KENDRIYA VIDYALAYA ANDREWS GANJ NEW DELHI

(Important Questions with solution from Exam point of view for the subject Economics)

1. Define economics.Economics is a subject matter that focuses on rational management of scarce resource in a manner such that our economic welfare is maximized.

2. Define micro economics.

It is the study of individual economic unit of an economy.

3. Define macroeconomics.It is the study Economic problems relating to economy as a whole.

4. State reasons why does an economic problem arises.1) Resources are scarce .2) Resources have alternative uses.

5. What is meant by production possibility curve?PPC show the different combination of two goods which can be produced with given and resources and technique of production.

6. What does the slope of PPC show?Slope of PPC shows marginal opportunity cost/ marginal rate of transformation.

7. Give one reason for rightward shift in PPC.When resources are increased.

8. Define opportunity cost.It is the Value of the factor in its next best alternative use.

9. Define marginal opportunity cost /Marginal Rate of Transformation.It is defined as the units sacrificed of one good to produce an additional unit of another good.

10. Why is PPC concave to the origin?Due to increasing marginal rate of transformation / marginal opportunity cost

11.Define Marginal utility.

It is change in total utility when an additional unit of a commodity is consumed.

MUn = TUn – TUn-1

12.What is an indifference curve?

A curve that shows various combinations of two goods that give a consumer equal level of satisfaction.

13.Why is IC convex to the origin?

Due to diminishing marginal rate of substitution (MRS).

14.What does the law of diminishing marginal utility state?

It states that as more and more units of a commodity are consumed, marginal utility derived from every additional unit declines.

15. What is a budget line?

It shows various combinations of two goods that a consumer can purchase with his given income and prices of the both goods.

16.What is individual demand?

It is demand for a commodity by single consumer

17. Give two causes of rightward shift in demand curve.

(1). Decrease in price of complementary goods (2).Increase in price of substitute goods.

18.What causes upward movement along the demand curve?

Increase in price of commodity.

19.What is shape of demand curve in case of perfectly inelastic demand?

Vertically straight line parallel to Y-axis.

20.What will be shape of demand if price elasticity of demand is unitary ?

Rectangular Hyperbola

21.Name two factors affecting price elasticity of demand?

Time Period, Availability of Substitutes.

22. What is production function?

It is functional relationship between physical inputs and physical output.

23. Define marginal product?

It is change in total product when an additional unit of a variable factor is used.

24. What is marginal cost?

It is change in total cost / total variable cost when an additional unit of an output is produced.

25. Define supply.

Quantity supplied of a commodity at various price levels in a given period of time.

26.What causes downward movement along the Supply curve?

Decrease in price of commodity.

27.What is elasticity of supply?

It is ratio of percentage change in quantity supplied to percentage change in price of the commodity.

28. Supply curve is upward sloping begins from X- axis what is elasticity of Supply?

Inelastic supply (less than unitary elastic)

29.What cause in leftward shift in supply curve?

Increase in taxes by govt, increase in price of intputs.

30. Supply curve in upward sloping at 45 degree starting from origin. What is elasticity of supply?

Unitary elastic

31. Define perfect competitive market.It is a market in which there are large number of buyers and sellers, selling homogeneous goods, which are perfect substitutes.

32. Define monopolistic competition market.

It is a market in which there are large number of buyers and sellers, selling differentiated goods, which are close substitutes.

33.Define monopoly market.

It is a market where there is only one seller selling a good which does not have any substitute. Firm is the price maker and there is restricted entry into and exit from the market.

34.What is the shape of demand curve of perfect competition market?

Horizontal straight line.

35. In which market form, a firm is price taker?

Perfectly competitive market.

36. In which market firm, there is product differentiation?Monopolistic competition.

37. What is shape of demand curve is case of monopoly market?

Downward sloping demand curve.

38. What is oligopoly market?

A market which has a few big sellers ,selling homogenous or differentiated goods.

39. What is equilibrium price?

Equilibrium price is that price where market demand equals market supply of the commodity.

40. Why is AC/AVC/MC curve U-shaped?

Due to application of the law of variable proportions.

41. Define Marginal revenue.

It is change in total revenue when an additional unit of a commodity is sold.

42. In which market AR= MR.

Perfectly competitive market.

43. Which cost curve has Rectangular hyperbola shape? Average fixed cost (AFC).

44. Define fixed factors. Fixed factors refer to those factors which can’t be changed in short run, they remain fixed.

45.If TP is increasing at an increasing rate, what can you say about MP? MP is rising

46. What is the shape of TFC curve?TFC curve is a straight line parallel to horizontal X-axis

47. Give the meaning of involuntary unemployment.Involuntary unemployment occurs when those who are able and willing to work at the prevailing wage rate but do not get work.

48. What is the relationship between marginal propensity to save and marginal propensity to consume?The sum of MPC and MPS is equal to one.

49. State the two components of money supply.Currency held by the public and demand deposits with commercial banks.

50. What is Cash Reserve Ratio?Cash Reserve Ratio is the ratio of bank deposits that commercial banks must keep as reserves with the Central Bank.

51. Define money.It is anything which is generally acceptable as a medium of exchange and at the same time acts as a measure of value, store of value and means of deferred payments.

52.What is Deficient Demand or deflationary gap?Deficient Demand is a situation, where aggregate demand is less than aggregate supply at the full employment level. It creates deflationary gap

53.What is Excess demand or inflationary gap?Excess demand is a situation, where aggregate demand is more than aggregate supply at the level of full employment. It creates inflationary gap

54. What is Aggregate demand?AD is the total amount of goods and services demanded by all the sectors in an economy during a financial year.

55. Define Revenue Deficit. It refers to the excess of total revenue expenditure of the government over its total revenue receipts. Revenue deficit = Total Revenue expenditure - Total Revenue receipts.

56. Define Fiscal Deficit. Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings. Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts Excluding borrowings)

57. Define Fiscal Deficit Primary deficit is defined as fiscal deficit minus interest payments.

58. What is Foreign exchange rate?It is the rate at which currency of one country can be exchanged for currency of another country. For example 1$ = Rs. 60

59.What is Flexible Exchange Rate/ Floating Exchange Rate?In a system of Flexible exchange rate the exchange rate is determined by the forces demand and supply of foreign exchange.

60.What is Fixed Exchange Rate System?It is the exchange rate which is officially fixed by the Govt. or monetary authority or central banks of a country.

61. What is devaluation of currency?When the central monetary authority decreases value of domestic currency in terms of foreign currency.

62. What is the balance of visible items in the balance of payments account called?

Balance of trade.

63.What is the relationship between APC and APS?

APC+APS= 164. Define open market operations.

It refers to the process of buying and selling of securities by central bank in open market.65. What are the components of BOP Accounts?

1. Visible Trade (Goods only) 2. Invisible Trade (Services) 3. Unilateral Transfers 4. Capital Transfers

3/4 Marks Questions

1. Explain the problem ‘how to produce’ with the help of example.

How to produce refer to choice of technique of production. There are two types of technique of production: (i) labour intensive technique (ii) capital intensive technique. The choice between labour intensive and capital intensive becomes a problem because the producers need to minimize their cost and at the same time maximize their efficiency.

2. Explain the circular flow of income in a two sector model.1. Real Flow - It refers to the flow of factor services from households to firms and the corresponding flow of goods and services from firms to households.

2. Money Flow - It refers to flow of factor payments from firms to households for their factor services and corresponding flow of consumption expenditures from households to firms for purchase of goods and services produced by the firms. It is also called nominal flow.

CIRCULAR FLOW IN A TWO SECTOR ECONOMY

Factor Payments (Rent, Wages, Interest and Profit)

Factor Services (Land, Labour, Capital and Enterprise)

Consumption Expenditure (On goods and services)

Purchase of Goods and Services

3. Differentiate between consumption goods and Capital goods.

Consumer goods or consumption goods Capital goods1. These are directly used by ultimate consumer household for satisfaction of wants.

1. These are fixed assets used by the producers in the production process.

2. These are final goods 2. These are final goods.3. They are not used in production by producer.

3. They help in production of other goods.

4. They may be changed during use by consumer like tea leaves are used to make tea.

4. They do not change during production process.

5.eg: Durable goods- car, washing machine 5. eg: machines , Plants and equipment used in production process.

4. what is the difference between Final goods and Intermediate Goods?

Final goods Intermediate goods1. These are ready for final useby consumer for consumption or By producer for investment.

1. These are not ready for use; they are for resale or used for further production.

2.These are:-(a)Consumer goods used for satisfaction of

2. These are purchased by one firm from another for following purpose:-

Household Sec Household sector

FIRMS

wants. They may change during use.(b) Capital goods which help in production process. Thy do not transform during use,;

(a) Resale during the year(b) Use as raw material in production process. So they may change during production process

3. Once sold these pass out of production boundary.

3. These are inside the production boundary.

4. These are included in national income 4. These are not included in national income.

5. Differentiate between Stocks and Flows variables.

Stocks Flows1. Stock variables are measured at a

particular point in time.2. They do not have a time dimension,3. Eg: Capital stock, inventory, wealth on

a particular day. 4. Stock is static concept

1. Flow variables are measured over a period of time,

2. They have a time dimension,3. Eg: Capital formation during a

year, change in stock, national income during a year.

4. Flow is dynamic concept.

6. Differentiate betweenFactor income and Transfer Income.

Factor income or Factor payment Transfer Income or Transfer payment

1. It is the income received in return for rendering factor services by the factors of production.

It is the income received without any corresponding services.

2. These are included in national income. These are not included in national income

3. Example: Rent, wages, interest, and profit. Retirement pension.

Example: old age pension, scholarship of students, unemployment allowance, charity ,gifts, expenditure on birthday / Marriage, pocket money, remittances from abroad, financial help to earthquake victims, beggars, meals to beggars, compensation given to accident victims etc.

7. Explain the relationship between AC and MC.

Relationship between AC and MC

Both AC & MC are derived from TC Both AC & MC are “U” shaped (Law of variable proportion) When AC is falling ,then AC >MC When AC is rising ,then AC < MC When AC = MC ,then AC will be minimum.

8. Why is AC curve U-shaped? AC curve is U-shaped in short run due to operation of laws of returns to factor ( LAW OF VARIABLE

PROPORTION) Initially production is subject to law of increasing returns, then law of constant return and ultimately to law of diminishing return. As output is increased, AC first falls, reaches its minimum and then rises.

9. State the distinction between explicit cost and implicit cost. Give an example of eachImplicit cost is the estimated value of inputs supplied by the owner of the firm, like imputed salaries of the owners, imputed rent of the building, imputed interest on the money invested by the owners, etc.Explicit cost is the actual monetary expenditure on inputs hired from outside, like expenditure on Purchases of raw materials, on payment of wages, interest, rent, etc

10. Explain the implication of ‘homogenous product’ feature of perfect competition.Homogenous product means that the buyers treat products of all the firms in the industry as identical. Therefore, the buyers are willing to pay only the same price for the products of all the firms in the industry. It also implies that no individual firm is in a position to charge a higher price for its product. This ensures uniform price in the market.

11. Explain the implication of ‘product differentiation’ feature of monopolistic competitionProduct differentiation means that the buyers of a product differentiate between the same products produced by different firms. Therefore, they are also willing to pay different prices for the same product produced by different firms. This gives an individual firm some monopoly power to influence market price of its product

12. How can budgetary policy be used for reducing inequalities in income?To reduce inequalities in income and wealth government can use progressive taxation policy. The government puts a higher rate of taxation on rich people and lower rates of taxation on lower income groups. This reduces disparities in income and wealth. The government can provide subsidies and other amenities to people whose income levels are low. This increases their disposable income and thus reduces the inequalities.

13. Differentiate between Micro Economics and Macro Economics.

Micro Economics Macro Economics

(i) It studies the individual units or

the economy like the study of

an individual firm

(i) Macro Economics studies the

aggregates of the economy such

as ‘General price level, National

income etc.

.

(iii) Its main instruments are

individual demand and

individual supply.

(iii) Its main instruments are

aggregate demand aggregate

supply.

(iv) It is also called as ‘Price Theory’. (iv) It is also known as ‘Theory of

Income, output & employment’.

14. Difference between direct and indirect taxes.

Direct Taxes Indirect Taxes

1. They are directly paid to government by the person on whom it is imposed

1. They are paid to the government by one person but their burden is borne by another person

2. It cannot be shifted 2. Cab be shifted to other person

3. Direct taxes are generally progressive

3. They are progressive nature (The rate of tax decreases as Income Increases)

4. Examples: Income Tax, Wealth Tax and Corporation tax

4. Examples: Sales Tax and Excise duty.

15.Difference between balance of payments and balance of trade.

Balance of trade Balance of Payments

Balance of trade is a record of only visible items i.e. export and imports of goods.

1. Balance of Payments is a record of both visible items (goods) and invisible items. (Services).

It is a narrow concept as it is a component of balance payments.

2. It is a wider concept as it is a record of all transactions.

Deficit in balance of trade can be met by balance of payments.

3. Deficit in the balance of payments cannot be met by the balance of trade.

16. Distinguish between autonomous and accommodating items.

Autonomous items Accommodating Items

Autonomous items refer to international economic transactions that take place due to some economic motive such as profit maximisation.

1. This refers to transactions that occur because of government financing.

These items are called above the line items in the BOP.

2. These items are called below the line items.

This includes all transactions of BOP.

3. This includes only official reserve transactions.

17. Distinguish between Changes in Quantity Demand and Change in Demand.

Change in Quantity Demanded Change in Demand

i) Other things being equal if the quantity

demanded increases with the fall in the price

of a product and decrease with the rise in the

price of commodity, it is known as movement

along a demand curve or change in quantity

demanded.

i) If more or less quantity of commodity is

demanded at the same price due to charge in

factors other than the price of the commodity is

called shift in the demand curve. Or change in

demand.

ii) The movement is either upward or

downward along the same demand curve.

ii) There is either rightward shift or leftward shift

of the demand curve itself.

iii) Downward movement along the demand

curve is called extension in demand.

iii) Rightward shift indicates increase in demand

and leftward shift shows the decrease in

demand

18. Briefly explain any four factors affecting elasticity of demand.

1) Availability of substitute goods -Demand of a commodity will be highly elastic if it has many substitutes.

2) Nature of commodity -Demand of necessary and essential goods are always inelastic because

consumers are restricted to buy those goods.

3) Different uses of the commodity: If the commodity has different uses, its demand will be elastic.

4) Taste & preferences -If the consumer is bound to use particular brand of a commodity then its demand

will be inelastic because consumer will buy that particular commodity only even at higher price.

19. What is the difference between cardinal and ordinal utility analysis.

S.No. Cardinal Utility Ordinal Utility1 Given by Prof. Alfred

Marshall Given by Prof. J.R. Hicks

2 Utility can be measured numerically

It cannot be measured numerically

3 Unit of measurement is ‘utils’ Possible for a consumer to scale his preferences.

20. Explain any three determinants of demand for a commodity. Following are the three determinants of demand for a commodity.i) Price of the commodity:- When the price of a commodity increases the demand for that

commodity decreases and vice versa.ii) Income of the consumer: - When the income increases the demand for that commodity

also increases and vice-versa.iii) Price of related goods : -

a) In complementary goods demand rises with fall in price.b) In substitute goods demand for a commodity falls with a fall in the price of other

substitute goods.21. Distinguish between perfect competition and monopoly .

22. Explain the objectives of the Government Budget.These below are the main objectives of the Government Budget.

a) Activities to secure reallocation of resources: - The Government has to reallocate resources with social and economic considerations.

Perfect competition market Monopoly1. Large number of buyers and sellers. 1. There is only one seller.2. There is free entry into and exit from the market.

2. There is restricted entry into and exit from the market.

3. Firm is price taker and industry is price maker.

3. Firm is the price maker

4. Average Revenue (AR) curve perfectly elastic & horizontal.

4. Average Revenue (AR) curve is downward sloping & inelastic.

b) Redistributive Activities : - The Government redistributes income and wealth to reduce inequalities.c) Stabilizing Activities : - The Government tries to prevent business fluctuations and maintain

economic stability.Management of Public Enterprises: - Government undertakes commercial activities that are of the

23. Why is foreign exchange demanded?Foreign exchange is demanded for the following purposes.

a) Payment of International loansb) Gifts and grants to rest of the worldc) Investment in rest of the world.d) Direct purchases abroad for goods and services as well as imports from rest of the world.

24. Why does the demand for foreign exchange rise, when it price falls?

With a fall in price of foreign exchange , the exchange value of domestic currency increases and that of foreign currency falls. This implies that foreign goods become cheaper and their domestic demand increases. The rising domestic demand for foreign goods implies higher demand for foreign exchange. So there is inverse relationship between price and demand for foreign exchange.

25. What are the sources of Supply of foreign exchange?

1. When foreigners purchase home countries goods and services through exports2. When foreigners invest in bonds and equity shares of the home country.3. Foreign currencies flow into the economy due to currency dealers and speculators.4. When foreign tourists come to India5. When Indian workers working abroad send their saving to families in India.

26. What are the components of current account of Balance of payments?

a) Visible items of trade: The balance of exports and imports of goods is called the balance of visible trade.

b) Invisible trade: The balance of exports and imports of services is called the balance of invisible trade E.g. Shipping insurance etc.

c) Unilateral transfers: Unilateral transfers are receipts which resident of a country receive (or) payments that the residents of a country make without getting anything in return e.g. gifts.

27. What are the components of capital account of Balance of payments?1. Private transactions : These are transactions that are affecting assets (or) liabilities by individuals.2. Official transactions : Transactions affecting assets and liabilities by the government and its

agencies.3. Direct Investment : It is the act of purchasing an asset and at the same time acquiring and control of

it.4. Portfolio investment : It is the acquisition of assets that does not give the particular control over the

asset.28. Why does the demand curve slope downward?

(i) Law of diminishing marginal utility- As consumer consumes more quantity of goods, according to

the Law of diminishing marginal utility satisfaction goes on decreasing. So consumer is willing to buy

more & demand more only at lower price as satisfaction is low. & vice versa

(ii) Income effect-as price of a good decreases purchasing power of the consumer increases so real income of consumer rises, so due to this income effect he demands more.

(iii) Substitution effect- As price of a good decrease consumer substitutes the good by relatively cheaper substitute good so his demand decreases.

(iv) Change in Number of consumers –as price of a good falls number of consumers who were not

buying it will now be able to afford it so they demand rises.

29. Distinguish between fixed cost and variable cost.

fixed costs variable costsFixed costs are those which do not change when output is increased or decrease

Variable costs are those costs which vary with output

These are cost of fixed factor inputs These are cost of variable factors inputs.For example Rent of Land, Insurance charges

For example. Cost of raw material used in production, wages paid to labor

30. Briefly explain determinants of a supply of a commodity?

1. Price of the commodity-There is a direct and positive relationship between supply and price. Generally, higher the price, larger would be the supply and lower price results into lesser supply.

2. Prices of factors of production-with the rise in prices of factors of production, cost of production may also rise. It lowers producer’s profits, which results into a decrease in its supply.

3. Goals of the firms –Supply of a commodity are also guided by the firm’s goal of profit maximisation or sales maximisation. If the firm has the goal of profit maximization, it will supply more goods at a higher price.

4. Change in technology-If producers make use of new technology that helps in reducing its cost of production and higher profits, it ensures a higher level of production and its supply

31. Differentiate between Perfect competition market and Monopolistic competition .

Perfect competition market Monopolistic competition market1 .Large number of buyers and sellers. 1. There are large number of buyers and

large number of small sellers.2. Firm is price taker and industry is price maker.

2.Firm is the price maker

3. Average Revenue (AR) curve is perfectly elastic & horizontal.

3. Average Revenue (AR) curve is downward sloping & elastic.

4. There is no Selling cost 4. Selling costs are high.

32. Differentiate between monopoly market and Monopolistic competition

Monopoly market Monopolistic competition market1. There is only one seller. 1. There are large number of buyers and

large number of small sellers.2. There is restricted entry into and exit from the market.

2. There is free entry into and exit from the market.

3.Selling costs are low & are onetime costs 3. Selling costs are very high.4 .Average Revenue (AR) curve is downward sloping and inelastic.

4. Average Revenue (AR) curve is downward sloping elastic.

5. Goods in this market have no close substitutes.

5. Goods in this market have very close substitutes.

33. Will the following be included or net in the domestic factor income of India? Give reasons for your answer:-

i) Salaries of non-residents working in India Embassy in Russia. ii) Salaries to Indian residents working in Russian Embassy in India.

Iii) Salaries received by Indian workings in American Embassy in India.iv) Profit earned by an Indian company from its branch in Singapore.

Ans. (1) Yes it will be included because Indian embassy is a part of domestic territory of India. (2)No it will not be included in the domestic factor income as the Russian embassy is not

a part of domestic territory of India. (3)No it will not be included in the domestic factor income as the American embassy is

not a part of domestic territory of India.(4) No it will not be included in domestic factor income of India because Singapore is not a part of domestic territory of India.

34. Explain Functions of Money.(1) Medium of Exchange:-- It is generally accepted means of payment for exchange of goods and services.- Facilitates trade, widens area of market by separating act of sale and purchase.(2) Measure of Value or Unit of Value:-- All goods and services can be given one unique value (Price) by expressing them in terms of money.-It is common unit of measurement of all goods. Thus makes exchange easier.-Its value remains constant.(3) Store of Value-It is liquid store of value.-It comes in convenient denominations.-Value remains constant, it is not perishable easily portable, requires less place to store& there is no storage cost.(4)Standard of deferred Payments -Or future payments like salaries, pension, interest etc.-Facilitates borrowing and lending.- Itovercomes disagreements and risks that are there isBarter system regarding future payments to be made as value of money remains constant.

35. What are the various sources of non-tax revenue ?(a) Fees-Payment received for providing certain services for public interest like Govt. college or hospital feesFines & penalties charged for breaking of laws or disobeying rules & regulations(b)License fee & Permit - Payment received for giving privileges or permits to perform a service. Like registration and license fee for industries or automobile.(c) Escheat-income Govt. gets by taking possession of property which has no claimant or legal heir.(d) Profits of PSU’s –Profits earned by public sector enterprises or dividend received by Govt. on investment made by it.

36. Differentiate between Revenue expenditure and capital expenditure.Revenue Expenditure - It consists of those Government expenditures which neither Create Assets nor Reduce Liabilities. EX.Borrowings,Recovery of loans

Capital Expenditure - It consists of those Government expenditures which either Create Assets or Reduce Liabilities.Ex-Repayment of loan,Expenditure on construction & purchase of Assets.

37. Differentiate between Revenue receipts and capital receipts.Revenue Receipts: - It refers to the receipts of the govt. Which don’t create any liability and cause any reduction in the assets of the govt. It may be divided into two, tax revenue and non-tax revenue

CAPITAL RECEIPTS: - It refers to those receipts of the govt. which create a liability / cause reduction in its assets. Loans raised by the govt. from the public, Loans received from foreign govt and international financial institutions, PSU disinvestment – selling shares /securities of PSU.

38. What is the relationship between TU and MU

Relationship between MU and TU:i) When MU is positive TU rises.ii) When MU is zero TU is maximum.iii) When MU is negative, TU falls

UNITS TU MU1 8 82 14 63 18 44 20 25 20 06 18 -2

Diagram:

TU/MU

6 Marks Questions

1. How is equilibrium achieved with the help of indifference curve analysis?

Consumer equilibrium refers to a situation where a consumer gets maximum satisfaction through his scarce resources; he has no tendency to change his available budget constraint.

Conditions:-

i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py

OR

Slope of indifference curve = slope of Budget line

ii) Indifference curve must be convex to the origin.

TU

X

Y

(-)MU

This may be explained with the help of following diagram;-

A

p

q IC3

r IC1

O Good x B X

Diagram Explanation:

‘AB’ is the budget line. It is sure that consumer’s equilibrium will lie on some point on ‘AB’. Indifference map (set of IC1,IC2, IC3) shows consumers scale of preferences between different combinations of good ‘x’ and good ‘y’.Consumers equilibrium will achieve where budget line (AB) is tangent to the IC2.

Consumers cannot achieve the following:

i) P and ‘r’ points on budget line give satisfaction, but, choosing point ‘q’ puts him on a higher IC2 that gives more satisfaction.

ii) He cannot move on IC3, as it is beyond his money income.

So, the consumer will be in equilibrium at point q where both of the conditions are satisfying.

2. Explain the law of variable proportions with the help of TP and MP curves.Statement of law of variable proportion: In short period,When one variable input is increased keeping other factor inputs constant, marginal product of variable factor increases then decreases becomes zero & then negative. It can be explained with the help of a following schedule

Fixed factor Variable factor Total product Marginal product Phase/stage

Land in acres Labour Units Units1 1 5 5

I Increasing returns1 2 15 101 3 30 151 4 40 10

II – diminishing returns to a factor1 5 45 5

1 6 45 0

1 7 40 -5 III - Negative returns to a factor

Good ‘y’

IC2

TP P

MPP

/TPP

Units of variable factor

Phase I / Stage I / Increasing returns to a factor.

TPP increases at an increasing rate

MPP also increases.

Phase II / Stage II / Diminishing returns to a factor

TPP increases at decreasing rate

MPP decreases / falls

This phase ends when MPP is zero & TPP is maximum

Phase III / Stage III / Negative returns to a factor

TPP diminishes / decreases

MPP becomes negative.

3. Differentiate between CHANGE IN QUANTITY SUPPLIED and CHANGE IN SUPPLY.

CHANGE IN QUANTITY SUPPLIED:- It is caused by a rise/fall in the price of a commodity. It is expressed either in form of an expansion in supply or contraction in supply. Expansion and contraction in supply are represented diagrammatically in the form of a movement along a given supply curve. Contraction is due to fall in price .(see fig.(A))

MPP

X

X

O

Y

1st

2nd

3rd

CHANGE IN SUPPLY:- A change in supply of a commodity caused by factors other than (Income of the consumer ii) Price of related goods and iii) Tastes and preferences of the individual/ consumer) the price of a commodity. Change in supply is represented graphically by a rightward or leftward shift. Decrease is due to fall in other factors than the price. Leftward shift shifting of supply curve leads to decrease the supply. .(see fig.(B))

4. Explain the following functions of central Bank:-A. Issue of Currency B. B. Banker to Government C. C. Bankers Bank & Supervisor

Issue of Currency : The Central Bank is given the monopoly of issuing currency in order to secure control over volume currency and credit. These notes are circulated throughout due country as legal tender money. It has to keep a reserve in the form if gold and foreign securities as per the statutory rules against the notes issued by it. It issues notes above Rs.2/-. One Rupee coins and other small coins are issued by the mints of Government.

Bankers to Government: Central Bank acts as the bank of Central and State governments. It carries out al banking business of Government. Government keep their cash balances in the current account with Central Bank. Similarly central bank accepts receipts and makes the payment on behalf of the Government. Also Central bank carries out exchange, remittances and other banking operation on behalf of Government. Central Bank gives the loans and advances for a short period to the Governments. It also manages the public debt of the country.

Bankers Bank & Supervisor: All the scheduled banks are controlled and supervised by the Central Bank. These banks are required to keep certain percentage of their deposits with Central Bank. They can take loans from the Central Bank.

5. Using diagrams explain the concepts of excess demand and deficient demand.OR

Using diagrams explain the concepts of inflationary gap and deflationary gap.

Excess demand refers to a situation where AD is more than AS corresponding to full employment equilibrium level. It also means that actual AD is more than what required to maintain full employment equilibrium level. It creates inflationary gap.

Inflationary Gap= Actual AD- AD required for full emp.

AD`

C+I+G(AD)

C+I+G(AD)

F

Inflationary y

xQ

450

O Output/ employment

Aggr

egat

e de

man

d

Deficient Demandrefers to a situation where AD is less than AS corresponding to full employment equilibrium level. It also means that actual AD is less than what required to maintain full employment equilibrium level. It creates Deflationary gap.

Deflationary Gap= AD required for full emp - Actual AD

AS=Y=C+S

AD &AS

ADF

F AD actual

G

P E

Q

O M N

Income, output & Employment

6. There is a simultaneous ‘decrease’ in demand and supply of a commodity.When it will result in -

(1)No change in equilibrium Price. (2)A fall in equilibrium priceDecrease means less quantity at the same price. Decrease in demand shift the demand curve to the left downwards. Decrease in supply shifts the supply curve to the left upwards.

(I)If decrease in demand is equal to decrease in supply, there will be no change in the equilibrium price .In the figure, both demand and supply decrease by E’E = Q’Q at a given price OP.

(ii)If decrease in demand is greater than decrease in supply, the equilibrium price will fall. In the figure, decrease in DD=AE. While decrease in supply is lower i.e. BE’’. Therefore, equilibrium price falls from OP to OP’.

7. Explain producer’s Equilibrium using MR and MC approach.

Producer’s Equilibrium:- A producer (a firm) is said to be in equilibrium when it earns maximum profits. Profit maximization of a firm means maximizing the difference between total revenue and total cost. When the profits of the firm are maximum, the firm is in equilibrium.

According to MC-MR approach, the conditions of producer’s equilibrium are-

1) MR= MC

2. MC Should greater MR after equilibrium level of output

In this example, producer will be in equilibrium at the output level of 4 units .At this level both of the

conditions are satisfying.

8. Explain the equilibrium level of income with the help of savings and investment function. If planned savings exceed planned investment what changes will bring about the equality between them.Economy is said to be in equilibrium when planned savings is equal to planned investment.

As we know, AD=AS

C+I=C+S

I=S

Level of Output MR MC

1 10 9

2 9 7

3 8 6

4 7 7

5 6 8

6 5 9

But we know savings and investment activities are generally done by different sections of the society. Therefore very often we can see a difference between planned saving and planned investment. It means that when S>I or S<I economy will experience disequilibrium as shown in the fig. given below.

S

Saving

&Investment E

I

Income

0

Y P

As shown in the diagram at point E, S= I. Up to point E, S<I and after point E, S>I. Both show situations of disequilibrium in the economy.

When S>I, it means that the households are savings more than what the firms desires to invest i.e., both household consumption demand and firm’s investment are less. This will induce the producers to reduce production and this will reduce the employment opportunities. National Income will be reduced from OP to OY and thus the economy will regain equilibrium.

By

Nand lal Jangid

PGT-Economics

K V PAndrews Ganj