GOBIND KUMAR JHA 9874411552

Chapter – 2 : Demand
[1Q X 2M]

Definition of Demand:
In economics, demand is the situation where all the following conditions exist together:

1. Desire to buy,
2. Ability to buy, and
3. Willingness to buy.
It simply means demand is the desire to buy the commodity along with purchasing power.

Factors or Determinants of Demand:

1. Price of the commodity or Price effect: There is the negative, indirect or inverse relationship between
price of the commodity and quantity demanded, other factors remaining constant. It simply means
higher the price then lower will be the demand and vice-versa.
2. Income of the consumer or Income effect: The income effect can be understood under the following
situation:
a) Income effect is positive in case of superior goods that mean the demand will increase with the
increase in income of the consumer.
b) The income effect is negative in case of inferior goods that means with the increase in income
demand falls.
3. Demonstration effect: This is the situation when the demand of the consumer is affected by seeing the
demand of another consumer. People tend to buy more and more due to this effect.
4. Population structure: Higher the population then higher shall be the demand and the demand of a
commodity is also affected by the ratio of population. It means if the female population is more then
the demand for cosmetics will be more.
5. Price of the related goods: Two commodities are said to be related when the price of one commodity
affects the demand of another commodity. There are two types of related goods:
a) Substitute Goods
b) Complementary Goods

a) Substitute Goods: When one commodity can be used in place of another commodity then they are
called substitute goods. E.g. Tea & Coffee.
b) Complementary Goods: When two commodities are jointly demanded that simply means both are
needed at a time and one is incomplete without other. E.g. Car & Petrol.

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Law of Demand:
Law of demand states that there is negative relationship between price and quantity demanded of the
product, other factors remaining constant.

Demand Schedule:
It refers to the chart that shows the relation between price of the commodity and quantity demanded. It can
be shown as below:
Price (`) Commodity (Kg.)
2 10
4 8
6 6
8 4

Demand Curve:
Demand curve is the graphical presentation of the law of demand or demand schedule. It can be shown as
below:
Y
(Price)

X
O 4 6 8 10 (Quantity)

The above diagram is downward slopping because it shows the negative relationship between price of the
commodity and quantity demanded.

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Exception to the Law of Demand or Positive relation between Price & Demand or
The situation where law of demand does nor work:

1. Prestigious Goods or Veblen Effect:

There are some commodities which are directly related with our prestige. It simply means those
commodities which are unique and expensive are demanded more. For e.g. Costly dresses, Luxury car,
Jwellery, etc. In case of prestigious goods law of demand does not work and people buy the product
even at high prices. This is also called ‘Veblen Effect’.

2. Habituated Goods:

There are few commodities which are the habit of the person in that situation law of demand does not
work as they buy even at high prices.
3. Giffen Goods:

This situation was observed by Sir Robert Giffen. In case of giffen goods the following two conditions
must exist:
 Consumer have to be poor,
 The goods should be inferior.
Here, the negative relation between price and demand does not work as the people buy more goods
even at high prices.

Change in Demand:
Change in demand is the situation when demand changes due to change in factors other than price.
There can be either increase in demand or decrease in demand. When there is increase then there will be
rightward shift but when there is decrease in then there will be leftward shift.

Consumer’s Surplus:
For any unit of output, consumer’s surplus is the difference between the demand price of this unit and the
market price of this unit. Suppose a consumer is willing to pay the maximum price of Rs. 1,000 for a pair of
shoes. But the market price of the pair of shoes is, say, Rs. 800. Then Rs. (1,000 – 800) or Rs. 200 is the
consumer’s surplus for this pair of shoes.

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Effect of increase in income on the position of the demand curve of normal

commodity:

For a normal commodity if the income of the consumer increases his demand curve for the commodity will
shift to the right.

Change in Demand:
Change in demand means shift of the demand curve either the same demand curve from one point to
another.

Change in Quantity Demanded:

Change in quantity demanded means movement along the same demand curve from one point to another.

Difference between Change in Demand and Change in Quantity Demanded:

‘Change in demand’ means shift of the demand curve while ‘Change in quantity demanded’ means
movement along the same demand curve from one point to another. Change in demand takes place when
factors other than the price of the commodity change. On the other hand change in quantity demanded
takes place if price of the commodity changes, other factors remaining the same.

Veblen Effect:
When a consumer judges the quality of a commodity by its price, the increase in price may be taken as
increase in the quality of the commodity. Then the consumer may purchase more units of the commodity
when its price rises. The consumer is then said to be subject to Veblen effect.

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Questions for Practice[2 Marks Each]

1) What do you mean by demand for a good?

2) What is individual demand?
3) What is market demand?
4) Mention two factors influencing individual demand for a commodity.
5) What is demand schedule?
6) What is demand curve?
7) State the law of demand.
8) Write the assumptions of law of demand.
9) What do you mean by inferior goods?
10) Define giffen goods.
11) Mention any two exceptions of law of demand.
12) State the law of diminishing marginal utility.
13) What is substitution effect?
14) What is Veblen effect?
15) What do you mean by change in demand?
16) Distinguish between ‘change in demand’ and ‘change in quantity demanded’.
17) What is consumer surplus?
18) What is normal goods?

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Chapter – 3: Concept of Elasticity

[1Q X 2M]

Elasticity:
The concept of elasticity was given by ‘Alfred Marshall’. It shows percentage change in the quantity
demanded of a commodity due to percentage change in the factors affecting demand.

Types of Elasticity:
P Price Elasticity
I Income Elasticity
C Cross Elasticity

 Price Elasticity: It shows percentage change in the quantity demanded of a commodity due to percentage
in the price of that particular commodity.

Or

Here,
= Change in quantity
Q = Original quantity
= Change in price
P = Original price.

Types of Price Elasticity:

1. Perfectly elastic demand

2. Perfectly inelastic demand
3. Relatively elastic demand or elastic demand
4. Relatively inelastic demand or inelastic demand
5. Unitary elastic demand.

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1. Perfectly Elastic Demand: In this situation a very small change in price results in the larger change in
the quantity demanded of a commodity.

Price

D D1

O Quantity
The above diagram is horizontal straight line parallel to ‘X’ axis.

2. Perfectly inelastic demand: In this situation quantity demanded does not change irrespective of the
changes in price.

Price D1

O D Quantity

The above diagram is vertical straight line.

3. Relatively elastic demand: In this situation, percentage change in quantity demanded is more than
percentage change in price.

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Price

P
P1

D1

O Q Q1 Quantity
The above diagram is downward slopping but flatter.
4. Relatively inelastic demand: In this situation, percentage change in quantity demanded is less than
percentage change in price.

Price

P
P1

D1

O Q Q1 Quantity

The above diagram is downward slopping but steeper.

5. Unitary elastic demand: In this situation, percentage change in quantity demanded is equal to
percentage change in price.

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Price

O Quantity

The above diagram is rectangular hyperbola.

 Income Elasticity: It shows the percentage change in quantity demanded due to percentage change in the
income of a consumer.

Types of Income Elasticity:

1. Positive Income Elasticity

2. Negative Income Elasticity
3. Zero Income Elasticity

1. Positive Income Elasticity: It shows percentage change in quantity demanded goes in the same
direction as the change in income. E.g. Superior Goods.

2. Negative Income Elasticity: In this situation, percentage in quantity demanded goes negative with the
changes in income. E.g. Inferior Goods.

3. Zero Income Elasticity: This is the situation, when the demand does not change irrespective of the
changes in income of the consumer. E.g. Neutral Goods (Salt, Matchsticks.)

 Cross Elasticity: It is the situation, when percentage change in quantity demanded of one commodity due
to percentage change in the price of another commodity.

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Types of Cross Elasticity:

1. Positive Cross Elasticity

2. Negative Cross Elasticity

1. Positive Cross Elasticity: It is the situation when percentage change in quantity demanded of one
commodity is positive with the increase in the price of another commodity. E.g. Substitute goods.

2. Negative Cross Elasticity: In this situation the percentage in quantity demanded of one commodity
goes negative with the percentage change in price of another commodity. E.g. Complementary goods.

Own Price Elasticity:

Own price elasticity of demand for a commodity is the percentage change in the quantity demanded of the
commodity due to one percentage change in its own price, other things remaining the same.

Questions for Practice [2 Marks Each]

1) Define price elasticity of demand.
2) Define income elasticity of demand.
3) What is cross price elasticity of demand?
4) What is elasticity of demand?
5) What is own price elasticity of demand?
6) What do you mean by perfectly inelastic demand?
7) What is perfectly elastic demand?
8) Mention two factors affecting elasticity of demand.
9) As the price of a commodity decreases from Rs. 4 to Rs. 2, the quantity demanded increases from 10
kg to 15 kg respectively. Find out the magnitude of price elasticity of demand.
10) As the price of a commodity increases from Rs. 6 to Rs. 9, the quantity demanded increases from 10
kg to 5 kg. what is the magnitude of price elasticity of demand?

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GOBIND KUMAR JHA 9874411552

Chapter – 4: Theory of Production

[1Q X 5M]

Production:
Production means in simple terms to create something but in economics, production is the process of
converting input into output.

Input/Factors of Production:
It refers to all those resources which are needed for production. The following are the factors of production:

a) Land
b) Labour
c) Capital, and
d) Organization.

Output:
It is the result or the final outcome of the input.

 TP (Total Product)
 AP (Average Product)
 MP (Marginal Product)

a) Total Product: It refers to the sum total of all the output which are produced at the given level of input.
b) Average Product: It refers to the output per unit of input. It can be shown as:

Here,
TP = Total Product,
L = Unit of Labour.

c) Marginal Product: It refers to the additional product which are produced from the additional input.

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Here,
= Change n total product,
= Change in unit of labour.

 Fill – up the following chart:

Unit of Labour TP AP MP
1 80
2 90
3 100
4 120
5 140

Production Function:
It shows the mathematical or technical relationship between input and output.

Production Function

Short – Run Production Function Long – Run Production Function

The Law of Variable Proportion The Law of Returns to Scale

(i) Short – Run Production Function:

a) It shows technical relationship between input and output in the short – run.
b) In the short – run, all factors of production are fixed except labour. It means labour is the only
variable factor.
c) The theory related to the short – run is the ‘Law of Variable Proportion’.

 Law of Variable Proportion:

Law of Variable Proportion is one of the most important law of production. It shows the nature of
rate of change in output due to a change in variable factor. As we know, it is a short-run production
function, hence it shows the change in the context of short-run where all factors of production are
fixed except labour.

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This law simply states that as we increase quantity of only one input keeping other input fixed
then Total Product initially increases at increasing rate, then at decreasing rate and finally negative.
Law of Variable Proportion is also known as “Law of Return to Factor”.

 Assumption of the Law:

a) It operates in the short run as factors are classified in variable and fixed factor.
b) The law applies to all fixed factors including land.
c) Here different units of variable factors are combined with fixed factor.
d) This law is applicable only in the field of production.
e) State of technology is assumed to be constant.
f) It is assumed that all variable factors are equally efficient.

There are three stages of the Law of Variable Proportion:

I. Increasing return to factor: It is the first stage of production when output increases as more and more
input are introduced. It simply means TP, AP, MP increases at this stage.
II. Diminishing return to factor: At this stage of production TP starts increasing at diminishing rate but MP
and AP both starts falling and when TP is maximum then MP is ‘zero’.
III. Negative return to factor: At this stage of production TP decreases. MP goes negative and AP falls.

The three stages can be explain with the help of following chart:

Fixed Factor (Land) Variable Factor TP (Units) AP (Units) MP (Units)

(Labour)
1 1 10 10 10
1 2 30 15 20
1 3 45 15 15
1 4 52 13 7
1 5 52 10.4 0
1 6 48 8 –4
The above chart can be explained with the help of following diagram: -
Space for diagram

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In the above diagram, upto 2nd unit there is increasing return to factor but from the 2 nd unit
upto 5 unit TP starts increasing at diminishing rate and both AP and MP decreases but at 6th unit TP falls
th

and AP also falls but MP goes negative.

(ii) Long – Run Production Function:

 Law of Returns to Scale:

It explains the proportional changes in output with respect to input. In other words, it states when
there are proportionate changes in the amount of input, the behaviour of output also changes.
In the long-run all factors of production are variable so the changes in scale are considered.

 Assumptions of the law:

a) There are only two factors of production i.e., labour and capital.
b) Both factors are variable.
c) Technology is said to remain constant.
d) Production function is homogeneous.

 The following are the three stages of return to scale:

1. Increasing return to scale,

2. Constant return to scale, and
3. Diminishing return to scale.

1. Increasing Return to Scale: It is the situation when all factors of production are increased, output
increase at higher rate. It means output increases with the increase in input. This can be shown in
the following diagram:
Space for Diagram

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2. Constant Return to Scale: In this situation, output increase exactly as same as input. It means if
factors of production are doubled then output will also be doubled. In this case internal and external
economics are equal. This can be shown in the following diagram:

Space for Diagram

3. Diminishing Return to Scale: It refers to that situation when the changes in output is less than
changes in scale of production. If input is doubled then output will be less than doubled. This can be
shown in the following diagram:
Space for Diagram

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The whole situation can be concluded with the following diagram:

Space for Diagram

In the above diagram, we have shown all three stages of production in the long-run.

Advantages:
When production are done on large scale, then there are various advantages that a firm gets. There are two
types of economies:
1. Internal Economies;
2. External Economies.

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1. Internal Economies: These are the advantages that a particular firm get due to large scale production.
a) Technical Economies: The advantage that the firm get due to the use of advance, updated and new
technology are known as technical economies. Due to technical economies a firm may produce more
output.
b) Marketing Economies: Marketing economies are those economies which are associated with the
purchase and sell of raw material. When the firm produces in large scale then they can get the input
at lower cost.
c) Financial Economies: Due to large scale production the firm needs large capital and the large capital
can be collected easily at cheaper rate of interest.
d) Risk – spreading economies: A large firm also enjoys lower risks associated with the organization of
production. A large firm can produce several commodities. Hence, even if the demand for one
commodity falls in the market, it can compensate the loss from the sale of other commodities
produced by it. Similarly, a big firm also collects raw materials from several sources. Hence the big
firm can spread risk among different products and among different sources of raw materials. These
are known as risk – spreading economies.
e) Managerial Economies: Several economies can also be obtained in the process of management of
large scale production. Managerial economies arise due to two reasons:
i) It is possible to delegate certain powers and responsibilities to subordinate workers and the
top management can engage themselves only in the process of supervision. This promotes
initiatives on the part of the workers and increases productivity.
ii) It is also possible to divide the process of management into several divisions and each division
can be entrusted to a particular expert. In this way, division of labour and specialisation is
possible. This also reduces total cost. Such economies associate with the process of
management are known as managerial economies.
f) Economies of Research and Development: A large firm can devote a large amount of resources for
research and development activities. As a result a large firm can innovate new products or new
processes of production. The new processes of production may reduce the cost of production. In this
way lower cost of production is possible through promotion of research and development. These
economies are known as economies of research and development.
g) Economies of Welfare: Large firms can earn higher profits. They can therefore spend more amount
of money on providing good working conditions and social security benefits for the employees. This
increases the efficiency and productivity of the workers. As a result the average cost of production
decreases. These economies are known as economies of welfare.

2. External Economies: These are the advantages which are common to every firm due to the growth of
industry.
a) Economies of localisation: Due to growth of industry in a particular region. There are the advantages
in the form of localisation due to cheap labour, transportation facilities, electricity supply, etc.
b) Economies of Information: If there are different firms then they can co-operate with one another to
share and exchange information which may result in reduction of cost and other benefits.
c) Economies of specialisation: Sometimes, the firm may decide to do the production of the part of
total product which may bring specialisation.

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Disadvantages:
The following are the diseconomies which are faced by large scale producer:
1) When the size of production process becomes very large, managerial difficulties arise. In a large scale
organization there are different departments and it becomes difficult to co-ordinate the activities of
the different departments. The control on the workers becomes rather weak. As a result wasteful
expenditures increase and average cost of production also increases.
2) In order to produce at a large scale large amounts of funds are necessary and sometimes it becomes
difficult to get large amounts of funds through borrowing. When loans are taken from banks and other
financial institutions, there are certain limits for borrowing.
3) In the case of large scale production there is no direct link between the workers and the owners. A
large scale production unit is generally organized as a joint stock company. In a joint stock company the
shareholders are real owners. But the shareholders do not directly participate in the management. The
task of management is at the hands of the board of directors. As a result there is no direct link
between the owners and the workers.
4) Large scale production is also hampered due to the limitations imposed on the size of the market. In
order to facilitate large scale production the market for the product should also be expanded. But
sometimes the market cannot be increased beyond a certain level because of difficulties of transport
or because of geographical reasons. As a result large scale production does not become profitable
beyond a certain level.
5) When large scale production takes place, it is not always possible to ensure the quality of the products
produced. Hence it is not possible to produce a variety of products keeping an eye on the tastes of the
consumers.
6) When large scale production takes place, the law of diminishing return operates. Output does not
increase in the same proportion in which inputs are increased beyond a certain level. As a result the
average cost of production increases. This problem becomes more acute when the firm grows too big
because it then becomes difficult to procure scarce resources in desired quantities.

Questions for Practice [5 Marks Each]

1) Distinguish between short-run production function and long-run production function.
2) Explain the law of variable proportions.
3) Give a brief account of three stages in the production process.
4) Give an account of the law of variable proportions in the short-run.
5) Explain diagrammatically the relation between average product (AP) and marginal product (MP).
6) Explain the law of returns to scale in production.
7) What do you mean by change in scale of the production process? What are the different types of
returns to scale? Explain them.
8) Explain with illustration, the internal economies of scale that arise in large scale production.
9) Explain the external economies of large scale production.

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Chapter – 5: Cost of Production

[1Q X 1M + 1Q X 2M]

Cost:
Cost refers to all the expenses which are incurred to produce the particular commodity. Different types of
cost on the basis of nature are as follows:

1. Explicit Cost or Accounting Cost or Money Cost: It refers to those costs where the outflow of money
can be directly seen. In other words, these are so called explicit cost and accounting cost because in
accounting only those cost are recorded which involve the outflow of money. Ex. Wages, Salary,
Interest, Rent, etc.
2. Implicit Cost or Imputed Cost: It refers to the cost which does not involve the outflow of cash. It is
actually the estimated loss that every entrepreneur has to suffer due to the introduction of the factors
of production in his own business. It simply means if instead of using his land for the own business had
he let it out, he could have earned the rent. So, the loss of estimated rent is considered as implicit cost.
3. Opportunity Cost: It is the cost of sacrifice to earn from next best alternative. In other words, every
individual comes across various opportunities and as we know there are limited resources. So it is not
possible to grab all the opportunities. Hence, they are bound to sacrifice some opportunities to earn
from the best option. So the cost of sacrificed opportunity are known as opportunity cost.

Different types of cost on the basis of time:

cost

Short - Run Cost Long-Run Cost

Fixed Cost Variable Cost All costs in Long - Run are variable

AFC MFC AC MC

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(i) Total Fixed Cost or Fixed Cost: These cost by nature does not change. It does not have any relation with
the level of output. It simply means whatever be the level of production, these cost arises. So even if
production is stopped TFC exist. Ex. Rent, Salary to permanent employees, Depreciation on machinery,
etc. this can be shown in the following diagram:
Space for Diagram

The shape of TFC is horizontal straight line parallel to x-axis.

a) Average Fixed Cost (AFC): It is the fixed cost per unit of output. It can be calculated as follows:

Here,
TFC = Total Fixed Cost
Q = Quantity

Unit TFC AFC

1 500
2 500
3 500
4 500

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It can be shown in the following diagram:
Space for Diagram

The shape of AFC is rectangular hyperbola due to the negative relationship between unit of output
and AFC.

b) Marginal Fixed Cost (MFC): This concept does not exist as fixed cost doesn’t change.

(ii) Total Variable Cost (TVC): It refers to the cost which has the direct relation with the level of output. If
there is high production then the variable cost is more but when there is no production variable cost
doesn’t arise. The shape of TVC is inverted ‘S’.
Space for Diagram

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a) Average Cost (AC): It refers to the cost per unit of output. It can be calculated as follows:

Or

Here,
TC = Total Cost
Q = Quantity of Output
It can be show in the following diagram:
Space for Diagram

The shape of average cost is ‘U’ shaped.

b) Marginal Cost (MC): It refers to the additional cost which are incurred to produce additional unit of
output. It can be calculated as follows:

Here,
= Change in Total Cost
= Change in quantity of output.
It can be shown in the following diagram:
Space for Diagram

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Relation between MC and AC:

The relationship between AC and MC can be studied under the following three situations:
(i) When AC rises, MC also rises but MC > AC.
(ii) When AC falls, MC also falls but MC < AC.
(iii) When AC is minimum then AC = MC.
The relation can be shown in the following diagram:
Space for Diagram

 Why long-run average cost never exceed short-run average cost?

Ans. As we know, long-run average cost is known as envelope curve because it carries various short-run
average cost. This means that long-run average cost curve touches every short-run average cost curve
but intersect none. In other words, in the long-run only variable cost exist.

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Questions for Practice

A. Choose the correct options:
1) The earning of a factor of production from an alternative use is known as the ______ of that
factor of production. (money cost/real cost/opportunity cost/average cost)
2) The TFC curve will be ______. (horizontal/upward rising/convex/concave)
3) When average cost decreases, marginal cost: (decreases/increases/will be less than AC/will be
greater than AC).
4) AFC curve will be _______. (downward sloping/horizontal/U-shaped/upward rising)
5) In the short run, AC will be _______. (U-shaped/upward rising/downward sloping/concave)
6) At the lowest point of the AC curve ______. (AC = MC/MC is lowest/AC > MC/AC < MC)
7) The difference between fixed cost and variable cost is applicable ______. (only in the short
run/only in the long run/both in the short run and long run/in no period of time)
8) When MC < AC, AC will be _______. (downward sloping/upward rising/fixed/none of these)
9) When average cost increases marginal cost _______. (increases/decreases/is higher than
average cost/is lower than average cost)
10) In the short run, the MC curve is ______. (downward sloping/upward rising/V-shaped/U-shaped)
11) The short run AVC curve will be _______. (downward sloping/upward rising/U-shaped/S-shaped)
12) When AVC is minimum: (AVC=MC/AVC>MC/AVC<MC/AVC=AC).
13) The shape of the short run cost curve is determined by: (law of variable proportion/law of
returns to scale/both A and B/none of these).
14) When the production process is subject to constant returns to scale, the long run total cost
curve will be: (downward sloping/upward rising/horizontal/vertical).
15) If the production process is subject to constant returns to scale, the long-run total cost curve will
be: (straight line through the origin/convex/concave/horizontal).
16) The curve which is obtained from the envelope of short run curve is: (LAC/LMC/Both A and
B/none of these).
17) Which curve is a rectangular hyperbola in shape? (AVC/AFC/AC/MC)
18) Among AC, MC and AVC the minimum point of _____ curve comes first and the minimum point
of ______ curve comes last. (AC, MC/MC, AC/MC, AVC/AVC, AC)
19) The vertical difference between the TC curve and the TVC curve: (continuously
increases/continuously decreases/remains the same/none of these).
20) The vertical difference between AC and AVC curves: (continuously increases/continuously
decreases/remains the same/none of these).
21) Which of the following costs is not an example of fixed cost? (salary of permanent
employees/value of raw materials/insurance premium/licence fees)
22) Which of the following is not a variable cost? (cost of raw materials/wage cost/cost of
fuel/depreciation of machinery)
23) TC = TVC + _______. (TFC/AFC/AVC/MC)
24) AVC + AFC = _______. (AC/MC/TC/TFC)
25) In economic theory it is assumed that the TVC curve will be: (straight line through the origin/first
convex and concave curve/first concave and then convex curve/downward sloping curve).

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GOBIND KUMAR JHA 9874411552
26) Additional cost incurred to produce one extra unit of output is called: (average cost/total
cost/marginal cost/average variable cost).
27) AVC curve is U shaped because: (the law of variable proportion operates/average product of the
variable factor increases/average product of the variable factor decreases/price of the variable
factor increases).
28) Which of the following statements is true about the relation between long run cost and short
run cost? (long run cost is higher than short run cost/long run cost is lower than short run
cost/long run cost is equal to short run cost/long run cost is less than or equal to short run cost)
29) At the point of inflation of the total cost curve: (MC is minimum/AC is minimum/MC=AC/MC is
upward rising).
30) Which of the following statement is true about the relation between LAC curve and SAC curve?
(LAC curve passes through the minimum points of SAC curve/LAC curve touches each SAC curve
from below/LAC curve is not U shaped like SAC curve/LAC curve touches SAC curves at their
falling portions)
31) As the level of output increases average fixed cost: (decreases/increases/remains the same/first
increases then decreases).
32) In the short run, when the output level si zero total cost of the firm will be equal to:
(TVC/TFC/TFC – TVC/Zero).
33) In the short-run, when the output level is zero, total variable cost will be:
(zero/positive/negative/none of these).
34) In the short-run, MC is determined by: (change in TFC/change in TVC/change in both TFC &
TVC/none of these).
35) In the short-run, TC curve is obtained by the ______ of TVC and TFC curves. (vertical
sum/horizontal sum/vertical difference/horizontal difference)
36) The AVC curve is U-shaped in the short-run because: (the law of variable proportion
operates/the law of returns to scale operates/the law of diminishing marginal utility
operates/none of these).
37) When AC decreases, then: (MC<AC/AC<MC/MC=AC/None of these).
38) When AC increases, then: (MC<AC/AC<MC/MC=AC/None of these).
39) In the short-run, the AVC curve of the firm will be the mirror image of the: (AP curve/MP
curve/both AP and MP curves/None of these).
40) In the short-run the MC curve of the firm will be the mirror image of the: (AP curve/MP
curve/Both AP and MP curve/None of these).
41) _____ curve is called as envelope curve. (SAC/AVC/LAC/LMC)
42) TVC curve is the mirror image of the _______ curve. (TP/TC/AP/MP)

ANSWERS

1. (C) 2. (A) 3. (C) 4. (A) 5. (A) 6. (A) 7. (A) 8. (A) 9. (C) 10. (D) 11. (D)
12. (A) 13. (A) 14. (C) 15. (A) 16. (A) 17. (B) 18. (B) 19. (C) 20. (B) 21. (B) 22. (D)
23. (A) 24. (A) 25. (C) 26. (C) 27. (A) 28. (D) 29. (A) 30. (B) 31. (A) 32. (B) 33. (A)
34. (B) 35. (A) 36. (A) 37. (A) 38. (B) 39. (A) 40. (B) 41. (C) 42. (A)

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GOBIND KUMAR JHA 9874411552

B. Short Answer Types Questions:

1) What is money cost in production?

2) What are imputed costs?
3) What is opportunity cost?
4) What is fixed cost?
5) Give two examples of fixed cost of the firm.
6) What is variable cost?
7) Give two examples of variable costs.
8) Distinguish between fixed cost and variable cost.
9) What is average cost?
10) What is marginal cost?
11) State the relation between average cost and marginal cost of production.
12) Why long run cost never exceed short run cost of production?

26 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 6: Revenue
[1Q X 2M]

Definition:
Revenue is the earning of the firm by selling the output.

 There are three concepts of revenue:

a) Total Revenue (TR),

b) Average Revenue (AR), and
c) Marginal Revenue (MR).

a) Total Revenue (TR): It can be defined as the total earning from output sold.

Here,
P = Price of the commodity
Q = Quantity of the output sold

b) Average Revenue (AR): It refers to the revenue per unit of output sold.

Here,
TR = Total Revenue
Q = Quantity of the output sold

AR always equal to price. This can be proved as:

c) Marginal Revenue (MR): It is the additional revenue earned from the sale of additional output.

Here,

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GOBIND KUMAR JHA 9874411552

Relation between AR and MR:

The relation between AR and MR can be studied as below:

a) When AR rises, MR also rises but MR > AR.

b) When AR falls, MR also falls but MR < AR.
c) When AR is maximum then AR = MR.
Space for Diagram

Relation between AR, Price, Marginal Revenue and Elasticity:

The following are the relation between AR, MR and Elasticity:

Here,
MR = Marginal Revenue
AR = Average Revenue = Price
e = Elasticity

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GOBIND KUMAR JHA 9874411552
What will be the relation between price and marginal revenue if the absolute value of elasticity is
infinity? = (Infinity)

Or,
Or,
Or,

What will be the relation between Price and MR if the absolute value of elasticity is 1?

Or,
Or,

Show the relation between AR and MR, when Price is fixed?

If the price is fixed then . This can be shown in the following diagram:
Quantity P TR AR MR
1 5 5 5 5
2 5 10 5 5
3 5 15 5 5
4 5 20 5 5
5 5 25 5 5
Space for Diagram

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GOBIND KUMAR JHA 9874411552
Draw the MR curve corresponding to upward region of TR Curve.

Space for Diagram

Upto the upward region, MR is positive.

Draw MR Curve corresponding to upward and downward region of TR Curve.

Space for Diagram

MR is positive till TR rises but it goes negative when TR falls.

30 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Questions for Practice (2 Marks Each)

1) What is total revenue?
2) Define average revenue and show that average revenue is equal to price.
3) What is marginal revenue?
4) What is the relation between total revenue and marginal revenue?
5) What is the relation between AR and MR if price is constant?
6) If price is variable, how are average revenue and marginal revenue related?
7) Mention the relation between average revenue and marginal revenue.
8) Draw the marginal revenue curve corresponding to the upward sloping region of the total revenue
curve.
9) What will be the relation between price and marginal revenue, if the magnitude of price elasticity of
demand is infinity?
10) Prove that marginal revenue of a firm equals zero if the magnitude of price elasticity of demand is
unity.

31 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 7: Profit Maximization

[1Q X 1M] [MCQ]
The concept of Profit: The difference between total revenue and total cost is called gross profit. It is not
a contractual income. It is a residual income. Net profit is the difference between gross profit and the
incomes of the factors supplied by the entrepreneur. There are several elements of profit. The main
difference between profit and other factor incomes is that while other factor incomes are fixed by
contract profit is not fixed by contract. It is a residual income.

Assumptions of Profit Maximisation Hypothesis: The profit maximization hypothesis is based on certain
assumptions: (i) The firm is a producing organization. (ii) Demand and cost functions are known with
certainty. (iii) The firm is owned and managed by a single individual. (iv) The firm operates within a given
time horizon and different time periods are not related to each other. (v) Techniques of production,
tastes and preferences do not change. (vi) The firm has unlimited information, etc.

Conditions of Profit Maximisation: Two conditions must be fulfilled for profit maximization. The
necessary condition is that MR should be equal to MC. The sufficient condition is that MC curve should
intersect MR curve from below.

Shut down condition: Even if profit is maximized, maximum profit may be positive, zero or negative.
When the profit is negative the firm loses. In the short run even if the firm loses it will continue
production so long as the amount of loss is less than the total fixed cost of the firm. But if the firm’s loss
exceeds total fixed cost, it will stop production. Thus the shut down condition is that total loss should
exceed the total fixed cost of the firm. Alternatively total revenue of the firm should be less than total
variable cost of the firm.

Limitations of Profit Maximisation Hypothesis: Profit maximization hypothesis is based on certain

unrealistic assumptions. Here it is assumed that the firm is owned and managed by a single individual.
But in the case of large firms the organizational form is joint stock companies may not be interested in
maximizing profit. Even if the firm wants to maximize profit it cannot do so because revenue and cost
functions are not known with certainty. Moreover it has been argued that firm has multiple goals and
profit is one of them. Empirically it has been found that the main consideration of the firm is price which
is determined on the basis of average cost and not by the principle of profit maximization.

MCQ Sheet
1) What is the first order condition for profit maximization? (AR=MR/MR=MC/AR=AC/AR=MC)
2) If total revenue equals total cost ______ profit is earned. (zero/normal/positive/negative)
3) The minimum point of the AVC curve is known as _____ point. (no profit no loss/shut down/long-run
equilibrium/minimum loss)

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GOBIND KUMAR JHA 9874411552
4) The minimum point of ______ curve is called break even point of no-profit-no-loss profit.
(MC/AC/AVC/AFC)
5) When MR>MC, total profit ______ when the level of output increases. (decreases/increases/remains
the same/is minimum)
6) When MR<MC, total profit ______ when the level of output increases. (decreases/increases/remains
the same/is minimum)
7) In the traditional theory about the goals of the firm it is assumed that the objective of the firm is: (to
maximize production/to maximize sales/to maximize profit/none of these).
8) When the firm takes the price as given then the firm will continue production even if it is losing,
provided ______. (P<AVC/AC<P AVC/AC>P AVC/P>AC)
9) A firm which takes the price as given will earn normal profit when ______. (P>AC/P=AC/P<AC/P AC)
10) Which of the following is not an assumption of profit maximization hypothesis? (The firm is owned by a
single owner/The firm knows its demand and cost with certainty/There are no costs other than
production costs/The firm operates in an uncertain world)
11) The difference between total revenue and total cost is called ______. (gross profit/net profit/normal
profit/none of these)
12) The difference between gross profit and the cost of inputs supplied by the entrepreneur is called
_______. (total profit/net profit/normal profit/contractual profit)
13) Which of the following statement is not applicable for profit? (profit is a surplus income/profit is not
fixed by contract/profit can be zero or negative/profit does not change suddenly)
14) The sufficient condition for profit maximization is: (MC cuts MR from above/MC cuts MR from
below/Slope of MR = slope of MC/slope of MR>slope of MC).
15) The firm will stop production when: (TR<TVC/Total loss>TFC/both A and B/None of these).
16) At the equilibrium position of the firm, the firm’s ______. (revenue is maximized/cost is
minimized/profit is maximized/none of these)
17) For profit maximization: (MR to be equal to MC/Mc cuts MR from below/Both A and B/None of these).
18) At the equilibrium output level of the firm: (P=AVC/P AVC/P<AVC/none of these).
19) The firm earns abnormal profit when ______. (P>AC/P AC/P=AC/None of these)
20) Total profit = ________ - total cost. (total production/total revenue/marginal revenue/average
revenue)
21) Net profit = Gross Profit - ______. (contractual costs/cost of inputs supplied by the owner
himself/depreciation cost/advertisement cost)
22) In which of the following situations will the firm stop production? (TR>TVC/TR=TVC/TR<TVC/none of
these)
23) In which of the following situations will the firm continue production?
(MR=TVC/TR=TVC/TR<TVC/TR TVC)
24) Maximization of profit is known as achievement of ______. (goodwill/success/equilibrium/none of
these)
25) Gross profit ______ net profit. (is greater than/is less than/cannot be less than/none of these)
26) A firm reaches the shut down point where: (AC is minimum/MR touches AVC at its minimum point/MC
is minimum/MR intersects the AC).
27) One element of gross profit is: (rent of own land/rent of land owner of others/risk bearing by
others/none of these).

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GOBIND KUMAR JHA 9874411552
28) When TR>TVC a firm: (will always continue production/will not continue production/will continue
production for some time/none of these).
29) The necessary condition for the equilibrium of the firm is MR = ______. (AC/MC/AR/AVC)
30) If the firm is a price taker, the relation between average revenue (AR) and marginal revenue (MR) will
be: (AR>MR/AR=MR/AR<MR/None of these).
31) If a firm stops production in the short run, the amount of its total cost will be: (TVC/AVC/TFC/AFC).
32) The minimum point of average cost curve is called: (shut down point/point of minimum loss/point of
no profit no loss/point of maximum revenue).

ANSWERS

1. (b) 2. (b) 3. (b) 4. (b) 5. (b) 6. (a) 7. (c) 8. (c) 9. (b) 10. (d) 11. (a) 12. (b)
13. (d) 14. (b) 15. (c) 16. (c) 17. (c) 18. (b) 19. (a) 20. (b) 21. (b) 22. (c) 23. (d) 24. (c)
25. (c) 26. (b) 27. (a) 28. (a) 29. (b) 30. (b) 31. (c) 32. (c)

34 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 8: Supply
[1 MCQ + 1 SAQ]

Definition:
It may be defined as the quantity afford at a particular price at a particular point of time.

Law of Supply:
The Law of Supply states that there is the positive relation between price of the commodity and
quantity supplied, other factors remaining constant.

Individual Supply Schedule:

It is the chart that shows the quantity supplied at different prices by individual supplier.

Price (Per kg. in Rupees) Rate of daily supply (Kg.)

3 50
4 60
5 70
6 80

Market Supply Schedule:

It is the aggregate of individual supply.

Price (Per Kg. in Rupee) Daily rate of supply (Kg.)

3 5,000
4 6,000
5 7,000
6 8,000

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Supply Curve:
Space for Diagram

Elasticity of Supply:
It shows percentage change in quantity supplied due to change in factors affecting quantity supplied.

Factors affecting elasticity of supply:

1. Nature of the commodity: The elasticity of supply depends on the nature of the commodity. The
commodities which are perishable in nature and cannot be stored have a very low elasticity of
supply because the commodities must be released for sale whether the price is high or low. But
those commodities which can be stored have a relatively high value of elasticity of supply. Thus,
commodities like vegetables, milk, fish, egg, etc. are perishable.
2. Time: The elasticity of supply also depends on the time period of production. In the short period
of time, it is not easy to increase or decrease the quantity supplied. For this reason, in the short-
run the elasticity of supply is relatively low.
3. Scale of Production: The elasticity of supply also depends on the scale of production process and
also on the technique of production. A big firm can easily increase the supply of output. Its
elasticity of supply will be relatively high. On the other hand, a small firm cannot increase the
supply of output easily. Its elasticity of supply will be relatively low.

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GOBIND KUMAR JHA 9874411552

Questions for Practice

A. Choose the correct options:
1) The concept of supply curve is relevant only in the ______ market. (perfectly
competitive/monopoly/goods/factor)
2) Which of the following statements is true in the supply function? (Quantity supplied is the
independent variable and prices is the dependent variable/Both Quantity supplied and price are
dependent variables/Quantity supplied is dependent variable and price is independent
variable/Both quantity supplied and price are independent variable)
3) If the law of supply operates the supply curve will be: (downward sloping/upward rising/industry
supply/country’s supply).
4) By adding individual supply curves we get: (firm’s supply/market supply/industry supply/country’s
supply).
5) If the supply curve is a vertical straight line, elasticity of supply will be: (zero/infinity/unity/greater
than 1).
6) If the supply curve is a horizontal straight line, elasticity of supply will be: (zero/infinity/unity/less
than 1).
7) If the supply curve is an upward rising straight line through the origin then the elasticity of supply
on each point of it will be: (zero/infinity/unity/greater than 1).
8) If the supply curve is an upward rising straight line having a positive intercept from the horizontal
axis, then the elasticity of supply at each point on it will be: (zero/infinity/unity/less than 1).
9) If the supply curve is an upward rising straight line having a positive intercept from the vertical axis,
then the elasticity of supply at each point on it will be: (zero/greater than 1/less than 1/unity).
10) Perfectly elastic supply curve will be: (upward sloping/downward sloping/horizontal/vertical).
11) Perfectly inelastic supply curve will be: (upward rising/downward sloping/horizontal/vertical).
12) If the value of elasticity of supply is zero, it is known as _______ supply. (elastic/inelastic/perfectly
elastic/perfectly inelastic)
13) If the value of the elasticity of supply is greater than 1, it is known as ______ supply.
(elastic/inelastic/perfectly elastic/perfectly inelastic)
14) In the law of supply the relation between price and quantity supplied is: (direct or positive/inverse
or negative/zero/none of these).
15) Price remaining the same, if the quantity supplied increases the supply curve will shift: (to the
left/to the right/parallel/in the upward direction).
16) In the perfectly competitive market, the supply curve is obtained from the _____ curve.
(AR/MR/MC/AC)
17) As the wage rate increases the supply of labour: (increases/decreases/first increases and then
decreases/remains the same).
18) At the price of Rs. 4 per unit the quantity supplied is 100 units. As the price rises to Rs. 5 per unit
quantity supplied increases to 150 units. What is the value of elasticity of supply? (1/2/50/25)
19) When we move from one point to another of the same supply curve, it is known as change in:
(supply/quantity supplied/price/demand).
20) Movement from one supply curve to another, price remaining the same, is known as change in:
(supply/quantity supplied/elasticity of supply/production).
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GOBIND KUMAR JHA 9874411552
21) If percentage change in price equals the percentage change in quantity supplied, the value of price
elasticity of supply is: (0/less than 1/1/greater than 1).
22) Which of the following is not a factor affecting supply? (price of the product/price of
factor/production technology/income of the consumer)
23) When quantity supplied changes due to change in price it implies: (shift of the supply curve to the
right/shift of the supply curve to the left/movement along the same supply curve from one point to
another/none of these).
24) Change in supply of any commodity means: (shift of the supply curve/movement along the same
supply curve from one point to another/change in the number of suppliers/none of these).
25) Price of the product remaining the same, if the price of any input used in the production process
decreases then the supply curve: (will shift to the left/will shift to the right/remain the same/none
of these).
26) Market supply is the _______ of individual supplies. (difference/sum/product/quotient)
27) In the case of elastic supply the value of elasticity of supply will be: (0/less than 1/greater than 1/∞)
28) In the case of perfectly inelastic supply the value of elasticity of supply is: (0/>1/<1/∞).
29) In the case of change in supply: (price changes/price remains the same/price increases/price
decreases).
30) What can you say about the slope of the supply curve if the law of supply operates? (it is positive/it
in negative/it is zero/it is infinity)
31) Which of the following is exception to the law of supply? (supply of wheat/drawing of Jamini
Roy/supply of industrial goods/supply of consumer goods)
32) The shape of the individual supply curve of labour will be: (upward rising/downward
sloping/parallel to horizontal axis/backward bending).
33) Which of the following factors causes the supply curve of a product to shift to the right? (fall in
labour’s wage rate/reduction in government subsidy in the production of the commodity/natural
calamity/disruption in the supply of raw materials)

ANSWERS

1. (a) 2. (c) 3. (b) 4. (b) 5. (a) 6. (b) 7. (c) 8. (d) 9. (b) 10. (c) 11. (d) 12. (d)
13. (a) 14. (a) 15. (b) 16. (c) 17. (c) 18. (b) 19. (b) 20. (a) 21. (c) 22. (d) 23. (c) 24. (a)
25. (b) 26. (b) 27. (c) 28. (a) 29. (b) 30. (a) 31. (b) 32. (d) 33. (a)

B. Fill in the blanks:

1) If the law of supply operates, the supply curve will be ________.
2) If supply is perfectly elastic, the supply curve will be ________.
3) If supply is perfectly inelastic, the supply curve will be ________.
4) One of the determinants of supply of any commodity is the _______ of the factor used to produce
the commodity.
5) The supply curve of a decreasing cost industry will be _________.
6) If prices of factors of production ________, the supply curve of this commodity shifts to the right.
7) Elasticity of supply of perishable commodities is relatively _______.
8) The concept of supply curve can be obtained only when the firm is a __________.
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GOBIND KUMAR JHA 9874411552
9) In the supply function, quantity supplied is the ______ variable.
10) In a perfectly competitive market, the supply curve of a firm can be obtained from its _____ curve.
11) If the value of elasticity of supply is greater than 1, supply is said to be _________.
12) If the value of elasticity of supply is less than 1, supply is said to be __________.
13) Elasticity of supply on each point of a straight line supply curve passing through the origin is
__________.
14) Elasticity of supply of those commodities which can be stored is relatively ________.
15) If the inputs required to produce any commodity are easily available, the elasticity of supply of the
commodity will be relatively __________.
16) While drawing the supply curve we measure ________ on the horizontal axis.
17) While drawing the supply curve we measure ________ on the vertical axis.
18) By change in supply means ________ of the supply curve.
19) Moving on the same supply curve from one point to another is called change in ___________.
20) According to the law of supply if price of a commodity increases, its __________ increases.
21) Market supply will be the _________ of individual supplies.
22) If prices of factors of production rise, the supply curve of the commodity shifts to the ________.
23) If percentage change in quantity supplied is less than the percentage change in price, the price
elasticity of supply is _______ than unity.

ANSWERS

1. upward rising; 2. Horizontal; 3. Vertical; 4. Price; 5. Downward sloping; 6. Fall; 7. Low; 8. Price
– taker 9. Dependent; 10. Marginal cost (MC); 11. Elastic; 12. Inelastic; 13. Unity (1); 14. High;
15. high; 16. Quantity supplied; 17. Price; 18. Shift; 19. Quantity supplied; 20. Quantity supplied;
21. sum; 22. Left; 23. Less

C. Write True or False:

1) There is a direct relation between price and quantity supplied. [True]
2) Market supply is the sum of supplies of all individual sellers. [True]
3) Individual supply curve of labour is always upward rising. [False]
4) In the supply function, price is the independent variable. [True]
5) Supply of the firm is determined by the MC curve. [True]
6) Supply does not depend on price of inputs. [False]
7) In the very short run, the supply of any commodity is fixed. [True]
8) The law of supply is applicable for all commodities and factors of production. [False]
9) Elasticity of supply will be positive. [True]
10) Elasticity of supply does not depend on price. [False]
11) If the elasticity of supply is greater than 1, it is known as elastic supply. [True]
12) For perfectly inelastic supply the value of elasticity of supply is zero. [True]
13) A perfectly inelastic supply curve will be parallel to horizontal axis. [False]
14) For perfectly elastic supply, the value of elasticity of supply is infinity. [True]
15) For perfectly elastic supply, the supply curve is parallel to the vertical axis. [False]
16) In the fish market, the supply of fish is perfectly inelastic. [True]

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GOBIND KUMAR JHA 9874411552
17) For perishable products the elasticity of supply is relatively high. [False]
18) When price increases, if the producers expect prices to rise further, the law of supply may not be
applicable. [True]
19) Change in quantity supplied takes place when other factors change, price of the product remaining
the same. [False]
20) Change in supply takes place when quantity supplied increases or decreases, price remaining the
same. [True]
21) A perishable goods has a very low price elasticity of supply. [True]
22) The supply curve will be horizontal if the supply is perfectly inelastic. [False]

40 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 9, 10 & 11: Market

[1 MCQ + 2 SAQ + 1Q X 5M]

Market:
It is the place where buyer and seller meet together to carry out business transactions.

Types of Market:
a) Perfect Competition Market,
b) Monopoly Market,
c) Oligopoly Market,
d) Bi-lateral Market,
e) Duopoly Market,
f) Oligopsony Market,
g) Monopsony Market.

a) Perfect Competition Market:

The following are the characteristics of perfect competition market:

(i) Large no. of buyer and seller: In this market, there are large no. of buyer and seller and the
number of buyers and sellers are so large that the individual buyer and seller has no control over
the market. It simply means the absence and presence of the buyer and seller is not felt.
(ii) Homogeneous Commodity: This is the market where all the seller deal in homogeneous
commodity that same type of commodity is sold. It simply means there is no difference in the
commodity sold by large no. of sellers.
(iii) Price taker: In this market, the sellers are price taker because they cannot set the price of their our
product as due to large no. they have no control. Hence they are bound to sell their product at the
price given to them by the interaction of demand and supply.
(iv) Free entry and free exit: In this market, the buyers and sellers can enter the market and the same
time can leave the market as per their own choice. It simply means there is no rules and regulations
as to the entry and exit of the buyers and sellers.
 The market which have above characteristics are known as pure competition market.
(v) Only production cost exist: This is the market where only production cost exist that means the
other cost such as selling cost, advertisement cost, marketing cost does not rise as the nature of
commodity is same.

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GOBIND KUMAR JHA 9874411552
(vi) Perfect mobility of factors: In this market, all factors of production such as land, labour, capital and
organization are assumed to be perfectly mobile that means they can be moved from one place to
another place.

Price determination in Perfect Competition Market:

In perfect competition market, there are large no. of buyers and sellers and the sellers of this market
are price taker. It means they sell the product at the price which is given to them.
In perfect competition market, the demand curve is downward
slopping. Through the aggregate of individual demand we can get market demand curve and the market
demand curve is also assumed to be downward slopping showing negative relationship between price
and demand.
Again, we know in this market different firms produces homogeneous commodity. Each firm
takes the price as given and determine the quantity of output to be supplied. The supply curve of each
firm can be determined by the marginal cost curve. Through the aggregate of the supply of each firm we
can get market supply curve which is assumed to be upward raising which shows the positive relation
between price and quantity supplied. Now, in perfect competition market price is determined through
the interaction of aggregate demand and aggregate supply. It also can be shown as follows:
Space for Diagram

In the above diagram, we have shown ‘op’ where the equilibrium price is ‘E’ and at point ‘op 1’ there is
excess supply ‘FG’ and at point ‘OP2’ there is excess demand ‘AB’.

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GOBIND KUMAR JHA 9874411552
b) Monopoly Market: It is the market where there is only one seller. Ex – Indian Railway.
c) Oligopoly Market: In this market, there are only few sellers. Ex – Toothpaste industry and Coke industry.
d) Bi-lateral Market: In this market, there is only one buyer and one seller.
e) Duopoly Market: In this market, there are only two sellers.
f) Oligopsony Market: In this market, there are only few buyers.
g) Monopsony Market: In this market, there is only one buyer.

Questions for Practice

A. Choose the correct option: (1 mark each)

1) The absolute value of price elasticity of demand at the equilibrium point of a monopolist will be:
(equal to 1/greater than 1/less than 1/infinite).
2) In monopoly equilibrium is attained when: (P=MC/MR=MC/AR=MR/AR=AC).
3) In monopoly equilibrium price will be: (equal to MC/less than MC/greater than MC/equal to MR).
4) If the MC of the monopolist is positive, the monopolist will attain equilibrium where elasticity of
demand is: (equal to 1/greater than 1/less than 1/infinite).
5) The value of Lerner’s index of monopoly power lies between _____ and ______. (0, 1/1, -1/0, ∞/-∞,
∞)
6) Lerner’s index of monopoly power is given by: .
7) In short-run equilibrium the monopolist earns ________ profit. (normal/more than normal/less
than normal/normal or more than normal or less than normal)
8) Which of the following is not a feature of monopoly? (only one firm produces the product/the
product has no close substitutes/entry of new firm is blocked/firm takes the price as given)
9) Costless monopolist will reach equilibrium where: ( ).
10) The value of Lerner’s index of monopoly power is equal to: .
11) In a perfect competitive market, the value of Lerner’s index will be: (1/0/∞/less than 1).
12) The formula for measuring the degree of monopoly power has been given by:
(Marshall/Lerner/Cournot/Ricardo).
13) In which market each firm is a price taker? (monopoly/perfect competition/both A and B/none of
these)
14) In the case of price discrimination the market with lower elasticity of demand will have _______
price. (lower/higher/lower or higher/none of these)
15) A condition of equilibrium of a monopolist is: (MR=AC/MR=MC/AR=MC/AR=AC).
16) In a monopoly market at the equilibrium position market price will be: (equal to AC/equal to
MC/equal to AR/equal to MR).

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ANSWERS

1. (b) 2. (b) 3. (c) 4. (b) 5. (a) 6. (a) 7. (d) 8. (d) 9. (a) 10. (a) 11. (b) 12. (b) 13. (b)
14. (b) 15. (b) 16. (c)

B. Fill in the blanks: (1 mark each)

1) In a perfectly competitive market, there are _________ buyers and sellers.
2) In __________ market there is only one seller with many buyers.
3) In a perfectly competitive market all sellers sell __________ product.
4) Monopolistic competition is the mixture of ____________ and monopoly.
5) In monopolistic competition sellers sell ___________ products.
6) In __________ market there are many buyers but few sellers.
7) The market in which one buyer faces one seller is called ________ market.
8) The market having two sellers but many buyers is called ________ market.
9) The oligopoly market in which all sellers sell homogeneous product is called _______ oligopoly.
10) The market for agricultural products may be called __________ market.
11) In India, rail transport is an example of ________ monopoly.
12) ________ market can be created through patents.
13) In India, the market for motor cars is an example of __________ market.
14) If the wage rate is determined by collective bargaining between the trade union and employer’s
union it will be an example of ___________ market.
15) The market in which few sellers sell differentiated products is called _________ market.
16) If there are many sellers but one buyer the market is called __________.
17) If there are few buyers but many sellers in any market it is called ___________.
18) In monopolistic competition, the products of different sellers are close _________.
19) In perfect competition all firms have the right of ___________.
20) In ___________ market, no single buyer or seller can influence the price.

ANSWERS

1. large number of; 2. Monopoly; 3. Homogeneous; 4. Perfect competition; 5. Differentiated;

6. oligopoly; 7. Bilateral monopoly; 8. Duopoly; 9. Pure; 10. Perfectly competitive; 11. State;
12. monopoly; 13. Differentiated oligopoly; 14. Bilateral monopoly; 15. Differentiated oligopoly;
16. Monopsony; 17. Oligopsony; 18. Substitute; 19. Free entry; 20. Perfectly competitive;
21. Normal; 22. Subjective; 23. Planned; 24. Mark-up; 25. Hall, Hitch; 26. AVC; 27. Horizontal;
28. excess; 29. L; 30. Downward-sloping; 31. LMC; 32. Horizontal; 33. Industry; 34. Unit; 35.
Upward; 36. Cost-determined

C. Mention whether True or False: (1 mark each)

1) In monopoly, there is no difference between firm and industry.
2) In perfect competition free entry is present.
3) Monopolist firm is price-maker, not price taker.

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GOBIND KUMAR JHA 9874411552
4) In perfect competition no single buyer or seller can influence the price.
5) Monopolistic competition can be regarded as the mixture of perfect competition and monopoly.
6) There is no different between perfect competition and pure competition.
7) There is no advertisement cost in perfect competition.
8) In monopolistic competition advertisement cost exists in the market.
9) In perfect competition sellers face perfectly elastic demand curve.
10) In perfect competition the factors of production are freely mobile.
11) In monopoly new firms can enter the market.
12) The monopolist firm does not have close substitute products.
13) In perfect competition production cost is the only cost.
14) The market for motor cars in India is monopoly market.
15) In pure oligopoly all sellers sell homogeneous products.
16) In India, rail transport is an example of state monopoly.
17) Monopoly cannot arise through new invention.
18) Product differentiation takes place in monopoly market.
19) Any firm under perfect competition earns normal profit in the long run.
20) Monopoly may arise from unequal competition.
21) Monopolist is called a price taker.
22) In a perfectly competitive market, a buyer or a seller does not have the freedom to enter the
market or exit from the market.
23) Each firm in a monopolistically competitive market sells a homogeneous product.
24) All firms in a perfectly competitive market sell a homogeneous product.
25) In an oligopoly market numerous buyers and sellers compete with one another.
26) The market in which there are numerous buyers but only a few sellers is called an oligopoly market.

ANSWERS

1. True; 2. True; 3. True; 4. True; 5. True; 6. False; 7. True; 8. False; 9. True; 10. True; 11. False;
12. True; 13. True; 14. False; 15. True; 16. True; 17. False; 18. False; 19. True; 20. True; 21. False;
22. False; 23. False; 24. True; 25. False; 26. True

D. Answer the following questions: (5 marks each)

1) What are the main characteristics of a perfectly competitive market?
2) Explain how short run equilibrium of a firm is reached in a perfectly competitive market.
3) What is a shut-down point? Explain the circumstances under which a perfectly competitive firm
reaches such a point.
4) Discuss the long run equilibrium of a firm under perfect competition.
5) Show how the short run curve of a perfectly competitive firm can be derived from its marginal cost
curve.
6) Show how the price of a commodity is determined through the interaction of aggregate demand
and aggregate supply in a perfectly competitive market.

45 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 12: Cost – Determined Pricing

[1 SAQ]

Mark-up System: According to the mark-up system, the firm first determines average cost. To this is added a
gross profit margin. The price is set at a level where it is equal to the sum of average cost and gross profit
margin. This system is known as the mark-up system. The mark-up may be fixed either per unit of output or
as a fixed percentage of cost.

Long run Industry Supply Curve: In the mark-up system it is assumed that the long run supply curve of the
industry is a horizontal straight line. This happens when all firms have identical cost curves and all firms
produce at the lowest point of the Lac curve.

Cost Induced Price Changes: If input prices change, the LAC curve will shift and since price is determined by
LAC, price will also change.

Effect of Changes in Demand: Since the supply curve is horizontal, price is determined by costs. Now if
demand changes it will have no effect on price. It will affect the quantity of output.

Application of the System in the case of Organised Manufacture: In the case of organized manufacture
price is determined by mark-up system. But demand also plays a role indirectly. If demand changes, mark-up
may be changed and this will affect price. Thus in the case of manufactured goods the general law of supply
and demand is applicable in a modified form.

SAQ Sheet

1) _______ profit is included in the cost of product. [Normal]

2) Normal profit is a ______ concept. [subjective]
3) The firm likes to get a _______ profit. [planned]
4) The system of determining price by adding something with average cost of production is known as
______ system. [mark-up]
5) Two economies _____ and ______ conducted an enquiry in 1939 regarding how prices of industrial
goods are determined. [Hall, Hitch]
6) According to Kelecki, price of an industrial product = ______ + mark-up. [AVC]
7) In the mark-up theory, it is assumed that the long run supply curve of industry is ______. [horizontal]
8) One feature of industrial production is that there remains some ________ capacity. [excess]
9) According to modern economists the long run average cost curve is _____ shaped. [L]

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GOBIND KUMAR JHA 9874411552
10) The LAC curve is _______ until the minimum optimum level of production arrives. [downward sloping]
11) On the horizontal portion of the LAC curve, LAC = _______. [LMC]
12) The _____ portion of the LAC curve is taken as the supply curve of the firm. [horizontal]
13) Since the Lac curve is horizontal, the supply curve of the ________ is horizontal. [industry]
14) Mark-up can be taken as per ______ of the commodity or as a percentage of the average cost of
production. [unit]
15) If mark-up is increased the LAC curve shifts in the _____ direction. [upward]
16) For industrial products price is ___________. [cost-determined]
17) For industrial products production is _______________. [demand determined]
18) With the help of _________ curve of the product, the number of firms within the industry is determined.
[demand]
19) In the case of industrial products, if demand increases excess _________ decreases. [production
capacity]
20) To reduce excess capacity the firm reduces _________. [mark-up]
21) In the mark-up system, average cost of production + planned profit = _________. [price]
22) In the mark-up theory, price = ______ + mark-up. [AVC]

Write True or False:

1) Planned profit is nothing but the mark-up. [True]

2) The LAC curve is L-shaped as the firm has excess capacity. [True]
3) In the case of industrial products price is cost determined while production is demand determined. [True
4) Normal profit is included in cost of production. [True]
5) Demand has no role in determining prices of industrial products. [False]
6) In the case of industrial products, if demand increases excess production capacity decreases. [True]
7) In the case of industrial products, the volume of production is determined by the demand curve. [True]
8) Normal profit is a subjective concept. [True]
9) There is a difference between normal profit and planned profit. [False]
10) Planned profit cannot be set per unit of the commodity produced. [False]
11) Planned profit is set only as a percentage of average cost of production. [False]
12) In their study Hall and Hitch found that firms did not try to maximize profit. [True]
13) Hall and Hitch found that prices was determined by marginal cost. [False]
14) In the mark-up system it is assumed that the long-run supply curve of the industry is horizontal. [True]
15) In the mark-up system it is assumed that the LAC curve of the firm is ‘U’ shaped. [False]
16) On the horizontal portion of the LAC curve excess capacity is present. [True]
17) Price of an industrial product is determined by production cost and mark-up. [True]
18) Mark-up is one kind of factor-income. [True]
19) If the price of input increases the average cost curve shifts in the upward direction. [True]
20) In the determination of price of an industrial product demand has an indirect role to play. [True]
21) Mark-up is nothing but planned profit. [True]

47 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 13: Pricing of Factor Market

[1Q X 5M]

Liquidity Preference Theory of Rent:

Liquidity Preference Theory given by ‘Keynes’. The rate of interest theory of Keynes is known as ‘Liquidity
Preference Theory’. According to Keynes, the rate of interest is a monetary phenomena and it is determined
by the demand and the supply of money.
Money supply does not have any relation with the rate of interest. It is independent of the interest rate
whether rate of interest increases, decreases or remain constant. Money supply always be the same. On the
other hand, the demand for money specially liquid cash is always high. People always love to hold some
amount of liquid cash because liquid cash has its own advantage. So their desire to hold liquid cash is known
as liquidity preference. According to Keynes, there are three basic reasons and motives of holding cash:
1. Transaction Motive,
2. Pre-cautionary Motive, and
3. Speculative Motive.

1. Transaction Motive: Whenever any person receives the income then there is the time gap between the
next income so to meet the expenses of time gap they need to hold cash. Hence, when money is needed
to carry out day to day transaction this is called transaction motive.
2. Pre-cautionary Motive: When people hold the cash to meet unexpected future contingencies as there
can be the unexpected uncertain situations. So the money held with the purpose of fighting with
unexpected situations are called Pre-cautionary Motive.
3. Speculative Motive: Speculative means doing something on expectation of the occurrence of some
event in future. When the people want to get engaged in speculative transaction then they hold the cash
and this is called ‘speculative motive’.
Rate of interest is determined by the interaction of demand and supply of money. Rate of
interest has no relation with the money supply. So supply curve of money is vertical straight line but it
has inverse relation with demand so the demand curve of money is downward sloping. Therefore, the
point at which demand curve intersect the money supply shall be the equilibrium rate of interest. This
can be shown in the following diagram:

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Space for Diagram

In the above diagram, r0 is the rate of interest.

Why the supply curve of labour is backward bending:

Contrary to the normal supply curve, the supply curve of labour is backward bending. As with the increase in
rate of wages, the hours worked will increase but after reaching certain point, it would start increasing at
decreasing rate because labour prefers leisure more than anything. This can be shown as below:
Space for Diagram

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In the above diagram, we have shown hours worked along X-axis and rate of wages along Y-axis. At ‘W’ the
labour hours supplied is ‘L’ when wages increases from W to W1 then labour hours supplied increases from L
to L1. Again, when wages increases from W1 to W2 then labour supplied increases at decreasing rate to L2
and by joining Q1, Q2, Q3. We get backward bending labour supply curve.

Ricardian Theory of Rent:

According to David Ricardo, Rent is the part of the produce of the land which is paid for original and
indestructible powers of the soil. According to David Ricardo, there are two types of rent:
1. Scarcity Rent, and
2. Differential Rent.

1. Scarcity Rent: According to him, rent arises due to scarcity of land.

2. Differential Rent: The concept of rent arises due to differences in productivity of land.

Assumptions:

(i) Rent is the payment for original and indestructible powers of the soil.
(ii) Total supply of land is fixed.
(iii) There are no alternative uses of land.
(iv) There exist perfect competition market.
(v) Land is the free gift of nature, so it does not involve production and supply cost.

Criticism:

(i) In the atomic age the land can also be destroyed.

(ii) From the view point of individual supply of land is elastic.
(iii) Land can be put to multiple purposes.
(iv) In reality, perfect competition market does not exist.
(v) Some expenses have to be incurred to make the land productive.

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Difference between Modern Theory and Ricardian Theory:

Modern Theory Ricardian Theory
a) The rent arises on all factors. a) Ricardian theory of rent is applicable only
on land.
b) Rent is the payment over and above transfer b) Rent is that part which is paid for original
earnings. and indestructible powers of soil.
c) The main reason for rent is inelastic supply of c) Rent arises due to two reasons:
factor. (i) Scarcity, and
(ii) Differentiality
d) Some expenses have to be incurred to make d) Land has no supply price because it is free
land fertile. gift of nature.
e) Land has multiple uses. e) Land has no alternative uses.
f) Transfer earning arises to prevent multiple f) There is no transfer earnings.
uses.

Questions for Practice (5 Marks Each)

1) State the assumptions of the marginal productivity theory of factor pricing.

2) Briefly discuss the Ricardian Theory of differential rent.
3) Discuss briefly the modern theory of rent.
4) State the differences between the Ricardian Theory and the Modern Theory of Rent.
5) Discuss how wage rate is determined by the marginal productivity of labour.
6) Explain why the individual supply curve of labour is backward bending.
7) What, according to Keynes, are the three motives for holding money? Explain your answer.
8) Explain how the rate of interest is determined by liquidity preference.
9) State the limitations of the Liquidity Preference Theory of rate of interest determination.

51 Special thanks to Mr. Jay Rudra Jha for his efforts.

GOBIND KUMAR JHA 9874411552

Chapter – 14: National Income

[1Q X 5M]

Methods of Measuring National Income:

There are three methods of measuring national income. The methods are:
a) Census of Production Method or Production Method or Product Method.
b) Census of Income Method or Income Method.
c) Census of Expenditure Method or Expenditure Method.

a) Census of Production Method or Production Method or Product Method: National income can be
derived b aggregating the money value of the amount of goods and services produced in a particular
period of time (generally one year) of any country. This method of measuring national income is called
census of production method or production method.
In the census of production method precaution should be taken so that the money value of any
commodity must not be multiple counting. There are two methods of avoiding multiple counting. One is
final product method and the other is the value added method.
In the Final Product Method, products are divided into two groups. One is the final product and
the other is the intermediate product. If any product which is produced in a year used for the production
of another product of the same year then it is called intermediate product or intermediate goods.
In Value Added Method only the additional value which is created or the value added in each stage of
production should be included at the time of national income accounting to avoid double counting. The
value receive by deducting the value of the factors of production used to produced the commodity from
the value of that commodity at each stage of product of the production unit is called Value Added.
Some precautions should be taken for measuring national income through census of production
method or production method i.e. there exist some problems for the measurement of this process.
These are given below:
(i) Multiple Counting: Precaution should be taken so that the value of any commodity must not be
multiple counting at the time of national income accounting. There are two methods of avoiding
multiple counting. One is final product method and the other is the value added method.
(ii) Value of Government Activities: Government of the country some times supply few goods and
services which are not sold in the market i.e. there is no market price of these goods and services.
For example services of roads, bridges etc. which are produced by the government. In these cases
the amount of money spent by the government to produce these goods or services should be
taken as the value of these goods and services.
(iii) Indirect Tax: To derive the money value of goods and services for the measurement of national
income in this method market prices of goods and services are to be known. If indirect tax of the
government is included in market price then to calculate national income that indirect tax should
be excluded because indirect tax is not included in the value of produced goods and services.

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(iv) Goods which are not produced in Economic Sense: Goods which are not produced in economic
sense should not be included in national income accounting. For example, goods produced in
kitchen gardens of households.
(v) Subsidy: Government sometime gives subsidy to the indigenous production unit. Subsidy does not
represent any production. For this subsidy should not be included in national income accounting.
(vi) Depreciation: Depreciation of capital should be excluded to calculate net value of the produced
goods and services. Net national income is derived if national income is measured by excluding the
depreciation of capital.

b) Census of Income Method or Income Method: In the census of income method, we make a census of
all the earning units of an economy. An earning unit may be an individual or a company. A joint stock
company owned by shareholders has a separate legal entity and it may earn income like an individual.
In the national income accounting, only those incomes of earning units are included which accrue to
the earning units due to their participation in the production process.
Let us assume that production takes place only in firms. Individuals supply different factors of
production to the firms and as a result they get factor income. These factor incomes take the firms of
rent, wages, interest and profit. Hence, the national income is equal to the sum total of all wages,
rents, interest and profits earned in the production process. This is also known as the factor payments
total.
In the census of income method, the following points should be noted:
(i) Transfer payment should not be included in the national income since such payments are made
without receiving any service in return. Transfer income is that type of income which is earned by
an individual without rendering any goods or services in return.
(ii) Capital gains should not be included in the national income as the capital gain are earned without
rendering any productive services.
(iii) Undistributed profits of the firms must be counted in the calculation of national income. A part of
the profits earned by companies is distributed as dividend to the individual shareholders. This part
is included in the incomes of individuals. The undistributed part of the total profit should be taken
as the income of the firms themselves.
(iv) Imputed rents of owner-occupied houses should be included in the national income total.
Sometimes production takes place in a house owned by the entrepreneur. The entrepreneur does
not pay any rent for this house. In this case, the rent of a similar house should be included in the
national income.
(v) Household services rendered by the members of the family and for which no payments are made
are not included in the computation of national income. If, however, domestic servants are
employed in the household sector, payments made to such domestic servants should be included
in the national income total.
(vi) Receipts from the sale of assets should not be treated as income in the calculation of national
income. Thus, if a person sells a house or a bond the receipt should not be included in the national
income. We have already said that the capital gains, if any, from such sale should not also be
included in the national income. However, the current flow of income from a house or a bond or a
patent right is the income to be included in the national income.

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GOBIND KUMAR JHA 9874411552
c) Census of Expenditure Method or Expenditure Method: National income which acquired at the hands
of the public is spent by the public of the country in two ways. Public of a country spend one part of
income to buy consumption goods and the other part of income use for capital formation i.e. for
investment. Money spend to buy consumption goods is called consumption expenditure and the
money used for capital formation is called investment expenditure. This means that aggregate of total
consumption expenditure and total investment expenditure is the national income.
Thus, national income can be derived by aggregating total consumptions expenditure and total
investment expenditure in a particular period of time (generally one year) of any country. This method
of measuring national income is called census of expenditure method or expenditure method.
Some precautions should be taken for measuring national income through census of
expenditure method or expenditure method i.e. there exist some problems for the measurement of
national income in this process.
These are given below:
(i) Expenditure on old commodity: Expenditure to purchase use or old commodity (e.g. old house,
old car etc.) should not be included in national income accounting. Because these expenditures
cannot help to create goods and services of a specific year.
(ii) Expenditure on old share or bond: Expenditure to purchase old share or bond should be included
in national income accounting because this expenditure is not spent for currently produce goods
and services.
(iii) Transfer Expenditure: Transfer expenditure e.g. unemployment relief, widow pension etc. should
not be included on national income accounting. Because no goods or services is created in
exchange of this type of expenditure.
(iv) Expenditure on Intermediary Product: To avoid multiple counting expenditure on intermediary
product should not be included in national income accounting.
(v) Foreign Trade: Net foreign gains should be included in national income accounting if the country
engages in foreign trade.

Here it may mentioned that there is no specific basic difference among the three methods.
Actually these three methods are the alternative method of measuring national income. National
income in all the methods will be the same.

The Circular Flow of Income:

Economic activities of any country flow in a circular way. Actually income is created in one side and on the
other side expenditure takes place as a result of economic activities. Here it is assumed that decisions
regarding economic functions are taken by two groups. One is the households and the other is the firms.
Here it is assumed that firms purchase different factors of production (land, labour, etc.) from the
households to produce goods and services. Households get money as income from the firms in exchange of
those factors of production. This money is the income of the households but expenditure of the firms. In this
way a flow of money takes place from the firms to the households due to purchase of factors of production.
This money again flow from the households to the firms when the households spent this income to purchase

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 GOBIND KUMAR JHA 9874411552
goods and services. This money is the expenditure of the households but income of the firms. In this way
another flow of money takes place from the households to the firms due to purchase of goods and services.
This means that the amount of money which is spent by the firms to purchase factors of production, that
money again came back to the firms through the sale of produced goods and services. This is called circular
flow of income expenditure or circular flow of income. Thus the flow of income from the firms to the
households and from the households to the firms in a circular way is called the circular flow of income or the
circular flow of income and expenditure.
The concept of circular flow of income is now explained with the help of diagram. In the upper part of
the diagram, two flows A and B exist. Flow A represents the supply of different factors of production (land,
labour, etc.) given by the households to the firms i.e. flow A represents purchase of different factors of
production (land, labour, etc.) by the firms from the households for the production of goods and services.
The amount of money received due to supply of these factors of production by the households from the
firms as factor income have been represented by the flow B. this means that flow B represents the flow of
money from the firms to the household due to purchase of the factors of production.

Space for diagram

Difficulties or Problems of National Income Measurement:

National Income is the sum total of the money value of goods and services which are produced in an
economy during particular period of time. The following are the difficulties of National Income
measurement:
1. Lack of reliable data: It is very difficult to collect error free and reliable data related to national income
in underdeveloped countries. This problem is very serious.
2. Existence of non-monetised sector: A large part of goods produced in any country are used by the
producer to exchange directly with other goods without any monetary transaction. So, it is very
difficult to collect the accurate information regarding this.

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3. Change in money value: A major problem of measurement of national income is in terms of money
value so money value itself changes too much. Hence, change in money value is one of the problem of
national income measurement.
4. Qualitative Improvement: Standard of living of any country also increase due to qualitative
improvements of goods and services. So, very after it is seen that the quantity of goods and services
may increase but the quality remain constant.
5. Difficulties in classification of commodity: It is necessary to classify the commodities at the time of
national income measurement and it is very difficult to judge whether the commodity is consumers
goods or capital goods.
6. Difficulties in classification of working population: In under develop countries the per capita income is
very low. Hence, people have to be engaged in various sources and it is very difficult to determine the
actual source of income.

Questions for Practice (5 Marks Each)

1) Explain, with a diagram, the concept of circular flow of income.

2) Explain how national income is obtained as the sum total of income of the factors of production?
3) Discuss the value added method of measuring national income of a country.
4) Discuss the difficulties of measurement of national income of a country.
5) Explain the census of expenditure method of national income accounting of a country.
6) Explain the census of production method of national income.

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Chapter – 15: Determination of Equilibrium Level of

National Income [1MCQ]

Keynasian Theory of Income and Employment: According to Keynes there is a close relation between
income and employment. National income and total employment depend on effective demand or aggregate
demand. Effective demand is equal to total expenditure on goods and services. According to the classical
theory if the wage rate is flexible full employment will be automatically achieved. In the Keynesian theory
full employment is not automatically achieved.

Aggregate Demand and Its Components: Aggregate demand has three components: consumption
expenditure, investment expenditure and government expenditure on goods and services. Consumption
expenditure depends on two factors – propensity to consume and the level of income. Investment
expenditure depends on the marginal efficiency of capital and the rate of interest. Government expenditure
is autonomously determined.

Consumption Function: According to Keynes aggregate consumption expenditure of the economy depends
on the national income such that as national income increases consumption expenditure also increases. The
relation between consumption expenditure (C) and national income (Y) is given by the consumption function
C = f (Y). According to Keynes the consumption function possesses four characteristics.

Shape of the Consumption Function: If the four characteristics of the consumption function are to be
satisfied the consumption function will be an upward sloping straight line having a positive intercept from
the vertical axis and intersecting the 450 line from above.

Average Propensity to Consume and Marginal Propensity to Consume: The average propensity to consume
is while the marginal propensity to consume is

Saving Function and its Properties: Saving is that part of income which is not consumed. The saving function
can be written as S = S (Y). It can be derived from the consumption function.

Factors Affecting Consumption Expenditure: Apart from income, consumption expenditure depends on
certain other factors. These other factors can be divided into three groups: objective factors, subjective
factors and structural factors.

Determination of the Equilibrium Level of National Income with the help of the Consumption Function: For
equilibrium, aggregate supply = aggregate demand i.e. Y = C + I = C (Y) + I. Solving this equation Y can be
obtained. That Y is the equilibrium income. Equilibrium is stable if the MPC is greater than zero but less than
I. again when Y = C + I, Y – C = I or S = I i.e. planned saving = planned investment. This is the alternative
condition for equilibrium.

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Equality and Identity between Saving and Investment: If saving and investment refer to actual magnitudes
then they are identically equal but if saving and investment refer to planned or desired magnitudes then
saving will be equal to investment only when the level of income is in equilibrium.

Multiplier Theory: When autonomous expenditure increases, the equilibrium level of income also increases
by a multiple of the increase in autonomous expenditure. This multiple is known as the multiplier. The value
of the multiplier is equal to the reciprocal of the marginal propensity to save. Normally, the marginal
propensity to save is less than one and so the value of the multiplier is greater than one. The multiplier
effect takes place when autonomous consumption or autonomous investment or any other autonomous
expenditure changes. There are some limitations of the multiplier analysis.

Concept of Full Employment: Full employment is attained when the supply of labour is less than or equal to
demand for labour. In the classical theory full employment is the only equilibrium position. But in the
Keynesian theory equilibrium may be at the full employment level or at less than full employment level or at
greater than full employment level.

Inflation: By inflation we mean a process during which the general price level rises continuously. For
inflation the rise in price must be sustained.

Causes of Inflation: Classical economists believed that inflation could occur only if there was an increase in
money supply. According to Keynes inflation occurs from excess demand. Modern economists argue that
inflation can occur either from the demand side or from the cost side.

Inflationary Gap: Inflationary gap is the difference between aggregate demand at full employment and
aggregate supply at full employment. This inflationary gap can arise for several reasons. So long as the
inflationary gap remains present, price level will rise.

Cost Inflation: If the price level increases due to an increase in the cost of production it is known as cost
push inflation. When the wage rate increases through collective bargaining and if labour productivity does
not increase when the wage rate increases per unit cost of production rises and price also rises and there is a
wage price level.

Difference between Demand Pull Inflation and Cost Push Inflation: Theoretically, it is possible to make a
distinction between demand pull inflation and cost push inflation. But in actual practice it is difficult to
distinguish between demand pull inflation and cost push inflation for different reasons.

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MCQ Sheet
1) The author of the book ‘General Theory of Employment Interest and Money’ is:
(Smith/Marx/Keynes/Marshall).
2) In a closed economy the sum of planned consumptions expenditure, planned investment expenditure
and planned government expenditure will be called: (aggregate demand/aggregate supply/national
income/national expenditure).
3) In the Keynesian theory as income increases the average propensity to consume:
(increases/decreases/remains the same/first increases then decreases).
4) When average propensity to consume decreases, marginal propensity to consume:
(decreases/increases/remains the same/is less than average propensity to consume).
5) The sum of average propensity to consume and average propensity to save will be: (0/1/-1/2).
6) The sum of marginal propensity to consume and marginal propensity to save will be: (1/2/3/4).
7) The point of interaction of the aggregate demand curve and the 450 line determines the equilibrium:
(national income/employment/rate of interest/expenditure).
8) Equilibrium national income will be determined when ______ saving and _______ investment are equal.
(actual, actual/planned, actual/actual, planned/planned, planned)
9) The value of investment multiplier is equal to: ( / MPS).
10) If MPC = 0.5, the value of the investment multiplier will be: (0.5/1/2/5).
11) If MPC = and autonomous investment increases by Rs. 100, income will increases by Rs. _____.
(300/150/67/250)
12) If APC is 0.5, what will be APS? (0.5/0.1/1/0.25)
13) If MPC = 0.6 what will be MPS? (0.6/0.4/1.6/0.36)
14) The functional relation between consumption expenditure and national income is called _____ function.
(demand/consumption/utility/expenditure)
15) Autonomous investment curve will be _______. (upward sloping/downward sloping/horizontal/vertical)
16) Inflation is a process through which ______ goes on increasing continuously. (supply of money/price
level/production/income level)
17) During a situation of full employment when inflation arises due to increase in aggregate demand, it is
known as _______. (demand pull inflation/cost push inflation/suppressed inflation/partial inflation)
18) If inflation arises due to increase in the wage rate in a less than full employment situation it is known as
______ inflation. (demand pull/cost push/mixed/partial)
19) According to Keynes total investment in an economy depends on two factors. One is marginal efficiency
of capital and the other is ______. (income level/saving/rate of interest/employment)
20) The value of marginal propensity to consume is greater than ______ but less than _____. (0, 1/0, 2/0,
∞/1, 1.5)
21) To satisfy the four characteristics of the consumption what should be the shape of the consumption
function? (upward sloping curve convex from below/straight line passing through the origin/upward
sloping straight line which cuts the 450 line from above/downward sloping straight line)
22) At the point of intersection of the consumption function with the 450 line consumption expenditure is
equal to: (saving/income/zero/investment).

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23) The slope of the consumption function is: (marginal propensity to consume/average propensity to
consume/greater than 1/zero).
24) As income increases average propensity to save _____. (decreases/increases/remains the same/first
increases then decreases)

ANSWERS

1. (c) 2. (a) 3. (b) 4. (d) 5. (c) 6. (a) 7. (a) 8. (d) 9. (c) 10. (c) 11. (a) 12. (a)
13. (b) 14. (b) 15. (c) 16. (b) 17. (a) 18. (b) 19. (c) 20. (a) 21. (c) 22. (b) 23. (a) 24. (b)
25. (d) 26. (c) 27. (d) 28. (c) 29. (a) 30. (c) 31. (a) 32. (d) 33. (a) 34. (b) 35. (a) 36. (c)
37. (a) 38. (a) 39. (b) 40. (c) 41. (c) 42. (d)

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Chapter – 16: Banking

[1Q X 5M]

Functions of Commercial Bank:

Commercial banks are the pillars of economic development of any country. Commercial banks perform
various functions. Some of them can be listed as below:

(i) Excepting deposit: The first and foremost function of commercial bank are to except the deposit
from common public. The following are the types of deposit in common practice:
a) Current deposit,
b) Savings deposit,
c) Recurring deposit,
d) Fixed deposit.
(ii) Granting loans: The another function of commercial bank is to grant loan in the form of cash credit,
loans and advances and overdraft facility. The entire banking system works on the process of credit
creation and loan giving for the rate of interest.
(iii) Agency function: Apart from primary function, bank also gives agency service on behalf of its client.
As per the standing order given to bank, bank makes the payment of electricity bill, rent, insurance
premium, etc. For all these services bank collects service charges from the customers.
(iv) Custodian function: In now a days, the banks are also providing custodian function for the valuables
of the customers. That mean through the locker facility customers can even keep the valuables such
as gold, silver and important documents for which locker rent is charged annually by the bank.
(v) Foreign Exchange Function: One of the another function of commercial bank is to help in
international trade. The banks also carry on the business of buying and selling foreign currencies.
(vi) E-Banking function: E-Banking stands for electronic banking through which bank provides the
banking facilities in electronic form for the faster transaction and convenience of the customers in
the form of ATM Card, Debit Card, Credit Card, E-Corner, etc.

Methods of Credit Creation by RBI:

The following are the methods adopted by RBI to control credit:
1. Bank rate: These are the rate at which the discounting of the bills of exchange and other securities
are done by commercial bank. It simply can be said as the rate decided by RBI to control credit.
Higher the bank rate lower shall be the amount of loan.

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2. Open Market Operation: This is the situation, when the RBI purchase and sell government securities
in the open market. Here when the government bonds to increase the money supply then it
purchases the securities and when it wants to decrease the money supply then it sells.
3. Cash Reserve Ratio: CRR refers to the percentage of minimum cash reserve that every commercial
bank have to maintain if the rate of CRR increase then the amount of loan given shall reduce and
vice-versa.
4. Statutory Liquidity Ratio: It refers t the minimum percentage of total deposit that every commercial
bank have to maintain in the form of liquid assets. RBI in order to control the credit increases the
SLR.
5. Moral suasion: This is the method whereby the meeting between RBI Governor and representatives
of commercial bank are fixed to control the inflation and credit supply.
6. Credit Rationing: Under this method, RBI gives the guidelines about the allocation of the amount of
loan. Under this method the quantum of loan to be given to different sectors are also fixed.

RBI is ‘Lender of Last Resort’:

RBI is the Central Bank of India. It has multiple functions to perform, such as:
a) RBI is the watch dog.
b) RBI is the banker’s bank.
c) RBI has the only authority of note issue.
d) RBI is the custodian of reserve.
e) RBI is the lender of last resort.
RBI is considered as lender of last resort as it performs following functions:
a) Any commercial bank approach the central bank for financial crunchiness.
b) The development banks such as IDBI, IFCI, etc. also approach RBI for financial support.
c) Whenever there is economic depression then RBI help the country to come out of such situation.
d) Export, Import bank also performs crises then RBI actively works to bring different banks out of these
situations.
e) RBI is also the ultimate source of finance for public sector undertaking also.

Questions for Practice (5 Marks Each)

1) Discuss the functions of commercial banks.

2) Discuss the functions of a commercial bank.
3) What is bank rate? How does it work to control credit?
4) What is model suasion? Explain?
5) Give a brief account of the different methods of credit control by the central bank.
6) ‘RBI is as Lender of Last Resort’ – Explain.

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Chapter – 17: Fiscal Policy

[1 MCQ + 1Q X 2M]

1. Fiscal Policy: These refers to all the panning made by the government related to its revenue and
expenditure. Fiscal policies are very important for making government planning about budget. It has
following objectives:
a) It is important to control economic stability.
b) It is done to maintain full employment level.
c) It helps to remove deficit in the BOP.
2. Expansionary Fiscal Policy: These are the policies adopted by the government to increase money
supply in an economy. These policies are helpful in increasing effective demand at the time of
recession. Some tools of increasing money supply is to increase spending or cut taxes.
3. Contractionary Fiscal Policy: These are the policies adopted in the economy to reduces the money
supply. This can be done by cutting expenditure or increasing taxes. This policy is adopted to slow the
growth of healthy economy level.
4. Government Expenditure Multiplier: These are the values or factors which shows the impact of
government expenditure on the national income level of an economy. This can be shown as:

It simply means national income of the country or government expenditure multiplier depends upon
Marginal Propensity to Consume.
5. Deficit Financing: This is the situation, when government of a country in order recover itself from
deficit borrows the money from common public, commercial banks or other institutions. This situation
turns up when the payment of the government is more than its receipt.
6. Inflationary gap: This is the situation which is created due to the difference between total demand for
the commodity and total supply of the commodity at full employment level. It generally arises due to
increase in consumption expenditure, investment expenditure and government expenditure.
7. Fiscal measures to control inflation:
a) Reduction in unnecessary expenditure
b) Increase in taxes
c) Increase in savings.

Public Debt:
It is the situation when government borrows the money from common public. Under this situation,
government is indebted to the public for their expenditure. Generally this situation arises due to deficit
financing.

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Questions for Practice

A. Choose the correct option: (1 Mark each)
1) That policy of government which words through the government budget is known as ______ policy.
(monetary/fiscal/income/revenue)
2) If government’s expenditure increases by Rs. 1,000 and if the marginal productivity to consume is
4/5, national income will increase by Rs.: (1,000/4,000/5,000/1,250).
3) If government’s tax revenue increases by Rs. 100 and if the MPC is 4/5, then the level of income
decreases by Rs: (100/400/500/125).
4) If government’s tax revenue and expenditure both increase by Rs. 100 and if the MPC is 4/5, then
national income increases by Rs: (100/400/500/125).
5) If the marginal propensity to consume is ‘b’, the government expenditure multiplier will be:
( ).
6) If the MPC is ‘b’, tax revenue multiplier will be: ( none of these).
7) The value of balanced budget multiplier is: (1/greater than 1/less than 1/none of these).
8) The objective of anti-inflationary fiscal policy is to reduce: (aggregate demand/rate of
interest/supply of money/national income).
9) If in the budget total revenue is less than total expenditure, it is known as ______ budget.
(surplus/deficit/balanced/capital)
10) Which of the following is not anti-inflationary in nature? (increase in tax revenue/decrease in
government expenditure/repayment of public debt/compulsory saving)
11) Classical economists favoured a ______ and ______ budget. (small, balanced/big, balanced/small,
deficit/big, deficit)
12) According to _______, income and employment can be increased through deficit financing.
(Marshall/Ricardo/Keynes/Marx)
13) If there are unutilized resources deficit budget can increase ________ of the country.
(income/employment/price level/both income and employment)
14) In order to remove recession there should be _________ in government’s budget.
(deficit/surplus/balance/none of these)
15) If there is a budget deficit in a situation of full employment there will be: (increase in
income/increase in production/increase in employment/increase in price level).
16) In order to control inflation there shall be ________ in government’s budget.
(surplus/deficit/balanced/none of these)
17) One adverse effect of deficit financing is: (decrease in the supply of goods/decrease in the volume
of production/increase in the price level/none of these).
18) If the marginal propensity to consume is 0.8, the value of government expenditure multiplier will
be: (5/8/10/16).
19) One instrument of fiscal policy is: (change in bank rate/change in the cash reserve ratio/change in
repo rate/change in government expenditure on goods & services).
20) Which type of fiscal policy is used to combat inflation? (expansionary/contractionary/balanced
budget/deficit budget)

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21) Which type of the following is not an element of aggregate demand? (total consumption
expenditure/total investment expenditure/government expenditure/government’s tax revenue)
22) What happens when government’s tax revenue increases? (disposable income of the public
increases/disposable income decreases/consumption expenditure decreases/both B and C)
23) Multiplier for change in tax revenue is ______ multiplier for change in government expenditure.
(greater than/smaller than/equal to/none of these)
24) Suppose marginal propensity to consume is 4/5. If government expenditure increases by Rs. 100
and tax revenue increases by Rs. 120, what will be the effect on the level of income? (income will
increase by Rs. 20/income will decrease by Rs. 20/income will increase by Rs. 500/income will
decrease by Rs. 480)
25) Which of the following is not anti-inflationary measure? (increase in government
expenditure/increase in tax revenue/introduction of compulsory saving scheme/increase in public
borrowing)
26) If government expenditure and taxes increase by equal amount then the value of the income
multiplier will be: (0/1/more than 1/less than 1).
27) Increase in government expenditure by Rs. 10,000 results in an increase in national income by Rs.
60,000. In this case, the value of the marginal propensity to consume is: ( ).

ANSWERS

1. (b); 2 (c); 3. (b); 4. (a); 5. (b); 6. (c); 7. (a); 8. (a); 9. (b); 10. (c); 11. (a); 12. (c); 13. (d); 14. (a);
15. (d); 16. (a); 17. (c); 18. (a); 19. (d); 20. (b); 21. (d); 22. (d); 23. (b); 24. (a); 25. (a); 26. (b); 27. (d)

B. Short Answer Questions: (2 Marks each)

1) What is the value of the government expenditure multiplier?

2) What is a deficit budget?
3) Mention two fiscal measures to control inflation.
4) What is meant by expansionary fiscal policy?
5) What is meant by fiscal policy?
6) What is deficit financing?
7) What do you mean by public debt?

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Chapter – 18: International Trade

[1Q X 5M]

Difference between Balance of Payment and Balance of Trade:

Balance of Payment Balance of Trade
a) It is the systematic record of all economic a) It records difference between visible export
transactions that takes place between two and import.
countries.
b) Balance of payment considers both visible b) It considers only visible trade.
and invisible trade.
c) Balance of payment always balances. c) It may be positive, negative or zero.
d) It reflects the comprehensive picture of d) It is the part of the BOP.
international trade.
e) BOP is the broader concept. e) It is the narrow concept.
f) BOP includes unilateral transaction, current f) It records only the transaction of current
account transaction and also capital account.
transaction.
g) It reflects the whole picture of international g) It does not reflects whole picture of
trade. international trade.

‘Balance of Payment always balances’ – Why?

Balance of Payment is the systematic record of all economic transaction during a period of time between
two countries. BOP is prepared for a given period of time and it has two sides, a credit and a debit side. The
credit side records those items which give rise to receipt of foreign but the debit side represent those items
which give rise to payment of foreign currency. This can be presented as below:
Debit Credit
1. Visible import 1. Visible export
2. Invisible import 2. Invisible export
3. Unilateral transfer payment 3. Unilateral transfer receipts
4. Capital payment 4. Capital receipts
The BOP account is prepared in such a manner, that the sum of all credit items are equal to the sum of all
debit items. This is due to the nature of double entry system of accounting used in preparing BOP account.
In the double entry system of accounting each transaction is recorded. In two sides, one is debit and other is
credit side whenever any transaction takes place these are two side one is debtor and other is creditor.

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According to the rules of double entry system, when these are decreases in assets or increases in
liability it will be recorded in credit side.
On the other hand, when there is increase in asset or decrease in liability it will be recorded in debit side.
For example: If Mr. X export some goods then the loss of asset equal to the value of exported goods shall be
credited but at the same time money received from exported goods will increase the asset and recorded in
the debit side this fact explains why BOP always balances.

Determination of Equilibrium Exchange Rate or Determination of Flexible

Exchange Rate:

Exchange rate is the rate at which currency of one country is converted into the currency of another country.
Exchange rate may be fixed or flexible. Fixed exchange rate is the rate which is determined by the
government but flexible exchange rate is the rate which changes depending upon the market forces.
Equilibrium exchange rate is the rate at which balance fo payment balances. Modern economist suggested
that the rate of exchange or the price of foreign exchange is determined just like the price of any commodity
as the equilibrium price is determined by demand and supply so the exchange rate the equilibrium exchange
rate will be the rate where the demand for foreign exchange will be equal to the supply of foreign exchange.
For example suppose there is international trade between two countries say India and USA then in the
foreign exchange market the price of dollar in terms of rupees will be determined by the supply of and
demand for dollar in terms of rupees. If there is excess demand for dollars then the price of dollar will boost
up but the price will go down if its demand falls.
Hence, equilibrium exchange rate shall be the rate at which demand for dollars are equal to supply of
it. This can be presented in the following diagram:
Space for Diagram

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In the above diagram, OR0 is the equilibrium exchange rate since at point E the demand for money which is
assumed to be downward slopping intersect the supply of money which is assumed to be upward rising.

Methods of Correction of Deficit in BOP:

Deficit in BOP is the situation when import of a country is more than its export. So deficit in BOP can be
corrected using following methods:
(i) By imposing restriction: This is the first and very simplest method of controlling deficit whereby
government imposes the restrictions completely on import.
(ii) By imposing import quota: Under this method quota is imposed on the physical quantity and money
value of goods to be imported.
(iii) By expansion of export: Under this method to correct the deficit it is tried to expand the export.
Export can be increased by the Bilateral agreement with new countries.
(iv) Through direct government intervention: Under this method only government authorities and
institutions are permitted to get engaged in International Trade. Government only imports required
quantity.
(v) Devaluation: Under this method, the value of domestic currency is decreased which ultimately
increases the price of imported goods and the demand for import reduces.
(vi) Deflation: Under this method the money value of national income of the country decreases which
results in the fall of purchasing power. Hence the capacity to import reduces.

Questions for Practice (5 Marks Each)

1) Explain, with example the distinction between balance of trade and balance of payments.
2) Discuss the different components on the credit side and on the debit side of balance of payments of a
country.
3) ‘Balance of payments always balances’ – Explain.
4) When does deficit occur in balance of payments? How can such deficit be removed?
5) How is the equilibrium exchange rate determined under the flexible exchange rate system?

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Chapter – 19: Measures of Dispersion

[1MCQ + 2 SAQ + 1Q X 2M + 1Q X 5M]

Dispersion:
Dispersion is the calculation of deviation from central value. There are two methods of dispersion:
a) Absolute Measure,
b) Relative Measure.

Dispersion

Absolute Relative

Range Co-Efficient of M.D.

Standard Deviation (S.D.) Co-efficient of Q.D.
Quartile Deviation (Q.D.) Co-efficient of
Mean Deviation (M.D) Variation (C.V.)

 Range: It is the difference between maximum value and minimum value.

Ex – 1: Calculate the value of range of 5, 10, 55, 75, 500.

Ex – 2: Calculate the value of range from the following information:

Values Frequency
5 2
10 3
15 5
25 1
35 4
75 2

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Ex – 3: Calculate range:

Wages: 100-200 200-300 300-400 400-500

Workers: 2 5 7 8

Ex – 4: Calculate range:

Class: 10-19 20-29 30-39 40-49 50-59 60-69

Frequency: 2 3 1 5 1 2

Advantage of Range:
a) It is easy to understand.
b) It is easy to calculate.
c) It is easy to interpret.

Disadvantage of Range:
a) It does not depend on all observations.
b) It only consider extreme value.
c) It is not suitable for frequency table with open end class.

 Standard Deviation:

1. S.D. is the positive square root of variance.

2. Variance is the square of S.D.
3.
4.
5.
6. Standard Deviation is denoted by the Greek Letter (Sigma).

Dispersion: Dispersion refers to the method of calculating the deviation from the given central value.

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Calculation of S.D. from Simple Observation:

Formula:

Here,
= Summation of
n = No. of observations.
= Summation of

Ex – 1: Calculate S.D. of 1, 2, 3, 4, 5.

Ex – 2: Calculation S.D. of 2, 3, 4.

Calculation of S.D. from frequency distribution:

Formula:

Here,

Ex – 1: X: 2 4 6 8
F: 1 2 3 4

Ex – 2: Marks: 10-20 20-30 30-40 40-50

Students: 5 7 2 1

Lorenz Curve:
It is the graphical presentation of the inequality of Income and Wealth. The concept of Lorenz Curve was
given by Dr. Max Lorenz. This can be shown in the following diagram:

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Space for Diagram

Properties:
a) It has positive slope.
b) It is convex below egalitarian line.
c) Lorenz Ratio or Gini Co-efficient shall be between 0 and 1.

Questions for Practice

A. Choose the correct option: (1 Mark Each)

1) The tendency of the values of a variable to scatter around a central value is known as:
(dispersion/central value/range/standard deviation).
2) The difference between the highest value and the lowest value of a variable is called:
(average/median/range/standard deviation).
3) The square of the standard deviation is called: (variance/range/coefficient of variation/median).
4) If all the values of a variable are equal, their standard deviation will be: (constant/1/zero/equal to
the values of variable).
5) Standard deviation is the ______ of variance. (negative square/positive square/position square
root/negative square root)

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6) To draw a Lorenz curve a ______ has to be taken. (triangle/rectangle/square/parallelogram)
7) If the Lorenz curve coincides with the egalitarian line then the inequality of income will be:
(highest/lowest/medium/immeasurable).
8) Lorenz curve is situated _______ the egalitarian line. (below/above/in the middle of/to the left of)
9) The area between the Lorenz curve and the egalitarian line measures: (inequality of
income/poverty/equality of income/unemployment).
10) Through which curve can inequality of income of a country be measured?
(supply/demand/Lorenz/cost)
11) Another measure of inequality of income through Lorenz curve is: (range/variance/standard
deviation/Gini coefficient).
12) The value of Gini coefficient or Lorenz ratio lies between _____ and _____. (0, 1/1, -1/0, ∞/0, 10)
13) If the inequality of income in the economy decreases the Lorenz Curve: (comes nearer to the
egalitarian line/moves away from the egalitarian line/coincides with the egalitarian line/moves to
the left of the egalitarian line).
14) The meaning of dispersion of a variable is: (how far the values deviate from their highest value/how
far the values deviate from their minimum value/how far the values deviate from their central
value/none of these).
15) Find the range of the given values: 2, 5, 7, 11, 25, 30. (10/25/28/13)
16) If the standard deviation of a variable is zero then each value of the variable will be:
(positive/negative/zero/equal).
17) If two variables ‘X’ and ‘Y’ are so related that Y = bX where ‘b’ is a constant, then the relation
between will be given by: ( none of these).
18) If the area between the egalitarian line and Lorenz curve is denoted by A and the area under the
Lorenz curve is denoted by A’, then A + A’ = ________. (1/2/ /4)
19) Lorenz curve is used to measure: (poverty/national income/unemployment/inequality in income).
20) If = 20, = 200, and n = 10, then find the value of standard deviation of x. (16/4/-4/none of
these)
21) The lowest value of standard deviation is: (-2/-1/0/1).
22) The value of Lorenz Ratio must be: (negative/greater than 0 but less than 1/greater than 1 but less
than 2/greater than 2).

ANSWERS

1. (a); 2. (c); 3. (a); 4. (c); 5. (c): 6. (c); 7. (b); 8. (a); 9. (a); 10. (c); 11. (d); 12. (a); 13. (a); 14. (c);
15. (c); 16.(d); 17. (c); 18. (c); 19. (d); 20. (b); 21. (c); 22. (b)

B. Fill in the blanks: (1 Mark Each)

1) If the values of a variable are equal the standard deviation of three values will be ________.
2) Variance = Mean of the squares of the observations - ________ of the mean of the observations.
3) Standard deviation = .
4) The square of the standard deviation is called _________.
5) The highest value of the Lorenz Ratio is ______.

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6) Standard deviation is a measure of ________.
7) Range of values of a variable = Highest value of the variable - ______ value of the variable.
8) Inequality in the distribution of income can be measured by the ______ curve.
9) While drawing a Lorenz Curve a ________ is taken.
10) The lowest value of the Lorenz Ratio is ________.
11) Standard deviation is the ________ square root of variance.
12) The lower the inequality in the distribution of income the ________ will be the Lorenz Ratio.
13) Variance is _________ of standard deviation.
14) If the inequality of income is _______ the Lorenz curve coincides with the line of perfect equality.
15) If each value of a variable is the same, the value of standard deviation will be ______.

ANSWERS

1. Zero; 2. Square; 3. Variance; 4. Variance; 5. 1; 6. Dispersion; 7. Lowest; 8. Lorenz; 9. Square;

10. Zero; 11. Positive; 12. Lower; 13. Square; 14. Nil; 15. Zero

C. Write True or False: (1 Mark Each)

1) If the standard deviation of the values of a variable is zero then all values of the variable will be
equal. (True)
2) Suppose range of 10 observations is 20. If each observation is increased by 5, the range will be 25.
(False)
3) There may be two types of measures of dispersion. (True)
4) An absolute measures of dispersion has no unit of dispersion. (False)
5) If all the observations are increased or decreased by the same amount their standard deviation will
remain the same. (true)
6) If all the values of a variable are multiplied by 5 their range will remain the same. (False)
7) Range depends on all values of the variable. (False)
8) Standard deviation depends on all values of the variable. (True)
9) The square root of standard deviation is called variance. (False)
10) Lorenz curve lies to the left of the egalitarian line. (False)

D. Answer the following questions in brief: ( 1 Mark each)

1) Define range.
2) Determine the range of the following values: 119, 213, 79, 98, 223, 117.
3) If a study on a number of students shows that they are all of the same age, what will be the value
of standard deviation of their age?
4) Determine the range of the following set of values: 228, 145, 315, 97, 113 and 298.
5) What is variance.

E. Answer the following questions: (2 Marks Each)

1) Define standard deviation.
2) Mention one advantage and one disadvantage of range as a measure of dispersion.

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GOBIND KUMAR JHA 9874411552
3) Mention any two disadvantages of range as a measure of dispersion.
4) Mention any two advantages of standard deviation.
5) What is Lorenz Curve?
6) What is meant by dispersion?

F. 5 marks questions:
1) The weight (in kg.) of 6 children in a class are: 16, 15, 15, 16, 15, 16. Find the standard deviation of
their weights.
2) Find the S.D. of the numbers: 20, 19, 20, 19, 19, 20.
3) The number of members of 6 families are respectively: 10, 9, 10, 9, 9, 10. Find the S.D. of the
number of members of these families.
Daily Wages (in Rs.) 20 – 24 25 – 29 30 – 34 35 – 39
No. of workers 16 28 14 12
4) Explain with the help of a diagram, the properties of Lorenz Curve.

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Chapter – 20: Poverty, Inequality and Unemployment

[2 MCQ + 2 SAQ + 1Q X 2M + 1Q X 5M]

UNEMPLOYMENT
This is the economic situation when people either don’t get the work or they do not want to work.

Types of Unemployment:
1. Open Unemployment: This is the economic situation when the surplus labour who are willing to work
at the ruling wage rate but they don’t get the job.
2. Disguised Unemployment: This is the economic situation when the marginal productivity of workers
are zero. It simply means it appears us that people are working but actually they are unemployed. The
additional contribution of workers are zero as even if they are removed it does not affect the
production. This situation is popularly found in agricultural sector.
3. Seasonal Unemployment: This is the economic situation when people remain employed in the
particular season but for the other season they have to be unemployed. It means due to fluctuation in
season the unemployment which is caused is known as seasonal unemployment.
4. Frictional Unemployment: This is the type of unemployment which is the result of perfect immobility
of labour from one job to another job.
5. Voluntary and Involuntary Unemployment: This concept was introduced by ‘J. M. Keynes’. According
to him voluntary unemployment refers to those workers who are not willing to work. On the other
hand involuntary unemployment is the situation when the employees are not getting the work.
6. Structural Unemployment or Technological Unemployment: When the economic structure of an
economy changes or there is the adoption of new technology then the number of people have to be
unemployed due to such changes which is known as technological unemployment.

Features of Disguised Unemployment:

a) Disguised unemployment is the situation when marginal productivity of labour is zero.
b) In disguised unemployment, there exist excess capacity and over employment.
c) In case of disguised unemployment even if employees are removed that does not affect the work.
d) Disguised unemployment is more chronic in agriculture sector.
e) This situation is generally seen in the country with over population.

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Features of Technological Unemployment:

a) This is the type of unemployment which is caused due to change in technology.
b) It is also known as structural unemployment.
c) This situation is very frequent in India after liberalization.
d) This unemployment is generally seen due to changes in the labour saving technology.
e) Technological unemployment indicates the shift in economy.

Cause of Unemployment in India:

Unemployment is situation when people do not get the job. It is one of the important economic
problem of our country. The reasons for unemployment can be explained as below:

a) High Population growth: One of the root cause of unemployment is the rate of population growth of
our country. It simply means the birth rate is multiple time greater than the average death rate but
this increase in population is not supported by employment opportunities.
b) Inappropriate Technology: In India capital intensive technique of production have been adopted
which is actually inappropriate. So, the adoption of new technology in production provides very less
scope for employment opportunities.
c) Faulty Education System: One of the cause of unemployment is the faulty education system. It
means the focus of our education system is more or general or theoretical study rather than on
vocational or practical training.
d) Dependence on Agriculture: The most of the population of our country is dependent on agriculture
and agriculture is dependent on monsoon as a result due to changes in season people have to face
seasonal unemployment.
e) Lack of suitable employment policies: There has not been any national employment policy to
provide the permanent solution to the unemployment. All the policies adopted had been temporary
thus the problem of unemployment still exist.
f) Decline of cottage industry: During the British Rule, Cottage Industry declined and the govt. of
Indian adopted various method to expand the cottage industry but the growth was not upto the
mark.
g) Lack of Mobility of Labour: The large portion of the population is unemployed due to the lack of
mobility from one place to another place due to social, religious and economical factor.

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Employment Generation Programmes of the Government:

The Government of India in order to create more employment adopted the following programmes:

a) Rural Work Programme: Under this programme the purpose was to construct civics work of
permanent nature.
b) SFDA (Small Farmers Development Agency): This programme provides credit facilities to small poor
farmers.
c) NREP (National Rural Employment Programme): This programme was started in October, 1980 to
create employment opportunities in the form of community assets.
d) RLEGP (Rural Landless Employment Guarantee Programme): This programme was launched in the
year 1983 to provide employment opportunities to rural people.
e) IRDP (Integrated Rural Development Programme): Various rural programme had been integrated to
make one single programme.
f) JRY (Jawahar Rojgar Yojna): This scheme was introduced in the year 1989 and it merged the scheme
of NREP and RLEGP.
g) JGSY (Jawahar Gram Samridhi Yojna): This was introduced in the year 1999 to provide employment
base to the poor people.
h) MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme): This programme was
adopted in 2005 with the name NREGS to provide 100 days employment to one member of every
family.

POVERTY

It is the economic situation when people does not have the basic necessities of life.

 Poverty Line: It refers to the money value or the minimum standard of goods and services set by the
government to check the level of poverty. There are two standards set in our country in the year 1999
– 2000:
a) The minimum daily calories intake for rural person is 2400 and 2100 for urban person.
b) The consumption in rural areas should be Rs. 328 per month per person but Rs. 454 in urban
areas.
The people who meet the above standard are called APL (Above Poverty Line) but those
who fail to meet are called BPL (Below Poverty Line).

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 Causes of Poverty in India:

The following are the causes of poverty in India:

a) Low level of national income: The national income of India compared to her natural resources is
very low. The volume of gross domestic product (GDP) compared to total production is low. This
is one of the main reasons behind poverty in India.
b) Low rate of growth: Not only total national output is low, its rate of growth is also low. During
the entire plan period, national output has increased at an average rate of 4 percet per annum.
Due to population growth at around 2 per cent, our per capita income has grown at an average
rate little over 2 per cent per annum during the entire plan period.
c) Faulty planning: Our planners stressed mainly on output growth. At least up to the fourth plan,
no direct measures were adopted to remove poverty. Only in the recent plans, various poverty
eradication programmes have been adopted.
d) Massive unemployment: Our planners took it for granted that employment will automatically
rise if output rises. But that need not always be true. Hence, during the entire plan period, size
of unemployment and underemployment has increased. This resulted in widespread poverty in
India.
e) High rate of growth of population: This is another major cause behind poverty in India. Total
population in India during the plan period has tremendously increased. This has created extra
pressure on food supply. It has also resulted in huge unemployment and underemployment. This
again results in widespread poverty.
f) Inflation: During the whole plan period, price level in India has increased. As a result, purchasing
power of the poor has decreased. Many items of subsistence have gone beyond their reach.
Consequently, they have fallen below the poverty line.
g) Lack of capital: As an underdeveloped economy, India suffers from lack of capital. Hence, her
growth rate is low. The lack of capital also results in low employment. The obvious consequence
is a high incidence of poverty.
h) Lack of infrastructure: The size of national output and its rate of growth depend heavily on the
basic infrastructures like energy, transport and communication, etc. Side by side, there should
be proper education, health and housing services. The supply of these basic factors of growth is
limited in India. This also results in massive poverty in India.
i) Inequality in the distribution of income and wealth: This is another major reason behind huge
poverty in India. The poor people cannot get fruits of economic development because of
unequal distribution in income and wealth. The benefits of growth are appropriated by
capitalists in urban areas and by landlords in rural areas. Thus, even if growth takes place,
incidence of poverty does not fall in India.
j) Inadequate and faulty programmes of poverty alleviation: Particularly in the recent past, many
poverty-alleviating measures have been adopted. But most of these measures are inadequate
and faulty. In many cases, these programmes are not properly implemented.

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Head Count Ratio (HCR):

HCR stands for ‘Head Count Ratio’. This is the absolute method of calculating poverty whereby each and
every person is being counted with the standard pre-determined and person’s failing to fulfill the standard
are considered as poor.

 Studies on Poverty:

a) Study of Dandekar and Rath

b) Study of Ojha
c) Study of Minhas
d) Study of Bardhan
e) Study of Ahluwalia
f) Study of Gaurav Datt and Martin Ravallion.

 Poverty Alleviation Programme:

Poverty is one of the biggest economic problem in our country. So, the fight with poverty following
programmes had been adopted:

a) MNP (Minimum Need programme): This programme was undertaken to provide and fulfill the
minimum need of the poor people such as primary education, public health, medical facilities,
home sites for poor people, etc.
b) SFDA:
c) JRY:
d) IRDP: Copy from back
e) NREP:
f) Mid day Meal: Under this programme, the government tried to provide one time meal to the
students of primary and secondary level at school.
g) MGNREGS: Copy from back

 Causes for the failure of the government poverty alleviation programme:

Although the poverty was extremely high yet various programme had been adopted to eradicate
poverty but due to following reasons poverty could not be eradicated:

a) Excess Population Pressure: Due to the pressure of population the programme of the government
could not be successful implemented as the birth rate is multiple time greater than death rate.
b) Huge Unemployment: Too much unemployment prevails in our country as the programme of the
government does not generate sufficient employment opportunity. So, with the increasing
unemployment poverty also increases.

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c) Inflation: Inflation is the economic situation when the prices of the commodity in a country rises
over the period of the time as a result the purchasing power of the people goes down and push up
more people below poverty line.
d) Top down approach: Al the programme adopted by the government had been top down. It means
the benefit of the programme had not actually been enjoyed by the ultimate poor people.
e) Temporary scheme: The benefit arising from various scheme could only solve the temporary
problems of the people. It means the government never approached to provide permanent
solution to the poverty of our country.
f) Political Influence: The programme of the government do not receive full co-operation from the
political parties as the benefit of the government programme are ultimately used by them for self-
interest.

IRDP:
IRDP stands for Integrated Rural Development Programme. It has following objectives:
a) It was implemented to replace various rural programmes.
b) It was implemented to generate self employment in rural areas.

INEQUALITY

It is the economic situation when the income or wealth of the country are not equally distributed.

Causes of Inequality:
Inequality is one of the major economic problem of our country. The following are the causes of inequality:

1. Unemployment or Underemployment: The first and foremost reason of inequality is unemployment

as the insufficient employment opportunities brings down various people below the poverty line and
at the same time few people are very rich.
2. Higher personal taxation: In our country, the system of direct tax is progressive. Hence, the people
do not prefer to pay the tax, which results in the creation of black money. Hence, a very big part of
our population still remains poor.
3. Inflation: It is the situation when the prices of the commodity in an economy rises over the period of
time. Hence, the rich people take more advantage of the situation and became richer but at the
same time poor remains the poor.
4. Dominant Capitalist Economy: Although India is a mixed economy. Yet the capitalist is more
dominating in our country. As a result some big businessman hold the large part of income and at
the same time a good section of people have very low income.

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5. Law of Inheritance: As per this law the person who take birth in a rich family automatically gets the
ownership of the properties held by his parents. So, the rich s=remains the rich by birth and the
inequality prevails.
6. New Agricultural Strategy: The benefits of green revolution in the form of agricultural strategy was
only enjoyed by the big farmers. Hence, the inequality from this also arised as the poor farmers had
been exploited and could not reach at the level of big farmers.

Questions for Practice

A. Choose the correct option: (1 Mark Each)
1) Which of the following names is not associated with the discussion on inequality of income in
India? (Ayenger and Mukherjee/Madalgi/Mahalanobis/S.P. Gupta)
2) Which of the following is not a cause of inequality of income in India? (tax evasion/problem of
inflation/land reforms/unemployment problem)
3) Which of the following is not a measure taken for reducing inequality of income in India? (ceiling on
land holdings/liberalization programme/unearthing of black money/minimum wages Act for
agricultural labourers)
4) The primary reason for income inequality in India is: (population growth/inflation/black
money/unemployment).
5) Disguised unemployment is generally found to exist in the: (agricultural sector/industrial
sector/banking sector/transport sector).
6) Mahindra and Mahindra is a: (monopoly firm/monopoly house/government company/joint
venture).
7) Tata family is a: (monopoly firm/monopoly house/government undertaking/joint stock company).
8) If three firms in an industry supply 75% of the total product then this industry has: (high level
concentration/medium concentration/low concentration/no-concentration).
9) Monopoly Enquiry Commission was appointed in the year: (1971/1964/1961/1981).
10) Which of the following economists is not associated with measurement of poverty in India?
(Dandekar and Rath/Bardhan/Mahalanobis/Minhas)
11) Inequality of income is ________ in urban areas than in rural areas. (stronger/lower/very low/very
high)
12) Measurement of poverty by means of calories is known ______ approach.
(biological/economic/social/nutritional)
13) Where is the intensity of poverty very high? (rural areas/urban areas/semi-urban areas/all of these)
14) To measure the depth of poverty _______ method is superior to head count method. (poverty
gap/relative poverty/absolute poverty/none of these)
15) _______ has shown that in India there is a relation between rural poverty and condition of
agricultural productivity. (Minhas/P.D.Ojha/Ahluwalia/Pranab Bardhan)

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16) Disguised unemployed persons are those persons whose marginal productivity is:
(zero/negative/zero or negative/positive).
17) Mahalanobis Committee was appointed in the year ______ to study the problem of inequality in
income. (1948/1960/1970/1951)
18) One of the indicators of economic inequality is: (inequality in the distribution of income/inequality
in the fertility of land/inequality in the efficiency of labour/racial inequality in society).
19) One of the reasons for inequality in the distribution of income is: (climate/inflation/labour
intensive technology/none of these).
20) In a developing country like India, the relevant problem of poverty is: (absolute poverty/relative
poverty/disguised poverty/none of these).
21) In the rural areas ________unemployment arises due to inadequate irrigation system.
(seasonal/disguised/structural/frictional)
22) Surplus labour in Indian agriculture leads to ________ unemployment.
(seasonal/disguised/structural/frictional)
23) What is measured by Head Count Ratio? (national income/unemployment/inflation/poverty)
24) Seasonal unemployment exists mainly in the: (educational sector/industrial sector/agricultural
sector/transport sector).

ANSWERS

1. (d); 2. (c); 3. (b); 4. (d); 5. (a); 6. (a); 7. (b); 8. (a); 9. (b); 10. (c); 11. (a); 12. (a); 13. (a); 14. (a);
15. (c); 16. (c); 17. (b); 18. (a); 19. (b); 20. (a); 21. (a); 22. (b); 23. (d); 24. (c)

B. Fill in the blanks:

1) To study the inequality in the distribution of income a committee under the chairmanship of
______ was appointed in 1960. (Mahalanobis)
2) If there is inequality in the distribution of capital in the private corporate sector, it implies there is
private _______ in the economy. (Concentration)
3) Monopoly Enquiry Commission was set up in the year _______. (1964)
4) Measurement of poverty with the help of calories intake is called _______ approach to poverty.
(Biological)
5) In the ________ method, the number of persons below the poverty line is counted. (head count)
6) To measure the depth of poverty the concept of _______ has been introduced. (poverty gap)
7) In the agricultural sector of India two types of unemployment are found. One is ______
unemployment and the other is disguised unemployment. (seasonal)
8) Gaurav Datta and Ravallion calculated poverty gap of different states of India for the year ____.
(1983)
9) In 1971 – 72, ________ of rural households were either landless households ar small land owners
owning 2.5 acres of land. (78%)
10) Families like Tatas and Birlas are example of monopoly _______. (houses)
11) Acute ________ is seen in the distribution of ownership of agricultural land in India. (inequality)

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C. Write True or False:

1) Inequality of income is greater in urban areas than in rural areas. (True)
2) There is no inequality in the distribution of land in India. (False)
3) Special measures were adopted for the removal of poverty before the fifth plan. (False)
4) Seasonal unemployment is found to exist only in agriculture. (False)
5) There is close connection between unemployment and poverty. (True)
6) Measurement of poverty in terms of calorie intake is called biological approach. (true)
7) Poverty is concentrated in certain special occupations. (true)
8) ‘Garibi Hatao’ slogan was raised in the year 1971. (true)
9) Daily intake of 2250 calories through consumption of food is taken as the poverty line. (true)
10) Poverty gap in urban areas than in rural areas. (false)
11) Income inequality has increased in India during the plan period. (true)
12) To enquire into the inequality of income distribution in India, a committee was appointed in 1960
under the chairmanship of Prof. Mahalanobis. (True)

D. Answer in one or two sentences:

1) Give the full form of IRDP.
2) Give the full form of NREP.
3) What is the minimum calorie intake taken to measure poverty line?
4) Give an example of a monopoly firm.
5) Give an example of a monopoly house.
6) Mention one indicator of economic inequality.
7) In which year was the Mahalanobis Committee appointed?
8) Which approach measures poverty line in terms of calorie intake?

E. Short answer type questions: (2 Marks each)

1) Mention two causes of inequality of income in India.
2) What is poverty line?
3) What is poverty gap?
4) What is disguised unemployment?
5) What is structural or technological unemployment?
6) Mention two causes of poverty in India.
7) Mention two measures adopted in India for the removal of poverty.

F. Essay Type Questions: (5 Marks Each)

1) What are the causes of persistence of poverty in India?
2) Give an account of measures taken by Government of India for the eradication of poverty in India.
3) Briefly discuss the features of different types of unemployment in India.
4) Briefly discuss the causes of unemployment in India.
5) Briefly mention the measures adopted by the Government to increase employment opportunities
in India.

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Chapter – 21: Economic Reforms in Banking, Insurance

and Trade [1MCQ + 2 SAQ + 3Q X 2M]

Banking:
1. Narshimham Committee was appointed for reforms in banking sector.
2. The report was submitted in the year 1991.
3. The following recommendation was given by this committee:
a) The rate of SLR (Statutory Liquidity Ratio) should be reduced from 38.5% to 25% over the
period of 5 years.
b) The ratio of CRR (Cash Reserve Ratio) should be reduced.
c) The power of RBI to control the rate of lending and deposit over commercial bank should be
abolished.

Insurance:
1. Definition: It is the contract between two parties whereby one party who is called Insured pays
premium to another party called Insurer who in return promises to pay compensation for any loss
which is covered in the Insurance Policy and are caused due to uncertain event.
2. There are two types of Insurance:
a) Life Insurance,
b) General Insurance
3. Difference between Life Insurance and General Insurance:
Life Insurance General Insurance
It is undertaken on the life of the person. The subject matter of this insurance is
property or things.
It is undertaken generally for the long period. It is undertaken for short-period.
It is known as “Contract of Guarantee or It is known as “Contract of Indemnity”.
Assurance”.

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 Life Insurance is known as “Contract of Guarantee”.

As we know, life insurance is undertaken on the life of the person so the insurer promises the
insured that they will be compensated in case the life comes to the end during the period of insurance
and even if the insured does not suffer the loss then also they shall be given lumpsum amount.

 General Insurance is known as “Contract of Indemnity”.

In case of general insurance, the insured shall be compensated only to the extent of actual loss.
It simply means if the loss occurs within the period of insurance then the money shall be given
otherwise no compensation can be claim.

Effects of reform in Insurance:

a) IRDA (Insurance Regulatory Development Authority) was set up in 1999.
b) Various private sector insurance companies have emerged.

Malhotra Committee:
1. Malhotra Committee submitted its report in the year 1994 related to insurance sector.
2. Recommendation of Malhotra Committee are:
a) The monopoly of LICI should be abolished.
b) The LICI and GICI should work together hand in hand.
c) An autonomous body in the name of Insurance Regulatory Authority shall be established.

 Master Capsule:

 LICI was set up in the year 1956.

 GICI was set up in the year 1972.
 IRDA (Insurance Regulatory Development Authority) was set up in the year 1999.
 Some examples of private sector insurance companies are:
 Max New York Insurance Company Limited.
 Tata AIG Insurance Company Limited.
 SBI Life Insurance Company Limited.

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Trade:
1. In the year 1991, LPG concept was introduced:
L – Liberalisation
P – Privatisation BSTD Book
G – Globalisation
2. In 1947, 23 countries came together for the agreement in multinational trade in General, which is
known as GATT (General Agreement on Trade and Tariff).
3. In the year 1995, WTO came into effect. (GATT was also known as WTO).

4. Difference between GATT and WTO:

WTO GATT
(i) It was set up in the year 1985. (i) It was entered in the year 1947.
(ii) It has its own legal status. (ii) It has no legal status because it was an
(iii) It is the charted institute. agreement.
(iii) It was just an agreement.
(iv) The rules of WTO are applicable on both (iv) The rules of GATT was applicable only on
goods and services. goods.

Merits of Globalisation:
a) Free flow of capital;
b) Free flow of technology;
c) Free flow of human resource.

World Trade Organisation (WTO): WTO stands for World Trade Organisation which was set up in
1995 for the purpose of looking after the activities of its member nations. Similar to watch dog, WTO also
looks after its member nation and if the activities of any nation is found to be wrong or against public
interest then WTO takes necessary steps.

Function/Objective of WTO:
The following are the functions of WTO:

a) Administration: WTO controls and look after the trading activities of its members.
b) Tariff Cut: WTO in order to increase the trade performance reduces the rate of tariff.
c) Updating trade statistics: The complete details and information related to trade is provided by WTO
which help to update statistics.

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Advantage of India as WTO Member:

(i) India’s export of agricultural goods will increase.
(ii) If the import restrictions are removed by develop countries then India’s textile industry will be
benefited.
(iii) India can export labour services such as banking, insurance and other services.

Disadvantage of India as the Member of WTO:

a) The domestic market of India will be out of pocket.
b) The unemployment problem will increase as the small industry will be closed.
c) The market of services sector will also be captured by foreign companies.

Dunkel Draft:
It was the draft prepared by Dunkel and approved on 15th April, 1994 as per the recommendation given
in Dunkel Draft, the WTO was set up. This draft also had various rules and regulations related to the
operation of International Trade.

TRIPs:
TRIPs stands for Trade Related Aspect of Intellectual Property Rights. This was the international
agreement among the members of WTO. Under this agreement the fraud related to intellectual property
had been reduced such as copyright, trade mark, patent right, etc.

Questions for Practice

A. Choose the correct option:
1) Economic reforms programme was first adopted in India in the year: (1981/1986/1991/1996).
2) The LIC was established in the year: (1956/1951/1941/1947).
3) Which of the following is not a recommendation of the Narasimham Committee? (lending to the
priority sector should be reached/SLR is to be reduced/all commercial banks to be
nationalized/control on rate of interest to be removed)
4) Which of the following insurance companies is private? (National Insurance/New India
Assurance/Tata AIG General Insurance/United India Insurance)

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5) Indian rupee becomes fully convertible for current account transaction in the financial year: (1992-
93/1993-94/1994-95/1991-92).
6) To recommend reforms for the banking sector Narasimham Committee was set up in the year:
(1981/1986/1991/1996).
7) NarAsimham Committee recommended a banking system having ______ stages. (3/4/5/2).
8) In which year GICI set up? (1952/1972/1991/1981)
9) Which committee was appointed to introduce reforms in the insurance sector? (Narasimham
Committee/Rangrajan Committee/Malhotra Committee/none of these)
10) In which year the IRDA Act passed? (1991/1995/1999/2001)
11) Which organization does provide social security for industrial workers? (LICI/ESIC/ICICI/GICI)
12) In which year was the GATT signed? (1947/1945/1970/1981)
13) In which year was the WTO established? (1991/1995/2001/1998)
14) Discussion on eighth round of GATT was held in: (Singapore/Bangkok/Uruguay/Tokyo).
15) Reforms in the banking sector were introduced on the basis of the recommendation of ______
committee. (Chakraborty/Rangarajan/Narasimham/Tendulakar)
16) WTO was established in the year: (1991/1992/1994/1995).
17) LICI was established in the year: (1948/1951/1956/1961).

B. Short Answer Questions: (2 Marks Each)

1) Mention two recommendations of the Narasimham Committee.
2) What is the difference between life insurance and general insurance?
3) Why is general insurance called a contract of indemnity?
4) Why is life insurance called a contract of assurance?
5) Mention two recommendations of Malhotra Committee regarding reforms in the insurance sector.
6) Mention two functions of WTO.
7) Mention two disadvantages of India for joining WTO.
8) Mention two advantages of India for joining WTO.
9) What do you mean by liberalization of foreign trade?

89 Special thanks to Mr. Jay Rudra Jha for his efforts.

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Sleeping Capsule

Set – 1

1. Economic Reforms Programme was first adopted in India in the year 1991.
2. The primary reason for income inequality in India is unemployment.
3. Disguised unemployment is generally found to exist in the agricultural sector.
4. The difference between the maximum and the minimum values of a set of observations is called
range.
5. If government expenditure increases by Rs. 1,000 and if marginal propensity to consume is , then
national income will increase by Rs. 5,000.
6. The sum of marginal propensity to consume and marginal propensity to save will be 1.
7. The absolute value of price elasticity of demand at the equilibrium point of a monopolist will be
greater than 1.
8. If percentage change in price equals the percentage change in supply the value of price elasticity of
supply is 1.
9. A firm reaches the shutdown point where MR touches AVC at its minimum point.
10. As output increases, average fixed cost decreases.
11. Risk cannot be prevented by insurance.
12. Inequality of income is greater in urban areas than in rural areas.
13. Seasonal unemployment is found to exist in not only agricultural sector.
14. Determine the range of the following values: 119, 213, 79, 98, 223, 117.
Range = Maximum – Minimum
= 223 – 79
= 144
15. If a study on a number of students shows that they are all of the same age, the value of standard
deviation of their age is zero.
16. A monopolist is called a price maker.
17. In a monopoly market, price is not equals to marginal revenue.
18. If supply is perfectly inelastic, the supply curve will be Vertical Straight Line.
19. If prices of factors of production fall, the supply curve shifts to the right.
20. For recommending reforms in the financial sector Narasimham Committee was set up.
21. Acute inequality is seen in the distribution of ownership of agricultural land in India.
22. The maximum value of Lorenz Ratio is 1.
23. In the mark-up system, average cost of production + planned profit = price.
24. In the mark-up theory, it is assumed that the long-run supply curve of industry is horizontal.

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25. In a perfectly competitive market, a buyer or a seller have freedom to enter the market or exit from
the market.
26. Each firm in a monopolistically competitive market sells a differentiated product.

Set – 2

1. The second order or sufficient condition for maximization of profit of a firm in a perfectly competitive
market is MC curve is upward rising.
2. A condition of equilibrium of a monopolist is MR = MC.
3. If government expenditure and taxes increase by equal amount then the value of the income
multiplier will be 1.
4. Mahalanobis is not associated with measurement of poverty.
5. World Trade Organisation was established in the year 1995.
6. If a firm stops its production in the short-run the amount of its total cost will be total fixed cost.
7. Fall in labour’s wage rate causes the supply curve of a product to shift to the right.
8. The sum of average propensity to consume and average propensity to save will be 1.
9. The lowest value of standard deviation is 0.
10. Poverty is measured by Head Count Ratio.
11. Price discrimination is one of the features of a monopolistic competitive market.
12. The market in which there are numerous buyers but only a few sellers, is called an oligopoly market.
13. Mark up is nothing but planned profit.
14. Variance is square of standard deviation.
15. Monopoly Enquiry Commission was set up in the year 1964.
16. In 1993, the government of India appointed Malhotra Committee for reform in the insurance sector.
17. A perishable goods has a very low price elasticity of supply.
18. The supply curve will be horizontal is the supply is perfectly elastic.
19. There is no difference between firm and industry under monopoly.
20. In a monopoly market, MR is not greater than AR.
21. The value of range of a set of observations cannot be negative.
22. The standard deviation of a set of 20 observations is 10. If 2 is added to each of these observations,
the new standard deviation will be 10.
23. There is close relation between unemployment and poverty.
24. Income inequality has been increased in India during the plan period.
25. Life Insurance Corporation of India was established in the year 1956.

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Set – 3

1. The average cost curve in the short run is U-shaped.

2. The minimum point of average cost curve is called point of no profit no loss.
3. If the percentage change in quantity supplied is equal to the percentage change in price, then the
price elasticity of supply is 1.
4. In a monopoly market at the equilibrium position market price will be equal to AR.
5. If the value of marginal propensity to consume is , the value of marginal propensity to save will be .
6. Increase in government expenditure by Rs. 10,000 results in an increase in national income by Rs.
60,000. In this case, the value of marginal propensity to consume is .
7. The value of Lorenz Ratio must be greater than 0 but less than 1.
8. The main cause of poverty in India is unemployment.
9. Seasonal unemployment exists mainly in the agricultural sector.
10. If prices of factors of production rise, the supply curve of the commodity shifts to the right.
11. If percentage change in quantity supplied is less than the percentage change in price, the price
elasticity of supply is less than unity.
12. All firms in a perfectly competitive market sell a homogeneous product.
13. In the mark-up theory, Price = AVC + mark up.
14. If the inequality of income is nil the Lorenz curve coincides with the line of perfect equality.
15. If each value of a variable is the same, the value of standard deviation will be zero.
16. The number of persons below the poverty line is counted in the head count method.
17. In case of disguised unemployment, the marginal productivity of labour is zero.
18. To enquire into the inequality of income distribution in India, a committee was appointed in 1960
under the chairmanship of Prof. Mahalanobis.
19. Tata AIG General Insurance company is an example of private insurance company.

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Set – 4

1. Marginal Cost (MC) curve initially slopes and then slopes up.
2. The first order or necessary condition for profit maximization of any firm is MR = MC.
3. In case of perfectly inelastic supply, the supply curve is vertical.
4. At the equilibrium point of a monopolist absolute value of price elasticity of demand will be greater
than 1.
5. The value of investment multiplier will be
6. If there are losses of crops due to drought, the supply curve of an agricultural product will be
downward sloping. (False)
7. In the mark-up system it is assumed that long-run industry supply curve will be horizontal.
8. Greater is the value of GINI co-efficient greater will be the magnitude of inequality in income
distribution.
9. Monopoly Enquiry Commission was set up in the year 1964.
10. According to Mahalanobis Committee, income inequality is greater in the urban areas than in the rural
areas.
11. New India Assurance Company Ltd. is an example of government insurance company.

93 Special thanks to Mr. Jay Rudra Jha for his efforts.