, households and firms have started to shift from cash payment to electronic payments.

*******

Page – 77 of 106 :

77 CHAPTER – 4 DETERMINATION OF INCOME AND EMPLOYMENT I ] Choose the correct answer:

1.

Consumption which is independent of income is called, a ) Induced consumption b ) Autonomous consumption c ) Wasteful consumption d ) past consumption 2.

Value of MCP Lies between a ) 1 And 2 b ) 0 and 1 c ) 2and 4 d ) 0 and 0.

5 3.

The pint where ex – ante aggregate demand is equal to ax – ante aggregate supply will be a ) Equilibrium b ) Disequilibrium b ) Excess Demand c ) excess Supply 4.

Easy Availability of credit encourages a ) Saving b ) Investment c ) Rate of Interest 5.

in the situation of excess demand a ) Demand is less than the level of output ) b ) Demand is more than the level of output c ) Supply is less than the level d ) Supply is more than the level of output INSANGE COLCE OF ARTS AND CÖMMERCE II Fill in the blanks ( eae ) carries 1 mark ) 1.

cY shows the dependence of consumption on Income 2.

Savings is that part of income that is Not consumed 3.

Avarage propensity to consume ( APC ) is the consumption per unit of Income 4.

Investmentls defined as addition to the stock of physical capital.

5.

Size of the multiplier depends on the value of Marginal propensity to consume 6.

I is a positive contact which represent the Autonomous Investment in the III.

Match the following ( each question carries 1 mark ) 1.

Savings 1.

Y – C 2.

Raw material 2.

Intermediate good 3.

Consumption per unit of income 3.

Average propensity consumption 4.

Aggregate demand for final goods 4.

C + I + CY 5.

Excess demand 5.

Leads to rise in the prices in the long run

Page – 78 of 106 :

Ans:

It is the consumption per unit of income.

It is obtained by dividing 78 IV.

ONE Marks questions:

1.

Write the meaning of autonomous consumption.

Ans:

The consumption which is independent of income is called as autonomous consumption.

2.

Give the meaning of marginal propensity to save ( MPS ).

Ans:

It is the change in savings per unit change in income.

It is denoted by S + C = I.

3.

Define average propensity to save ( APS ).

consumption by income i.

e.

, APS = where c is consumption and y is income.

4.

Write the meaning of full employment level Ans:

Full employment level of income is that level of income where all the factors of production are fully employed in the uction process 5.

Mention two fiscal variables which influence aggregate demand.

Ans:

The two fiscal variables mfluence aggregate demand are as follows:

a ) Tax.

b ) Government Expenditure.

6.

Write the formula Ans:

MPC is in consumption by changing in each units of level of income.

MPC V.

TWO Marks questions:

1.

Writet meaning of excess demand and deficit demand.

Sl.

no|

Excess Demand Sl.

no Deficit Demand If the equilibrium level of 1.

If the equilibrium level of output is more than the full output is less than the full employment level, it is due to employment of output, it is the fact that the demand is due to fact that demand is not more than the level of output enough to employ all factors produced at full employment of production.

This situation level.

This situation is called is called deficient demand.

excess demand.

MUINE ALI COLLINS FOR EATS AND’EQMMERCE

Page – 79 of 106 :

79 2.

Give the meaning of investment multiplier.

Write its formula.

Ans:

Investment multiplier is the ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure.

Its formula is, Investment Multiplier = AY / AA 3.

Give the meaning of paradox of thrifts.

Ans:

If all the people of the economy increase the proportion of income they save, total value of savings in the economy will not increase – it will either decrease or remain unchanged.

This result is known as the Paradox of Thrift.

4.

What are the factors which cause change in aggregate demand?

Ans:

i ) Change in consumption ii ) Change in investment VI.

FOUR Marks questions:

1.

Give the meaning of aggregate demand etion.

How can it be obtained graphically?

Ans:

The aggregate demand function shows the total demand at each level of income.

Graphically it means the aggregate demand function can be obtained by vertically adding the consumption Dinvestment function.

Y APS EVENING PU COLLEGE OF ARTS AND COMMERCE Aggregate demand = C + I + cY C = c + cY L i = 1 X Here, OM = C, OJ = I, OL = C + I The aggregate demand is obtained by vertically adding the consumption and investment functions.

The aggregate demand function is parallel to the consumption i.

e.

, they have the same slope of ‘ c 2.

Briefly explain consumption function.

Page – 80 of 106 :

80 Ans:

The consumers demand can be expressed by the equation C = Ĉ + cY, where Ĉ is autonomous expenditure and c is the marginal propensity to consume.

The consumption function can be graphically expressed as follows:

C = + cY c Y In the above diagram Ĉ is the intercept of the ‘ c ‘ is slope of consumption function equals a.

3.

Explain the consumption and investment function with help of graphs.

Ans:

In a two sector model, there are two sources of final demand.

The first is consumption and the second is investment Investment functions:

The investment function was shown as I = I.

Graphically, this is shown as a horizontal line at a height equal to Ï above the horizontal axis.

APS EVENING PU COLLEGE OF ARTS AND COMMERCE I = 1 -Y income ) In this model, I is autonomous which means, it is the sasme no matter whatever is the level of income.

Consumption Function:

Page – 81 of 106 :

81 The consumers demand can be expressed by the equation C = Ĉ + cY, where Ĉ is autonomous expenditure and c is the marginal propensity to consume.

The consumption function can be shown as follows.

The consumption function can be graphically expressed as follows:

C = C + CY O Y In the above diagram Ĉ is the intercept of the ‘ c ‘ is slope of consumption function equals a.

VII.

SIX Marks questions:

1.

Explain the effects on autonomous change in aggregate demand on income and output.

Ans:

The equilibrium level of income depends on aggregate demand.

If aggregate demand changes, the equilibrium level of income also changes.

This happens in any one or n of the following situations.

APS SVERING COLLEGE OHARTS AND COMMERCE a ) Change in onsumption:

The change in consumption can happen due to Change in autonomous consumption ( Ĉ ) and marginal propensity to consume ( c ) in investment:

It is assumed that investment is autonomous.

That does not depend on income.

There are other variables which can affect investment, they are Availability of credit:

easy availability of credit encourages investment.

– Interest rate:

Rate of interest is the cost of investible funds and at higher interest rates, firms tend to lower investment.

Page – 82 of 106 :

82 * The effect of an autonomous change in Aggregate demand on Income and output can be explained with the help of following diagram Aggregate Demand E2 AD AD2 = A2 + cY АБ ΔΙ AL J AD = A1 + cY AD1 E1 G A Y Y2 Income In the above diagram, Income is measured in X axis Aggregate demand is measured in Y axis.

When the people income j QY1 the aggregate demand is AD1 its equilibrium point can be shown in the point of Y1E1 ‘.

Similarly when the income of people will reases to OY2 the aggregate demand of people also increases to AD2 and equil pium point is shift to point of ‘ Y2E2 ‘.

2.

Explain the supply side of macro conomics equilibrium.

Ans:

Under macroeconomics, we onsider the price level as fixed.

Here, the aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all Whatever is the level of P, that much will be supplied and price level has not role to play.

This kind of supply situation is shown by a 45 ° line.

APS ÉVENING PLE COLLECOMAKE AND COMMERCE Aggregate supply 0 1000GDP Income In the above diagram Income is measured in horizontal axis and Aggregate supply is measured in vertical axis.

If GDP is Rs.

1000 at point A, the goods worth of Rs.

1000 is supplied.

Page – 83 of 106 :

83 Equilibrium:

Equilibrium is shown graphically by putting ex ante aggregate demand and supply together in the following diagram.

AD & AS E M The point where ex ante aggregate demand ( AD ) is equal ante aggregate supply ( AS ) will be equilibrium.

Thus equilibrium point is £ and equilibrium level of income is OY1.

3.

Explain the multiplier mechanism.

Ans:

The production of final goods employs factors like labour, capital, land and entrepreneurship.

the total value of the output is distributed among different factors of production payments, such as, Land:

Rent Capital:

Interest:

Wages ganization:

Profit The remaining part is entrepreneur.

Thus the sum of aggregate factor payments i.

e.

, National is equal to the aggregate value of the output of final goods.

Its also known as GDP.

Example:

APREGENING RÁ, POLIÉGE OMIRTS AND COMMERCE the extra output 10 is distributed among various factors of the income of the economy also goes by 10.

hen income increases by 10, consumption expenditures goes up by 10.

Since people spend 0.

8 ( marginal propensity to consume ) fraction of their additional income on consumption.

• Hence, in the next round, aggregate demand in the economy goes up by ( 0.

8 ) 210 and there again emerges an excess demand equal to 10 and so on.

This can be represented in the following table.

Page – 84 of 106 :

84 Rounds Consumption Output / Income Aggregate Demand 10 Round 1 10 Round 2 ( 0.

8 ) 10 ( 0.

8 ) 10 ( 0.

8 ) 10 Round 3 ( 0.

8 ) 2 10 ( 0.

8 ) 2 10 ( 0.

8 ) 2 10 Round 4 ( 0.

8 ) 3 10 ( 0.

8 ) 3 10 Etc.

, The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called investment multiplier of the economy.

The investment multiplier can be expressed as follows:

1 ANNENWOJ ANV SLOW, LŐL 9810 30 Sanita С 4.

Discuss the paradox thrift.

Ans:

The paradox of is a situation where, if all the people of the economy increase their saving the total value of savings in the economy will not increase but it either deci ses or remains constant.

That means, the people become more thrifty and they end up saving less or same as before.

due to the initial equilibrium of Y = 250, there is an autonomous shift in expenditure pattern- they suddenly become more thrifty.

This may happen a new information regarding an imminent war or some other disaster, which makes people more conservative about their expenditures.

Hence the MPS ( marginal propensity to save ) of the economy increases or the MPC ( marginal propensity to consume ) from 0.

9 to 0.

6.

At the initial income of Ad = Y = 250, this sudden decline in MPC will imply a decrease in aggregate consumption spending and aggregate demand by an amount equal to ( 0.

9-0.

6 ) x 250 = 75.

This can be regarded as an autonomous reduction in consumption expenditure to the extent that

Page – 85 of 106 :

85 the change in marginal propensity consume is occurring from some exogenous cause and is not a consequence of changes in the variables of the model.

As Aggregate demand decreases by 75, it falls short of the output Y = 250 and there will be excess supply equal to 75 in the economy.

Stocks will pile up in warehouses and producers decide to cut the value of production by 75 in the next round to restore equilibrium in the market which further leads to reduction in factor payments in the next round and hence reduction in income by 75.

As income decreases people reduce consumption proportionately and aggregate demand goes down again by ( 0.

6 ) -75.

The process goes on as follows:

.

00.

The total reduction in output turns out to be:

75+ ( 0.

6 ) 75 + ( 0.

6 ) -75 + 75 / 1-0.

6 The paradox of thrift can be explained in the following AD ADI AD2 = A + c2Y AD2 E A Income APS EVENING PU COLLEGE OF ARTS AND COMMERCE As per the above when A changes the line shifts upwards or downwards in parallel.

When c nges, however, the line swings up or down.

An increase in marginal save or a decline in marginal propensity to consume reduces slope of the AD ( Aggregate Demand ) line and it swings downward:

The above diagram depicts the paradox of thrift – downwards swing of AD line.

**********

Page – 86 of 106 :

86 CHAPTER – 5 GOVERNMENT BUDGET AND THE ECONOMY I ] Choose the correct answer:

1.

The taxes on individual and firms are a ) Direct Taxes b ) Indirect Taxes c ) Fixed Taxes d ) Non Tax revenues 2.

Duties levied on goods produced with in the country.

a ) Service Taxes b ) Estate duties c ) Excise duties d ) Custom duties 3.

The Tax which acts as an automatic stabilizer a ) Qualitative income tax b ) Income Tax c ) Quantitative Tax d ) proportional Income 4.

Which of the following is an example for paper taxes a ) Income Tax b ) Excise Taxes c ) Wealth Tax d ) Customs Taxes put under conditions of high level of 5.

When the demand exceeds the available employment, this may give rise to, a ) Inflation c ) Stabilization ANGALUN ČETE OBARTS AND COMMERCE II Fill in the blanks ( each stion carries 1 mark ) 1.

Non paying users of public goods are known as Free Riders 2.

Financial year runs fro April to 31st March in India.

3.

Taxes imposed on goods imported into and exported out of India are called Custom duties 4.

The government may spend an amount equal to the revenue it collects this is known as Balanced Budget 5.

Revente deri deficit = Revenue Expenditure = Revenue Receipts III.

ONE Marks questions:

1.

What are the public goods?

Ans:

Public goods are the goods and services provided by the Government and which cannot be provided by the market mechanism.

Ex:

Roads, defense, etc.

Page – 87 of 106 :

87 2.

Who are free riders?

Ans:

If some users do not pay and it is difficult and impossible to collect fees for the public good, such non paying users are known as free riders.

3.

What do you meant by public provision?

Ans:

Public provision means that they are financed through the budget and can be used without any direct payment.

4.

Give the meaning of progressive Tax?

Ans:

If the rate of tax is changes as per level of income changes are known as progressive tax.

5.

What are the revenue receipts?

Ans:

Revenue receipts are those receipts that do not lea government.

They consist of Tax and non – tax revenues.

to a claim on the 6.

Write the meaning of capital receipts?

Ans:

All those receipts of the Government which create liability or reduce financial assets are termed as capital receipts.

7.

Give the meaning of Revenue Ans:

Revenue Expenditure is expenditure incurred by government out of its current revenue receipts.

This expenditure is related to maintain government departments and various services, interest payments, grants given to state governments etc.

ATÀLNN05 ° N, Suka0 Trepadlands 8.

Give the meaning of Capital Expenditure?

Ans:

The capit expenditures are the expenses of government which result in or financial assets or reduction in financial liabilities.

It includes expenditure on the acquisition of land, building, machinery, Cequipment, investment in shares, etc.

9.

Expand FRBMA.

Ans:

Fiscal Responsibility and Budget Management Act.

10.

What is primary deficit?

Ans:

Primary deficit is the fiscal deficit minus the interest payments.

Or Gross Primary deficit = Gross Fiscal deficit – Net interest liabilities.

Page – 88 of 106 :

88 IV.

TWO Marks questions:

1.

Write a difference between public provision and public production.

Sl.

no Public Provision Sl.

no Public production A set of facilities financed When the goods produced by the government directly by the Government, 1.

through its budget are 1.

are called a public production known as public provision.

These are used without 2.

These are used with direct any direct payment.

payment.

Example 2.

2.

Example Free education, Electricity, water supply etc.

Who mid day meals etc.

free riders?

Why are they called so?

Ans:

If some users do not pay and it is difficult sometimes impossible to collect fees for the public good, such non paying users are known as free riders.

are They are called so because, consumers will not voluntarily pay for what they can get for free and for which there is no exclusive title ( ownership ) to the property being enjoyed 3.

Distinguish between surplus budget and deficit budget.

Ans:

Si no Si no Deficit Budget If anticipated expenditure of the 1.

government exceed anticipated 1.

government exceed its anticipated Revenue in a year is called Deficit budget.

2.

It lanned by developed 2.

It usually planned by developing countries.

MEMANG PO JELLEGE OF ARTS AND COMMERCE goods must be provided by the central government.

The benefits of public goods are available to all and are not restricted to one consumer.

Example public goods like, park or measures of air pollution, the benefits will accrue to all whereas private goods, say, chocolates, will not be available to others.

Page – 89 of 106 :

89 lio In case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits.

But, in public goods, there is no feasibility way of excluding anyone from enjoying the benefits of the good.

Hence, public goods must be provided by the Government.

5.

Mention the non – tax revenues of the central government.

Ans:

– Interest receipts on account of loans by the central government.

Dividends and profits on investments made by the government.

Fees and other receipts for services rendered by the government.

– Grants – in – aid from foreign countries and international 6.

Why the proportional income tax acts as automatic Ans:

The proportional income tax, acts as an automatic stabilizer because, it makes disposable income and consumer spending less sensitive to fluctuations in GDP.

When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes.

This helps to limit the upward fluctuation in consumption spending.

During a recession when GDP falls, disposable income falls less sharply and consumption does not drop as much as it otherwise would have falla the tax liability been fixed.

This reduces the fall in aggregate demand and stabilizes the economy.

V.

FOUR Marks questions:

1.

Write the chart of Governm Ans:

The chart of Government Budget is represented as follows:

APS EVENING PU CON EĆE UF ARTS AN ASCOMMERCE Government Budget Capital Budget Revenue Receipts Revenue Expenditure Capital Receipts Capital Expenditure Plan Non Plan Tax Revenue Non tax RevenueR.

ERev.

Exp Loans Disinvestment Plan CE Non Plan Cap.

Exp RE – Revenue Expenditure; C E – Capital Expenditure

Page – 90 of 106 :

90 machinery, equipma MRAERCE 2.

Distinguish between revenue expenditure and capital expenditure.

Sl.

no Revenue Expenditure Sl.

no Capital Expenditure 1.

Revenue Expenditure is 1.

The capital expenditures are expenditure incurred for the expenses of government purposes other than the which result in creation of creation of physical or physical or financial assets or financial assets of the reduction in financial central government.

liabilities.

2.

This expenditure is related 2.

It includes expenditure on to maintain government acquisition of land, building, departments and various services, interest payments, grants given to state governments etc.

3.

It includes Plan Revenue expenditure and non – plan revenue expenditure.

4.

Interest payments, external loans and from various reserve funds constitute largest component under non – plan revenue expenditure.

Central plan and central assistance for state and union territory plans constitute largest component under non plan capital expenditure.

3.

Briefly explain the revenue deficit and fiscal deficit.

Ans:

If the Government’s expenditure exceeds its revenue, it is called Budget deficit.

The budget deficit includes Revenue Deficit and Fiscal Deficit.

Deficit:

The revenue deficit refers to the excess of Government’s revenue expenditure over revenue receipts.

That means Revenue Deficit = Revenue Expenditure – Revenue Receipts.

– The revenue deficit includes only such transactions that affect the current income and expenditure of the government.

Page – 91 of 106 :

91 – When the government incurs a revenue deficit, it implies that the government is dis – saving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

b ) Fiscal Deficit:

It is the difference between the government’s total expenditure and its total receipts excluding borrowing.

It can be express as follows, Gross Fiscal Deficit = Total Expenditure – ( Revenue receipts + non – debt creat capital receipts ).

The non – debt creating capital receipts are those receipts which are not borrowings and therefore, do not give rise to debt.

Examples are recovery of loans and the proceeds from the sale of public sector undertakings.

So it Fiscal deficit also expressed as follows, Gross fiscal deficit = net borrowing at home + borrowing from RBI + Borrowing AKTSLAND 4.

Does public dept impose a Ans:

The government, by borrowing transfers the burden of reduced consumption on future generations.

• This is because it borro by issuing bonds to the people living at present but may decide to off the bonds 10 years later by raising taxes.

• The tax may be levied on the young population that has just entered the work force.

ose disposable income will go down and hence consumption.

Thus, national savings would fall.

Further, government borrowing from the people reduces the savings available to the private sector.

• Therefore, to the extent of the reduction in capital formation and growth, debt acts as a burden on future generations.

5.

Write a short note on Ricardian equivalence.

APSÁNLATNE PARCBULEURSOE • According to Ricardo a counter argument is that consumes are forward looking and will base their spending not only on their current income but also on their expected future income.

• They will understand that borrowing today means higher taxes in the future.

Page – 92 of 106 :

i ) Revenue Receipts:

Revenue receipts are those receipts which do not lead to a 92 • Further, the consumer will be concerned about future generations.

They would increase savings now, which will fully offset the increased government dis – saving so that national savings do not change.

This view is called Ricardian equivalence.

• David Ricardo said that in the face of high deficits, people save more.

It is called equivalence because; the taxation and borrowing are equivalent means of financing expenditure.

VI.

SIX Marks questions:

1.

Explain the classifications of receipts.

Ans:

The government budget consists of Revenue Budget and apital Budget Both the budgets have receipts viz.

, Revenue Receipts and receipts.

claim on the government.

They include the • Tax Revenue Non Tax Revenue ARTS AND COMMERCE * Tax Revenues:

are the important components of revenue receipts.

Tax revenue consists of Direct tax and indirect taxes – The direct tax includes income corporate tax, wealth tax and gift tax etc.

, – Indirect tax includes exc duty ( tax on production of goods in the country ), customs duties ( tax on e orts and imports ) and service tax ( GST ).

Olanda, A BLANETARIO Other direct taxes like have never brought in large amount of revenue and thus they are called paper taxes.

revenue of the central government consists of the following:

Interest receipts on account of loans by the central government.

Dividends and profits on investments made by the government.

Fees and other receipts for services rendered by the government.

ii ) Capital Receipts:

All those receipts of the government which create liability or reduce financial assets are termed as capital receipts Sources of capital receipts are:

Page – 93 of 106 :

93 The government receives money by way of loan Sale of government assets like sale of shares in Public Sector Undertakings Selling of treasury bills to RBI or commercial bank Loans borrowing from foreign financial institutions.

Etc.

, 2.

Explain the classification of expenditure.

Ans:

The public expenditure can be classified as follows:

• Revenue Expenditure Capital Expenditure.

i ) Revenue Expenditure:

It is the expenditure of government spent on the purposes other than the creation of physical or financial assets.

-This expenditure is related to maintain government departments and various services, interest payments, grants given to state governments etc.

The revenue expenditure consists of the following; ► Plan Revenue expenditure; and > Non – plan revenue expenditure, o central plans and central assistance for – The plan revenue expenditure is state and union territory plans.

– The non plan revenue ture covers a vast range of general, economic and social services of the government.

The main items of non – plan expenditure are interest payments, defence services, subsidies, salaries and pensions.

ii ) Capital Expenditure:

The capital expenditure of the government includes the expenditures which result in creation of physical or financial assets or reduction in financial liabilities.

OpticameGEOT ARTS AND COMMERCE APPLE – It includes expenditure on the acquisition of land, building, machinery, hent, investment in shares, etc.

The capital expenditure is categorized as follows:

Plan capital expenditure and Non – plan capital expenditure The plan capital expenditure is related to central plan and central assistance for state and union territory plans.

The non – plan capital expenditure covers various general, social and economic services provided by the government.

Page – 94 of 106 :

94 3.

The fiscal deficit gives borrowing requirements of the government.

Elucidate.

Ans:

If the Government’s expenditure exceeds its revenue, it is called Budget deficit.

The budget deficit includes Revenue Deficit and Fiscal Deficit.

a ) Revenue Deficit:

The revenue deficit refers to the excess of Government’s revenue expenditure over revenue receipts.

That means Revenue Deficit = Revenue Expenditure – Revenue Receipts.

– The revenue deficit includes only such transactions that affect the current income and expenditure of the government.

– When the government incurs a revenue deficit, it implies that government is dis – saving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

b ) Fiscal Deficit:

It is the difference between the gove ument’s total expenditure and its total receipts excluding borrowing.

It can be express as follows, Gross Fiscal Deficit = Total Expenditure – ( Revenue receipts + non – debt creating eceipts ).

capital recei So, fiscal deficit indicates that a large parvof borrowing is being used to meet its consumption expenditure needs rather than investment.

4.

Discuss the issues deficit duction.

has become the major issue in recent years.

The government deficit can be reduced by an increase in taxes or reduction in expenditure.

Andi The deficitare che il suo APS EVENING PU COLLEGE OF ARTS AND COMMERCE In India, the government has been trying to incre tax revenue with greater reliance on direct taxes as the indirect taxes are regressive in nature and have impact on all income groups equally.

There is also an attempt made to raise receipts through disinvestment.

The major thrust is towards reduction in government expenditure.

This could be achieved through making government activities more efficient through better planning of programmes and better administration.

The recent study says that, to transfer Re.

1 to the poor, the government spends Rs.

3.

65.

This kind of expenditure may be increase welfare of socity but also cause to increase Government expenditure.

Page – 95 of 106 :

95 The other way of reducing government expenditure is to change the scope of the government by withdrawing from some of the areas where it operated before.

Cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation etc.

would adversely affect the economy.

So the instead of above the expenditure, if government control the recession, economic crisis, credit control, etc in an economy will generate good government and it can be balance the Fiscal deficit.

to 5.

Explain the changes in taxes with the help of diagram.

Ans:

We know that a decrease in tax leads to increase in disposable income at each level of income.

This shifts the aggregate expenditure schedule upwards by a fraction ‘ c ‘ of the decrease in taxes.

This can be shown in the following diagram:

AD Y = AD E E 0 Income APS EVÉNIA NU COLLEGE ORARTS AND COMMERCE In the above diagram, e is measured in X axis and Aggregate demand is measured in Y axis.

Wh the tax is decreased, there will be increase in consumption and output and the tax multiplier is negative.

The tax multiplier

Page – 96 of 106 :

96 VII.

Project oriented questions:

1.

Prepare a budget on monthly income and expenditure of your family.

Ans:

The budget is a financial statement which includes anticipated income and anticipated expenditure.

An imaginary monthly income and expenditure of a family is given below:

Income Expenditure 1.

Father’s salary Rs.

40,000 1.

Food 2.

Rent from house Rs.

10,000 2.

Electricity 3.

Income from others Rs.

10,000 3.

Water 4.

Transportation Rs.

3000 5.

Newspaper Rs.

500 6.

Mobile recharge Rs.

300 7.

Miscellaneous Rs.

5,000 Total:

Rs.

60,000 Rs.

20,300 Budget for the month of January – 2019 This family has surplus budget as its income is more expenditure.

500 APS EVENING PU COLLEGE OF ARTS AND COMMERÉE

Page – 97 of 106 :

97 CHAPTER – 6 OPEN ECONOMY I ] Choose the correct answer:

1.

The consumers and producers can choose between domestic and foreign goods, this market linkages is called, a ) Financial market linkages b ) Output market linkages c ) Labour market linkages d ) none of the above 2.

The exchange rate is determined by the market forces of demand and supply is called as, a ) Fixed exchange rate b ) Dirty floating exchange rate c ) Flexible exchange rate d ) none of the above 3.

The balance of payments ( BOP ) recorded these transactions between residents and with the rest of the world.

a ) Goods b ) Services C ) Assets All of the above 4.

The rate at which the price of one currency terms of foreign currency is called, a ) Exchange control c ) Foreign exchange rate None of the above 5.

In this standard all currencies were defined in terms of gold a ) Metal standard b ) Silver standard c ) Gold standard d ) None of the above.

Bannon kay Simu a avaTIOD ANTARA II Fill in the blanks carries 1 mark ) 1.

Current account is the record of trade in goods and services and transfer payments.

2.

Capital account records all international transactions of assets.

foreign currency in terms of domestic currency has increased and Depreciation of domestic currency.

4.

aged floating exchange rate is a mixture of a flexible and fixed exchange rate stem.

5.

The Bretton conferences held in the year 1944 III.

Match the following ( each question carries 1 mark ) 1.

SDR 1.

Paper Gold 2.

Balance of Payment 2.

Trade in goods and services 3.

Balance of trade 3.

Trade in goods 4.

Floating exchange Rate 4.

Flexible exchange rate 5.

Managed Floating 5.

Dirty Floating

Page – 98 of 106 :

98 IV.

ONE Marks questions:

1.

What do you mean by open economy?

Ans:

An open economy is an economy which has economic relationship with other countries in the world with regards financial asset, goods and services, etc.

2.

What is balance of payment?

Ans:

Balance of payment is a systematic record of all economic transactions between one country and rest of the world during a year.

3.

What is balance of trade?

Ans:

Balance of trade is the difference between the value of visible items of export and import of a country during a year.

4.

What do you mean by flexible exchange rate?

Ans:

Flexible exchange rate is a system in which exchange rate keeps on changing or floating.

In this system exchange rate is determined by market force.

5.

Give the meaning of official reserve sale.

Ans:

when there is deficit balance of payments, Reserve Bank of India sells foreign exchange it is called official reserve sale.

ÁNS EVENING NA OLMALIDA ARTS AND COMMERCE 6.

Give the meaning of mar floating Ans:

The managed floating exchange rate system is the mixture of a flexible exchange rate system and a fixed exchange rate system.

Here, eserve bank of India fixed lower and upper of exchange rate.

Vhe exchange rate fluctuates outside this two limits monetary authority intervenes to V.

TWÒ Marks questions:

1.

Mention the three linkages of open economy.

Ans:

– Output market linkage Financial Market linkage Labour market linkage.

2.

What is difference between current account and capital account?

SL Current account SL Capital account

Page – 99 of 106 :

99 1.

1.

It is the record of trade in goods and services and transfer payments.

It consists of factor and non – factor incomes apart from gifts, remittances It is the record of all international transactions of assets.

It includes money, stocks, bonds, government debt etc.

2.

2.

and grants.

3.

When do surplus and deficit arise capital account?

Ans:

Surplus in capital account arises when the capital inflows are greater than capital outflows.

Deficit in capital account arises when capital inflows are lesser than capital outflows.

4.

Write the meaning of balanced, surplus and Deficit BOT.

Ans:

a ) Balance of trade is said to be in balance when exports of goods are equal to the imports of goods i.

e.

, balanced balance of trac b ) Surplus balance of trade arises if country’s exports of goods are more than its imports.

c ) Deficit balance of trade arises if a country’s imports of goods are more than its exports.

FENOG PILLOLLEGE OHAR SKAUD COMMERCE 5.

Why do people demand eign exchange?

Ans:

People demand forei exchange rate because of the following reasons:

To purchase and services from other countries.

To purchase financial assets abroad.

6.

What is foreign exchange rate?

Ans:

The term foreign exchange means conversion of one currency into other.

It links the currencies of different countries and enables comparison of international costs and prices.

Ex:

if we need to pay Rs.

68 for 1 dollar, then the exchange rate is Rs.

68 per dollar.

7.

Differentiate between depreciation and devaluation.

SL Depreciation SL Devaluation Here the price of foreign The deliberate reduction of 1.

currency in terms of domestic 1.

Indian currency against to

Page – 100 of 106 :

100 2.

Write the chart of components of Current account.

currency increases.

foreign currency is called Devaluation.

It happens because of market It is a deliberate action of 2.

forces i.

e.

, demand for foreign 2.

government.

exchange and supply of foreign exchange.

VI.

FOUR Marks questions:

1.

Write a note on balance of trade.

Ans:

Balance of trade is the difference between the value of exports and value of imports of goods of a country in a given period of time.

Export of goods is entered as a credit item in balance of trade.

Impor entered as a debit item in balance of trade.

It is also called Balance of trade is categorized into 3 types, a ) Balance BOT:

Balance of trade is said to be in balance when exports of goods are equal to the imports of goods i.

e.

, balanced balance of trade.

b ) Surplus BOT:

Surplus balance of trade arises it country’s exports of goods are more than its imports.

c ) Deficit BOT:

Deficit balance of trade arises if a country’s imports of goods are more than its exports.

Balance of trade is narrow concept and it may not show the international economic position of an economy.

It gives partial picture of international transactions and it is less reliable.

ABUSE NING PU OMULAGE OF ARTSANIR.

COMMERCE Ans:

The chart which consists of different components of current account can be drawn as follows:

Current Account Trade in services Transfer Payments Export of Goods Import of Net factor Goods Income Net non – factor Income Gifts, remittances Grants Net income From Compensation of employees Shipping, banking insurance, tourism software service etc.

Net investment income

Page – 101 of 106 :

101 3.

Write the chart of components of Capital account.

Capital Account Investments External Borrowings External Assistance Direct Portfolio External Govt.

aid, Inter Investment Investment commercial governmental, multi Borrowings FDI, Equity FII, Offshor short term debt Reinvested funds Earnings & Other direct Capital flows FDI – Foreign Direct Investment; FII – Foreign Institutional Investments 4.

Briefly explain the effects an increase in demand for imports in the foreign exchange market with the help of a Ans:

Foreign exchange market is the market in which national currencies are traded for one another.

The major participants in foreign exchange market are commercial banks, foreign exchange brokers and other authorized dealers and monetary authorities.

✓ Foreign exchange is the price of one currency in terms of another merican dollar is equals to RS.

64 of Indian currency.

MIOD UNV ŠIAME TO DA Judita ames ✓ The exchange rate can be determined by 3 ways as follows, fixed exchange rate Managed floating exchange rate.

The flexible exchange rate is determined by the market forces of demand and supply.

Here, the exchange rate is determined at that point where the demand curve intersects with the supply curve.

If the demand for foreign goods and services increases, the demand curve shifts upward and right to the original demand curve.

This can be graphically represented as follows,

Page – 102 of 106 :

102 Rupees E2 Ei D ‘ S D O Dollars In above the diagram shown when demand for foreign goods increases D1 the equilibrium of foreign exchange also Shift to E to El.

Because demand curve is intersect the supply curve.

5.

Explain the merits and demerits of flexible and fixed exchange rate system.

Ans:

i ) Flexible exchange rate:

The flexible exchange rate is determined by the market forces of demand and supply.

Here, the exchange rate is determined at that point where the demand curve intersects with the • Merits of Flexible exchange rate:

The flexible exchange rate system gives government more flexibility and they do not need to maintain large stocks of foreign exchange reserves.

The movements in the exchange e rate automatically take care of the surpluses and deficits in the Balance WENN NI TOLLAL OF ARTS AND COMMERCE • Demerits of Flexible xchange rate:

It may lead to uncertaint os in foreign exchange market due speculations.

ii ) Fixed rate:

Under this exchange rate system, the Government fixes the exchange e at a particular level.

Here, the central monetary authority or the lecides the exchange rate in accordance with the international market Merits of Fixed Exchange rate:

There is more credibility that the government will be able to maintain the exchange rate at the level specified.

In case of deficit balance of payments, the governments will interfere to take care of the gap by use of its official reserves.

• Demerits of Fixed exchange rate:

Page – 103 of 106 :

– The Trade in services includes the factor 103 If the foreign exchange reserves are inadequate, people would begin to doubt the ability of the government.

There may be aggressive buying of one currency forcing the government to devalue, so there may be speculative attack on a currency.

VII.

SIX Marks questions:

1.

Write a note on balance of payment.

Ans Balance of payment is a systematic record of all economic transactions between one country and rest of the world during a year.

• The balance of payments consists of two accounts viz.

, ► Current Account ► Capital Account.

i ) Current Account:

– It is the record of trade in goods and services and trans payments.

The main components of current account are trade in goods exports and imports of goods.

ncome and non – factor income transactions.

– Transfer payments are the receipts which the residents of a country get for free without having to provide any goods or services in return.

They consist of gifts, remittances and grants.

They could be given by the government or by private citizens living abroad.

Current account also categorized into 3 types as follows, APŽÍVIANG BU COLLEGE DE ARTS AND COMMERCE Current account is in balance when receipts on current account are equal to the payments on the current account.

current account means that the nation is a lender to other countries current account means that the nation is a borrower from other ii ) Capital Account:

It is the record of all international transactions of assets.

An asset is any one of the forms in which wealth can be held.

This account includes stocks, bonds, government debt etc.

Purchase of assets is a debit item on the capital account.

For example:

Page – 104 of 106 :

104 If an Indian buys a UK car company it inters capital account transactions as a debit item.

On the other hand, sale of assets like sale of share of an Indian company to a China customer is a credit item on the capital account.

The capital account mainly consist 2 types as follows, Foreign direct investment, foreign institutional investments, External borrowings and assistance.

The capital account will in balance when capital inflows are equal to capital outflows.

Surplus in capital account arises when capital flows are greater than capital outflows and deficit in capital account arises when inflows are lesser than capital outflows.

2.

Briefly explain the foreign exchange market with fixed exchange rates with the help of diagram.

Ans:

Under fixed exchange rate system, the goverment decides the exchange rate at a particular level.

The foreign exchange market with fixed exchange rates can be explained with the help of following diagram.

Rs / D E1 4 CAPS EVENING – PU COLLEGE OF ARTS AND COMMERCE E E2 D Dollars In the above diagram, the market determined exchange rate is e where demand and supply intersect.

However, if the government wants to encourage exports for which it needs to make rupee cheaper for foreigners it would do so by fixing a higher exchange rate say, Rs.

50 per dollar from the current exchange rate of Rs.

70 per dollar.

At this exchange rate, supply of dollars exceeds the demand for dollars.

The RBI

Page – 105 of 106 :

105 intervenes to purchase the dollars for rupees in the foreign exchange market in order to absorb this excess supply which has been marked as AB in the diagram.

3.

Write a short note on the Gold Standard.

Ans:

The gold standard was prevailing from 1870 to 1914.

All currencies were defined in terms of gold; indeed some were actually made of gold.

Each participant country committed to guarantee the free convertibility of its currency into gold at a fixed price.

That means a domestic currency which was free convertible at fixed another asset acceptable in international payments.

Exchange rates were determined by its worth in terms of gold.

For example:

If one unit currency A was worth one gram of gold, one unit of currency B was worth two grams of gold, currency B would be worth twice as much as currency A.

Economic agents could directly hvert one unit of currency B into two units of currency A, without having to buy gold and then sell it.

The rates would fluctuate between an upper and a lower limit, these limits being set by the costs of melting, shipping andr coining between the two currencies.

To maintain the official parity each country needed an adequate stock of gold reserves.

All countries on the tandard had stable exchange rates.

Many problems the gold standard to break down periodically.

Moreover, world price levels were at the mercy of gold discoveries.

This can be explained looking at the crude quantity theory of money, M = kPY, which, if output ( GNP ) increased at the rate of 4 percent per year, the gold supply would have to increase by 4 percent per year to keep APSBVENING POLEDNE GEOR ARTS AND COMMERCÊ With mines not producing this much gold, price levels were falling all over the world in late 19th century, giving rise to social unrest.

For a period, silver supplemented gold introducing ‘ bi – metallism “.

Also, fractional reserve banking helped to economize on gold.

Paper currency was not entirely backed by gold; typically countries held one – fourth gold against its paper currency.

Page – 106 of 106 :

106 VIII ] Project oriented questions:

1.

Name the currencies of any five countries of the following.

SL.

NO Countries Currencies 1 U.

S.

A Dollar 2 UK Pound sterling 3 GERMANY euro 4 JAPAN Yen 5 CHINA Yen 6 ARGENTINA Argentaino peso 7 UAE Dhirham 8 BANGLADESH Taka 9 RUSSIA Rubel APS EVENING PU COLLEGE OF ARTS AND COMMERCE