COMPREHENSIVE GUIDELINES FOR ACADEMIC EXCELLENCE ...

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Transcript of COMPREHENSIVE GUIDELINES FOR ACADEMIC EXCELLENCE ...

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COMPREHENSIVE GUIDELINESFOR

ACADEMIC EXCELLENCEIN

ECONOMICSfor

PGTs’

2010

State Council of Educational Research & TrainingVarun Marg, Defence Colony, New Delhi-110024

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Published By State Council of Educational Research & Training, New Delhi and Printed at SonuPrinting Press (P) Ltd. S-217, Bank Street Munirka, New Delhi-110067

Chief AdvisorRakesh Mohan, IAS

Principal Secretary (Education) GNCT of Delhi-cum-Chairperson, SCERT

GuidanceP. Krishnamurthy, IAS

Director (Education), GNCT of Delhi

CoordinatorDr B. K. Kappor

ContributorsProf. S. K. Singh

Dr. Poonam NagpalMr. Neelam VinayakMr. Rajni NijhawanMs. N. R. ShandilyaMr. Sanjeev Kumar

Mr. S. N. WadwaSheelu MarAlex (English)Suman Bhatia (Life Skills)

Publication OfficerMukesh Yadav

Daljeet KaurAdditional Director, SCERT

Dr. Nahar SinghSecretary, SCERT

Rashmi Krishnan, UTCSDirector, SCERT

Dr Pratibha SharmaJoint Director, SCERT-cum-State Pedagogy Coordinator

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1 Syllabus 1

2. Design of the question paper 3

3. Blue Print 4

4. Sample question papers 5

5. Hard Spots 42

6. Tips to students to score better 72marks in examination

S.No. Name of the Topic Page No.

CONTENTS

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SyllabusCentral Board of Secondary Education, New Delhi

Economics I Class XII

1½HoursUnitsPart -A: Introductory Microeconomics1. Introduction2. Consumer Equilibrium and Demand3. Producer Behaviour and Supply4. Forms of Market and Price Determination5. Simple Applications of Tools of Demand and Supply

PART - A: INTRODUCTORY MICROECONOMICS(Periods 10)

Unit-1: IntroductionWhat is an economy? Central problems of an economy: what, how and for whom to produce; concepts ofproductionpossibility frontier and opportunity cost.Distinctions between (a) planned and market economies, (b) positive and normative perspectives in economics,and(c) microeconomics and macroeconomics.(Non-evaluative topics: Some basic tools in the study of economics - equation of a line, slope of a line, slopeof a curve.)

(Periods 32)Unit - 2: Consumer Equilibrium and DemandConsumer’s equilibrium - meaning of utility, marginal utility, law of diminishing marginal utility, conditions ofconsumer’sequilibrium using marginal utility analysis.Indifference curve analysis of consumer’s equilibrium-the consumer’s budget (budget set and budget line),preferences ofthe consumer (indifference curve, indifference map) and conditions of consumer’s equilibrium.Demand, market demand, determinants of demand, demand schedule, demand curve, movement along andshifts in thedemand curve; price elasticity of demand - factors affecting price elasticity of demand; measurement of priceelasticity ofdemand - (a) percentage-change method and (b) geometric method (linear demand curve);.relationship betweenpriceelasticity of demand and total expenditure.

(Periods 32)Unit-3: Producer Behaviourand SupplyProduction function: Total Product, Average Product and Marginal Product. Returns toaFactor(ONLY).Cost and Revenue: Short run costs - total cost, total fixed cost, total variable cost; average fixed cost, averagevariable cost and marginal cost-meaning and their relationship. Revenue -total, average and marginal revenue.Producer’s equilibrium-meaning and its conditions-under (a) total revenue-total cost approach and (b) marginalrevenue-marginal cost approach.Supply, market supply, determinants of supply, supply schedule, supply curve, movements along and shifts insupply curve, price elasticity of supply; measurement of price elasticity of supply - (a) percentage-changemethod and (b) geometric method.

(Periods 22)Unit - 4: Forms of Market and Price DeterminationPerfect competition - meaning and features.Market Equilibrium under perfect competition - Determination of equilibrium price, Effects of shifts in demandand supply.Non-Competitive Markets - monopoly, monopolistic competition, oligopoly - their meanings and features.

(Periods 18)Unit - 5: Simple Applications of Tools of Demand and Supply(Not to be examined)‘Expressions in red ink highlight some notable changes in the syllabus.

Periods

3018251714

Marks: 50Marks

1508120807

Total 104 50

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SyllabusCentral Board of Secondary Education, New Delhi

Economics I Class XII

1½ HoursUnitsPart- B : introductory Macroeconomics6. National Income and Related Aggregates7. Money and Banking8. Determination of Income and Employment9. Government Budget and the Economy10. Balance of PaymentsPART - B : INTRODUCTORY MACROECONOMICS

(Periods 30)Unit - 6: National Income and Related AggregatesMacroeconomics: Its meaning.Some basic concepts of macroeconomics: consumption goods, capital goods, final goods, intermediate goods;stocks andflows; gross investment and depreciation.Circular flow of income; Methods of calculating National Income - Value Added or Product method, Expendituremethod,Income method. Concepts and aggregates related to National Income:Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic Product (GDP and NDP) - atmarketprice, at factor cost; National Disposable Income (gross and net), Private Income, Personal Income and PersonalDisposable Income; Real and Nominal GDP. GDP and Welfare.

(Periods 18)Unit - 7: Money and BankingMoney-its meaning and function.Supply of money - Currency held by the public and neWemand deposits held by commercial banks.Money creation by the commercial banking system.’Central banking and its functions (example of the Reserve Bank of India).

(Periods 25)Unit - 8: Determination of Income and EmploymentAggregate demand and its components.Propensity to consume and propensity to save (average and marginal).Short-run fixed price in product market, equilibrium output; investment or output multiplier and the multipliermechanism.Meaning of full employment and involuntary unemployment.Problems of excess demand and deficient demand; measures to correct them - change in government spending,availability of credit.

(Periods 17)Unit - 9: Government Budget and the EconomyGovernment budget - meaning, objectives and components.Classification of receipts - revenue receipt and capital receipt; classification of expenditure - revenue expenditureandcapital expenditure.Various measures of government deficit - revenue deficit, fiscal deficit, primary deficit: their meaning and implications.Fiscal policy and its role (non-evaluative topic).

(Periods 14)Unit-10: Balance of PaymentsBalance of payments account-meaning and components; balance of payments deficit-meaning. Foreign exchangerate - meaning of fixed and flexible rates and managed floating. Determination of exchange rate in a free market.“Expressions in red ink highlight some notable changes in the syllabus.

Periods

3018251714

Marks: 50Marks

1508120807

Total 104 50

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There are certain goods and services in which the private sector shows littleinterest due to huge investment required and lower profits, like sanitaiton,roads, parks, etc. Government can undertake the production of these goodsand services. Alternatively, it can encourage private sector by giving taxconcessions and subsidies.

OR

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SAMPLE QUESTION PAPER

Part ‘A’Q.1. What is meant by an inferior good in economics?Q.2. Why is average cost greater than average variable cost ?Q.3. What causes an upward movement along a supply curve ?Q.4. What will be the behaviour of fixed cost with change in output ?Q.5. State one common feature or similarity between monopoly and monopolistic competition.Q.6. Calculate average total cost and average variable cost from the following data. When

average fixed cost of 2nd unit is Rs. 20.Output 1 2 3MC 30 26 24

Q.7. Explain the effect of technical progress on the supply of a good.Or

Explain the effect of rise in input prices on the supply of a good.Q.8. Why is indifference curve convex to the origin?Q.9. Distinguish between monopoly and perfect competition on the following basis.

(i) Slope of demand curve(ii) Control over supply

Q.10. What will be the behaviour of TR when :(i) MR curve is negetively sloped but is positive.(ii) MR curve touching X-axis.(iii) MR curve is under X-axis.

Q.11. The ratio of price elasticity of demand of a commodities ‘X’ and ‘Y’ is 1 : 2. A 20 percentfall in price of ‘X’ results in 40% increase in its demand. Calculate the percentage increasein demand of ‘Y’ if its price decreases from Rs. 20 to Rs. 16 per unit.

Q.12. What is meant by marginal rate of substitution? How is it responsible for the concave slopeto the origin of production possibility curve ? Explain with the help of numerical example.

OrDistinguish between

(i) Positive and normative economic prespective in eeconomics.(ii) Planned and market economy.

Q.13. Explain the following causes in respect of downward slope of demand curve.(i) Substitution effect(ii) Income effect.

Q.14. What is budget line? Explain diagramatically the effect of following on budget line.(a) Change in income of the consumer(b) Decrease in price of only one good (showing on X-axis)

For blind candidates in lieu of Q.14.Explain the determination of consumer’s equilibrium in case of single commodity with thehelp of numerical example.

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Q.15. Giving reasons, state wheather the following statements are true or false:(a) Supply curve passing through the origin, irrespective of any angle implies elasticity of

supply equal to unity.(b) Total cost and total variable cost curves are always parallel to each other.

Q.16. Define equilibrium price. Explain the effect of increase in deamdn of a commodity on itsequilibrium price and quantitiy with the help of diagram.For blind candidates in lieu of Q.16.Define equilibrium price. How is it determined. Explain with the help of schedule.

OrExplain any three feactures of oligopoly competition.

Part ‘B’Q.17. What is meant by devaluation of currency.Q.18. What is meant by statutory liquidity ration (SLR).Q.19. Why is borrowing by the Govt a capital receipts.Q.20. What will be the effect of appreciation of currency on exports of an economy.Q.21. Which of foreign exchange rate promotes speculation.Q.22. How can a Goct budget help in reducing inequalities of income explain.Q.23. Calculate Govt. final consumption expenditure from the following data

Rs. (Lakh)(i) Gross fixed capital formation 5,000(ii) Change in stock (–) 800(iii) Import 600(iv) Gross National Product at factor cost 25,000(v) Coinsumption of fixed capital 2,000(vi) Private final consumption expenditure 8,000

Q.24. Define real gross domestic product and nominal gross domestic product. Which of themis suitable to measure economic welfare of an economy.

Q.25. Compute APC and MPSIncome 0 50 100 150Savings – 30 0 30 60

Q.26. Wheather following statements are ‘True’ or ‘False’. Give reasons.(a) Consumption can never be zero even at zero level of income.(b) Autonomous investment is responsible for parallel slope of aggregate demand curve and

consumption curve.Q.27. Explain the “open market operations” method of credit control used by a Central Bank.

OrExplain any two types of deposits accepted by commercial bank.

Q.28. Explain the followings(a) Components of current and capital account.(b) Impact of increase in demand on foreign exchange.

Q.29. Giving reasons catagories the following into revenue receipts and capital receipts.

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(i) Recovery of loans(ii) Corportiaon tax(iii) Dividends on investment made by Govt.(iv) Sale of public sector undertaking

Q.30. Why are exports included in the estimation of domestic product by the expenditure method?Can gross domestic product be greater than gross national product? Explaoin/

OrCalculate National Income by income method and expenditure method.

Rs. (Lakh)(i) Subsidies 10(ii) Private final consumption expenditure 200(iii) Net factor income from abroad (–) 20(iv) Indirect taxes 50(v) Rent 10(vi) Govt. final consumption expenditure 40(vii) Net domestic fixed capital formation 60(viii) Operating surplus 40(ix) Wages and salaries 100(x) Net exports (–) 10(xi) Addition to stock (–) 10(xii) Social security constribution by the employers 20(xiii) Mixed income 80

Q.31. How are the following treated in estimating National income.(i) School fees paid by students(ii) House rent allowance paid to teacher by school management(iii) Purchase of new shares of Domestic firm.(iv) Service fo free Govt dispensary.

Q.32. Explain the meaning of equlibrium level of income and output with the help of savings andivnetment curves. If planned expenditure is less than planned expenditure is less thanplanned output, what changes will take place in the economy?For blind candidates in lieu of Q.32.Explain the meaning of equilibrium level of exmployment by saving and investment ap-proach. If planned expenditure is less than planned output, what changes will take place inthe economy?

MARKING SCHEMES.No. Expected Answer/Value Points Distribution

of marks1. Inferior goods are those goods, the demand for which decreases 1

as income of the buyer increases.2. Because average cost is the sum of AFC and AVC and AFC can 1

never be zero, so AC is always greater than AVC.3. An increase in the price fof the commodity causes an upward 1

movement along a supply curve.

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4. Fixed cost does not change with change in output. It remains 1constant at all levels of output.

5. Negetively stoped demand curve/AR curve. 16. output MC TVC AFC TFC AVC ATC ½×6=3

1 30 30 40 40 30 702 26 56 20 40 28 483 24 80 13.3 40 26.3 39.7

7. Technological progress raises productivity, reduces cost, raises 3preofit and thus indvees the producer to supply more resultingincrease in supply.

OrRise in input pricer, raises cost reduces profits, resulting decreasein supply.

8. Indifference curve is convex to tyhe orgin,mainly because of 2diminishing marginal rate of Substitution (MRS). MRS decreasesbecouse as consumer is having more and more of Good-I decreses.As a result to have one unit of Good-I, consumer is willing to give upless and less of Good-2 which makes indifference curve convex to theorigin.

9. (a) Monopaly– Demand curve is negetively sloped 1½Perfect compoetition–Demand cureve is strainght line, horizontaland parrellel to x-axis.

(b) Monopaly– has full control over supply. 1½Perfect competition– No control over supply.

10. (i) TR Increases 1×3=3(ii) TR will be maximum(iii) TR will start falling

11.

12. It is the rate at which the consumer is willing ot substitute Good-I for 1Good-2 Marginal rate of substitution tells the slope of the curve. SinceMRS is increasing, which results in concave slope of PPCNumerical example 2

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Or(a) Positive Economics : These statement s make real discription of an 1

activbity and deals with “ What is, what was”?Normative economics: These statements make an assessment of an 1activity and deal with ‘what ought to be” etc,.

(b) Market economy is an economy in whihc all wxonomic problems are 1solved through the freely operative market forces of demand and supply.Which all economic problems are solved by the Govt through planning 1social welfare is main motive of production.

13. (i) When price of a commodity falls, its substitutes become expensive. 2The consumer will demand more of the good in question substitutes thiscommodity for other substitute good–It is called substitution effect.

(ii) When price of a xommodiy falls, the purchasing power of the 2consumer increases, which induces him to demand more of that goodand real income increases. It is called Income effect.

14. Budget line is a line which shows different possible combinations of two 1goods which a consumer can buy from his given income and prices oftwo goods.(a) Due to change in income, budget line may shift rightwards with

increase in income and shift leftward with decrease in income.

1½+1½ = 3

(b) Due to decrease in price of one good, budget line will rotate rightwardsand slope of the budget line will become flat.

2

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for blind condidatesConsumer’s equilibrium is determined at the point, where he get maximum 1catisfaction from his given income and priceEqulibrium condition

= Px or MUxPx = MUm 4

Any Numerical example and example and explanation15. (a) True. It is because:- Supply curve intercept x-axis= supply at given ½ + 2½

price at all the angles(b) True. It is because:- The vertical distance between TC & TVC is ½+2½

equal to TFC Since TFC is constant at all levels of output, there foprTFC & TVC are parrallel to each other.

16. Equlibrium price:- The price at which both demand and supply are equal 1and there is no tendency to change

2

Due to increase in demand of a commodity, equalibrium price and output 3both will also increase.Followed by detailed explanation with the help of ohajram.

Part ‘B’17. Fall in the value of the currency in terms of foreign currency 118. Satatutory Liqnidity ratio is the ratio which every commercial bank is 1

required to maintian a specified percentage of their net total demandand time liabilities.

19. Borrowing by the Govt are capital receipts because:- 1(i) It creates liabvilities of repayment of loans.

20. Exports will increase 121. Flexible exchange rate 122. The Govt redistributes income and wealth by imposing taxes an higher 3

income grooup and by increasing expenditure aon social security,subsiclies, public works etc. and reduces inequalities.

23. Govt final consumption expenditive = (iv)–(i)–(ii)+(iii)–(vi) 3 = 25000 – 5000 – (-) 800 + 600 – 8000 = Rs. 13,400/-

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24. GDP measured in terms of constant prices is called Real GDP 1GDP measured in terms of constant prices in Nominal GDP 1Real GDP is a suitable measure of economic welfare of an exonomy 1

25. Income savings APC consumption MPS ½×6=30 –30 – 30 –50 0 1.0 50 .6

1000 30 0.7 70 .6150 60 0.6 90 .6

26. (a) True, Because, its compulsory for every consumer to fullfill the ½+1basic requirementrs to surgvive

(b) True, Because: ½+1(b) Aggregate demand is the sum of comsumption and insverstment.

Therefore the vertical distance between ADF curve and consmptioncurve is equal to investment And Investment is constant at all levelsof income. Therefore both the curves are parrelle to each other.

27. Open market operations is the buying and selling of govet securities by 3the contral benk to the baks By selling Govt securities to its baks willreduce the credit & money supply and vice-a versa.

OrTypes of deposits accepted by commercial banks are 1½+1½(a) Current account deposits(b) Fixed deposits(c) Saving account deposits Explanation of any two.

28. (a) Components of current account 1(i) visible track or export and import of goods(ii) Invisible trade or export and import of services(iii) Unilateral transfers.

Components of capital account 1(i) Private transactions(ii) Official transactions(iii) Direct insvestment(iv) Portfolio investment

(b) Due to increase in demand, foreign exchange rate rises. it impliesmore rupee. notes will be required to buy US$. It means domesticcurrency becomes les valueable.

29. (i) Recovery of loans – capital receipts Reason – It reduces asets. 1×4=4(ii) Corporation tax - Revenve receipts Reason – It does not create

hability It does not reduces assels(iii) Dividends on investment made by Govt – Revenue receipts Reason

– It does not create habilities(iv) Sale of public sector undertaking – capital receipts reson – It reduces

assets

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30. Expenditure method estimates expenditure on domestic product ie 4expenditure on final goods and services produced within domesticterritory of the country. It includes expenditure by residents andnon-residents both Exports, through purchased by non-residents, areproduced within the economic territory and therefore it is a part ofdomestic productDomestic product can be greater than national product if factor income 2paid to rest of the world is greater than factor incomereceived fromabroad or when net factor income received from abroad is negetive

OrIncome Method

N.I (NNPFC) = viii + ix + xii + xiii + iii= 40 + 100 + 20 + 80 + (–)20= Rs. 220. Lakh.

Expenditure MethodN.I (NNPFC) = ii + vi + vii + x + xi – iv + i + iii

= 200 + 40 + 60 + (–)10 + (–)10 – + 10 + (–)20= Rs. 220. Lakh.

31. (i) Yes, Included 1½×4=6It is a part of put final consuption expenditure

(ii) Yes, IncludedIt is a part of compensation of emplayees

(iii) No, not includedThere is no production activity but only exchange of funds for financial claims

(iv) Yes IncludedFree services by the Govt is a part of govt final consumption expenditure.

32. The equilibrium level of income and output is that level at which planned saving andplanned investment are equal. SS is the saving curve that shows planned saving atdifferent le3vels of income. II shows fixed level of investment as it is assument thatinvestment is give nand is constant. Or is the equilibrium level of income and out putas at this level, planned savings and investment are equal.

It planned expenduture is less than planned output inventories will increase. Sooutput will be reduced will planned expenditure and planned savings are equal.

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HARD SPOTS5.1 INTRODUCTIONUNIT-1 IntroductionMicro Economics:-

Micro Economics is the branch of Economics which studies Economic problems at the level ofan individual.

Micro economics is concerned with determination of output and price.Macro Economics:-

Macro Economics studies Economic problems at the level of the economy as a whole.Macro economics concerned with determination of aggregate output and general price level in

the economy as a whole.Market Economy:-

A market economy is an economy in which all Economic problems are solved through the freelyoperating market forces of demand on supply

Objective of production is to earn maximum profit.Centrally Planned Economy:-

A planned is an economy in which all economic problems are solved by the government throughplanning social welfare is the main motive of production.

5.2 CONSUMER’S EQULIBRIUM AND DEMANDConsumer’s equilibrium may be defined as a situation when the consumer maximies his total

satisfaction with his given income and market prices.

Conditions of consumer's equilibrium

Utility Approach Indifference curve Approach

MUx = Px

MUx Px

= MUm

MRS × Y =PxPy

Diminishing MRS

Budget line and indifference curveare tangent to each other

Budget line:- A Budget line represents all the possibilities of the quantity of two goods which aconsumer can buy with his given income and proces of two goods

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Shift / Rotation of Budget Line

Change in Price Change in Income of consumer

Righward rotationonly on one axis

Lefword rotationonly on one aixs

Change slope ofBudget BecomesFlatter

Changed slopeBudget line BecomeSteaper

Decrease in priceof only one good

increase in priceof only one good

Right word shift Leftword Shift

Increase in Income Decrease in Income

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5.3 PRODUCER BEHAVIOUR AND SUPPLY1. Production function, 2. Cost, 3. Revenue, 4. Producer’s equilibrium

1. ProductionProduction function:- The physical relationship between inputs and outputs

1. Returns to a factor :- Law of variable proportions occurs in short run.1. Definition2. Assumptions3. Schedule4. Diagem = Stating the relationship between TP (Total Product) and MP (Marginal

Producat) with explanation of stage I, II, III2. Returns to scale - Where all the factors are changed (Increased or decreased end save

proportionExample - A Shedule showing total product ie returens to scale increasing, constant +diminishing– Diagram– Why do returns to scale occur–Three types of returns to scale viz

(a) Increasing returns to scale(b) Constant returns to scale(c) Decreasing returns to scale

– Differences between returns to a variable factor and returns to scale

PROBLEM / QUESTIONS1. What do you mean by fixed factors, variable factors, total product marginal product,2. How does TPP behave with change MPP3. Explain the law of variable factor proportions with the help of a schedule and a diagram.4. State and explain the reasons of law of variable proportions.

5.3 COSTSCost :- It is the sum of explicity and implicit costs.Cost function :- It is the functional relationship between cost and quantity produced

C = F(Qx)Where C is production cost and Qx is quantity produced of x goods.Time Element and costs-

(i) Short run cost curves(ii) Long run cost courves

In short run produciton can be varied only by changing the quantities of variable factors and not offixed factors

In ..... run– production can be varied by changing all factors of production (ie fixed and variable both)

Total cost (TC) = Total fixed cost + Total variable cost Total fixed cost is the cost at zero production level.

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TVCTC

TFC

TFC

Output

Costs

Average costs :- Total cost/Total Quantity1. Average fixed cost :- Total fixed cost/Total Quantity

ORAverage fixed cost = Average cost–Average variable cost

2. Averagae variable cost = Average cost – Average fixed cost

AC

AVC

AFC

Marginal cost:-

MC = TCTQ

DD or MC = TVCn + 1 – TVCn

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1. Revenue and Producer’s equilibrium– Revenue refers to money reeceipts of a firm from the sale of its output– Total revenue– is the sum total of revenue from the sale of all units of goods produced

TR = EMR– Average revenue – Average revence is the revenue per unit of output sold– Marginal revene is the change in total revence as a result of selling one or more (or less)

unit of output

MR =TRQ

DD

MRn = TRn+1 – TRn

– Shape of AR and MR curves Shape of Average revenue curve and marginal revenue curveand output level determenation under different market condititions

(a) Under perfect competition

D

D

S

S

PPrice

D MC

Q1

AR/MR

Q

AR = MR

tirm

OutputO

OP is the price determined by the indestryAR = Price accepted by a firm.

OQ and OQ, is the level of output of the firm because at the point MC cuts ME from below andMC = MR

(b) Under monopolistic competition:

MC

Q

Revenue

MR

M

OutputO

Y

AR

X

Mr. Slopes downward under monopolistic competitionMarginal revenue can be zero or negative but the average revence can never be zero nor

negativeM is the point of equilibrium because at M

MC = MR and also MC Cuts MR from below

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\ OQ = Level of outputOP = Price per unit of the good

Effects of changes in demand and supply on equilibrium price(a) Effects of changes (or shifts) in demand

P1

QuantiyO

Y

X

S

S D11

D

D1P

P2

Price

OP - Price under equilibrium conditionOP1 - Price when demand increase from DD to D’D’OP2 - Price when demand decreases from DD to D”D”Effects of changes for shifts in supply when demand curve remains constant

P1

QuantiyO

Y

X

S

D

P

P2

Price

S2

S1

S2

S1

OP is the equilibrium priceOP1 is the market price when supply increases from SS to S1S1

OP2 is the price when supply decrease from S to S2S2 in marketEffects of changes in equal proportions and also in uneqal proportion–all the conditions

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5 0

UNIT 45.4 FORMS OF MARKET AND PRICE DETERMINATION

— Concept of market equilibrium.— Market equilibrium is a situation where market demand is equal to market supply or it is

situtations of zero excess demand and zero excess supply.— Market equilibrium is determind by the proces of demand and supply.— For a perfectly competitive firm, the equilibrium price is determined by an industry by the

forces of demand and supply. In a state of equilibrium,AR = MR = Price = MC

Under perfect competition Industry is a price maker and firm is a price taker

D S

D

PP

AR = MR

Outputx x

yy

Output

Price

(INDUSTRY) (FIRM)

Under perfect competition equilibrium output is detrermined at the point where MC inter-sects MR from below

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5 1

5.6 NATIONAL INCOME AND RELATED AGGREGATESMethods of measurment of national income

1. Production Method (Values added method)Significance : The production method shows the contribution of different sectors of theeconomy to national income. On the basis of relative significance of a sector for theeconomy, policy decisions can be taken

Nation Income = Value of output of the sectors– Intermediate consumption of all the three sectors– Consumption of fixed capital– Net Indirect taxes– Net factor income earned from abroad

2. Income method :Significance : This method reveald the distribution of income among factors of produc-tion. This data helps Govt to take appropriate steps to reduce inequalities in distributionof Income.

National Income = Compensation of employees+ operating surplus+ Mixed income+ Net factor income from abroad

3. Expenditure methodSignificance : This method measures the final consumption expenditure and investmentexpenduture of private sector and Govt secor and expenditure on net exports during anaccounting year

Nation Income = Private final consumption expediture+ Govt final consumption expediture+ Gross domestic capital formation+ Net exports– Depreciation– Net Indirect taxes+ Net factor income from abroad

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5 2

Treatment of items in national income items

Items

1. Increase in prices ofstocks lying with atracler

2. Direct purchase ofgoods by Govt fromforeign conntry

3. Interest of Nationaldebt

4. Goods used byresearch centres

5. Interest on debentures

6. Interest paid byconsumer household

7. Expenditiure incurredby a foreign tourist ina country

8. Govt. Expenditure onMetro

9. Sale of an old house

10. Pocket moneyreceived from parents

Reason

It is a capital gain and does not lead to any newproduction capital gain is a transfer income so notincluded in domestic income

It is an intermediate cousumptions in produciton ofservices by the general Govt. It is deducted fromthe value actded

It is the interest paid by the Govt. It is on thoseloans which are taken by the Govt. to meetconsumption expenditure. Therefore, it is atransfer payment.

These ar intermedrate products and to bededucted whiole calculating value added byproductions method .

It is a factor Payment. So it should one includedwhile calculating domestic income by incomemethod.

Households borrow to meet their consumptionexpearditure. Ths type of borrowing is not used forproduction. So it is not a factor payement.

It is like an export which is a domestic concept andis included by expenditure method.

It is an investment expenditure of the Govt. It sisthe componets of Govt domestic investment sov itshould be involveded by expenditure method.

It is not a current produciton activity and alreadyincluded wehen it was sold as new.

It is transfer income as it does not contrubute toproduction:

Included orNot included

Not Included

Not Included

Not Included

Not Included

Included

Not Included

Included

Included

Not Included

Not Included

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5 3

Treatment of items in national income items

Items

1. Profits earned by anIndian Company inAmerica

2. Salaries received byIndian employesworking in AmericanEmbassy

3. Salaries of Indiansworking in the officeof W.H.O located inNew Delhi

4. Profits earned byIndian bank from itsbranches abroad

5. Salaries paid to non-resident Indiansworking in IndianEmbassy in America

6. Profits earned byForeign company inIndian

7. Wages paid to non-resident working inIndian company insingapore

8. Rent received byIndian resedent onbuilding rented out toforeign embassies inIndia

9. OId age pensiongiven by Govt

10. Scholarship given byGovt of Russia

Reason

It is a factor income from abroad

Its is a factor income from abroad. Because Indianemployees working in American Embassy arenormal residents of India.

Staff working in international bodies are treatednormal residents of the country in which that bodyoperates

It is a factor income from abroad

It is a factor income of abroad, so it should bededucted to calculate net factor income from abroad.It is the income of non-resident.

It is factor income to abroad because, it is the incomeof non-resident in India

It is factor income to abroad because, it is the incomeof non-resident.

It is a factor income from abroad

It is transfer payment as productive sevices are notbeing sendered

It is a transfer payment & not productive service be-ing rendered.

Included orNot included

Included

Included

Included

Included

Not Included(to bededucted)

Not Included

Not Included

Included

Not Included

Not Included

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5 4

5.7 DETERMINATION AND EMPLOYMENTAggregate demand is the total demand for final good services in on economy empenents of AD) = 1Aggregote supply= C + S

= NND = Factor income = rew + wages + interest frofitAverage propensity to consumer =Average propensity to sack = ADS =Marginal propensity to save MPS =Marginal propensity to consame MPC.APC + APS = 1.MPC + MPS = 1.Determination of equilibrium level of income and output:-Equilubrium • fmeans state of no change/-At the point of equilibrium AD = ASOR C + I = C + Sor I = SThis suggests that this are two approaches by which equilibrium level of national income can be

explained1 AD and AS approach and 2 I,S approach AD AS approachAggregate DemandAD = c + I + G + (x–M)Graphical represantation of AD

O

I = AutonomousInvestmentX

ExpeditionSaving

C + I = ADC = Consumer courve

Y

Level of Income/employment

Investment can be either induced investment or Autonomous incvestment - Definition & supply

Investment

Level of Income

I

I

O

I I

X

Aggregate supplyDefination:- It refers to total supply of goods & services produced in an economy in a year at

different levels of employmentComponents:- AS = C + S

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5 5

= NNPFC = Factor income = rent + wages + interest + profit

AS

45°

AS = C + S

–Level of Income/Employment output

Impact of increase or decrease in AD (C+I) on level of income/employment output

Level of income/employment\/output

ConsumerptingInvestment

45°

AS AD, (C + I )1 1

AD, (C + I)AD, (C + I )2 2

M1MM2X

Y

Investment, Saving approach (I-S approach)Defination – The equilibrium level of income output is determined at a point where planned saving

is equal to planned investment (S = I) or where SS curve intasects the I-I curve

Dissaving Zone

Saving Investment

M1MM2X

Y

Output/Income

S

I

Efficient Demand:-Defination :- When Aggregate Demand for a level of output is less clian full employment level of

output. It is under employment equilibrium and creates in flatatinary gapExcess demandDefination When Aggregate Demand for the level of output is move crain full employment level of

output, it is known as excess demand). It measures the amount of excess of aggregate demandInflatinary gap - definitionDefcationary gap - definitionShown with the help of diagram

M – Income/output/couplayment (level)

Saving

Y

E–

AS

ADAD1

J

Deflationary gap

Full employment level (at M OraEE)Whe Ad = AS‘At E1 — Under employemnt equilibrium level AD – AD, Shows deflationary gap

Page 60: COMPREHENSIVE GUIDELINES FOR ACADEMIC EXCELLENCE ...

5 6

Num

ber o

fse

llers

Nat

ure

of th

epr

oduc

t

Ent

ry a

nd e

xit

of fi

rms

Per

fect

know

ledg

e

Pric

ede

term

inat

ion

Nat

ure

of fi

rms

dem

and/

AR

curv

e

Perf

ect c

ompe

titio

n

Ver

y la

rge

num

ber o

f sel

lers

All

the

firm

s pr

oduc

e id

enti-

cal p

rodu

ct in

resp

ect o

fco

lour

, siz

e, p

acki

ng e

tc.

New

firm

s ar

e fre

e to

ent

erin

cas

e of

pro

fits

and

old

firm

s ca

n le

ave

in c

ase

oflo

sses

in s

hort

perio

d.

Buy

ers

have

per

fect

kno

wl-

edge

abo

ut th

e pr

ice

and

the

prod

uct

Pric

e of

the

prod

uct c

harg

edby

all

the

firm

s is

uni

form

as

pric

e is

det

erm

ined

by

an in

-du

stry

by

the

forc

es o

fde

amnd

and

suy

pply

.

Mon

opol

y

Sin

gle

selle

r

Sin

gle

firm

pro

duce

s a

prod

uct w

hich

has

no

clos

e su

bstit

utes

Sin

ce th

ere

is a

sin

gle

firm

,so

ther

e ar

e ba

rrie

rs to

en-

try Buy

er m

ay n

ot h

ave

perfe

ctkn

owle

dge

abou

t the

pric

eof

the

prod

uct,

as a

resu

ltm

onop

olis

t may

pra

ctic

epr

ice

disc

rimin

atio

n.

Pric

e ch

arge

d by

the

mo-

nopo

list m

ay n

ot b

e un

i-fo

rm a

s th

ere

is p

rice

dis-

crim

inat

ion.

Mon

opol

istic

Larg

e nu

mbe

r of s

elle

rs

All

the

firm

s pr

oduc

e si

mila

rdi

ffere

ntia

ted

prod

uct

New

firm

s ar

e fre

e to

ent

erin

cas

e of

pro

fits

and

old

firm

s ca

n le

ave

in c

ase

oflo

sses

in s

hort

perio

d.

Buy

ers

have

impe

rfect

know

ledg

e ab

out t

he p

rod-

uct.

Pric

e ch

arge

d is

not

uni

form

beca

use

of p

rodu

ct d

iffer

en-

tiatio

n

Olig

opol

y

Few

firm

s bu

t lar

ge in

siz

e.

Firm

s m

ay p

rodu

ce e

ither

hom

ogen

ous

or d

iffer

ntia

ted

prod

uct.

Ther

e ar

e ef

fect

ive

barr

iers

to th

e en

try o

f new

firm

s.

Impe

rfect

kno

wle

dge

Pric

e ca

n no

t be

dete

rmin

edas

pric

e le

vel d

epen

ds o

nac

tion

and

reac

tion

of o

ther

firm

s.

It is

not

pos

sibl

e to

det

er-

min

e fir

ms

dem

and

curv

e

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5 7

Leve

l of p

rofit

Firm

s de

man

d cu

rve

is h

ori-

zont

al s

traig

ht li

ne, p

aral

lel t

oX

-axi

s an

d is

per

fect

ly e

las-

tic in

nat

ure.

AR

cur

ve w

ill b

epa

ralle

l to

X-a

xis

beca

use

ofpe

r uni

t pric

e is

con

stan

t

Firm

can

ear

n pr

ofit

or lo

sses

in s

hort

perio

d, w

here

as

inlo

ng p

erio

d fir

m c

an e

arn

only

nor

mal

pro

fit.

(AR

= A

C i.e

., N

orm

al p

rofit

)

Firm

s de

man

d cu

rve

isdo

wnw

ard

slop

ing

and

isre

lativ

ely

less

ela

stic

. AR

curv

e fa

lls a

s m

ore

units

of

outp

ut s

old

becu

ase

of p

erun

it pr

ice

falls

.

Firm

s ca

n ea

rn p

rofit

or

loss

es in

sho

rt pe

riod

asw

ell a

s in

the

long

per

iod.

(AR

> A

C i.e

., ex

tra N

orm

alpr

ofit)

Firm

s de

man

d cu

rve

isdo

wnw

ard

slop

ing

and

isre

lativ

ely

mor

e el

astic

Firm

s ca

n ea

rn p

rofit

or

loss

es in

sho

rt pe

riod,

whe

reas

in th

e lo

ng p

erio

dfir

m c

an e

arn

only

nom

ral

prof

its.

(AR

= A

C i.e

., N

orm

al p

rofit

)

Firm

s ca

n ea

rn p

rofit

or

loss

es in

sho

rt pe

riod

whe

reas

in th

e lo

ng p

erio

dfir

m c

an e

arn

norm

al p

rofit

.

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5 8

5.8 MONEY AND BANKINGMoney is an instrument that serves as a medium of exchange, a measure of value, a store of value

and a standard for deferred paymentsMoney supply :- It refers the stock of money held by the public at a points of time in an economyMi c + DD ODm2 m1 + saving of the people with post officesm3 = M1 + Net time deposit with the commercial banksM4 m3 + saving with the post offices (other them in the form of NSC)Bank:- Banking company is one which transacts the business of banking which means the accept-

ing of deposits of money from the public repayable on demand or otherwise and with drawable bycheque, daraft, order or other wise

Difference between bank and other financial institutions1. Bank deposits are chequable2. Banks creates money

Money multiplier:-Credit creation is one of the most significant function of commercial bank they contribute to money

supply by creating credit.k deposit multiplierr ratio of cash reserve to depositeGovt budget and economyMeaning of budget :- It is an annual statement of estimated receipts and expenditure over a fiscal

year. (fiscal year sum from 1st April to 31st march)Objectives of budget are:-

1. Redisturbution of income and wealth2. allocation of resources3. Economic stability4. Managin public enterprises5. Foreign exchange rate

Rate of exchange :- Rate of exchange between any two currencies is the rate at which they areexchanged or sold against each other.

Merits1. Promote market stability2. Encourages International trade3. Encourage long term policy of foreign trade4. Prevents speculation

Demerits1. Huge reserve of gold.2. Discourages mobility of capital.

Merits1. Gold reserve not required2. Encourages International mobility capital.

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5 9

3. Promotes venture capital4. Optimum resource allocation

Demerits1. It causes of instability in the internationtional in the international money market.2. It becomes difficult to draw long period policy of trade.3. Bilateral trade agreement becomes difficult

Sources of demand for foreign exchanges1. Payment of international loan2. Direct purchase from abroad (Import)3. Investment in the rest of the world4. Gifts and grants to the rest of the world.

Sources supply of foreign exchange1. Receipts from export2. Direct purchase by non residents in domestic market3. Direct foreign investment4. Remittances by the non residents

Determination of foreign exchange rateEquilibrium of foreign exchange rate is determine by the forces of demand and supply of foreign

exchange It occurs at that point where the demand and supply of foreign exchange are equal.Apprication of a currency :- It refers the increase in the value of a currency in terms of another

foreign currency.Depreciation of a currency :- It refers the decrease in the value of a currency in terms of another

foreign currency.Impact of currency appreciation

1. It promots injections in the economy like:- Export, foreign Investments2. It restricts leakages in the economy like:- import savings and lead to favourable condition.

Impact of currency depreciation1. It promote leakages like import and savings2. It discourage injections like :- exports, direct purchase by non residents in domestic market,

foreign investments