SET 2.

Q.7 What is pricing policy? What are the internal and external factors of
the policy?
Ans: Pricing Policies:
Pricing Policies refer to the policy of setting the price
of the product or product & services by the management after taking into
account of various internal and external factors, forces and its own business
objectives. The decision of pricing is very important in any business. Price once
fixed is never permanent. It needs to be reviewed and revised according to the
market conditions.
Internal factors which can affect the pricing decisions of the company include
suppliers, employee’s efficiency, profit margin, production cost and other
expenses, brand image and expectations of the company. Suppliers provide the
raw materials to the company and good relations with suppliers can make the
company to buy quality products at reasonable prices. Employees' efficiency
can also reduce the costs of the company and company can charge lower prices.
Product cost also determines the prices of the products because all of the
companies have to cover up the product costs. Moreover, image of the company
also plays an important role in the price decisions of the company because a
global brand will usually charge premium prices. On the other hand, the
external factors include government policies, competitors' prices, costs of raw
materials, consumer’s expectations and demand and supply of the product.
Government sets the price floors to save the interest of the borrowers and the
sellers, therefore, government policies should be also take into consideration.
Expectations of the consumers or consumer reservation prices are also
considered in the price decisions. Costs of raw materials in the market also
determine the pricing strategies. Moreover, the prices offered by the competitors
can also impact the pricing decisions of the company.

Q.8 Mention three crucial objectives of price policies.

Ans:
Price policy has certain objectives:-

1. To maximize profits: - Every firm tries to maximize their profits. So they

should have a price policy, which fetches them maximum revenue. Every firm
should have a price policy keeping the long run prospects in mind.

2. Price Stability: - Always fluctuating price is not for the goodwill of the
company. A stable price always wins the confidence of customers.
3. Ability to pay: - The price should be fixed according to the ability of
consumer to pay; high price for rich customers and low for poor customers. This
can be applied in case of services given by doctors, lawyers etc.

Q.9 Mention the bases of price discrimination.

Ans: PRICE DISCRIMINATION:
The monopoly seller has the advantage of price
discrimination, as he is the only producer in the market. Price discrimination is
charging different price to different buyer for the same product.

DEGREES OF PRICE DISCRIMINATION:

1. First degree price discrimination:

It is also called perfect price
discrimination, as it involves maximum exploitation of the consumer in the
interest of the seller. It happens when the seller is able to sell each unit
separately and at a different price. Each buyer is made to pay the amount he is
willing to pay rather going without it. The seller will make different bargain
with each buyer. Such type of price discrimination enjoyed by the seller is
called first degree price discrimination.

2. Second degree price discrimination:

It happens when the monopoly seller
will charge separate price in such a way that the buyer is divided into different
groups according to the price elasticity of demand for his product.

3. Third degree price discrimination:

When the seller will be divided into
sub-market and charge different price depending on the output sold in the
market and the demand condition of that sub-market. The seller practicing price
discrimination between the domestic market and international market, the seller
will charge higher price in the domestic market, where he enjoys monopoly and
charge low price in the international market, where he has to face more
competition.

Q.10 What do you mean by the fiscal policy? What are the instruments of
fiscal policy? Briefly comment on India’s fiscal policy.
Ans: Fiscal policy is a policy, which affects aggregate output, employment,
saving, investment etc. A responsible government would contain its expenditure
within its revenue and thus making the budget balanced. The instruments of
Fiscal Policy are Automatic Stabilizer and Discretionary Fiscal Policy:
i) Automatic Stabilizer:
 The tax structure and expenditure are programmed in
such a way that there is increase in expenditure and decrease in tax in recession
and decrease in expenditure and increase in tax revenue in the period of
inflation. It refers to built-in response to the economic condition without any
deliberate action on the part of government. It is called built- in- stabilizer to
correct and thus restore economic stability. It works in the following manner,

Tax revenue:
Tax revenue increases when the income increases; as those who
were not paying tax go into the higher income tax bracket. When there is
depression, the income decreases and many people fall in the no-income-tax
bracket and the tax revenue decreases.

ii) Discretionary Fiscal Policy:

Under this, to stabilize the economy, deliberate
attempts are made by the government in taxation and expenditure. It entails
definite and conscious actions.

Instruments of Fiscal Policy: Some important instruments of fiscal policy are:-

1. TAXATION:
Taxation is always a very important source of revenue for both
developed and developing countries. Tax comes under two heading –Tax on
individual (direct tax) and tax on commodity (indirect tax or commodity
tax).Direct tax includes income tax, corporate tax, taxes on property and wealth.
Indirect tax is tax on the consumptions. It includes sales tax, excise duty and
custom duties. Direct tax structure can be divided into three bases-
1. Progressive tax
2. Regressive tax
3. Proportional tax

Progressive tax:
Progressive tax says that higher the level of income, greater
the volume of tax burden you have to bear. This means as income increases, the
tax contribution should also increase. Low income group people pay low tax,
whereas the high income group people pay higher tax.

Regressive tax:
It is theoretically possible, though no government implements
such tax structure, because that leads to unequal distribution of income. As your
income increases the contribution through tax decreases. Low income people
will pay more and high income people will pay less.

Proportional tax:
When the tax imposed is irrespective of the income you earn,
every income group, high or low pay the same amount of tax.
2. INDIRECT TAX OR CONSUMPTION TAX:
Indirect tax differs from direct
tax. Tax which is imposed on every unit of product is known as lump sum tax.
E.g. excise tax and sales tax. Taxes depending on the value of particular product
are called ‘ad valorem tax’ e.g. tax on airline tickets.
A good tax structure has to control and bring stability in economic system.
There are few requirement of a good tax structure. They are –
The revenue earned through tax structure should be adequate.
The distribution of tax burden should be equal.
Administration cost should not be more than revenue earned.
Tax burden should be borne by the person who is taxed.

Q.11 Comment on the consequences of environmental degradation on the

economy of a community.
Ans: Environmental Degradation:
For sustainable economic growth, the
environment should be properly preserved and improved. The stocks may
remain constant or it can even rise but the environment resources are the base of
the country and the quality of air, water and land represents the heritage of a
nation. The environment damages in the developing countries are the main
concern nowadays. Environmental damages can be in these categories-

Water pollution:
The water quality is continuously deteriorating due to
contamination from the industrial waste, by throwing out chemical waste and
heavy metal in the river. It is difficult to remove the pollutants from the water to
make it good for drinking purpose. The capacity of the water to preserve the
aquatic life is becoming more and more difficult. The underground water is also
getting affected by the industrial waste, as they sometimes get discharged
directly into underground water.

Air pollution:
Air pollution can be contributed to the three man made sources,
industrial production, vehicles and the energy. Human suffering increases due to
the air pollution. Respiratory disorders and cancers are due to inhalation of
polluted air. The vehicle increases the sulphur dioxide concentration in the air
creating breathing problems for the children and affects their neurological
developments.
Deforestation:
Forest is the most important source to protect environment.
They protect soil erosion and regulate the ecological balance of the nature. They
i affect the nature and the climatic condition of the region. The blind increase in
the industrial growth is leading to cutting down of many forest leading to many
serious problems for the human being.

Q.12 Write short notes on the following:

a) Philips curve
Ans: Philips Curve describes the relationship between inflation and
unemployment in an economy.
New Zealand-born economist A.W Philips first put this theory forward in 1958
gathered the data of unemployment and changes in wage levels in the UK from
1861 to 1957. He observed that one stable curve represents the trade-off
between inflation and unemployment and they are inversely/negatively related.
In other words, if unemployment decreases, inflation will increase, and vice
versa.

• For example, after the economy has just been in recession, the
unemployment level will be fairly high. This will mean that there is a
labor surplus.

• As the economy has just started growing, the aggregate demand (AD)
will increase and therefore leading to an increase in employment. In the
beginning, there will be little pressure for a raise in wages. However, as
the economy grows faster and more people are employed, wages will start
rising slowly.

B) Stagflation
Ans: Stagnation + Inflation = Stagflation
Stagnation = Slow or no growth. Inflation = Rises in price.
Stagflation is an economic trend in which inflation and unemployment rise
while general growth of the economy is slow. It can be difficult to correct
stagflation, because focusing on one aspect of the problem can exacerbate other
aspects. Many governments try to avoid stagflation through fiscal policy, by
promoting even and healthy growth and attempting to prevent inflation. If
stagflation continues long enough, it will trigger an economic recession and an
ultimate self-correction.
Stagflation is when the economy experiences slow GDP growth (stagnation)
with high inflation and high level of unemployment. This occurred in the 1970's
in many countries. When the economy is working normally, slow economic
growth reduces demand, which keeps prices low, preventing inflation.
Stagflation can only occur when fiscal or monetary policy sustains high prices,
and inflation, despite slow growth. Stabilization policies to control stagflation.
1. The money supply should be tightened to check inflation.
2. We can control inflationary wage and price increases with direct controls.
Government can limit increases by law or constrain them through tax policies.
3. Protect people against the effects of inflation. All wages, including the
minimum wage, could be increased automatically when the Consumer Price
Index increases. Government bonds could pay a fixed real interest rate by
adjusting the actual interest rate for inflation.
Stagflation is difficult to control without government controls. Therefore,
political will is necessary for formulating the measures to stop stagflation.