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ZIET BHUBANESWAR
केन्द्रीय विद्यालय संगठन नई विल्ली
KENDRIYAVIDYALAYA SANGATHANNEW DELHI
सन्दभथ सहायक सामग्री
Reference Support Material
कायथिाला
3 Day Workshop
on
Capacity Building in Economics
for PGTs (Economics)
9से 11 अगस्त 2016
09-11 August 2016
स्नातकोत्तर विक्षकों (अर्थिास्त्र) हे तु
क्षमता वनमाथण पर 3 – वििसीय
कायथ स्र्ल : केन्द्रीय विद्यालय वहनू रांची (रांची संभाग)
Venue: KENDRIYA VIDYALAYA HINOO RANCHI (RANCHI REGION)
ZONAL INSTITUTE OF EDUCATION AND TRAINING, Bhubaneswar
KV-4 Campus, NILADRI VIHAR, Bhubaneswar (Odisha) 751021
Visit us: www.zietbbsr.org Contact us: [email protected], [email protected], 0674-2721290
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
OUR PATRONS
Shri Santosh Kumar Mall (IAS)
Commissioner KVS New Delhi
Shri G.K. Srivastava (IAS)
Additional Commissioner (Admn) KVS New Delhi
Shri. U. N. Khaware
Additional Commissioner (Acad) KVS New Delhi
Dr. Shachikant
Joint Commissioner (Training) KVS New Delhi
Dr. Vijayalakshmi
Joint Commissioner (Acad) KVS New Delhi
Dr. E. Prabhakar
Joint Commissioner (Pers) KVS New Delhi
Shri M. Arumugam
Joint Commissioner (Fin.) KVS New Delhi
Shri S. Vijaykumar
Joint Commissioner (Admn) KVS New Delhi
Special thanks
Shri A. V. L. J. Rao, Deputy Commissioner, KVS RO Bhubaneswar
Shri N. Goyal, Deputy Commissioner, KVS RO Ranchi
Shri N. R. Murli, Deputy Commissioner, KVS RO Kolkata
Shri C. Neelap, Deputy Commissioner, KVS RO Guwahati
Shri Ajay Pant, Deputy Commissioner, KVS RO Tinsukia
Shri P. K. Koul, Deputy Commissioner, KVS RO Silchar
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
Acknowledgement
Course Director
Shri A. V. L. J. RAO
Deputy Commissioner &Director, ZIET Bhubaneswar
Associate Course Director
Shri A. P. S. Brar
PRINCIPAL KV ROURKELA
Resource Persons
Shri PARSURAM SHUKLA
PGT (Economics) & FACULTY ZIET BHUBANESWAR
Mrs. Sujata Mishra
PGT (Economics)
K V BANDAMUNDA, RANCHI Region
Manual Developed By:
Mr. PARSURAM SHUKLA
PGT (Economics) & FACULTY ZIET BHUBANESWAR
Technical Support:
Dr. SANTOSH GUPTA
LIBRARIAN ZIET BHUBANESWAR
ZONAL INSTITUTE OF EDUCATION AND TRAINING, Bhubaneswar
KV-4 Campus, NILADRI VIHAR, Bhubaneswar (Odisha) 751021
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
केविसं विक्षा एिं प्रविक्षण का आं चवलक संस्र्ान ( जे ड आई ई टी) : भुिनेश्वर / KVS ZIET
BHUBANESWAR
प्रवतभावगयों का सूची / LIST OF PARTICIPANTS
कायथिाला का नाम / NAME OF WORKSHOP :
CAPACITY BUILDING FOR NEWLY RECRUITED/PROMOTED PGT (ECO)
कायथस्र्ल: वहनू
S.
NO
NAME OF
PARTICIPANT
विनां क / DATED : 09.08.2016 TO 11.08.2016
NAME OF K.V.
REGION
MOBILE
NO.
E-mail id
(IN CAPITAL)
1
DR. SUDHA UPADHYAY
Dipatoli
RANCHI
9431352897
[email protected]
2
MS. ERA TIRKEY
Namkum
RANCHI
9431107956
[email protected]
3
MRS. MANJAREE ANAND
MAITHON DAM
RANCHI
7050843354
[email protected]
4
MS. ARCHANA PRASAD
GOMOH
RANCHI
8986736210
[email protected]
5
MRS. KAMANA PANDEY
NO.1 DNANBAD
RANCHI
9431725367
[email protected]
6
MR. VIJAY KUMAR
HINOO(2ND SFT)
RANCHI
9472739394
[email protected]
7
MR. VALERIAN KUJUR
HINOO(1ST SFT)
RANCHI
9471127190
[email protected]
8
MR. RAVI SHANKAR SAINI
SILCHAR
SILCHAR
9401245848
[email protected]
m
9
MR. RANJEET SINGH
YADAV
AIZAWL
SILCHAR
9716073901
[email protected]
10
MR. BADAL RAM JANGID
LOKTAK
SILCHAR
8014050516
[email protected]
11
MR. AMIT KUMAR SINGH
OIL, DULIAJAN
TINSUKIA
9897403618
[email protected]
12
MR. ALOK KUMAR SINGH
NAMRUP
TINSUKIA
7896661313
[email protected]
13
MR. BIPUL VIKASH
ONGC,
SIVASAGAR
TINKUKIA
8721082849
[email protected]
14
MR. RAJENDRA PRASAD
SONWAL
LOKRA
TINSUKIA
8723954981
[email protected]
15
MR. NIRANJAN PANI
NO.1 CUTAK
8093126400
[email protected]
16
MR. RAGHUNATH PANDA
BALASORE
9635170888
[email protected]
17
MR. PRAMOD BARIK
NO.1
SAMBALPUR
9861586146
[email protected]
18
Mr.PRAGYAN PAramita
DHAL
Puri
9439391845
[email protected]
19
MR. NIRANJAN SAHOO
GAJAPATI
9040551623
[email protected]
20
MR. ARUN KUMAR PATRA
KHURDA ROAD
7504004808
[email protected]
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BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
S.
NO
NAME OF
PARTICIPANT
21
MR. RAJIV KR PANDEY
22
MS. D. SUVARNA LATA
23
MR. RAMESH MANDAL
24
MR. KUBERA CHANDRA
PRADHAN
STEEL PLANT
VISHAPATANAM
NO.2 KV, SVN
VISAKHAPATNAM
CMERI
DURGAPUR
COMMAND
HOSTIPAL
25
MR. KAMAL KISHORE
26
NAME OF K.V.
REGION
MOBILE NO.
E-mail id
(IN CAPITAL)
BHUBANESHWAR
8184835264
[email protected]
BHUBANESHWAR
8912526822
kv2svngar.ap.nic.in
KOLKATA
9475323087
KOLKATA
9635560626
CRPF DURGAPUR
KOLKATA
8927726576
[email protected]
MS. SHYAMALI SHAW
BKS (AFS)
KOLKATA
9007815252
[email protected]
27
DR. KALPANA
CHATTOPADHYAYA
BARRACKPORE
(ARMY)
KOLKATA
9477448906
[email protected]
28
Mrs. SHEELA YADAV
BURDWAN
KOLKATA
9415600052
[email protected]
29
MS. SEEMA MARANDI
KOLKATA
8420507514
[email protected]
30
MR. RAMESH NIMAI
GUWAHATI
96474111656
[email protected]
31
MR. BIJENDRA SINGH
NO.2 BINNAGURI
GUWAHATI
8900526162
[email protected]
32
MR. ADITYA BHARDWAJ
NFR MALIGAON
GUWAHATI
7089251970
adityabhardwajsiingh@gmail
.com
33
DR. ASHISH KUMAR
NAGAON
GUWAHATI
9609603392
[email protected]
34
MR. RAJESH KUMAR
PANBARI
GUWAHATI
7875467659
[email protected]
35
MR. ABHISHEK
CHATURVEDI
NTPC, SINGTAM
EAST SIKKIM
GUWAHATI
7031774205
[email protected]
KV No.1
KANCHPRAPARA
NO.1 KALAI
KUNDA AFS
[email protected]
[email protected]
m
Associate Course Director
1
MR. APS BRAR,
Principal
Rourkela
9438143255
[email protected]
ZIET
9938649454
[email protected]
Ranchi
9438488662
[email protected]
Ranchi
Resource Persons
2
MR. PARSURAM
SHUKLA
ZIET
3
MR. SUJATA MISHRA
Bondamonda
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
Road map for Teachers of class XII:
Acquaint yourself with the latest CBSE syllabus.

Prepare a time table for yourself.

Complete the syllabus as per the time table by 30th November.

Give notes to students while teaching.Verify whether the students are writing in their notebook.

Correct the copies of under-achiever with care.

Take slip tests every week, keep proper record.

Ensure that the monthly test is conducted every month with a proper time table.

The month, in whichHYE/PBE is conducted; monthly test should not be conducted in that month.

Provide answer to each and every question asked in every exam, after each exam.

Revision schedule should be prepared and implemented after the completion of syllabus.

Entire syllabus should be revised carefully; it should be completed by 31st January2017.

During the revision time conduct sample test and keep proper record.

Solve last nine years (2008-2016) CBSE question papers; ensure that each and every child knows
the answer to each and every question asked in all these years.

Ask every child to prepare file in which they will keep all the question papers discussed during the
year and they be asked to maintain separate copy in which the solution to each and every
question be recorded.

Utilise those days judiciously before the day of exam e.g.the students especially the underachiever should be called to attain classes during the days when there is no exam, it should be
done for those days before the Economics exam only if possible.

Emphasis should be on the syllabus not on the books, for example NCERT texts should not be
followed blindly rather it should be supplemented from other sources.

Identify the easy portion from the syllabus for the underachievers.

Modify the plan when required.

Accept the change even when it is bitter in taste.

Always keep track on the CBSE syllabus to know the latest change.

Inform the students about the mark distribution unit wise, total no of questions, question wise
mark distribution etc. before every exam.

Accept the students as they are.

Keep an eye on the students who remain absent from classes/tests.

Be optimistic in every situation.
Prepared By:-Parsuram Shukla, PGT (Economics)
KVS ZIET Bhubaneswar
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
KVS - ZONAL INSTITUTE OF EDUCATION AND TRAINING, BHUBANESWAR
3-Day Workshop for Newly Recruited/Promoted PGT (Economics)
on Capacity Building in Economics 9-11August 2016
Venue: Kendriya Vidyalaya Hinoo Ranchi
TIME TABLE
Time / Date
09.08.16
10.08.16
11.08.16
9.00-9.15 Hrs
Registration
Assembly
Assembly
9.15-10.45 Hrs
Inauguration:
1.Objectives of WS
2.Need Analysis
Determination of Income
and Employment
{Class XII}- RP
Producer Behaviour and Supply
{Class XII}: RP
10.45-11.00
Hrs
11.0013.00Hrs
Tea Break
National Income and
Related Aggregates
{Class XII}-
13.00-14.00
Hrs
14.00-15.45
Hrs
Producer Behaviour and Supply
(Contd….)
{Class XII}: RP
Lunch Break
National Income and
Related Aggregates
(Cont…)
{Class XII}-RP
15.45-16.00
Hrs
16.0017.30Hrs
Determination of Income
and Employment (Contd….)
{Class XII}- RP
Consumer’s Equilibrium and
Demand {Class XII}-RP
Group workWorsheetprearation:
Coordinator/RPs
Forms of Market{ClassXII}
Tea Break
Group work-Worksheet
preparation: Coordinator/
RPs
Consumer’s Equilibrium and
Demand (Contd…)
{Class XII}-RP
Plenary Session
Director
ZIET BHUBANESWAR
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SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
ZIET BHUBANESWAR
INDEX
Our Patron .......................................................................................................................................................2
Acknowledgement ...........................................................................................................................................3
Details of Teachers ..........................................................................................................................................4
Road Map for Teachers of Class XII .................................................................................................................6
Time-Table .......................................................................................................................................................7
Index ................................................................................................................................................................8
TOPIC 1: Meaning of Micro and Macro Economics, Central Problems of an Economy .................................10
By DR. SUDHA UPADHYAY
Topic 2: Concepts of Production Possibility Curve and Opportunity Costs ...................................................15
By MS. ERA TIRKEY PGT. Economics K. V. Namkum, Ranchi
Topic 3: Consumer’s Equilibrium ...................................................................................................................18
By Manjaree Anand, PGT(Economics), Kendriya Vidyalaya Maithon Dam, Ranchi Region
Topic 4: INDIFFERENCE CURVE .....................................................................................................................22
By ARCHANA PRASAD,PGT(ECO),K.V.GOMOH
Topic 5: Demand ............................................................................................................................................26
BY Kamana Pandey ( PGT ECO), K V NO 1 Dhanbad
Topic 6: PRICE ELASTICITY OF DEMAND ........................................................................................................30
By Vijay Kumar (PGT-Eco), KV Hinoo Ranchi
Topic 7: Production function-Meaning and Type of Production Function ...................................................40
BY:VALERIAN KUJUR PGT(ECONOMICS) KV HINOO, RANCHI
TOPIC 8: RETURNS TO A FACTOR ...................................................................................................................45
By RAVI SHANKAR SAINI PGT ECONOMICS K.V.SILCHAR (SILCHAR REGION)
TOPIC 9- REVENUE .........................................................................................................................................51
By Badal Ram Jangid, PGT (Eco), K.V. LOKTAK , NHPC MANIPUR (SILCHAR REGION)
TOPIC 10 : SUPPLY .........................................................................................................................................56
BY Amit Kumar Singh, PGT (Economics), K.V OIL Duliajan, Assam (Tinsukia Region)
Topic11: Producer’s Equilibrium....................................................................................................................59
By: Alok Kr. Singh PGT (Economics), Kendriya Vidyalaya Namrup (Tinsukia Region )
Topic 12: Monopolistic Competition .............................................................................................................63
By Niranjan Pani, PGT (Economics), KV Kankinara
TOPIC 13: PERFECT COMPETITION ................................................................................................................66
BY BIPUL VIKAS, PGT (ECONOMICS), KV ONGC SIVASAGAR, ASSAM
Topic 14: MONOPOLY ....................................................................................................................................68
BY: RAJENDRA PRASAD SONWAL, PGT (ECONOMICS), KENDRIYA VIDYALAYA LOKRA, TINSUKIA REGION
TOPIC 15: SIMPLE APPLICATION TOOLS OF DEMAND AND SUPPLYPRICE CEILING AND PRICE FLOUR .........72
BY RAGHUNATH PANDA, PGT (Economics), KV BALASORE
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TOPIC 17: Some Basic Concepts: Consumption Goods, Capital Goods, Final Goods, Intermediate Goods ..77
BY: PRAGYAN PARAMITA DHAL, PGT (ECONOMICS), K.V. PURI
Topic 18: SOME BASIC CONCEPTS – STOCKS AND FLOWS, GROSS INVESTMENT AND DEPRICIATION .........80
BY: NIRANJAN SAHOO, PGT (ECONOMICS), K.V, GAJAPATI
Topic 19: ASSIGNMENT ON CIRCULAR FLOW OF INCOME, ...........................................................................83
BY: ARUN KUMAR PATRA, PGT(ECONOMICS), K.V. KHURDA ROAD
Topic 20: EXPENDITURE METHOD OF CALCULATING NATIONAL INCOME ....................................................87
BY: RAJIV KUMAR PANDEY
Topic 21: Aggregates related to National Income: GNP, NNP, GDP, and NDP at MP & FC, National
Disposable Income (Gross & Net) ..................................................................................................................96
BY: RAMESH MANDAL, PGT (Eco), KV CMERI Durgapur
Topic 22: AGGREGATES RELATED TO NATIONAL INCOME, PRIVATE INCOME PERSONAL INCOME
PERSONAL DISPOSABLE INCOME REAL AND NOMINAL GDP........................................................................99
BY KUBERA CHANDRA PRADHAN, PGT (ECONOMICS), K V COMMAND HOSPITAL, KOLKATA
Topic 23: GDP AND WELFARE ......................................................................................................................103
BY: From: KAMAL KISHORE, PGT (ECONOMICS), K V CRPF DURGAPUR
Topic 24: MONEY-MEANING & FUNCTIONS ................................................................................................106
BY: From: KAMAL KISHORE, PGT ECONOMICS ,KV CRPF DURGAPUR
TOPIC: MONEY AND BANKING ....................................................................................................................110
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
Topic 26: Money Supply and Credit Creation ..............................................................................................114
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
Topic 27 : CENTRAL BANK ITS FUNCTION ...................................................................................................117
BY: Dr. KALPANA CHATTOPADHYAYA, PGT (ECONOMICS), K.V. BARRACKPORE (ARMY)
Topic 28: Aggregate Demand and Its Components, Propensity To Consume And Propensity To Save ......121
BY: Mrs.Sheela Yadav, PGT (Economics), KV Burdwan
Topic 29: Short Run Equilibrium of Output , Investment Multiplier and Its Mechanism ............................124
BY: Seema Marandi, PGT (Economics), KV No. 1 Kancharapara
Topic 30: ASSIGNMENT ON MEANING OF FULL EMPLOYMENT AND INVOLUNTARY UNEMPLOYMENT ..127
BY: From: RAMESH NIMAI, PGT (ECO.), K.V.NO. 1 AFS KALAIKUNDA
TOPIC 31: Government Budget- Meaning and Components, Revenue Receipts and Capital Receipts ......131
BY: ADITYA BHARDWAJ, PGT (ECONOMICS), K.V. NFR MALIGAON
Topic 32: Government Budget: RE, CE, Meassures of Government Deficit, RD, FD, PD .............................135
BY: Dr. Ashish kumar, PGT (ECO), K.V. NAGAON (GUWAHATI REGION)
Topic 33:BALANCE OF PAYMENT AND FOREIGN EXCHANGE DETERMINATION ..........................................139
BY: ABHISHEK CHATURVEDI, PGT ECONOMICS, KV NHPC SINGTAM
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TOPIC 1: Meaning of Micro and Macro Economics, Central Problems of an
Economy
By DR. SUDHA UPADHYAY
MCQ QUESTIONS
Q1. PPC will shift to the left when there is
(a) Underutilization of resources
(b) (C) technological improvement
(b )growth of resources
(d) loss of resources due to natural calamities
Ans-(d)
Q2. Value of a factor in its next best alternative use is
(a) Social cost
(b) opportunity cost
(b) (C)marginal rate of substitution (d) PPC
Ans-(b)
Q.-3 Define microeconomics and macroeconomics
Ans. - Meaning of microeconomics :- Microeconomics is a branch of economics which deals
with study of economic problems and relationship at individual level, like –demand, supply, price
determination in a market etc.
Macroeconomics :Macroeconomics is a branch of economics which deals the study of economic
Problems and relationship at national level as a whole ,like –aggregate demand, aggregate
supply, general price level etc.
MLL Questions
Q.4 Define marginal rate of transformation.
Ans. – MRT/MOC of a good along a PPC is defined as the amount of one good that needs to be
sacrificed per unit increase in production of the other good.
Q.5 what is the problem of “what to produce” ?
Ans.-It is the problem of selection of different goods and their quantities with available
resources.
Q.-6 Explain the problem of “how to produce” ?
Ans.- This is also called problem of choice of technique of production. There are two techniques:
(A)
Labor Intensive-Under this technique, more of labor and less of capital are used .With
this technique, more employment can be generated for the society.
(B)
Capital Intensive Technique-In this technique, more of capital and less of labour is
required per unit of output. It produces goods on large scale with the use of high technology.
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Short Answer Questions:Q.7 How PPC will rotate when there is an improvement in technique of production of Y good ?
Ans.- If there is an improvement in technique of production of Y good PPC will rotate to its right
from AF To A1F (fig-1.1).It will mean that economy will produce more of Y good with given
resources.
Fig 1.1
Q.8 Giving reason comment on the shape of PPC based on the following schedule:
Good X (Units)
Good Y (Units)
0
30
1
27
2
21
3
12
4
0
Ans.Good X
Good Y
MRT
(Units)
(Units)
0
30
1
27
3Y :1X
2
21
6Y : 1X
3
12
9Y : 1X
4
0
12 : 1X
Since MRT is increasing, the PP curve downward sloping concave to the origine.
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Q.9 Distinguish between Micro Economics and Macro Economics.
Ans.-
Micro and Macro Economics.
S. N.
Basis
Microeconomics
Macroeconomics
1
Meaning
It is the study of
individual economic unit.
It is the study of economy
as a whole.
2
Central
Problems
It deals with central
problems of allocation of
resources and related
principles and policies.
Its central problems are
determination of level of
income and employment
and related principles and
policies.
3
Instruments of
study
The main instrument to
study Microeconomic
problems are demand
and supply.
The main instruments to
study Macroeconomic
problems are aggregate
demand and aggregate
supply.
4
Alternative
name
It is also known as “Price
Theory”.
It is also known as
“Theory of income and
employment”.
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HOTs Questions
Q. 10 What is likely to be the impact of efforts towards reducing unemployment on the
production potential of the economy?
Ans.- Reducing unemployment has no effect on the production potential of the country. It is
because production p0tential is determined assuming full employment.
Unemployment indicated that the country is operating below potential. Reducing unemployment
simply helps in reaching potential.
Q. 11 What are the reasons for increasing MOC ?
Ans. As we move along PPC, more and more units of a good are sacrificed to get an additional unit
the other good. This rate of sacrifice is called marginal opportunity cost. MOC is always increasing.
It is because of the following reasons:
(a)
Resources are not equally efficient in the production of all goods:- Resources are not
equally efficient in the production of all goods. Therefore as we draw more and more resources
from the production of one good to the production of other good, it implies that we have
transferred resources from more productive use to less productive use. Thus MOC increase.
(b)
Law of diminishing returns:- The law of diminishing returns states that as more and more
output of one good is produced, the marginal productivity of factors of production used in its
production decreases. As a result of it, more quantity of the factors needs to be applied to produce
the same quantity of the good. In other words to raise output of one commodity, more and more
output of another good has to be sacrificed.
Long Answer Questions
Q. 12 Explain central problems of an economy with the help of PPC.
Ans.-Meaning:- PPC is a curve which shows the different combinations of two goods that can be
produced with given resources and technology.
Explanation:- Different combinations of two goods (say wheat and cloth) that can be produced
are shown in table given below :
Production Possibilities Schedule
Production Possibilities
Cloth(in thds. Meters)
Wheat(in thds quintals)
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A
0
15
B
1
14
C
2
12
D
3
9
E
4
5
F
5
0
SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
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Table and figure indicate that if the economy decides to use all its resources in the production of
cloth, it can produce 5 thousand meters of cloth. And if it decides to use all its resources in the
production of wheat it can produce maximum 15 thousand quintals of wheat. There are also other
possible combinations of two goods that can be produced with full and efficient utilization of
resources. These combinations in the table and diagram are A, B, C, D, and E. The economy has to
choose out of the combinations. If more of resources are used in the production of cloth, less
resource are available for the production of wheat and vice-versa.
All points on PPC indicate full and efficient utilization of resources. Any point inside the PP curve
such as K in the figure shows the situation of inefficient or under utilization of resources. In other
words economy is not utilizing its productive capacity fully. Any movement from point K to any
point on PP curve AF will indicate production of more cloth or more wheat. On the other hand,
any point above the PP curve (point H in the figure) is unattainable for the economy. When
economy succeeds in achieving combinations like H, it indicates situation of growth of resources.
Q.13 Write two properties of PPC.
Ans. A typical production possibility curve has the following two properties:(a)
PPC is downward sloping from left to right:- A production possibility curve slopes
downwards from left to right. Movement along a PPC from one point to another indicates change
in combination of two goods. It shows that more of one good can be produced only after
sacrificing some quantity of the other good. Since PPC is based upon the assumption of full
employment, production of both the goods cannot be increased simultaneously.
(b)
PPC is concave to the point of origin :- The PPC is concave because marginal opportunity
cost increases continuously as more and more of one good is produced only by reducing the
quantity of the other good .It means that to produce more and more units of one good each time
the quantity of the other good is sacrificed at an increasing rate.
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Topic 2: Concepts of Production Possibility Curve and Opportunity Costs
By MS. ERA TIRKEY PGT. Economics K. V. Namkum, Ranchi.
MULTIPLE CHOICE QUESTIONS:
1. A typical pp curve is:
a) Upward sloping convex
b) upward sloping concave
c)Downward sloping convex
d)Downward sloping concave
2. Opportunity cost refers to the value of the opportunity:
a) To be available in future.
b) Available in the past.
c) Actually availed at present.
d) Could be availed at present as a second alternative.
Answers:- 1(d) 2(d)
MLL QUESTIONS:
1. What does rightward shift of PPC indicate?
Ans: The rightward shift of PPC indicates growth of resources or technological progress.
2. Define opportunity cost. OR Give the meaning of opportunity cost.
Ans: Opportunity cost is the cost of the next best alternative foregone.
3. Define ‘Marginal Rate of Transformation’.
Ans: Marginal Rate of Transformation is the ratio of units of one good scarficed to
produce one more unit of the other good.
SHORT ANSWER QUESTION:
1. Why does PPC look concave to the origin? Explain.
Ans: PPC looks concave to the origin because of increasing marginal rate of
transformation/substitution ( or increasing marginal opportunity cost ). It means that more
and more units of commodity ‘Y’ are to be sacrificed, to get each additional unit of
commodity ‘X’.
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2. What does a PPC show? When will it shift to the right?
Ans: Production Possibility Curve shows the different combinations of two goods which an
economy can produce with available technology and resources. It would shift towards
right-hand side in case of growth of resources or technological progress.
3. Why does an economic problem arise? Explain.
Ans: Reasons:a) Unlimited Wants – Human wants go on multiplying with the expansion of
education, knowledge, scientific advancement and economic growth. A man
cannot satisfy all of his wants therefore he has to make a choice in order of urgency.
b) Limited Resources – The resources are limited in relation to need for them. It is the
main cause of economic problem.
c) Alternative Use of Resources – A resource can be utilized in a different way and for
different purposes. Therefore choice has to be made among different uses of
resources.
LONG ANSWER QUESTIONS:
1. Define Production Possibility Curve and explain its properties.
Ans: Production Possibility Curve is a curve which depicts all possible combinations of two
goods that an economy can produce with given resources and technology.
Properties of PPC:
a) It slopes down from left to right because in a situation of full employment of
resources production of one good can be increased only after sacrificing some
quantity of other good.
b) The shape of PP curve is concave to the origin due to increasing marginal
opportunity cost. It implies that for producing an additional unit of a good, sacrifice
of units of other good goes on decreasing.
2. What is ‘Marginal Rate of Transformation’? Explain with the help of an example.
Ans: Marginal Rate of Transformation is the rate at which output of good ’Y’ is to be
sacrificed for a unit more of good ‘X’, when the given resource are fully and efficiently
utilised in the production of good X and Y, and the technology remains constant. It refers
to the slope of PPC. It is also called the opportunity cost of producing a unit more of good
‘X’ in terms of the loss of output of good ‘Y’.
Example:
Output of Y
Output of X
10
10
7
11
When some resources are shifted from Use-Y to Use-X, there is a loss of output of 3 units
Δ𝑌
3
of Y for a unit more of good ‘X’. MRT= Δ𝑋 = 1 =3. [ Here, ∆𝑌 refers to loss of output of good
‘Y’. ∆𝑋 refers to loss of output of good ‘X’.]
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VALUE BASED (HOTS) QUESTION:
1. Does production take place only on the PP curve?
Ans: Yes and No both. Yes, if the given resources are fully and efficiently utilized. No, if the
resources are underutilized or inefficiently utilized or both.
Y
A
b
PPC
Cloth
c
.U
o
D
X
Wheat
Refer to the above figure; on a point anywhere in the PPC the resource are fully and efficiently
employed. On point U, below the PPC or any other point but below the PPC, the resources are
either underutilized or in efficiently utilized or both. Any point below the PP curve thus highlight
the problem of unemployment and inefficiency in the economy.
2. A lot of people died and many factories were destroyed in an earthquake. How will it affect
the PPF of the economy?
Ans: PPF of the economy will shift to the left. It happens because the number of possible
combinations available with the economy has decreased due to destruction of resources
in the economy.
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Topic 3: Consumer’s Equilibrium
By Manjaree Anand, PGT(Economics), Kendriya Vidyalaya Maithon Dam,
Ranchi Region
MCQ
1.
An indifference curve looks convex to the origin because of
(a)
Diminishing MRS
(b)
Increasing MRS
(c)
Constant MRS
(d)
Diminishing marginal utility
Ans.
2.
(a) Diminishing MRS
The law of diminishing marginal utility states that with the consumption of
successive units of a good,
(a)
MU decreases
(b)
MU increases
(c)
MU remains constant
(d)
None of these
Ans.
(a) MU decreases
MLL
1.
What is consumer’s equilibrium?
Ans. Consumer’s equilibrium refers to a situation where a consumer maximizes his
satisfaction from the purchase of commodity, given his budget constraint and
market price of goods consumed. This is a balanced stage in which the consumer
does not like to make any change.
2.
Define indifference curve. Mention any three properties of indifference curve.
Ans. Indifference curve is a curve showing different combinations of two goods
which yields equal satisfaction to the consumer.
Properties of indifference curve:
1) Indifference curve is downward sloping.
2) Indifference curve is convex to the origin.
3) Higher indifference curve shows higher level of satisfaction.
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3.
Define price elasticity of demand. Give any three factors affecting elasticity of
demand.
Ans. Price elasticity of demand is the degree of responsiveness of the change in the
quantity demanded of a commodity to a change in its price while other things
being constant.
Factors affecting price elasticity of demand:
1) Nature of the commodity
2) Number of substitutes available
3) Number of uses of the commodity
SAQ
1.
Why does an indifference curve slopes downward from left to right?
Ans. An indifference curve is downward sloping curve indicating that when a
consumer wishes to have more quantity of one good, he must be ready to give
up some quantity of other good so as to keep his satisfaction level constant.
When a consumer is offered more quantity of both goods or he is offered more
quantity of one good and no less of other, his satisfaction level will increase and
such combination can’t form an indifference curve.
2.
MRS (marginal rate of substitution) along an indifference curve tends to diminish.
Comment.
Ans. Yes, it’s true. As we move along the indifference curve MRS tends to diminish
because when we have less of a commodity, intensity of its desire increases.
Accordingly less and less of a commodity is sacrificed for every additional unit
of other commodity.
3.
Fall in price of a commodity always leads to expansion of its demand. Comment.
Ans. Fall in price of a commodity leads to expansion of its demand but not always.
There are situation of exceptions to the inverse relationship between price of a
commodity and its quantity demanded. These exceptions are
i)cases of Giffen goods
ii)articles of social distinction
iii) judgment of the consumer (when the consumers are driven by the idea
“costlier the better”)
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LAQ
1.
Write and explain any four factors affecting demand for a commodity.
Ans. Factors affecting demand are as following:
1)Own price of the commodity:- Others things being constant there exist inverse
relationship between price of the commodity and its quantity demanded. This
implies that if price of good increases its quantity demanded decreases and
vice-versa.
2) Price of related good :- related commodity can be of two types:
a) Substitute good:- These are goods which can be substituted for each other,
such as tea and coffee. In case of substitute goods, increase in price of good
cause increase in the demand for other good and vice-versa.
b) complementary good :- These are goods which complete the demand for
each other therefore demanded together, such as bread and butter. In case of
complementary good fall in price of a god leads to rise in demand of other good
and rise in price of good leads to fall in demand of other good.
3)Income of the consumer:- Demand for normal goods increases with increase
in income of the consumer and vice-versa. On the other hand the demand for
inferior goods like coarse grain tends to decrease with increase in income and
vice-versa.
4) Tastes and preferences :- Tastes & preferences of the consumer are
influenced by advertisement, change in fashion, climate, new inventions etc.
Other things being equal, demand for those goods increases for which
consumers develop strong taste and preferences. Contrary to it, if taste and
preferences for a product is fading, its demand will decrease.
2.
A consumer consumes only two goods. Explain the conditions of consumer’s
equilibrium with the help of the Utility Analysis.
Ans. A consumer is in equilibrium when:
1) Ratio of marginal utility to price in case of each good is the same. Let the
goods be X and Y, then
MUx/Px = MUy/Py
Suppose MUx/Px > MUy/Py which means per rupee marginal utility by spending
on X is greater than on Y. This induces the consumer to spend more on X by
reducing spending on Y. This leads to fall in MUx and rise in MUy. This shift of
spending from Y to X continues till MUx/Px = MUy/Py..
Similarly if, MUy/Py > MUx/Px which means per rupee marginal utility by
spending on Y is greater than on X. This induces the consumer to spend more
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on Y by reducing spending on X. This leads to fall in MUy and rise in MUx. This
shift of spending from x to y continues till MUx/Px = MUy/Py..
2) Marginal utility falls as more is consumed i.e. Law of Diminishing
Marginal Utility is operating. This ensure fulfillment of first condition.
Value Based Question OR HOTs
1.
It is because of monotonic preferences of the consumer that IC slopes downward.
Comment.
Ans. True. An indifference curve slopes downward because of monotonic
preferences of the consumer. According to this, more of one commodity implies
less of the other, so that total satisfaction remains the same. An IC therefore
must slope downward.
2.
What price the consumer is ready to pay for a commodity in a state of his
equilibrium?
Ans. In a state of equilibrium, the price that the consumer is ready to pay for a
commodity is the marginal utility of the commodity (estimated in terms of
money). Because in state of equilibrium Px=MUx (in terms of money).
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Topic 4: INDIFFERENCE CURVE
By ARCHANA PRASAD,PGT(ECO),K.V.GOMOH
MCQ
1.
Diagramatic presentation of consumers indifference set is called
(a)
Indifference curve
(b)
Utility curve
(c)
Budget line
(d)
Transformation curve
Ans. Indifference curve
2.
Marginal rate of substitution of X for Y is calculated as
(a)
Px/Py
(b)
Py/Px
(c)
∆X/∆Y
(d)
∆Y/∆X
Ans. ∆Y/∆X
MLL
1.
Define Marginal rate of substitution
Ans. Marginal rate of substitution refers to the rate at which the consumer is willing
to sacrifice Good Y for a unit of Good X.
2.
What is Indifference Map
Ans. A set of ICs drawn in a graph is called Indifference Map.
3.
What does an Indifference Curve show ?
Ans. Indifference Curve shows the different combination of two commodities
yielding the same level of satisfaction.
SAQ
1.
Explain the distinction between budgets set and budget line.
Ans. Budget set refers to attainable combinations of a set of two goods, given prices
of goods and income of the consumer. Budget line is a line showing different
possible combination of Good-1 and Good-2 which a consumer can buy, given
his budget and the prices of Good-1 and Good-2.Anywhere on the budget line
the consumer is spending his entire income either on Good-1 or on Good-2 or
on both Good-1 and Good-2.
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2.
Why is an Indifference curve downward sloping and convex?
Ans. It is because of monotonic preference of the consumer that IC slopes downward
indicating negative slope. Consumption of Good X is negatively related to
consumption of Y.As we move down the IC we find that its slope tends to
decline. Implying that MRS=∆Y/∆X. tends to decline. This is why IC is convex to
the origin.
3.
What is budget set ?Explain what can lead to change in budget set?
Ans. Budget set refers to attainable combinations of a set of two goods given prices
of goods and income of the consumer .The budget set equation is
P1X1+P2X2<=Y.Here P1 is price of good 1,X1 quantity of good 1,P2 price of good
2,X2 is quantity of good2,Y total expenditure or total budget. Budget set
depends on P1,P2 and Y.change in any of these variables will lead to a change in
the budget set.
LAQ
1.
Explain the concept of diminishing marginal rate of substitution with the help of
numerical example. Also explain behavior along an indifference curve.
Ans. Combinations
X
Y
MRS= ∆Y/∆X
A
2
6
-
B
3
4.5
-1.5/1= -1.5
C
5
3
-1.5/2= -0.75
D
7
2.5
-0.5/2= -0.25
Y
A
B
C
D
IC
X
Between points A and B the consumer is willing to give up 1.5units of good Y
for one more unit of good X.so that MRS=-∆Y/∆X=-1.5/1=-1.5.But as we move
down the curve we find that between points B and C the
consumer is
willing to give up 1.5 units of good Y for 2 more units of good X. or 0.75 units of
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good Y for one more unit of good X so that MRS=-∆Y/∆X=-1.5/2=-0.75.Likewise
between C and D Y=0.5 and X=2, so that MRS=-∆Y/∆X=-0.5/2=-0.25.It is
because of declining slope of IC that IC is convex to the origin.MRS is same as
slope of IC. It shows the amount of good Y that the consumer is willing to give
up for one more unit of good X.It is measured as ∆Y/∆X between any two points
on IC, it is determined by the consumer himself according to his preferences.
2.
What are monotonic preferances? Explain why an IC to the right shows higher utility.
Ans. Monotonic Ypreferences of the consumer are the basic assumption of IC analysis.
It means that consumer preferences are such that greater consumption of a
commodity always offers him a higher level of satisfaction , implying that the
consumer is never over supplied with a commodity. In the diagram point A
offers 4 units of good Y and 2 units of good X. Point B offers 4 units of good Y
and 2 units of good X. Since point B offers greater amount of good X it must
yield higher level of satisfaction than point A. The assumption of monotonic
preference of the consumer permits us to conclude that greater the
consumption higher must be the level of satisfaction. Implying that point B on
IC2 yields higher satisfaction than point A on IC1.
A
B
IC2
IC1
X
Value Based Question OR HOTs
1.
If IC is not convex at the point of equilibrium, the consumer cannot reach the point
of stable equilibrium .Comment.
Ans. True if IC is not convex at the point of equilibrium, the consumer cannot reach
the point of stable equilibrium. In case IC is concave, it implies that MU tends to
rise as more of a commodity is consumed. If MRS is not declining the law of
diminishing MUis not in operation. In which situation the consumer will
continue to consume more and more of one commodity getting higher MU from
its successive units. In such a situation any equilibrium will never be a stable
equilibrium.
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2.
How will a consumer move along
(b)MRS<Px/Py ?
his IC in a situation when (a)MRS>Px/Py
Ans. (a)The consumer should move downward to the right along the IC. Convexity of
the IC ensures that as the consumer moves downward to the right along the IC
,MRSxy ,tends to fall. Implying that the consumer should start consuming more
of X in place of Y.
(b)The consumer should be consuming more of X in place of Y. That is he should
move upward to the left along the IC .Convexity of the IC ensures that as the
consumer moves upward to the left along his IC ,MRSxy tends to rise . He should
stop at a point where MRSxy=Px/Py.
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Topic 5: Demand
BY Kamana Pandey (PGT ECO), K V NO 1 Dhanbad
MCQ
1.
When the income of consumer falls, the impact of price demand curve of an inferior
good is
(a)
Shifts to right
(b)
Shifts to left
(c)
Upward movement along the
curve
(d)
Downward sloping straight line
Ans.
2.
(A) Shifts to right
Rises in price of a commodity results in
(a)
Expansion of demand
(b)
Contraction of demand
(c)
Increase in demand
(d)
Decrease in demand
Ans.
(B) Contraction of demand
MLL
1.
Mention Three factors responsible for increase in demand.
Ans.
2.
Increase in fashion.
Increase in income of consumer.
Increase in taste of consumer.
Distinguish between individual demand and market demand.
Ans.
3.
I)
II)
III)
a) Individual demand – Refers to the desired demand for a commodity at
different possible prices by an individual.
b) Market demand – refers to total demand of a commodity in the market
of various possible prices by all individual in the market
What is normal good .
Ans. A good whose demand increases with increase in income of consumer is called
normal good.
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SAQ
1.
How is the price elasticity of demand of a commodity affected by the number of its
substitutes? Explain.
Ans. The demands for a commodity will be vary elastic if it has greater number of
close substitutes. A small rise in the price of such a commodity will induce
consumers to use substitute. For example, gas, kerosene oil coal etc. Will be use
more as fuel if the price wood increases. On the other hand, the demand of such
commodity is inelastic which have no substitutes such as salt.
2.
Explain the effect of rise in the income on the demand of related goods.
Ans.
A) Normal Goods – As income increases the demand increases as normal
goods have positive income effect.
B) Inferior Goods – As income increases demand decreases as inferior
goods have negative income effect.
3.
Distinguish between increases in demand and increase quantity demanded.
Ans. Increase in quantity demanded (Expansion of demand) – when the demand of
good rises with a fall in its price and other factors remaining constant, it is
expansion of demand. Whereas, increase in demand- when the demand of a
good increase at the given price, due to change other factors affecting demand
,it is called an increase in demand. Increase in demand is due to factors other
than price such as increase in the income of the consumer, rise in the price of
substitutes, fashion etc.
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LAQ
1.
The demand function of commodity X is given by QX= 30-4px the value of Px is given
as 6,5,4,3,2,1 and 0. Find the demand schedule.
Ans. Given Qx=30-4px
When
Px = 6
Qx = 30 – 4 x 6 = 6
Px = 5
Qx = 30 - 4 x 5 =10
Px = 4
Qx = 30 – 4 x 4 = 14
Px = 3
Qx = 30 – 4 x 3 = 18
Px = 2
Qx = 30 – 4 x 2 = 22
Px = 1
Qx = 30 – 4 x 1 = 26
Px = 0
Qx = 30 – 4 x 0 = 30
Therefor, Demand schedule is
2.
Price
6
5
4
3
2
1
0
Demand
6
10
14
18
22
26
30
Does a rise in price of other good have same effect on demand for a commodity?
Ans. No, rise in price of other goods does not have same effect on demand for a
commodity.
(i)
(ii)
(iii)
In case of rise in price of substitute goods, demand for the given
commodity rise.
In case of rise in price of complementary goods, demand for the
given commodity fall
In case rise in price of unrelated goods, there is no change in demand
for the given commodity.
Therefore effect is not same on all the cases.
Value Based Question OR HOTs
1.
“Law of demand is a qualitative statement”. Comment.
Ans. Law of demand is only an indicative, and not a qualitative statement. Its
indicates only the direction, in which the demand will change with a change in
price. It says Nothing about the magnitude of such a change. For example, Price
of PEPSI rises from Rs.10 to Rs.12 per bottle, then, as per law of demand , we
can say that the demand for Pepsi will fall. But the law does not give the actual
amount by which the demand for Pepsi will decline.
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2.
Does a fall in income have the same effect on demand for the given commodity?
Ans. NO, fall in income does not have the same effect on demand for the given
commodity.
(i)
(ii)
(iii)
If the given commodity is a normal good, then fall in income will
reduce the demand for the normal good.
If the given commodity is an inferior good, then fall in income will
rise the demand for inferior good.
IF the given commodity is a necessity, then fall in income will not
change the demand for necessity good.
So it is not same in all the cases.
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Topic 6: PRICE ELASTICITY OF DEMAND
By Vijay Kumar (PGT-Eco), KV Hinoo Ranchi
Q1.) What will be price elasticity of demand incase of ‘Luxury’ goods?
a.) Zero
b.) less than 1 c.) more than 1
d.) Infinite
ANS: d.) Infinite.
Q2.) A consumer buys 10 units of a commodity at a price of Rs. 10 per unit. He incurs an
expenditure of Rs. 200 on buying 20 units. Calculate price elasticity of demand.
a.) Zero
b.) less than 1 c.) more than 1
d.) Infinite
ANS: a.) Zero.
Q1.) Define Price Elasticity of Demand. What are different components of it? Explain.
ANS: It can be defined as the percentage change in quantity demanded due to percentage
change in price of the commodity.
𝐸𝑑 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Price elasticity of demand has five major components, which are as followed:
i.)
ii.)
iii.)
iv.)
v.)
Ed = 0
Ed< 1
Ed= 1
Ed> 1
Ed= ∞
(this is called as Perfectly Inelastic demand)
(this is called as inelastic/less elastic demand)
(this is called as unitary elastic demand)
(this is called as elastic/more elastic demand)
(this is called as Perfectly elastic demand)
Q2.) Explain about the Expenditure method to calculate Price elasticity of Demand.
ANS: In this method to find price elasticity of demand, if there is any change in price of the good,
then the total expenditure of the consumer may also change.
With this method, exact value of the Ed cannot be determined. The price elasticity of demand
can be obtained only in terms of “less than 1” , “equal to 1” or “more than 1”.
These can be estimated by the following observations:
1. If Price increases and Total Expenditure also increases
Or
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If Price decreases and Total Expenditure also decreases
Then………… price elasticity of demand will be Less than 1.
2. If Price increases and Total Expenditure does not change.
Or
If Price decreases and Total Expenditure does not change.
Then………… price elasticity of demand will be Equal to 1.
3. If Price increases and Total Expenditure decreases
Or
If Price decreases and Total Expenditure increases
Then………… price elasticity of demand will be More than 1.
Q3.) When price of a good is Rs. 12 per unit, the consumer buys 24 units of that good. When
price rises to Rs. 14 per unit, the consumer buys 20 units. Calculate price elasticity of demand.
ANS: Given, Initial Price (P) = Rs. 12
Initial Quantity (Q) = 24 units.
Final Price (P’) = Rs. 14
Final Quantity (Q’) = 20 units.
Then, Price Elasticity of demand (Ed) = ?
As, Change in Price (∆P) = 14-12 = Rs. 2
units
Change in Quantity (∆Q) = 20-24 = - 4
As we know that,
𝐸𝑑 = (−)
∆Q
𝑃
𝑋
∆P
𝑄
𝐸𝑑 = (−)
−4
12
𝑋
2
24
𝐸𝑑 = 1
Therefore, the Price elasticity of demand is Unitary Elastic in nature.
Q1.) Explain about the Point method / Geometric method to calculate price elasticity of
demand.
ANS : In this method, the elasticity of demand is measured by using the formula:
Ep =
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upper segment of demand curve
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Diagrammatically,
AB is a negatively slopped straight line
demand curve joining X-axis and Y-axis as
shown in the diagram.
The price elasticity of demand at different
point on demand curve can be calculated
as below:
At point
At point A, Ep =
At point E, Ep =
At point D, Ep =
At point C, Ep =
At point B, Ep =
lower segment of demand curve
upper segment of demand curve
lower segment of demand curve
upper segment of demand curve
lower segment of demand curve
upper segment of demand curve
lower segment of demand curve
upper segment of demand curve
lower segment of demand curve
upper segment of demand curve
C,
Ep < 1
At mid point D,
Ep = 1
At point
E,
Ep > 1
At point
B,
Ep = 0
At point
A,
Ep = ∞
Ep =
Ep =
AB
Ep = ∞
0
EB
Ep > 1 ( EB > EA )
EA
Ep =
Ep =
Ep =
DB
DA
CB
CA
0
BA
Ep = 1 ( DB = DA )
Ep < 1 (CB < CA )
Ep = 0
Q2.) Explain about the Proportionate method / Percentage method to calculate price elasticity
of demand.
ANS: Price elasticity can be precisely measured by dividing the percentage change in quantity
demanded by the percentage change in price. Thus, we can measure price elasticity by using the
following formula:
Ep = −
32 | P a g e
percentage change in quantity demanded
percentage change in price
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𝐸𝑝 = −
Ep = −
(Q′ −Q) ⁄ Q
(P′ −P)⁄P
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 ⁄ 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 ⁄ 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
∆Q⁄Q
∆Q
𝐸𝑝 = − ∆P⁄P
P
𝐸𝑝 = − ∆P x Q
Where,
∆Q = Q’-Q = Change in quantity demanded ; Q = Original quantity demanded.
∆P = P’-P = Change in price ; P = Original Price.
Ep = Co-efficient of price elasticity of demand. Ep is negative, as the ratio is a negative number
because price and quantity demanded are inversely related.
To eliminate this negative sign, we use modulus, and thus all numbers and percentage are treated
as positive.
Thus, the formula for the price elasticity of demand can be written as follows:
𝑬𝒑 = |
∆𝐐
∆𝐏
𝐱
𝐏
𝐐
|
Q3.) A Consumer buys 18 units of a good at a price of Rs. 9 per unit. The price elasticity of
demand for the good is (-) 1. How many units the consumer will buy at a price of Rs. 10 per
unit? Calculate.
ANS: Given, Initial Price (P) = Rs. 9
Initial Quantity (Q) = 18 units.
Final Price (P’) = Rs. 10
Price Elasticity of demand (Ed) = (-) 1
Then, Final Quantity (Q’) = ?
As, Change in Price (∆P) = 10-9 = Rs. 1
Change in Quantity (∆Q) = (Q’- 18) units
[Note: As Price is increased, so Quantity demanded must be decreased]
As we know that,
𝐸𝑑 = (−)
∆Q
𝑃
𝑋
∆P
𝑄
(−)1 =
(Q’ − 18)
9
𝑋
1
18
(−)1 =
(Q’ − 18)
1
𝑋
1
2
(−)2 = (𝑄 ′ − 18)
𝑄 ′ = 18 − 2 = 16 𝑢𝑛𝑖𝑡𝑠
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Q1.) Explain briefly about the different degrees of price elasticity of demand.
ANS: There are FIVE types/degrees of the price elasticity of demand, which are as follows:
1. Perfectly Inelastic Demand ( ep = 0)
2. Inelastic Demand / Less than Unitary Elastic Demand ( ep < 1)
3. Unitary Elastic Demand ( ep = 1)
4. Elastic Demand / More than Unitary Elastic Demand ( ep > 1)
5. Perfectly Elastic Demand ( ep = ∞)
Explanation: all degrees of price elasticity of demand as explained as follows:
4. Perfectly Inelastic Demand ( ep = 0) :
Price Elasticity of Demand is said perfectly inelastic or equal to zero, when there is no change is
the quantity demanded due to any percentage change in price of the good or commodity.
Diagrammatically,
Here there will be no any change in the quantity
demanded of the good. Whatever is the price either
increased or decreased; quantity demanded remains
fixed. This happens with the necessities or compulsory
goods like – salt, water, food, medicines etc.
In this case demand curve becomes parallel to the Yaxis.
This is shown in the adjacent figure
that with increased in price by PP2 as well as
decreased in price by PP1, quantity demanded is fixed
as OQ.
So, here ep = 0
2. Inelastic Demand / Less than Unitary Elastic Demand ( ep < 1) :
Price Elasticity of Demand is said inelastic or less than one, when there is less proportionate or
percentage change is the quantity demanded in comparison to the percentage change in price of
the good or commodity.
Diagrammatically,
34 | P a g e
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When price changes, quantity demanded also changes,
but the percentage change in quantity demanded is less
than the percentage change in the price.
In this case demand curve becomes steeper.
This is shown in the adjacent
figure that with decreased in price by PP1, quantity
demanded is increased by OQ1. But the percentage of
increase in quantity demanded is less than the
percentage of decrease in price.
As, QQ1 < PP1
So, here ep < 1
5. Unitary Elastic Demand ( ep = 1) :
Price Elasticity of Demand is said unitary elastic or equal to one, when there is equal
proportionate or percentage change is the quantity demanded in comparison to the percentage
change in price of the good or commodity.
Diagrammatically,
When price changes, quantity demanded also changes,
and the percentage change in quantity demanded is just
equal to the percentage change in the price of the good.
In this case demand curve becomes flatter.
This is shown in the adjacent figure that
with decreased in price by PP1, quantity demanded is
increased by OQ1. And the percentage of increase in
quantity demanded is just equal to the percentage of
decrease in price.
As, QQ1 = PP1
So, here ep = 1
6. Elastic Demand / More than Unitary Elastic Demand ( ep > 1) :
Price Elasticity of Demand is said elastic or more than one, when there is more proportionate or
percentage change is the quantity demanded in comparison to the percentage change in price of
the good or commodity.
35 | P a g e
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Diagrammatically,
When price changes, quantity demanded also
changes, but the percentage change in quantity
demanded is more than the percentage change in
the price.
In this case demand curve becomes more flattened.
This is shown in the adjacent figure that with
decreased in price by PP1, quantity demanded is
increased by OQ1. But the percentage of increase in
quantity demanded is more than the percentage of
decrease in price.
As, QQ1 > PP1
So, here ep > 1
7. Perfectly Elastic Demand ( ep = ∞) :
Price Elasticity of Demand is said perfectly elastic or equal to infinite, when there is unexpected
change is the quantity demanded due to no change in price of the good or commodity.
Diagrammatically,
Here there will be unexpected change in the
quantity demanded of the good. Due to No change
in price the quantity demanded may be extended
to infinite or contracted to zero. This happens with
the luxuries goods like – luxuries cars, costly
jewelleries etc.
In this case demand curve becomes parallel to the
X-axis.
This is shown in the adjacent figure that with the
fixed price at OP, quantity demanded is extended
to OQ1 as well as contracted to OQ2.
So, here ep = ∞
36 | P a g e
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Q2.) What are the factors which may affect the price elasticity of demand? Explain in brief.
ANS: Following are the factors affecting price elasticity of demand.
a) Nature of the commodity.
b) Level of income.
c) Availability of substitutes.
d) Tastes and preferences.
e) Possibility of postponement of use.
f) Various uses of the commodity.
g) Habits.
h) Time period.
i) Portion of expenditure.
Etc.
a.) Nature of the commodity: Commodities are broadly divided into two groups- necessities and
luxuries. Necessities have highly inelastic, while Luxuries have highly elastic demand.
b) Level of income: Elastic of demand is less in the case of consumers having either a very income
or very low income. The demand of middle income consumers is more elastic.
c.) Availability of substitutes: The demand for commodities having a large number of close
substitutes is more elastic than the commodities having smaller number of substitutes.
If a commodity has a large number of substitutes, its elasticity of demand is high. Because, when
there is rise in its price, consumers easily switch over to other substitutes in a big way.
d.) Tastes and preferences: If the consumer’s tastes and preferences are in favour of the goods,
then elasticity of demand for that good will be inelastic.
e.) Possibility of postponement of use: The commodity whose consumption can easily be
postponed has more elastic demand, and the commodity whose consumption cannot be easily
postponed has less elastic demand.
f.) Various uses of the commodity: If a commodity has many alternative uses, demand is highly
elastic and if it has only limited uses, demand is less elastic.
g.) Habits: If a consumer has become habitual for a particular commodity, its demand is inelastic.
h.) Time period: Elasticity of demand for goods is more in the long run than in the short run.
i.) Proportion of expenditure: Elasticity of demand is less with regard to those goods on which
consumer spends a very small fraction of his total expenditure. For example: salt, match box,
alpins, etc.
On the other hand, elasticity will be greater to those goods on which consumer spends a larger
portion of his total expenditure.
37 | P a g e
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Q1.) Consider the Demand Curve D(p) = 10 – 3p . what is the Elasticity at Price 5/3?
ANS: Given, D(p) = 10- 3p
i.e. Q = 10 – 3p
Ed = ? at Price (p) = Rs. 5/3
As, Q = 10 – 3p
Differentiating both sides with respect to price.
∆𝑄
∆(10 − 3𝑝)
=
∆𝑝
∆𝑝
∆𝑄
∆𝑝
= −3 ……………………………………………………. (I)
At p = 5/3, as, Q = 10 – 3p
Q= 10 − 3 𝑥
5
3
= 10 − 5 = 5 ……………………………( II)
𝐸𝑑 = (−)
As, we know that
∆𝑄
∆𝑝
𝑋
𝑝
𝑄
From Equation (I) and Equation (II), we have……
𝐸𝑑 = −(−)3 𝑋
𝐸𝑑 = 3 𝑋
5/3
5
5
3𝑋5
𝐸𝑑 = 1
Q2.) A consumer spends Rs. 1000 on a good priced at Rs. 8 per unit. When price rises by 25
percent, the consumer continues to spend Rs. 1000 on the good. Calculate price elasticity of
demand by percentage method.
ANS : Given, Initial Expenditure (TE) = Rs. 1000
Therefore, Initial Quantity (Q) =
Initial Price (P) = Rs. 8
𝑇𝑅
𝑃
=
1000
8
= 125 units
Given, there is 25% increase in price,
So, Final Price (P’) = 8 +
8 𝑋 25
100
= 8 + 2 = 10
Also given, Final Expenditure (TR’) = Rs. 1000
Therefore, Final Quantity (Q’) =
38 | P a g e
𝑇𝑅
𝑃
=
1000
10
= 100 𝑢𝑛𝑖𝑡𝑠
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So,
Change in Price (∆P) = 10 – 8 = Rs. 2
Change in Quantity (∆Q) = 100 – 125 = (-) 25units
As we know that,
𝐸𝑑 = (−)
= (−)
∆Q
𝑃
𝑋
∆P
𝑄
(−)25
8
𝑋
2
125
=
1
4
𝑋
1
5
= 0.8
As, Price elasticity of demand is less than 1. Therefore Ed is less elastic or inelastic.
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39 | P a g e
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Topic 7: Production function-Meaning and Type of Production Function
BY:VALERIAN KUJUR PGT(ECONOMICS) KV HINOO, RANCHI
MCQ
1.
Which of the following is not a phase in the law of variable proportions?
(a)
Increasing returns to a factor
(b)
Constant returns to a factor
(c)
Diminishing returns to a factor
(d)
Negative returns to a factor
Ans. Constant returns to a factor
2.
When AP is maximum, MP is equal to:
(a)
AP
(b)
TP
(c)
Zero
(d)
One
Ans. AP
MLL
1.
What is production function?
Ans. It is the functional relationship between inputs and output.
2.
Define Marginal product ?
Ans. MP is an addition to the total product when an additional unit of a variable
input is employed i.e.
MPP=TPn-TPn-1.
3.
What is long run?
Ans. Long run is the period of time in which all factors of production are variable .
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SAQ
1.
Explain the law of diminishing returns to scale with schedule.
Ans. When all inputs are increased by a given proportion the
Proportionate increase in output is less than the proportionate increase in
inputs is known as law of diminishing returns to scale.
2.
inputs
Output(in units)
% increase
inputs
in % increase
output
16k+32L
2400
-
-
32K+64L
4200
100%
75%
64K+124L
7350
100%
75%
in
What is relationship between TPP & MPP?
Ans. 1. When MP rises TPP rises at an increasing rate.
2.When,TPP rises at a MPP falls but positive
Diminishing rate.
3.When MPP is zero, TPP is maximum
4.When MPP falls but negative,TPP falls.
3. Calculate APP & MPP of a factor from the following table.
Variable factor
TPP
Variable factor
1
2
3
4
0
4
10
18
26
TPP
APP
MPP
0
0
--
--
1
4
4
4
2
10
5
6
3
18
6
8
4
26
6.5
8
Ans.
41 | P a g e
0
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LAQ
1.
Explain Law of Variable proportions with the help of a schedule.
Ans. Law of variable proportions is also known as short run production function or
Returns to a factor. The law states that as more and more units of a variable
factor along with fixed factor, are used in the process of production the
marginal production, the Marginal product initially increases and then starts
diminishing and becomes equal to zero or even negative. This is explained in
three stagesUnits of labour
MPP
TPP
1
10
Phase -1
2
12
3
8
4
5
5
-5
IRF
Phase-2
DRF
Phase-3
NRF
a)In the ist phase both MPP and TPP are increasing at increasing rate. Therefore
this stage is known as increasing returns to a factor. The first stage is over when
MPP is at its maximum.
b) In the second stage MPP is falls but TPP still increases but at diminishing rate.
Since
MPP is diminishing at this stage, this stage is known as diminishing returns to a
factor.
c) In the third stage MPP is negative and TPP also starts falling, therefore this
stage is known as Negative returns to a factor.
Assumptions:1. It operates in short run.2.The law applies to all fixed factors including land.3.
It is assumed that factors of production become imperfect substitutes.4. The
law applies
To the field of production only.
( Needs Diagram in support to the answer)
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2.
What is the relationship between AP and MP? Explain
Ans. MPP determines the APP. The relationship between MPP and APP is as follows:
1. When MPP is greater than APP, then APP is rising.
2, When MPP is equal to APP, then APP is maximum.
3. MPP always intersects APP curve at its highest point.
4. When MPP is less than APP, then APP is falling,
The following schedule shows the relationship between MPP and APP:Variable inputs (units)
TPP(units)
MPP(kg)
APP (kg)
1
3
3
3.0
2
7
4
3.5
3
12
5
4.0
4
16
4
4.0
5
19
3
3.8
The above schedule and diagram show that so long as MPP curve is above APP
curve, APP curve is rising. This is up to point M. When MPP curve lies below
APP curve, APP starts falling.
(Diagram to be drawn in support to the answer)
Value Based Question OR HOTs
1.
To increase the production of a good, only one input is increased while other inputs
are held constant. Explain its effect on total physical product. Give reasons.
Ans. When the amount of only one input is increased, while other inputs are held
constant, the total physical product in the beginning increases at the increasing
rate. This is the first phase of increasing marginal returns to the variable input.
Beyond a point with increase in the variable input, total physical product
starts increasing at the diminishing rate.
Eventually, further increase in the variable input causes the TPP to decline. This
is the third phase of negative marginal returns to a variable inputs.The following
schedule illustrate the point:
43 | P a g e
Land
Labour
TPP
Phases
1
1
3
1
2
7
1
3
12
TPP increases at
the
increasing
rate
(phase I)
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1
4
16
1
5
19
TPP rises at
diminishing rate
1
6
21
(phase II)
1
7
22
1
8
22
1
9
21
TPP falls
1
10
20
(phase III)
Reasons behind different phases –
1. In phase 1 we get increasing returns to a variable input because greater use
of the variable input makes it possible to utilize fixed invisible inputs more
efficiently and also to introduce a greater division of labour . In phase II, we get
diminishing returns to the variable input because in this stage the proportion
between the variable input and the fixed input has crossed the optimum
proportion between them and a variable input such as labour has less and less
fixed inputs to work with. In phase III, the variable input becomes too much
relative to fixed inputs which obstructs the production process and results in
fall with the physical product.
2.
Can a producer increase his production without changing the quantities of fixed
inputs in the long run?
Ans. In short run a producer can only change the quantity of variable inputs and the
fixed inputs. In long run none of the factor inputs remain fixed but rather all
factors are subject to change. Every rational producer tries to reduce the cost
of production and may follow the practice of becoming spendthrift but will end
up with less and less saving which further lead to fall investment and without
investment output will cannot be increased. However it is not possible for a
producer to increase production without increasing the units of fixed factors .It
is possible only by increasing the units of working capital such as raw material
and money that too only for a short span of time and not in the long
run.Therefore, we can say that a producer cannot increase the production
without increasing/changing the units of fixed inputs.
***************************************************************************
44 | P a g e
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TOPIC 8: RETURNS TO A FACTOR
By RAVI SHANKAR SAINI PGT ECONOMICS K.V.SILCHAR (SILCHAR
REGION)
MCQ
1.
When MP cuts AP at its highest point:
(a)
MP>AP
(b)
MP<AP
(c)
MP =AP
(d)
all of these
Ans. (C)
2.
When total production is maximum then marginal product:
(a)
Decreases
(b)
Increases
(c)
Is also maximum
(d)
Is zero
Ans. (d)
MLL
1.
What is meant by production function?
Ans. Production function refers to the functional relationship between (physical)
inputs and (physical) output
2.
What is meant by returns to a factor?
Ans. Returns to a factor refers to the behaviour of physical output owing to change
in physical input of a variable factor, fixed factor remains constant.
3.
What are the fixed and variable factors of production?
Ans. Fixed factors of production are those factors of production the application of
which does not change with the change in output.
Variable factors of production are those factors of production the application of
which change with the changes in output.
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SAQ
1.
How ‘returns to a factor’ is different from ‘returns to scale’?
Ans. Following points highlight the difference between ‘returns to a factor’ and
‘returns to scale’
Returns to a factor
Returns to scale
(i)Returns to a factor are studied are (i)Returns to scale are studied with
with
reference
to
‘variable reference to ‘constant proportion
proportions type production’.
type production function’.
(ii)Returns to a factor are studied Returns to scale are studied when all
when one factor alone is variable and factors of production are variable and
other factors remain constant.
change in the same proportion.
(iii)In case of returns to a factor, scale (iii)In case of returns to scale, scale of
of production does not change.
production ought to change.
2.
Explain the ‘law of variable proportions’. Use schedule.
Ans. The law of variable proportions shows the impact on output when units of
variable factors are increased, keeping fixed factors constant in the short run.
The law states that if more and more units of a variable factor employed with
fixed factors, Total Physical Product (TPP) increases at an increasing rate in the
beginning then increases at a diminishing rate and finally starts falling.
Land
acre)
46 | P a g e
(in No. of Labors
TPP
Qtls.)
(in APP
Qtls.)
(in MPP
Qtls)
1
0
0
-
-
1
1
2
2
2
1
2
6
3
4
1
3
12
4
6
1
4
16
4
4
1
5
18
3.6
2
1
6
18
3
0
1
7
14
2
(-)4
(in
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1
3.
8
8
1
(-)6
Complete the following table:Units of labor
TP
AP
MP
1
………
………
20
2
………
………
16
3
………
………
12
4
………
………
8
5
………
………
4
6
………
………
0
7
………
………
-4
Ans. TP = ∑MP or MP1+MP2+MP3+…..MPn
AP = TP ÷ Q, MP = TPn-TPn-1
Where, TP = Total Product, AP = Average Product, MP = Marginal product
Q = Units of Labor, ∑MP = Sum of marginal Product
47 | P a g e
Units of Labor
TP
AP
MP
1
20
20
20
2
36
18
16
3
48
16
12
4
56
14
8
5
60
12
4
6
60
10
0
7
56
8
-4
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LAQ
1.
State the behaviour of Marginal Product (MP) in the law of variable proportions.
Explain the causes of this behaviour.
Ans. Law of variable proportion-It states that the marginal product of a variable
factor input initially rises with its employment level. But after reaching a certain
level of employment, it starts falling.
Explanation of Law
This low may be explained with the help of following schedule and diagramUnits
Land
of Units
Labor
of Total
Product
Marginal
Product
Stage
Ist stage
1
1
2
2
1
2
5
3
1
3
9
4
1
4
12
3
1
5
14
2
1
6
15
1
1
7
15
0
1
8
14
-1
1
9
11
-3
IInd stage
IIIrd stage
Diagram:-
48 | P a g e
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Following observations can be made from the given table(i) Marginal product (MP) rises till 3rd unit of labor, in this condition Total
Product (TP) increases at an increasing rate, this situation is called increasing
returns to factors.
(ii)With the use of 4thunit of labor, MP starts decreasing and TP increases only
at decreasing rate, this situation is called diminishing returns to factors.
(iii)When decreasing MP reduces to zero, TP is maximum.
(iv)When MP is negative, TP starts declining.
Law of variable proportions basically depends on diminishing returns to
marginal factor.
It’s main cause are(a) Fixity of the factor.
(b) Imperfect factor substitutability.
(c) Poor coordination between the factor
2.
Explain the behaviour of total product under the law of variable proportions. Use
diagram
Ans. Law of variable proportions states that as more and more of the variable factor
is used with the fixed factors, a stage must come when marginal product of a
variable factor starts diminishing.
Diminishing marginal product may become zero or negative.
Of course, initially marginal product may rise owing to better coordination
between the factors and better utilisation of the factor. But, continuous
increase of the variable factor must cause mismatch between the variable and
the fixed factor, and must ultimately decline.
Following Fig. further explains the behaviour of total product (TP) under the
law of variable proportions.
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Behaviour of TP:(i) TP tends to rise at an increasing rate OL units of variable factor are used with
the constant application of fixed factor. This occurs till point K on the TP curve.
This corresponds to the situation of increasing returns to a factor.
(ii)Beyond OL units of variable factor, TP increases only at diminishing rate. This
occurs between point K and point T on TP curve. This corresponds to a situation
of diminishing returns to a factor.
(iii)TP reaches its maximum (i.e.,TS) at OS units of variable factor.
(iv)Beyond OS units of variable factor, TP starts declining. Economists
sometimes refer to this situation as a situation of negative returns.
Value Based Question OR HOTs
1.
MP can be negative, but not AP. Comment.
Ans.
2.
MP can be negative, but not AP. Comment 2.Do the terms ‘diminishing’ or
‘constant’ mean that the output decreases or remains constant in the context
of the law of variable proportions?
Do the ‘diminishing’ or ‘constant’ mean that the output decreases or remains
constant in the
context of the law of variable proportions?
Ans. NO, the terms ‘diminishing’ or ‘constant’ do not mean that the output
decreases or remains constant. Output always increases when an input is
increased. This holds as long as marginal product of each factor is positive, i.e.,
the firm is not operating in stage III of negative returns to a factor. ‘Diminishing’
or ‘constant’ only refer to marginal product of the output. It is marginal product
which tends to diminish when diminishing returns are in operation. Again, it is
marginal product which tends to remain constant when constant returns are
operative.
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TOPIC 9- REVENUE
By Badal Ram Jangid, PGT (Eco), K.V. LOKTAK , NHPC MANIPUR (SILCHAR
REGION)
MCQ
1.
2.
When TR increases at constant rate, MR should be(A)
Increasing
(B)
Decreasing
(C)
Constant
(d)
Zero
Ans.
(C) Constant
Under perfect competition—
(A)
MR curve is below AR curve
(B)
Price = AR = MR
(C)
MR curve is negative
(d)
None of the above
Ans.
(B) Price = AR = MR
MLL
1.
Fill in he blanks –
Ans-
2.
Output
AR
TR
MR
1
--
--
15
2
--
24
--
3
10
--
--
4
--
28
--
Output
AR
TR
MR
1
15
15
15
2
12
24
9
3
10
30
6
4
7
28
2
How do changes in marginal revenue affect total revenue?
Ans-
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
When marginal revenue is constant total revenue is a straight line,
increasing at constant rate.
 When MR is decreasing but remains positive TR is increasing at decreasing
rate.
 When MR become zero total revenue reaches maximum.
 When MR is negative TR start declining.
In a nutshell The shape of TR depend upon the changes of the MR.
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3.
Find the fall in the market demand for the commodity when TR of the monopoly firm
reduces from Rs. 5000 to Rs. 4500 and AR increases from Rs. 50 to Rs. 90.
Ans-
1.
The statement is not correct since marginal revenue simply refers to a additional
revenue when an additional unit of a commodity is sold. It happens to be equal to
price under perfect competition. But, under monopoly and monopolistic
competition MR and price are definitely different from each other.
Explain the economic value of a horizontal straight line price line for a firm.
Ans
3.
TR = 5000
Price = AR = 50
So, Q= 5000/ 50 = 100
When TR = 4500 then Q = 4500/90 =50
Hence market demand falls by 50 – 100 = 50 units.
SAQ
Marginal revenue is always the price at which the last unit of a commodity is sold. Comment.
Ans.-
2.
Given,
Horizontal straight price line indicates the price of the product is constant for a firm,
or it is given to a firm. At the given price, a firm can sell any quantity. However if the
firm increases the price it will sell nothing. It would lose its all buyers to other firms
in the market. It implies that the elasticity of demand for the firm’s product is equal
to infinity. It is situation of perfect competition in the market.
A monopolist never allows MR to fall because he is the only producer of a commodity in the
market. Comment.
Ans-
No. Marginal revenue is always falling in case of monopoly because monopolist can
sell more only at lower price of the commodity. A monopolist has to follow the law
of demand even if he is a sole producer of the good. Decreasing average revenue
implies decreasing marginal revenue.
LAQ
1.
Draw TR and MR curves under monopoly market with schedule and explain their
relationship.
Ans.
Definition:Total Revenue (TR) :- total revenue is the sum of money receipts of producer
corresponding to given level of output.
Or
Total revenue is product of price and quantity sold by the producer at that price.
𝑇𝑅 = 𝑃×𝑄
Marginal Revenue:- marginal revenue is the change in total revenue resulting from
change in sale of an additional unit of output.
𝑀𝑅 = 𝑇𝑅𝑛 − 𝑇𝑅𝑛−1
Marginal revenue is ratio of change in total revenue to change in sale.
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𝑀𝑅 =
∆𝑇𝑅
∆𝑄
Schedule :P=AR
Q
TR
MR
11
0
0
-
10
1
10
10
9
2
18
8
8
3
24
6
7
4
28
4
6
5
30
2
5
6
30
0
4
7
28
-2
3
8
24
-4
DiagramREVENUE
TR Increa ses a t
d iminishing ra te
TP
Ma ximum
TP d eclines
TR
O
QUANTITY
MP d ecrea ses
b ut p ositive
REVENUE
MP= 0
O
MR
MP is
nega tive
QUANTITY
Relationship between TR & MR
1. When MR decreases but it remains positive, TR increases at decreasing rate.
2. When MR=0, TR is maximum.
3. When MR is negative, TR decreases.
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2.
Draw TR , AR and MR curves under perfect competition along with suitable schedule.
Ans-
In perfect completion firm is a price taker, price of commodity remains constant.
Quantity (Q)
Price= AR
TR=P×Q
MR
0
5
0
-
1
5
5
5
2
5
10
5
3
5
15
5
4
5
20
5
TR curve -In perfect competitive market total revenue curve is a positively slopped
straight line starting from origin.
REVENUE
TR
O
QUANTITY
AR = MR in perfect competitive market. AR & MR curves are horizontal straight line.
PRICE
&
REVENUE
P= AR= MR
P
O
QUANTITY
Marginal revenue is rate of change of total revenue. In perfect competitive market
MR is constant therefore total revenue increases at constant rate. Hence TR is
positively slopped straight line.
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VALUE BASED QUESTION OR HOT
1.
Why average revenue is considered the demand curve of the firm?
Ans-
Average revenue :- is per unit revenue received from the sale of one unit of a
commodity. Average revenue is ratio of total revenue to quantity sold.
𝐴𝑅 =
𝑇𝑅
𝑄
𝑇𝑅 = 𝑃×𝑄 ,
Since
𝐴𝑅 =
𝑃×𝑄
𝑄
Therefore
𝐴𝑅 = 𝑃
Hence average revenue is always equal to price.
AR curve is graphical representation of AR & quantity. Since AR = P, therefore it
shows same relationship between quantity as shown by price with quantity. Hence
AR curve is demand curve of a firm.
2.
The slope of the MR is twice of AR . Comment.
Ans-
Total revenue is the product of price and quantity sold by the producer at that price.
𝑇𝑅 = 𝑃×𝑄
And
𝐴𝑅 =
𝑇𝑅
𝑄
Suppose , demand curve (AR) of a firm is – d= a-bq
Than TR will be- TR= (a- bq)*q
= a- bq2
MR is the slope of the TR that is first derivative of TR𝑑𝑇𝑅
𝑑𝑞
= - 2bq
Hence, the slope of AR is twice of slope of MR
Slope of AR= (-) b
Slope of MR= (-) 2b
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TOPIC 10 : SUPPLY
BY Amit Kumar Singh, PGT (Economics), K.V OIL Duliajan, Assam
(Tinsukia Region)
MCQ’s
1. What causes a movement along the supply curve of a commodity?
a) Rise in the price of a commodity
b) Fall in the price of a commodity
c) Both a) and b)
d) None of these
Ans. c) both a) and b)
2. What causes a rightward shift of the supply curve?
a) An improvement in technology
b) A rise in the price of inputs
c) A rise in the rate of excise duty
d) Both b) and c)
Ans. a) an improvement in technology
MLL
1. Define market supply.
Ans. Market supply of a commodity is the total amount of a given good offered for sale by all
the individual firms in the market at different prices during a period of time.
2. State the law of supply.
Ans. Law of supply states that other things remaining constant, there is a direct relationship
between the price of a commodity and its quantity supplied. The quantity supplied of a
commodity rises with the rise in its price and falls with a fall in its price.
3. What is meant by a change in supply?
Ans. When change in supply is caused by change in ‘factors other than price’, it is called change
in supply. Change in supply indicates shift in supply curve.
SAQ’s
1. Explain the supply of a commodity is affected by the change in price of other commodities?
Ans. Any change in the prices of other products would influence the supply of a given product
by causing substitution of one product for another. For example, if the market price of wheat
rises, it will lead to the reduction in the production and supply of sunflower by the farmers as
they would withdraw some land and other resources from the production of sunflower and
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devote them to the production of wheat. This will cause the supply of the sunflower to
decrease implying the supply curve of the sunflower would shift to the left.
2. How does an increase in the rate of excise duty shift the supply curve and why?
Ans. When there is an increase in excise duty on the production of goods by the government,
the unit cost of production will rise and consequently the firm would supply less than before
at the given price. The supply would decrease implying that the supply curve would shift to
the left.
3. How does a change in the price of inputs affect the supply curve of a commodity?
Ans. Changes in the price of inputs used affect the supply of a product by altering the cost of
production. A fall in the price of inputs used causes a fall in the cost of production and
consequently brings an increase in supply. For example, if either wages of labour falls or prices
of raw materials comes down, the unit cost of production will fall. With less unit cost of
production, more would be supplied than before at the given price. That is, the supply would
increase implying that the supply curve would shift to the right.
LAQ’s
1. Explain any three determinants of supply of a commodity.
Ans. Following are the factors (determinants) that affect the supply of a commodity:
i.
Technological changes: The supply of a commodity depends on the production
technology used by the firm. If there is an improvement in the production technology
used by the firm, the cost of production declines. Lower cost of production increases
the supply of a commodity. The use of obsolete technology raises the cost of
production and consequently supply of a commodity decreases.
ii.
Prices of inputs: The supply of a commodity is also affected by change in price of inputs
used in the production of the good. If the price of inputs (wages of labour, prices of
raw materials and fuel) goes up, the gross cost of production will rise and a result, the
supply of the commodity decrease. On the other hand, if the price of inputs declines,
unit cost of production declines and as a result, the supply of the commodity increases.
iii.
Price of other goods: The supply of a commodity depends upon the price of other
goods. Suppose, a farmer is growing wheat and rice. If the price of wheat rises, it will
be probable for the farmer to grow more wheat. The farmer would withdraw some
land and other resources from the production of rice and devote them to production
of wheat. This will cause a decrease in the supply of rice, the price of which has not
changed. The supply curve of rice shifts to the left.
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2. Give three reasons for a rightward shift of supply curve of a commodity.
Ans. Following are the reasons of a rightward shift of supply curve (or increase in the supply)
of a commodity:
i.
ii.
iii.
iv.
An improvement in production technology: When there occurs an improvement in
production technology used by the firm, the cost of production declines and
consequently the firm would supply more than before at the given price, i.e., the
supply would increase implying that the supply curve would shift to the right.
A fall in the price of inputs: When the price of inputs (i.e., wages of labour, prices of
raw materials and fuel) goes down, unit cost of production decline and consequently
the firm would supply more than before at the given price, i.e., the supply would
increase implying that supply curve would shift to the right.
A reduction in the rate of excise duty: When the rate of excise duty is reduced by the
government, the unit cost of production will decline and consequently the firm would
supply more than before at the given price, i.e., the supply would increase implying
that the supply curve would shift to the right.
A fall in the price of other good: Suppose wheat and sunflower are the two goods
which a farmer produces. If the price of sunflower falls, then it would not be profitable
for the farmer to produce more sunflower. The farmer would withdraw some land and
other resources from the production of wheat and devote them to production of
wheat, the price of which has not changed. This would increase in the supply of the
wheat implying that the supply curve of wheat shifts to the right.
Value Based Questions or HOTS
1. If the farmer grows rice and wheat, how will an increase in the price of wheat affect the
supply curve of rice?
Ans. Supply curve of rice will shift to the left.
2. Because of cyclone in a coastal area, the sea water covers a lot of rice fields. This reduces
the productivity of land. How will it affect the supply curve of rice of that region?
Ans. Supply curve of rice of that region will shift to left due to reduce in productivity of land
because of cyclone. Due to cyclone, production of rice will fall. Now irrespectively of increase
in price of rice, production (or supply) cannot rise. In other words, supply of rice will fall at the
same price.
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Topic11: Producer’s Equilibrium
By: Alok Kr. Singh PGT (Economics), Kendriya Vidyalaya Namrup
(Tinsukia Region )
MCQ
1.
At Break even point
(a)
TR>TC
(b)
MR>MC
(c)
TR=TC
(d)
TR <TC
Ans. TR=TC
2.
At shut down point
(a)
TR=TC
(b)
TR=TFC
(c)
AR=AVC
(d)
TC=MC
Ans. AR=AVC
MLL
1.
Who is a producer?
Ans. A producer is a producing unit who uses factor inputs to produce goods which
have exchange value.
2.
What is meant by producer’s equilibrium?
Ans. Producer is said to be in equilibrium when he maximizes his profits and
minimizes his loses. It occurs when (i) MR=MC and MC> MR after equilibrium.
3.
Will a profit maximizing firm in a competitive market ever produce a positive level
of output in the range where MC is falling? Explain
Ans. NO, because the necessary condition of equilibrium is that MC >MR after
equilibrium.
SAQ
1.
What is meant by producer’s equilibrium?
Ans. Producer’s equilibrium is the situation in which the producer maximizes his
profits and minimizes his loss. A producer will be under equilibrium condition
when.
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(a) MC = MR
(b) MC cuts the MR curve from below.
2.
Will a profit maximizing firm in a competitive market produce a positive level of
output in the short run if market price is less than the minimum of AVC? Explain
Ans. No, a firm will not operate if market price is less than the minimum of AVC. It
is because if market price =AVC, it is the shut down point.
3.
Will a profit maximizing firm in a competitive market produce a positive level of
output in the long run if market price is less than the minimum AC? Explain
Ans. No, because In the long run all firms enjoy normal profits due to free entry and
exit i.e., Price=AC. If market price is less than AC, the firm will never operate.
LAQ
1.
Explain why will a producer not be in equilibrium if the conditions of equilibrium
are not met.
Ans. Producer’s equilibrium refers to that price and output combination which
brings maximum profit to the producer and profit declines as more is
produced. According to MR-MC approach, producer’s equilibrium will be
achieved when,
(a) MC = MR
(b) MC cuts the MR curve from below.
(a) MC = MR Every producer aims to maximise the total profit. For this a firm
compares its MR with its MC. Profit will increase as long as MR exceeds MC.
So, equilibrium cannot be achieved when MC<MR as it is still possible to earn
profits by increasing production. Producer would also not like to produce when
MC>MR because this implies that benefit is less than cost, i.e., the firm will be
in equilibrium only when MC=MR
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(b) MC> MR after equilibrium This condition also has to be fulfilled because
MR=MC may occur at more than one output level. But equilibrium output level
will be the one after which MC becomes greater than MR because than it will
not be possible to earn any profit.
As shown in the diagram, producer’s equilibrium will be determined at OQ level
of output corresponding to point E because it is only at this point that both the
conditions of equilibrium are met.
2.
On the basis of the information given below, determine the level of output at which
the producer will be in the equilibrium. Use the marginal cost and marginal revenue
approach. Give reason of your answer.
Output
1
2
3
4
5
6
7
AR(Rs.)
7
7
7
7
7
7
7
TC (Rs.)
7
15
22
28
33
40
48
Ans.
Output
1
2
3
4
5
6
7
MR(Rs.)
7
7
7
7
7
7
7
MC (Rs.) -
8
7
6
5
7
8
AR=MR when AR is constant and MC =TCn - TCn-1
The producer achieves equilibrium at 6 units of output. It is because this level
of output satisfies both the conditions of producer’s equilibrium.
(1) MC is equal to MR
(2) MC becomes greater than MR after this level of output (equilibrium)
The producer does not achieves equilibrium at 3rd unit of output as MC<MR
after this level of output
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Value Based Question OR HOTs
1.
Is it enough to say that profit is maximized when MC=MR?
Ans. No, it is necessary to fulfil both the conditions for equilibrium
I. MR = MC
II. MC curve cut MR curve from below that is MC rising after equilibrium.
2.
If MC is more than MR at a particular level of output, then how will a producer react
to maximize the profit?
Ans. Producer will decrease the production to maximize the profit. Reduction in the
production will be done till he reaches when MR =MC.
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Topic 12: Monopolistic Competition
By Niranjan Pani, PGT (Economics), KV Kankinara
MCQ
1.
What are the number of firms under monopolistic competetion.
(a)
one
(b)
few
(c)
very large
(d)
Large
Ans. (d) Large
2.
A monopolistic firm in the longrun gets?
(a)
Normal profit
(b)
Abnormal profit
(c)
Can make loss
(d)
Super normal profit
Ans. (a) Normal profit.
MLL
1.
What is The product-variety externality?
Ans. The product-variety externality:
Because consumers get some consumer surplus from the introduction of a new
product, entry of a new firm conveys a positive externality on consumers.
2.
what do you mean by business-stealing externality ?
Ans. The business-stealing externality:
Because other firms lose customers and profits from the entry of a new
competitor, entry of a new firm imposes a negative externality on existing
firms.
3.
Is advertisement justified as in case of monopolistic competetion?
Ans. Critics of advertising argue that firms advertise in order to manipulate people’s
tastes.
They also argue that it impedes competition by implying that products are
more different than they truly are.
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SAQ
1.
What do mean by excess capacity in monopolistic competetion?
Ans. Excess Capacity
There is no excess capacity in perfect competition in the long run.
Free entry results in competitive firms producing at the point where average
total cost is minimized, which is the efficient scale of the firm.
There is excess capacity in monopolistic competition in the long run.
In monopolistic competition, output is less than the efficient scale of perfect
competition.
2.
Explain the feature of Free Entry or Exit under monopolistic competetion.
Ans. Free Entry or Exit
Firms can enter or exit the market without restriction.
The number of firms in the market adjusts until economic profits are zero.
3.
Analyse the feature of Many Sellers under monopolistic competition.
Ans. Many Sellers
There are many firms competing for the same group of customers.
Product examples include books, CDs, movies, computer games, restaurants,
piano lessons, cookies, furniture, etc.
LAQ
1.
Explain the aattributes of Monopolistic Competition
Ans. Attributes of Monopolistic Competition
Many sellers
Product differentiation
Free entry and exit.
Explananation of the above points
2.
Explain the price and output of the Monopolistically Competitive Firm in the Short
Run and long run.
Ans. The Monopolistically Competitive Firm in the Short Run
Short-run economic profits encourage new firms to enter the market. This:
Increases the number of products offered.
Reduces demand faced by firms already in the market.
Incumbent firms’ demand curves shift to the left.
Demand for the incumbent firms’ products fall, and their profits decline.
In the long run
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Firms will enter and exit until the firms are making exactly zero economic
profits.
Value Based Question OR HOTs
1.
Explain the normal deadweight loss of monopoly pricing.
Ans. There is the normal deadweight loss of monopoly pricing in monopolistic
competition caused by the markup of price over marginal cost.
However, the administrative burden of regulating the pricing of all firms that
produce differentiated products would be overwhelming
2.
What is Markup Over Marginal Cost?
Ans. Markup Over Marginal Cost
For a competitive firm, price equals marginal cost.
For a monopolistically competitive firm, price exceeds marginal cost.
Because price exceeds marginal cost, an extra unit sold at the posted price
means more profit for the monopolistically competitive firm.
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TOPIC 13: PERFECT COMPETITION
BY BIPUL VIKAS, PGT (ECONOMICS), KV ONGC SIVASAGAR, ASSAM.
MCQ:
1.In which market a firm is a Price taker?
a)Perfect competition
b) Monopoly
c) Monopolistic competition
d) Oligopoly
Ans: a
2.In which form of market AR=MR
a)Perfect competition
b) Monopoly
c) Monopolistic competition
d) Oligopoly
Ans.a
MLL:
1. Define perfect competition.
Ans:- Perfect competition is a market with large number of buyers and sellers , selling
homogeneous product at same price.
2. Why AR is equal to MR under perfect competition?
Ans:- AR is equal to MR under perfect competition because price is constant.
Short Anawer:
1. What is break-even price?
ANs:-In a perfectly competitive market, break- even price is the price at which a firm earn
normal profit (Price=AC). In the long run, Break- even price is that price where P=AR=MC.
2. Distinguish between monopoly and perfect competition.
Ans:Perfect Competition
Monopoly
Very large number of buyers and sellers.
Single seller of the product.
Products are homogenous
Product has no close substitute
Firm is the price taker and not a maker
Firm is price maker not price taker
Price is uniform in the market (price =AR)
Due to price discrimination price is
not uniform.
Free entry and exit of firms.
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Long Answer:
1. Explain any four characteristics of perfect competition market.
Ans:-Large number of buyers and sellers : The number of buyers and sellers are so large in this
market that no firm can influence the price.
i) Homogeneous products: Products are uniform in nature. The products are perfect
substitute of each other. No seller can charge a higher price for the product. Otherwise he will
lose his customers.
ii) Perfect knowledge: Buyers as well as sellers have complete knowledge about the product.
iv) Free entry and exit of firm: Under perfect competition any firm can enter or exit in the
market at any time. This ensures that the firms are neither earning abnormal profits nor
incurring abnormal losses.
2. Explain the process of price determination under perfect competition with the help of
Ans:-Equilibrium price is that price which is determined by market forces of demand and supply.
At this price both demand and supply are equal to each other. Diagrammatically it is determined
at the point where demand curve and supply curve intersect each other. At this point price is
known as equilibrium price and quantity is known as equilibrium quantity.
Price (Rs.)
M.D (Units)
M.S (Units)
1
10
2
2
8
4
3
6
6
4
4
8
5
2
10
HOTS
1. What is break-even price?
ANs:-In a perfectly competitive market, break- even price is the price at which a firm earn
normal profit (Price=AC). In the long run, Break- even price is that price where P=AR=MC
2.Relationship between AR and MR (when price remains constant or perfect competition) Under
perfect competition, the sellers are price takers. Single price prevails in the
market. Since all the goods are homogeneous and are sold at the same price AR = MR. As a result
AR and MR curve will be horizontal straight line parallel to OX axis. (When price is constant or
perfect competition).
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Topic 14: MONOPOLY
BY: RAJENDRA PRASAD SONWAL, PGT (ECONOMICS), KENDRIYA
VIDYALAYA LOKRA, TINSUKIA REGION
MCQ
1.
In which of the following markets, in the long run firm earns supernormal profits
(a)
Monopoly
(b)
Monopolistic Competition
(c)
Both (a) and (b)
(d)
Oligopoly.
Ans. Monopoly
2.
The following are key features of a Monopoly Except
(a)
Diseconomics Scale
(b)
No close substitutes
(c)
Influence over price
(d)
Barriers to entry
Ans. No close substitutes
MLL
1.
3. Define monopoly.
Ans. Monopoly is a market situation dominated by a single seller who has full
control over the price.
2.
3. What are the reasons which give emergence to the monopoly market?
Ans.
i)
Patent Rights: Patent rights are the authority given by the
government to a particular firm to produce a particular product for
a specific time period.
ii)
Formation of Cartel: Cartel refers to a collective decision taken by
a group of firms to avoid outside competition and securing
monopoly right.
Government licensing: Government provides the license to a particular firm to
produce a particular commodity exclusively.
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3.
Explain the feature of ‘no close substitutes’ under monopoly.
Ans. The monopoly produces all the output in a particular market. The monopoly is
a ‘price-maker’. It does not mean that monopoly can fix both price and the
quantity demanded. If he fixes a high price, less commodity will be demanded.
SAQ
1.
What do you understand by PRICE DISCRIMINATION (Under monopoly market):
Ans. Price discrimination occurs when a producer sells a specific commodity or
service to different buyers at two or more different prices. For example
Railways, Doctors, lawyers & Chartered Accountants charge different rates for
their services that vary according to the income of their clients.
2.
Write the Conditions for price discrimination (Under monopoly market):
Ans.
3.
1)
2)
3)
4)
Full control over supply
Division of market into two or more sub-markets
Different price elasticity under different markets
No possibility to resale
Write the merits and demerits of monopoly.
Ans. Merits
1. High level of Skill and Efficiency
2. High level of Research and Development
Demerits
1. Less output
2. High price
3. Economic Concentration.
LAQ
1.
What are Characteristics (Features)of monopoly market? Explain
Ans. 1) Single seller & large number of Buyers: There is only one firm producing
or supplying a product. This single firm constitutes the industry. There are
so many buyers of the product.
2) Restrictions to entry: There are strong barriers to the entry of other firm in
the market.
3) No close substitutes: A monopolist sells a product which has no close
substitutes, but there may be substitutes of the product for example
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substitutes of railways are buses & airlines but these are not close
substitutes.
4) Firm is also an industry: in monopoly there is only one firm, so firm is also
an industry.
5) Both a Price-maker & Price taker: The firm itself determines the price of
the commodity & firm is also an industry, so price-taker & price-maker both
are same.
6) Perfect immobility: Factors of production are perfectly immobile, because
these factors are under single seller.
7) Example: Railways is the best and the only example in India.
2.
Explain the EQUILIBRIUM OF THE FIRM (OUTPUT AND PRICE DETERMINATION)in
the monopoly market:
Ans. Conditions for the equilibrium: The twin conditions for equilibrium in a
monopoly market are same.
i. MC = MR
ii. MC curve must cut MR curve from below :
COST & REVENUE
Y
MC
P
E
AR
O
Q
OUTPUT
X
MR
Equilibrium position of a monopolist (Short run)
MR curve at E, equilibrium price is OP and equilibrium output is OQ .
COST & REVENUE
Y
AC
MC
A
P
PROFIT
B
C
E
AR
MR
O
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Q
OUTPUT
X
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COST & REVENUE
Firm’s equilibrium under monopoly : maximization of profits
Y
SMC
SAC
A
P
LOSSES
B
C
E
O
Q
AR
OUTPUT
X
MR
Equilibrium of the monopoly : Losses in the short-run
In the above figure MC cuts MR at E. here is the point of loss minimization. At
E, equilibrium output is OQ and equilibrium price is OP. Cost corresponding to
OQ is QA. Cost per unit of output i.e. QA is greater than revenue per unit, which
is BQ. Thus the monopolist incurs losses to the extent of AB per unit or total
loss is ABPC. If he is unable to meet his average variable cost even, he will
shut down.
1.) Long run Equilibrium: (Super Profit LAR >LAC): Monopoly firm
in the long run gets abnormal profits. It is so because the new
firms are not allowed to enter the market. To earn super profits
LAR > LAC.
Value Based Question OR HOTs
1.
The government has granted license of production of a particular commodity to one
production unit leading to emergence of monopoly. Though monopoly leads to
concentration of power in few hands as per conventional belief, how in your opinion
monopoly is good for us?
Ans. If monopoly emerges because of its competency to provide a better product.
If it is outcome of development and research and uses scarce resources
efficiently.
2.
Why are patent right granted?
Ans.
1. Encouraging research and development, and
2. Encouraging new discoveries and innovations.
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TOPIC 15: SIMPLE APPLICATION TOOLS OF DEMAND AND SUPPLY
PRICE CEILING AND PRICE FLOUR
BY RAGHUNATH PANDA, PGT (Economics), KV BALASORE
1. Equilibrium price and demand is determined by
(i)
Demand by consumers
(ii)
Supply by producers
(iii)
Both demand and supply
(iv)
None of these.
Ans. (iii) Both demand and supply
2. Price flour is for the benefit of
(i)
Consumers
(ii)
Producers
(iii)
Both consumers and producers
(iv)
None of these
Ans. (ii) Producers
3. Whether Ceiling price is above equilibrium price or below equilibrium price ?
Ans: Below equilibrium price
4. Define flour price .
Ans:The price above equilibrium price which is fixed by the Govt. assuring reasonable price to
producers.
5. State one effect of price ceiling.
Ans: Hoarding and black marketing.
6. State five factors affecting demand for a good.
Ans:
(i)
(ii)
(iii)
(iv)
(v)
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Price of the good
Price of related good
Income of consumer
No. of population
Taste and preference
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7. State five factors affecting supply of a good.
Ans:
(i)
(ii)
(iii)
(iv)
(v)
Price of the good
Price of other good
Input price
Technology
Excise tax rate
8. Explain the concept of price flour .
Ans: Price flour is the price fixed by the Govt. for the benefit of producers. It is above the
equilibrium price. It covers the cost of production and a reasonable profit.
9. Looking at the high cost of production of wheat the Govt. of India fixed the support price of
wheat per quintal as Rs 2000. How will it affect the economy ?
(i) Farmers will be encouraged for wheat cultivation
(ii) Country will achieve self-sufficiency in wheat
(iii) Increase the buffer stock capacity
(v) Increase our export capacity
10. Government of India is planning to withdraw essential goods from price ceiling . Will the
economy be affected ? If so then how ?
(i) Around 20 % people who are below the poverty line can not afford for essential goods
(ii) Poverty will be aggravated
(iii) Starvation may cause social unrest and may some anti social activities.
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OLIGOPOLY
BY Mr. Pramod Barik , PGT (Economics), KV No.1, Sambalpur
KVS Bhubaneswar Region
MCQ
1.
Oligopoly is the market structure in which there are/is…………….
(a)
Many sellers and many buyers
(b)
(c)
Few sellers and many buyers
(d)
One seller and many buyers
None of these
Ans. c- Few sellers and many buyers
2.
Demand curve under monopoly is:
(a)
(c)
Less elastic
Perfectly elastic
(b)
Highly elastic
(d)
Indeterminate
Ans. d- Indeterminate
MLL
1.
Define oligopoly.
Ans. Oligopoly refers to a market situation in which there are a few firms selling
homogeneous or differentiated products.
2.
It lies between monopolistic competition and monopoly.
Sometimes it is also called as ‘ competition among the less’.
Examples : markets for automobiles,cement,steel,aluminium etc.
Mention the features of oligopoly.
Ans. The features of oligopoly are:
a.
b.
c.
d.
e.
f.
g.
h.
3.
Few large firms
Interdependence among the firms
Non-price competition
Barriers to entry of firms
Role of selling costs
Group behavior
Nature of the product
Indeterminate demand curve
What do you mean by pure oligopoly?
Ans. Pure oligopoly-If the firms produce homogeneous products then it is called
pure or perfect oligopoly.Itie rare to find pure oligopoly situation,
howevercement,steel,aluminium and chemicals producing industries are pure
oligopoly.
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SAQ
1.
How are the firms in an oligopoly market interdependent on each other? Explain.
Ans. The firms under an oligopoly are interdependent. Interdependence means that
actions of one firm affect the actions of other firms.
A firm considers the action and reaction of the rival firms while determining its
price and output levels.
A change in output or price by one firm evokes reaction from other firms
operating in the market.
Examples: market for cars in India is dominated by few firms like
Maruti,Tata,Hyundai,Ford,Honda etc.
2.
Briefly explain collusive and non-collusive oligopoly.
Ans. Collusive oligopoly-If the firms cooperate with each other in determining price
or output or both, it is called collusive oligopoly or cooperative oligopoly.
Non-collusive oligopoly-If firms in an oligopoly market compete with each
other, it is called a non-collusive oligopoly.
3.
Why is number of firms small in oligopoly market? Explain.
Ans. The main reason for small number of firms under oligopoly is the ‘Barriers to
entry’, which prevent entry of new firms into the industry.
Patents,requirement of large capital,control over crucial raw materials, etc are
some of the other reasons which prevent new firms from entering into
industry.
As a result there are few firms in an oligopoly market.
LAQ
1.
Explain the following implications in an oligopoly market:
a. Non-price competition
b. Barrier to the entry of firms.
Ans. Non-price competition:Under oligopoly firms are in a position to influence the
prices. However they try to avoid price competition for the fear of war.
They follow the policy of price rigidity,advertising,better services to customers
etc to compete with each other.
If a firm tries to reduce the price, the rivals will also react by reducing their
prices. However if it tries to raise the price,other firms might not do so.
It will lead to loss of customers for the firm, which intended to raise the price.
So firms prefer non-price competition instead of price competition.
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b] Barrier to the entry of firms: The main reason for few firms under oligopoly
is the barriers, which prevent entry of new firms into the industry.
Patents,requirement of large capital,control over crucial raw materials, etc are
some of the other reasons which prevent new firms from entering into
industry.
2.
Only those firms enter into the industry which are able to cross the barriers. As
a result firms can abnormal profits in the long run.
Explain the following implications in an oligopoly market:
a. Role of selling costs
b. A few large firms
Ans. a)Role of selling costs: due to severe competition and interdependence of the
firms various sales promotion techniques are used to promote sales of the
product.
Advertisement is in full swing under oligopoly. Selling costs are more important
under oligopoly than under monopolistic competition.
b]A few large firms:Under oligopoly there are few large firms. Each firm
produces a significant portion of the total output.
There exists severe competition among different firms and each firm try to
manipulate both prices and volume of production .
Example: The number of automobile firms in India is so small that an action by
any one firm is likely to affect the rival firms. So every firm keeps a close watch
on the activities of rival firms.
Value Based Question OR HOTs
1.
Under oligopoly though firms are free to take decisions about price and quantity to
be sold but they do not change the price and hence buyers are deprived of the
benefit of fall in price. Comment.
Ans. Oligopoly firms are mutually dependent and therefore while fixing the price
the output they are guided by the reactions of other firms. As such price
tends to be rigid and the consumers suffer.Value-critical thinking.
2.
Firms in oligopoly form cartel and in this way these firms can control over
prices. Value-Critical thinking.
Although there are few firms in oligopoly they can enjoy monopoly power. How?
Firms in oligopoly form cartel and in this way these firms can control over
prices. Value-Critical thinking.
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TOPIC 17: Some Basic Concepts: Consumption Goods, Capital Goods, Final
Goods, Intermediate Goods
BY: PRAGYAN PARAMITA DHAL, PGT (ECONOMICS), K.V. PURI
MCQS
1. Bread purchased by a bakery shop is
a]Consumer good
b]Capital good
c]Intermediate good
d]Final good
2. ----------------------------are used for further production
a] Intermediate good
b] Capital good
c] Producer good
d] All of the above
MLL
3. What are consumption goods ?
Ans-The final goods used directly by their final users for the satisfaction of wants.
4. Define capital goods.
Ans- The final goods used for further production as fixed asset by the producer.
5. Define intermediate good.
Ans-The goods used up in the production of final goods or used for resale.
SA
6. Differentiate between consumption goods and capital goods.
Ansconsumption goods
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capital goods.
1.
Definition
Definition
2.
Known as consumer goods
Known as producer goods
3.
Car purchased by a household Car purchased by a company
for personal use
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7. Distinguish between final goods and intermediate goods.
Ansfinal goods
intermediate goods
1
Definition
Definition
2
Are beyond the production Are within the production boundary
boundary
No further value addition
Scope for value addition
3
8. What are final goods ? Name two types of final goods with example.
Ans- Definition
Final goods are of two types.
A]Consumption goods- Refrigerator purchased by a household
B]Capital goods- Refrigerator purchased by a restaurant.
HOTS
9. All capital goods are producer goods but all producer goods are not capital goods.
Comment.
Ans- All capital goods are producer goods but all producer goods are not capital goods
because producer goods are all those goods which are used for the production of other goods
but capital goods are the fixed assets used for further production.
Ex: raw materials used in production are producer goods but not capital goods.
10. Though both intermediate and final goods are produced by an economy during a given
financial year, value of only final goods are included for estimation of national income.
Why?
Ans- Because the value of intermediate goods are already added up in the value of the final
goods.
So, addition of the value of both intermediate and final goods will lead to the overestimation
of NI of the economy resulting out of double counting.
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LA
11. Distinguish between final goods and intermediate goods. Explain the importance of this
distinction in the study of NI.
Ans- Combined answer of Q7 and Q10
12. State true/ false with reason.
A] Machines purchased by a dealer of machines are final goods.
Ans- False. They are intermediate goods as to be used for resale.
B] A computer purchased by a household is a capital good
Ans- False. A computer purchased by a household does not lead to any further value addition
in the process of any other goods or services. It is consumer durable good.
C]Furniture purchased by a school is final good.
Ans- True. This is a part of investment expenditure used to build up the stock of capital goods.
D] Chalk purchased by a school is intermediate good.
Ans- True. It is used up in the process of generation of teaching services.
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Topic 18: SOME BASIC CONCEPTS – STOCKS AND FLOWS, GROSS
INVESTMENT AND DEPRICIATION
BY: NIRANJAN SAHOO, PGT (ECONOMICS), K.V, GAJAPATI
MCQ
1.
Which of the following is a flow concept
(a)
savings
(b)
Wealth
(c)
GNP
(d)
investment
Ans. (b) wealth
2.
If expenditure on the purchase of fixed asset is Rs200cr and Gross investment is
worth Rs500cr ,what is the value of inventory stock
(a)
100cr
(b)
200cr
(c)
400cr
(d)
300cr
Ans. (d) 300cr
MLL
1.
Define a stock variable.
Ans. A stock variable is defined as any quantity measured at a point of time like
number of machines in a plant or amount in the bank account on specific date.
2.
What is a flow variable?
Ans. Flow variable is defined as any quantity measured per unit at a particular
period of time like income or expenditure over a time period of one month or
one year.
3.
Define the concept ‘Depreciation’.
Ans. Depreciation is the loss of value of fixed asset in use on account of normal wear
and tear, normal rate of accidental damage or expected or unforeseen
obsolescence.
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SAQ
1.
Give reason and categorize
losses,production,capital
the
following
into
stock
and
flow
-
Ans. LOSSES- It is a flow variable since losses are incurred over a period of time.
PRODUCTION- It is a flow concept because it accrues over a period of time.
CAPITAL –It is a stock concept because it is measured at a point of time already
accumulated.
2.
How is national income a flow concept?
Ans. National income is the market value of goods and services produced within the
country in an accounting year. Since we know that production of goods and
services gives rise to equivalent amount of income to the factors of production.
There is a flow of income and product in a circular manner generated over a
period of time.
3.
What is Net Investment?
Ans. Net investment is the value of gross investment less depreciation. Since fixed
assets wear and tear during the production ,these values are to be calculated
and deducted from the total investment to arrive at net investment.
LAQ
1.
What is meant by ‘Gross Investment’? What are its components?
Ans. Gross investment is that part of our final out put that comprises of capital
goods i.e. expenditure on fixed assets and inventory stock. It has two
components –Fixed Investment and change in inventory in an accounting year.
Fixed investment is the increase in the fixed assets of the producers while
change in inventory includes sum of unsold goods, semi-finished goods and raw
materials.
2.
Distinguish between stock and flow variables.
Ans.
STOCK
FLOW
1.Any quantity measured at a point of 1.Any quantity measured over a period
time is stock.
of time is a flow concept.
2.It has no time dimension
2. It has time dimension.
3.example-stock of money ,bank deposit 3.example-GDP,money
as on 31st march,2000
supply,productionof goods and services
and capital formation
4.increase or decrease in stock affects
the flow like stock of wealth and asset
leads to increase in the flow of goods
and services.
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4. change in the flow also affects the
stock as the change in the supply of
money leads to the total stock of money
in the economy.
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Value Based Question OR HOTs
1.
Why do firms maintain depreciation reserve fund?
Ans. Depreciation reserve fund is created by the producers to meet the upcoming
depreciation losses. It is maintained by the firms to replace for the possible
breakdown of fixed assets so as to maintain continuity in production.
2.
Explain briefly how stocks and flows influence each other.
Ans. Both stock and flow variables influence each other. For example- greater stock
of capital good leads to greater flow of goods .Similarly flow variables also
influence stocks. For example monthly increase in the money supply leads to
increase in the quantity of money.
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Topic 19: ASSIGNMENT ON CIRCULAR FLOW OF INCOME,
VALUE ADDED METHOD OF CALCULATING NATIONAL INCOME
BY: ARUN KUMAR PATRA, PGT(ECONOMICS), K.V. KHURDA ROAD
MCQ
1.
Problem of double counting can be avoided by using:
(a)
Final output method
(b)
Value added method
(c)
Both (a) and (b)
(d)
neither (a) nor (b)
Ans. Both (a) and (b)
2.
Which one of the following is a component of real flow?
(a)
Rent
(b)
Wages
(c)
Money income
(d)
Goods
Ans. Goods
MLL
1.
What are the main precautions required to be taken in estimating national income
by value added method?
Ans. The following precautions are to be taken while estimating national income by
value added method.
I)
II)
III)
2.
Avoid double counting. To avoid this, instead of taking the value of
total output at each stage of production, take the value added by
each production unit.
Production of self consumption should be counted while measuring
national income.
Sales and purchase of second hand goods should not be included in
current production but services produced in the sale of secondhand
goods must be counted.
Distinguish between real flow and money flow. Give examples.
Ans. Real Flow-Under this flow of income, household renders services to the firms
and the firm provides goods and services. Thus flow of goods and services
between household and firm is called real flow.
Money flow-Under money flow of income, factor payments made by the firms
in terms of money and expenditure made by the households in terms of money
are taken into account. Thus flow of money between household and firm is
called money flow.
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3.
Explain the problem of double counting in the estimation of national income.
State one method of avoiding it.
Ans. The problem of double counting is the problem of estimating the value of
goods and services more than once. All enterprises treat their sales as final
goods and services. This leads to the problem of double counting. This should
be avoided because if the value of any commodity is added more than once it
will be the over estimation of national income.
The problem can be avoided by using value added method.
Value added = Value of output – intermediate consumption.
SAQ
1.
Explain the concepts of leakages and injections in the circular flow of income.
Ans. Leakage- A leakage is a withdrawal of income from the circular flow. Leakages
from the circular flow are of different types-like (i) Taxes (ii) Savings (iii) Imports
etc. Leakages cause contraction of circular flow as money is taken out of the
flow process.
Injections- An injection is an addition to the circular flow. This addition arises
in different forms- like (i) investment (ii) Exports (iii) Govt. expenditure etc.
Injections cause expansion of circular flow because money is injected in to the
flow process.
2.
Calculate Value added by firm X from the following data.
(Rs. in lakhs)
i)
ii)
iii)
iv)
v)
vi)
Sales
Closing stock
Purchase of raw material
Import of raw material
Import of machines
Opening stock
600
40
200
100
200
10
Ans. Value added by firm X = Sales + Closing Stock - Opening Stock – Purchase of
raw material =600+40-10-200=Rs. 430 lakhs.
3.
Calculate net value added by market price from the following data.
(Rs. in Lakhs)
i)
ii)
iii)
iv)
v)
vi)
vii)
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Opening stock
Net indirect tax
Subsidy
Intermediate cost
Closing stock
Depreciation
Sales
10
7
2
12
8
5
40
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Ans. NVAmp = Sales + Closing stock – Opening stock – intermediate cost depreciation
= 40 + 8 -10 – 12 - 5 = Rs. 21 lakhs
LAQ
1.
Explain the product method of estimation of national income.
Or, Describe the steps involved in the estimation of national income by value added
method.
Ans. Value added method (or product method) measures the contribution of each
producing unit to production or the value added by each enterprise in the
production process. Main steps involved in this method are –
i)
ii)
iii)
iv)
v)
2.
Identification of all the producing units within the domestic
territory and to classify them into various industrial sectors like
primary, secondary and tertiary.
Estimation of value of output (sales + ∆ stock), value of intermediate
consumption, value of depreciation and net indirect tax.
Estimation of net value added at factor cost (NVAfc) by each
producing enterprise.
To calculate NDPfc of the economy add NVAfc of all sectors of the
economy.
To estimate National Income, Net Factor Income from Abroad is
added to Domestic income (NDPfc).
From the following data, calculate gross domestic product at market price:
(Rs. in crores)
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
Value of output in primary sector
Intermediate consumption of secondary sector
Intermediate consumption of primary sector
Net factor income to abroad
Net indirect Tax
Value of output of tertiary sector
Value of output of secondary sector
Intermediate consumption of tertiary sector
2000
800
1000
20
300
1400
1800
600
Ans. GDPfc = (Value of output in primary sector – Intermediate consumption of
primary sector) + (Value of output in secondary sector – Intermediate
consumption of secondary sector) + (Value of output in tertiary sector –
Intermediate consumption of tertiary sector) - NIT
= (2000 – 1000) + (1800 -800) + (1400 - 600) - 300
= 1000 + 1000 + 800 - 300
= Rs. 2,500 crores.
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Value Based Question OR HOTs
1.
Money flows are opposite to real flows. Do you agree with the statement? Give reason in
support of your answer.
Ans.
Money flows are opposite to real flows. I do agree with the statement becauseMoney flows are generally in response to real flows. If there is a real flow of goods and
services from the producers to the households; it is in response to it, that the
households make payments to the producers. Likewise, if there is a real flow of factor
services from households to the producers; it is in response to it, that the producers
make payments to the households. So that, money flows from producers to the
households in terms of factor payments.
2.
Explain the economic value of using value added method for the estimation of GDP.
Ans.
Value added method refers to the net output method of estimation of GDP.
Value added=Value of output - Intermediate consumption.
When we estimate value added by each producing unit in the country, we make an
assessment of the level of production in the economy. Low value added implies low
level of output and therefore, low level of income and employment. It points to low
quality of life of the people.
Since value added is estimated across different sectors of the economy we are also
able to access the relative contribution of these sectors in GDP. This helps the
government to formulate sector wise policies for growth and development.
Value added tax is based on the value added method of estimation of GDP.
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Topic 20: EXPENDITURE METHOD OF CALCULATING NATIONAL INCOME
BY: RAJIV KUMAR PANDEY
MCQ
1.
2.
Which of the following is not a part of capital formation?
(a)
Closing stock
(b)
Increase in the stock of valuables
(c)
Increase in livestock
(d)
Investment in shares
Ans.
(d) Investment in shares
Which of the following is true for Net Export
(a)
Net exports = exports(X)Imports (M)
(b)
Net exports = Imports (M)exports(X)
(c)
Both (a) and (b)
(d)
None of these
Ans.
(a) Net exports = exports(X)- Imports (M)
MLL
1.
What is the significance of Expenditure method of measuring NI?
Ans.
2.
Define GDP?
Ans.
3.
Expenditure method measures the flow of expenditures on goods and
services.This enables us to understand the consumption , savings and
investment behavior of the economy.
This is termed as final expenditure method also. According to expenditure
method, the gross domestic product( GDP) is the sum total of all the final
expenditure on various goods and services, within the domestic territory of
a country, during a year.
Write down the formula to measure GDP
Ans.
GDP mp= PFCE + GFCE + GDCF + ( X-M)
OR
GDP mp = C+I +G + ( X –M)
HERE C- PFCE, I-INVESTMENT EXPENDITURE OR GDCF , G – GFCE , X –M =
NET EXPORTS
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SAQ
1.
Distinction between consumption expenditure and investment expenditure.
Ans.
It is that part of final expenditure which is made on purchase of goods and
services for current consumption
Investment expenditure: Investment refers to all goods of current
production which are not consumed or used up during a year and the
expenditure on these goods is called investment expenditure.
2.
How is expenditure on consumer durables treated in estimation of a country’s
national product ?
Ans.
Goods acquired by households which have expected lifetime of considerably
more than one year and are of relatively high price are called consumer
durables. e.g. T.V.
National income accounts treats all consumer durables excepts dwellings to
have been consumed the moment they are purchased by consumers.
As far as residential buildings ( dwellings) are concerned , since they are
supposed to contribute to human welfare and satisfaction throughout their
existence, they are , treated as producer goods and imputed value of their
service is added to the production of each accounting year.
3.
Do you agree that saving as source of capital formation?
Ans.
Gross domestic capital formation is addition to the capital stock
within the domestic territory of a country during a year .In fact , surplus of
production over consumption during a period of account in the domestic
economy adds to its capital stock which is called gross domestic capital
formation. It is sum of
(i)
(ii)
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gross addition to fixed capital formation, and
(ii) increase in stock of inventories within
economy.
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LAQ
1.
Describe the difficulties in the use of expenditure method.
Ans.
Following are the difficulties faced in estimating national income
expenditure method :
i)
ii)
iii)
iv)
v)
2.
by
Consumer durable- goods like TV , car are not used up in a year , should
be treated as consumption expenditure or investment expenditure .
e.g. Expenditure on purchase of a car is treated as consumption
expenditure whereas on purchase of a taxi is considered as
investment expenditure . Moreover, it is almost impractical to
measure the value of services rendered by goods like washing
machines, tv
Government consumption- sometimes it becomes difficult to
differentiate govt. consumption expenditure from government
investment expenditure. E.g. govt. expenditure on roads ,dams ,
irrigation canals is treated as investment expenditure whereas
expenditure on defence is treated as consumption expenditure.
Interest on National debt paid by the govt. – It is not included in
government expenditure about which some economists have
reasonable and justifiable doubts
Expenditure in Private sector- it is difficult to get data about
consumption expenditure and investment expenditure in the private
sector
Change in inventories- Production process is a continuous process
where change in stocks or inventories is also continuous. It is ,
therefore, very difficult to find out changes in the value of inventories.
Explain the main steps involved in measuring national income through Expenditure
method?
Ans.
[a] Classify the economic units incurring final expenditure into distant groups
like households, government, firms etc.
[b] Estimate the following expenditure on final products by all economic
units
* private final consumption expenditure :( household final consumption
expenditure in home country + Direct purchases made by resident
households abroad + Expenditure of Private non-profit institutions serving
household – Direct purchases made by non resident households in home
country
* Government final consumption expenditure: it represents final
expenditure of the govt. on purchase of various goods and services within
and outside the country.It also includes COE paid by the govt.
* Gross domestic Capital Formation:
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(a) Gross domestic fixed capital formation
(b) Inventory investment ( change in stock =
closing stock- Opening stock)
*Net export( sum total of above gives GDP mp):Exports(X) – Imports (M)
[c] Deduct depreciation ,net indirect taxes to get NDP fc
[d] Add net factor income from abroad to NDP fc.
Value Based Question OR HOTs
1.
Why are exports included in the estimation of domestic produced by the
expenditure method? Can the gross domestic product be greater than the gross
National Product? Explain.
Ans.
Expenditure method estimates expenditure on domestic product i.e.,
expenditure on final goods and services produced within the economic
territory of the country.It include expenditure by residents and non residents
both .Exports though purchased by by non residents are produced within the
economic territory and therefore a part of domestic product.
Domestic product can be greater than national product, if the factor
income paid to the rest of the world is greater than the factor income
received from the rest of the world i.e. , when net factor income received
from abroad is negative.
2.
Compensation given to victims of Uttrakhand tragedy is a good measure taken by
the government.Why is it not included in National Income?
Ans.
Compensation given to victims of uttrakhand tragedy is a welfare measure
taken by the government of India but it is not included in estimation of
National income because it is a transfer payment which does not lead to
corresponding flow of goods and services
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Assignment submitted by Rajiv Kumar Pandey PGT Economics, KV Steel
Plant Visakhapatnam
MCQ
Q1]In expenditure method we calculate Final Expenditure on ‘ Gross Domestic Product’ at
I] MP
ii] FC
iii] Both
iv] None of these
Ans. I] MP
Q2] Another name of Investment Expenditure is
I] GDCF ii] change in stock iii] BFI (business fixed investment)
iv] None of these
Ans. I] GDCF
MLL
Q1] Define Gross Investment:
It includes
(a) All final purchase of machinery, equipment, and tools by business enterprise in given
time period-change incapital stock (b) all current construction (c) changes in inventories:
changes in stocks of finished goods and goods in process as well as changes in the raw
material that businesses keep on hand. Inventories can be negative, positive or zero
(a)
Write the formula of expenditure method of NIA
Ans- GDP = C + I + G +NX
In this approach GDP is calculated as the sum of four categories of expenditures on
output. These are:
Gross Private Consumption Expenditures(C)
Gross Private Investment (I)
Government Purchases (G)
Net Exports (X - M) Q2] Define Government Expenditure .
Ans- Government Expenditure (G):
This includes all governmental spending (federal, state and local) on the finished product of
business and all direct purchases of resources such as labour etc, it excludes all govt. transfer
payments, because it doesn't reflect any current production.
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Q3] Write about the concept of Net Export
(4) Net Exports (NX) = Export - Import :
This includes the difference between the imports and exports, called net exports. it is the
component of the total demand for our goods. it can be negative positive or zero.
SHORT ANSWER QUESTIONS
Q1] what are the components of private consumption expenditure .
•
Ans-Private Consumption Expenditures (C):
•
This consists of all goods and service purchased by households. This is broken down even
farther into services, nondurable goods, and durable goods. As interest rates increase, people
begin to save more and consume less in relation to their spending/saving habits with lower
interest rates, so C decreases.
•
When taxes go down, people tend to have more income, so C increases.
•
When income increases, C increases.
This is the largest category and accounts for about two-thirds of the GDP
Q2] Justify and explain briefly the given equation
Total Investment (I) = Fixed Investment + Inventory Investment + Residential Investment
Eventually all capital begins to wear out because of use or may even become technologically
obsolete. This process is called depreciation which is the decrease in the capital's value. Net
private investment is gross private investment minus depreciation. Net private investment is
important because it gives economists a clue to a possible increase to a certain capacity that a
country can produce.
There are two types of investment: fixed investment and inventory investment. Fixed investment
is the purchase of capital goods such as robots, machines, and factories. Raw materials
(intermediate goods) are NOT included in investment. Inventory Investment is the change in
inventories such as goods awaiting sale on store shelves, or raw materials which have yet to be
assembled into final form or sold.
Positive inventory means that inventory is rising, while negative inventory means that inventory
is falling.
Residential Investment is the purchase of new residential homes by the household sector.
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Q3] define government purchase
Ans- This accounts for the total expenditures on new goods and services by the local, state, and
federal government. Transfer payments are not included in government purchases, but rather find
their way to consumption or investment. These payments include the spending of the government
on welfare projects. These are programs and benefits that are awarded to individuals who do not
need to work for it.
Q1] LONG ANSWER QUESTIONS
Q1] EXPLAIN THE METHODS INVOLVED IN CALCULATION OF NI THROUGH EXPENDITURE
Method:
Expenditure method measures final expenditure on ‘Gross Domestic Product at market price (GDP
at MP) during a period of account. Since all domestically produced goods and services are
purchased for final use either by consumers for consumption or by producers for investment,
therefore, we take sum of final expenditure on consumption and investment. This sum equals GDP
at MP. Final expenditure is the expenditure made on purchase of domestically produced goods
and services for final use, i.e., for consumption and investment.
Under expenditure method national income is calculated first by adding up all the items of final
consumption expenditure and final investment expenditure within the domestic economy The
resulting total is called GDP at MR By subtracting depreciation and net indirect taxes from GDP at
MP and adding to its net factor income from abroad, we get NNP at FC or national income. Thus,
under expenditure method, national income is measured at the point of actual expenditure.
Mind, income generated by factors of production in the production process is spent by them on
final goods. Final use of a commodity is either for consumption or for investment and expenditure
on them is called Final Consumption Expenditure and Final Investment Expenditure, respectively
By adding up all the items of final consumption expenditure and final investment expenditure
within the domestic economy, we get the aggregate called GDP at MPQ2]Explain the steps to
calculate NI with Expenditure method :
(i) Identification of economic units incurring final expenditure, e.g., household (or consuming)
sector, firm (or producing) sector and government sector.
(ii) Classification of final aggregate expenditure into following components:
1. Private final consumption expenditure.
2. Government final consumption expenditure.
3. Gross fixed capital formation.
4. Change in stocks.
5. Net exports.
(iii) Measurement final expenditure on the above components. Sum total of the above five items
gives us the value of GDP at ME By deducting depreciation and net indirect taxes from GDP at MP
we get NDP at FC.
(iv) Estimation of net factor income from abroad which is added to NDP at FC (Domestic Income)
to obtain NNP at FC (National Income).
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Q3] Explain the Precautions of expenditure method
The following precautions need to be taken for correct estimation of national Income by
expenditure method.
Alternatively, following items of expenditure should not be included:
(i) To avoid double counting, expenditure on all intermediate goods and services is excluded. For
example, purchase of vegetables by a restaurant, expenses on electricity by a factory, etc., are not
included as they are for intermediate consumption.
(ii) Government expenditure on all transfer payments such as scholarships, unemployment
allowance, old-age pension, etc. is excluded because no productive service is rendered by the
recipients in exchange.
(iii) Expenditure on purchase of second-hand goods is excluded from national income because this
type of expenditure is not on currently produced goods.
(iv) Expenditure on purchase of old shares/bonds or new shares/bonds, etc. is excluded because
it is not payment for goods or services currently produced. It shows mere transfer of property
from one person to another. Likewise, gifts from abroad which bring transfer payment are not
included.
(v) Imputed expenditure on own account output (e.g., owner occupying his house, self- consumed
output by a farmer) should be included.
VALUE ADDED QUESTIONS
Q1] Imports create leakages in the circular flow of income.Do you agree? How in your opinion
the leakages can be corrected?
Ans. I agree that imports cause outflow of foreign exchange implying withdrawals from the circular
flow of income , yet we can not do away with certain necessary imports. In case of other goods,
we should develop the preference for domestically produced goods, also we should develop
import substitution.
Q2] Government provides subsides to producers and transfer payments to the households. It
increases government expenditure. How can this excessive expenditure be reduced?
Ans. As a welfare providing agency,the government is supposed to help the society( here
producers and the households), however there should be some administrative checks enforced to
evaluate the requirements of the society.Some influential producers and households may not
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require this help from the government, hence only productive expenditure should be incurred by
the government.
HOT QUESTIONS
Q1Why should the aggregate final expenditure of an economy be equal to the aggregate factor
payments? Explain.
Ans. The sum of final expenditure in the economy must be equal to the income received by all the
factors of production. It is because that the revenues earned by all the firms put together must be
distributed among the factors of production as salaries , wages , profits, interest and rent in the
economy as their services are exchanged for factor payments.
Q2] calculate GDPmp
particulars
Rs. In crores
1]
Private consumption expenditure
15000
2]
Government consumption
expenditure
11500
3]
Gross fixed capital formation
1000
4]
Increase in stocks
200
5]
Exports
500
6]
Imports
700
7]
Capital consumption allowance
650
8]
Net indirect taxes
500
Ans- GDPmp= private final consumption exp+ government final consumption exp+ gross domestic
capital formation+ net exports
= PFCE+GFCE+ ( GDFCF+ CHANGE IN STOCKS)+ (X –M)
= 15000 + 11500 + ( 1000 + 200) + ( 500 – 700 )= Rs 27500
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Topic 21: Aggregates related to National Income: GNP, NNP, GDP, and NDP
at MP & FC, National Disposable Income (Gross & Net)
BY: RAMESH MANDAL, PGT (Eco), KV CMERI Durgapur
MCQ
1.
Which of the following makes GDP an inappropriate index of welfare?
(a)
Externalities
(b)
Distribution of GDP
(c)
Non-monetary transaction
(d)
All of these.
Ans.
2.
(d) All of these.
Which of the following is incorrect?
(a)
NNP at MP = NDP at MP + Net
factor income from abroad
(b)
GDP at MP = NDP at MP +
Depreciation
(c)
NDP at FC = GDP at FCDepreciation
(d)
GNP at FC= GNP at MP + Net
indirect taxes
Ans. (d) GNP at FC= GNP at MP + Net indirect taxes
MLL
1.
Define GDP at MP.
Ans. It refers to market value of all the final goods and services produced within
the domestic territory of a country during a year.
2.
What is Market Price?
Ans. Market Price = Factor Cost + Net indirect taxes.
3.
When is GDP of an economy equal to GNP?
Ans. GDP of an economy is equal to GNP when net factor income from abroad is
zero.
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SAQ
1.
Why GDP at MP is called Gross?
Ans. It is called gross because no provision has been made for depreciation.
However, if depreciation is deducted from the GDP, it becomes NDP.
2.
Is net export(X- M) a part of net factor income from abroad?
Ans. No, it is not. Income from exports will be treated as a part of domestic income.
3.
. Distinguish between NNP at FC and GDP at MP.
Ans. NNP at FC = GDP at MP - Depreciation – Net indirect taxes + Net factor
income
from abroad.
Thus (a) GDP at MP includes depreciation and net indirect taxes, while NNP at
FC does not.
(b) NNP at FC includes net factor income from abroad, while GDP at MP does
not.
LAQ
1.
Calculate net national product at factor cost and gross national disposal income
from the following.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Gross domestic product at market price
Net current transfers to abroad
Net indirect taxes
Net factor income to abroad
National debt interest
Consumption of fixed capital
Current transfers from Govt.
(Rs in crore)
2,000
(-)200
150
60
70
200
150
Ans. NNP at fc = GDP at mp – Depreciation - Net factor income to abroad-Net
indirect taxes
= 2,000 – 200 – 60 -150
= Rs 1590 crore
Gross National Disposable Income = GDPat mp - Net factor income to abroad
- Net current transfers to abroad.
Or Gross National Disposable Income = 2000 – 60 – (-) 200
= Rs 2140 crore
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2.
Will the following factor income be a part of Net Domestic Product of India? Give
reasons for your answer.
(i) Profit earned by foreign bank from their branch in India.
(ii)Salary received by Indian residents, working in American embassy in India
(iii) Profit earned by Indian company from its branch in Singapore.
Ans. .(i) It is a part of domestic product of India because the branch is within the
domestic territory of India.
(ii)It is not a part of domestic product of India because American embassy in
India is not a part of domestic territory of India.
(iii) Profit earned by Indian company from its branch in Singapore is not a part
of domestic product of India because the branch of Indian company in
Singapore is not a part of domestic territory of India.
Value Based Question OR HOTs
1.
Sale of cars is rising in India. Analyse its impact on GDP
Ans. Increase in sale of cars during the year indicates increase in GDP, in case
there is no change in stock during the year.
2.
Government spends on Mid-day Meal Programme. Analyse its impact on GDP.
Ans. Government expenditure adds to aggregate demand in the economy. It has a
multiplier effect on GDP.
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Topic 22: AGGREGATES RELATED TO NATIONAL INCOME, PRIVATE
INCOME PERSONAL INCOME PERSONAL DISPOSABLE INCOME REAL AND
NOMINAL GDP
BY KUBERA CHANDRA PRADHAN, PGT (ECONOMICS), K V COMMAND HOSPITAL,
KOLKATA
MCQ
1.
Expenditure of the producers on the purchase of capital goods are called:
(a)
Fixed Investment
(b)
Inventory Investment
(c)
Gross investment
(d)
Net Investment
Ans. b
2.
Goods that are ready for use by the final users:
(a)
Intermediate Goods
(b)
Final Goods
(c)
Capital Goods
(d)
Consumer Goods
Ans. b
MLL
1.
Distinguish between Consumption goods and capital goods with examples.
Ans. Consumption goods are consumed by ultimate consumers to satisfy their
needs like T.V.,Shirt etc.
They can be durable and non-durable goods.
Capital goods help in the production of other goods like machinery, plants etc.
It depends upon the use to which the goods put to use should be observed.
2.
Distinguish between Intermediate products and final products with examples.
Ans. Intermediate goods: They are used in the production of other goods or re-sold
in the same year like raw materials,fuels etc. They remain within the
production boundary. Their value are not added in the estimation of national
income as it will create the problem of double counting.
Final goods:They are used for final consumption or final investment like
cloth,bread,machinery etc.They cross the production boundary and their value
is added in the estimation of national income.
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3.
Distinguish between National income and Domestic income:
Ans. Domestic Income: It is the sum of all factor incomes paid to the factors of
production like land,labour,capital and enterprise which are in the form of
rent,wage,interest and profit and mixed income of self employed persons.They
are generated within the domestic territory of a country.
Domestic Income =
Compensation of employees + rent + interest + royalty + profit + mixed income
of self employeds.
National Income:It is the sum of domestic income and net factor income from
abroad(NFIA). The difference between factor income received from abroad
and paid to abroad is called NFIA.
The difference arises due to NFIA.
SAQ
1.
Diffferentiate between stock and flow concept with examples.
Ans.
Stock concept: It is a quantity which is measured at a point of time like as on
1st August2016.
It has no time dimension like population,wealth,water in a tank etc.
Flow concept:It is a quantity which is measured over a specified period of time
like months,week etc.It has time dimension like birth rate, death rate etc.
2.
What is investment? Distinguish between Gross investment and net investment.
Ans.
Investment: It is the net addition made to the existing stock of physical assets
of the economy during a given period of time like structures,equipment etc.
Gross investment:It refers to total addition of capital goods to the existing
stock of capital during a given period.. It includes depreciation which means
normal wear and tear and foreseen obsolence.
Net Investment:On the other hand, it refers to net availability of new capital
after taking into account the wear and tear of existing capital.
It means ( Gross investment –Depreciation)=Net investment.
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3.
Distinguish between GNPmp and NDPfc.
Ans.
GNPmp:It is the money value of all final goods and services produced within
the domestic territory of a country in an accounting year including net factor
income from abroad. It includes consumption of fixed capital and net indirect
taxes.
NDPfc:From GNPmp,if depreciation,net indirect taxes and NFIA is
subtracted,we get NDPfc.
NDPfc=GNPmp-depreciation-NFIA-NIT.
The difference between the two arises due to depreciation,NFIA and Net
indirect taxes.
LAQ
1.
Differentiate between real GDP and Nominal GDP.
Ans.
GDP:It is the money value of all final goods and services produced within the
domestic territory of a country in an accounting year .
Nominal GDP:When goods and services included in GDP are valued at current
prices is called nominal GDP.It is calculated at market prices prevailing in the
year for which GDP is measured.
Real GDP:When GDP is measured at base price or constant prices is called real
GDP.It truly reflects the level of economic growth. It is a better and reliable
index of growth of an economy.
2.
From the following data calculate:
i)Private Income and iii)Personal disposable income.
Ans.
ITEMS
Rs.Crs.
i.Income from domestic product accruing to private sector
ii.Savings of non-departmental public enterprises
200
iii.Current transfers from govt.administrative department
150
iv.Savings of private corporate sector
400
v.Current transfers from rest of the world
vi.Net factor income from rest of the world
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4,000
50
(-)40
vii.Corporation tax
60
viii.Direct personal taxes
140
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Solution:
Private Income=i+iii+v+vi
=4000+150+50+(-)40
=Rs.4160crs.
Personal Disposable Income=Private Income-iv-vii-viii
=4160-400-60-140
=Rs.3560 crs.
Value Based Question OR HOTs
1.
Which two items are to be subtracted from income from domestic product
accruing to private sector to get private income.
Ans.
Income from property and entrepreneurship accruing to govt. administrative
department
-
2.
Savings of non-departmental enterprises.
What should be added to NNPfc/National Income to get net national disposable
income.
Ans.
-Net indirect taxes
-Net current transfers from abroad
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Topic 23: GDP AND WELFARE
BY: From: KAMAL KISHORE, PGT (ECONOMICS), K V CRPF DURGAPUR
MCQ
1.
Real GDP is considered as an index of:
(a)
price level in the economy
(b)
welfare of the people
(c)
profit maximization
(d)
none of the
Ans. (b) welfare of the people
2.
Which of the following makes GDP an inappropriate index of welfare?
(a)
Non-monetary transactions
(b)
(c)
Composition and distributions of (d)
GDP
externalities
all of these
Ans. (D) all of these
MLL
1.
Welfare of the people in an economy is measure in terms of the availability of
average income per person.
Ans.
2.
With every increase in the level of GDP, social welfare definitely increases in the
economy.
Ans.
3.
False. Welfare of the people is measured in terms of the availability of goods
and services per person.
False. If increase in the level of GDP is associated with higher level of income
inequality, social welfare may not increase.
Which things are to be considered for the GDP as welfare indicator?
Ans.
Population should not increase more than resources.
2. Environment should not be harmed.Pollution should not increase.
3. There should be rise in real GDP.
4. Unequal distribution of income should not increase with the increase in GDP.
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SAQ
1.
How are GDP and welfare related to each other?
Ans. Other things remaining constant, higher GDP implies higher welfare. So that
there is a positive relationship between GDP and welfare.
2.
Define externalities.
Ans. Externalities refer to positive and negative impact of an economic activity on
the other without involving any price or penalty.
3.
GNP estimates does not consider the quality of life. Discuss.
Ans. GNP estimates does not consider the quality of life which is an important
constituent of economic welfare. GNP does not say anything about the quality
of life. GNP may be high in a country, but the quality of life of its people may
be very bad. There may be pollution, shortages of essential commodities,
illiteracy, crime, overcrowding and many other inconveniences which may
deteriorate the joy of living. All these, no doubt, will reduce social welfare but
these inconveniences cannot be presumed from the study of GNP. The quality
of life may be better even with lower GNP. But the nature of the quality of the
life cannot be known from the estimated GNP.
LAQ
Explain shortcomings of GDP/GNP as a measure of welfare.
Ans. 1. Many non-market transactions such as the services of housewives increase
welfare but these transactions are not included in the estimation of GNP. This
is so because GNP only includes the transactions which can be evaluated in the
market.
2. GNP estimate does not reflect the capacities of different goods for providing
different levels of satisfaction to the society. For instance, the same amount of
money spends on destructive weapons or on milk production will have the
same effect on national income, but they will provide different levels of
satisfactions to the society.
3. GNP estimate cannot catch the standard of living effect of population.
Mostly, economics welfare is determined by the standard of living of the
people. The same amount of GNP may show a large endowment of capital
goods production or a small endowment of capital goods production. The
welfare in these two cases will not be the same. Other things remaining the
same, the GNP which accompanies the production of more consumptions
goods and less capital goods will show a better welfare content than the GNP
which accompanies the production of more capital goods and less
consumption goods. The standard of living aspect cannot be gauged from the
GNP as such.
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2.
Discuss the effect of externalities on welfare
Ans. There are some externalities which have a direct bearing on economic welfare,
but these are not taken into account in the estimation of GNP. “An externality
is a cost or benefit conferred upon second and third parties as a result of acts
of individual production and consumption.” There are many examples of
externalities. For example, an external benefit can be derived by listening to
the music which is being played by the neighbour in his stereo. An example of
external cost (diseconomies in consumption) is the smoke emitted by the
chimney from the local factory. However, these external cost and benefits
cannot be reflected in the GNP as these cannot be measured in money terms.
The external benefits increases economic welfare but external cost decreases
economic welfare.
Value Based Question OR HOTs
1.
National income Rose by 8% during the year 2011 does it represent the growth of
every Indian discuss.
Ans. No because national income includes the factor income of all the factors of a
nation. It does not analyze the distribution of income of every Indian some
people have very high income while others income might be negative is
negligible thus 8% growth of national income does not mean equal and growth
of every Indian.
2.
GDP calculation do not directly included social causes of environmental damages
for example global warming acid rain stop do you think this course should be
included in GDP why oh why not
Ans. Yes these are negative externalities which affect the well being of a society,
though these cannot be estimated Monetarily but must be assessed with
measuring GDP.
Welfare of the society is affected by environmental damages.
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Topic 24: MONEY-MEANING & FUNCTIONS
BY: From: KAMAL KISHORE, PGT ECONOMICS ,KV CRPF DURGAPUR
MCQ
1.
Money which is accepted as a medium of exchange because of the trust between
the payer and payee is called:
(a)
Full bodied money
(b)
credit money
(c)
fiat money
(d)
Fiduciary money
Ans. (d) Fiduciary money
2.
Money that is issued by the authority of govt.of India is called:
(a)
Fiat money
(b)
full bodied money
(c)
fiduciary money
(d)
credit money
Ans. (a) Fiat money
MLL
1.
What were the difficulties in Barter System?
Ans. These were the Following difficulties in barter system:
2.
•
Problem of double coincidence of wants-it is very rare when owner of
some good could find someone else who wanted his goods and also
having that good.
•
Lack of measuring unit-there is no common measure of value of goods
and services. Evaluation of goods and services is very difficult.
•
Lack of value store-it difficult to store wealth for future use in form of
goods like cattle, wheat, potatoes etc.
•
Lack of standard of deferred payments- it creates problem in entering
in contracts which involve future payments because of lack of any
satisfactory unit over a time period.
Give the Primary function of Money?
Ans. These are the primary function of money-
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•
Medium of Exchange: It means that money acts as a medium for the
sale and purchase of goods and services.
•
Measure of value: money serves as a measured of value in terms of
unit of account.
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3.
Give the Secondary function of Money?
Ans.
These are the secondary function of money•
Store of Value: It implies that store of wealth.
•
Standard of Differed Payment: Differed payment refers to those
payments which are made some time in the future.
•
Transfer of Value: money also serves as a convenient mode of transfer
of value.
SAQ
1.
Explain function of money as a unit of value.
Ans. 1. It is a unit of account in terms of which the value of all goods and services
is measured and expressed.
2. The value of each good or service is expressed as its
price.
3. Prices of all goods and services are expressed in terms of money.
4. This function makes possible of keeping business accounts.
2.
How money acts as a medium of exchange?
Ans.
Money helps in buying and selling of gods and services as it is commonly
accepted measure of value.




3.
Money has solved the problem of double coincidence of wants.
Money reduces time and energy spent in barter system.
Use of money offers freedom of choice.
Explain standard of deferred payments function of money.
Ans. 1. Deferred payments refer to payments made in future.
2. Money as a standard of deferred payments has facilitated market
transactions of buying, selling and borrowing etc.
3. Money makes possible credit transactions to happen when payments are
not to be made immediately.
4. Money is durable and commonly accepted.
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LAQ
1.
Give the concept of narrow and broad definition of money supply.
Ans. High liquidity of money is referred to as narrow definition of money supply.
The most liquid assests are :
(a) Currency in the form of coins and paper notes.
(b) Demand deposits with bank (Only current account)
M1 = Narrow Money
C = Currently with public
DD = Demand Deposit
M1 = C + DD
So,
(a) Currency : it includes coins and paper notes of different denominations. It
is
most liquid asset.
It is a legal tender produced by the central bank of the country. Currency has
general
acceptability and all economic and business transactions can be
performed by it.
(b) Demand Deposit : Deposit which can be withdrawn by the account holder
at any time are called demand deposits. Current account deposit qualify this
condition.
Savings bank accounts do not qualify it, so it is not included in demand deposit.
Broader definition of money supply is based upon lesser liquidity of money.
M2 in addition to M1
includes term deposits which also includes savings bank deposits
M2 = M1 + Term deposit (includes savings bank)
People want to store money as an asset. Time deposits which also include
saving deposits are also liquid. There can also be withdrawn by the account
holder, but the depositor has to lose some interest. This broad money supply
includes currency with the public, demand and time deposit with bank.
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2.
Write a note on Indian monetary system.
Ans. India is at present on the paper currency standard. This standard is referred as
the managed currency standard.
The term monetary standard refers to the type of standard
money used in the economy.
Standard money is the legal money in which the government of the country
discharges its obligation. India’s monetary authority is Reserve Bank of India
(RBI). It has adopted standard currency made of paper. India is on a paper
currency standard. Paper currency is an unlimited legal tender, I.e., it can be
used to settle debts and make payments upto an unlimited account. For making
smaller payments, coins made up of cheap and light metals are used. these
coins are limited legal tenders since they can be used to make payments and
settle debts only upto a limited amount.
The system governing note issue in India is Minimum Reserve System. Paper
currency is not convertible into the precious metal (gold) that is backing it,
hence currency is said to be inconvertible.
Value Based Question OR HOTs
1.
Distinguish between ‘face value’ and ‘intrinsic value of money’.
Ans. Face value refers to what is indicated on a note or a coin, like five rupees or
ten rupees.
Intrinsic value refers to the market value of the material with which money is
made off. In older days, coins were made of gold and silver. Intrinsic value of
a coin then implied the market value of gold or silver that the coin was made
off.
2.
Distinguish between ‘money’ and ‘near money’.
Ans. Money refers to notes and coins or things like cheques which are commonly
accepted as medium of exchange.
Near money refers to all such financial instruments (likes Kisan Vikas Patra)
which are sometimes used like money as a medium of exchange or for the
store of value or for the transfer of value from one individual to the other.
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TOPIC: MONEY AND BANKING
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
MCQs
1. Money which is accepted as a medium of exchange because of the trust between the payer
and payee is called:
(a) Full bodied money (b) credit money (c) fiat money (d) Fiduciary money
Ans. (d)
2. Money that is issued by the authority of govt.of India is called:
(a) Fiat money
(b) full bodied money (c) fiduciary money (d) credit money
Ans. (a)
3. In case of credit money:
(a) Money value=commodity value (b) money value>commodity value
(c) money value<commodity value (d) none of these
Ans. (b)
MLL QUESTIONS
Q.1. What were the difficulties in Barter System?
Ans.These were the Following difficulties in barter system:
•
Problem of double coincidence of wants-it is very rare when owner of some good could
find someone else who wanted his goods and also having that good.
•
Lack of measuring unit-there is no common measure of value of goods and
services.Evaluation of goods and services is very difficult.
•
Lack of value store-it difficult to store wealth for future use in form of goods like cattle,
wheat, potatoes etc.
•
Lack of standard of deferred payments- it creates problem in entering in contracts which
involve future payments because of lack of any satisfactory unit over a time period.
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Q.2. Give the Primary function of Money?
Ans.These are the primary function of money•
Medium of Exchange: It means that money acts as a medium for the sale and purchase of
goods and services.
•
Measure of value: money serves as a measured of value in terms of unit of account.
Q.3. Give the Secondary function of Money?
Ans.These are the secondary function of money•
Store of Value: It implies that store of wealth.
•
Standard of Differed Payment: Differed payment refers to those payments which are
made some time in the future.
•
Transfer of Value: money also serves as a convenient mode of transfer of value.
SHORT ANSWER QUESTIOS
1. Explain function of money as a unit of value.
Ans. 1. It is a unit of account in terms of which the value of all goods and services is measured
and expressed.
2. The value of each good or service is expressed as its price.
3. Prices of all goods and services are expressed in terms of money.
4. This function makes possible of keeping business accounts.
2. How money acts as a medium of exchange?
Ans.* Money helps in buying and selling of gods and services as it is commonly accepted measure
of value.



Money has solved the problem of double coincidence of wants.
Money reduces time and energy spent in barter system.
Use of money offers freedom of choice.
3. Explain standard of deferred payments function of money.
Ans. 1. Deferred payments refer to payments made in future.
2. Money as a standard of deferred payments has facilitated market transactions of buying,
selling and borrowing etc.
3. Money makes possible credit transactions to happen when payments are not to be made
immediately.
4. Money is durable and commonly accepted.
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LONG ANSWER QUESTIONS
Q1:-
Give the concept of narrow and broad definition of money supply.
Ans:- High liquidity of money is referred to as narrow definition of money supply. The most liquid
assests are :
(a) Currency in the form of coins and paper notes.
(b) Demand deposits with bank (Only current account)
M1 = Narrow Money
C = Currently with public
DD = Demand Deposit
So,
M1 = C + DD
(a) Currency : it includes coins and paper notes of different denominations. It is
liquid asset.
most
It is a legal tender produced by the central bank of the country. Currency has general
acceptability and all economic and business transactions can be performed by it.
(b) Demand Deposit : Deposit which can be withdrawn by the account holder at any time
are called demand deposits. Current account deposit qualify this condition.
Savings bank accounts do not qualify it, so it is not included in demand deposit.
Broader definition of money supply is based upon lesser liquidity of money.
M2 in addition to M1
includes term deposits which also includes savings bank deposits
M2 = M1 + Term deposit (includes savings bank)
People want to store money as an asset. Time deposits which also include saving deposits
are also liquid. There can also be withdrawn by the account holder, but the depositor has
to lose some interest. This broad money supply includes currency with the public, demand
and time deposit with bank.
Q2:-
What is money? What are its functions?
Ans:- As per Crowther, money is “anything that is generally accepted as a means of exchange
and that at the same time, acts as a measure and as a store of value”. The important
functions are :
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1. Primary Functions
(a ) Medium of Exchange
(b ) Measure of Value
2. Secondary Functions
(a) Store of Value
(b) Standard of Deferred Payment
( c) Transfer of Value
3. Contingent Functions
(a) Basis of Credit Creation
(b) Liquidity
(c ) Distribution of National Income
(d) Maximum Utilisation of resources
(e) Guarantor of Solvency
HOTS
Q1:-
Name the items not included in narrow money.
Ans:- The items which are not included in narrow money is :
(a) Time Deposit : It is also known as fixed deposit. It cannot be withdrawn before a
stipulated time period. Hence, they are liquid, so it is not included in narrow money.
(b) Currency with Government and Banks : Currency with government is not included
because it is not I circulation, and so is the currency with bank.
(c) Stock of Monetary Gold:- Which is held in reserves as a backing to paper currency is
not included in money supply. It is not permitted to circulate in economy.
Q2:- Write a note on Indian monetary system.
Ans:- India is at present on the paper currency standard. This standard is referred as the
managed currency standard.
The term monetary standard refers to the type of standard money used in the economy.
Standard money is the legal money in which the government of the country discharges its
obligation. India’s monetary authority is Reserve Bank of India (RBI). It has adopted standard
currency made of paper. India is on a paper currency standard. Paper currency is an unlimited
legal tender, I.e., it can be used to settle debts and make payments upto an unlimited account.
For making smaller payments, coins made up of cheap and light metals are used. these coins are
limited legal tenders since they can be used to make payments and settle debts only upto a limited
amount.
The system governing note issue in India is Minimum Reserve System. Paper currency is
not convertible into the precious metal (gold) that is backing it, hence currency is said to
be inconvertible.
Q 3:- Explain the significance of store of value function of money.
Ans. (i) saving in terms of money allows convenient portability. It involves only paper titles
which can be handled anywhere and in any part of the world with just a click of mouse.
(ii) Saving in terms of money allows fractional denominations to any extent. It is unlike
saving in terms of goods which have limited divisibility.
(iii) Saving in terms of money allows a high degree of liquidity which is not possible in case
of goods.
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Topic 26: Money Supply and Credit Creation
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
MCQ
1. Credit creation is also known as
(A) Money creation
(B) Deposit creation
(C) A and B
(D) None of these
Ans. (c) A and (B)
2. Who can change repo rate and reserve rate?
(A) Govt. of India
(B) Finance Minister
(C) State Bank
(D) RBI
Ans. (D) RBI
3. Who regulates money supply?
Ans. RBI (Reserve Bank of India)
4. What is money multiplier?
Ans. Money multiplier or deposit multiplier is 1/LRR.
5. Define money supply. State the components of money supply.
Ans. Money supply means the total stock of money in circulation in an economy at a given point
of time. There are mainly two components of money supply:
1. Currency (Paper money and coins) held by public.
2. Demand deposits against which cheques are issued.
6. Define demand deposits?
Ans. Demand deposits are the deposits made to the bank and are withdrawal through cheques on
demand and these are included in money supply.
7. What are the four measures of money supply?
Ans. M, M2, M3, M4.
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8. Explain the process of money creation by commercial banks. Use numerical example.
Ans. Credit or money creation is an important function of commercial bank.

When commercial bank gives loan to consumers and producers then Credit creation
process starts.

There are two types of deposits with commercial banks

Primary Deposits OR Initial Deposits

Secondary Deposit – arises due to loan given by banks

Credit creation by commercial banks depends upon two factors

Primary Deposits

Legal Reserve Ratio – It is the minimum ratio of deposits legally required to be kept
by the commercial banks with themselves (i.e., SLR) and with the Central Bank (CRR)

LRR = SLR + CRR

SLR – is the amount kept by the Commercial banks with themselves.

CRR – is the amount kept by the Commercial banks with the Central bank.
EXAMPLE
Stage
Deposit in Rs.
LRR in Rs.(10%)
Loans/Credit
Creation in Rs.
Initial
1000
100
900
I Round
900
90
810
II Round
810
81
729
III Round
729
72.9
656.1
-
-
-
-
-
-
-
-
Total
10000
1000
9000
Credit Creation = Initial Deposit *( 1 / LRR)
= 1000 ( 1 / 0.1) = 1000 * 10= 10000.
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9. If money multiplier =10 and initial deposit is Rs 4000. Then find total deposit.
Ans. Total Deposit = Initial Deposit x Money Multiplier
= 4000x10=Rs 40,000
10. In a particular year RBI instructed the commercial banks not to advance loan to people
whose annual income is above Rs 6 lakh. Is it justified . Why?
Ans. Justification depends on phases of trade cycle.
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Topic 27 : CENTRAL BANK ITS FUNCTION
BY: Dr. KALPANA CHATTOPADHYAYA, PGT (ECONOMICS), K.V.
BARRACKPORE (ARMY)
MCQ
1.
In order to control credit in the country, the RBI may_______________.
(a)
Buy securities
market.
in the
open (b)
(c)
Reduce cash reserve ratio.
(d)
Sell securities in the open market.
Reduce bank rate.
Ans. b) Sell securities in the open market.
2.
Who is the fiscal agent and adviser to government in monetary and financial
matters in India?
(a)
SBI
(b)
IDBI
(c)
ICICI
(d)
RBI
Ans. d) RBI
MLL
1.
Define central bank.
Ans. The central bank is the apex institution of a country’s monetary system. The
design and the control of the country’s monetary policy is its main
responsibility. India’s central bank is Reserve bank of India.
2.
What are the functions of central bank?
Ans. The functions of central bank are as follows
1.
2.
3.
4.
Currency authority
Banker, Agent and adviser to the government
Banker’s bank and supervisor.
Controller of money supply and credit.
Principal instruments of monetary policy or credit control of the central
bank of a country are broadly classified as
A. Quantitative instrument as,
i. Bank rate
ii. Open market operations
iii. Varying Reserve requirements
B. Qualitative instruments as,
i. Imposing margin requirement on secured loans
ii. Moral suasion
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3.
iii. Selective credit controls.
What is Legal Reserve Ratio or Varying Reserve requirement? Explain its
components.
Ans. The Legal Reserve Ratio or Varying Reserve requirement is fixed by the Central
bank. Banks are obliged to maintain reserves with the Central bank, which is
known as Legal Reserve Ratio or Varying Reserve requirement.
It has two components –
(1) Cash Reserve Ratio: - It refers to the minimum percentage of a commercial
bank’s total deposit which it is required to keep with the central bank as
reserve.
(2) Statutory Liquidity Ratio: - It refers to the minimum percentage of net total
demand and time liabilities, which commercial banksare required to maintain
with themselves.
SAQ
1.
How does the central bank control the availability of credit by open market
operation?
Ans. Open market operation is the policy of the central monetary authority to sell
and buy the government securities in the market.
RBI purchases government securities from commercial banks and general
public in a bid to increase the stock of high powered money in the economy.
Similarly, RBI sells the government securities to commercial banks and general
public in a bid to decrease the stock of high powered money in the economy.
2.
Explain “Banker’s Bank” function of central bank.
Ans. Central bank act as banker to all other banks in the country just as commercial
banks act as banker to general bank public. It performs following function:
a) Making policies and regulation for commercial banks.
b) Maintaining cash reserve as deposit by the commercial banks.
Providing financial assistance to commercial banks during crisis.
3.
What is bank rate policy? How does it work as a method of credit control?
Ans. Bank rate is the rate at which central bank lends funds as a “lender of last
resort” to banks, against approved securities or eligible bills of exchange.
The effect of a change in the bank rate is to change is the cost of securing funds
from the central bank. And increase in the bank rate increases the cost of
borrowing from the central bank. This will reduce the ability of banks to create
credit. A rise in the bank rate will then cause the commercial banks to increase
the rates at which they lend. This will then discourage business man and others
from taking loans. Thus it will reduce the volume of credit. A decrease in the
bank rate will have opposite effect.
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LAQ
1. Distinguish between central bank and commercial bank.
Ans.
S.N.
CENTRAL BANK
COMMERCIAL BANK
1.
It is the apex financial institution of It is a part of the banking system
the country.
of the country.
2.
It doesn’t deal with the public.
It directly deals with the public.
3.
It is the only financial institution
which has the right to issue
currency.
It don’t have the power to issue
currency.
4.
It carries out banking function of
the government and acts as a
banker’s bank and supervisor.
It doesn’t perform any such
functions.
5.
It is generally owned and
governed by the government.
It may be owned by the
government or by the private
entrepreneurs.
6.
It doesn’t aim t a profit, though it
may earn huge profits.
It treats profit making as their
primary objectives.
7.
It controls credit.
It creates credit.
8.
It gives advice on monetary and
fiscal matters.
It has no advisory responsibility
towards the state/country.
2. Explain the currency authority function of central bank.
Ans.

The central bank has the sole monopoly to issue currency notes.
Commercial banks cannot issue currency notes. Currency notes and cons
issued by the central bank are the legal tender money.

Legal tender money is one, which every individual is bound to accept by
law in exchange for goods and services and in the discharge of debts.

Central bank has an issue department, which is solely responsible for the
issue of notes and coins.

However, the monopoly of the central bank to issue the currency notes
may be partial in certain countries.
For example, In India, one rupee notes are issued by the government and all
other notes are issued by the Reserve Bank of India.
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Value Based Question OR HOTs
1.
What is a main reason for giving monopoly right of note-issue to the central bank?
Ans. The main reason for giving monopoly right of note-issue to the central bank are
as follows:
1) It brings uniformity in note circulation.
2) It gives distinctive prestige to the note issue. As a result, public develop
faith in the currency.
3) It enables the government to have supervision and control over the
supply of money in the country.
It enables the central bank to exercise the control over the creation of credit by
the commercial bank.
2.
What is the significance of centralized cash reserves with central bank?
Ans. The significance of centralized cash reserves with central bank are as follows:
i.
Banks get financial accommodation when required.
ii.
Central bank gets opportunity to exercise control over the entire banking
system of the country.
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Topic 28: Aggregate Demand and Its Components, Propensity To
Consume And Propensity To Save
BY: Mrs.Sheela Yadav, PGT (Economics), KV Burdwan
MCQ
1.
If the value of MPS is 0.25, what is the value of multiplier?
(a)
4
(b)
2
(c)
5
(d)
4.5
Ans. 4
2.
What is the value of MPC when MPS =0?
(a)
1
(b)
0
(c)
∞
(d)
4
Ans. 1
MLL
1.
What is aggregate demand?
Ans. It refers to the total demand for goods and services in an economy during an
accounting year
2.
Why can the value of MPC not greater than one?
Ans. The value of MPC cannot be greater than one because change in consumption
cannot be more than change in income.
3.
Define MPS?
Ans. It is a ratio of change in saving to change in income.
MPS=∆S/∆Y
SAQ
1.
Briefly explain the components of aggregate demand?
Ans. Aggregate demand is the total demand for goods and services in the economy.
There are four components of Aggregate demand (AD)
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AD=C+I+G+(X-M)
2.
What is consumption function?
Ans. The relationship between consumption and income is called consumption
function.
consumption function shows the relationship between consumption and
income in terms of equation, it is written as under C=f (Y)
3.
Distinguish between MPC and MPS?
Ans. Marginal propensity to consume is the ratio of change in consumption to
change on income.
Symbolically, MPC= ∆C/∆Y
Where ∆C = change in consumption
∆Y= change in income
Marginal propensity to save is the ratio of change in saving to change in
income.
Symbolically, MPS= ∆S/∆Y
Where ∆S = change in saving
∆Y= change in income.
LAQ
1.
Explain the concept of inflationary gap. What is its impact on output, employment
and price level in the economy?
Ans. In a situation of excess demand, the level of output does not rise. Infact it
cannot raise because factors are already full employed. Output level remains
constant corresponding to the full employment level. Only price tend to rise.
Impact:
1- When AD increases beyond its full employment level, output remains
constant. But the pressure on demand on the existing supply starts
mounting up.
2- Mounting pressure on demand on the existing output causes a rise in
the prices.
3- Excess demand also generates pressure of demand on existing
resources, further it cause rise in the general price level.
2.
Give the relationship between multiplier, MPC and MPS?
Ans. There is a direct relationship between multiplier and MPC and inverse
relationship between multiplier and MPS.
At equilibrium, we have
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Y= C+I
We use the consumption function to substitute C with the expression
C¯ +b y, to give
Y=C ¯ +b y+I
Y-b Y = C¯ +I
Or Y (I-b)= C¯+I
Or Y= 1/(1-b)( C¯ +I)
Since b is nothing but the MPC, we have
Y= 1/(1-mpc)( C¯ +I)
To find out the effect of a change in investment on income, we differentiate
the equation to get:
MPS=∆S/ ∆Y= 1/1-mpc. ∆I
Or ( change in income) =(Multiplier)X ( Change in investment)
∆Y/ ∆I = 1/1-MPC= 1/MPS
The multiplier is equal to 1/1-MPC. It is the number by which the change in
investment must be multiplied in order to determine the resulting change in
output.
As we can see, the size of the multiplier depends on the value of the MPC.
Value Based Question OR HOTs
1.
What will be the value of multiplier if entire additional income is converted into
additional consumption?
Ans. In such a situation ∆C=∆Y ( change in consumption= change in income )
Symbolically, MPC= ∆C/∆Y=1
Accordingly, K would be,
K= 1/1-mpc= 1/1-1=1/0=∞
The multiplier value would tend towards infinity.
2.
Why is there equilibrium when AS=AD?
Ans. Because in such a situation, all that is produced in the economy is fully
purchased. The producers do not suffer{:
1- The burden o[[[f unwanted supplies ( unsold stock)
2- The loss of unfulfilled demand (due to lack of stocks).
When AS=AD, actual stocks with the producers = desired stocks with
the producers.
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Topic 29: Short Run Equilibrium of Output , Investment Multiplier and Its
Mechanism
BY: Seema Marandi, PGT (Economics), KV No. 1 Kancharapara
MCQ
1.
2.
If C = 250 and Y= 1000, the average propensity to consume will be
(a)
750
(b)
0.75
(c)
250
(d)
0.25
Ans.
0.25
Multiplier can be estimated as
(a)
1/MPS
(b)
1/1-MPS
(c)
1/1-MPC
(d)
Both A and C
Ans.
Both A and C
MLL
1.
What is equilibrium income?
Ans.
2.
Define involuntary unemployment.
Ans.
3.
Equilibrium income is that level of income where AS=AD, but full employment is
not achieved.
Involuntary unemployment is a situation in which a worker is willing to work at
current rate of wages but does not get work.
What is investment multiplier?
Ans.
Investment multiplier is the ratio of a change in income to a given change u
investment.
SAQ
1.
Explain natural rate of unemployment.
Ans.
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It refers to unemployment which is bound to exist even when labour market is in
a state of equilibrium. It occurs largely due to time required in shifting from one
job to another and time required in adjusting to change in technology.
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2.
Explain the relationship between investment multiplier and marginal propensity to
consume.
Ans.
There is direct relationship between investment multiplier and marginal
propensity to consume. Higher the marginal propensity to consume, greater is
the size of multiplier. On the contrary, lower the marginal propensity to
consume, smaller is the size of multiplier. In fact the value of multiplier is
determined by the value of marginal propensity to consume.
K= 1/1-MPC
Where K= multiplier and MPC= marginal propensity to consume.
3.
If disposable income is rs. 1000 crore and consumption expenditure is rs. 750 crore , find
out average propensity to save.
Ans.
S=Y-C = Rs. 1000 Crore –Rs. 750 Crore
= Rs. 250 Crore
APS = S/Y
= Rs. 250 Crore / Rs. 100 Crore = 0.25
LAQ
1.
Explain the concept of underemployment equilibrium with the help of a diagram. Show
on the same diagram the additional investment expenditure required to reach full
employment equilibrium.
Ans.
Underemployment equilibrium refers to the situation of equality between AS
and AD when their level is less than that of full employment.
Full employment equilibrium
AD =AS
AD 1
expenditure
F
R
AD 2
E
K
S
equilibrium


Under employment
45 ®
L
L1
Income /output
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Underemployment equilibrium level of income= OL
equilibrium level of income= OL1
, while full employment
In order to achieve full employment equilibrium, deficiency of demand must be
corrected through additional investment expenditure. In the diagram , deficiency
of AD = FK =RS
Thus RS amount of additional investment is required to reach the level of full
employment.
2.
An increase in investment leads to total rise in national income by RS. 500 Crores. If MPC
is 0.9 what is the increase in investment? Calculate.
Ans.
Increase in national income = Rs. 500 crore
MPC = 0.9
We know ,
Multiplier (K) = 1/1-MPC
= 1/1-0.9
=1/1-0.1
= 10
We also know ,
K = ∆Y/∆I
∆I=∆Y /K
= 500 /10
=50
Increase in investment = Rs. 50 Crore
Value Based Question OR HOTs
1.
Shouldn’t greater saving imply greater investment and greater flow of goods and
services?
Ans.
2.
Relationship between greater saving and greater investment holds good on poor
economies where that is lacking in the capacity to produce or aggregate supply
in relation to aggregate demand. It does not hold good in affluent economies
where what is lacking is aggregate demands or AD in relation to aggregate
supply. In these economies, greater saving would mean lesser consumption,
lesser demand and lesser production even when capacity to produce exist in
Economy.
Does an excess of AD over AS always implies a situation of inflationary gap?
Ans.
No, excess of AD over AS does not always imply a situation of inflationary gap.
Inflationary gap occurs only when AD is more than AS corresponding to the full;
employment level of output.
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Topic 30: ASSIGNMENT ON MEANING OF FULL EMPLOYMENT AND
INVOLUNTARY UNEMPLOYMENT
BY: From: RAMESH NIMAI, PGT (ECO.), K.V.NO. 1 AFS KALAIKUNDA
MCQ
1
2
There is full employment in an economy, when there exists no ________on current wages
(a)
Involuntary unemployment
(b)
Voluntary unemployment
(c)
Disguised Unemployment
(d)
None of these
Ans.
(a)Involuntary unemployment
Which of the following is true in case of classical theory of employment ?
(a)
Economy remains in full employment. (b)
No possibility of over production
or underproduction
(c)
Both (a) and (b)
none of these
Ans.
(c) Both (a) and (b)
(d)
MLL
1
Is the full employment is a natural stage of equilibrium ?
Ans.
2
What is meant by effective Demand?
Ans.
3.
No, According to Keynes, the equilibrium is normally decided before the stage of
full employment and underemployment is a normal situation.
The level of aggregate demand required to achieve full employment equilibrium is
called effective demand.
What is excess demand in macroeconomics?
Ans.
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Excess demand refers to a situation in which the Aggregate Demand is more than
the Aggregate Supply at the full employment level of output.Here, Actual
Aggregate Demand is greater than required Aggregate Demand.
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SAQ
1.
Define full employment Equilibrium.
Ans.
2.
Full employment equilibrium refers to the situation where Aggregate Demand is
equal to Aggregate Supply and all those who are able to work and willing to work
at the prevailing wage rate get work.
Diiferentiate between full employment and underemployment equilibrium.
Ans.
Full employment equilibrium
Underemployment equilibrium
1. Situation where AD=AS and all 1. Situation where AD=AS but all those
those who are willing to work get who are able to work and willing to
work.
work do not get work.
2. Full employment equilibrium 2.Under employment equilibrium does
corresponds to the highest possible not correspond to the highest possible
level of output in the economy under level of output in the economy.
the given circumstances.
3.Attempt to increase production 3. Attempt to increase production
beyond full employment equilibrium beyond underemployment does not
causes inflationary gap.
cause inflationary gap.
3.
Explain the distinction between voluntary and involuntary unemployment.
Ans.
(i) Voluntary unemployment is a situation in which a worker is not willing to work
at the current wage rate. On the other hand Involuntary unemployment is a
situation in which a person is willing to work at current wage rate but does not get
work.
(ii) Voluntary unemployment is not considered in the estimation of total
unemployment in a country. While, Involuntary unemployment is considered in
the estimation of total unemployment in the economy.
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LAQ
1.
Explain the meaning of underemployment equilibrium with the help of a diagram. Explain
two measures by which full employment equilibrium can be reached.
Ans.
Underemployment equilibrium refers to the situation where AD=AS but all those
who are able to work and willing to work at the prevailing wage rate do not get
Work.
Underemployment equilibrium occurs owing to deficient demand. In the above fig.
E is the point of underemployment equilibrium, F is the point of full employment
equilibrium, AD1(Aggregate demand at underemployment) and AD( aggregate
demand at full employment). Deficient demand is equal to FK
Accordingly, this can be addressed by way of increasing AD.
Two measures:
(i)
Public expenditure should be increased. This will act as an injection of
demand into the system and is expected to induce private expenditure.
Accordingly, AD is expected to rise and the situation of full employment
equilibrium will be raised.
(ii)The Central bank should decrease the repo rate .A decrease in repo lower the
market rate of interest, promoting a rise in demand for credit, an expansion in the
demand for credit leads to a rise in aggregate demand. Accordingly the situation
of full employment will reached
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2.
Explain in brief classical theory of employment and Keynesian theory of employment.
Ans.
(i) Classical theory of employment:
The main points of this theory are as follows:
a) Full employment is the natural state of the economy because there can
never be the deficiency of aggregate demand.
b) Unemployment first does not arise and if it arises then it is temporary
because wage rates are always flexible in the free market price system
which will automatically remove unemployment.
c) The theory is based on Say’s law of market according which supply creates
its own demand. Therefore there is no question of surplus production as
the production and supply of a good and services create an equal demand
for these goods and services.
(ii)
Keynesian theory of employment.
Ans. Classical theory was proved wrong during the period of great depression as
it could not answer the question raised by it. Keynes who was a British Economist,
started his carrier as a supporter of classical economics but when in 1930 all
assumption of classical economics proved wrong he left it .During the period of
great Depression he published many articles and 1936 published his great book
‘The General Theory of Employment ,Interest and Money’.
Keynes’s theory of employment is a part of Modern Macroeconomics Analysis.
According to him level of employment in economy depend on the size of effective
demand which is decided by the equilibrium of aggregate demand and aggregate
supply. It is the aggregate demand which is more important. So if the
Economy likes to increase the level of employment has to increase the AD, which
in turn will increase the effective demand.
Value Based Question OR HOTs
1.
What happens if AD>AS prior to full employment level of employment ?
Ans.
2.
It is a state of disequilibrium in economics. When AD>AS, producers have to cater
to demand out of their existing stock of goods, implying that the desired level of
stocks will decrease. It implies greater production and therefore there is increase
in AS. This process continues till equilibrium is struck between AD and AS. (ch)
Does full employment occur when AD=AS or S=I? Study 14-15/186
Ans.
It is not necessary that full employment occur when AD=AS or S=I. It means that
full employment may or may not occur at AD=AS or S=I. (ch)
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TOPIC 31: Government Budget- Meaning and Components, Revenue
Receipts and Capital Receipts
BY: ADITYA BHARDWAJ, PGT (ECONOMICS), K.V. NFR MALIGAON
MCQ
1.
Which one of the following is a tax revenue(a)
Fines
(b)
Interest received
(c)
Excise duty
(d)
Donations received
Ans. (C) Excise duty
2.
Which one of the following is an indirect tax(a)
Corporation Tax
(b)
Value Added Tax
(c)
Wealth Tax
(d)
Income Tax
Ans. (B) Value Added Tax
MLL
1.
Explain any three major sources each of revenue receipts and capital receipts.
Ans. Revenue receipts- a) Tax receipts- direct tax such as income tax, corporation tax
and indirect tax such as excise duty, value added tax.
b) non-tax receipts- dividends on investment in PSUs, interest received, fee and
fine etc.
Capital receipts – Recoveries of loans, borrowings from the market or other
sources, receipts from disinvetment.
2.
Distinguish between direct tax and indirect tax. Give example of each.
Ans.
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DIRECT TAX
INDIRECT TAX
1. These are the taxes the final
burden of which falls on the
person who is liable to pay the
tax to the government.
2. These taxes are progressive in
nature.
3. The final burden of tax cannot be
shifted to others.
4. Ex- income tax
1. These are the taxes whose final
burden does not fall on the
person who is liable to pay the tax
to the government.
2. These taxes are regressive in
nature.
3. The final burden of taxation can
be shifted to others.
4. Ex- value added tax
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3.
Explain any one objective of government budget.
Ans. Economic growth- Government budget can promote economic growth by
investing in public sector undertakings, by giving tax concessions to the
investors, providing subsidy on inputs to encourage production of goods and
services. It can also allocate funds for creation of employment opportunities
and human capital formation.
SAQ
1.
What are the components of capital receipts of the government?
Ans. Following are the components of capital receipts: a.
Receipts increasing liability of the government- borrowing from the
market, RBI and foreign countries.
b.
Receipts reducing assets of the government- disinvestment in public
sector undertakings, recoveries of loans by the government.
2.
Explain the role of government budget in redistribution of resources.
Ans. Government budget helps in redistribution of wealth and income by the means
of taxation and subsidy. In the budget, progressive taxation is adopted to get
more tax from well-off section and these funds can be used for subsidies and
provision of health, education, housing facilities for the down trodden section
of the society.
3.
What are non-tax receipts of the government? Give examples.
Ans. Non-tax receipts are those revenue receipts which are received from sources
other than taxes. Some of the non-tax receipts area) Dividends received from public sector enterprises.
b) Fees- it is a payment paid for the services provided by the government e.g.
passport fee, license fee.
c) Grants or donations are often received at the time of natural calamity from
the people or foreign institutions.
.
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LAQ
1.
Differentiate between capital receipts and revenue receipts in a government budget.
Ans.
REVENUE RECEIPTS
CAPITAL RECEIPTS
These receipts neither creates These receipts either create liability
liabilities nor does it reduces assets. or reduce assets.
These are of regular or recurring These are of non-recurring nature.
nature
It has two components- tax and non- It has two components- first which
tax receipts
reduces assets and second which
creates liability.
Example- income tax, interest
received, donations, fee, fines.
2.
Example- recoveries of loans,
disinvestment.
Government
Borrowings.
Giving reasons, categorize the following into revenue receipts and capital receipts1.
Dividends on investment made by government
2.
Goods and services tax
3.
Sale of share in BSNL
Ans.
1.) Dividends received on investment made by government is a revenue
receipts, as it is a regular source of revenue and neither increase liability
nor decrease assets of the government.
2.) Goods and services tax is the indirect tax imposed on goods and services by
the government therefore it is a revenue receipt. It does not change asset
or liability of the government.
3.) sale of share in BSNL, a public sector undertaking, is disinvestment. This
would reduce asset of the government that is why it is a part of capital
receipt of the government budget.
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Value Based Question OR HOTs
1.
Tax on essential items has been reduced and tax on luxury goods has been increased.
Which economic value does it reflect? Explain.
Ans. Reduction in tax of essential goods by the government would benefit poor the
most as their consumption of such goods will increase, so the welfare. Higher
tax revenue collected from increasing tax on goods consumed by rich could also
be used for providing subsidies and facilities to the weaker section of the society
and development of the country. So, the resources can be re-distributed to
promote equality in the country.
2.
Suppose there is economic recession in an economy, explain how government
budget could play a role in curbing the situation?
Ans. Government can allocate more funds for developmental and infrastructure so
as to boost investment in the economy. Subsidies can also be provided on inputs
used by firms. Provision for tax concessions and exemptions in the budget could
also encourage the firms to produce more as well as increase the disposable
income of consumers thereby increasing their demand. In this way economy
can move out of economic recession.
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Topic 32: Government Budget: RE, CE, Meassures of Government Deficit,
RD, FD, PD
BY: Dr. Ashish kumar, PGT (ECO), K.V. NAGAON (GUWAHATI REGION
MCQ
1.
Revenue deficit can be managed through:
(a)
Borrowing from RBI
(b)
Disinvestment
(c)
Borrowing from general public.
(d)
All of the aboe
Ans. d
2.
Interest payment are included in:
(a)
Revenue deficit
(b)
Fiscal deficit
(c)
Primary deficit
(d)
None of these
Ans. b
MLL
1.
Define revenue deficit.
Ans. Revenue deficit is the excess of total revenue expenditure over total revenue
receipts.
Revenue Deficit= revenue receipt-revenue expenditure.
2.
What problem can the fiscal deficit create?
Ans. Fiscal deficit creates these problem:
1. It leads to rise in public debt.
2 fiscal deficit leads to inflation.
3. hampers the future growth.
4.foreign dependence.
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3.
What are the two ways of reducing revenue deficit ?
Ans. Two ways of reducing revenue deficit are the following:
1. Borrowing from general public ,RBI or ret of world.
2. Disinvestment.
SAQ
1.
Distinguish between direct tax and indirect tax
Ans.
Direct tax
Indirect tax
1.Direct taxes are levied
individuals and companies.
on 1.indirect taxes are levied on goods
and services.
2. The burden of direct tax cannot be 2. The burden of an indirect tx can be
shifted ,i.e. impact and incidence is shifted ,i.e. impact and incidence is
on the same person.
on different persons.
3. They are generally progressive in 3. They are generally proportional in
nature .
nature.
4.They have limited reach as they do 4.They have wide coverage as they
not reach all the section of the reach all the sections of the society.
economy.
2.
State three sources each of revenue receipts and capital receipts in government
budget.
Ans. Sources of revenue receipts in government budget :
1. Direct and indirect tax
2. Fees and fines.
3. Profits from PSU.
Sources of capital receipts in government budget:
1.Recoveries of loan from state government, U.T. and other parties.
2.Borrwing from market, RBI and other sources.
3.Disinvestment.
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3.
What is the importance of government budget?
Ans. The following is the importance of government budget:
1.It reflects fiscal policy of the government, giving a direction to the pace of
growth and development of the country.
2.Government budget is an important instrument of fiscal policy that is often
used to correct the situation of inflationary gap and deflationary gap in the
economy.
3.Government budget reflect the effort of government to achieve equality in
distribution of income and wealth.
LAQ
1.
1.Giving reason ,categories the following into revenue receipts and capital receipts
I.
II.
III.
IV.
V.
VI.
Ans.
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Loans recovered from public sector enterprises.
Sale of shares held by government in a PSU.
Profits of LIC .
Amount borrowed from japan for construction of metro.
License and fees received by the government in the year 2014-15
Financial help from Microsoft for the victims of flood affected areas.
I.
Loans recovered from public sector enterprises: It is a capital receipt as
it reduces assets of the government.
II.
Sale of shares held by government in a PSU: It is a capital receipts as it
reduces assets of the government.
III.
Profits of LIC: It is revenue receipt as it neither creates any liability nor
reduces any asset of the government.
IV.
Amount borrowed from japan for construction of metro: It is capital
receipt as it create liability for the government.
V.
License and fees received by the government in the year 2014-15:It is
revenue receipt as it neither creates any liability nor reduces any asset
of the government.
VI.
Financial help from Microsoft for the victims of flood affected area: It
is revenue receipt as it neither creates any liability nor reduces any asset
of the government.
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2.
Giving reason categories the following into revenue expenditure and capital
expenditure
i.
ii.
iii.
iv.
v.
vi.
Ans.
Salary paid to army officer
Repayment of loan taken from world bank
Grant given by central government to state government.
Pension paid to retired government employe.
Interest paid on national debt
Loan given to union territories.
i.
Salary paid to army officer: It is revenue expenditure as it neither
creates any asset nor reduces any liability of the government.
ii.
Repayment of loan taken from world bank: It is capital expenditure as
it reduces the liability of the government
Grant given by central government to state government: It is revenue
expenditure as it neither creates any asset nor reduces any liability of
the government
Pension paid to retired government employee: It is revenue
expenditure as it neither creates any asset nor reduces any liability of
the government.
iii.
iv.
v.
Interest paid on national debt: It is revenue expenditure as it neither
creates any asset nor reduces any liability of the government
vi.
Loan given to union territories:It is capital expenditureas it increases the
assets of the government.
Value Based Question OR HOTs
1.
Are fiscal deficit necessarily inflationary?
Ans. It may be or not be, depending on the possibility adjustment of output by the
firms. If
Firms are able to produce more quantities against the rise in aggregate demand
(caused by fiscal deficit) then it need not be inflationary. But if firms are not able
to increase output, it will surely result to be inflationary.
2.
How good is disinvestment as a means to tackle revenue deficit in India?
Ans. Disinvestment occurs when the government sells its stake to the private
entrepreneurs. This is good means of tackling revenue deficit, provided the
disinvestment is related to such government companies which are running into
losses. To the extent ,revenue deficit is funded through disinvestment, need for
borrowing is reduced . Lesser borrowing are a sign of financial prudence of the
government which is good for growth and stability of an economy.
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BALANCE OF PAYMENT AND FOREIGN EXCHANGE DETERMINATION
BY: ABHISHEK CHATURVEDI, PGT ECONOMICS, KV NHPC SINGTAM
MCQ
1.
Which of the following is not an export?
(a)
Sales of cars abroad
(b)
Purchase of foreign components
(c)
Students from abroad studying in
your country
(d)
Sales of financial services overseas
Ans. b
2.
A demand switching policy to improve the trade position could involve:
(a)
Higher interest rates
(b)
Higher income tax
(c)
Tariffs
(d)
Reduced government spending
Ans. c
3.
Free trade is based on the principle of:
(a)
Comparative advantage
(b)
Comparative scale
(c)
Economies of advantage
(d)
Production possibility advantage
The exchange rate should adjust to
equate the supply and demand of
the currency
The Balance of payments will always
equal the government budget
Ans. a
4.
In a floating exchange rate system:
(a)
The government intervenes to
influence the exchange rate
(b)
(c)
The Balance of Payments should
always be in surplus
(d)
Ans. b
5.
The Balance of payments equals:
(a)
(c)
The difference between
household spending and income
A measure of the value of
economic transactions between
residents of a ountry and the rest
of the world
(b)
(d)
The difference between
government spending and income
The difference between inflation
and unemployment
Ans. C
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6.
If there were a balance of payments deficit then in a floating exchange rate system:
(a)
(c)
The external value of the
currency would tend to fall
The injections from trade are
greater than the withdrawals
(b)
The external value of the currency
would tend to rise
(d)
Aggregate demand is increasing
Ans. a
7.
Which of the following items raises the supply of foreign exchange?
(a)
Imports of good from China.
(b)
Indian student going to USA for
MBA
(c)
Donation of 50 Million dollar
received from Microsoft
(d)
Purchase of land in England
Ans. c
8.
Depreciation of domestic currency leads to rise in(a)
Exports
(b)
Imports
(c)
both a and b
(d)
Nither a nor b
Ans. b
9.
Inflow of foreign exchange is recorded on the side(a)
Credit
(b)
Debit
(c)
Either a or b
(d)
Neither a nor b
Ans. a
10. Export and import of goods is also known as(a)
Invisible trade
(b)
Visible trade
(c)
One-sided transactions
(d)
Unrequited transfers
Ans. b
Very Short Answer type Question
1. Define foreign exchange rate.
Ans: Foreign exchange rate is the rate at which currency of one country can be exchanged for
currency of another country.
2. What do you mean by Foreign Exchange Market?
Ans: The foreign exchange market is the market where international currencies are traded for one
another.
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3. What is meant by Fixed Exchange Rate?
Ans: Fixed Rate of exchange is a rate that is fixed and determined by the government of a country
and only the government can change it.
4. What is equilibrium rate of exchange?
Ans: Equilibrium exchange rate occurs when supply of and demand for foreign exchange are equal
to each other.
5. Define flexible exchange rate.
Ans: Flexible rate of exchange is that rate which is determined by the demand and supply
of different currencies in the foreign exchange market.
6. What is meant by appreciation of currencies?
Ans: Appreciation of a currency occurs when its exchange value in relation to currencies of other
country increases.
Q7. What is meant by balance payment?
Ans. The balance of payment of a country is a systematic record of all economic transactions
between the residents of the reporting country and the residents of foreign countries during a
given period of time.
Q8:- What is meant by balance of trade?
Ans. Balance of trade takes into account only those transactions arising out of the experts and
imports of goods(the visible items).It does not consider the exchange of services.
Q9. Give two examples of invisible items of balance of payments.
Ans. The two examples of invisible items of balance of payments are:1) Services like shipping, insurance banking
2) Expenditure by tourists.
Q10. Name the two accounts of balance of payment.
Ans. 1) Current account
2) Capital account
Q11. What type of activities are recorded in the current account of balance of payment?
Ans. The current account records imports and exports of goods and services and unilateral
transfers.
Q12. What type of transactions are recorded in the capital account of balance of payments?
Ans. The capital account records all international transactions that involve a resident of the
domestic country changing his assets with a foreign resident or his liabilities to a foreign resident.
Q13. What are unilateral transfers or unrequited transfers?
Ans. Unilateral transfer are receipts which residents of a country make without getting anything
in return eg. Gifts etc.
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The net balance of visible trade, invisible trade and of unilateral transfers is the balance on current
account.
Q14. Are exports and imports recorded as positive or negative items in foreign exchange?
Ans. Exports cause an inflow of foreign exchange into the country so they are entered as positive
items. Imports cause an outflow, so they are entered as a negative item.
Q15. Give an example of private unrequited transfers.
Ans. Gifts that domestic residents receive from or make to foreign residents eg. An Indian resident
working in Dubai sending back money to their relative in India.
Q16. Give an example of official unrequited transfers.
Ans. Receipt of or giving of foreign aid from development countries to developing countries.
Q17. What is meant by ‘ Portfolio Investment’ in the capital account transactions?
Ans. Portfolio Investment is the acquisition of an asset that does not give the purchaser control
over the asset. For eg. Investment in the purchase of shares in a foreign company or of bonds
issued by a foreign govt.
Q18. What is meant by ‘Direct Investment’ in the capital account transactions?
Ans. Direct investment is the act of purchasing an asset and at the same time acquiring control of
it. For example, acquisition of a firm in one country by a firm in another country.
Short Answer Questions :Q1. Differentiate between balance of payment and balance of trade.
Ans.
Balance of Trade
1. Balance of trade is a record of
only visible items i.e. exports and
imports of goods.
2. Balance of trade is a narrower
concept as it is only a part of the
balance of payments account.
3. Balance of trade can be in a
deficit, surplus or balanced
Balance of Payments
1. Balance of payments is a record of
both visible items (goods) and
invisible items (services)
2. Balance of payments is a wider and
more useful concept as it is a record
of all transactions in foreign
exchange.
3. Balance of payments must always
balance
Q2. Explain the components of capital account
Ans. It records are international transactions that involve a resident of the domestic country
changing his assets with a foreign resident or his liabilities to a foreign resident.
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Various forms of capital account transactions :1) Private Transactions :- There are transactions that effect the liabilities and assets of
individuals.
2) Official Transactions :- Transactions affecting assets and liabilities by the govt. and its
agencies.
3) Portfolio Investment :- It is the acquisition of an asset that does not give the purchaser
control over the asset.
4) Direct Investment :- It is the act of purchasing an asset and at the same time acquiring
control of it. The net value of the balance of direct and portfolio investment is called the
balanced on Capital Account.
Q3. Differentiate between autonomous and accommodating items.
Ans.
Autonomous Items
Accommodating Items
1. Autonomous items refer to 1. This refers to transactions that occur
international economic transactions because of other activity in the BOP, such
that take place due to some as government financing.
economic motive such as profit
maximization. These transactions
are independent of the state of the
country’s BOP.
2. These items are often called above 2. These items are called below the line
the line items in the BOP.
items
Q4. Describe the cause for disequilibrium in the BOP.
Ans. The cause of disequilibrium in the BOP are :1.) Economic Factors :- Large scale development expenditure that may cause large imports
Cyclical fluctuations in general business activity such as recession or depression. High
domestic prices may result in increase in imports. New sources of supply, new and better
substitutes to existing products and changes in costs will bring about a change in trade
flows and hence BOP over a period of time.
2.) Political Factors :- Political instability can cause large capital outflows and reduce the
inflow of foreign capital.
3.) Social Factor :- Changes in tastes, preferences and fashion may affect imports and
exports and hence the balance of trade.
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Long Answer Type QuestionsQ-1Explain about main components of balance of payment?
Structure of Balance of Payments Accounts:A Balance of payments statements is a summary of a nation’s total economic transactions
undertaken on international account. It is usually composed of two sections :1) Current Account
2) Capital Account
1) Current Account :- It records the following 3 items :i) Visible items of trade :- The balance of export and import of goods is called the balance of visible
trade eg. Tea, Coffee etc.
ii) Invisible trade :- The balance of exports and imports of services is called the balance invisible
trade eg. Shipping, insurance etc.
iii) Unilateral transfers :- Unilateral transfer are receipts which residents of a country make
without getting anything in return eg. Gifts etc.
The net balance of visible trade, invisible trade and of unilateral transfers is the balance on
current account.
2) Capital Account :- It records are international transactions that involve a resident of the
domestic country changing his assets with a foreign resident or his liabilities to a foreign resident.
Various forms of capital account transactions :1) Private Transactions :- There are transactions that effect the liabilities
and assets of individuals.
2) Official Transactions :- Transactions affecting assets and liabilities by
the govt. and its agencies.
3) Portfolio Investment :- It is the acquisition of an asset that does not
give the purchaser control over the asset.
4) Direct Investment :- It is the act of purchasing an asset and at the same
time acquiring control of it.
The net value of the balance of direct and portfolio investment is called
the balanced on Capital Account.
Other items in the balance of payments:These are included since the full balance of payments account must balance. These are as follows:
i) Errors and omissions :- These may arise due to the presence of sampling error or dishonesty.
ii) Official reserve transactions :- All transactions excepts those in the category of autonomous
transactions.
Autonomous Items :-
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Autonomous items in BOP refer to international economic transactions that take place due to
some economic motive. Such as profit maximization. These items are often called above the line
items in BOP.
The BOP is in deficit if autonomous receipts are less than autonomous payments. The monetary
authorities may finance a deficit by depleting their reserves of foreign currencies or by borrowing
from the IMF.
Accommodating Items :- Accommodating items in the BOP refer to transactions that occur
because of other activities in the BOP, such as government financing. Accommodating items are
also referred to as below the line items.
Question2: How the foreign exchange rate is determined? Explain with help of diagram?
Ans-Foreign exchange rate is determined by market firces of demand and supply.
Component of Demand for foreign exchange1.) Import of goods and services
2.) Servicesn of tourism used by the domestic country
3.) Unilateral transfers sent to abroad
4.) Purchases of assets in foreign countries
5.) Speculation activities
Demand curve for foreign exchange
Demand curve of foreign exchange slopes downwards due to inverse relationship between
demand for foreign exchange and foreign exchange rate.
Supply of foreign exchange-The supply of foreign exchange comes from those people whom
receive it due to following reasons.
1.) Export of goods and services
2.) Foreign investment
3.) Remittances from abroad(unilateral transfer)
4.) Speculation
Determination of exchange rateThe equilibrium exchange rate is determined by the interaction of demand and
supply curve of foreign exchange.
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In above diagram DD is the demand curve of foreign exchange and SS is the supply curve of foreign
exchange.At point E the equilibrium is established because at point E demand of Dollar is equal to
Supply of dollar. At point R’ there is excess supply of dollar and at point R’’ there is excess demand
of dollar.
HOTS with model answersQ1 State which type of exchange rate has no official intervention in the foreign exchange
market? How it is determined?
Ans. Flexible exchange rate has no official intervention. It is determined by the interaction
of supply and demand in the foreign exchange market.
Q.2 State which of the following is a visible item and which is an invisible item in Balance of
payments.
(a) Export of jute product (b) Software services exports.
Ans. (a) Export of jute product - Visible Item
(b) Software services exports - Invisible Item
Q.3 Name the items which are not included in the current account of India’s Balance
of payment,
Ans. The capital transactions in the form of direct and portfolio investment that take
place between the countries are not included in the current account of India’s Balance
of payments.
Q.4 In which account of balance of payment tourism services to tourist are included?
Ans. Tourism services to tourist are included in current account of Balance of payments.
Q.5 Which transactions- autonomous or accommodating bring balance in the balance
of payments.
Ans. Accommodating transactions bring balance in the balance of payment.
Q.6 Why foreign currency/exchange is needed?
Ans. i) To purchase of goods and services from other countries.
ii) To send a gift abroad.
iii) To purchase financial assets in a particular country and
iv) To speculate on the value of foreign currencies.
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Q.7 What are the factors responsible for inflow of foreign currency?
Ans.
i) foreigners purchasing home country goods and services through exports.
ii) Foreigners investment in home country through joint ventures and through
financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and speculators
Q.8 When exchange rate of foreign currency falls it’s supply also falls. Explain how?
Ans. When exchange rate falls, experts become less profitable hence supply of foreign
currency through exports falls.
Q.9 When exchange rate of foreign currency falls, its demand rises. Explain how?
Ans. When exchange rate falls, imports become cheaper, demand for imports rises and so
rises the demand of foreign exchange to purchase more imports.
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Please send your feedback to:
Mr. Parsuram Shukla
PGT (Economics) & Faculty Training
Zonal Institute of Education & Training Bhubaneswar
Mobile: 9938649454
e-mail : [email protected]
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