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MARCH - 2017[Time : 3 hours] ECONOMICS [XII] (With key) [Marks : 200]

PART - A

Note : Answer all the questions.

I. Choose the most suitable answer from the given four alternatives and write the option code and the corresponding answer: 14 × 1 = 14

1. Theauthorofwealthdefinitionis:(a) Samuelson (b) Alfred Marshall(c) Adam Smith (d) Lionel Robbins

2. RedtapismandCorruptionleadto:(a) InefficiencyofProduction (b) Inequalityofincomeandwealth(c) Absenceoftechnology(d) EfficientUseofresources.

3. Singlecommodityconsumptionmodeis:(a) Productionpossibilitycurve(b) Lawofequimarginalutility(c) Lawofsupply(d) Lawofdiminishingmarginalutility

4. Demandforacommoditydependson:(a) Priceofthatcommodity(b) Priceofrelatedgoods(c) Income (d) Alltheabove

5. Thedegreeofresponseofdemandtochangeinpriceis:(a) Incomeelasticityofdemand(b) Cross-elasticityofdemand(c) Priceelasticityofdemand(d) Alltheabove

6. The time element in price analysis wasintroducedby:(a) J.R.Hicks (b) J.M.Keynes(c) Alfred Marshall (d) J.S. Mill

7. Theinitialsupplypriceoflandis:(a) Zero (b) Greater than one(c) Less than one (d) Equal to one

8. Average variable cost is obtained by dividing:(a) TC/Q (b) TFC/Q(c) TVC/Q (d) None

9. Underperfectcompetition,thedemandcurveis:(a) upwardsloping (b) horizontal(c) downwardsloping(d) vertical

10. Thedemandforlabouris:(a) effectivedemand(b) directdemand(c) deriveddemand (d) elasticdemand

11. Theclassicaltheoryassumedtheexistenceof:(a) Unemployment(b) Disguisedunemployment(c) Fullemployment (d) Under-employment

12. Themarginalpropensitytosaveis:

(a) ΔSΔY

(b) ΔCΔY

(c) ΔPΔQ

(d) ΔCΔY

13. Duringinflation:(a) businessmengain(b) wageearnersgain(c) salariedpeoplegain (d) rentiersgain

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2 Sura’s XII Std Economics 2017 – March Question Paper with Answers

14. Taxrevenuedealswiththe:(a) Fees (b) Kindsoftaxes(c) Revenue (d) Nontaxrevenue

II. Fill in the blanks with suitable answers : 12 × 1 = 12

15. Productionreferstothecreationof______.16. Mostoftheeconomicactivitiesofcapitalism

arecenteredon_________.17. Wantsmaybeboth_______and_______.18. Addingupofindividualconsumersschedule

is________.19. _______isthemajordeterminantofsupply.20. _______isman-madephysicalgoodsused

toproduceothergoods.21. Thedistinctionbetweenthefixedandvariable

factorsispossibleonlyin______.22. Monopoly power achieved throughpatent

rightiscalled________.23. MarginalProductivityTheoryisbasedonthe

assumptionof_________competition.24. _______refers to thecashholdingsof the

people.25. Thedirect exchangeofgoods for goods is

knownas_______.26. _______taxisablendofprogressivetaxand

proportionaltax.III. Match the following : 12 × 1 = 1227. Wealth (a) Vebleneffect28. Marketforces (b) Prof.Schumpeter29. MaximumSocial (c) C+I+G+(X–M) Advantage30. Positiverelationship(c) Diamond ofpriceanddemand31. Longperiod (e) Taxratedecreases supplycurve32. Entrepreneur, (f) Clark aninnovator33. Averagecost (g) Stock

34. SouthAfrica (h) Costperunit35. Dynamictheory (i) Purchasingpower ofprofit ofmoney36. Aggregatedemand (j) HicksandDalton37. Valueofmoney (k) Moreelastic38. Regressivetax (l) Supply, demand

andprice

IV. Answereachofthefollowingquestionsinaword or two: 12 × 1 = 12

39. WhatistheothernameforEconomics?40. Whatistheresultofover-production?41. WhatisIndifferenceCurve?42. Whenthedemandforlabourisinelastic,can

atradeunionraisewages?43. Giveanexampleforfixedinput.44. Givetheconditionforproducersequilibrium?45. Whatisanenvelopecurve?46. Whatistheessentialfeatureofmonopolistic

competition?47. WhoistheauthorofAgioTheoryofInterest?48. Whoistheauthorofthe“GeneralTheoryof

Employment,InterestandMoney”?49. Namethebankwhichcontrolsmoneysupply

inacountry.50. Whatispublicdebt?

PART - B

V. Note : (i) Answer any ten of the followingquestions. 10 × 3 = 30

(ii)Answer for eachquestion shouldbe about four or five lines.

51. DescribetherelationshipbetweenEconomics,MathematicsandStatistics?

52. Name the important general economicsystems.

53. WhatisOpportunityCost?

54. Whataretheclassificationsofgoods?

55. Why does the demand curve slopedownwards?

56. Whatisequilibriumprice?





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Sura’s XII Std Economics 2017 – March Question Paper with Answers 3

57. Differentiatetheshortperiodfromthelongperiod?

58. Whatismeantbydivisionoflabour?59. Whataretheformsofcapital?60. Mention the relationship between MC and

AC.61. Whatareeconomiccosts?62. Distinguishbetweenrealwagesandmoney

wages.63. What are the threemotives of Liquidity

PreferenceTheory?64. Whatisstagflation?65. Whatarethecanonsoftaxation?

PART - C

VI. Note : (i) Answer any sixofthefollowingquestions.

(ii)Answerforeachquestionshouldbe about a page. 6 × 10 = 60

66. Whatarethemeritsanddemeritsofmixedeconomy?

67. Explaintheshiftinsupplywithdiagram.

68. Whatarethefunctionsofentrepreneur?

69. Explaintheshortrunaveragecostcurves.

70. Explain Marginal cost with suitableillustration.

71. Explainthefeaturesofperfectcompetition.

72. What are the criticisms of Say’s Law? [any ten]

73. Whatare thedeterminantsofconsumptionotherthanincome?

74. DefineBudget. Explain the balanced andunbalancedbudget?

75. Differentiatebetweenthedirectandindirecttaxes.

PART - DVII. Note : (i) Answer any threeofthefollowing

questions. (ii)Answerforeachquestionshould

be about threepages. 3 × 20 = 60

76. Discussthenatureandscopeofeconomics?

77. What is indifference curvemap?Explainthe properties of indifference curvewithdiagrams.

78. Explainthemethodsofmeasurementofpriceelasticitydemandindetail.

79. Explainthepriceandoutputdeterminationundermonopoly.

80. ExamineRicardianTheoryofRent.

81. Describethefunctionsofmoney.

ANSWERSI. 1. (c) Adam Smith 2. (a)InefficiencyofProduction 3. (d)Lawofdiminishingmarginalutility 4. (d)Alltheabove 5. (c)Priceelasticityofdemand 6. (c) Alfred Marshall 7. (a) Zero 8. (c) TVC/Q 9. (b) horizontal 10. (c)deriveddemand 11. (c)Fullemployment

12. (b) ΔCΔY

13. (a)businessmengain 14. (b)KindsoftaxesII. 15. wealth and utilities 16. Pricemechanism 17. competitiveandcomplementary 18. marketdemandschedule 19. Price 20. Capital

]]]]





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21. short run 22. LegalMonopoly 23. perfect 24. LiquidityPreference 25. barter 26. DigressiveIII. 27. (g) 28. (l) 29. (j) 30. (a) 31. (k) 32. (b) 33. (h) 34. (d) 35. (f) 36. (c) 37. (i) 38. (e)IV. 39. Politicaleconomy 40. Depression 41. Locus of differentCombinations of

two Commodities 42. Yes 43. Heavymachinery / building / capital

equipment

44. MRTS xy = pxpy

45. Itisagroupofshortruncostcurves/planningcurve

46. Productdifferentiation 47. Bohm-Bawerk 48. Keynes 49. Centralbank 50. Borrowingfromthepublic

PART - BV. 51. 1. Economics is related tomathematics

& statistics. Statistics is the science ofaverageandcounting.

2. In economics, statistics helps tomaketablesanddiagramsforstatisticalanalysis.

3. InModern economics, statistics andmathematicalmethodswere called asEconometrics.

52. The most important general economicsystemsare

1. TraditionalEconomy. 2. CapitalistEconomy. 3. SocialistEconomy. 4. MixedEconomy.

53. 1. The “opportunity cost” is the cost ofsomethingintermsofopportunityforgone.

2. Theopportunitycostofanactionisthevalueofnextbestalternativeforgone.

3. Itisakeydifferencebetweenaccountingcostandeconomiccost.

54. • Necessaries • Comforts • Luxuries55. • The demand curve slopes downwards

mainly due to theLawof diminishingmarginalutility.

• TheLawofDMUstatesthatanadditionalunit of a commodity gives a lessersatisfaction.

• Therefore, theconsumerwillbuymoregoodsonlyata lowerpricewhenpriceincreasesdemanddecline.

• This effects is known as substitutioneffect.

56. • There is only one price atwhich thepreference of sellers and buyersmeettogether.

• Atthepointofintersectionofthedemandandsupplycurve.

• Demandisequaltosupply. • Priceisstable.57.

Short period Long period(a) Short period at

leastonefactorisfixed

(b) Supplyisinelastic(c)Demand

determines the price

(a) Longperiodallthefactorsarevariable

(b) Supplyismoreelastic

(c) Supplydeterminestheprice

58. • Division of labourwas introduced byAdam Smith.

• Itmeansdividingprocessofproductionintodistinctandseveralcomponent.

• Processesandassigningeachcomponentin the hands of Labour or a set of Labourerswho are specialists in theparticularprocess.

• Division of Labour is limited by theextentofmarket.





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59. • PhysicalcapitalorMaterialResources • MoneyCapitalormonetaryResources • HumanCapitalorHumanResources60. • Whenmarginalcostislessthanaverage

cost,averagecostisfalling. • Whenmarginalcost isgreater thanthe

averagecost,averagecostisrising • Themarginal cost curvemust cut the

average cost curve atAC’sminimumpoint from below.

61. • Theeconomiccostincludesbothexplicitandimplicitcost

• Themoneyrewardsfortheownservicesoftheentrepreneurandthefactorsownedbyhimselfandemployedinproductionareknownasimplicitcostsorimputedcost.

Economiccost=implicitcost+explicitcost62.

Money Wages Real Wages(i) Moneywagesare

alsoknownasnominalwages.

(i) Realwagesrefer to the commoditiesandservices.

(ii) Depend upon the purchasingpowerofmoney.

(ii) Depend upon the standardoflivingofworkersinacountry.

63. • Transactionmotive • Precautionarymotive • Speculativemotive64. Since1970stheworldhasbeenfacingthe

problemofstagflationandlackofdemandontheonehandandinflationontheotheriscalledStagflation.Inthecaseofstagflation,bothmonetarypolicyandfiscalpolicyarefoundtobeineffective.

65. (a)Canonofequity (b)Canonofcertainty (c)Canonofconvenience (d)Canonofeconomy

PART - CVI. 66. Merits: (i) Efficientresourceutilization: 1. Theresourcesareutilizedefficiently

asgoodfeaturesofbothcapitalismandsocialismcoexist.

2. Ifthereismisallocationofresources,theStatecontrolsandregulatesit.

(ii) Prices are Administered : 1. Inthecaseofgoodswhicharescarce

the prices are administered by thegovernment.

2. Thepricesarenotfixedalwaysbyforcesofdemandandsupply.

(iii) Social welfare : 1. There is overall welfare due to

centralizedplanning. 2. workers are given incentives and

rewardsforanyinnovation. 3. Inequalitiesofincomeandwealthare

reduced. Demerits: (i) Lack of Co-ordination of mixed

economy : 1. Poor co-ordination between the

publicandprivatesectors. 2. Lackofco-ordinationisduetothe

private sectorwhich dislikes anyrestriction imposed on it by thegovernment.

(ii) Red –tapism and delay by Public Sector :

1. There is toomuch of red-tapismand corruptions leading to delaysin decision making and projectimplementation.

(iii) Economicfluctuations: 1. The lack of policy co-ordination

between private and public sectorresultsineconomicfluctuations.

2. Themixed economies experienceeconomicfluctuations.

67. Shifts in supply:• Thesupplycurveshowstherelationshipbetween the price and quantity suppliedkeepingthe‘otherthings’constant.





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• The ‘other things’ which affect supplyincludenumberof sellers in themarket,factorpricesetc.

Shift in supply curve

0 X

P

E2

Quantity

Pric

e

P2

P1

Q1 Q2

D

Y

Q

D

E1

E

S2

S1

S

• XaxisrepresentsQuantity.• Yaxisrepresentsprice.• TheshiftofsupplycurvefromitsoriginallevelofStonewlevelofS1.

• AnIncrease in factorpricewill increasethe cost of production and supply curvewill shift from S to S2.

• Equilibriumpointalsomoves fromE toE1 or E2respectively.

68. Ident i fy ing Prof i table Invest ible opportunities:• Conceiving a new and most promisingand profitable idea or capturing a newideaavailableinthemarket.

Decidingthesizeofunitofproduction:• Anentrepreneurhastodecidethesizeoftheunit–whetherbigorsmalldependinguponthenatureoftheproduct.

Deciding the location of the production unit :• Arationalentrepreneurwillalwayslocatehisunitofproductionnearertobothfactormarketandtheendusemarket.

Identifying the optimum combination of factors of production :• He decides in what combinations heshould combine these factors so thatmaximumoutputisproducedatminimumcost.

Making innovations :• According to Schumpeter, basicallyan entrepreneur is an innovator ofnew markets and new techniques ofproduction.

Deciding the reward payment : • Thefactorsusedinproductionhavetoberewardedonthebasisoftheirproductivity.

• Reward is the crucial function of anentrepreneur.

Taking Risks and facing uncertainties :• According to Hawley, a business isnothingbutabundleofrisks.

• Onewhoisreadytoacceptriskbecomesasuccessfulentrepreneur.

• AccordingtoKnightoneoftheimportantfunctions of entrepreneur is uncertaintybearing.

69. Short run average cost curves.AverageFixedCost(AFC)• The average fixed cost is the fixed cost

per unit of output.• It is obtained by dividing the totalfixedcostby thenumberofunitsof thecommodityproduced.

AFC = TFCQ

WhereAFC = AverageFixedCost TFC = TotalFixedCost Q = Number of units of

outputproduced• SupposeforafirmthetotalfixedcostisRs.2000whenoutputis100units,AFCwillbeRs.2000/100=Rs.20





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Average Variable Cost (AVC):-• Averagevariablecostisthevariablecost

per unit of output.• It is the total variable cost divided bythe number of units of output producedAveragecostisthecostperuintofoutputproduced.

AVC= TVCQ

WhereAVC = AverageVariableCost TVC = TotalVariableCost Q = Number of units of

outputproduced.• Averagevariablecostcurveis‘U’shaped• AstheoutputincreasestheAVCwillfallup to normal capacity output due to theoperationofincreasingreturns.

Average total cost or Average cost.• Averagetotalcostissimplycalledaveragecostwhichisthetotalcostdividedbythenumberofunitsofoutputproduced.

AC= TCQ

WhereAC = AverageCost TC = TotalCost Q = Number of units of

outputproduced.• Averagecostisthesumofaveragefixedcostandaveragevariablecosti.e.

AC=AFC+AVC

Units of output

1TFC

2TVC

3

TC2 +3

4

AFC2/15

AVC3/15

AC5 +6

70 120 0 120 – 0 –1 120 100 220 120 100 2202 120 160 280 60 80 1403 120 210 330 40 70 1104 120 240 360 30 60 905 120 400 520 24 80 1046 120 540 660 20 90 1107 120 700 820 17.14 100 117.148 120 880 1000 15 110 125

Short run average cost curve

0 X

Y

Output

Cos

t

MC ATC

AVC

AFC

70. Marginal cost• Marginal cost is defined as the additionmade to the totalcostby theproductionof one additional unit of output.

Output (Unit)

Total Cost (Rs.)

Marginal Cost (Rs.)

0 200 –1 300 1002 390 903 470 804 570 1005 690 1206 820 1307 955 1358 1100 145

For Example:• Thetotalcostofproducing99%unitsisRs.9000andthetotalcostofproducing100unitsisRs.10,000thenthemarginalcost will be Rs. 10,000 – Rs. 9000 = Rs. 1000

MCn = TCn−TCn−1 MCn = Marginalcost TCn = Totalcostatproducingnunits TCn−1 = Totalcostofproducingn−1

units





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0 X

Y

Output

MCM

argi

nal C

ost

• Themarginalcostcurveis‘U’shaped.• TheshapeofMCisdeterminedbylawofvariableproportions.

• Ifincreasingreturns(economiesofscale)is in operation, the marginal cost curvewillbedeclining.

• The diminishing returns (diseconomiesofscale)are inoperation, theMCcurvewillbeincreasingasitisthesituationofincreasingcost.

71. (a) Large number of buyers and sellers: 1. Therearealargenumberofbuyers

andsellersinaperfectcompetitivemarketthatneitherasinglebuyernorasinglesellercaninfluencetheprice.

2. Theprice isdeterminedbymarketforces namely the demand for andthesupplyoftheproduct.

3. Therewill beuniformprice in themarket.

4. Sellersaccept thispriceandadjustthequantityproduced tomaximisetheirprofit

5. Thesellersintheperfectcompetitivemarketareprice-takersandquantityadjusters.

(b) Homogeneous Product: 1. Theproductmustbehomogeneous

and identical in all respects i.e theproductsaresameinsize,taste,etc.

2. Theproductsofdifferentfirmsareperfect substitutes and the cross-elasticityisinfinite.

(c) Perfect knowledge about market conditions:

1. Both buyers and sellers are fullyaware of the current price in themarket.

2. Thebuyerwillnotofferhighpriceandthesellerswillnotaccepttogivelowprice.

(d) Free entry and Free exit 1. Theremustbecompletefreedomfor

theentryofnewfirmsortheexitoftheexistingfirmsfromtheindustry.

2. Whentheexistingfirmsareearningsupernormalprofits,newfirmsenterintothemarket.Whenthereislossintheindustry,somefirmsleavetheindustry.

(e) Perfect mobility of factors of production:

Factorsofproductionsshouldbefreetomovefromoneusetoanotherorfromone industry to another easily to getbetter remuneration.

(f) Absence of transport cost: 1. Inaperfectlycompetitivemarket,it

is assumed that there are no transport costs.

2. Iftransportcostisincurred,thefirmsnearertothemarketwillchargealowpricethanthefirmsfaraway.

(g) Absence of Government artificial collusions:

1. Therearenogovernmentcontrolsorrestrictionsonsupply,pricingetc.

2. There is also no collusion amongbuyersorsellers

72. Criticism of Say’s Law:- The main points of criticism of the law are: 1. Great Depression made Say’s law

unpopular.





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2. Allincomesearnedarenotalwaysspendonconsumption.

3. Similarly whatever is saved is notautomaticallyinvested.

4. Thelawwasbasedonwronganalysisofmarket.

5. Itsuffersfromthefallacyofaggregation. 6. Aggregatesupplyandaggregatedemand

arenotalwaysequal. 7. Rateofinterestisnottheequilibrating

factor. 8. Capitalist system is not self-adjusting

always. 9. Perfect competition is an unrealistic

assumption. 10. Money is a dominant force in the

economy.73. Other Determinants of Consumption : 1. Incomedistribution 2. Size and nature of wealth distribution 3. Agedistributionofpopulation 4. Inflationorpricelevel 5. Governmentpolicies 6. Rate of interest 7. Expectationsaboutprice,income,etc. 8. Advertisements 9. Improvementinthelivingstandard 10. Changesinculturalvalues74. DefinitionofaBudget: Prof.Dimocksays,“Abudgetisabalanced

estimate of expenditures and receipts foragivenperiodoftime.Inthehandsoftheadministration,thebudgetisrecordofpastperformance,amethodofcurrentcontrolandprojectionoffutureplans”.

(a) Balanced Budget : Abalancedbudgetis thatoveraperiodof time, revenuedoes not fall short of expenditure. Inotherwordsgovernmentbudgetissaidtobebalancedwhenitstaxrevenueandexpenditureareequal.

(b) Unbalanced Budget : Unbalancebudget is that over a period of time,revenueexceedsexpenditure(Surplus)orexpenditureexceedsrevenue(Deficitbudget).

(i)SurplusBudget (ii)DeficitBudget (i) Surplus Budget: When there is an

excessofincomeoverexpenditure.Itiscalledassurplusbudget.

(ii) Deficitbudget: When there is an excessofexpenditureoverincome.Itisacaseofdeficitbudget.

75. Direct tax 1. Taxesonincome. 2. Taxes imposed on one person and

collectedfromthesameperson. 3. Impactandincidenceofthetaxfallon

the same person. 4. Taxcannotbeshifted. 5. Theburdenof thetaxisbornebythe

persononwhomitislevied. 6. Thistaxpaidbytherich. 7. Taxevationisimpossible. 8. Examples: Income tax, wealth tax,

corporate tax, gift tax, estate duty,expendituretaxetc.

Indirect tax : 1. Taxesoncommoditiesandservices. 2. Taxes imposed on one person and

collectedfromtheanotherperson. 3. Impactoftaxisfallononepersonand

incidenceofthetaxfallontheanotherperson.

4. Taxcanbeshifted. 5. The burden of the tax is borne by

ultimateconsumer.Thistaxpaidbythepoor.

6. Taxevationispossible. Examples:Exciseduty,customduties,

salestaxetc.





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PART - DVII. 76. Nature of Econmics:-

• EconomicsisaSocialSciencewhichdealswithhumanwantsandtheirsatisfaction.

• Economicsisthescienceofscarcity.• Scarcityisthebasicfactoflife.• Our wants are unlimited but means are

limited.• Thisleadstochoicemaking.• Choice is the essence of economicactivity.

• Asallwantsarenotofequalimportancethisleadstochoice.

• Wehavetopayapriceforscarcitygoods.• As prices are paid in money, we studyabout the part played by money in theeconomiclifeofasociety.

• Allscarcegoodswhichsatisfyourwantsareknownaswealth.

• In economics, we study about theproductionofwealth,exchangeofwealthdistributionofwealthandconsumptionofwealth.

• This wealth is produced to promotehumanwelfare,westudytherelationshipbetween wealth and welfare.

Scope of Economics:-• Economics has become one of theimportantbranchesofsocialsciences.

• It isofgreatpracticalvalue inourdailylife.

• In pure science we study the subject toarrive at the truth but in economics itsto find out many economic and socialproblemsofthesociety.

“KnowledgefortheSakeofknowledge”isnotthegoalofaneconomist.

• Economicsmust be fruit bearing. It hasno ready made answer for immediateproblems.

• The Government is making broadeconomicpolicies.

• According to Keynes “The theory ofeconomics does not furnish a bodyof settled conclusions immediatelyapplicabletopolicy.Itisamethod,ratherthan doctrine an apparatus of themind,a technique of thinking, which helps todrawcorrectconclusions”.

• Mostoftheproblemsofthemodernstateareeconomicinnature.

• During World war II, the Germaneconomy was damaged heavily. Theadvice of an economist Ludwig Erhardwhomademiracletorecoverquickly.

• Similarly, J. M. Keynes, had greatinfluence on the economic policies oftheAmericangovernmentwhenitwasingreateconomictroubleduringthe1930s

• “youcannotbeinanyrealsenseacitizen,unless you are also in some degree aneconomist”.

77. Indifference Map:• IndifferencemapisagroupofIndifferencecurves for two Commodities showingdifferentlevelsofsatisfaction.

• In this indifference map, a higherindifferencecurvedenoteshigherlevelofsatisfactionandalowerindifferencecurverepresentslowerlevelofsatisfaction.

Indifference Map

0 X

Y

IC1

IC2

IC3

IC4

Good X

Goo

d Y

IC1 < IC2 < IC3





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Properties of an Indifference Curve:• Indifference curves slope downwards totheright.

• Indifference curves are Convex to theOrigin.

• No two indifferencecurvescanevercuteachother.

All Indifference curves slope downwards from left to right:• The downward slope of indifferencecurvemust be attributed to the fact thattheConsumer insubstitutinggoodXbygoodY, increases the amount ofY andreducestheamountofX.

• The indifference curve were horizontalline running parallel to X axis then thecombinations which it represents is thesame amount of Y but more and more of X.

• In that case, the satisfaction from thecombinationwillnotbeequal.

All indifference Curves are Convex to the origin:• The Operation of a principle knownas ‘Diminishing Marginal Rate ofSubstitution’.

• XaxisrepresentstheCommodityofX.• YaxisrepresentsthecommodityofY.• IftheIndifferenceCurvesareConcavetotheorigin,thenitwillmeanthatMRSisIncreasing.

• IndifferenceCurvecan’tbeastraightline orverticalline.

0 X

Y

IC

Good X

Goo

d Y

∆Y

∆X

No two indifference curves intersect each other• PointAwhichisonIndifferencecurve2representsahigherlevelofsatisfactiontotheconsumerthanatpointBwhichisonindifferencecurve1.

• But Point C lies on both curves. ThatmeanstwolevelsofsatisfactionAandBwhich are unequal have become equal.Thatcannotbeaccepted.

• SoIndifferenceCurvescannevercuteachother.

B

Good X

Goo

d Y

B

AC

78. Introduction:

• Elasticity of demand explain the rate atwhichdemandchangesduetoachangeinprice.





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• The concept of elasticity of demandmeasurestherateofchangeindemand.

• TheconceptofelasticityofdemandwasintroducedbyAlfredMarshall.

Definition:“The elasticity (or responsiveness) ofdemand in a market is great or smallaccording as the amount demandedincreasesmuchor little for a given fall inprice, and diminishes much or little for agivenriseinprice”.Types of elasticity demand:(i) Price (ii)Income(iii)CrosselasticityofdemandMeasurement of price elasticity of demand:Important methods for calculating priceelasticityofdemandare,• Percentagemethod• Pointmethodorslopemethod• Totaloutlaymethod• ArcmethodPercentage method:Percentage change in demand divided bypercentagechangeinprice.

pqFormula is ep

%∆=%∆

Forexample,thepriceofricerisesby10%andthedemandforricefallsby15%.

Then p15e 1.510

= =

∴ ep >1,Thedemandforriceiselastic.Thustherearefivemeasuresofelasticity

(i) Relativelyelasticdemand – ep > 1 (ii) Relativelyinelasticdemand– ep < 1 (iii) Unitaryelasticdemand – ep = 1

(iv) Perfectlyinelasticdemand – ep = 0 (v) Perfectlyelasticdemand – ep =∞

Graphical illustration :Relatively elastic demand

P1

P

Q1 Q

Y

ep > 1

0

Quantity demanded

Pric

e

X

D

Relatively inelastic demand

0

P

Q

D

Price

Quantity demandedQ1 X

P1

ep<1

Y

Unitary elastic demandY

P

P1

0 Q XQuantity demanded

Pric

e ep = 1

Q1

D





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Perfectly inelastic demandY

P

Q

D

ep = 0

Quantity demanded

Pric

e

P1

0 X

Perfectly elastic demand

Price

Y

X

D

1

P

Quantity demanded

ep = ∞

Q10 Q

Point Method:-We can calculate the price elasticity ofdemand at a point on the linear demand curve.

p

Lower segment of the demand curveFormula e

Upper segment of the demand curve=

AC

E

D

Pric

e

0 BQuantity

AE = Upper SegmentEB = Lower Segment

ep = 1

ep = 0

Forexample,letasassumethatthelengthofthedemandcurveABis4cmExactly at middle point of AB demandcurve,

(i) ep at point E pEB 2e 1EA 2

= = =

pe 1∴ =

(ii) ep point D pDB 1e 0.3DA 3

= = =

pe 1∴ <

(iii) ep at point C pCB 3e 3CA 1

= = =

pe 1∴ >

(iv)epatpointB p0 0e 0

AB 4= = =

pe 0∴ =

(v)ep at point A pAB 4e0 0

= = = ∞

pe∴ = ∞

Total outlay method• Demand is elastic, if total outlay orexpenditure increases for a fall in price(ep >1)

• Demand is inelastic, if total outlayor expenditure falls for a fall in price (ep < 1)

• Elasticity of demand is unitary, if totalexpendituredoesnotchangeforafallinprice(ep = 1)

Changes in price

Types of elasticity of demandep = 1 ep < 1 ep > 1

FallinpriceTotaloutlay

remains constant

Totaloutlayfalls

Totaloutlayrises

RiseinpriceTotaloutlay

remains constant

Totaloutlayrises

Totaloutlayfalls





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Arc Method:Segment of a demand curve between twopointsiscalledanArcMethod.Formula

1 2 1 2P

1 2 1 2

q q P PE

Q q P P− −

= ÷+ +

1 2 1 2

q pQ q P P

∆ ∆= ÷+ +

1 2

1 2

P PqQ q p

+∆= ×+ ∆

1 2P

1 2

P PqEp Q q

+∆∴ = ×∆ +

∆q=Changeinquantitydemanded∆p=ChangeinpriceofthecommodityP1 =OriginalpriceP2 =NewpriceQ1 =OriginalquantityQ2 =Newquantity

0 Q

P

B

Quantity Demanded

Pric

e

B

P1

P2

Q1 Q2

A

D

In figure we can measure are elasticitybetween points A and B on the demandcurve, we will have to take the averageprices ofOP1 andOP2 and averageof thetwo quantities demanded (original and thenew).

79. (i) Price and output Determination : Amonopolist like a perfectly competitive

firmtriestomaximisehisprofits• A monopoly firm faces a downwardslopingdemandcurve,thatis,itsaveragerevenuecurve.

• The downward sloping demand curveimpliesthatlargeroutputcanbesoldonlybyreducingtheprice.

• Themarginalrevenuecurvewillbebelowtheaveragerevenuecurve.

• Theaveragecostcurveis“U”shaped.• The monopolist will be in equilibrium

when MC = MR.• TheMC curve cuts theMR curve from

below.

0 M

Y

Output

Cos

t and

Rev

enue

P

H

X

S

T

E

MR

AR

ACMC

1. ARistheaverageRevenueCurveandMRistheMarginalRevenueCurve.

2. ARcurveisfallingandMRcurveisliesbelow AR.

3. The monopolist is in equilibrium at E where MR=MC.

4. OMunitsofoutputandfixespriceatOP.

5. TheaveragerevenueisMSandAverageCost is MT.

6. ProfitperunitisMS-MT= TS.





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7. Total profit is average profit (TS)multipliedbyoutputOM,whichisequaltoHTSP.

8. The monopolist is in equilibrium at point ‘E’andproducesOMoutputatwhichheisearningmaximumprofit.

9. ThemonopolypriceishigherthantheMarginalRevenueandMarginalCost.

80. Ricardian Theory of Rent : (i) Ricardian theoryof rent isoneof the

earliesttheoryofrent.ItisnamedafterRicardo,agreatclassicaleconomistofthe 19thcentury.

(ii) According to Ricardo, “rent is thatportionoftheproduceoftheearthwhichis paid to the landlord for the use of the originalandindestructiblepowersofthesoil.

(iii) Rentispaymentmadefortheuseoflandforitsoriginalpowers.

(iv) Rentaroseonaccountofdifferencesinthefertilityofland.

(v) Onlysuperiorlandsgetrent. (vi) Rentisadifferentialsurplus. (vii)Rentmay also arise on account of

situationadvantage. (viii)Forexample,somelandsmaybenearer

tothemarket. (ix) Theproducercansavealotoftransport

costs. (x) Evenifalllandareequallyfertile,land

which enjoy situation advantagewillearn rent.

(xi) Ricardoexplainedhistheorybytakingtheexampleofcolonization.

(xii)Ifsomepeoplegoandsettledowninaplace,first theywillcultivatethebestlands.

(xiii) Ifmorepeoplegoandsettledown,thedemandforlandwillincreaseandtheywillcultivatethesecondgradelands.

(xiv) Thecostofproductionwillgoup. (xv) Thepriceofgraininthemarketmust

coverthecostofcultivation. (xvi) Inthiscase,thefirstgradelandwill

getrent. (xvii) Aftersometime,ifthereisincrease

inpopulationeventhirdgradelandswillbecultivated.Now,evensecondgradelandswillgetmorerentbutthethirdgradelandswillnotgetrent.

(xviii) Itisknownasno-rentland. (xix) Ricardocametotheconclusionthat

rentdidenterpricebecausetherearesomeno-rentormarginallands.

(xx) Astheproduceofno-rentlandgetsaprice,Ricardoarguedthatrentdidnotenterprice.Ricardian theory of rent

y

No Rent Landor

Marginal Land

200

x0 I

50

100

II III

Out

put

Grades of Land

Rent

Explanation: (i) Grades ofLand are shown along the

x-axis





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(ii) Outputareshownalongthey-axis. (iii) Theshadedareainthediagramindicates

rent. (iv) Inthiscase,gradeIandgradeIIlands

getrent. (v) ThegradeIIIlandwillnotgetrent. Criticism of the Ricardian Theory of Rent: (i) AccordingtoRicardo,landhas“original

and indestructible powers”. But thefertilityoflandmaydeclineaftersometimebecauseofcontinuouscultivation.

(ii) Ricardobelieved that rent is peculiarto land alone. But many moderneconomists argue that the rent aspectcanbeseeninotherfactorslikelabourandcapital.

(iii) Thistheorydoesnottakenoteofscarcityrent.

(iv) Itisbasedonperfectcompetition.butin the realworld,we have imperfectcompetition.

Conclusion: Thoughtherearesomecriticismagainstthe

Ricardian theory,wemaynote it tells thatbecauseofincreasingpressureonland,wehavetocultivateinferiorlands.

81. Money has over come the difficulties ofbarter.Walkerhassaid“Moneyisthatwhichmoneydoes”.Bythis,hehasreferredtothefunctionsofmoney.Moneyperformsmanyfunctionsinamoderneconomy.

“Moneyisamatteroffunctionsfour Amedium,ameasure,astandard,astore”. (i) Medium of exchange: Money is

accepted freely in exchange for allother goods. Barter system is veryinconvenient. So the introduction ofmoney has got over the difficulty ofbarter.

(ii) Measure of Value: Money acts asa common measure of value. It isa unit of account and a standard ofmeasurement. Whenever we buy agoodinthemarketwepayapriceforit inmoney.Andprice is nothingbutvalueexpressedintermsofmoney.

(iii) Store of Value: A man who wants to store his wealth in some convenientform will find money admirablysuitable for the purpose. It act as astoreofvalue.

(iv) Standard of deferred payments: Moneyisusedasastandardforfuturepayments.Itformsthebasisforcredittransactions.Businessinmoderntimesis based on credit to a large extent.This is facilitated by the existence ofmoney. In credit, since payment ismade at a future date, there must besomemediumwhichwill have as faraspossible the sameexchangepowerin the future as at present.





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