RAHUL COMMERCE ACADEMY

PART :- 2 ( SECTION - A )

Very short answer questions-

31. What is economic activity?

Economic activity is an activity which is related to the use of limited resources

to satisfy needs. All economic activities do not necessarily generate income i.e.
economic activity may or may not generate income. For example:
consumption is an economic activity but it does not generate income

32 What is the meaning of consumer equilibrium?

A consumer is in a state of equilibrium when he considers his choice to be the

best in the present circumstances and he does not want to make any change in
his behavior until the present situation itself changes.

33. What is meant by total revenue, average revenue and marginal revenue?

Total Revenue :- The total revenue of a firm is obtained by multiplying the unit
price of the commodity and the total number of units sold.
Total revenue = Total income from sale of goods

Average revenue :- Average revenue is the revenue obtained from the sale of
per unit of output.

Average revenue = TR / Q

Marginal revenue :- The revenue received by the producer from an additional

unit of a commodity is called marginal revenue. It means the rate of change in
total revenue.

MR = ∆TR/∆Q
or MRn = MRn - MRn-1
34. Define market?
Market means the entire area where buyers and sellers are spread. Those who
have free and perfect competition or imperfect competition, buy and sell
goods at the same or different prices through mutual bargaining.

35. What is meant by the circular flow of national income?

Circular flow of income refers to the flow of monetary income or goods and
services in a circular form in different sectors of the economy. It is called
circular flow because this flow has neither a beginning nor an end. It keeps
flowing continuously in the form of a cycle.

36. What are two functions of a commercial bank?

Commercial bank has two important functions-
(a) Accepting deposits
(b) Giving loans

37. Define marginal propensity to consume?

Marginal consumption tendency is the ratio of change in consumption and
change in income. Marginal consumption tendency Change in consumption
Change in income.
MPC = ∆C/∆Y

38. What is the market rule of 'SAY'?

French economist J.B. Say propounded a rule in his book Traited Economics
Political which is called Say's market rule. According to this rule, "Supply
creates its own demand." That is, while production increases supply, on the
other hand, it increases demand in the form of income given to the resources.

🎯📌 SECTION :- 2 [ 3×6 = 18 ]

Answer any six questions :-

39. What do you understand by price elasticity of demand? How many
categories does it have?
Price elasticity of demand means change in the quantity of demand of goods
due to change in its price.

ed = ∆Q/Q ÷ P/∆P

here, ed = elasticity of demand

∆Q = change in quantity of demand
Q = initial demand
P = initial price
∆P = change in price

There are five type of elasticity of demand:-

1. Elastic demand
2. Perfect elastic demand
3. Unit elastic demand
4. Inelastic demand
5. Perfect in elastic demand

40. Explain the three main features of monopoly market?

1. Single producer or seller
2. Larger number of buyers
3. Firm is price taker
4. No nearest substitute goods
5. Restrictions on entry of new firms
6. Price differentiation.

41. "Demand and supply are the two sides of the scissors." Explain this
statement in the context of pricing.

Marshall, while explaining the balanced price determination in the case of

perfect competition, has said that the price of the commodity is determined at
that point where the demand and supply of the commodity become equal.
Marshall gave the example of scissors in support of his idea. In his opinion,
just as both the blades of scissors are necessary to cut paper, in the same way
demand and supply are also necessary for determining the price of the
commodity.

This can be shown with a diagram:-

It is clear from the above diagram that DD is the line of demand and DD is the
line of supply which meet at point E like the two faces of scissors and
determine the price OP for OQ quantity of the commodity.

42. Calculate marginal cost from the following data:

Production (per unit) Total Cost (TC) Marginal Cost (MC)

0 50
1 100
2 120
3 150
4 210

43. What is the difference between microeconomics and macroeconomics?

44. What is green gross national product?
Green Gross National Product (GNP) indicates sustainable economic growth.
GNP of a fixed base year does not include in its calculation the environmental
pollution and destruction of natural resources in the country during
production. The increase in GNP with increasing environmental pollution and
excessive exploitation of natural resources cannot be considered as
sustainable economic development. Thus, Green GNP indicates that GNP
which helps in proper sustainable use of natural resources in the country and
controlling environmental pollution. That is, GNP estimation done with
excessive use of natural resources and environmental pollution is called Green
GNP

45. What is a liquidity trap?

Prof. J.M. Keynes has explained the liquidity trap. He called the demand for
money as liquidity preference. Liquidity preference means the demand for
money in the form of cash by the public. According to Keynes, liquidity
preference or demand for money is done for three purposes, transaction
purpose, foresight purpose and speculative purpose.
The demand for money for bargaining purpose and foresight purpose is
inelastic towards interest but the demand for money for speculative purpose
is elastic towards interest. In this context, he explained the liquidity trap.
According to Keynes, liquidity trap is a condition in which the demand for
money for speculation becomes completely elastic. This is a condition of
perfect liquidity preference. Liquidity trap is a situation when a person
prefers to keep money in cash with him instead of investing it in bonds etc. at
the lowest interest rate because there is a fear of loss at the lowest interest
rate. To avoid this, a person wants to keep the extra cash as a passive asset.

Which can be shown with a diagram:-

46. Write four components of the monetary policy of the Reserve Bank of
India?

The monetary policy of the Reserve Bank of India has four components-

(1) Bank Rate:- Bank rate is the rate at which the central bank of a country
lends money to commercial banks against government and other approved
securities, it is also called discount rate.

(i) Open market operations:- Under this, the central bank itself influences the
cash reserves of commercial banks by buying and selling government and
other approved securities in the money market and capital market.

(iii) Change in cash reserve ratio:- Commercial banks are required to deposit a
certain percentage of their deposits with the central bank.It is compulsory to
keep a deposit. The central bank can increase the cash reserves of commercial
banks by changing the cash reserve ratio.It can expand or contract credit by
affecting the funds.
 (iv) Changes in the Statutory Liquidity Ratio:- Every bank is legally required
to keep a certain percentage of its assets in cash or other liquid assets, by
changing which it can expand or contract credit

💥📌 SECTION - C [ 4× 5 = 20 ]

Long Answer Type Questions :-

47. What is called indifference curve? Explain the consumer's equilibrium

through indifference.
As an alternative concept thought to Marshall's utility analysis, economists Hicks
and Allen presented the concept of indifference curve analysis which is based on
the ordinal approach, which states that utility can be expressed not in terms of
units but only by giving order of preference.
Indifference curve is related to different combinations of two goods. It
explains the behaviour of the consumer. The behaviour of the consumer is shown
by his indifference schedule. Different combinations of two goods giving equal
satisfaction to the consumer form an indifference schedule which is displayed in
the form of a graph to obtain the indifference curve.
Thus, every point on the indifference curve represents the same
level of satisfaction with different combinations of two goods and every point on
this curve has no preference over any other point on the curve.

This can be explained by an imaginary indifference schedule:-

There are two conditions of consumer equilibrium in indifference curve
analysis -

(i) Indifference curve touches the price line Consumer equilibrium will occur
when the marginal rate of substitution for commodity x in quantitative terms
is equal to the ratio of the prices of commodity x in the price of commodity x
i.e. when the indifference curve touches the price line. i.e. in equilibrium

(ii) For stable equilibrium, the indifference curve at the equilibrium point
should be convex towards the origin i.e., MRS should be decreasing at the
equilibrium point.
48. Explain the law of demand? What are the assumptions of this law?

The law of demand states that, other things remaining the same, there is an
inverse relationship between the price of a commodity and the quantity
produced.
The law of demand tells us the qualitative relationship between the price of
the commodity and the quantity demanded at that price. Due to his
psychological tendency, the consumer demands more at a low price and less
at a high price, on which the law of demand is based, i.e. other things being the
same, more demand is made for a commodity at a low price. Inversely, under
stable conditions, there is an inverse relationship between the price of the
commodity and the demand for the good.
This law only tells the direction of change in price and demand, it does not tell
the amount of change
The phrase other things being equal means the assumptions of the law of
demand which are as follows:

1. There should be no change in the income of the consumer.

2. There should be no change in the consumer's interest, nature, likings etc.

3. There should be no change in the prices of related goods.

4. The consumer should not be aware of any new substitute product.

5. There should be no possibility of change in the price of the commodity in

future.

49. Explain the three states of the law of variable proportions?

In production, when the quantity of variable factor is increased along with

fixed factors, then due to division of labour and specialisation, efficient use of
indivisible factor becomes possible and ideal combination of factors is
established at a point. After this point, as the units of variable factor are
increased, marginal product keeps falling which is divided into three stages. it
can be explained with a table:-
(1) Stage of Increasing Returns: In the first stage, i as the units of variable
factor are increased with fixed factor, increased production takes place
because as we increase units of variable factor, optimum utilisation of fixed
factor becomes possible. Thereby, total production, average production and
marginal production all increase in the beginning of the stage of production.

(2) Stage of Diminishing Returns: In the second stage, AP and MP both are
decreasing. This stage ends at the point where MP becomes zero. In this stage,
TP increases at a decreasing rate because MP is decreasing but remains
positive.
In this stage, AP continues to decline and so, this stage is also called 'Stage of
Decreasing Average Product’.

(3) Stage of Negative Returns: In this third stage of production, MP becomes

negative or less than zero. Due to negative Marginal Product, Total Product
(i.e., TP) starts declining. Due to decreasing TP and negative MP, this stage is
also called 'Stage of Negative Returns'.
50. Explain the circular flow in the four sector economy.

The four sector model of circular flow of income represents an open economy.
In the four sector circular flow model, foreign sector or the rest of the world
sector is included. At present, the nature of the economy is that of an open
economy in which goods are imported and exported. When an economy pays
for goods imported from the rest of the world, then there is flow of money out
of the country towards the rest of the world. On the other hand, when a
country exports to the rest of the world, then other countries pay for it, thus
there is flow of money from the rest of the world towards this country. In an
open economy, there are five major pillars of income flow-

1. Domestic/ Household area

2. Business Firm
3. Government Sector
4. Rest of the World Region
5. Capital Market

When the rest of the world region is included, both imports and exports have
a cyclical effect of income.There is an impact on the flow. When imports take
place, there is leakage of income from the circular flow and when exports take
place, there is injection of income in the circular flow.
Equilibrium condition:-
 Y=C+I+G+(X-M)
Here, Y = Income
I = Consumption
G = Government
(X-M) = Net Export

51. How does a commercial bank create credit? Explain with examples?

In the present times, commercial banks not only transact money but also
create credit.
According to Prof. Ham, there are two types of bank deposits: primary
deposits and derivative deposits. Primary deposits are those deposits which
are deposited by the depositors in the bank in the form of real currency.
When a bank gives a loan to a person, then the bank puts the loan amount in
his account in the bank, then the amount written by the bank in that account is
called derivative deposit. Derivative deposit is the result of credit deposit,
because the bank provides credit only on the basis of its cash reserves, so
these derivative deposits are also called credit deposits.
The more loans a bank gives, the more credit deposits it generates. Thus loans
create deposits and deposits give rise to loans.

Example:-
1. If a customer deposits Rs.10,000 in his Bank A then it is the primary deposit
of Bank A.

2. The bank knows from its experience that customers demand only a part of
their deposits at any given time so it does not maintain Rs 10,000 cash in its
customer's account.

3. On the assumption that the cash reserve ratio is 20 percent, Bank A will
keep Rs 2000 as cash reserve and lend out the remaining Rs 8000.

4. Now the bank deposits this money in Dinesh's account instead of giving it in
cash. In this way a derivative deposit of Rs 8000 is created in Bank A.

5. Now if Dinesh gives this money to Suresh through cheque for some
payment.

6. Suresh deposits it in his bank B. So, out of the initial deposit of Rs. 8000 in
bank B, he will keep 20 percent of it i.e. Rs. 1600 in cash with himself and lend
the remaining Rs. 6400 to another person Shyam i.e. he will deposit it in
Shyam's account.
This process will continue across different banks till the entire first cash
primary deposit amount of Rs 10,000 is increased 5 times (based on 20%
CRR).

This process can be understood through a table :-

Bank primary deposit cash held by bank Loan (Derivative Deposit)
A 10,000 2,000 8,000
B 8,000 1,600 6,400
C 6,400 1,280 5,120
B 5,120 — —

50000 10000 40000

52. Explain balanced and unbalanced budget.

Balanced budget :- It is the budget in which the income and expenditure of the
government are equal.

Balanced Budget:-
government income = government expenditure

A balanced budget has no effect on the level of economic activities. Due to this,
neither contractionary nor expansionist forces can work.

Eminent economists were in favour of implementing a balanced budget. But as

a result of the Great Depression of 1930, the balanced budget was criticised.
According to Prof. Keynes, a balanced budget is not suitable for solving the
Great Depression and unemployment in developed countries and for the
development of underdeveloped countries because a balanced budget cannot
be a solution to these problems.

Unbalanced Budget :- Unbalanced budget is that budget in which the income

of the government and the mutual expenditure of the government are not
balanced is not equal.
There are two types of unbalanced budget :-

1. Savings budget or surplus budget

2. Deficit budget