S.Y.J.C.

– ECONOMICS

INDEX

Sr. No. Chapter Name Pg. Nos.

SECTION-A (MICRO ECONOMICS)

1. Introduction to Micro Economics 1–5

2. Consumer’s Behaviour 6 – 14

3. (A) Demand Analysis 15 – 19

(B) Elasticity of Demand 20 – 23

4. Producer’s Behaviour 24 – 30

Forms of Market and Price Determination

5. 31 – 36
Under Perfect Competition
6. Factors of Production 37 – 41

SECTION – B (MACRO ECONOMICS)

7. Introduction to Macro Economics 42 - 50

8. National Income 51 – 59

9. Determinants of Aggregates 60 – 74

10. Money 75 – 84

11. Commercial Banking 85 – 87

12. Central Banking 88 – 94

13. Public Economics 95 – 99

14. Board Paper 100 – 121

J.K.SHAH CLASSES S.Y.J.C. - ECONOMICS

CHAPTER 1 – INTRODUCTON TO MICRO ECONOMICS

Q.1. Do you agree with the following statements? Give reasons.
1. Micro Economics studies behavior of individual economic unit.
Ans. Yes, I agree with this statement.

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2. Micro Economics is known as income theory.

Ans: No. I disagree

It explains the types of market on the basis of degree of competition prevailing in such
market. It explains the price determination of firms and industries under different market
conditions.

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Q.4 Define or explain the following concepts

1. Economic Efficiency
Ans. Theory of economic welfare is concerned with efficiency in allocation of
resources. Efficiency in allocation is achieved when people's satisfaction is
maximized. Economic efficiency is summarized as followed:
Sr.No. Type Meaning
I Efficiency in production Producing maximum possible
goods and services from available
resources
II Efficiency in consumption Distribution of produced goods
and services among the people for
their consumption such that the
total satisfaction of the society is
maximum
III Efficiency in direction of Producing those goods which are
production i.e. overall economic most desired by people.
efficiency

2. Individual economic unit

Ans. Micro Economics Is a study of micro variables. It studies Individual economic
units like household, firms, consumer, etc. The economists pick up a small unit
and undertake detailed observations. In short, it is an examination of tree and
not the forest

3. Resource Allocation
Resources are scare and the government has to allocate such resources
properly for maximum public welfare. Micro economic analysis helps the
government in allocation of scare resources in the economy so as to achieve
maximum social welfare. Resource allocation determines:
i) What goods to produce.
II) Who will produce and in what manner.
iii) How the goods produced are to be priced.
iv) How to distribute the goods
It also examines whether allocation of resources is efficient which will help in
economic welfare of the society.

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Q.5 Give reasons or explain the following statements

1. Micro-Economics is also known as price theory
Ans:
1. The scope of Micro-Economics includes theory of product pricing and
theory of factor pricing
2. The theory of product pricing explains how relative prices of cotton,
cloth, wheat, rice, sugar, car and many other commodities are
determined.
3. The theory of factor pricing explains how the rewards of rent, wages,
interest and profits are determined for factors of production like land,
labour, capital and entrepreneur.
4. Micro-Economics helps In determining product prices as well as factor
prices
5. Hence, it is also known as price theory.

2. Micro - economics studies individual economic unit.

Ans:
1. Micro - economics is derived from the Greek work "Mikros" which
means 'small.
2. Hence it is a branch or approach of Economics which deals with the
small or individual units or parts of an economy like a consumer, a
particular family, a firm etc.
3. According to Prof. K.E. Bouldlng, "Micro Economics is the study of
particular firms, particular households, Individual prices, wages,
incomes, individual Industries and particular commodities".
4. In simple terms, It is examination of the 'tree' and not the ‘forest'.
5. Micro Economics involves study or examination of the behaviour of
these individual units with regards to allocation of limited resources.

3. Micro-Economics analyses partial equilibrium.

Ans:
1. According to Prof. K.E. Boulding, "Micro Economics is the study of
particular firms, particular households, individual prices, wages,
incomes, individual Industries and particular commodities".
2. Micro Economics studies the equilibrium position of the firm, Industry,
market using partial equilibrium analysis.
3. It neglects the interdependence between economic variables.
4. Therefore, when one variable is being analyzed, all the other variables
are considered to be constant.
5. Micro Economics is said to be based on "ceteris paribus" assumptions
i.e. other things being constant or equal.

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4. Micro Economic theories are based on certain assumptions

Ans:
1. According to Prof. K.E. Boulding, "Micro Economics is the study of
particular firms, particular households, individual prices, wages,
incomes, individual industries and particular commodities".
2. All Micro Economics laws like Law of Demand, Law of DMU, Law of
Supply etc begin with the statement "all other things being equal".
3. Apart from this basic assumption, Micro Economics further assumes
no government intervention, full employment perfect competition etc.
4. Thus, Micro Economic theories are said to be based on certain
assumptions.

5. Marginalism principle is used as tool of analysis in Micro Economics

Ans:
1. Marginal means the difference or change that is brought about by one
additional unit.
2. For e.g.: Marginal utility means the utility derived on consumption of an
additional unit of a commodity.
3. According to Alfred Marhsall, all consumers and producers tend to
take their decisions at margin.
4. The marginalism principle forms the basis of various economic laws
like the Law of Diminishing Marginal Utility, Law of Equi-Marginal Utility
etc.
5. Therefore, marginalism principle is used as a tool of analysis in Micro
Economics.

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CHAPTER 2 – CONSUMER’S BEHAVIOUR

Q. 1. (A) Distinguish between:
1. Utility And Usefulness
Utility Usefulness
1. Meaning
Utility means the capacity of a Usefulness is the amount of satisfaction
commodity to satisfy the human actually realized from the consumption
wants. For Example, pen has the of a commodity.
capacity to satisfy the want of
writing. This want satisfying power
is called utility
2. Identification
Mere inspection of the commodity Only the application of the commodity
enables the consumer to identify shows how useful it is
Utility.
3. Nature
All goods which yield utility may Goods like opium gives utility drug
not be necessarily useful. addicts. But it is harmful to health.
4. Subjective
Utility of a commodity differs From Usefulness of a commodity generally
person to person remains the same for The every person
5. Moral or Ethical
Utility is ethically neutral Usefulness has ethical Significance

2. Utility and Satisfaction

Utility Satisfaction
1. Meaning
Utility means the capacity of the Satisfaction is the amount of commodity to
human wants. For example, pen satisfy pleasure actually realized from the
has the capacity to satisfy the want consumption of a commodity.
of writing. This want satisfying
power is called utility.
2. Realization
Utility can be realized before Satisfaction of a commodity can be
consumption. realized only after the consumption of a
commodity.
3. Nature
Utility is the 'expected satisfaction’ Satisfaction is the ‘realized satisfaction’. It
of a consumer from the may be more or less than the consumer’s
consumption a commodity. expectation.
4. Source-Effect
Utility is the source. Satisfaction is the effect.

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3. Total Utility and Marginal utility

Total Utility Marginal Utility
1. Meaning
Total utility means the sum total by Marginal utility refers to the net
consuming one more unit of utilities addition made to the total utility by
derived by the consumer from all the consuming one more unit.
units of a commodity.
2. Maximum satisfaction
Total utility remains maximum Marginal utility remains zero at the
maximum satisfaction. time of at the time of maximum
satisfaction.
3. Positive/ negative
Though TU declines after maximum, MU diminishes sharply and turns
it remains positive. negative later.
4. Formula
Symbolically Symbolically.
TUn = MU1 + MU2 + ....+ MUn MU of 'N' th unit=TU of 'N'
Items -TU of (N-1) items.

4. Place utility and Time utility

Place utility Time utility
1.Meaning
When utility is added by changing the When utility is added by time of
place of utilization, called the place utilization, it is it is called time
utility. utilization.
2.When
When surplus grains like wheat utility Umbrella provides more during rainy
and rice are transported to places seasons. Ice –cream adds more utility
Where it is scarce, it results summer during than winter.
in place utility.
3.Determinant
The amount of utility is determined The amount of utility depends upon the
by the choice of place. time chosen
4.Example:
Transport services create place utiliy Where housing services create time
Mumbai - Kashmir utility.
Rainy - summer

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5. Form utility and Service utility

Form Utility Service Utility
1. Meaning
When the utility is added by changing Utility derived from the personal
the form or structure of a commodity, services of doctors, lawyers,
called form utility engineers, teacher is termed as it
is service utility.
2. How?
Change in size or structure adds A service satisfies a particular
merits to the commodity. This leads purpose and thus adds utility.
to creation of utility, when a Doctor’s service cures a patient.
carpenter converts wooden logs into
furniture, its form utility increases.
3. Determinant
Amount of utility determined by type Amount of utility is determined the
of change. by the type of service.
4. Tangible
Form utility is tangible one can See it Service utility is intangible one can
happening only experience it.
5. Creation
When the matter is converted in Specific service provision creates
Product it creates formality service utility.

(B) State with reason whether you agree or disagree:

1. There are no real expectations to the law of diminishing Marginal Utility.
Ans: Yes. I agree with this statement.
There are certain cases which are considered as exception to the law. The
law is not applicable in such cases. However they are not genuine cases.
1. Hobbies :
It is argued that in case of certain hobbies like collection stamps, old
coins etc., every additional unit gives more utility to the person. But it
is not a genuine case of exception as it violates the assumption of
homogeneity, i.e, the stamps or coins collected are not identical
units.
2. Drunkards:
It is said that a drunkard gets more satisfaction when he drinks more.
But it cannot be treated as an exception because it violates the
assumption of rationality. The behaviour of a drunkard is irrational or
abnormal. Even a drunkard's marginal utility diminishes and
eventually reaches negative. No drunkard drinks indefinitely.

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3. Misers :
It is argued that a miser enjoys more utility when he acquires more
wealth. However, it should be carefully noted that the miser is only
accumulating more and more money or wealth and not spending the
same. As his behaviour is an act of accumulation, it is unfit to call it
as an exception to the law.
4. Reading :
It is said that a scholar derives more and more utility by reading more
and more books. Here also we must note a point that the scholar's
reading is not restricted to a particular book. He refers different books
from different fields by different authors and violates the assumption
of homogeneity. Hence it is not an exception.
5. Power:
When a person enjoys more and more power, the utility from it
increases and never decreases. More the power he gets, he is only
interested to enjoy still more of it.
Power gets the possessor addicted to more and more power. Thus
the law of diminishing marginal utility is not applicable. In such a case
the assumption of rationality is violated.
6. Music :
People who are fond of music enjoys more and more pleasure when
they hear more and more music. The law is not applicable.
However the assumptions of homogeneity is violated as the person
listens to different types of music.
7. Money :
It is said that when a person gets more money, he gets more utility.
However the law is applicable in this case too.
First of all, it is our common experience that the poor people get
greater utility of money while the rich enjoys less. We may notice in a
vegetable market that a rich lady may purchase the vegetables
without arguing for a lower price, because, for the rich lady, a
reduction of 50 or 25 paise per kilo will not yield much satisfaction.
But a poor lady, while purchasing vegetables, will have to fight with
the seller to reduce the price, because, for her, even a reduction of
50 or 25 paise per kilo adds greater utility. This point proves the fact
that the marginal utility of money is not constant. Though it
diminishes, it can never become zero or negative.

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We can conclude that all the above cases appear to be exception

since they violate assumptions. Actually there is no real exception.
The law is universally applicable.

2. When MU is zero, TU diminishes.

Ans. Statement of the law.
"The additional benefit which a person derives from a given increase of his
stock of a thing diminishes with every increase in the stock that he already
has". - Marshall
Illustration of the law.
The law explains that when a consumer consumes more and more of a
commodity, the marginal utility derived from each additional unit
diminishes. To explain the law, let us have a hypothetical utility schedule
and diagram. Let us suppose a consumer consumes oranges. The
following schedule indicates the total utility and marginal utility derived by
the consumer.

As the consumer increases consumption, the extra satisfaction (marginal

utility) that he gains by the consumption of each successive unit goes on
diminishing.
The total utility goes on increasing up to 4th unit. However it increases at a
diminishing rate as MU of every additional unit declines.
The first unit of orange provides him the highest amount of satisfaction (10
units). At this point the marginal utility and the total utility are same. As long
as total utility increases, the marginal utility diminishes upto 4th unit.
When the consumer reaches fifth unit, he enjoys maximum satisfaction (20
units). At this point, the total utility remains maximum and constant. The
marginal utility is zero when the total utility is maximum i.e. there is
complete satisfaction of a given want when the marginal utility is zero. This
stage is called the point of satiety.

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Any further consumption leads to negative marginal utility. When the

consumer goes for the sixth unit, the marginal utility is - 2. This is called
disutility. Consequently total utility starts declining and it is found to be 18
units.

The law is also diagrammatically represented.

In the diagram, the MU curve which is called the marginal utility curve,
slopes downward from left to right. The 'downward slope' indicates the
diminishing marginal utility when the consumer goes for more and more
units.
The intersection between MU curve and X axis indicates the maximum
satisfaction This is otherwise called the point of satiety.
After showing the point of satiety, the MU curve enters the negative
quadrant indicating negative utility.

Assumptions of the (Law of diminishing marginal utility.)

1. Continuity : All the units of the commodity should be consumed in
quick succession. There should be no long time interval between the
consumption of one unit and the another. If there is long time
interval between the consumption of successive units, the MU will
not diminish.

2. Uniformity or Homogeneity : All the units consumed should be

identical, i.e. the size, shape, colour, quality of all units should be the
same.

3. Single use. It is assumed that the consumer will consume only that
commodity which satisfies a single want.

4. Measurability: It is assumed that the utility can be measured

cardinally, (i.e.) Numerical measurement of utility is possible.

5. Rationality: The consumer should possess the quality of rationality,

i.e. he is assumed to behave rationally and normally at the time of
analysing the law If he wants to consume fruits he must buy fruits
with reasonable quality. He should not select rotten fruits because
they are cheap.
6. Reasonability: It is assumed that the units consumed should be of
normal standard unit. In other words the units should neither be too
big nor too small.
7. Income, Taste and habit of the consumer should remain the same
throughout. When there is a change, the law becomes invalid.
8. Constancy of marginal utility of money. It assumed that marginal
utility of each unit of money remains the same.

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3. Law of Diminishing Marginal Utility is important in practice.

Ans: Yes. I agree with statement.
Importance of law of diminishing marginal utility.
1. Useful to the government.
The principle of socialism adopted by government to reduce
inequality is based on marginal utility of money.
Government imposes land reform measures to take away surplus
land from rich and to redistribute the same to poor. The loss of
wealth by rich have little impact as their marginal utility of wealth is
not so great. When the wealth is transferred to poor, they enjoy
greater welfare as the marginal utility is more. This helps in reducing
inequality of wealth.
2. Useful to the consumer.
The law of diminishing marginal utility guides consumer as how to
spend his income effectively so as to ensure maximum satisfaction.
Thus it helps consumer to plan his expenditure in a rational manner.
3. Useful to the monopolist.
The law is helpful to monopolists to apply the policy of price
discrimination. He charges different prices for the same product to
different customers on the basis of marginal utility.
4. Useful to explain paradox of value.
Modern economists use the concept of marginal utility to explain the
difference between value in use and value in exchange. According
to them total utility (value in use) of a commodity does not determine
the price of a commodity. It is marginal utility (value in exchange)
which determines the price of that commodity. Diamond is scarce
and its relative marginal utility is high. Therefore the price of
diamond is higher, though its total utility is lower than water.
In case of water, it is available in abundant quantity and the relative
marginal utility is very low. Therefore its price is very low or zero,
though its total utility is higher than diamond.

5. Useful to the finance minister.

"Fife taxation policy of the modern government is based on the
concept of marginal utility. The government redistributes income
from rich to poor through progressive taxation. Since rich have low
marginal utility for money, it is desirable to tax them. The proceeds
from taxes are redistributed to poor through welfare programmes. As
poor have high marginal utility for money, such expenditure would
provide them great welfare.
The gain in utility enjoyed by the poor person is greater than the loss
in utility suffered by rich. Thus the general community welfare
increases.

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6. Useful to the households.

The Law of Diminishing Marginal Utility guides households how to
plan of their expenditure. It helps them to avoid waste expenditure.
They restrict consumption upto certain point beyond which marginal
utility declines.
Therefore they stop purchase at a point where marginal utility is
equal to price.

7. Useful to the producer.

It guides the producer to determine price and sales policy. It helps
him taking important decisions to maximise his profit.

8. Useful to explain the downward sloping demand curve.

Law of diminishing marginal utility explains why the demand curve
slopes downward. The law states that the consumer buys more at a
lower price and less at a higher price to adjust equilibrium between
price and marginal utility.

9. Basis of economic laws.

Some of the very important laws and principles are based on the law
of diminishing marginal utility. The law of demand, the law of equi-
marginal utility, the concept of consumer surplus have been directly
derived from the law of diminishing marginal utility.

Q.3 Give reasons or explain

1. Utility Is a subjective concept
Ans: 1. "Subjectivity" means changing from one person to another.
2. A product may give utility to one person but the same product may not
give as much
utility to another person.
3. The utility of a commodity differs from person to person on account of
differences in tastes, preference, habits, surroundings, age, occupation
etc.
4. Therefore, utility is a subjective concept.

2. Utility and happiness are different

Ans: 1. Utility refers to the want satisfying power of a commodity
2. A commodity may have utility but it is not necessary that its
consumption will give pleasure or happiness to the consumer.
3. For e.g.: A textbook has utility for a student but he may not derive
pleasure from reading it.
Thus, utility and happiness are different.

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3. Utility is ethically neutral

Ans: 1. Utility refers to the want satisfying power of a commodity
2. The concept of utility does not consider whether the commodity
satisfies a good want or a bad want.
3. A commodity can have utility even if it satisfies a bad or unethical want.
4. For e.q: A gun has utility for a soldier as well as a terrorist.
5. Therefore, it is said that utility is ethically neutral.

4. Utility is a psychological term

Ans: 1. Utility refers to the want satisfying power of a commodity
2. This want satisfying power is internal to a person. It changes for one
person to another.
3. There is no standard utility for a particular product.
4. A person analyses to what extent a product can satisfy his want and
then decides if the product has utility for him.
5. Thus, utility is a psychological term.

5. Utility depends on urgency of want (September 2008)

Ans. 1. Utility refers to the want satisfying power of a commodity.
2. If the want is intense and the commodity satisfies the want, then the
utility of the commodity is higher.
3. When the intensity of the want reduces, the utility of the commodity
diminishes.
4. For e.g:
i. The utility of notes is higher when exams are closer as the want for
notes is intense.
ii. The utility of the fan is high when the weather is warm outside as
the want for the fan's breeze is high.
5. Thus, the utility depends on the urgency of the want.

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CHAPTER 3 (A) – DEMAND ANALYSIS

Q.1. Give reasons or explain the following.
1. All desires are not demand.
Ans. i. Desire is only an idea.
Mere desire cannot become demand unless it becomes effective
demand. A desire is simply an idea. It becomes effective demand when
it is backed by ability and willingness of a person to pay.
ii. Ability to pay.
The desire of a beggar to become the owner of a five star hotel will
remain a mere desire for he lacks ability (purchasing power) to buy the
same.
iii. Willingness to pay.
The desire of a miser to buy a Maruti car may remain a desire as he is
not willing to spend money.
iv. Availability of the product.
More than desire, what is important is the availability of the commodity.
There can be no demand in the absence of availability, even if the
consumer is willing and able to buy.

2. Increase in demand indicates a right ward shift in the demand curve.

Ans. Increase in demand means change in demand due to factors other than
price. When demand rises or falls due to change in price, all such points can
be shown in the same demand curve. When demand changes due to other
factors like income or population, such a change can be shown in a separate
demand curve. In such cases, the demand curve shifts to the right.

In the above diagram the original demand curve is DD. The point 'a' in the
demand curve indicates that the consumer demand OQ quantity at OP price.
However, when the income of the consumer increases, demand increases to
0Q1 quantity. It is not because of fall in price. It is due to change in other
factors like income. The increase in income pushes up purchasing power
and enables the consumer to buy more at the same price. This change is
indicated at point 'b' in a separate demand curve D1D1. Thus when there is
increase in demand, it is indicated by shifting of demand curve to the right.

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3. Demand curve slope downward from left to right.

Ans. i. Law of equi marginal utility.
A consumer equates marginal utility with price. When the price falls the
consumer buys more of a commodity so as to reduce the marginal
utility and to equate it with price.
ii. Income effect.
When the price falls, the real income i.e. purchasing power of the
consumer rises. It enables him to purchase more. This is called the
income effect.
iii. Substitution effect.
In case of substitutes like tea and coffee, if the price of tea falls, it
becomes relatively cheaper and the consumer purchases more of it.
This is called the substitution effect. It will also attract new consumers
from coffee.
iv. Different uses.
When the price of a commodity falls, it may be used for different
purposes and the demand rises.
Thus there is inverse relationship between price and quantity
demanded and therefore the demand curve slopes downward.

4. Demand for factors of production derived is derived demand.

Ans. i. Derived from direct demand.
All factors of production enjoy derived demand. The demand for factors
of production like and, labour, capital and organisation are derived from
direct demand. For e.g. demand for book is direct demand. But the
demand for printing machine to print the book is derived remand.
ii. Interrelated demand.
When demand for one commodity derived from another commodity, it is
called derived demand. For example, when there is increase in demand
for food, the demand for factor land increases.
iii. Related to parent good.
Derived demand is related to parent good. When there is demand for
cotton shirts, the demand for raw cotton (capital) increases. Here cotton
is parent good. Cotton shirt is dependent good.
iv. Derived demand is indirect demand.
Factors of production cannot satisfy wants directly. They help to satisfy
want indirectly. Indirect demand is derived demand.
For example, when students demand books, the demand for printing
machine increases. The printing machine helps to print books and
satisfy the demand for books. Here the C demand for machine (capital
good) is derived demand.

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Q. 2. Distinguish between
Ans. 1. Desire and Demand
Desire Demand
1. Meaning
Desire refers to simply an idea or wish Demand refers to desire backed by
ability to have something. and willingness to pay.
2. Consumption
A desire may or may not result in Demand means consumption which
consumption. provides utility.
3. Purchasing Power
A desire is not necessarily associated Demand in possible only when a
with purchasing power. Any one, rich, person enjoys sufficient purchasing
miser or beggar can have a desire. power which he willing to forgo
All desires are not demand Demand has to be desired.

2. Increase in demand and Decease in demand

Increase in demand Decease in demand

1. Meaning
It is a situation when the demand of a It is a situation when the demand of a
commodity rises due to factors other commodity falls due to factors other
than price, (a) More is demanded at a than price, (a) Less is demanded at a
given price, (b) Same quantity is given price, (b) Same quantity is
demanded at a higher price. demanded at a lower price.
2. Cause
It is caused by increase in It is caused by decrease in consumer's
consumer's income, increase in the income, decrease in the price of other
price of other goods, change in the goods, change in the consumer's taste
consumer's taste and preferences etc. and preferences etc.
3. Movement/Shifting
The increase in demand is indicated The demand curve shifts to the left.
by shifting of demand curve to the
right.
Diagram

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3. Individual demand and Market demand

Individual demand Market demand
1. Meaning
Individual demand refers to the A market demand is the aggregate
demand by an individual at a given demand of a commodity demanded by
price during a given period of time. all consumers in the market at a given
price during a given period of time

Schedule.
Individual demand Price of Individual Demand Schedules Market
Price Qty. demanded Mangoes Consumer Consumer Consumer Schedule
`)
(` (Units) per kg A B C (A + B+C)
2 50 `)
(`
4 40 50 1 2 3 5
6 30 40 2 4 6 12
8 20 30 3 6 10 19
10 10 20 4 8 15 27
10 5 10 20 35
2. Narrow/wider concept
Individual demand is part of market Market demand includes individual
demand. It is a narrow concept. demand. It is a wider concept.
3. Importance
Individual demand is not useful for Market demand is useful for sellers to
framing business policy. It has no frame business policy and plan their
practical significance.sales targets sales targets

4. Inferiors goods and Superior goods

Inferiors goods Superior goods
1.Meaning.
Inferior goods are those goods for Superior goods are prestige goods
which income effect is negative (i.e.) which improve the standard of living,
Higher the income lower the but they are not essential. The
consumption, lower the income higher consumption can be postponed.
the consumption.
2.Price.
Inferior goods are low priced goods Superior goods are highly priced goods
which are generally consumed by poor which are generally consumed by rich
e.g. Bajra, Maize for the sake of snob appeal, e.g.
Diamond & cars.
3.Type.
All giffen goods are inferior goods. All status goods are superior goods.

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Q.3. Define or explain the following concepts

1. Demand
Demand is a desire backed by ability to pay and willingness to spend. A desire or
wish can become demand only when the person desiring the product has the
ability to pay for the product and also willingness to pay.
DEMAND = DESIRE + ABILITY TO PAY + WILLINGNESS TO SPEND
2. Increase in demand
Increase in demand is a form of change in demand. When more quantity is
demanded than before at the same price, it is called as increase in demand.
Increase in demand takes place due to favourable changes in factors other than
price like fashion, income, taxation policy, advertisement, tastes and habits etc. In
this case, price remains constant and it has no effect on the demand for the
commodity.
3. Derived Demand
Goods that are needed by the producers or manufacturers in order to produce
finished goods for consumers are said to have derived demand. In short, goods
that satisfy a want indirectly are said to have indirect or derived demand. For e.g.:
Demand for land, labour, capital, etc. are the examples of derived demand. All
factors of productions have derived demand.
4. Direct Demand
The demand for a commodity which satisfies want of the consumer directly is
called as direct demand.
For e.g.: Demand for food, clothes and house are examples of direct demand. All
finished or consumption goods have direct demand.
5. Demand Schedule
A demand schedule is a tabular representation of goods demanded by individual
buyer(s) at different prices during a given period of time. A demand schedule can
either be an individual demand schedule or a market demand schedule.

.

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CHAPTER 3 (B) – ELASTICITY OF DEMAND

Q. 1. Give reasons or explain the following statements .
1. Demand for necessaries is inelastic.
Ans. i. Necessary goods have inelastic demand.
Generally, all necessary goods have
inelastic demand. Medicine, salt and
agricultural goods are necessary goods. So
their demand is inelastic, i.e. whatever may
be the price, the consumer will continue to
demand more or less the same quantity of
the commodity.
ii. Commodities which have a specific use will
have inelastic demand.
Salt, food and medicine and agricultural goods
can be used only for a specific use and
therefore their demand is inelastic.
iii. Consumption cannot be postponed.
Necessary goods are important for survival. People cannot postpone
consumption of such goods. Therefore the demand for such goods is
inelastic.
iv. A lower percentage of change in price leads to higher percentage
of change.
In case of necessary goods like medicine,
salt and agricultural goods (food), a higher proportionate change in price
leads to a lower proportionate change in demand, (i.e.) change in
demand is smaller than change in price. Thus they have inelastic
demand.
2. Demand for habitual goods is inelastic
Ans. Demand for conventional necessaries (habitual goods) is inelastic.
(i) Consumption continue irrespective of
level of price. Conventional necessaries are
the goods which are regarded essential due to
habits or customs. In case of alcohol, a person
who is addicted will continue to consume even
if the price rises or falls.
(ii) Habitual goods are consumed whether useful
or harmful.
Goods like opium, cigarettes, coffee, tobacco are
not necessary but harmful. Still people go after
them as they are habituated. People are willing to
sacrifice wealth in order to consume such conventional necessaries.
Thus their demand is inelastics.
(iii) Willing to spend on habitual goods irrespective of the level of price.
People celebrate parties in big halls or 5 star hotels even though hiring
them becomes costlier every year. They are ready to spend money for
such costly parties because it is habitual.

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(iv)
A higher percentage of a change in price leads to lower percentage
change in demand.
In case conventional essentials a higher proportionate change in price
results in lower proportionate change in demand. Thus the demand is
inelastic in nature.
3. Concept of Elasticity of Demand helps trade union leaders.
Ans. The concept of elasticity of demand is useful to trade union.
i. Knowledge of elasticity of demand is useful in wage determination.
Trade union uses the knowledge of elasticity of demand to claim higher
rewards. Elasticity of demand influences the decisions of wage
determination.
ii. Inelastic labour demands higher wages.
If the demand for particular type of labour is inelastic, it is easy for trade
union to claim higher wages. The management has no option but to
employ them irrespective of wages.
iii. Strikes are effective when the demand for labour is inelastic.
In case of inelastic demand, even a minor threat to go for strike will work
effectively. The management response quickly and raises the wage
immediately.
iv. Highly skilled labour enjoys inelastic demand.
In case of highly skilled labour like technicians the supply is limited while
demand is inelastic. The employer is ready to pay the highest possible
wage

4. Demand for commodity having multiple uses has elastic demand

Ans: 1. A commodity having multiple uses means a commodity which can be
used for various purposes.
2. Electricity is an example of commodity having multiple uses and is need
for watching TV, washing machine, computer etc.
3. If the price of elasticity falls, then its demand will rise because it can be
used to operate various other gadgets and equipments.
4. Thus, demand for commodity having multiple uses has elastic demand.

5. Demand for goods having snob appeal has inelastic demand

Ans: 1. Good having snob appeal refer to the goods that are purchased by rich
people as a status symbol or show off. Fancy cars, high end watches,
diamond jewellery are examples of such goods.
2. For rich people, possessing the product is more important than its price.
Just because the price of such goods increases, they will not reduce or
postpone their demand. Infact, they may buy more at higher prices.
3. When there is no change in demand for a commodity inspite of a
change in price, it is called as perfectly inelastic demand.
4. Since, the demand for goods having snob appeal does not change with
a change in price, they have inelastic demand.

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6. The demand for medicines is inelastic

Ans: 1. When there is no change in demand inspite of a change in price, it is
called as perfectly inelastic demand.
2. In short, a change in price has no effect on quantity demand.
3. Medicines are required to save life of a person. A person cannot
postpone or reduce his consumption because he will not be able to
survive if he does that.
4. A change in price generally does not have any effect on demand of
medicines.
5. Therefore, demand for medicines is inelastic.

Q. 2. Distinguish between.
1. Perfectly elastic demand and perfectly inelastic demand
Ans.
Perfectly elastic demand Perfectly inelastic demand
1. Meaning
It refers to a situation when a small or It refers to a situation when a
no change in price brings unlimited significant change in price fails to
amount of change in demand. bring any change in quantity
demanded
2. Zero / infinity
The elasticity in this case is measured The elasticity in this case is
to be infinity. measured to be zero.
3. Diagram

4. The demand curve (PD) remains a 4. The demand curve (QD) remains
horizontal straight line which is a vertical straight line which is
parallel to X axis. parallel to y axis.

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2. Relatively elastic demand and Relatively inelastic demand

Ans.
Elastic Demand (More elastic) Inelastic Demand (Less elastic)
(Relatively Elastic Demand) (Relatively inelastic demand)
1. Meaning :
Elastic demand refers to a situation When Inelastic demand refers to a situation when a
a lower proportionate change in price higher proportionate change in price leads to
leads to a higher proportionate change in lower proportionate change in demand.
demand. Generally luxury goods like TV, Generally necessary goods like food and
Car etc. have elastic demand. medicine have inelastic demand
2. Flatter/Steeper Curve

3. More than one/less than one

In case of elastic demand, elasticity is said In case of inelastic demand, the elasticity is
to be more than one said to be less than One.
4. Elastic demand is indicated by demand 4. Inelastic demand is indicated by demand
curve DD which is flatter. curve D D which is steeper

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CHAPTER 4 - PRODUCER’S BEHAVIOUR

Q.1. Give reasons or Explain.
1. Supply is directly related to price.
Ans. 1. Direct relationship.
The law of supply explains the direct relationship between price and
supply (i.e.) higher the price higher the supply.
2. Positive relationship.
It states that generally a seller prefers to supply more when the price
increases and contracts supply when the price decreases. Thus price
and supply have positive relationship.
3. Upward sloping supply curve. The positive relationship can be explained
with the help of supply schedule and supply curve.

The above schedule shows that price and quantity supplied are directly relate
d. The supply curve slopes upward indicating the positive relationship between
price and supply.

2. Stock can exceed supply.

Ans. 1. Supply is part of stock.
Stock is the total quantity produced by seller. The seller may not be
willing to supply the entire stock for sales. Thus a part of stock which the
seller is ready to offer for sales becomes supply. Therefore stock can
exceed supply.
2. Stock is the source of supply.
Stock determines the supply. Supply comes out of stock.
Stock being the source of supply, there is no question of supply
exceeding stock.

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3. Reservation price determines supply.

The seller determines the supply on the basis of reservation price.
When the market price is higher than reservation price the supply may
reach maximum. Even under such a situation the supply can only be
equal to stock. It cannot be more than stock.
4. Supply may be equal but never exceed.
In case of perishable goods, the supply is restricted to the existing
demand. Here the stock is equal to supply. But supply can never be
more than stock.

3. The supply of agriculture commodity is relatively elastic.

Ans. 1. Lack of storage facilities.
Agricultural goods are generally perishable or semi perishable. They can
not be stored for a long time. Sellers like small traders can not build cold
storage facility. Therefore supply remains limited.
2. Perishable in nature.
In case of perishable goods like flowers, fruits and vegetables, the
sellers do not want to take the risk. If they are not sold, they get rotten
and bring heavy losses. Therefore the sellers supply limited quantity.
They cannot increase supply even price rises. Therefore supply is
inelastic.
3. Seasonal supply.
Agricultural goods cannot be cultivated throughout the year. The supply
is seasonal in nature and therefore it is in limited. Even if price rises,
supply cannot be increased immediately.
4. Local market.
Due to poor infrastructure like transport, communication and storage, the
market for agricultural goods is confined to local area. Therefore sellers
do not take the risk of expanding supply.

4. With a slight change in the price, if supply varies in a greater proportion

then supply is said to be relatively elastic.
Ans. 1. Smaller change in price leads to greater change in supply.
(i) In case of durable goods a smaller proportionate change in price
brings about a greater proportionate change in supply, it is
relatively elastic supply.
2. Change scale production.
In case of durable goods like equipment’s, machinery, furniture, cars,
chairs sellers produce such goods in large scale and keep sufficient
stock.

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3. Quick response.
Durable goods can be produced in advance and stored for future.
Therefore the sellers are in a position to respond quickly wherever there
is a change in price.
4. Ready to face risks.
Unlike perishable goods, durable goods never get rotten and bring
losses to sellers. If not sold seller can store the goods and supply them
later. Therefore they take the risk to produce more and have a large
stock.

Q.2. Distinguish between the following.

1. Stock and Supply
Ans.
Stock Supply
1. Meaning
Stock refers to the total quantity Supply refers to that part of stock
available as reserves. It is the potential which is offered for sale at particular
supply of the producer. For example, if time at different prices. For example,
a producer produces 1000 pens in a if the producer prefers to sell only 400
day, the total production 1000 pens pens out of 1000 available as
becomes the stock. reserves, the supply is 400 pens.
2. Nature
Stock is a reservoir. It is the source of Supply is a flow. It is part of stock.
supply.
3. Inter relationship
Stock can exceed supply. Supply cannot exceed stock. In some
cases it may be equal to supply
4. Dependence
Stock depends upon production. Supply depends upon stock.

2. Individual Supply and Market Supply

Ans.
Individual Supply Market Supply
1. Meaning
Individual supply refers to the different Market supply refers to the total of
amounts of a commodity offered various quantities of the commodities offered for
sale by an individual firm at different sale by all the firms at different prices.
prices.
2. Narrow / wider concept
Individual supply is part of market supply. Market supply includes individual supply. It
It is a narrow concept. is a wider concept.
3. Importance
Individual supply is not useful for Market supply is useful for sellers to frame
Framing business policy. It has no business policy and plan their production
practical significance. targets.

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4. Schedule
Individual Supply Schedule Market Supply schedule
Price per Quantity supplied Price Individual supply Market
Kg (Rs) Kg (Rs) per Schedules Supply
10 100 kg(`) (x + y
15 150 + z)
20 200 Supply Supply Supply
25 250 by x by y by z
2 5 10 15 30
4 10 15 20 45
6 15 20 25 60
8 20 25 30 75
10 25 30 40 95

3. Extension and Contraction of Supply.

Ans.
Extension in Supply Contraction in Supply.
1. Meaning
Extension refers to a rise in supply only Contraction refers to a fall in supply Other
due to a rise in price. remain the same. things only due to a fall in price. Other
things remain the same.
2. Schedule

`)
Price (` Qty. supplied `)
Price (` Qty. supplied
5 100 10 200
10 200 5 100
3. Diagram
When price rises to 10 quantity supplied When price falls to 5, the supply contracts
rises to 100. to 100.

4. Movement
Extension in supply is indicated by Contraction in supply is indicated by
upward movement in supply curve. downward movement of supply curve.

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4. Relatively Elastic Supply and Relatively Inelastic Supply.

Ans.
Relatively Elastic Supply Relatively Inelastic Supply
1. Meaning
When a smaller proportionate change in When a larger proportionate change in
price brings about a larger proportional price brings about a smaller
change in quantity supply, it is called proportionate change in supply, it is
relatively elastic supply. called relatively inelastic supply.
2. Measurement of Es.
In case of elastic supply, the elasticity is In case of inelastic supply, the elasticity
said to be more than one(>1). is said to be less than
3. Supply curve
In case of elastic supply, the supply In case of relatively inelastic supply, the
curve appears to be flatter. supply curve appears to be steeper.

5. Average Revenue and Average Cost

Ans.
Average Revenue Average Cost
1. Meanings
Average revenue refers to revenue per Average cost refers to cost per unit of
unit of output. output.
2. Calculation
Average revenue is estimated by dividing Average cost can be estimated by
total revenue by total output sold. dividing total cost by total output
3. Formula
Total Revenue Total cost TC
AR AC
output output O
4. Indicator
Average revenue indicates the price per Average cost indicates the level of
unit of the firm's product at each level of profit.
output. a. When there is normal profit
AC=Price.
b. When there is abnormal profit
AC<Price.
c. When there is subnormal profit
(loss)AC >price.

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Q.3. Do you agree or disagree with the following statement? Give reasons.
1. There is no difference between stock and supply.
Ans. No. I disagree with the statement.
1. Stock is the source of supply.
Stock is the total volume of a commodity which can be brought into
market for sale at a short notice. No seller would prefer to sell the entire
stock at the same time. Depending upon the market price, he may like to
change the amount of supply. He may release a part of stock for sale and
the rest is kept as stock. It is more true in case of durable goods.
2. Supply is the amount offered out of stock.
Supply means the quantity which is offered for sales out of stock. Thus
supply means the quantity which is actually brought into the market for
sales. If the market price is high, larger quantities of durable goods are
sold. If price is less, the sellers offer less quantity for sales.
3. Supply is equal to stock in case of perishable goods.
In case of perishable goods like fruits, vegetables and fish, the supply
would be equal to stock. The reason is that there is a risk of unsold good
getting rotten. It would bring losses to the sellers. Therefore the stock of
perishable goods is equal to supply.
However, modern marketing make use of cold storage facility to store
even perishable goods for sometime and sell later.
4. Extent of market.
In case of perishable goods like fruit and vegetables the demand is
mostly restricted to local area. Therefore the demand for such goods is
more or less same. Demand being the same, seller never takes risk by
keeping more stock than what is demanded.
5. Stock and supply depends upon Reservation price.
Reservation price is the minimum price below which seller will refuse to
sell any quantity of a product. In case of durable goods the reservation
price is relatively higher. He will supply goods only when the market price
is equal to reservation price.
Higher the market price, lesser the stock and vice versa.
Thus there is always a difference between stock and supply of durable
goods.
However in case of perishable goods, the seller keeps relatively lower
price and dispose off all the stock.

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6. Infrastructure.
If the producer is able to build a large network cold storage, he can keep
stock of perishable goods. A strong system of transport also helps quick
movement of goods
From one place to another place. In the absence of better infrastructure
even durable
goods cannot be stored and transported.
7. Seasonal demand.
Some goods enjoy seasonal demand. During festival seasons, the
demand increases and the difference between stock and supply would be
least. During slack seasons, the demand declines and the difference
between stock and supply would widen. In case of crackers the demand
is seasonal. During Diwali the production and stock would be maximum.
Once the season is over the production declines and the stock would be
minimum.

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CHAPTER 5 – FORMS OF MARKET AND PRICE DETERMINATION UNDER

PERFECT COMPETITION
Q.1. Distinguish between the following.
1. Perfect competition and Pure competition.

Ans. Perfect competition Pure competition.

Meaning.
(1) Perfect competition is much wider Pure competition is said to exist in a
than pure competition. In addition to market having the following features:
the said three conditions, it requires: (a) There are large number of buyers
(a) Perfect mobility of the factors of and sellers
Production (b) Homogeneous product
(b) Perfect knowledge about the market (c) Free entry and exit'
(c) Absence of transport cost
(d) No government restrictions
Concept.
Perfect competition is a more Pure Competition is much simpler and
exclusive concept involving many less exclusive concept than perfect
assumptions. competition.

2. Perfect competition and Monopoly

Perfect Competition Monopoly

Meaning.
Perfect competition is a market
where large number of sellers selling Monopoly is a market where there
identical units of the same commodity is only one seller controlling
at uniform price. the entire supply.
Entry and exit.
Under perfect competition there is free Under monopoly the entry of new
entry and exit of all the firms. firms is strictly prohibited.

Price determination.
No individual seller can influence the Under monopoly, the seller
price under perfect competition. can determine the price

He is a price taker He is a price taker

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3. Natural monopoly and social monopoly

Meaning.
When a seller controls the ownership When the government controls
of natural resources. the sole ownership and supply
It is called natural monopoly. of goods or services it is called
public monopoly.
Objective.
Profit motive is the objective Public welfare is the objective of
of natural monopoly. public monopoly.
Example.
Control on minerals or oil is an Railways run by government of
example of natural monopoly. India is an example of public
Rhodesia's virtual monopoly in the monopoly.
supply of chrome is a case of
natural monopoly.

4. Natural monopoly and legal monopoly

Meaning.
When a seller controls the Monopoly that is legally recognized
ownership of natural resources. by the government is called legal
It is called natural monopoly. monopoly.
Objective.
Profit motive is the objective of Safety and security are the
natural monopoly. main objectives.
Example.
Control on minerals or oil is an The patent rights enjoyed by
example of natural monopoly. inventors, copyrights of authors
Rhodesia's virtual monopoly in the and composers are the examples
supply of chrome is a case of of legal monopoly.
natural monopoly.

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5. Perfect competition and Monopolistic competition

4. Selling cost:
Under Perfect Competition Seller Under monopolistic competition
Need not incur any selling cost the seller has to spenton selling,
Ad & Publicity.

Q. 2. State with reasons whether you agree or disagree with the following statements.
1. Perfect competition means Monopolistic Competition.
Ans. No I disagree with this statement.
Perfect competition and monopolistic competition are not one and the
same. They are different from each other.
1. Meaning :
Perfect competition is a market where large number of sellers
selling identical units of the same commodity. The number of
sellers and buyers are so large that no single firm or buyer can
influence the price. The demand and supply forces operate freely
without interference of any external forces. Monopolistic
competition is the market where there are many sellers selling
same but differentiated products to a large number of buyers. It is
the mixture of the features of monopoly and perfect competition.

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2. Homogeneous &heterogeneous products.

In a perfectly competitive market, the product is homogeneous in
character. There is no product differentiation by the sellers. All the
units sold are identical.
Product differentiation is the vital feature of monopolistic
competition. Products are differentiated on the basis of brand
name, shape, color, design, quantity and quality.
3. Price takers and price makers.
Under perfect competition, sellers are price takers and not price
makers. All buyers follow uniform price.
Sellers are price makers under monopolistic competition. Different
buyers pay different prices for the same product.
4. Idealistic and realistic markets.
Perfect competition is an ideal market which hardly exists.
Monopolistic competition is the real market which exists
practically.
e.g. Firms manufacturing Tooth Pastes.TV. Sets, Shoes,
represent monopolistic competition.
5. Relationship with monopoly.
Perfect competition and monopoly are contradictory to each other.
Monopolistic competition is the blending of perfect competition
and monopoly.
6. Average revenue and marginal revenue :
Average Revenue and Marginal Revenue curves are one and the
same and parallel under perfect competition, i.e. AR = MR.
AR and MR are different and downward sloping under
monopolistic competition. MR remains below AR. MR<AR.
7. Demand curve.
In case of perfect competition demand curve remains a horizontal
straight line parallel to x axis. In case of monopolistic completion,
the demand curve is downward sloping.
8. Selling cost. Selling cost is inevitable under monopolistic
competition. In the face of tough completion, the sellers of
monopolistic competition spend a significant portion of their
revenue towards advertisement, publicity, salesmanship etc.
There is no selling cost under perfect competition.
9. Perfect knowledge of market.
In perfect competition market both buyers and sellers have
perfect knowledge regarding price structure and availability of
substitute.
In monopolistic competition there are various products possessing
same features. There are different brands of the same product
which are sold in different prices. It is difficult to have perfect
knowledge. In fact sellers adopt campaigns and advertisements to
spread knowledge of price structure.

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Q.3. Give Reasons or Explain

1. Single price prevails In perfect competition
Ans:
1. Perfect competition can be defined as "a market structure where
there are large number of sellers selling homogenous goods to large
number of buyers at a uniform price without any type of government
Intervention."
2. There are a large number of buyers and sellers In perfect
competition. Therefore, neither the buyer nor the seller in a position
to influence the market price. Both the buyer and seller are price
takers in perfect competition.
3. The sellers sell homogenous goods i.e. exactly the same product.
Therefore, if one seller charges a higher price, the buyer can go to
another seller.
4. Further, transport cost is constant for all the firms. Hence, the cost or
profit of any firm Is not affected because
5. In a perfect competition, market price Is determined by market forces
of demand and supply.
6. Due to all the above reasons, a single price prevails in perfect
competition.
2. Price discrimination is possible under monopoly.
Ans:
1. Monopoly refers to the form of a market where there supply of the
commodity is under the control of a single seller or producer.
2. The product which is sold by the monopolist has no*close substitute.
There Is no other seller producing or se close substitute to the
commodity.
3. Since, the monopolist has complete control on the supply and there
Is no close substitute, he himself fixes the : He is the price maker.
4. The buyers have to buy the product from the monopolist as they
have no other option.
5. Thus, the monopolist can charge different prices from different
buyers. He may charge higher price from and lower price from the
poor.
3. Selling cost is incurred by a firm in monopolistic competition (Textbook
+ Sept'08)
Ans:
1. There are a fairly large number of sellers In a monopolistic
competitive market.
2. The products sold by the firms in monopolistic competition are not
close substitutes.
3. Each product has certain differentiating quality.
4. Therefore, in order to enlighten and attract the customer about
such different qualities/features, the firms have to incur selling
cost. It helps to increase sales of the product.
5. Selling cost includes advertising the product over TV, radio, in
newspaper, incentives to sales staff, free gifts, etc

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4. A monopolist can control the supply of goods

Ans:
1. Monopoly refers to the form of a market where there supply of the
commodity is under the control of a single seller or producer
2. The monopolist is the sole producer or seller of the commodity.
3. The product that is sold by the monopolist is unique to him and there
is no close substitute available.
4. He sets various entry barriers and does not allow any other seller to
enter the market.
5. Thus, a monopolist can control the supply of goods.

5. Sellers and buyers are price takers in perfect competition

Ans:
1. Perfect competition can be defined as "a market structure where
there are large numbers of sellers selling homogenous goods to
large number of buyers at a uniform price without any type of
government intervention."
2. In perfect competition, the price of a commodity is determined by the
market forces of demand and supply.
3. There are a large number of buyers and sellers in perfect
competition. Therefore, neither the buyer nor the seller is in a
position to influence the market price.
4. The seller and buyer have to accept the equilibrium price i.e. the
price at which demand and supply are equal.
5. Hence, both the buyer and seller are price takers in perfect
competition.

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CHAPTER 6 – FACTORS OF PRODUCTION

Q.1. Distinguish between the following.
1. Land and Capital.
Ans.
Land Capital
Meaning.
Land refers to all resources available Capital goods refer to man-made on,
above and under the surface of earth. It assets which are used for further
is a free gift of nature. production. They are otherwise known as
It includes air, rains, mountain, river, produced means of production Machinery,
forest, minerals, oil etc. building, raw material etc. are capital
goods.
Reward
Land receives rent as its reward Capital receives interest as the reward
Durability
Land is durable and a permanent factor. Though durable, capital turns Useless
after certain period of time

2. Fixed capital and variable capital

Ans.
Fixed capital Variable capital
Meaning.
Fixed capital is that capital which is Circulating capital or variable capital is that
invested on the fixed assets like capital which is invested by the firm on raw
machinery, building, tools, factory material, electricity, fuel etc. It is used once
plant etc. It can be used again and for all.
again for a long period.
Variable
Fixed capital remains constant in the Variable capital changes with change in the
short run irrespective of changes in output.
the output. However, in the long run,
fixed capital is variable.
When
Fixed capital arises even when there Variable capital is required only when the
is no production. production is on.
FC remains constant in short run Variable Capital varies with the level of
Production.

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3. Insurable risk and non-insurable risk

Ans.
Insurable risk Non-insurable risk
1. Risks which are for seen by the Risks which cannot be foreseen by
entrepreneur are called insurable entrepreneur are called non-insurable risks.
risks. E.g.: Competition, arrival of substitutes,
E.g.: Fire, theft, accident, flood etc. changes in demand etc.
2. Insurable risks are covered by the Non insurable risks cannot be covered by
insurance companies. insurance companies.
3. Insurable risks have no uncertainty Non-insurable risks bring uncertainty and
since they are covered. provide profit.

4. Labour and entrepreneur.

Ans.
Labour Entrepreneur
Meaning.
Labour means any mental or physical Organizer is one who collects and
work which is undertaken with the combines different factors together. He
purpose of earning economic reward. coordinates the activities of different
E.g. Coolie (physical labour) and doctor factors in the process of production.
(mental labour).
Reward
The factor labour receives wages as the The factor organiser receives profit as the
reward. reward for his entrepreneurial services.
Risk
The labour does not face risk and The organizer faces risks and uncertainty
uncertainty bearing. in business.

Q. 2. State with reasons whether you agree or disagree with the following
statements.
1. Profit is a reward for bearing risk only.
Ans. No. I disagree with this statement.
i. All types of risk do not bring profit.
According to Prof. Knight all types of risk will not add profit. It is non-
insurable and unforeseen risk which bring profit. He divides risks into two
types.
ii. Insurable risks which can be insured bring no profit.
These are risks which can be foreseen by the entrepreneur. Such a risk
can be covered by the insurance companies. Such risks include fire,
flood, accident etc. In the event of such risks happening, compensation
is paid by insurance companies. Therefore in reality they are not risk.
Profit does not occur due to such risks.
iii. Non-lnsurable risks bring profit.
These are risks which can not be foreseen by the entrepreneur. It is
unforseeable risk which brings uncertainty. Profit occurs due to such
uncertainty. These risks can not be covered by insurance companies.

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Such risks include competition, availability of substitutes, government

intervention, changes in demand due to business cycle, changes in
technology etc.
iv. It is not risk but uncertainty which leads to profit.
Profit occurs to the entrepreneur on account of uncertainty. It is not risk
but the degree of uncertainty associated with the risk that brings profit.
Unforeseen risks like changes in demand, changes in government
policy, arrival of substitutes bring uncertainty.
Such risks are non-insurable in nature and add profit.
v. Risk and profit are not always directly related.
There is no direct relationship between risk and profit. It is not necessary
that high degree of risk means high rate of profit. In fact profit is
determined by several factors other than risk. The other functions of the
entrepreneur such as initiating, co-ordinating and bargaining etc also
influence profit.

2. Labour is a perishable factor of production.

Ans. Yes. I agree with this statement.
i. Labour once lost is lost forever.
Labour is perishable in nature. It is not possible to store labour for future
use. For e.g. If a teacher is absent for one day, that day's labour is gone.
May be the teacher come next day and deliver the lecture. But that can
not compensate today's labour which is lost. Labour, once lost, is lost
forever. It can not be recovered.
ii. Labourcan not be stored.
Labour is perishable and can not be stored. There is no technology by
which labour can be stored for future use. It can not be stored and used
in future.
iii. Labour and labourercan not be separated.
Capital can be separated from capitalist and stored. But labourcan not
be separated from labourer. The labourer must be present when labour
is being used.
iv. Labour is an intangible asset.
Labour is a kind of talent or skill which is invisible. Whether it is physical
labour or mental labour, it has no shape or structure. Labour is not the
person but the personal talent of that person. Therefore it can not be
stored.
v. Labour is a qualitative aspect.
Labour is a quality. Qualities like intelligence, beauty can not be
separated and stored in a place. Similarly labour is a human quality
which can not be separated and stored. It can not be seen. Only its
effects can be realised.

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3. All risks are insurable.

Ans. No I disagree with this statement.
i. Risks which are foreseen are insurable.
Risks which are foreseen by the entrepreneur are called insurable risks.
E.g. fire, theft, accident, flood etc. The businessman is in a position to
predict the arrival of such risks. These risks are covered by insurance
companies.
ii. Risks which are not foreseen are non-insurable risks.
Risks which cannot be foreseen by entrepreneur are called non-
insurable risks.
E.g. competition, arrival of substitutes. Such risks are beyond the control
of businessman. No estimation is possible. Therefore they are not
covered by insurance companies.
iii. Insurable risks are not risks at all.
Since the risks in case of theft and accidents are covered by insurance
companies and fully compensated, they are not treated as risks.
iv. Non insurable risks have the element of uncertainty.
Non insurable risks have greater degree of uncertainty. Such risks
cannot be predicted but to be faced by the entrepreneurs. The
entrepreneur is rewarded with huge profit when-he faces such risks.

4. Supply of land is fixed.

Ans. Yes, I agree with this statement.
i. Free gift of nature.
The land is a free gift to man given by nature. It is not made out of human
efforts. The supply always remains fixed for the entire society as a whole.
ii. Indestructible in nature.
There is no technique by which land can be increased or decreased.
Even if a bomb is dropped, it can only destroy the structure of land. But
the land remains the same. The debris ultimately become land.
iii. Permanent factor.
Land is permanent factor. Unlike labour, it is durable and used again and
again. It will not get out of existence.
iv. Quantity remains unchanged.
Quality of land differs from place to place. But the quantity of land
remains unchanged for the entire universe. Thus supply of land remains
fixed.

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Q.6 Give reasons or explain

1. The entrepreneur Is called as the leader of the organization
Ans:
1. An entrepreneur is a person who co-ordinates the factors of
production and directs the entire process of production.
2. He invests his capital and bears all the risks.
3. He ensures that resources are utilized properly and wastage is
avoided.
4. He takes firm decisions regarding the business quickly to gain
competitive advantage.
5. He introduces innovation in the products and business strategies.
6. Thus, he is called as the leader of the organization.
2. Labour cannot be stored
Ans.
1. Labour is a human factor of production.
2. It is a living and most active factor of production.
3. Labour refers to work or effort directed towards producing goods or
rendering services. This work or effort may be physical or
intellectual.
4. If a labourer is absent for a day, then that day's labour is lost
forever. That day and time will not come back.
5.. Therefore, labour is perishable and it cannot be stored.
3. The supply of land is inelastic
Ans.
1. Land is the most basic and primary factor of production.
2. Land includes all those natural resources which are found:
i) On the surface of earth like soil, river, mountains, forest,
agricultural land.
ii) Below the surface of earth like coal, gold, silver, oil etc.
iii) Above the surface of earth like air, sunlight, heat etc.
3. Land is a natural resource and a free gift of nature.
4. By applying labour & capital, the utility of land can be increased but
the area or number of plots cannot be increased.
5. Therefore, supply of land is perfectly inelastic as there cannot be an
increase in the total supply of land.
4. Raw material is considered as variable capital
Ans.
1. Variable capital refers to the capital that can be used only once in the
production process.
2. Variable capital is used for or absorbed in the production of the
finished output.
3. Raw material also can be used only once in the production process.
Once it used, it is not available for reuse.
4. Further, raw material is used for or absorbed in the production of
finished output.
5. Therefore, raw material is considered as variable capital.


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CHAPTER 7 – INTRODUCTON TO MACRO ECONOMICS

Q. 1. Give reasons or explain the following statements
1. Macro-Economics is the study of aggregates.
Ans. 1. Macro economics studies macro variables.
The term macro is derived from Greek word 'makro' meaning large.
Macro economics is concerned with the study of macro variables like
aggregate demand, aggregate supply, total savings, total investment,
national income etc. Such variables represent the whole economy.
Therefore it is a study of aggregates covering whole economy.
2. Objectives of macro economics are broad based.
The main objectives of macro economics are achievement of price
stability, full employment, economic growth etc.
There are broad based issues dealing with the economy as a whole.
3. Macro Economics presents over all picture of the economy.
Macro economy presents the overall picture of the economy. It takes into
account the entire economy into consideration. In otherwords it studies
the forest and not the trees. Thus it gives a birds eye view of the
economy.
4. Macro economics provides remedies for solving national problems.
Macro economic theory provides solution to macro issues at the national
level. It provides remedial policies for facing problems such as
unemployment, fluctuation in national income, depression etc. Thus it is
an analysis of aggregates.

2. Macro – Economics is also known as income and employment theory.

Ans. 1. Analysis of national income is the subject matter of macro
economics.
The subject matter of macro economic analysis explains the factors
determining level of national income and employment.
2. Explains causes of fluctuation in national income.
It also analyses the causes of fluctuations in the level of national income
and employment.
It explains why the level of national income and employment is low
during depression. It also suggests measures how to come out of
depression.
3. Explain equilibrium level of national income.
Keynes' book titled "A General Theory of Employment Interest and
Money" which is based on macro approach explains how equilibrium
level of national income and output is determined by aggregate demand
and aggregate supply.
4. National income and employment.
Keynes explains the relationship between national output and
employment. Higher the level of employment higher the national income.
He further states that employment and national income can be increased
by raising effective demand.

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3. The scope of Macro - Economics is wide.

Ans. 1. Macro economics studies macro variables.
The term macro is derived from Greek word 'makro' meaning large.
Macro economics is concerned with the study of macro variables like
aggregate demand, aggregate supply, total savings, total investment,
national income etc. Such variables represent the whole economy.
Therefore it is a study of aggregates covering whole economy.
2. Objectives of macro economics are broad based.
The main objectives of macro economics are achievement of price
stability, full employment, economic growth etc.
There are broad based issues dealing with the economy as a whole.
3. Macro Economics presents over all picture of the economy.
Macro economy presents the overall picture of the economy. It takes into
account the entire economy into consideration. In otherwords it studies
the forest and not the trees. Thus it gives a birds eye view of the
economy.
4. Macro economics provides remedies for solving national problems.
Macro economic theory provides solution to macro issues at the national
level. It provides remedial policies for facing problems such as
unemployment, fluctuation in national income, depression etc. Thus it is
an analysis of aggregates.

4. Macro – Economics deals with whole economy.

Ans. 1. Extensive approach covering entire economy.
The term macro is derived from Greek word "Makros" meaning large.
Thus macro economics study the behavior of all units combined together
and not a small, single units. It is an extensive approach covering the
entire economy.
2. Studies macro variables.
Macro economics covers all macro variables of the economy such as
total production, total consumption, total savings and total investments.
According to Prof. MC Connel, "Macro economics examines the forest,
not the trees".
3. Studies overall economic activity.
Macro economics is concerned with macro issues like general price
level, unemployment economic growth. It explains the causes of inflation
and examines the fluctuations in growth. Thus it analyses the overall
economic activity.
4. Adopts lumping method.
Unlike micro economics, macro economics does not split up the
economy into the small units but studies it in big lumps. That is why it is
called lumping method. In the words of K. E. Boulding, "Macro
economics deals not with individual quantities but with aggregate of
these quantities.

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5. Macro – Economics is different from Micro – Economics

Ans. 1. Study of aggregates and individual units.
The term micro is derived from Greek word 'MIKRO meaning 'small'
Micro economics is the study of individual economic units like a firm, a
market, a consumer, an industry etc. Micro economics deals with micro
variables which are individualistic in nature.
The term macro is desired from Greek word 'makro' meaning large.
Macro economics is a study of aggregates like national income,
aggregate investment, saving etc. Macro economics deals with macro
variable in totality.
2. Output and employment of the firm and economy.
Micro economics shows interest in finding out output and employment of
a particular firm or industry. In analyses now the price of a particular
product is determined. Macro economics is concerned with the study of
determination is total output of goods and services in the economy. It
explains how the total employment of resources are determined.
3. Partial equilibrium and general equilibrium.
Micro economics adopts the technique of partial equilibrium analysis.
Such an analysis is based on assumptions called certain paribus. Here
every firm or industry is treated as a small single unit.
In case of macro analysis, the technique of general equilibrium. It is
useful to study the determination of the general price level, total
employment and output and fluctuations in these aggregates.

Q. 2. Distinguish between the following.

1. Micro Economics and Macro Economics
Ans.
Micro Economics Macro Economics
Meaning
The word micro has been derived from The word macro has been derived from the
the Greek word mikros which means Greek word makros which means large. It is
small. It is concerned with the study of concerned with the study of aggregates like
individual units such as individual firms, national income, aggregate demand, aggregate
industries and individual markets. supply etc.
E.g. Alfred Marshall's book "principles E.g. Keynes' book "The General Theory of
of economics" was mainly based on Employment interest and Money" is based on
micro economics. macro economics
Price theory / income theory
Micro economics is known as price Macroeconomics is known as income theory
theory which explains how the prices of which explains the determination of national
goods and factors are determined. income and causes of its fluctuations.
Partial/general equilibrium
It is based on partial equilibrium which It is based on general equilibrium which
explains the equilibrium of an individual, explains the equilibrium of all consumers, all
a firm, an industry etc. firms and all industries in an economy.

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2. Slicing Method and Lumping Method.

Ans.
Slicing Method Lumping Method
Meaning
It is an approach in which the is spilt up It is the approach in which the economy
into small Units analysation. entire economy is taken into for intensive
consideration for extensive analysation.
Field
It is applied in the field of micro It is applied in the field of macroeconomics
economics which deals with individual which deals with the behaviour of
units like single consumer, a firm, an aggregates like national income, total
industry or a market investment, general price level etc...
Application
It analyses part of the economy and It analyses overall performance of the
fails to give overall picture of the economy and provides the clearpucture of
economy as a whole. the whole economy.
Can also be called as Deductive Can also be called as Inductive Method.
method

3. Partial equilibrium and general equilibrium

Ans.
Partial equilibrium General equilibrium
Meaning
An equilibrium which is related to a An equilibrium which is related to
single variable or few variables may be numerous variables or the economy as a
called partial equilibrium or particular whole may be called as general
equilibrium. equilibrium.
Prof. Alfred Marshall and Cambridge Walras and the Lay lanne school are
School of economists introduced associated with general partial equilibrium.
equilibrium.
Nature
It is simple analysis which is more It is complicated and difficult to deal with
effective. It is easy to deal with such such analysis.
analysis.
Use
It is useful to analyze a particular It is useful to analyse the interrelationship
aspect of a problem at a particular time. of various sectors of the economy.
It is suitable for analysis of variables
which have no inter relationship.

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Q.3. Do you agree with the following statements ? Give reasons.

1. The scope of Macro-Economics is wide.
Ans. Yes.I agree with this statement.
1. Analyses Macro Variables.
The word Macro is derived from the Greek word 'Makros* meaning
large. Hence macro economics is concerned with the study of the entire
economy and not individual units.
Macro economics is concerned with study of macro units like national
income, general price level, aggregate supply, aggregate demand, total
investment, total consumption and total savings. In the words of K. E.
Boulding, "Macro economics deals not with individual quantities but with
aggregate of these quantities, not with individual incomes but with
national income, not with individual prices but with price levels, not with
individual outputs but with the national output".
2. Studies the problem of unemployment.
Macro economic is an effective tool to analyse macro issues like the
problem of unemployment and to find out remedies. The general theory
of employment given by Keynes is a complete macro analysis. In short
macro economics is very useful in studying the causes, effects and
remedies of general unemployment.
3. It studies the entire economy and not part of the economy.
Macro economics does not deal with part of the economy. It studies the
entire economy as one unit. In the words of Prof. MC Connel, "Macro
economics examines the forest, not the trees" That is why it is known as
aggregate economics.
4. Income theory.
Macro economics is not concerned with the income of an individual but
with the national income. It studies about the factors determining the
national income of the economy and analyses the causes of fluctuations
in national income. It analyses the growth of the economy in terms of
national income. Hence it is known as income theory.
5. It analyses the over all performance of the economy.
Macro economics seeks to know the increase in the material well being
of the whole nation. The reason being that macro economics is
concerned with all the issues like size of national income, its
components, employment, inflation, taxes, budget etc. Thus macro
economics is an useful instrument to study and analyse the overall
performance of the economy.
6. Lumping method.
Macro economics deals with macro quantities and macro units. Unlike
micro economics, it does not split up the economy into small slices but
studies it in big lumps. Therefore it is called the method of lumping.
7. Helpful in comparative analysis of the growth of different
economies.

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Macro economics provides data regarding aggregate demand,

aggregate supply,investment, saving and employment. They are very
useful for the comparative study of the growth of the various
economies.
8. Macro objectives.
Macro economics is concerned with the achievement of objectives like
full employment, price stability and economic growth. Thus it is based
on broader objectives. Its approach is general in nature and not
individualistic.
9. Source of reliable data on aggregates.
Macro economics provides data regarding aggregate demand,
aggregate supply, investment, saving and employment. They are very
useful for the measurement and study of the national income.
Measurement of national income is possible only with the data provided
by macro economics. Macro economics is very helpful in measuring,
studying and analysing national income.
10. Macro theory of distribution.
Macro theory of distribution is a branch of study of macro economics
which deals with the study of shares of wages and profit in total national
income.
It explains how the relative shares of wages and profits in the national
income are determined and distributed. For example it tells us what is
total amount of all wages of all labourers in the economy or total profits
of all entrepreneurs in the economy. It is the analysis of aggregate
rewards for various factors.

2. Macro – Economics is different from Micro-Economics

Ans. Yes. I agree with this statement.
Macro is concerned about the whole economy while micro is a study of
individual units of the economy. They differ from each other in many respects
as given below:
1. Study of aggregates and individual units.
The term micro is derived from Greek word 'MIKROS' meaning 'small'
Micro economics is the study of individual economic units like a firm, a
market, a consumer, an industry etc. According to Boulding "Micro
economics is the study of particular firm, particular household, individual
prices, wages, incomes, individual industries, particular commodities.
Micro economics deals with micro variables which are individualistic in
nature.
The term macro is derived from Greek word 'makros' meaning large.
Macro economics is a study of aggregates like national income,
aggregate investment, saving etc. According to Boulding, "Macro
economics deals not with individual quantities as such but with
aggregate of these quantities, not with individual income, but with the
national income". Macro economics deals with macro variable in totality.

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2. Basis.
Micro economics is based on price mechanism which operates with the
help of demand and supply forces.
The basis of macro economics is national income, output and
employment.
3. Determination of price, output and employment.
Micro economics shows interest in finding out output and employment of
a particular firm or industry. It analyses how the price of a particular
product is determined.
Macro economics is concerned with the study of how total output of
goods and services of economy is determined. It also analyses how the
total employment and general price level are determined.
4. Allocation and distribution of resources.
Micro economics is concerned with the study of how an individual
consumer allocates his given income among many goods and services
so as to maximise his total satisfaction.
Macro economics, shows interest in finding out how resources of the
economy are distributed. It examines how output of the economy is
made and how national income is distributed among factors.
5. Equilibrium.
Micro economics adopts the technique of partial equilibrium analysis to
study the determination of price-output of a single commodity or service.
Such an analysis is based on assumptions called ceteris paribus. Here
every firm or industry is treated as a small single unit.
In case of macro analysis, the technique of general equilibrium is used to
study the determination of the general price level, total employment and
output in an economy. General equilibrium studies the interdependence
between different markets and sectors in the economy.
6. Income theory and price theory.
Micro economics analyses how the prices of individual commodities and
services are determined. Since it is concerned with the price
determination of products and factors, it is called price theory.
Macro economics is known as income theory. It studies the factors
determining national income and employment and the causes of
fluctuations in income and employment. According to Edward Shapiro,
the major task of macro economics is the explanation of what
determines the economy's income.
7. Vision.
Micro economics takes into account only individual units or part of the
economy. Therefore it gives us a worm's eye view of a particular variable
or issue.
Macro analysis takes the entire economy into consideration. Therefore it
provides us a bird's eye view of the whole economy.
8. Objectives.

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As far as demand side is concerned, the objective of micro economics is

to achieve maximum utility for a rational consumer.
In case of supply side, the objective is to achieve maximum profit at
minimum cost for a firm.
The objectives of macro economics are economy oriented. The
achievement of full employment, price stability, economic growth and
rise in national income are its main objectives.
9. Theory of distribution.
Micro theory of distribution is an important branch of study of micro
economics which deals with factor pricing of each factor. It analyses how
factor rewards like wages, rent, interest and profit are determined and
distributed with respect to a particular firm or a market. It is the analysis
of determination of individual reward for each factor.
Macro theory of distribution is a branch of study of macro economics
which deals with the study of shares of wages and profit in total national
income.
For example it tells us what is total amount of all wages of all labourers
in the economy or total profits of all entrepreneurs in the economy. It is
the analysis of aggregate rewards for various factors.
10. Aggregation of macro economics is different from aggregation of
micro economics.
Micro economics also deals with aggregates like industry and market.
But these aggregates are not related to the whole economy but confined
to particular industry or a particular market.
Macro economics analyses the behaviour of aggregates which are
related to the whole economy. For example, macro economics is
concerned with the study of aggregates like total consumption and total
investment. But these aggregates are not confined to a single product or
single industry. They are related to all industries producing consumer
goods and capital goods.
11. Basic questions.
Micro economics deals with the following basic questions:
i) What goods and how much quantity of those to be produced?
ii) How they shall be produced?
iii) How they shall be distributed?
Macro economics deals with the following basic questions :
i) Are the existing resources effectively employed? (Full employment)
ii) How they improve the productive capacity of the economy?
(Economic growth)
iii) Is the balance of payment position comfortable? (International
trade)

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3. Macro – Economics is a partial equilibrium analysis

Ans. No.Idisagree with this statement.
1. General equilibrium.
Macro economics is associated with general equilibrium. The reason
being that general equilibrium deals with the economy as a whole.
Partial equilibrium is related to a single variable or few variables. It
analyses only a part of the economy. Since macro economics concerns
itself with the study of entire economy, general equilibrium suits macro
analysis.
2. Analysis of macro variables.
Macro economic analysis takes into consideration macro variables For
example aggregate variables like aggregate demand, aggregate supply,
national income, total investment, employment etc can be better
analysed only under macro analysis. General equilibrium is
indispensable for a proper and effective analysis of such aggregate
variables.
3. Extensive analysis.
Macro analysis is not based on restricted data. It is much more extensive
and vast. It isa comprehensive analysis including the entire data of the
economy. General equilibrium is suitable for such extensive analysis.
4. Interrelationship between sectors.
Macro economic analysis takes into account the entire economy as a
whole. It considers the vast network of the national economy under its
analysis. In such a net work there are different sectors which are
interrelated. Disturbance in one sector will have impact on another
sector. Such a interrelationship and their over all effect can be effectively
analysed only under general equilibrium.
5. Mutual interdependence of different ogranisms.
Macro economics deals with all segments functioning in an economy.
These segments are mutually interdependent on each other. General
equilibrium is suitable for analysis of all segments simultaneously. Partial
equilibrium is suitable for the analysis of a particular segment. But
general equilibrium analyses all segments in totality. It provides a
collective treatment of all segments functioning in the economy.

Q.4. Define or explain the following concepts

1. Macro-variables
The term "Macro” is derived from Greek word 'Makros' which means large or
aggregate (total). Macro variables refers to large variables which relate to or
cover the entire economy like total employment, national income, national
output, total investment total savings, total consumption, aggregate supply,
aggregate demand etc. Macro-Economics is a study of macro variables.

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CHAPTER 8 – NATIONAL INCOME

Q.1. Distinguish between.
1. Gross National Product (GNP) and Gross Domestic Product (GDP)
Ans.
Gross National Product (GNP) Gross Domestic Product (GDP)
Meaning
It is the gross value of goods and It is the gross value of goods and
services produced within the country services produced within the domestic
plus net factor income from abroad. territory.
NFIA
It includes net factor income from It excludes net factor income from
abroad. GNP = GDP + NFIA abroad. GDP = GNP-NFIA
Territory
GNP can take place in any part of the It is concerned with goods and services
world. produced within domestic territory
GNP =C+I+G+(X-M)+(R-P) GDP = C+I+G+(X-M)

2. Output method of measuring national income and Income method of

measuring national income.
Ans.
Output Method Income Method
Meaning
Under production method national Under income method, National lncome is
income is viewed as the total value of viewed as the sum of total of money income
final goods and services produced received by all the factors of production
annually in a nation. including land, labour, capital and
organization during a given year.
Other name Product Method Other name Factor Cost Method
Items included
(i) Consumer goods and services a. Wages and salaries, rent, interest, profits
(ii) Gross domestic private investment, from private and government sector,
(iii) government purchases, b. The mixed income,
(iv) Net foreign earnings. c. The net factor income from abroad.
Main determined
The total value of final goods and Factor payments act as main determinant of
services act as the main determinants national income.
of national income

3. Gross National Product (GNP) and Net National Product (NNP)

Ans.
Gross National Product (GNP) Net National Product (NNP)
Meaning
Gross National Income or GNP refers to Net National Income or NNP changes is
the gross money value of goods and calculated by deducting depreciation
services produced in a country plus net from Gross National Income i.e. NNP =

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factor income from abroad during a GNP - Depreciation.

given time period, say, a year. It
includes the depreciation.
Formula:
C+I+G + (X-M)+(R-P) C+I+G+(X-M)+(R-P)-D
Gross / Net
Gross National Income or GNP Net National Income, represents the net
represents Gross value of National value of the National product.
product.
Economics analysis
Gross national Income is useful for Net National product is useful for long
short period analysis when changes in run analysis when there are many
capital assets are insignificant changes in capital assets like building,
machinery, equipment etc.

4. National income at market price (Nlmp) and National income at factor cost
(Nlfc)
Ans.
National income at market price (Nlmp) National income at factor cost (Nlfc)
Meaning
National income calculated on the basis National income calculated on the basis of
of prevailing market prices is called factor cost (wage, rent, interest and profit)
national income at market price. is called national income at factor cost.
Formula
Indirect taxes and subsidies
NImp = NIfc+ indirect taxes – subsidies NIfc= NImp – indirect taxes + subsidies.
Primary Factor
Market price is the primary factor Factor cost is the primary factor
influencing the value of goods and determining the value of goods and
services. services.

Q.2. State with reasons whether you agree or disagree with the following
statements.
1. There are many conceptual or theoretical difficulties in the measurement
of national income.
Ans. Yes. I agree with the following statement
The calculation of the national income of a country is a task full of difficulties
and complexities. The following difficulties generally arise while estimating
national income.
1. Theoretical difficulties 2.Practical difficulties.
1. Theoretical difficulties:
This is also known as conceptual difficulties.
(i) Transfer payments:
Individuals get pension, unemployment allowance, but whether these
should be included in national income is difficult problem. On one hand,
these earnings are a part of individual income and, on the other, they are

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government expenditure. Therefore, these transfer payments are

ignored from national income.
(ii) Income of foreign firms:
According to IMF view-point, income of a foreign firm, should be included
in the national income of the country, where the firm actually undertakes
production work. However, profits earned by foreign firms are credited to
the parent concern.
(iii) Unpaid services:
National income is always measured in money, but there are a number
of goods and services which are difficult to be assessed in terms of
money. For example, painting as a hobby by an individual, the bringing
up of children by the mother, these services are not included in national
income as remuneration is not given to them.
Also services of housewives and the services provided out of love,
affection, mercy, sympathy and charity are not included in national
income, as they are not paid for. By excluding all such services from it,
the national income will work out to be less than what it actually is.
(iv) Incomes from illegal activities:
Income earned through illegal activities such as gambling, black
marketing, theft, smuggling etc., is not included in national income. Such
goods and services do have value and meet the needs of the
consumers. Thus to that extent national income is underestimated.
(v) Treatment of government sector:
Government provides a number of public services like defence, public
administration, law and order etc. Measuring the market value of such
government services is difficult, as the real value of these services is not
known, therefore it has become a convention to treat all such services as
final consumption. Hence, it is included in national income.
(vi) Production for self consumption: .
Goods produced for self consumption such as food grains, vegetables
and other farm products do not enter in the market. But the value of such
goods should be estimated at the rate of market price that have been
marketed and should be included in national income.
(vii) Changing price levels:
The difficulty of price changes arise in the national income estimate,
when the price level in the country rises, the national income also shows
an increase even though the production might have fallen and when
price level falls, National Income may show a decrease even though
production may have increased.

2. Conceptual difficulties/statistical:
In practice, a number of difficulties arise in the collection of required
statistics in estimating national income, some of these are:
(i) Problem of double counting:
The greatest difficulty in calculating the national income is of double
counting. It arises from the failure to distinguish properly, between a final
and an intermediate product. It so happens, the national income would

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work out to be many times the actual For example, flour used by a
bakery is an intermediate product and that by a household the final
product.
(ii) Existence of non-monetized sector:
There is a large non-monetized sector in the developing economy like
India. Agriculture, still being in the nature of subsistence farming in the
developing countries, a major part of the output is consumed at the farm
itself and a part of production is partly exchanged for other goods and
services. Such production and consumption cannot be calculated in
national income.
(iii) Lack of occupational specialization:
There is the lack of occupational specialization, which makes the
calculation of national income by product method difficult. For instance,
besides the crop, farmers in a developing country are engaged in
supplementary occupations like dairy farming, poultry farming, cloth
making etc. But income from such productive activities may not be
revealed and thus is not included in the national income estimates.
(iv) Inadequate and unreliable data:
Adequate and correct production and cost data are not available in a
developing country, such data relate to crops, fisheries, animal
husbandry, forestry, the activities of petty shopkeepers, construction
workers, small enterprises etc. That is why, national income of a country
will not show at its actual.
For estimating national income by income method, data on unearned
incomes and on persons employed in the service sector are not
available. Data on consumption and investment expenditures of the rural
and urban population are also not available for the estimation of national
income.
Moreover, there is no machinery for the collection of data in such
countries.
(v) Capital gains or losses:
Capital gains or losses, which accrue to property owners by increases or
decreases in the] market value of their capital assets or changes in
demand, are not included in the gross national product, because these
changes do not result from current economic activities.
(vi) Depreciation:
The calculation of depreciation on capital consumption is one more
difficulty. Depreciation refers to wear and tear of capital assets, due to
their use in the process of production. Depreciation of capital assets will
depend on technical life of the asset, the intensity of its use, nature of
the asset, regular and careful maintenance etc. There are no uniform,
common or accepted standard rates of depreciation applicable to the
various capital assets. In case of depreciation, one has to make many
reasonable assumptions, which involve an element of subjectivity. So it
is difficult to make correct deductions for depreciation.

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(vii) Valuation of inventories:

Raw materials, intermediate goods, semi-finished and finished products
in the stock of the producers are known as inventory. All inventory
changes, whether negative or positive, are included in the gross national
product. Any mistake in measuring the value of inventory, will distort the
value of the final production of the producer. Therefore, valuation of
inventories requires careful assessment.
(viii) Illiteracy and Ignorance:
Majority of the small producers in developing countries are illiterate and
ignorant, and are not in a position to keep any account of their
productive activities. So they cannot give information about the quantity
or value of their output. Hence, the estimates of production and earned
income are simply guesses.
2. Many precautions are to be taken while estimating national income by
income method.
Ans. Yes. I agree with the following statement.
Precautions:
While estimating national income by income method, the following
precautions should be taken.
1. Transfer incomes or transfer payment like scholarships, gifts, donations,
Charity, old age, pensions, unemployment allowance etc., should be
ignored.
2. All unpaid services like services of housewife, teacher teaching her/his
child, should be ignored.
3. Any income from sale of second hand goods like car, house etc., should
be ignored.
4. Income from sale of shares and bonds should be ignored, as they do not
add anything to the real national income.
5. Revenue received by the government through direct taxes, should be
ignored, as it is only a transfer of income.
6. Undistributed profits of companies, income from government property
and profits from public enterprise, such as water supply, should be
included.
7. Imputed value of production kept for self consumption and imputed rent
of owner occupied houses should be included.
In India, the national income committee of the Central Statistical
Organization, uses the income method for adding up the income arising
from trade, transport, professional and liberal arts, public administration
and domestic services.
3. Gross National Product and Gross Domestic product are same concepts.
Ans. No.I Disagree with the following statement.
Gross national product and Gross National Product are two different concepts.
1. Meaning.
Gross Domestic Product refers to the gross total money value of final
goods and services produced within the domestic territory of the country
annually.

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Gross National Product refers to gross total money value of goods and
services produced within the economy plus net factor income from
abroad.
2. Components.
GDP includes the following items :
(a) Consumption goods and services (C)
It includes consumption goods like food, clothing, books, furniture,
car, TV. setsand educational and health services consumed by the
households in the economy.
(b) Gross Domestic Private Investment (I)
It includes fixed factors like building and machinery, residential
construction arm inventories.
(c) Government purchase (G)
It includes value of goods and services used by government like
public investment on road, railways, airways, dams and business
units plus police, defence educational and | health services.
All the three items constitute GDP
(d) Net export (x-m) net export refer to difference between imports and
exports
GDP = C+l+G+(x-m)
Gross National Product includes something more than GDP. In
addition to the above four items, if we add net factor income from
abroad (R-P) it becomes Gross National Product.
GNP = C+l+G+(x-m) + (R-P)
(e) GNP is broader realistic than GDP.
GDP fails to show overall picture of the economy during the year. As
it fails to include net factor income from abroad, it does not represent
the overall picture of the economy in terms of national income.
GNP includes net factor income from abroad. It represents the
money value of total national production for any given period.
Therefore it is more suitable for comparative analysis.

4. The calculation of national income exclude the value of intermediate

goods.
Ans. Yes. I agree with the following statement.

1. Only final goods and services are included.

National product is defined as the money value of all final goods and
services produced in the economy annually. Therefore there is no
possibility of intermediate goods being included in the calculation of
national income.
2. Intermediate goods are part of final goods.
Final goods are those goods which are ready for consumption. There
is no need to include the value of intermediate goods since they are
already a part of final goods. The reason being that no final good can
be produced without the use of intermediate goods. Cotton is the

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intermediate goods for the final good cotton shirt. As cotton is already
a part of final good, there is no need for including is separately
3. Inclusion of intermediate goods leads to double counting
Since the intermediate good sugarcane is part of sugar, inclusion of
the value of sugarcane separately amounts to double counting. It
results in over estimation of national income.
4. Goods which crosses the production boundary becomes final
goods.
The intermediate goods do not cross the production boundary. The
production process of intermediate goods is still on. They are not
treated as final goods and therefore their value is not included in the
calculation of national income.
Final goods are those goods which crosses the production boundary
and reaches the consumer. In case of final goods the process is
completed. Following example would make the point more clear.

Cotton Yarn Cloth Shirt

(Final Good)

5. Intermediate goods need no be included separately.

in the above example cotton, yarn and cloth are not final goods. Shirt
is the final good which includes the value of all intermediate goods.
Therefore there is no need to include the value of intermediate goods
separately.
6. Final goods may be consumer goods or capital goods.
Cotton is transformed into cotton shirt which is a consumer good. Iron
ore is transformed into a machine which is a capita! good. The
consumer goods and capital goods are final goods which are
included in the estimation of national income.

Q.3. Give reasons or explain the following concepts

1. Income from second hand sale of goods is excluded from national income.
Ans: 1. National income refers to the monetary value of goods and services
produced in a country, during a given j time, generally a year.
2. Second hand goods refer to the goods that have been sold once, used by a
person and then resold to a person.
3. The value of such goods would have been considered in the national income
when they were produced o the first time.
4. Therefore, considering it for calculation of national income when it is again
sold as second hand would double counting of the same goods.
5. Also, second hand goods are not reproduced in the year. They are only
resold. Therefore, second hand goods not goods produced in a country
during the year.
6. Therefore, income from second hand sale of goods is excluded from national
income.

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2. National income at factor cost includes subsidy.

Ans. 1. NIFC refers to sum of all incomes earned by resources suppliers for their
contribution of land, labour, capital entrepreneurial ability which are utilized in
the production of the year.
2. In short, it is the sum total of all income received and accrued to the factors
of production.
3. A government may offer subsidy on certain necessary goods to the citizens
of the country in order to bring social welfare. As a result, the business unit
may receive lesser amount for his goods from the consumer.
4. However, the balance amount (i.e. subsidy amount) is given to the business
unit by the government. This also in the income of the business unit.
5. The total income of the business unit is distributed among the factors of
production.
6. Therefore, national income at factor cost includes subsidy.

3. National income estimates are not accurate in India

Ans. 1. National income refers to the monetary value of goods and services
produced in a country, during a given period of time, generally a year.
2. In India, the calculation of national income is undertaken by Central
Statistical Organization (CSO) since 1955.
3. There are various practical and theoretical difficulties in measurement of
national income.
4. The following are certain difficulties in measurement of national income-
- There is no proper mechanism to collect and record data pertaining to
unorganized sector, small enterprises, service providers, animal
husbandry etc.
- It is difficult to sometime distinguish between final product and
intermediate product.
- It is difficult to estimate the production for self-consumption.
- Due to ignorance, small producers do not keep any account of their
production.
5. Due to such various difficulties, national income estimates are not accurate
in India.

4. Old age pension is transfer income.

Ans: 1. Transfer income refers to the income received by a person without being a
factor of production i.e. without contributing to the process of production for
that particular year.
2. Old age pension is received by a person post his retirement. It is generally
paid by the government to people were earlier in government service.
3. The persons receiving old age pension do not contribute anything to the
production of the current year.
4. Therefore, old age pension is transfer income.

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5. Paid services are included in national income

Ans: 1. National income refers to the monetary value of goods and services
produced in a country, during a given period of time, generally a year.
2. Paid services refer to the services produced in the country during a year.
3. For e.g.: services of a lawyer, professor, chartered accountant, consultant,
designer etc.
4. The value of such services provided can be easily determined.
5. Thus, paid services are included in national income.

6. The services of a housewife or househusband is not included in national

income
Ans: 1. National income refers to the monetary value of goods and services
produced in a country, during a given period time, generally a year.
2. A housewife or househusband provides service to the family out of their love
and affection of the family.
3. They are not paid by the family and therefore it is not an economic activity.
4. Further, it is not possible to measure the value of such services provided.
5. Therefore, service of a housewife or househusband is not included in
national income.

7. Illegal income is not included in national income

Ans. 1. National income refers to the monetary value of goods and services
produced in a country, during a given period c time, generally a year.
2. Illegal income refers to income received from illegal activities like kidnapping,
extortion, smuggling, gambling etc.
3. It actually fits in the term "monetary value of services produced in the country
during the year."
4. However, since it is illegal income, there are no proper records of such
transaction.
5. Further, it is very difficult to determine the illegal income generated in the
country during the year.
6. Therefore, illegal income is not included in national income.

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CHAPTER 9 – DETERMINANTS OF AGGREGATES

Q.1. A Distinguish between the following.
1. Aggregate demand and Aggregate supply

2. Autonomous Investment and Induced Investment.

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3. Exports and Imports

4. Consumption & Saving

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5. Consumption function and saving function

Consumption function Saving function

Q. 2 State with reasons whether you agree and disagree with the following
statements.

1. Aggregate demand depends only on the consumption expenditure.

Ans. No. I disagree with the following statement.

Aggregate demand refers to the sum total of demand for all goods and services by all
sections of the economy including consumers, entrepreneurs,government and others at
different prices during the year.

Aggregate demand represents all types of goods and services demanded by the people
from primary, secondary and tertiary sector. Aggregate demand is equal to aggregate
expenditure.

(1) Components of Aggregate Demand

Consumption demand by household (c) or Consumption Expenditure.

The consumption expenditure refers to expenditure incurred by consumers on

consumption.

Household consumption refers to total demand for consumption goods like food,
clothing, books, furniture’s, car, TV. sets, educational and health services etc by all the
households in the economy. Consumption is of two types :

Autonomous consumption expenditure.

It refers to expenditure incurred irrespective of the size of income received by a person.
It is always positive and cannot be zero.

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For example, demand for essential or necessary goods like food, clothing, shelter and
religious activities is inevitable which cannot be postponed. All sections including poor,
middle class and rich have no option but to demand such goods and services for
survival.

Induced consumption expenditure.

It refers to expenditure that is incurred depending upon the size of disposable income. It
is directly related to income

Thus consumption expenditure is the sum total of a and b.

C=a+b

(2) Investment demand. (I) or Investment Expenditure.

Expenditure on investment refers to the expenditure incurred by the private

entrepreneurs on capital goods like new factory building, machinery, raw material,
tools, equipments etc. It is called capital formation. Demand for investment goods
depends upon the marginal efficiency of capital (MEG) and the rate of interest.

According to Keynes when the marginal efficiency of capital exceeds interest rate the
demand for investment will increase. It will continue until MEI become equal to the
rate of interest.

Keynes considers only the real investment like capital assets as investment. The
financial investment on shares, bonds, debentures etc. is not treated as investment.

(3) Government Demand (G) or Government Expenditure.

Government spends money on capital goods and consumption goods to provide

services like defence, administration, education, health, transport, communication etc
Government also invests huge capital on public enterprises. Thus government spends
a significant portion of money on purchase of variety of goods and services. A major
portion of the government investment is autonomous in nature.

(4) Foreign demand or foreign expenditure on our exports. (Net export)

At present almost all modern economies are open economies. Hence the foreign
demand has assumed greater importance in the calculation of aggregate demand.
Foreign demand refers to the demand made by foreigners on our goods. At the same
time our people also incur expenditure when they demand imports. The net expenditure
can be calculated) by knowing the difference between exports and imports (X-M). (X
means the receipts from exports while M refers to payments towards imports). It may be
either positive or negative.

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If exports exceed imports, the net exports is positive and it is added to aggregate
expenditure. If imports exceeds exports, it is negative and it is deducted from aggregate
expenditure.

Symbolically, the determinants of aggregate demand can be expressed as follows :

AD = C + I + G + (X-M)

2. Aggregate supply is influenced by the state of technology only.

Ans. No, I disagree with following statement.

Aggregate supply refers to the sum of all goods and services produced and supply
all producers and sellers in an economy during a given period of time, say, one
Aggregate supply is also referred to as national product or national income. It includes
all the quantity of goods and services produced by primary sector, secondary sector and
tertiary sector.

Factors Determining Aggregate Supply

Aggregate supply, in general, is determined by the following factors. They are:

1. Natural Resources (land) (N):

Generally, the productivity of an economy is very much influenced by the natural

resources available. By natural resources we mean all the resources which are
available on and under the surface of earth. It includes fertile land, forest, rivers,
mountains, buildings on the surface of earth, rains, clouds, air, sunlight above the land
and the minerals metals under the surface of earth. All such natural resources are very
helpful ir process of production of goods and services.

2. Labour (L):

The factor labour plays a crucial role in promoting productivity of an economy. Indeed
the productivity is determined by quantity and quality of labour force. Labour is required
to exploit the natural resources. The quantity of goods and services available in
economy depends upon the skill and efficiency of the human resources.

3. Capital (K):

Stock of capital is equally important in determining aggregate supply. Capital formation

is the key factor promoting productivity and economic growth. Availability of capital good
is instrumental in making industrialization a great success. On the other hand, deficient
of capital leads to low production, low aggregate supply and low national income.

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4. State of technical know-how (T):

The state of technology plays an important role in the determination of aggregate supp
Latest technology and improved technical know-how along with large scale product*
help the producers to expand supply. On the contrary application of primitive technique
and unscientific methods of operation result in poor productivity and poor supply i
goods and services.

Thus aggregate supply is determined by the four important factors namely land, labor
capital and technology. The relationship between aggregate supply and these factor the
short run can be symbolically expressed as follows:

0 = f(N, L, K, T) (Short run)

where, O = aggregate output, N-Natural resource, L-Labour, K-Capital, T-Technology -

Function of.

The symbol'—' indicates that the respective factors remain constant. Since other factors
remain constant in the short run, the output depends upon the level of employment.

In a closed economy model the entire national income is spent on consumption and
savings. Thus national income or aggregate supply is equal to the sum of consumption
expenditure (C) and savings (S)

Symbolically

AS = C + S

The following diagram shows the AS curve.

In the diagram AS curve is represented by 45°

line indicating that at every point in AS curve,

total national income (aggregate supply) is

equal to total expenditure (consumption + savings).

The above model is based on economy where

we have only two sectors viz household and firm.

In such an economy the major part of the income is spent on consumption and the
balance is saved. If the entire income is spent on consumption, there will be no savings
and this point is called the breakeven point.

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3. Positive net earnings from foreign transactions add to aggregate demand.

Ans. Yes. I agree with following statement.

1. Positive net earnings from foreign transactions imply that the expenditure on
exports exceeds the expenditure on imports.

Positive net earnings from foreign transactions refer to difference between imports
and exports. It is also known as net exports. When foreigners buy our goods it is
called exports.

If exports exceed imports, the net exports is positive and it is added to aggregate
expenditure. If imports and exports are equal net export becomes zero. It has no
impact on national income or national expenditure.

Net export = X - M, X = exports, M = imports

2. Positive net earnings indicate that there is more demand for domestic goods
foreigners.

At present almost all modern economies are open economies. Hence the foreign dc
has assumed greater importance in the calculation of aggregate demand. Foreign d
refers to the demand made by foreigners on our goods. When Indian exports grow
than imports, India is left with positive net earnings. Since exports represent
spending by foreigners on Indian goods, they are added to aggregate demand.

3. Heavy imports can result in negative net earnings.

Local people also incur expenditure when they demand imports. In countries like In
import goods like petrol, machinery etc. They are bought at high prices in the market
If imports exceed exports, the net earnings may be negative. In such a case\
deducted from aggregate demand.

4. Foreign transactions are possible only with an open economy.

In case of a closed economy, there is no foreign demand. At present almost all

economies are open economies. After the introduction of World Trade Centre and
trade reforms, is significant rise in foreign trade. As the volume of foreign trade
expands, the inclusion positive net export in aggregate demand has become very
important.

Symbolically, the determinants of aggregate demand can be expressed as follows:

AD = C + I + G + (X-M).

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5. Higher the growth, higher the net earnings from foreign transactions.

Generally countries achieving high growth rate enjoy better prospects of foreign
trade. developed country performs better than developing countries in terms of
foreign trade. Due to better performance of export sector, they maintain a favourable
balance of trade. It results in positive net earnings.

4. At break even point consumption (C) is equal to income(Y).

Ans. Yes. I agree with following statement.

Consumption function or propensity consumption refers to a schedule indicating the

amount of consumption at different levels of income. It shows the functional relationship
between aggregate consumption and aggregate income. It indicates how consumption
changes in response to change in income.

Thus the consumption function or propensity to consume is defined as the amount of

expenditure spent out of at different level of income.

Symbolically

C - f(y)

where c = consumption function, y = income (disposable), f = function of

The propensity to consume does not mean a mere idea or desire to consume. It is an
effective idea indicating the actual amount of current consumption or expected
consumption at different levels of income.

Aggregate Consumption Saving APC MPC

Income

0 250 -250 - -

500 550 -50 1.1 0.6

1000 1000 00 1 0.9

1500 1400 100 0.93 0.8

2000 1700 300 0.85 0.6

2500 1900 600 0.76 0.4

(i) At the initial stage, when the national income is zero, people have to maintain
minimum i expenditure to ensure survival. Thus they spend Rs. 250 crores at
zero level income. It may be done either by borrowing or by charity. It ultimately

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results in dissaving or negative saving amounting to Rs. 250 crore. This

consumption is known as autonomous consumption.

ii) When income increases to Rs. 1000 crore, the entire income is spent on
consumption and therefore saving become zero. This is called break even
point.

iii) After break even point, income rises by Rs. 500 crore. Consumption too rises
but less I proportionately. Therefore entire income is not spent on consumption
and a part of the income goes for saving.

iv) When income increases, both consumption and saving increase. However
consumption increases at a diminishing rate while saving rises at an increasing
rate.

v) Average propensity to consume (APC) is the ratio of consumption to any

particular level of income.

Algebraically, APC = c/y Where C=consumption y = income

The APC goes on diminishing.

vi) The marginal propensity to consume (MPC) may be defined as the ratio of
change in consumption to the change in income. It is the increase in
consumption as a result of increase in income.

Algebraically, MPC =

In the diagram, OE is the line of equality drawn

at 45° angle which indicates equality between

consumption and income (Y = C) at all stages.

CC is the straight line linear consumption curve.

At break even point the consumption and income

are equal. At this stage, there is no savings.

After the point B, the consumption expenditure

remains less than income. The distance between

the line of equality and consumption curve indicates saving.

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5. Savings are negative before breakeven point.

Ans. Yes. I agree with the following statement.

Saving is the excess income over consumption expenditure. In other words it is that
part of income which is not spent on consumption. Saving can be obtained by
deduction consumption expenditure (C) from income (y)

Symbolically,

S = y-c

Saving function or propensity to consume refers to the functional relationship

between saving and income. It shows that saving depends upon income.

Algebraically,

S = f(y)

The relationship between savings and income is direct or positive, (i.e) An increase in
income results in decrease in income results in decrease savings.

Saving function schedule and diagram Negative saving.

Aggregate Consumption Saving

Income Expenditure
0 250 -250
500 550 -50
1000 1000 00
1500 1400 100
2000 1700 300
2500 1900 600

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In the above table it is observed that saving remains negative (Rs. -250 crore) at the initial
stage when income is zero. This is because people spent on consumption even when their
income is zero by borrowing. This is called dissavings.

At the initial stage, when the national income is zero, people have to maintain minimum
expenditure to ensure survival. Thus they spend Rs. 250 crores at zero level income. It may
be done either by borrowing or by charity or even by begging. It ultimately results in dissaving
or negative saving amounting to Rs. 250 crore. This consumption is known as autonomous
consumption.

When the level of income reaches Rs. 1000 crores, saving becomes zero as the entire income
is spent on consumption. This stage is called break even point.
After breakeven point, the saving turns positive. This is because the level of income exceeds
consumption.

At this stage, the increment in income is divided between savings and consumption.

Q.3 Define or explain the following concepts

1. Autonomous Consumption
It is the expenditure which has to be incurred in order to sustain life. It is
basically the expense incurred for minimum food, clothing, shelter, expenditure
for religious purpose, etc. This expenditure has to be incurred irrespective of
the income. If a person has no income, the may beg or borrow or steal in order

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to collect money to spend for these basic necessities. Since, this consumption
expenditure is not dependent on income, it is called autonomous consumption
expenditure.

2. Aggregate Demand
Aggregate demand refers to the amount of sales proceeds which are actually
expected from the sale of output produced at a given level of employment
during the year. Aggregate demand in an economy is measured in terms of
total expenditure on goods and services. The determinants of aggregate
demand are
i) Consumption expenditure
ii) Investment expenditure
iii) Government expenditure
iv) Net earnings from foreign exchange transactions.

3. Aggregate Supply
Aggregate supply refers to the minimum amount of sales proceeds which
entrepreneurs expect to receive from the sale of output at a given level of
employment during the year. In short, it refers to the total national product or
national income. The determinants of aggregate supply are
i) Natural resources
ii) Labour
iii) Stock of capital
iv) State of technology.

4. Effective Demand
Effective demand is the actual expenditure incurred by all people on all types
of goods and services in an economy during a given period of time.
Expenditure of a person is income for another. Thus, the flow of expenditure
determines the flow of income. Therefore,
Effective Demand = Total Expenditure = Total Income = Total Output.
According to Lord Keynes, the effective demand determines the level of
income, output and employment in the country.
The level of effective demand is determined by the intersection of Aggregate
Demand Function (ADF) and Aggregate Supply Function (ASF).

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Q.6 Give reasons or explain

1. Investment demand is not the sole determinant of aggregate demand.

Ans:
1. Aggregate demand refers to the amount of sales proceeds which are
actually expected from the sale of output produced at a given level of
employment during the year.
2. Aggregate demand in an economy is measured in terms of total
expenditure on goods and services.
3. The determinants of aggregate demand are
i. Consumption expenditure:
Consumption expenditure refers to the expenditure increased
for those goods and services which satisfy the ants of private
individuals and business firms directly.
ii. Investment expenditure
Investment expenditure refers to the use of savings for the
purpose of capital formation. Capital formation refers to an
addition to capital goods i.e. factory, machinery raw material,
finished goods, work - in - progress (i.e. semi finished goods)
etc.
iii. Government expenditure
It refers to public expenditure. It includes the expenditure
incurred by the government at the centre, state as well as the
local level.
iv. Net earnings from foreign exchange transactions.
The difference between the foreign exchange received on
export and the foreign exchange spent on import is the net
earnings from foreign transaction
4. Thus, investment demand is not the sole determinant of aggregate
demand.

2. Saving may be used in the future for unforeseen contingencies

Ans:
1. Savings refers to the difference between income and expenditure.
2. It is that part of income which is not spent for consumption.
3. People may save for various purposes. One of the prime motives of
saving is the motive of precaution
4. People save as precaution against any future contingencies or
unforeseen events like accident, major sickness or any other urgent
expenditure.

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3. There are many subjective factors determining consumption function

Ans:
1. Propensity to consume refers to the actual amount of consumption that
is expected to take place at various levels of income. The propensity to
consume is also called as consumption function.
2. There are various subjective and objective factors that determine the
consumption function.
3. Subjective factors are internal factors and change from one person to
another. These are human factors which affect the consumption
pattern of an individual.
The following are the various subjective factors which determine
consumption function:
i. Motive of self pride ii. Motive of precaution
iii. Motive of independence iv. Motive of calculation
v. Motive of enterprise vi. Motive of foresight
vii. Motive of improvement viii. Motive of avarice

4. Aggregate demand is a positive function of the level of employment and

output.
Ans:
1. ADF is measured with the help of aggregate demand price. Price means the
expected maximum sale proceeds.
2. Thus, aggregate demand price is the total amount that the household and
firms are expected to spend on purchase of different goods and services.
3. When we look at this from the income perspective refers to the revenue which
the producers expect to earn from the sale of the output at the given level of
employment
4. There is a direct relationship between level of employment and aggregate
demand price. Higher the level of employment, higher the aggregate demand
price and vice versa.
5. Thus, aggregate demand is a positive function of the level of employment and
output.

5. The propensity to consume means consumption function

Ans.
1. Propensity to consume refers to the actual amount consumption that is
expected to take place at various levels income.
2. The propensity to consume is also called as consumption function.
3. To put it simply, propensity to consume shows the relation between
aggregate consumption expenditure (C) aggregate income (Y).

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4. According to Lord Keynes, other things, other things being equal,

consumption is a function of income. Symbolic : C = f (Y)
Where, C = Aggregate consumption expenditure
f = Function of
Y = Aggregate Income

7. In a rich country, the marginal propensity to consume is less.

Ans:
1. As per Keynes Psychological Law of Consumption, "as income goes
on increasing, the consumption also increases but at a rate lesser
than Increase in income."
2. Marginal propensity to consume (MPC) represents the portion of
increase in aggregate income that is spent on consumption rather
than being saved.
3. In a rich country, the people generally have a high income level. At
such levels, their basic consumption needs have already been met.
4. When their income rises, they do not need to spend on consumption
and therefore that portion of income gets saved.
5. Thus, in a rich country, the marginal propensity to consume is less.

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CHAPTER 10 – MONEY
Q.1. Distinguish between:
1. Paper money and metallic coins.
Paper Money Metallic Coins
Meaning
Money that is printed out of paper is called Money which is made out of a particular
paper money . (e.g) currency notes like metal like gold, silver Copper, nickel etc.
` 1000 , ` 500 ,` 100, ` 20, ` 10Etc. is called metallic money .e.g. coins
` 1,50 paise etc.
Suitability
Currency notes are more suitable for Metallic coins are usually made in
making bulky payments in case of large smaller denominations. They are
transactions. Suitable for small volume of payment in
case of small transactions
Portability
Being lighter in weight, it is easy and It is inconvenient to carry metallic money
convenient to carry. from one place to another place.
Risk of duplication is more since paper is a Risk of duplication is less since Metal is
cheaper comm. an expensive comm.
2. Convertible paper money and inconvertible paper money.
Convertible Paper Money Inconvertible Paper Money
Meaning
Convertible paper money refers to that Inconvertible paper money refers to that
type of paper currency which is convertible type of paper money for which the
into standard coins at the option of the monetary authority gives no Option to
holder. convert the paper note into coins.
Use
Convertible paper currency is not in Inconvertible paper money is used
Practical use at present. Practically. All the currency notes Issued
by reserve bank of India like ` 500 and
upto ` 2 are inconvertible Paper money.
Backing
Convertible paper currencies are backing Inconvertible paper currency are Usually
by gold and silver reserves. backed by government securities bonds
and treasury bills.

3. Full – Bodied Coins and Token Coins

Full – Bodied Coins Token Coins
1. Full – bodies coins are those coins where the 1. Token coins are those coins where the face
face value and intrinsic value is the same value is higher than intrinsic value.
2. The coins which were made of gold and silver 2. The coins which are made of cheap metails
were standard or full bodied coins. like copper, nickel etc are token coins.
3. These coins are rarely used. 3. All money coins in circulation today are token
coins
4. They are minted for higher denomination 4. They are minted for small denomination.

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4. Commodity Money and Metallic Money

Commodity Money Metallic Money
1. In the initial stage of human development, 1. It refers to the money which is made
different commodities were used as money. of metals like gold, silver, iron, etc.
2. They were perishable in nature. 2. They are more durable in nature.
3. Commodity money of each place differs from 3. Metallic money is of tw types i.e. full –
another place depending on various factors bodied money and token money.
such as location, climatic , culture, etc.

5. Primary Functions of Money and Secondary Functions of Money

Commodity Money Metallic Money
1. The functions of money that are 1. The functions of money that are
fundamental and comparatively more additional to the fundamental
important are called primary functions of functions are called secondary
money. functions of money.
2. Medium of exchange and measure of 2. Standard of deferred payments, store
value or unit of account are the primary of value and transfer of value are the
functions of money. secondary functions of money.

Q.2. State with reasons whether you agree and disagree with the following statement.

1. Barter System did not have any difficulty.

Ans. No. I Disagree with following statement

1) Lack of double co-incidence of wants.

2) Lack of common measure of value.
3) Difficulty of storage of goods.
4) Problem of indivisibility.
5) Problem of making deferred payments.
1) Lack of double co-incidence of wants –

Double /co-incidence of wants indicates need of each other's goods

and willingness to accept it. Lack of double co-incidence of wants was
one of the important limitations of Barter system, e.g. Person "A' has
cloth and he wants rice in exchange and the person 'B' has wheat
and he wants milk in exchange. In this case exchange between 'A'
and 'B' would not take place as both are not in need of each other's
goods.

2. Lack of common measure of value - In the

absence of common measure of value or a unit of account, it was

difficult to calculate the values of the goods exchanged. Exchange

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became difficult in the case of goods which could not be compared,

e.g.. It was difficult to compare 2 litres of milk with 2 kgs of onions. At
the same time it was difficult to compare certain units of a commodity
with any service.

3. Difficulty of storage of goods –

Under barter exchange, it was necessary to store goods for future

consumption. Storage of highly perishable goods like fish, vegetables,
milk etc. was difficult, besides there were space constraints.

4. Problem of indivisibility –

Under barter system, it was difficult to make fractional payments,

especially when things to be exchanged were indivisible e.g. Person 'X'
had a bag of rice which he wanted to exchange for a plough, with person
'Y', but suppose 'Y' wanted only half a bag of rice, then it would be difficult
to offer half of the plough.

5. Problem of making deferred payments -

Deferred payments are those which are made in future. When people
used to borrow cattle, it was difficult to return the cattle in the same
physical conditions, after a certain number of years.

Thus, various difficulties faced under the Barter System gave rise to
money. Invention of money is one of the most fundamental invention.

2. Anything can function as money.

Ans. NO. I Disagree with the following statement.

Any commodity cannot act as money. A thing which works as money must
possess some qualities for characteristics. Following are the qualities of money.

1) General acceptability –

The thing which acts as money must be easily accepted by all without
hesitation for exchange.

2) Divisibility –

It should be divisible into different denominations, e.g., 5 rupees, 10 rupees,

50 rupees, etc.

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3) Durability –

It should be durable. It should last for a longer period of time e.g. metallic
coins are more durable than paper notes.

4) Cognizibility –

It must be easily recognizable and distinguishable from other things.

5) Portability –

It must be easy to carry from one place to another without any difficulty,
expense and inconvenience e.g. paper notes are easily portable. They also
possess high value in a small bulk e.g. notes of Rs. 500, Rs. 1000.

6) Homogeneity –

The money of same denomination should be of the same size, quality etc.

7) Stability of Value - It must have general stability of value.

3. Money performs various functions.

Ans. Yes. I agree with the following statement

Money plays many significant roles in modern economy.

Broadly the functions of money can be classified into three categories.
Broadly the functions of money can be classified into three categories.

FUNCTIONS OF MONEY

A) Primary Function Secondary Functions Contingent Functions

i) Money as i) Standard of i) Measurement and
medium of deferred Division of National
exchange payments Income
ii) Measure of value ii) Store of value ii) Basis of Credit
of unit of iii) Transfer of Value iii) Imparts liquidity to
account wealth
iv) Equalization of marginal
utilities and marginal
productivities with price
v) Estimation of Macro-
Economic variables.

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a) Primary functions
b) Secondary functions
c) Contingent functions

A) Primary Functions:

i) Medium of Exchange –

The fundamental role money is to serve as a medium of exchange. This is the

most important function of money. By working a medium of exchange money
divides the exchange transactions into two parts, namely sale purchase. This
function of money has solved of the biggest problems of the Barter System.
lack of double co-incidence of wants. Any commodity or service can be
bought with and sold money. Money represents general purchasing power. A
person can sell any commodity today for money and can use the money in
future to purchase any commodity or service. Some unique characteristics of
money like general acceptability, portability, durability etc. have helped money
to as a medium of exchange.

ii) Measure of Value or unit of account –

The value goods and services is expressed in terms of money. It is a unit of

account. When the value of a commodity is expressed in terms of money, it is
called price. It helps us to compare the value of all commodities. By
comparing the prices of different commodities, relative values of these
commodities can be calculated, e.g., price of a table is f 2,000 and price of a
chair is ? 500. It indicates that the value of a table is equivalent to the value of
4 chairs. Goods and services are quantified in different units. It would have
been difficult to express the value of a kilogram of sugar in terms of certain
litre of milk or a certain metre of cloth, in the absence of money. This difficulty
is overcome when the prices of all these goods are expressed in terms of
money which is a unit of account. Every country has a standard money or a
monetary unit in terms of which values are expressed and measured e.g.
Dollars, Pounds, Yens, etc. In India Rupee is the unit of account. Incomes
and expenditures of all kinds, assets and liabilities of all kinds, budgets of the
government etc., are stated in terms of money as a unit of account.

B) Secondary Functions:

i) Standard of deferred payments –

In the modern economy many transactions take place without instant

payments. The debtors make a promise to make payments on some future
date. Such future payments are possible because of money. Under Barter

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System taking loan was easy, but its repayment was difficult because loans
were in the ' form of grains or cattle. Money facilitates lending and
borrowings, because the borrowings are in the form of money and the
repayment are also in the form of money. Due to general acceptability,
stability of value compared to other goods, durability etc., money acts as a
standard of deferred payments.

ii) Store of value –

Money works as a store of value. Along with satisfaction of present wants,

provision for satisfaction of future wants is equally important. It requires
savings from the current earnings. Money is a convenient means through
which savings can be done easily. According to Lord J.M. Keynes, "money is
a link between the present and the future." Money serves as a store of value
because money has purchasing power. It can be used to purchase.

real assets like land, house etc. and financial assets like shares, debentures,
bonds, etc.

iii) Transfer of Value –

Today with the extension of trade among various countries and organizations
it becomes necessary to transfer purchasing power from one place to
another. This is easily done by money. Money helps to shift the purchasing
power from one place to another e.g. real assets like building or agricultural
land from one place can be sold and with the help of that money, building or
land can be purchased at some other place.

C) Contingent/Incidental Functions of Money:

According to Prof. Kinley, money in modern times also performs certain contingent
functions.

Following are some contingent or incidental functions of money.

i) Measurement and Division of National Income -

Money facilitates estimation and distribution of national income. Numerous

goods and services are produced in a country during a period of time. When
these goods and services are converted in terms of money, calculation of
national income becomes possible. Factors of production like land, labour,
capital and organisation contribute to national income. All these factors get
their respective rewards like rent, wages, interest and profit in terms of
money. Thus, total production and factor prices are easily expressed in
terms of money.

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ii) Basis of Credit –

Modern economy is based on credit. Commercial banks create credit on the

basis of their cash holdings. Without the use of money, credit instruments
cannot operate. One cannot issue cheque without having a bank balance.
Money provides the liquid base of the banking system.

iii) Imparts liquidity to wealth –

Money is called the most liquid asset. Money can be easily converted into
any asset and any asset can be converted in to money e.g. a person can
purchase gold and if he wants, he can sell it and can purchase government
bonds, securities etc. Liquidity of money has improved the mobility of capital
from a business in loss to a profit making business. It also facilitates transfer
of capital from less productive use to a more productive use.

iv) Equalization of marginal utilities a marginal productivities with Price

Prices goods, services and prices of all factors production are expressed in
terms of money. It help the consumers to compare marginal utilities goods
with their prices. Based on this comparison consumers can allocate their
income on various goods, in such a way that the price of each commodity is
equal to its marginal utility.

Producers compare factor prices like rent, f land, wages for labour, interest
for capital, wi marginal productivity (contribution made r additional factor unit
to total productivity) of fact of production. The producers try to maximize the
profits by equalizing marginal productivity of] factor with its price.

v) Estimation of Macro Economic Variables

Macro Economic variables like Gross Nation Product, total savings, total
investment etc. can easily estimated in monetary terms. It also facilitate,
government tax collection, budget etc.

Thus, in modern monetized economy money has facilitated production,

distribution, saving etc.] It encourages international trade, transport.
formation of capital market and other financial institutions.

Along with these functions money also| performs some other functions like

(a) It helps in the maintenance of the repaying capacity which is called

'guarantee of solvency'.

(b) Money can be used for any purpose according to the priority of an
individual or an organization e.g. Money saved by a person to

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purchase a house in future can be used for higher education of

children. Prof. Graham has called this function of money as 'bearer
of option'.

(c) It is the base of price mechanism – Prices of all goods and all
factors of production are expressed in terms of money. Price
mechanism guides important decisions like what to produce how
much to produce, how to distribute etc.

When money performs various functions, different qualities or

characteristics of money help it to perform these functions. Let us
discuss qualities of good money.

Q.3 Define or explain the following concepts

1. Barter system

Barter means exchange of goods & services with goods & services. In other words,
barter also means paying the price for goods in terms of goods. Under the barter
system, goods & services itself played the role of money.
For e.g.:

i. Exchange of 5 bags of wheat with one goat

ii. Washing clothes for a glass of milk

2. Double co-incidence of wants

The double co-incidence of wants is a pre-requisite or basic requirement in a barter

system. It refers to simultaneous need of each other's goods and willingness to accept
it.

For e.g. Mr. Ali has earthen pots and wants a can of oil in exchange. Now, there has to
somebody who has a can of oil and wants earthen pots in exchange.

This double co-incidence of wants was not always possible and was one of the major
difficulties in the barter system.

3. Money

According to Prof. Crowther, "Money is anything that is generally acceptable, as a

means of exchange and which, at the same time, acts as a measure and store of
value." Therefore, money is any instrument which is generally used as a medium of
exchange and which also has measures & stores value.

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4. Near Money

As the name suggests, near money is not money but it is nearly money. Near money
refers to assets that can be easily converted to cash. They are highly liquid. Near
money in itself is not a medium of exchange but it has a feature of money i.e. it stores
value. For e.g.: Bill of exchange, treasury bills, short term government securities, equity
shares etc

5. Limited Legal Tender

It is legal tender money which is accepted only upto a certain limited amount. Beyond a
certain limit, a person can refuse to accept it. For e.g.: In India, coins of Rs. 25 paise
are legal tender only upto a limit of Rs. 25. (i.e. only 100 coins of 25 paise)

6. Bank Money / Credit Money

Credit money is also called as bank money. Basically, it means the money that is
deposited in the demand deposit of the bank i.e. current account and savings
account. This money is withdrawable by issue of cheques. Cheque can be presented
to the bank and money can be withdrawn for the account or it can be issued to a
creditor who may deposit the same in his own bank account. The basic advantage of
bank money is that is eliminates or reduces the need to carry paper money.

Q.4. Give reasons or explain

1. Money works as a store of value

Ans:

1. According to Prof. Crowther, "Money is anything that is generally acceptable, as a

means of exchange and which, at the same time,, acts as a measure and store of
value."
2. Money has purchasing power i.e. it can be used to buy goods and services at present
and also in the future.
3. When money is received it is not necessary to use it to buy goods and services
immediately. Money can be saved for future use.
4. Money also becomes a form of holding wealth. Money can be used to buy assets like
land, house, shares, securities etc.
5. Thus, money serves a store of value because its utility can be used at any point of time
and it is the most liquid asset.

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2. Any commodity cannot act as money

Ans:

1. Anything that is used as money needs to possess certain qualities

2. The following are the qualities of good money: Mention in brief the qualities of good
money
3. Thus, any commodity cannot act as money. It has to possess the above qualities.

3. Barter system had many difficulties

Ans: Refer notes. and mention in brief the difficulties of barter system

4. Money is the basis of credit

Ans:

1. Credit plays an important role in the modern economic system and money constitutes
the basis of credit.
2. People deposit their money (saving) in the banks and on the basis of these deposit, the
banks create credit.
3. Therefore, without money it is not possible to create credit.
4. Credit instruments like cheque, draft, bills of exchange will be of no use without money.
5. Thus, money forms a base for the credit system in the economy.

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CHAPTER 11 – COMMERCIAL BANKS

Q.1. Distinguish between
1. Call loans and long term loan
Call loans long term loan
Meaning
Call loans refer to loans granted for short A long term loan refers to loans granted for a
period of 1 to 7 days. long period of 5 years or more than five years.
To Whom
Call loans are given mainly to bill brokers Long term loans are given to manufacturers
or stock brokers to support their and producers to satisfy their working capital
transactions in shares and securities requirement
Rate of Interest
Call loans bear the least interest rate. Long term loans attract highest rate of interest
Call loans mainly given to temporary Long term loans are mainly given for a cronic
cash cronic money problem

2. Cash credit and overdraft facility

Cash credit Overdraft facility
Meaning
It is an indirect loan under which the It is an indirect loan under which the
borrowers are allowed to draw cash to customer is allowed to withdraw over and
meet their cash requirements. above their actual balance
To Whom
It is granted to any customer or borrower It is granted to current account holder who
against eligible securities. They are enjoys good reputation in their transaction.
allowed to draw cash upto a Certain limit.
Mode of Payment
Borrower is allowed to draw cash. Funds are adjusted by the bank to meet the
shortage and to clear the cheque of the
borrower.
Interest
Interest is charged on the amount Very low or no interest is charged on the
Withdrawn OD amount.

3. Current Account and Savings Account

Current Account Savings Account
1. Current account is suitable for 1. This account is useful for individuals getting
businessmen, companies and firms. monthly salary, small traders and others.
2. No restrictions on withdrawal. 2. Withdrawals are allowed subject to certain
restrictions.
3. The aim of current deposit is to facilitate 3. It main purpose is to save a part of the
daily financial transactions. income.
4. Generally, no interest is paid on current 4. The rate of interest on saving account is
deposits. Few banks pay extremely low comparatively more.
interest on these deposits.

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5. The bank provides a cheque book and 5. The bank provides a pass book, cheque
passbook, monthly statement, pay–in– book and pay – in – slip book.
slip book.
6. It requires a large amount. 6. It can be operated with lesser amount.
7. The current account holder gets the 7. No overdraft facility is given to savings
benefit of overdraft facility accountant

Q.2 Give reasons or explain the following statements

1. Commercial banks provide agency functions to earn profits
Ans:
1. Commercial banks perform various agency functions for its clients:
- Making periodic payments of rent, insurance premium, telephone bills,
electricity bills etc .
- Collection of cheques, bills, promissory notes, dividends on behalf of
consumers
- Managing investment portfolio of clients
- Phone banking services
- E-banking services
- Acting as executor, trustee, attorney etc on behalf of customers.
- Providing demat facility to their customers
2. The bank charges fees for providing all such services.
3. Thus, commercial provide agency functions to earn profits.

2. Overdraft facility is provided to current account holders

Ans:
1. The facility of overdraft is provided to current account holders.
2. Under this facility, the customer is allowed to withdraw more than what is currently
outstanding (i.e. account balance) in the account upto an agreed limit.
3. The withdrawal limit depends on the collateral security.
4. No separate overdraft account needs to be opened.
5. Interest is charged on the amount withdrawn.

3. Savings account is generally opened by salaried class

Ans:
1. A savings account is an account where people deposit their personal savings.
2. Interest is paid by the bank on the balance in the account.
3. There are certain restrictions on the number of times money can be withdrawn from
the account.
4. Banks provide many agency and general services to savings account holders.
5. Savings accounts encourage the habit of saving amount people in the country.
6. Savings account is very suitable by people earning a fixed income and therefore, it
is generally opened by salaried class.

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4. Rate of interest on fixed deposits is high

Ans:
1. In a fixed deposit, money is deposited for a fixed period of time varying from 10
days to 10 years.
2. This money can be withdrawn only at the end of the stipulated period.
3. Therefore, the bank can safely use the money for lending and investment purpose.
The bank earns high income of the loans given and investment made.
4. Therefore, the rate of interest on fixed deposit is relatively higher as compared to
any other deposit in the bank and the rate of interest depends on the duration for
which money is deposited. Higher the duration, higher is the interest rate.

5. Every loan creates a deposit

Ans.
1. The process of credit creation starts when the customers deposit their cash in the
bank. Such deposits are called "primary deposits" or "cash deposits".
2. The banks lend money (i.e. provide loans) out of the deposits received by them.
The balance amount left after keeping aside the minimum cash reserves is used for
providing loans and it is known as "derivative deposit" or secondary deposit.
3. When the bank provides loan to a customer, the bank opens a deposit account in
the name of the borrower. The loan amount is credited to this deposit account.
4. Therefore, every loan given by a bank creates a deposit.

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CHAPTER 12 – CENTRAL BANKING

Q.1 Distinguish Between:
1. Cash reserve Ratio and Statutory Liquidity Ratio
Cash reserve Ratio Statutory Liquidity Ratio.
1. Meaning
CRR refers to ratio at which all In addition to SLR, commercial banks have
commercial banks have to maintain to keep certain percentage of their total time
amount of cash out of their time and and demand deposit with the central bank in
demand deposits the form of cash, gold and securities.
2. Mode of Payment
CRR must be kept only in cash SLR may be held in gold and securities.
3. No interest is paid on cash reserves. Government security earn interest
Current CRR is 47 % Current SLR is 21.50%
2. Central Bank and Commercial Bank
Central Bank Commercial Bank
1. The Central Bank is defined as the 1. Commercial banks are the intermediary
apex banking and monetary institution. financial institutions which deal in money.
2. The main function of Central Bank is to 2. The main function is to accept deposits and
control, regulate and stabilize the lend loans and advances.
banking and monetary system of the
country.
3. It does not deal with the public directly. 3. It deals with the public. It accepts deposits
It acts as the bank of government and from the public and lends loans and
bank of the banks. advances to businessmen, organizations.
4. The main objective is to control money 4. The main objective of commercial banks is
supply and stabilize price level. It is profit making through its function of accepting
welfare oriented organization. deposits and lending loans.
5. It enjoys the monopoly right to print 5. Commercial banks do not possess such
and issue currency notes. rights.
6. Central Bank controls the credit. 6. Commercial banks create credit.
7. There is only one Central Bank in 7. Owned by private or government. There are
India. R.B.I. is owned by the several commercial banks like State Bank of
Government. India, ICICI Bank, Canara Bank, etc.
3. Quantitative Credit Control Measures and Qualitative Credit Control Measures
Quantitative Credit Control Measures Qualitative Credit Control Measures
1. The measures which are useful for 1. The regulation of credit for specific purposes
controlling the volume of credit which or branches of economy is called Qualitative
the commercial banks create are Credit Control.
called Quantitative Credit Control
measures.
2. They create direct and immediate 2. They aim at providing funds for socially and
effect on the liquidity position of banks. economically desirable purposes.
3. Quantitative credit control measures 3. Qualitative Credit Control measures are also
are also known as General Credit known as selective credit control measures.
Control measures.

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4. The important quantitative measures 4. The important qualitative measures are as

are as follows: (a) Bank Rate; (b) Open follows: (a) Margin requirements; (b)
market operation; (c) Variable reserve Consumer credit control; (c) Issue of
ratio. Directives (d) Credit Rationing; (e) Direct
Action; (0 Publicity;
(g) Moral suasion.
5. They control the credit activities of 5. They are devised to control the use or
banks through expansion and purpose of credit without seeking to control
contraction of liquidity position of the the volume of credit.
commercial banks.

4. Bank Rate and Open Market Operations

Bank Rate Open Market Operations
1. Bank Rate is the rate at which Central 1. Open market operations refer to the sale
Bank of the country rediscounts the bills and purchase of Government securities by
of exchange presented by the the Central Bank.
commercial banks.
2. Bank rate is an indirect method utilized 2. Open market operations have a direct effect
by Central Bank to control the volume of on credit mechanism of the country.
credit.
3. In Bank Rate policy, the Central Bank 3. The initiative of open market operations lies
depends on the functioning of with the Central Bank.
commercial banks.
4. This method of credit control is inferior to 4. This method of credit control is superior to
open market operations. the Bank Rate policy.
5. The important limitations of bank rate 5. The important limitations of open market
policy are - operations are:
i) Dependence of commercial banks for i) Non-existence of broad and well
rediscounting. organized Government security market
ii) Existence of well-organized money ii) Open market operations are not suitable
market. during the period of depression.
iii) Lack of flexible and elastic economic iii) Lack of adequate stock of cash and
structure etc. securities with Central Bank etc.

Q.2 State with reasons, whether you agree or disagree with the following statements.
1. A Co- operative bank acts as a lender of the last resort.
Ans. No. I disagree with following statement
Central bank acts as the lender of the last resort. It supports, protects and
assists, whenever commercial banks face problems.
i. .Accommodates commercial banks to meet their reasonable
demand.
The function of lender of last resort has become very essential under
present situation. The central bank meets all reasonable demands from
commercial banks and discount houses. Almost it has become sine qua
non of central banking.

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Being the lender of the last resort, central bank meets all the reasonable
requirements of commercial banks by rediscounting eligible bills. Central
bank provides them great relief.

ii. Crisis manager.

As a lender of last resort, central bank rescues commercial banks in times

of crisis.

Commercial banks keep only a fraction of their deposit with the central
bank and the rest goes for loans. In case if public rushes to withdraw their
deposits, any well developed commercial bank can run into trouble.
Central bank protects their interest by acting as] the lender of the last
resort. It provides cash during emergencies.

iii. To meet seasonal demand.

In countries like India, the demand for loan is seasonal. During rainy
seasons the demand I for funds increases rapidly in the agricultural sector.
Commercial banks face shortage of | funds. Under such circumstances,
they can approach central bank and receive funds by rediscounting bills or
by selling securities.

iv. Provides liquidity.

The facility of rediscounting strengthen the liquidity position of commercial

banks, Whenever commercial banks face adverse situation and their cash
reserves fall below the required level, they depend upon rediscounting.

v. The function of lender of the last resort suits central bank better
than other banks.

Commercial banks or co-operative banks are not in a position to perform

the function as lender of the last resort.

Central bank has been granted the power of monopoly of note issue. As
the volume of money circulation is under its direct control, central bank
effectively act as the lender of the last resort.

The function of lender of the last resort was initially introduced to Bank of
England in 1873.

It is Walter Bagehot in his book Lombard Street stressed the need for the
central bank to act as lender of the last resort. Eventually it has been
recognised as the vital function of all central banks globally.

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2. Credit control is the function of Central Bank of the country.

Ans. Yes, I agree with statement.

Write Quantitative and qualitative measures in brief.

3. Central Bank is a profit making institution.

Ans. No. I disagree with the following statement.

i. Welfare oriented.
Central bank is a public sector organisation. The objective of central
bank is to act in the interest of public welfare. It is not a profit making
organisation. Its main aim is to maintain price stability and boost
economic growth.

ii. It is not based on profit making.

Central bank does not perform ordinary commercial bank functions like
receiving deposit It does not advance loans in expectation of profit. It
never competes with commercial banks. Rather it supports commercial
banks and ensure smooth functioning of the banking system. Central
bank also earns a surplus and enjoys profit. But its operations are not
based on the objective of profit maximisation.

iii. Economic growth.

Its operations like credit control and price stability are undertaken purely
in the interest of the economy. Such acts aim at improving general
growth and welfare of the economy.

iv. It deals with government.

Unlike commercial banks central bank does not deal directly with general
public. It does not provide agency functions to earn commission.It deals
only with government and banks with an objective to improve economic
welfare of the country.

4. Central Bank having monopoly of note issue is most appropriate institute of

the government

Ans. Yes agree with the following statement.

i. Central bank is the only authority to issue notes.

Central bank is entrusted with the job of printing and issuing currency notes. It is
the only bank in country which is authorised to issue currency notes. No
commercial bank in India enjoys the power to issue notes.

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In India RBI prints and issues ail currency notes except 1 rupee note and coins
The central bank has its issue department which issues notes to commercial
banks. Though coins are manufactured by government mint, they are circulated
by central bank.

ii. Central bank is a legal monopoly to issue notes.

In India Reserve Bank of India acts as the central bank which enjoys the
monopoly of note issue. The R.B.I, keeps a minimum reserve to issue currency
notes since 1957. Under this system the Reserve banks of India its a minimum
reserve of Rs. 200 crores out of which 115 crores must be in gold and the
remaining 85 crores in foreign securities. There is no limit for the issue of
currency notes.

iii. Notes enjoy distinct prestige.

Notes issued by RBI enjoy distinctive prestige as RBI enjoys the monopoly.
Such a distinct prestige make the notes of RB! popular, it enjoys wider
recognition. Since the notes are guaranteed by government security, it adds
further strength to the dignity of RBI notes. Such prestige and dignity will be lost
if commercial banks and co-operative banks are allowed to print notes.

iv. Controlling money supply.

At present size of deposit money and volume of credit creation by commercial
banks have been ever expanding. This has created a need for a powerful
controlling authority to avoid excess credit creation. The power of monopoly of
note issue provides central bank to have absolute control on money circulation.

Q.3 Give reasons or explain

1. Clearing house system economises the use of cash

Ans:
1. In every country, there are several commercial banks operating in a banking system.
2. It is not possible for them to meet personally and to debit & credit their accounts.
3. Thus, this difficulty is solved by the central bank which acts a clearing house.
4. Every commercial bank has its account with the central bank.
5. Therefore, any outstanding claims of banks against each other are settled by debit
credit entries in their accounts.
6. The actual transfer of money does not take place.
7. Thus, the clearing house system economises the use of cash.

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2. Central bank acts as a lender of last resort.

Ans:
1. A major portion of money received by commercial banks as deposits is given as loan or
invested in securities.
2. Therefore, banks do not have very high liquidity.
3. If many account holders demand cash from the bank at a point of time, the bank
might face difficulty as the bank might not have enough cash reserves.
4. At such times, the commercial banks can go to the central bank for financial assistance.
5. The central bank is the ultimate source of final assistance to commercial banks.
6. Thus, the central bank is also called as lender of last resort.

3. The CRR affects the lending capacity of the banks.

Ans:
1. Commercial banks have to keep a certain percentage of the total demand and time
deposits as cash reserve with the central bank. This percentage is called as cash
reserve ratio (CRR).
2. Only the balance amount is available to the banks for lending activities.
3. During inflation, the central bank increases the CRR. As a result, the commercial bank
has to keep a higher amount as reserve with central bank and the amount available for
lending is reduces.
4. During recession, the central bank decreases the CRR. As a result, the commercial
bank has to keep a lesser amount as reserve with central bank and the amount
available for lending increases.
5. Thus, CRR affects the lending capacity of the banks.

4. As a banker to the government, the central bank transfers government funds.

Ans:
1. The central bank is a banker to the government. It is an apex monetary & banking
authority and occupies a pivotal position in the banking structure of the country.
2. The government is the custodian of all government funds. It maintains all the cash
balance of the government.
3. It makes all payments on behalf of the government towards salaries, interest, pension
etc.
4. It transfers funds of government from one part of the country to another and from one
account to another account.
5. In India, for this purpose, the RBI has 5 zonal offices and 19 regional offices. Where
there is no RBI office, the SBI acts as an agent of RBI.

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5. A central bank may take "direct action" against defaulting commercial banks
Ans.

1. The central bank is a banker to the government. It is an apex monetary & banking
authority and occupies a pivotal position in the banking structure of the country.
2. It supervises and regulates the activities of commercial banks.
3. The central bank takes strong disciplinary action against commercial banks which
violate the directives issued by the central bank.
4. The central bank could take the following action against defaulting commercial banks:
- It may refuse to rediscounting facilities to commercial banks
- It may charge penal rate of Interest to banks who borrow from the central bank
above a prescribed limit.
- The central bank may refuse to grant loan & advances to commercial banks
against some collateral securities.
- It may threaten the commercial bank to be taken over by it if it continues to
default.

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CHAPTER 13 – PUBLIC ECONOMICS

Q.1 Distinguish between
1. Revenue Receipt and Capital Receipt
Revenue Receipt Capital Receipt
1. Meaning Revenue receipts refer to those Capital receipts refer to those
receipts which increase usable receipts which increase the
funds of the government without usable funds of the government
creating any debt liability. by creating debt obligation
2. Sources i. Receipts from taxation i. Borrowing by the government
ii. Non– tax receipts like registration
from the public. (market
fees, court fees, fines and borrowings)
penalties surpluses from public
ii. Borrowing from Reserve Bank
enterprises and surpluses from of India and other parties.
public utilities. iii. External borrowing from
foreign government and
international organization.
iv. Recoveries of loans from
states and union territories.
v. Small savings and public
provident fund (PPF).
3. Liability Revenue receipts does not add Excessive borrowing results in
liabilities liabilities for the government.

2. Direct Tax and Indirect Tax

Direct Tax Indirect Tax
1. Meaning : A direct tax is a tax which is An indirect tax is a tax which is imposed on a
paid by a person on whom it is legally person but paid partly or wholly by other
imposed. person.
E.g.: Income tax, wealth tax etc. E.g.: Sales tax, excise duty, import duty etc.
2. Impact and incidence : Impact and The impact and incidence are on different
incidence are on the same person, i.e. person i.e. there is a shifting of the tax.
the tax payer is also the tax – bearer.
3. Determinant : Generally direct tax is Generally indirect taxes are linked to
linked to income and wealth. expenditure.
Direct tax are more just and equitable Indirect tax are unjust and unequitable.

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3. Deficit budget and Balance budget

Deficit budget Balance budget
1. Meaning : A deficit budget is that type of A balanced budget is the type of budget in
budget in which the estimate expenditure which the estimated revenue of the
exceeds estimated revenue. government is equal to estimate expenditure
of the government.
2. Borrowing : The revenue is not sufficient Government raises sufficient revenue to meet
to meet expenditure. It results in the expenditure. There is no need to borrow.
borrowing.
3. Suitability : It is suitable for governments At present, it is not possible to introduce a
especially when the economy suffers from balanced budget.
depression.
More favorable for developing nations like Not favorable (Just Idealist)
India.

Q.2 State with reasons whether you agree or disagree with the following statement.
1. Capital budget consists of revenue receipts and revenue expenditure.
Ans. No. I disagree with following statement.
Capital budget consists of revenue receipts and revenue expenditure.
Capital budget gives an account of capital receipts and capital expenditure.
a) Capital receipts.
Capital receipts refer to those receipts which increase the usable funds of the
government by creating debt obligations. It may also result in reduction in assets of
the government it includes the following items:
(I) Borrowing by the government from the public, (market borrowings)
(II) Borrowing from Reserve Bank of India and other parties through the sale of
treasury.
(III) External borrowing from foreign governments and international organisation
like world bank, International Monetary Fund, Asian Development Bank etc.
(IV) Recoveries of loans from states and union territories.
(V) Small savings and public provident fund (PPF). Small savings refer to funds
mobile from general public in the form of post office deposits, national saving
certificates etc. creates liability for the government.
(V) Disinvestment. It refers to the act of selling shares of reputed public sector
organization to private enterprises either partly or fully. It will results in
reduction in the assets government.

b) Capital Expenditure.
Capital expenditure refers to expenditure incurred by the central government on
acquisition of assets like land, building, machinery and equipment. It also includes
investment on shares, loans granted to state and union territories, government
companies, corporations etc.
Capital receipts result in creation of assets which can become sources of further
revenue for the government. Thus they help in reducing debt liability.

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2. During the period of inflation surplus Budget is advisable

Ans. When estimated government receipts are more than the estimated government
expenditure it is termed as Surplus Budget. When government spends less than
the receipts the budget become surplus. That is, estimated Government receipts >
anticipated Government expenditure.
A surplus budget is used either to reduce governments public debt (its liabilities) or
increase its savings.
A surplus budget may prove useful" during the period of inflation. In periods of
inflation, although there is greater employment, there is also a tendency for prices to
rise rapidly. This has to be checked, particularly in the interest of those who have a
more or less fixed income. This inflationary gap can be corrected by lowering the
level of effective demand in the economy. It can be corrected by increasing taxes.
This would increase the revenue of the government; but reduce the purchasing
power of the people. As a result, the aggregate demand will fall. This inflationary
gap can be corrected by lowering the level of public expenditure.
When government reduces its expenditure on public works and other infrastructure,
the revenue with the government is in excess of its expenditure.
The surplus budget should not be used in situation other than the inflationary gap,
as it may lead to unemployment and low levels of output in an economy.
Reserve Budget Capital Budget
It is a study of revenue receipts & revenue Capital receipts & expenditure
expenditure
Sources of revenue receipts are tax Sources of capital receipts are recovery of
revenue & non tax revenue. Reserve loans, borrowing, small savings,
expenditures are incurred in the form of pla, disinvestment capital expenditure is also
non-pla, dev, non-devl. incurred an P,NP, D,ND.
Revenue budget does not result into Capital budget results into creation &
creations & reduction of assets & liabilities. reduction of assets & liabilities.
Imbalance of RR & RE may result into Imbalance between CR & CE may result
surplus or deficit in revenue budget into surplus or deficit in capital budget.
RB is depicted in P & L A/c Capital Budget brings changes in BS.

Q.3 Define or explain the following concepts

1. Fine and Penalty
The government also earns revenues from various fines and penalties levied on citizens
and business organization in the country. The government levies fines and penalties to
maintain law and order.
For e.g.:
- Fine of Rs. 350 crores was collected from Bharti Airtel for violating telecom license
conditions
- Penalty for not paying taxes on due date, not disclosing proper income, not
maintaining proper books of accounts etc.
2. Budget
A budget is an annual statement of the expenditure and revenue of the government
prepared by the financial authority (i.e. the Finance Ministry) which covers the preceding
year, current year and the following year. The word 'budget' derived from the French
word, "Bougettee" which means a bag or a wallet containing the financial proposals.

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3. Plan Expenditure
Plan expenditure refers to expenditure incurred on the various plans and programmes of
the government. For e.g.: Employment programmes, poverty eradication programmes,
rural development programmes etc.

4. Recovery of debt
The government gives loans to state government and private organisations in time of
need. Recovery of debt refers to the recovery of such loans given by the government.
The recovery of debt Is a capital receipt and leads to a reduction in assets of the
government.

5. Deficit Budget
A budget in which the estimated revenue of the government is less than the estimated
expenditure of the government is called as a deficit budget.
i.e. Government's estimated < Government's estimated
revenue expenditure
A deficit budget either increases the liability of the government (because the government
will borrow more funds) or will reduce Its reserves.

Q.4 Give reasons or explain the statement

1. Income collected from tax is the main source of government revenue
Ans:
1. Tax is a compulsory payment made by people and various business organizations
in the country
2. Tax revenue is collected from two types of taxes - direct taxes and indirect taxes
3. Direct tax is the tax on income of individuals and profit of business organizations.
4. Indirect tax is the tax on commodities or services which are manufactured or
produced by business organizations.
5. Payment of tax is compulsory and non-payment of tax is a punishable offence.
6. Thus, tax Is collected on income as well as on the goods & services which are
purchased with the income.
7. Hence, income collected from tax Is the main source of government revenue.

2. Revenue receipts and revenue expenditure is known as revenue budget

Ans:
1 Revenue budget consists of revenue receipts of the government and the allocation
of the same towards various revenue expenditures.
2. It is a summary of revenue receipts and revenue expenditure of the government.
3. Revenue receipts refer to the recurring earning of the government. For e.g.: tax
revenue and non-tax revenue.
4. Revenue expenditure refers to the recurring expenditure of the government. For
e.g.: expenditure of defe judiciary, health, education etc.
Thus, revenue receipts and revenue expenditure together Is known as revenue budget.

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3. Government revenue is more than government expenditure.

Ans.
1. A budget in which the estimated revenue of the government during the year is
more than the estimated expenditure is called as a surplus budget.
i.e. Government estimated > Government estimated
revenue expenditure
2. A surplus budget either reduces debt (because the government can repay its
debts out of the surplus revenue) or increases the reserves.
3. A surplus budget indicates that either the government is spending less on public
welfare or it is collecting excess taxes or both.
4. When the country is facing the pressure of inflation, the government may reduce its
spending. Simultaneously, it may increase the tax rates and reduce the disposable
income of the people.
5. Thus, when tax revenue increases and government reduces its spending, the
government revenue is more than government expenditure.



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ECONOMICS
Time : 3 Hours MARCH 2014 Max Marks : 80

Q.1. (A) Fill in the blanks with appropriate alternatives given in the brackets below the
questions : (5)(16)
(1) Micro economics is a ______________ equilibrium approach.
( partial / general / total / multi-variable )
(2) The demand for salt is ______________.
(elastic / in elastic / infinitely / unitary elastic)
(3) Investment made by the government is ________investment.
(unplanned / gross / autonomous / induced)
(4) A bank is an institution which deals in money and ________.
(commodity money / credit / barter / standard money )
(5) During depression___________ budget is preferable.
(balance / surplus / deficit / zero)

(B) Match the following Group ‘A’ with group ‘B’: (5)

Group ‘A’ Group ‘B’

(1) Tea and coffee (a) Wages
(2) Stock (b) Flow concept
(3) Labour (c) Central bank
(4) National Income (d) Commercial bank
(5) Clearing house system (e) Complementary goods
(f) Rent
(g) Potential Supply
(h) Substitute goods

(C) State whether the following statements are True or False : (6)
(1) Perfectly inelastic demand curve is parallel to ‘Y’ axis.
(2) Supply is inversely related to price.
(3) Price discrimination is possible under monopoly.
(4) In case of token coins intrinsic value is less than their face value.
(5) Credit money is created by the central bank of a country.
(6) The main objective of the Central bank is to earn profit.

Q.2.(A) Define or Explain the following concepts (Any THREE) : (6)(12)

(1) Slicing method (2) Total output (3) Pure competition
(4) Entrepreneur (5) Macro economics (6) Repo rate

(B) Give reasons or explain the following (Any THREE) : (6)

(1) Theories of micro economics are based on certain assumption.
(2) Utility is a relative concept.
(3) Demand for the commodity having multiple uses is elastic.
(4) Old age pension is transfer income.
(5) The propensity to save depends upon the level of income.
(6) Central bank acts as a lender of the last resort of commercial banks.

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Q.3.(A) Distinguish between (Any THREE) (6)(12)

(1) Individual demand and Market demand
(2) Increase in supply and Decrease in supply.
(3) Partial equilibrium and General equilibrium.
(4) Gross domestic product at market price and Gross domestic product at factor cost.
(5) Legal tender money and Non legal tender money
(6) Surplus budget and deficit budget.

(B) Write short notes (Any TWO) : (6)

(1) Subject matter of micro economics.
(2) Significance of price elasticity of demand.
(3) Types of monopoly
(4) Types of capital

Q.4. Write short answers for the following questions. (Any THREE) : (12)
(1) Explain the type of utility.
(2) Explain the features of monopolistic competition.
(3) Explain the subject matter of macro economics.
(4) Explain the determinants of aggregate demand.
(5) Explain the agency function of commercial banks.
(6) Explain the budget expenditure of the government.

Q.5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following
statements (Any THREE) : (12)
(1) The law of ‘diminishing marginal utility’ is important in practice.
(2) Price is the only determinant of demand
(3) Supply curve of labour bends backwards.
(4) Money also performs certain contingent functions.
(5) Commercial banks can not create credit money.
(6) Cash reserve ratio is a quantitative measure of credit money.

Q.6. Write explanatory answers (Any TWO) (16)

(1) State and explain the ‘Law of demand’ with its exceptions.
(2) Explain any ‘two methods’ of measuring price elasticity of demand.
(3) Explain the practical difficulties involved in the measurement of national income.
(4) What is ‘consumption function’? Explain the subjective factors which determine
consumption function.

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ECONOMICS
Time : 3 Hours OCTOBER 2014 Max Marks : 80

Q.1. (A)Fill in the blanks with appropriate alternatives given in the brackets below
the questions : (5)(16)
(1) Microeconomics is a study of ______________.
(whole economy / individual economic unit / general price level / national output )
(2) The slope of demand curve is ___________in the case of relatively inelastic demand.
(flatter / steeper / horizontal / vertical )
(3) The book “ The General Theory of Employment, Interest and Money” was written
by________
(Marshall / Keynes / Smith / Ricardo )
(4) Every loan creates a ____________. (loss / profit / deposit / credit )
(5) ___________ is an example of direct tax. ( Excise duty / Income tax / Sales tax/ Gifts )

(B) Match the following Group ‘A’ with group ‘B’: (5)

Group ‘A’ Group ‘B’

(1) Inferior goods (a) Average cost (AC)
(2) Reward of capital (b) 1st April to 31st March
(3) Financial year (c) Quantitative measure of credit control
(4) Bank Rate (d) Marginal cost
(5) Total cost (TC) (e) 1st January to 31st December
Total quantity (TQ) (f) Profit
(g) Interest
(h) Giffen goods

(C) State whether the following statements are True or False : (6)
(1) Demand for electricity is elastic.
(2) Supply is directly related to price.
(3) In monopolistic competition goods have no lose substitutes.
(4) Barter system did not have any difficulty.
(5) D-mat account is useful to investors who deal in shares.
(6) Clearing house system economics the use of cash.

Q.2.(A) Define or Explain the following concepts (Any THREE) : (6)(12)

(1) Microeconomics (2) Average revenue (3) Monopoly
(4) Land (5) Macroeconomic variables (6) Central bank

(B) Give reasons or explain the following (Any THREE) : (6)

(1) Microeconomics is useful to the government
(2) Utility is a relative concept.
(3) Demand for habitually used goods is inelastic.
(4) Services of housewives are excluded from national income.
(5) Autonomous investment is not directly linked with profit.
(6) Central bank has the sole power of issuing currency notes.

Q.3.(A) Distinguish between (Any THREE) (6)(12)

(1) Direct demand and Indirect demand
(2) Percentage method and Geometric method of measuring elasticity of supply.
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(3) Microeconomics and Macroeconomics.

(4) Gross national product and Net national product.
(5) Standard coins and Token coins.
(6) Revenue budget and Capital budget.

(B) Write short notes (Any TWO) : (6)

(1) Historical review of microeconomics.
(2) Proportional method of measuring price elasticity of demand.
(3) Price determination under perfect competition.
(4) Risk and uncertainty bearing functions of an enrpreneur.

Q.4. Write short answers for the following questions. (Any THREE) : (12)
(1) Explain the importance of the ‘law of diminishing marginal utility’.
(2) Explain the features of perfect competition.
(3) Explain the features of macroeconomics.
(4) Explain the determinants of aggregate supply.
(5) Explain the various types of deposits.
(6) Explain the types of government budget.

Q.5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following
statements (Any THREE) : (12)
(1) There is no relationship between marginal utility and total utility.
(2) There are no exceptions to the ‘law of demand’.
(3) There is difference between stock and supply.
(4) Good money has many qualities.
(5) Commercial banks provide many general utility services.
(6) Central bank does not work as a banker for the government.

Q.6. Write explanatory answers (Any TWO) (16)

(1) State and explain the ‘law of demand’ with assumptions.
(2) What is elasticity of demand? Explain the types of price elasticity of demand.
(3) Explain any ‘two’ methods of measuring national income.
(4) Explain Keynesian ‘Psychological law of consumption’.

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 J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours MARCH 2015 Max Marks : 80

Q.1.(A) Fill in the blanks with appropriate alternatives given in the brackets below the
questions: (5) [15]
(1) The terms ‘micro’ and ‘macro’ economies were first used by___________ .
(Marshall / llagnar Frisch / Robbins/ Adam Smith )
(2) The objective of a seller in monopoly market is maximization.
(loss / profit / negative profit / zero profit)
(3) Marginal propensity to consume + marginal propensity to save ..
(zero / one / less / more)
(4) Method of withdrawing money without goi ng to the bank is by__________ .
(cheque / demand draft f ATM / mail transfer)
(5) The term ‘budget’ is derived from the____________ word ‘bougette’.
(Greek / German / French / Latin)

(B) Match the following Group *A’ with group ‘B’: (5)

Group ‘A’ Group ‘B’

1. Pen and ink 1. Quantity-price
2. Revenue 2. Accident
3. Insurable risk 3. Transfer income
4. Unemployment allowance 4. Short period
5. Reverse repo rate 5. Long period
6. Change in demand
7. Joint demand
8 Quantity x price

(C) State whether the following statements are True or False: (6)
(1) Demand for perishable goods is inelastic.
(2) Total cost is the total expenditure incurred by a firm.
(3) The seller is a price maker in the perfect competition.
(4) Cheque is an optional money.
(5) A bank is an institution which deals in money and credit.
(6) The RBI was nationalised in the year 1935.

Q. 2.(A) Define or Explain the following concepts (Any THREE): (6) [12]
(1) Resource allocation (2) Elasticity of supply (3) Market
(4) Labour (5) Macro economics (6) Central bank

(B) Give reasons or explain the following (Any THREE) : (6)

(1) Micro economics studies individual economic unit.
(2) Change in the price of substitute goods affects the demand lor another goods.
(3) In order to avoid double counting, value added approach is used.
(4) Effective demand is also called macro economic equilibrium.
(5) The Central bank may take direct action against the defaulting commercial
banks.
(6) Unpaid sendees are not included in national income.

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 J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q. 3.(A) Distinguish between (Any THREE): (6) [12]

(1) Place utility and Time utility.
(2) Demand curve and Supply curve.
(3) Individual supply and Market supply.
(4) Slicing method and Lumping method.
(5) Convertible paper money and Inconvertible paper money.
(6) Revenue expenditure and Capital expenditure.

(B) Write short notes (Any TWO): (6)

(1) Microscopic study. (2) Income elasticity of demand.
(3) Determination of equilibrium price under perfect competition.
(4) Functions of an Entrepreneur.

Q. 4. Write short answers for the following questions. (Any THREE): [12]
(1) Explain the law of diminishing marginal utility.
(2) Explain the features of monopoly.
(3) Explain the features of macro economics.
(4) Explain various types of investment expenditure.
(5) Explain the secondary functions of money.
(6) Explain different types of loans and advances provided by commercial banks.

Q.5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following statements
(Any THREE): . [12]
(1) The law of equi-marginal utility is based on certain assumptions.
(2) Population is the only determinant factor of demand.
(3) There are no exceptions to the law of supply.
(4) Providing safe deposit vault facility is the only general function of commercial banks.
(5) There is no difference between Central bank and a commercial bank.
(6) During the period of inflation surplus budget is advisable.

Q. 6. Write explanatory answers (Any TWO): [16]

(1) Explain in detail ‘saving function’ with schedule and diagram.
(2) What is ‘elasticity of demand”? Explain the factors determining elasticity of demand.
(3) What is ‘national income’? Explain the theoretical difficulties involved in the
measurement of national income.
(4) State and explain the law of demand’ with its exceptions.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours OCTOBER 2015 Max Marks : 80

Q.1. (A) Fill in the blanks using proper alternatives given in the brackets:
(1) Micro economics is a study of ________.
(whole economy, general price level, national output, individual economic unit)
(2) Demand for salt is__________.
(elastic, inelastic, infinitely elastic, unitary elastic)
(3) __________consumption cannot be zero.
(Induced, Autonomous, Government, Private)
(4) The primary function of commercial banks is to .
(purchase and sale securities, accept deposits, provide safe deposit vaults, issue
letter of crcdit)
(5) During depression___________budget is preferable.
(balanced, surplus, deficit, zero)

(B) Match the following :

Group ‘A’ Group ‘B’
(a) Demand and price (1) Interest
(b: Stock (2) Profit
(c) Reward of capital (3) Reserve Bank of India
(d) Unemployment allowance (4) Bank of India
(e) Central Bank (5) Direct relation
(6) Potential supply
(7) Transfer income
(8) Inverse relation

(C) State whether the following statements are True or False :

(1) Concept of elasticity of demand is useful for finance minister.
(2) Supply of perishable goods is inelastic.
(3) There is no price discrimination under monopolistic competition.
(4) A cheque is a fiat money.
(5) The savings bank deposit can be opened with a small amount.
(6) The Central Bank does not work as bankers’ bank.

Q. 2. (A) Define or explain the following concepts (Any THREE): (6) (12J
(1) Average revenue (2) Selling cost
(3) Land (4) General equilibrium
(5) Bank rate (6) Individual economic unit

Q. 2. (B) Give reasons or explain the following statements (Any THREE) : (6)
(1) Micro economic theories are based on certain assumptions.
(2) Utility is ethically neutral.
(3) Demand for habitual goods is inelastic.
(4) Paid services are included in national income.
(5) There are many subjective factors that determine consumption function.
(6) Central Bank acts as a lender of the last resort.
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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q. 3. (A) Distinguish between (Any THREE) : (6) [12)

(1) Desire and Demand.
(2) Gross National Product and Net National Product.
(3) Paper money and Metal coins.
(4) Surplus budget and Deficit budget.
(5) Micro economics and Macro economics.
(6) Stock and Supply.
(B) Write short notes (Any TWO) : (6)
(1) Importance of micro economics.
(2) Ratio method of measuring elasticity of demand.
(3) Types of monopoly.
(4) Qualities of an entrepreneur.

Q. 4. Write short answers for the following questions (Any THREE): [12]
(1) What are the characteristics of utility?
(2) Explain the features of perfect competition.
(3) What are the features of macro economics?
(4) What are the determinants of aggregate supply?
(5) Explain various types of deposits.
(6) Explain the components of budget.

Q.5. Explain with reasons whether you Agree or Disagree with the following
statements(Any THREE): [12]
(1) Various factors influence the demand for a commodity.
(2) Law of diminishing marginal utility is important in practice.
(3) Price is the only determinant of supply.
(4) Money performs various functions.
(5) Commercial banks provide many general utility services.
(6) Central Bank is a profit making institution.

Q. 6. Write explanatory answers (Any TWO) : [16]

(1) State and explain the law of demand with assumptions.
(2) What are the types of price elasticity of demand?
(3) Explain the practical difficulties involved in the estimation of national income.
(4) Explain the determinants of aggregate demand.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours MARCH 2016 Max Marks : 80

Q. 1. (A) Fill in the blanks with appropriate alternatives given in brackets : (5) [16]
(1) The terms ‘Micro’ and ‘Macro’ economics were first used by
(Adam Smith / Robbins / Ragncr Frisch / Marshall)
(2) Demand for necessaries is
(elastic / inelastic / infinitely elastic / un itary clastic)
(3) _____________consumption can not be zero.
(Induced / Autonomous / Government /Private)
(4) Accepting deposits from the public is the_________
(secondary / general /primary / incidental)
(5) In India budget is presented in the Parliament by the_______
(Prime Minister / Finance Minister / Chief Minister / Defence Minister)

(B) Match the following:

Group ‘A’ Group‘B’

(a) Financial plan (1) Savings account
(b) Demand for electricity Perfectly elastic (2) Rent
(c) supply land (3) Transfer income
(d) Pension (4) Dear money policy
(e) Inflation (5) Composite demand
Horizontal supply curve
(f) (6)
Part of national income
(7) Vertial supply curve
(8) Cheap money policy

(C) State whether the following statements are True’or‘False’: (6)

(1) Income elasticity of demand for inferior goods is negative.
(2) If price falls, the supply curve will shift to the left.
(3) Product differentiation is the most distinguishing feature of monopolist
competition.
(4) In the case of token coins, intrinsic value is less than their face value.
(5) Overdraft facility i$ provided to saving account holders.
(6) Clearing house system economises the use of cash.

Q.2. (A) Define or Explain the following concepts (Any THREE): (6)[12]
(1) Micro Economics (2) Relatively elastic supply
(3) Price discrimination (4) National income
(5) General equilibrium (6) Reverse Repo Rate

(B) Give reasons or explain the following (Any THREE): (6)

(1) Micro Economics studies behaviour of individual economic unit.
(2) Utility has no ethical consideration.
(3) Demand for the commodity having multiple uses has elastic demand.
(4) An entrepreneur is called a leader of the organization.
(5) With the increase in income, both consumption and savings increase.
(6) Central Bank is a banker to the government.
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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q.3. (A) Distinguish between (Any THREE): (6)[12]

(1) Expansion of demand and Increase in Demand.
(2) Total Cost and Total Revenue.
(3) Micro Economics and Macro Economics.
(4) Gross National Product and Net National Product.
(5) Convertible paper money and Inconvertitable paper money.
(6) Surplus Budget and Deficit Budget.

(B) Write short notes (Any TWO): (6)

(1) Features of Micro Economics.
(2) Total expenditure method of measuring Elasticity of Demand.
(3) Features of Monopolistic Competition.
(4) Features of Land.

Q.4. Write short answer for the following questions. (Any THREE): [12]
(1) Explain the relationship between Total utility and Marginal utility.
(2) What are the features of perfect competition?
(3) Explain the subject matter of Micro Economics.
(4) State the determinants of aggregate demand.
(5) Explain Primary functions of Commercial Bank.
(6) What are the main components of government budget?

Q.5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following
statements(Any THREE): [12]
(1) The law of diminishing marginal utility can be explained with the help of schedule .
and diagram.
(2) There are no exceptions to the law of demand.
(3) Price is the only determinant of supply.
(4) Money performs various functions.
(5) Commercial Bank cannot create credit.
(6) Bank rate is quantitative measure of credit control.

Q.6. Write explanatory answer (Any TWO): [16]

(1) State and explain the ‘Law of Demand' with its assumptions.
(2) What is elasticity of demand? What are the types of elasticity of demand?
(3) Explain various methods of measuring national income.
(4) What is aggregate supply? Explain determinants of aggregate supply?

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours OCTOBER 2016 Max Marks : 80

Q. 1. (A) Fill in the blanks with appropriate alternatives given in brackets : (5) [16]
(1) Micro Economics is a study of ___________
(Whole economy/general price level/national output/individual economic unit)
(2) Indirect demand is also known as ____demand.
(derived/ direct/ composite /joint)
(3) Under monopoly there is existence of _______.
(single buyer/ several buyers/single seller/ several sellers)
(4) Producer means of production is known as ____________
(a) land/labour/capital/ entrepreneur)
(5) Budget is the __________of the revenue and expenditure of the coming
year.
(exact value/estimate/ planning of private sector/ planning of co-operative
sector)

(B) Match the following:

Group ‘A’ Group‘B’
(a) Electricity (1) Inelastic demand
(b) Complementary goods (2) Share brokers
(c) Pension (3) Elastic demand
(d) D-mat account (4) Composite demand
Transfer income
(e) Central Bank (5)
Primary function of Commercial Banks
(6) ATM facility
(7) Apex banking institution

(C) State whether the following statements are True or False: (6)
(1) Perfectly inelastic demand curve is parallel to ‘X’ axis.
(2) Micro Economic theory assumes full employment.
(3) There is no product differentiating under monopolistic competition.
(4) Labour is a perishable factor of production.
(5) Investment made by the government is autonomous investment.
(6) The Cash Reserve Ratio does not affect the lending capacity of the
commercial banks.

Q.2. (A) Define or explain the following concepts (Any THREE): (6) [12]
(1) Micro Economics (2) Service utility
(3) Market demand (4) Induced consumption expenditure
(5) Token coins (6) Government budget

(B) Give reasons or explain the following statements (Any THREE): (6)
(1) Demand for habitual goods is normally inelastic.
(2) Supply of land is perfectly inelastic.
(3) Macro Economics is concerned with macro economic variables.
(4) Rate of interest on fixed deposit is high.
(5) Central Bank acts as a lender of the last resort.
(6) A deficit budget may prove useful during the period of depression.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q. 3. (A) Distinguish between (Any THREE) : (6) [12]

(1) Average Revenue anil Average Cost.
(2) Land and Capital.
(3) Partial equilibrium and General equilibrium.
(4) Metallic money and Paper money.
(5) Central Bank and Commercial Bank.
(6) Revenue expenditure and Capital expenditure.

(B) Write short notes (Any TWO): (6)

(1) Giffen's paradox. (2) Income elasticity of demand.
(3) Difficulties in Barter system. (4) Credit creation.

Q. 4. Write short answers for the folio wing questions (Any THREE): [12]
(1) Explain the Law of Demand.
(2) Explain increase in supply and decrease in supply.
(3) What is the importance of the study of Micro Economics?
(4) Explain factors determining elasticity of demand.
(5) Explain features of National income.
(6) Explain qualitative measures of credit control adopted by the Central Bank.

Q. 5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following
statements (Any THREE): [12]
(1) Price is the only factor that affects demand of a commodity.
(2) Price elasticity of demand can not be measured by using geometric method.
(3) There is direct relationship between price and quantity supplied.
(4) Aggregate supply is influenced only by availability of natural resources.
(5) Commercial banks perform agency functions to earn profit.
(6) There is a difference between Micro Economics and Macro Economics.

Q. 6. Write explanatory" answers (Any TWO): [16]

(1) State and explain in detail the Law of Diminishing Marginal Utility.
(2) Define perfect competition and explain price determination under perfect
competition.
(3) Explain the’Output Method’of measuring National income.
(4) What is Aggregate demand? Explain the determinants of Aggregate demand.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours MARCH 2017 Max Marks : 80

Q. 1. (A) Fill in the blanks with appropriate alternatives given in brackets : (5) [16]
(1) Market demand is a total demand of ______________buyers.
(Some /all/one/two)
(2) Perfectly inelastic demand curve is __________
(flatter/ steeper/vertical straight line parallel to “OY” axis/ horizontal straight
line parallel to “OX” axis)
(3) Other factors remaining constant, when price of a commodity rises, then is
________of supply.
(extension/ contraction/decrease increase)
(4) National income is _____________concept.
(stock/final/intermediate/flow)
(5) ______________is the apex body of the monetary and banking system of the
nation’s economy.
(Commercial bank/Central bank/ Government /CO-operative bank)

(B) Match the following:

Group ‘A’ Group‘B’

(a) Adam Smith (1) Private monopoly
(b) Railway (2) Father of economics
(c) Legal tender money (3) Public monopoly
D-mat account Principles of economies
(d) (4)
Bank rate Buying and selling of shares
(e) (5)
Quantitative tool of credit control
(6) Flat money
(7) Selective method of credit control

(C) State whether the following statements are True or False: (6)
(1) Total Revenue = Total quantity x price
(2) Demand for necessary goods is inelastic
(3) Capital is a natural factor of production.
(4) Consumption expenditure is the only component of aggregate demand.
(5) Credit money is created by the central bank of country.
(6) Budget is a monthly statement.

Q.2. (A) Define or explain the following concepts (Any THREE): (6) [12]
(1) Micro economics
(2) Service utility
(3) Unitary elastic demand
(4) Disposable income
(5) Autonomous consumption
(6) Bank rate

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

(B) Give reasons or explain the following statements (Any THREE): (6)
(1) Supply is directly related to price
(2) Price discrimination is possible under monopoly
(3) Labour cannot be stored
(4) Macro economics is the study of aggregates
(5) Cash reserve ratio (CRR) affects the lending capacity of banks.
(6) Macro economics deals with allocation of resources.

Q. 3. (A) Distinguish between (Any THREE) : (6) [12]

(1) Increase in demand and Decrease in demand
(2) Partial equilibrium and General equilibrium
(3) Personal Income and National income
(4) Standard coins and Token coins
(5) Direct tax and Indirect tax
(6) Extension of supply and Contraction of supply

(B) Write short notes (Any TWO): (6)

(1) Importance of Micro Economics
(2) Factors determining elasticity of demand
(3) Features of monopoly
(4) Types of capital

Q. 4. Write short answers for the folio wing questions (Any THREE): [12]
(1) What are the characteristics of utility.
(2) What are the features of pure competition
(3) What are the features of ‘macro economics’?
(4) What are the primary functions of commercial bank?
(5) What are the types of budget?
(6) What are the determination of aggregate demand?

Q. 5. Explain with reasons whether you ‘agree’ or ‘disagree’ with the following statements
(Any THREE): [12]
(1) There are no exception to the Law of Demand.
(2) Commercial banks can create on the basis of primary deposit.
(3) Central Bank is called as the bankers bank
(4) There is no difference between Stock and Supply
(5) General acceptability is the only quality of good money.
(6) Law of Diminishing Marginal Utility is importance in practice.

Q. 6. Write explanatory" answers (Any TWO): [16]

(1) State and explain Law of Demand with assumption.
(2) Explain Ratio method and Geometric method of measuring price elasticity of
demand
(3) What is National Income? Explain theoretical or conceptual difficulties of
measuring national income?
(4) Explain the Subjective and Objective factors determining consumption function.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours JULY 2017 Max Marks : 80

Q. 1. (A) Fill in the blanks with appropriate alternatives given in brackets : (5) [16]
(1) Demand for car and petrol is _______ demand.
(Direct I Indirect / joint / Composite)
(2) Total Revenue total number of units sold = _______.
(Average cost I Average revenue / Marginal cost / Total cost)
(3) Personal income – Direct tax =
(Private income / Disposable Income / National income / Total income)
(4) _______ bank has the monopoly o\ note issue.
(Commercial / Co-operative / Central / Industrial)
(5) When government revenue exceeds government expenditure, it is known as
a _________ budget.
(surplus / balanced / deficit / unbalanced)

(B) Match the following: (5)

Group ‘A’ Group ‘B’
a) Marginal utility 1) Price discrimination
b) Medicines 2) Legal tender money
c) Monopoly 3) Government bank
d) Currency notes 4) Utility from last unit
e) Central Bank 5) Inelastic demand
6) Commercial bank
7) Utility of all units
8) Elastic demand

(C) State whether the following statements are True or False: (6)
(1) Adam Smith is known as the 'Father of Economies'.
(2) Better transport facility increases supply at the same price.
(3) There is no need of advertisement in monopolistic competition.
(4) Depreciation is included in net investment,
(5) Central Bank acts as a lender of the last resort.
(6) Budget is not prepared for each and every year.

Q.2. (A) Define OR explain the following concepts (Any THREE): (6)
(1) Individual demand (2) Cross elasticity of demand (3) Stock
(4) Entrepreneur (5) Effective demand (6) clearinghouse

(B) Give reasons OR explain the following statements (Any THREE): (6)
(1) All desires are not demand.
(2) Perfectly inelastic demand curve is parallel to OY' axis.
(3) Agricultural goods arc exception to law of supply.
(4) Macro Economics is also known as income and employment theory.
(5) Kale of interest on fixed deposit is high.
(6) During the period of depression deficit budget is used.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q.3. (A) Distinguish between (Any THREE): (6)

(1) Form utility and time utility.
(2) Increase in demand and Decrease in demand.
(3) Relatively inelastic demand and relatively elastic demand.
(4) Micro Economics and Macro Economics.
(5) Standard coins and token coins.
(6) Commercial bank and Central bank.

(B) Write short notes (Any TWO): (6)

(1) Features of Micro Economics
(2) Importance of the Law of Diminishing Marginal Utility.
(3) Types of loans of commercial banks.
(4) Revenue receipts.

Q.4. Answer the following questions (Any THREE): (12)

(1) Explain the importance of Micro Economics.
(2) Explain the features of utility.
(3) Explain the importance of Elasticity of Demand.
(4) Explain the features of Macro Economics.
(5) Explain the circular How of national income.
(6) Explain the agency functions of commercial bank.

Q.5. State with reasons whether you 'agree' or 'disagree' with the following statements
(Any THREE): (12)
(1) Various factors influence Elasticity of Demand.
(2) Supply curve slopes upward from left to right.
(3) There are many features of labour. '
(4) Aggregate demand depends only on the consumption expenditure.
(5) Barter system did not have any difficulties.
(6) Central bank do not adopt quantitative measures of credit control.

Q.6. Write explanatory answers (Any TWO): (16)

(1) State and explain law of demand with exceptions.
(2) What is Perfect Competition? Explain price determination under Perfect
Competition.
(3) Define national income. Explain hove National income is measured by output
method.
(4) What do you mean by Aggregate Supply? Explain determinants of Aggregate
Supply.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours MARCH 2018 Max Marks : 80

Q.1. (A) Fill in the blanks using proper alternatives given in the brackets: (5) [16]
(1) The terms 'micro' and 'macro' economics were first used by
(Adam Smith / Robbins / Ragner Frisch / Prof. Marshall)
(2) ________ consumption cannot be zero.
(Induced / Autonomous / Government / Private)
(3) During depression ______ budget is preferable.
(Balanced / surplus / deficit / zero)
(4) The demand for salt is .
(Elastic / inelastic / infinite elastic / unitary elastic)
(5) ________ is a primary function of commercial bank.
(Purchases and sell securities / Accept deposits / Safe deposit vault / Letter
of credit)
(B) Match the following words from group 'A' and B': (5)
Group ‘A’ Group ‘B’
a) Demand and price 1. Wages
b) Perfect elastic supply 2. Vertical supply curve
c) Land 3. Transfer income
d) Unemployment allowance 4. Horizontal supply curve
e) Reserve Bank of Indian 5. Inverse relation
6. Rent
7. 1935
8. Direct relation
(C) State whether the following statements are true or false: (6)
1. Concept of 'elasticity of demand' is useful for the finance minister.
2. Supply of perishable goods is inelastic.
3. Under perfect competition price is determined by equilibrium of demand and
supply.
4. Token coins are such coins whose face value is greater than their intrinsic
value.
5. Credit control is the function of commercial banks.
6. Central bank also performs commercial banking business.

Q.2. (A) Define or explain the following concepts (Any THREE): (6) [12]
1. Individual economic unit
2. Marginal utility
3. Elasticity of Demand
4. National Income
5. Effective demand
6. Budget
(B) Give Reasons or explain the following statements (Any THREE): (6)
1. The Supply of agricultural commodity is relatively inelastic.
2. A monopolist can control the supply of goods.
3. The supply of land is inelastic.
4. Macroeconomics is different from micro economics.
5. As a banker for the government, the central bank transfers government
funds.
6. Micro economics is also known as price theory.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q.3. (A) Distinguish between the following (Any THREE): (6) [12]
(1) Desire and Demand
(2) Slicing method and Lumping method
(3) Paper money and Metallic coins
(4) Quantitative and Qualitative measures of credit control.
(5) Output method and Income method of measuring national income
(6) Average revenue and Average cost

(B) Write Short Notes (Ant TWO): (6)

(1) Subject matter of micro economics.
(2) Geometric method of measuring price elasticity of demand.
(3) Price determination under perfect competition.
(4) Features of labour.

Q.4. Answer the following questions (Any THREE): [12]

(1) Explain the relationship between 'total utility' and 'marginal utility'.
(2) What are the features of monopolistic competition?
(3) What are the features of macro-economics?
(4) Explain the types of investment expenditure.
(5) What are the different types of loans provided by commercial banks?
(6) Explain the development and non-developments expenditures of government.

Q.5. State with reasons whether you 'agree' or 'disagree' with the following statements
(Any THREE): [12]
(1) Law of diminishing marginal utility depends upon various assumptions.
(2) There are many types of demands.
(3) There are no exceptions to the law of supply.
(4) Barter system had many difficulties.
(5) Central bank has the sole power of issuing currency notes.
(6) Overdraft facility is not provided to the current account holders.

Q.6. Write explanatory answers (Any TWO): [16]

(1) Explain the law of demand with its assumptions.
(2) What is price elasticity of demand? Explain the types of price elasticity of demand.
(3) State and explain J.M.Keynes's 'psychological law of consumption'.
(4) Explain the output method of measuring national income.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours JULY 2018 Max Marks : 80

Q.1. (A) Fill in the blanks using proper alternatives given in the brackets: (5) [16]
(1) Micro economics is also called as _______ theory.
(Income / Price / Growth / Employment)
(2) Income elasticity of demand for inferior goods is ______.
(Positive /negative / zero / greater than one)
(3) Part of income, which is not spent on consumption is called _______ .
(Expenditure / saving / investment / public debt)
(4) _______ is an example of direct tax.
(Excise duty / Wealth tax / Sales tax / Gifts)
(5) Every loan creates a _______.
(Credit / deposit / profit / loss)

(B) Match the following words from group ‘A’ and ‘B’ : (5)
Group ‘A’ Group ‘B’
a. Production 1. Average expenditure
b. Tea and coffee 2. Personal income - Direct taxes
c. Stock 3. Substitute goods
d. Disposable income 4. Central bank
e. Credit control 5. Complementary goods
6. Potential supply
7. Commercial bank
8. Creation of utility

(C) State whether the following statements are True or False : (6)
(1) Demand for luxurious goods is elastic.
(2) Supply is indirectly related to price.
(3) Metallic coins are easily portable than paper notes.
(4) In a monopoly market, firm and industry are the same.
(5) Commercial banks are the- backbone of modern economy.
(6) The main objective of the central bank is to earn profit.

Q.2. (A) Define 'or' explain the following concepts (Any THREE): (6) [12)
(1) Macro economic variables
(2) Marginal cost
(3) Monopolistic competition
(4) Partial equilibrium
(5) Entrepreneur
(6) Moral suasion

(B) Give reasons or explain the following statements (Any THREE): (6)
(1) Micro economic theories are based on certain assumptions.
(2) Utility is a subjective concept.
(3) Demand for necessary goods is inelastic.
(4) Paid services are included in national income.
(5) There are many subjective factors determining consumption function.
(6) Central bank acts as a lender of last resort.

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Q.3. (A) Distinguish between the following (Any THREE): (6) [12]
(1) Expansion of demand and Contraction of demand
(2) Micro economics and Macro economics
(3) Output method of measuring national income and Income method of
measuring national income
(4) Commodity money and Metallic money
(5) Deficit budget and "Balanced budget
(6) Individual supply and Market supply

(B) Write short notes on the following (Any TWO): (6)

(1) Features of micro economics.
(2) Ratio method of measuring price elasticity of demand.
(3) Types of monopoly.
(4) Qualities of an entrepreneur.

Q.4. Answer the following questions (Any THREE) : [12]

(1) Explain the types of utility.
(2) What are the features of perfect competition?
(3) What is the subject matter of macro-economics?
(4) State the objective factors determining consumption function.
(5) Explain various types of deposit.
(6) What are the sources of non-tax revenue?

Q. 5. State with reasons whether you 'agree' or 'disagree' with the following statements
(Any THREE): [12]
(1) There are no real exceptions to the law of diminishing marginal utility.
(2) Many factors influence the demand for a commodity.
(3) Barter system did not have any difficulty.
(4) Price is the only determinant of supply.
(5) Commercial banks perform many general utility services.
(6) Central bank works as a banker to the government.

Q. 6. Write explanatory answers (Any TWO) : [16]

(1) Explain the law of demand with its exceptions.
(2) What is price elasticity of demand? Explain the types of price elasticity of demand.
(3) Explain the practical (statistical) difficulties involved in the estimation of national
income.
(4) What is 'aggregate supply'? Explain the determinants of aggregate supply.

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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

ECONOMICS
Time : 3 Hours MARCH 2019 Max Marks : 80

Q. 1. (A) Fill in the blanks using appropriate alternatives given in the brackets: [16] (5)
(1) _______ is regarded as the father of ‘Economies’.
(Prof. Marshall / Adam Smith / Ragner Frisch / Robbins)
(2) The demand for perishable goods is ______.
(Elastic / inelastic / unit elastic / perfectly inelastic)
(3) ________ Consumption cannot be zero.
(Induced / Autonomous / Government / Private)
(4) The e-banking facility is provided through ________.
(Telephone / debit card / internet / credit card)
(5) The duration of government budget is ________ years.
(One / two / five / ten)

(B) Match the correct pairs: (5)

Group “A” Group “B”
a) Prestigious goods 1. Average cost

    2. Transfer payment
b)

    3. Qualitative credit control
c) Labour 4. Rent
d) Unemployment allowance 5. Quantitative credit control
e) Direct action 6. Exception to the law of demand
7. Wages
8. Average revenue

C) State whether the following statements are True or False: (6)

1) Demand for luxurious goods is elastic.
2) Stock is a source of supply.
3) There is no price discrimination in monopoly.
4) In the initial stage of human civilization commodity money was used.
5) Loans given by banks for a period of less than five years is known as long-
term loan.
6) The main objective of the central bank is to earn profit.

Q. 2. (A) Define 'or' explain the following concepts (Any THREE): (6) [12]
1) Partial equilibrium
2) Ratio method of measuring price elasticity of demand
3) Product differentiation
4) Fixed capital
5) Lumping method
6) Propensity to save

(B) Give reasons or explain the following statements (Any THREE) : (6)
1) Clearing house facility by central bank economizes the use of cash.
2) Micro economics studies individual economic unit.
3) Utility and satisfaction are different concepts.
4) Law of supply is not applicable to rare articles.
5) Income from sale of second hand goods is excluded from national income.
6) Central bank acts as a banker to the government.
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J. K. SHAH CLASSES S.Y.J.C. - ECONOMICS

Q. 3. (A) Define 'or' explain the following concepts (Any THREE): (6) [12]
1) Desire and Demand
2) Increase in supply and Decrease in supply
3) Micro economics and Macro economics
4) Personal income and Disposable income
5) Standard coins and Token coins
6) Direct tax and Indirect tax

(B) Write short notes (Any TWO): (6)

1) Importance of micro economics.
2) Total outlay method of measuring price elasticity of demand.
3) Types of monopoly.
4) Functions of an Entrepreneur.

Q. 4. Answer the following questions (Any THREE) : [12]

1) Explain the relationship between Total utility and Marginal utility?
2) Explain the features of Perfect competition.
3) Explain the features of Macro economics?
4) Explain the subjective factors determining consumption function?
5) What are the different types of deposits?
6) Explain the types of government budget.

Q. 5. State with reasons whether you 'agree' or 'disagree' with the following statements
(Any THREE) : [12]
1) Homogeneity of commodities is the only assumption of the law of diminishing
marginal utility.
2) Demand curve slopes downward from left to right.
3) Supply depends on several factors.
4) Barter system did not have any difficulties.
5) Credit creation of commercial banks is based on primary deposits.
6) Central bank is a bank which issues notes.

Q. 6. Write explanatory answers (Any TWO) : [16]

1) Explain the law of demand with its exceptions.
2) What is elasticity of demand? Explain the determinants of elasticity of demand.
3) What is National Income? Explain the practical difficulties in measuring National
Income.
4) What is aggregate supply? Explain the determinants of aggregate supply.

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