Chapter-5 Economic Theory ¥. a & n o Income of a country is denoted in a curved line space that i has Increased, then what does {t denote? fa) the income is increasing | the income is decreasing ¢) dissimilarity ia decreasing in income distribution @) dissimilarity in income distribution ie increasing Multiplier process in economic theory is conventionally taken to mean a] the manner in which prices increase 1 the manner in which banks create credit | income of an economy grows on account of an initial investment dl) the manner in which government expenditure increases ‘A financial instrument is called a "primary security’ if it repre- ents the lability of a} some ultimate borrower | the Government of India | a primary cooperative bank 4) a commercial banke Personal disposable income is 4) always equal to personal income 5 always more than personal income | equal to personal income minus direct taxes paid by household 4) equal to personal inceme minus indirect taxes Which of the following most closely approximates our defi- jon of oligopoly? 4) The cigarette industry ) The barber shops. | The gasoline stations 4) Wheat farmers Who said ‘Supply creates its own demand’? a) Adam Smith D) IB Say | Marshall 8) Ricardo One of the essential conditions of perfect competition te a} product differentiation 1} multiplicity of prices for identical producte at any one time c} many sellers and a few buyers 4) Only’ one price for identical goods at any one time ‘The theory of distribution relates to which of the following? a) The distribution of assets 1b) The distribution of income | The distribution of factor/payments 4) Equality in the distribution of the income and wealth If an industry is characterised by economies of acale then a} barriers to entry are not very large 1) long-run unit coste of production decreases as the quantity the firm produces increases | capital requirement are small due to the efficiency of the large sale operation 4) the costs of entry Into the market are likely to be substantialaaa a, 1a 13", a4. ass, 16 ar 1a, 1 20". Objective Banking and Economic Awareness Say’s Law of Market holds that fa) supply is not equal to demand 1) supply creates its own demand 6} demand creates sts own supply 4) supply is greater than demand Movement along the same demand curve is know a a) Extension and Contraction of Demand 3} Increase and Decrease of Demand ¢} Contraction of supply 2) Increase of supply When there is a change in demand leading to a shift of the Demand Curve to the right, at the same price as before, the ®) increase 6) remain the same 2) contract ‘The income elasticity of demand being greater than one, the commodity must be al a necessity b) a huxury ©) inferior goods 4) None of these ‘Marginal efficiency of capital’ is a) expected rate of return an new investment | expected rate of return of existing investment 6) difference between rate of profit and rate of interest 4) value of output per unit of capital invested When there is one buyer and many sellers then, that situation in called 1) Monopoly b) Single buyer right 6) Down right 4} Double buyers right ‘The measure of a worker's real wage is a) The change in bie productivity over a given time ) His earnings after deduction at source 6} His daily earnings 8) The purchasing power of his earnings Average Revenue means f) the revenue per unit of commodity sold b) the revenue from all commodities sold } the profit realised from the marginal unit sold 4) the profit realised by sale of all commodities Economie rent refers to a} Payment made for the use of labour ®) Payment made for the use of capital c} Payment made for the tse of organisation 4) Payment made for the use of land If the price of an inferior goods falls, ite demand al rises 5) falle ¢} remains constant 4} can be any of the above ‘The Marginal Utility Curve slopes downward from left to right indicating a} A direct relationship between marginal utility and the stock of commodity b) A constant relationship between marginal utility and the stock of commadityEconomie Theory 448 au a2", ae aa. ase a7. ¢] A proportionate relationship between marginal utility and the stock of commodity 4) An inverse relationship between marginal utility and the stock of commodity Capital output ratlo of a commodity measures fa) its per unit cost of production 1) the amount of capital invested per unit of output | the ratio of capital depreciation to quantity of output 4) the ratio of working eapital employed to quantity of output In equilibrium, a perfectly competitive firm will equate ‘} marginal social cost with marginal social benefit ‘| market supply with market demand | marginal profit with marginal cost 4d) marginal revenue with marginal cost ‘An economy is in equilibrium when fa) planned consumption exceeds planned savings 5 planned consumption exceeds planned investment ¢} intended investment equals intended savings 4 intended investment exceeds intended savings What is “book-building”? 4} Preparing the income and expenditure ledgers of a company’ (book keeping) 1 Manipulating the profit and loss statements of a company | A process of inviting subscriptions to a publi offer of securities, essentially through a tendering process 4) Publishers” activity ‘The method of calculating the national income by the product method ie otherwise known as ) Income method ) Value added method | Expenditure method 4) Net output method Entrepreneurial ability is a special kind of labour that a) is bired out to firms at high wages 9) organises the process of production } produces new capital goods to carn interest 4) manages to avoid losses by continual innovation What is “narrow money”? 4) The sum of currency in circulation and the demand depos banks 1 The sum of M1 money and the time deposits The aum of currency in circulation with the public and the cash reserves held by banks 4 ‘The market value of the stocks held by all the promoters ‘Transfer earning or alternative cost is otherwise known as a) Variable cost 3) Implicit cost | Explicit cost 4} Opportunity cost (economic cost Which of the following concepts are most closely associated with J M Keynes? 3) Control of money supply, ») Marginal utility theory | Indifference curve analysis dd) Marginal efieiency of captial the holders excluding446 30. an aa, a3, a6 36. am, ae, a9, 40%, an. 4a 43°, Objective Banking and Economic Awareness Devaluation of money means fa) decrease in the internal value of money 5) decrease in the external valuie of money 6) decrease in both internal and external valies of money 4) the government takes back currency notes of any denominations Demand of commedity mainly depends upon a) Purchasing will ») Purchasing power ©) Tax policy 4) Advertisement Basle infrastructure facilities in Economics are known as a) Human eapital ») Physical capital } Social overheads capital _¢) Working capital Evaluating all the options to find out most suitable solution to business problems is inter-disciplinary activities. It is called 4) Professional research 3) Management research ©) Operational research 4) Commercial research [Avacller or buyer protects his business or holdings from changing prices and takes action against it. It is known as f) defence ®) betting 6) inter-trading 4) mortgage Devaluation usually causes the internal prices to a) fal by rise 6} remain unchanged 4) None of the above According to Keynesian theory of income determination, at full employment, a fall in aggregate demand causes a} a fallin prices of output and resources bj a fll in real gross national product and employment ) a rise in real gross national product and investment @) a rise in prices of output and resources When aggregate supply exceeds aggregate demand a) unemployment falls b) prices rise } inventories accumulated) unemployment develops, Equilibrium price means a) Price determined by demand and supply b) Price determined by cost and profit 6} Price determined by cost of production 4) Price determined to maximise profit When marginal utility is zero, the total utility is a) Minimum 2) Increasing 6) Maximum 4) Decreasing Which unit of valuation is known as “Paper Gold”? a] Burodollar bj Petrodollar¢) SDR 4) GDR “Dear Money” means a} low rate of interest b) high rate of interest ©) depression 4) inflation Sellers market denotes a situation where a} commodities are available at competitive rates ®} demand exceeds supply «} supply exceeds demand ) supply and demand are even! “Legal Tender Money” refers to a) Cheques ) Drafts ©) Bill of exchange 4) Curreney notes balancedEconomie Theory a7 as 46". an. 49, sor. si, 52. 53+, 5a, ‘The sum total of incomes received for the services of labour, and or capital in a country is called a) Grows domestic product b) National income | Gross domestic income __@) Gross national ineame Gres ‘Law meane a} Good money replaces bad money in circulation ») Bad money replaces goad money in circulation 6) Good money promotes bad money in the system 4d) Bad money promotes good money in the system Bull and bear are related to which commercial activity? ) Banking ) E-commerce ¢] International trade 6} Stock market ‘The share broker who sells shares in the apprehension of falling prices of shares is called a) Bull b) Dog 9) Bear a) Stag ‘The fixed cost on such factors of production which are neither Iired aor bought by the firm is called a) social cost 5) opportunity cost fd economic cost 4) sureharged cost ‘The ‘break-even point” ls where a} marginal revenue equals marginal cost ») average revenue equals average cost 6 total revenue equals total cost 4) None of these ‘One of the essential conditions of Mono-polistic competition is a} Many buyers but one seller 9 Price discrimination ¢} Product differentiation 4) Homogeneous product In a Laissez-Faire economy a} the customers take all the decisions regarding production of al the commodities bj the Government does not interfere in the free functioning of demand and supply forces in the market | the private-sector takes all the decisions for price-determination of various commodities produced 4) the Government controle the allocation of all the factors of production A firm is in equilibrium when its 4) marginal cost equals the marginal revenue ») total cost is minimum 6 total revenue is maximum dl) average revenue and marginal revenue are equal Given the money wages, if the price level in an economy Increases, then the real wages will a) increase 3b) decrease ] remain constant 4) become flexible ‘The outcome of ‘devaluation of currency’ is 4) increased export and improvement in balance of payment 1) increased export and foreign reserve deficiency | increased import and improvement in balance of payment 4) increased export and importaa 55°. se sz, 58. 59° 60. or, ea. 63, oa, 65° oer. or. Objective Banking and Economic Awareness What is referred to as ‘Depository Services’? fa) Anew scheme of fixed deposits ) A method for regulating stock exchanges } An agency for sale-keeping of securities ‘The ‘Interest Rate Polley’ la a component of 1) Fiscal Policy 3) Manetary Policy 6) Trade Policy 4) Direct Controt ‘A mixed economy works primarily through the 3) mariect mechaniem 2) central allocative machinery ¢} market mechanism regulated by Government policy| 4) market mechanism guided by Government participation and planning In Economics, production means a) manufacturing '5) making 6) creating utility 8) farming ‘According to modern thinking, the Law of Diminishing Returns applic to a} agriculture b} industry ) mining 4) all fields of production The concept that under a eystem of free enterprise, it Le consumers who decide what goods and services shall be produced and in what quantities, is known as f) Consumer Protection 8) Consumer's Decision 6} Consumer Preference 4) Consumer's Sovereignty Seawater, fresh air, ete are regarded in Economics as a} Giffen goods 9) Inferior goode 6) free goods 4) normal goods Hf the price of tea falls, demand for coffee will a) increase 2) decrease 6) remain same 4) None of these Which of the following does not determine supply of labour? | Size and age-structure of population bj Nature of work: ) Marginal productivity of labour 4) Workcleisure ratio Prime cost is equal to a) Variable cost plus administrative cost ) Variable cost plus fixed cost ) Variable cost only 8) Fixed cost only ‘The practice of selling goods in a foreign country at a price below their domestic selling price is called 4} diplomacy 3) diserimination ©) damping 4) double pricing Who propounded the ‘market law"? a) Adam Smith BJ B Say 6) TR Malthus 4) David Recardo “The national income consists of a collection of goods and services reduced to common basis by being measured in terms of money."— Who says this?Economie Theory 449 69°, 70. ne 72 73° a, 75, 76+, 7. 78. 79° 20°, a} Samuelson ) Kumets Hicks 8) Prgou Capital-Output Ratio measures fa) is per unit cost of production 1) the amount of capital invested per unit of output | the ratio of capital depreciation to quantity of output 4) the ratio of working capital employed to quantity of output Engel’s Law states the relationship between a} quantity demanded and price of a commodity 5 quantity demanded and price of substitutes ¢} quantity demanded and tastes of the consumers 4) quantity demanded and income of the consumers ‘The demand curve for Giffen goods is a) upward rising ) downward falling 6) parallel to the quantity axis 4) parallel to the price axis Al of the goods which are scarce and limited in supply are called a) Lauxury goods b) Expensive goods 6) Capital goods 4) Economic goods Which ia the most essential function of an entrepreneur? 2) Supervision ) Management ¢] Marketing 4) Risk bearing Knowledge, technical skill, education ete in economics, are rogarded as 2) social-overhead capit ®) human capital | tangible physical capital) working capital Purchasing Power Parity theory is related with a) Interest rate 8) Bank rate «} Wage rate 4) Exchange rate Imputed gross rent of owner-occupied buildings is a part of ‘) capital formation ) final consumption | intermediate consumption 4) consumer durable Economies of Scale means reduction in a} unit cost of prouetion 3) unit cost of distribution 6) total cost of production) total cost of distribution With which form of economy is the term ‘Laissez-faire’ associated? 4) Capitalist economy ») Socialist economy | Mixed economy @) Command econ ‘The supply of agricultural products is generally a} elastic ) inelastic, | perfectly elastic 4) perfectly inelastic Who among the following is not = classical economist? a) David Ricardo b) John Start Mil Thomas Malthus 8) John Maynard Keynes ‘The process of curing inflation by reducing money aupply le called 2) Cost-push Inflation ) Demand-pull inflation | Disiafation 4) Refiation450 8° 84 a6, 89°, 90%, on, oat, Objective Banking and Economic Awareness ‘The main determinant of real wage is a) extra earning 2) nature of work 6} promotion prospect 4) purchasing power of money AA refrigerator operating in a chemist's shop is an example of fa) free goods: ®) final goods| ©) producer's goods 4) consumer's goods When average cost production (AC) fal production must be 4) Rising 2) Falling } Greater than the average cost 6) Lees than the average cost Production function expresses 4) technological relationship between physical inputs and output b) financial relationship between physical inputs and output 6} relationship between finance and technology @) relationship between factors of production “Interest is a reward for parting with liquidity” is according to a) Keynes ®) Marshall 6) Haberler 4) Oblin Extension or contraction of quantity demanded of « commodity in a result of a change in the 2) unit price of the commodity 1) income of the consumer ¢) tastes of the consumer 4) climate of the region Cross elasticity of demand between petrol and car is ‘marginal cost of a) infinite ) positive 3 zero 8) negative ‘The Law of Demand expresses a} effect of change in priee of a commodity on its demand 1} effect of change in demand of a commodity on its price effect of change in demand of a commodity over the supply of its substitute 4) None of the above AA situation where we have people whose level of income is not sufficient to meet the minimum consumption expenditure is considered as 4} Absolute Poverty ®) Relative Poverty 6) Urban Poverty 4) Rural Poverty Full convertibility of « rupee means fa) purchase of foreign exchange for rupees freely 1) payment for imports in terms of rupees } repayment of lonns in lerms of rupees 48) determination of rate of exchange between rupee and foreign currencies freely by the market forces of demand and supply ‘An exceptional demand curve ls one that moves a) upward to the right 3) downward to the right 6) horizontally 4) vertically Production function explains the relationship between 4) initial inputs and ultimate output 5) inputs and ultimate consumptionEconomie Theory 451 93°, 4, os. 96". om. oer, 99". 100°. 102. 103". 104! «) output and consumption 4) output and exports ‘The term stagflation refers to a situation where a) growth has no relation with the change in prices 1 rate of growth and prices both are decreasing | rate of growth is faster than the rate of price increase 4) rate of growth is slower than the rate of price increase In Economics the ‘Utility’ and ‘Usefulness’ have a} same meaning ») different meaning. | opposite meaning 4) None of the above If two commodities are complements, then thelr cross-price elasticity is 2} zero 2) positive | negative 4) imaginary number Opportunity cost of production of a commodity is al the cost that the firm could have incurred when a different technique was adopted 1) the cost that the firm could have incurred under a different method of production ¢) the actual cost ineurred 4) the next best alternative output Surplus earned by a factor other than land in the short perlod of time referred to 2) economic rent b) net rer ©) quasi-rent 6) super-normal rent Price theory is also known 2} Macroeconomics ») Development Economics | Public Economics 4) Microeconomics ‘A want becomes a demand only when it is backed by the 4) Ability to purchase ) Necessity to buy 6} Desire to buy 4} Utility of the product ‘The terms “Microeconomics” and “Macro-economice” were coined by 2) Alfred Marshall b) Rogner Nurkse | Ragner Frisch 4) JM Keynes “Economics is what it ought to be", This statement refers to 2) Normative economics 3) Positive economies ¢] Monetary economics 4) Fiscal economies ‘The excess of price a person ix to pay rather than forego the consumption of the commodity is called a) Price 8) Prost ) Producers’ surplus } Consumer's surplus When the price of a commodity falle, we cam expect a) the supply of it to increase ) the demand for it to fall } the demand for it to stay constant 4) the demand for it to increase ‘The most distinguishing feature of oligopaly is fa) number of firme »} interdependence ) negligible influence on price 4) price leadership452 108" 106. 107" 108! 110. Objective Banking and Economic Awareness Which of the following cost curve is never U-shaped? a] Marginal cost curve ) Average variable cost curve } Average fixed cost curve 4) Average cost curve Kinked demand curve is a feature of fa) Monopoly 3) Oligopoly ©} Monopsony 4) Duopoly Demand for complementary goods ls knows a} Joint demand 3) Derived demand 6) Direct demand 4) Cross demand Plant and machinery are 1) Producers" goods »} Consumers! goods 6) Distributors’ goods 4) Free goods ‘The addition to total cost by producing an additional unit of output by a firm is called 4) Variable cost 2) Average cost 6) Marginal cost @) Opportinity cost In @ perfectly competitive market a firm's a} Average Revenue is always equal to Marginal Revenue b} Marginal Revenue is more than Average Revenue } Average Revenue is more than Marginal Revenue 4) Marginal Revenue and Average Revenue are never equal 1 ae 3a 4c Ba 6b a Bd 3b 15 1b 12,5 2b Ika 15.0 wd Ma as. d we 20.4 a1b 22d 2a. ¢ a4. ¢ 26.4 26. 27.8 28d 028.4 a0. ab ae a3.¢ a0 8c Ba ane aha a9.¢ 4c 4b 4a 4d hc 45.0 es 4b 80.¢ sib S28 53.b 54a 55.c 86.6 87.4 88. 898.d 60d sc 62. 63. ¢ 640 65.c 66.5 src 68. 69.4 70 Td Td 3b Th 75.5 760 774 7b 79.4 B06 sid s2b 83d BH 82 868 a7.d eae as. 90. 4 o1b 928 93.4 940 8c OB e700 | 98d 99.8 100.c 101.2102. 103.4 108.105. 106.5 107.2108. 8Economie Theory 453 Explanatory Notes 1. It shows inequality in income distribution. Inequality indices can also be derived directly from the Lorenz curve. Perhaps the most commonly used inequality index is the Gini coefficient, which ranges from 0 (perfect equality) to 1 perfect inequality). It is the ratio of the area enclosed by the Lorenz curve and the perfect equal- ity line to the total area below that line 2. In economics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. For example, suppose a one-unit change in some variable x causes ancther variable y to change by M unite. ‘Then the multiplier is M. In monetary macroeconomics and banking, the money multiplier measures how much the money supply increases in response to a change in the monetary base, The multiplier may vary aeross cotintries, and will also vary depending on what measures of money are considered, 3, Instruments (certifieates) issued by the ultimate borrower are called primary securities. Instruments issued by intermediaries on behalf Of the ultimate borrower are called indirect securities, ‘The market for instraments (also called securities) issued for the first time, is called the primary market, Primary security ia the asset created out of the eredit facility extended to the borrower and/or which are directly associated with the business/project of the borrower for Which the credit facility has been extended, 4. Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings 5. An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influ: fenced by, the decisions of other firms. Businesses that are part of fan oligopoly, share some common characteristics: they are less con- centrated than in a monopoly, but more concentrated than in 2 competitive system. This creates a high amount of interdependence Which encourages competition in non-price-related areas, like ad- vertising and packaging. The tobacco companies, soft drinic compa- nies, and airlines are examples of an imperfect oligopoly.454 10. a a2 Objective Banking and Economic Awareness “The fundamental condition of perfect competition is that there must be a large number of sellers of firms. Homogeneous Commodity is the second fundamental condition of a perfect market. The products of all firms in the industry are homogeneous and identical. In other words, they are perfect substitutes for one another. There are no trademarks, patents etc to distinguish the product of one seller from that of another. Under periect competition, the control over price is completely eliminated because all firme produce homogeneous commodities, This condition ensures that the same price prevails fn the market for the same commodity In economics, distribution theory is the systematic attempt to account for the sharing of the national income among the owners of the factors of production—tand, labour and eapital. Traditionally, economists have studied how the costs of these factors and the size of their retarn—rent, wages, and profite—are fixed. The theory of distribution involves three distinguishable sets of questions. First, hhow is the national income distributed among persons? Second, what determines the prices of the factors of production? Third, how is the national income distributed proportionally among the factors of production? In microeconomics, economies of acale are the cost advantages that fan enterprise obtains due to expansion. There are factors that cause fa producer's average coat per unit co fall aa the scale of output is Increased. "Eeonomies of scale” is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levele of other inputs increase Say’s Law, or the Law of Market, is an economic principle of classical economics named after the French businessman and economist Jean Baptiste Say (1767-1832), who stated that “supply creates its own demand". “Supply creates its own demand’ is the formulation of Say's Law by John Maynard Keynes. A shift in the demand curve is caused by a factor affecting demand other than a change in price, If any of these factors change then the amount consumers wish to purchase changes whatever the price The shift in the demand curve is referred to as an increase oF Gecrease in demand. A movement along the demand curve occurs when there Is a change in price. This may oceur because of a change in aupply conditions, The factors affecting demand are assumed to be held constant. A change in price leads toa movement along the demand curve and it referred to as a change in quantity demanded. In economics, the demand eurve is the graph depicting the relationship between the price of certain commodity and the amount of it that consumers are willing and able to purchase at thet given price, The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in aEconomie Theory ass 13, 16. 15. 16. new demand curve. There is movement along a demand curve when 2 change in price causes the quantity demanded to change. When there ia a change in an influencing factor other than price, there ‘may be @ shift in the demand curve to the left or to the right, aa the quantity demanded increases or decreases at given price. For example if there is @ positive news report about the product the quantity demanded at each price may increase as demonstrated by the demand curve shifting to the right In economics, income elasticity of demand measures the responsiveness of the demand for the goods to a change in the income of the people demanding the goods, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change im income. For example, f in response to a 10% increase in income, the demand for the goods increased by 20%, 20% city of demand would be 72> clasticity of demand is associated with normal goods; an increase {in income will lend to a rise in demand, If income elasticity of demand of a commodity is less than 1, these are necessity goods. If the elasticity of demand is greater than 1, these are luxury goods or superior goods ‘the income el 2. A positive income The volume of investment depends upon the following two factors: {8} rate of interest; and (b) marginal efficiency of capital. Before investing the money businessman compares interest with the rate fof marginal efficiency capital. If they expect that rate of profit will bbe greater than the rate of interest, then they invest the money otherwise not. The expected rate of feturn on capital is called the ‘marginal efficiency of capital. In other words, marginal efficiency of capital is @ return on investment which is based partly on expectations of future yields and partly on the actual price of the ‘capital goods concerned In economies, a monopsony (mono: single) i¢ a market form in which only one buyer faces many sellers, I s an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of goods or services, the ‘monopeoniat may dictate terme to ita suppliera in the same manner that a monopolist controls the market for its buyers. It is algo known as Single Buyer Right, A single-payer universal health care system, in which the government is the only “buyer” of health care service is an example of a monopsony. Another possible monopsony could develop in the exchange between the feed industry and farmers. A real wage rate is a nominal wage rate divided by the price of goods and ls a transparent measure of how much of the goods an hhour of work buys. It provides an important Indicator of the living standards of workers, and also of the productivity of workers, While differences in earnings or incomes may be misleading indicators of worker welfare, real wage rates are comparable across time and location. Nominal wages are not sulicient to tell us if workers gain456 a 18. 19 Objective Banking and Economic Awareness since, even if wages rise, the price of one of the goods also rises When moving to free trade. The real wage represents the purchasing power of wages— that is, the quantity of goods the wages will purehase Average revenue is the revenue per unit of the commodity sold Since the demand curve shows the relationship between price and the quantity demanded, it also represents the average revenue ot price at which the various amounts of a commodity are sold, because the price offered by the buyer is the revenue from seller's point of view. Therefore, average revenue curve of the firm is the same at demand curve of the consumer. Rent refers to that part of payment by a tenant which is made only for the use of land, ie, fee git of nature, The payment made by an agriculturist tenant to the landlord ie not necessarily equals to the economic rent. A part of this payment may consist of interest on capital invested in the land by the landlord in the form of buildings, fences, tube wells, ete, The term ‘seonomie rent’ refers to that part ff payment which is made for the use of land only, and the total payment made by a tenant to the landlord Is called ‘contract rent Economic rent is also called ‘surplus’ because it emerges without any effort on the part of a landlord Some goods are known as inferior goods. With inferior goods, there ia an inverse relationship between real income and the demand for the goods in question. If real incomes rise, the demand for inferior goods will fall f real incomes fall (in a recession, for instance), the demand for inferior goods will rise. For example, bus travel. As people get richer, they are more likely to buy themselves a car, oF tise a tax, rather than rely on the more inferior bus, ao the demand for bus travel falls as real incomes rise, ‘The Marginal Utility Curve is a curve illustrating the relation between the marginal utility obtained (rom consuming an additional unit of goods and the quantity of the goods consumed. Tae negative Slope of the marginal utllity curve reflects the law of diminishing ‘marginal utility. The marginal utlity curve also can be used to derive the demand curve, Marginal Utility is the utility derived from the last unit of commodity purchased. One of the earliest explanations of the inverse relationship between price and quantity demanded is the law of diminishing marginal utility. This law suggests that fas more of a product is constimed the marginal (additional) benefit to the consumer falls; hence consumers are prepared to pay less Capital Output Ratio is the ratio of capital used to produce an output over @ period of time. This ratio has a tendency to be high when capital is cheap as compared to other inputs. For instance, a country with abundant natural resources can use its resource in jeu of capital to boost its output; hence the resulting Capital Output Ratio is low. The Capital Output Ratio tends to increase if the capit available in country a cheaper than the other inputs. Therefore theEconomie Theory 487 a2. 24 25, 26. ‘countries that are rich in natural resources have a low capital output ratio, This is because they can easily substitute the eapital with natural resource in order to increase the output. When countries luse their natural resources instead of capital then Capital Output Ratio (COR} reduces, A perfectly competitive firm's aupply curve Is that portion of i ‘marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximises profit Uy producing the quantity of output that equates price and marginal cost. In that price equals marginal revenue for a perfectly competitive firm, price ia also equal to marginal cost. In other words, the firm produces by moving up and down along its marginal cost curve, The ‘marginal cost curve is thus the perfectly competitive firm's supply In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. The condition of equilibrium of income is the equality of intended savings and intended investment. An economy is in equilibrium when total savings equals total investment. Book-building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery. Usually, the issuer appoints a major investment Dank to act a8 a major securities, underwriter oF book-runner. The “book is the off market collation of investor demand by the book- runner and is confidential to the book-runner, issuer, and underwriter, Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within which the investor is allowed to bid for shares Primarily there are three methods of messuring national income, Which method is to be employee depends on the availability of data and purpose, The three methods are Product Method, Income Method and Expenditure Method. According to Preduet Methed the total value of final goods and services produced in a country during @ year is calculated at market prices. According to this method only ‘he final goods and services are included and the intermediary goods land services are not taken into account, In this method, National ‘Output ~ National Expenditure (Aggregate Demand) = Nation: Income. In economics, factors of production’ are the inputs to the production process. ‘Factors of production’ may also refer specifically to the ‘primary factors’, which are stocks including land, labour (the abiity to work), and capital goods applied to production. Many economist today consider “human capital" (skills and education) as the fourth factor of production, with entrepreneurship as a form of humanass 27, 20. an Objective Banking and Economic Awareness capital. In markets, entrepreneurs combine the other factors of production, land labour and capital, in order to make a profit. Often these entrepreneurs are scen at innovators, and developing new ways to produce new products. Ina planned economy, central planners decide how land, labour and capital should be used to provide for maximum benefit for all citizens. ‘The four main monetary aggregates of measures of money supply which reflect’ the state of the monetary sector are! (i) Ma (arrow money} = Currency with the public + demand deposits of the public, (li) M2 ~ MI + Post Olfice Savings deposits; (At) M3 (Broad money) ~ MI + time deposite of the publie with banks and (iv) M4 = M3 + Total post office deposits. So Narrow Money’ imply a category of money supply that includes all physical money like eoins and currency along with demand deposits and other liquid assets held by the central bank. This category of money is considered to be the most readily available for transactions and commerce. ‘Opportunity cost’ is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It fn the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. When economists refer to the “opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, we spend time and money going to a movie, wwe cannot spend that time at home reading a book, and we cannot spend the money on something else, If our next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure we forgo by not reading the book. ‘The Marginal Efficiency of Capital (MEC} is that rate of discount Which Would equate the price of a fixed capital asset with ite present iscounted value of expected income, The term "marginal efficiency of capital” was introduced by John Maynard Keynes in his General ‘Theory, and defined as “the rate of discount which would make the present value of the series of annuities given by the returns expected from the capital agset during its life just equal its supply price" Devaluation refers to a decline in the value of a currency in relation to another, usually brought about by the ations of a Central Bank of Monetary Authority. Devaluation is sometimes used more generally to deacribe any significant drop in a currency's international exchange rate, although usually a decline caused by market forces with no government intervention is termed depreciation, ‘are most often associated with ‘The demand of commodity mainly stems from the consumption capacity of the buyer. Demand ia equal to desire plus al 10 payEconomie Theory 459 a4. as. a7, 38, 39, plus will to spend. Demand for a commodity depends upon number of factors called ‘determinants’ Social overheads capital is the capital spent on social infrastructure, such as schools, universities, hospitals, libraries. They are capital goed of types which are available to anybody, hence social; and are fot tightly linked to any particular part of production, hence overhead, Because of their broad availability they often have to be provided by the government. Examples of social overhead capital include roads, schools, hospitals, and public parks, Operational research is a discipline that deals with the application of advanced analytical methods to help make better decisions, Employing techniques from other mathematical sciences, such mathe-matical modeling, statistical analysis, and mathematics ‘optimisation, operation research arrives at optimal o near-optimal solutions to complex decision-making problems. in a nutshell, operation research (OR) Is the discipline of applying advanced analytical methods to help make better decisions. I is known as defence. It is a type of resistance against danger, attack, or harm to business or holding, A seller or buyer resorts (0 defence at means of protection. Devaluation reduces the export price in term of foreign currencies fn the world market. As a reault the exports are increased 0 as to increase the revenue of the country. When the exports are increased all efforts are made to increase the production of the country, However, devaluation of currency is in relation to external currenci fand external trade, I: has effects on a country’s international trade by alluring traders, But, internal prices remain unaffected. Deflation and recession set in when aggregate supply exceeds aggregate demand. ‘This will lead to a buildup in stocks (inventories) land this sends a signal to producers either to cut prices (to stimulate fan increase in demand) or to reduce output so as to reduce the ‘buildup of excess stocks. Either way, there is a tendency for output to move closer to the current level of demand, Equilibrium price is a state in economy where the supply of goods matches demand, When a major index experiences a period of consolidation or sideways momentum, it can be said that the forces fof supply and demand are relatively equal and that the market is ir ' state of equilibrium, In short, it is the market price at which the ‘supply of an item equals the quantity demanded, Marginal utility measures the extra ulility (or satisfaction) from consuming an additional unit of a product. Total utility is the total satisfaction from the consumption of the product, According to the Law of Diminishing Marginal Utility, total utility increases at & diminishing rate. When marginal utility is 0 this means there is no Increase in total satisfaction from the consumption of thet unit, So460 a aa. Objective Banking and Economic Awareness the total unit is at maximum, Paper Gold is a messure of a country's reserve assets in the International monetary ayatem. It ia also called Special Drawing Rights (SDRs) which is an international reserve asset, created by the IMF in 1969 to supplement its member countries official reserves. Its value is based on a basket of four key international currencies, a a é SDRs can be exchanged for freely usable currencies. SDRs may actually represent a potential claim on IMF member countries non- old foreign exchange reserve aasets which are usually held in those currencies Dear Money, also Known as tight money, is money which has to bbe borrowed at a high interest rate, and so restricts expenditure by companies. This situation can be « result of a restricted money supply, causing interest rates to be pushed up due to the forces of Supply and demand. Businesses may have a tough time raising capital uring @ period of dear money. Seller's market is a market which has more buyers than sellers High prices result from this excess of demand over supply. The opposite of the seller's market is the buyer's market, where supply sreatly exceeds demand, Legal Tender is a medium of payment allowed by law or recognised bya legal system to be valid for meeting a financial obligation. Paper currency and coins are common forms of legel tender in many countries. Legal Tender Money is a type of payment that is protected by law. A legal tender, also Known as the forced tender, is a very secured and it ia impossible to deny the legal tender while subsiding a debt which is assigned in the same medium of exchange. The term legal tender does not represent the money itself, rather itis. @ lund of status which can be bestowed on certain types of money. ‘The Gross Domestic Income (GDI) is the total income received by all sectors of an economy within @ nation. It includes the sum of all wages, profits, and taxes, minus subsidies. Since all income is erived from production (including the production of services), the gross domestic income of a country should exactly equal its gross domestic product (GDP) Gresham's Law is an cconomic principle that states: "When 2 government compulsorily overvalues one type of money and Sndervalues another, the undervalued money will leave the country fr disappear from circulation into hoards, while the overvalued money will flood into cireulation.” It 4s commonly stated as: “Bad money drives out good." More exactly, if coins containing metal of different value have the same value aa legal tender, the coin: composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulationEconomie Theory 461 46. a7. 50. 51 52 Both the terms are related to stock market, Investors who take a “bull” approach purchase securities under the assumption that they ccan be sold later at a higher price. A "bear" is considered to be the ‘opposite of a bull. Bear Investors believe that the value of a specific security or an industry is likely to decline in the future A bear market is a market condition in which the prices of secuiti fare falling, and widespread pessimism causes the negative sentiment to be self-sustaining, Ae investors anticipate logses in a bear market ‘and selling continues, pessimism only grows, Bear investors believe ‘that the value of a specific security of an industry is likely to decline fn the future Social cost is defined as a sum of the private cost and extern: costs. The social cast is generally not borne by an individual. It may bbe borne by entire society, city or even country. This is not a one- time cost like private cost. This coat is recurrent and it is very dificult to calculate due to the inclusion of external costs. The cost ‘may result from an event, action, or policy changes. Social costs are not calculated whenever a seller sells any product or item to buyer. This cost is added up from the use of that product. ‘The Break-Bven Point (BEP) is the point at which cost or expense land revenue are equal — there is no net loss or gain, and one bi “broken even”, ‘Monopolistic competition is a type of imperfect competition auch that many producers sell products that are differentiated from one another as goods but not perfect substitutes (euch as from branding, quality, oF location}. In monopolistic competition, a firm takes the Prices charged by ite rivals as given and ignores the impact of i ‘own prices on the prices of other firms. In a monopolistically competitive market, firms can behave like monopolies in the short run, ineluding by using market power to generate profit. In the long-run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firme cannot gain economic profit. Lalases Faire is an economic theory from the 18th century that is strongly opposed to any government intervention in business affairs. ‘Sometimes it ia referred to aa let it be economies.” It is an economic fenviron-ment in which transactions between private parties are free from tariffs, government subsidies, and enforced monopolie with only enough government regulations sulficient to protect property rights against theft and aggression. A consumer is in a state of equilibrium when achieves maximum fageregate satisfaction on the expenditure that he makes depending fon the set of conditions relating to his tastes and preferences, income, price and supply of the commodity ete. Producers equiliarium eccura when he maximises his net profit subject to a given set of462 sa. 86. 5s. 57. Objective Banking and Economic Awareness economic situations. A firm's equilibrium point is when it has no inclination in changing its production, In short-run Marginal revenue = Marginal cost ia the condition of equilibrium, If workers receive a higher nominal wage and the price level does rot change, then the real purchasing power of their wages is higher and they are inclined to increase the quantity of labour supplied. If the workers receive the same nominal wage, but the price level Jnereases, then the real purchasing power of their wages is lower and they are inclined to decrease the quantily of labour supplied Any combination of changes in nominal resource prices or the price level that changes the purchasing power of resource price entices resource owners to change quantities supplied. Devaluation is @ reduction in the exchange value of a country’s monetary unit in terms of gold, silver or foreign currency. By decreasing the price of the home country’s exports abroad and increasing the price of imports in the home country, devaluation encourages the home country's export sales and discourages expenditures on Imports, thus improvising its balance of payments. I is a service offered by a securities depository under which the depository maintains book accounts recording the ownership of securities held on behalf of the depository’s participants, for eligible Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stabibiy. ‘The official goals weually Include relatively stable prices and low unemployment. The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates Monetary authorities in different nations have differing levele of control of economy-wide interest rates. Mixed economy is an economic system in which both the State and Private Sector direct the economy, reflecting characteristics of both market economies and planned economies. The basic idea of the mixed economy is that the means of production are mainly under private ownership; that markets remain the dominant form of economic coordination; and that profit-aeeking enterprises and the Accumulation of eapital remain the fundamental driving force behind economic activity. However, unlike a free-market economy, the government would wield considerable indirect influence over the economy through fiscal and monetary policies designed to counteract economic downturns and capitaliam’s tendency towards financial crises and unemployment, along with playing a role in interventions that promote social welfare. All factors of production like land, labour, capital and entrepreneur fare required in combination at a time to produce a commodity,Economie Theory 463 59. 60 6 62 63. 64. Production means creation or an addition of utility, Factors of production (or productive inputs’ or resources} are any commodities fr services used to produce goods and services. ‘The Law of Diminishing Returns (also Law of Diminishing Marginal Returna or Law of Increasing Relative Cost) states that in all productive processes, adding more of one factor of production, while holding all others constant ('eeteris paribus"), will at some point yield lower per-unit returns. Tne law of diminishing returns oes not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common. Consumer Sovereignty means that buyers ultimately determine which goods and services remain in production. While businesses ccan produce and attempt to sell whatever goods they choose, if the goods fail to satisfy the wants and needs, consumers decide not to buy. Ifthe consumers do not buy, the businesses do not sell and the goods are not produced, Free goods are what are needed by the society and are available without limits. The free goods is a term used in economics to describe the goods that are not scarce. Free goods are available in as great @ quantity as desired with zero opportunity cost to society Tea and coffee are substitutes to each other to a great extent. Hence, the rise in price of one causes the imerease in demand of the other and vice-versa ‘The term ‘supply of labour’ refers to the number of hours of @ aiven type of Inbour which will be offered for hire at different wage rates. Usually, it is found that higher the wage rates larger is the supply indicating @ direct relationship that exists between the wage Fate ie the price of labour and labour hours supplied, The supply of labour is very much affected by the work leisure ratio which in turn is affected by the changes in wage rates. The supply of labour in an economy depends on various economic and non-economic factors such as population, sex composition, age composition of the population, willingness to work, wage rates, migration and immigration, working hours, social attitude and standard, legal barriers, education and training, employer's attitude, labour supply and leisure, efficiency of workers, eic. In economics, the Marginal Product of Labour (MPL) i the change in output that results from employing an added unit of labour. It has nothing to da with the supply of labour. ‘The Prime Cost refers to a Business’s expenses for the materiale and labour it uses in production. Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. By analysing its prime costs, a company can determine how muich it must charge for ite finished product in order to make profit. Variable costs are expenses that change in proportion to the Activity of a business. Variable cost is the sum of marginal costs464 67 8. cs 70. Objective Banking and Economic Awareness over all units produced. It can also be considered normal costs, Fixed costs and variable costs make up the two components of total cost. Prime Cost = Direct Materials + Direct Labour + Direct Expenses. This comes to Variable cost + Administrative cost Administrative cost is the cost associated with the general management of organisation in accounting, In economics, “dumping” is a kind of predatory pricing, espec fn the context of international trade. It accurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained ‘through normal market competition Say's Law, or the Law of Market, is an economic principle of classical economics named after the French businessman and ‘economist Jean-Baptiste Say (1767-1832), who stated that "products pald for with products” and “a glut can take place only when there are too many means of production applied to one Kind of product and not enough to another’ British economist John Hicks said that National income Is a collection of goods and services reduced to a common basis by being measured in terms of money. Hicks was one of the most important fand influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in micro-economics, and the IS/LM model (1937), which summarised a Keynesian view of macroeconomics. His book "Value and Capital (1939) significantly extended general-equilibrium and value theory Capital-Output Ratio (COR) is the ratio of capital used to produce an output over a period of time. This ratio has a tendeney to be high when capital is cheap as compared to other inputs. For instance, a ountry with abundant aatural resources can use its resources in feu of capital to boost its output; hence the resulting Capital-Ourput Ratio is low. Engel’s Law is an observation in economies stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. In other words, the income elasticity of demand of food is between O and 1. Enge!'s Law doesn't imply that food spending remains unchanged 28 income increases. Ie suggests that consumers increase their expenditures for food products {in % terms) less than their increases in income. ‘The Giffen goods are the goods whose consumption increases as its price increases. (For normal goods, as the price increases, consumption decrenses,) Thus, the demand curve will be upward Instead of downward sloping. The Giffen goods have an upward sloping demand curve because these are exceptionally inferior. It hhas a strong negative income elasticity of demand such that when a price changes the income effect outweighs the substitution effectEconomie Theory 465 nm 7 1. 7. 76. and this leads to perverse demand curve. In economics, the goods are something that are intended to some wants or needs of a consumer and thus has economie utility ‘The economfe goods are consumable items that are useful to people but scarce in relation to their demands, so that human effort is required to obtain them. In contrast, free goods (euch a& aie) are naturally in abundant supply and need no conscious effort to obtain them An entrepreneur performs a series of functions necessary right rom the genesis of an idea up to the establishment and effective operation of an enterprise, The functions of an entrepreneur ‘a8 risk bearer are specific in nature. The entrepreneur assumes fll possible risks of business which emerges due to the possibility fof changes in the tastes of consumers, modern techniques of production and new inventions. Such risks are not insurable and incalculable. In simple terms such risks are known uncertainty concerning a loss, Human capital is the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labour so as to produce economic value It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biologi: cultural and psychological complexity as they interact in explicit and/or economie transactions. Purchasing Power Parity (PPP) is an cconomic theory and & technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate ‘between countries in order for the exchange to be equivalent to (or fon par with) each currency’s purchasing power. It asks how much ‘money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. Using that PPP rate, an amount of money thus has the same purchasing power in different countries ‘The figure of final private consumption expenditure includes the imputed gross rent of owner-occupied dwellings, consumption fof own-account production and payment by households of wages land salaries in kind valued at cost, eg, provision for food, shelter land clothing ta the employees, wherever they exist, Production for self-consumption is a part of production and hence an income and is also a part of final consumption expenditure. In microeconomics, economies of scale are the cost advantages that an enterprise obtains due to expansion. "Economies of scale” ie a long-run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.466 78. 20. a1 32. Objective Banking and Economic Awareness In economics, Inissez-faire means allowing industry to be free of state intervention, especially restrictions in the form of tariffs and government monopolies. The growth of industry in England in the farly 19th century and American industrial growth in the late 19th ‘century both occurred in a laissez-faire capitalist enviroment. The ssea-faire period ended by the beginning of the 20th century, when large monopolies were broien up and government regulation of business became the norm, Im the conditions of @ free market, the terms of trade are constantly changing. The supply of agricultural products ta generally {inelastic in the sense that a rise in prices cannot call forth, before fa year has passed, a commensurate increase in sales, At the same time, demand is inelastic, in the sense that a rise in prices of foodstuffs does not cause purchases to be reduced proportionately. Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean- Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill. John Meynard Keynes was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, and formed the economic policies of governments. He built on ané greatly refined earlier work on the causes of business cycles and is widely considered co be one of the founders of moder macroeconomics and the moat influential economist of the 20th century. His ideas are the basis for the school of thought known, Keynesian economles, as well as its various offshoots Disinflation is a decrease in the rate of inflation—a slowdown the rate of increase of the general price level of goods and services fina nation’s gross domestic product over Lime. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down from the previous period when the prices were rising. Disinflation is the reduction in the general price level Jn the economy but for a very short peried of time. Disinflation takes place only when an economy is suffering from recession. ‘The term real wages refers to wages that have been adjusted for inflation. This term is used in contrast to nominal wages or unadjusted wages. Real wages provide a clearer representation of fan individual's wages. The real purchasing power of income or money is the key determinant of real wages. It #e nn indication of a individual’s actual purchasing power. Real wages are a useful economic measure, as opposed to nominal wages, which simply Show the monetary valle of wages in that year. However, real wages does not take into account other compensation like benefits or old fage pensions, Final goods are goods that ate ultimately consumed rather than used in the production of another goods. For example, a car sold to ‘2 consumer ie an example of the final goods; the components auch fs tires sold to the car manufacturer are not; they are intermediate fgocds used to make the final goods,Economie Theory 467 86. 8s. 86. 87 ‘Average cost is the total cost per unit of output. Marginal cost, on the other hand, is the addition to the total cost by producing one more units of output. Economies of scale are said to exist if an additional unit of output can be produced for less than the average ff all previous units that is, if longerun marginal cost is below long-run average cost, 40 the latter is faling. Conversely, there may bbe levels of production where marginal cost Is higher than average cost, and average cost is an increasing function of output. Production involves transformation of inputs into outputs. The output is a function of input. The functional relationship between physical inputs and physical outputs of a firm is called production function. ‘The word ‘function’ in mathematics means the precise relationship that exists between one dependent variable and @ number (or one) of independent variables. The production function states the maximum quantity of output that can be produced from any given quantities of Various inputs during a given period of time. In macroeconomic theory, liquidity preference refers to the demand for money, considered as liquidity. The concept was firat developed by John Maynard Keynes in his book “The General Theory of Employment, Interest and Mc of the interest rate by the supply an demand for money. The demand for money as an asset was theorised to depend on the interest foregone by not holding bonds. Interest rates, he argues, cannot be ‘2 reward for savings as auch because, if a person hoards his savings in cash, keeping it under hia mattress say, he will receive no interest, although he has nevertheless refrained from consuming all his current income, Instead of a reward for savings, interest in the Keynesian analysis is reward for parting with liquidity. Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, ete) being constant. Demand includes the desire to buy the commodity accompanied by the willingness t0 buy it and sufficient purchasing power to purchase it, So changes in the unit price of a commodity leads to either extension oF contraction in demand. The law of demand states that there is. an Inverse relationship between quantity demanded of a commodity and its price, other factors being constant. In other words, higher the price, lower the demand sid vice versa, other things remaining constant, In economics, the eross elasticity of demand or the cross-price elasticity of demand measures the responsiveness of the demand for the goods to.a change in the price of another goods, I is measured fs the percentage change in demand for the first goods that occurs in response to a percentage change in price of the second goods For example, if, in response to a 10% increase in the price of fu the demand of new cate that are fuel inefficient decreased by 20' the cross elasticity of demand would be -2. A negative cross elast denotes two products that are complements, while a positive cross468 90. 92 93, Objective Banking and Economic Awareness clasticity denotes two substitute products ‘The Law of Demand states the inverse relation that comes to exist of between price in one hand and quantity demanded on the other. ‘The law of demand portrays that demand is the function of price. Price is the key determinant of demand, Fiuetuations im price leads to changes in the quantity demanded, In other words, the higher the price of a product, the lower the quantity demanded, “Absolute poverty is defined ae a situation in which the individual basic needs are not covered. In other words, there is a lack of b foods end services (normally related to food, housing and clothes) ‘This concept of poverty is strongly linked to destitution which is, fan inability to meet the minimum consumption expenditure. It ie level of poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter. According to a UN declaration that resulted from the World Summit on Social Development in Copenhagen in 1995, absolute poverty is “a condition characterised by severe deprivation of basic Numan needs, ineluding food, safe drinking water, sanitation facilities, health, shelter, education and information, It depends not only on income but also on access to services ‘The Full Convertibility of the Indian Currency means that the rupee would be made freely exchangeable into other currencies and vice versa, The rupee was made partially convertible in. 1994. Currently, it ean be changed freely inte foreign currency for business and trade expenses but ot freely for activities like aequiring overseas assets. Full converted of the currency means the local currency ean be exchanged to foreign currency without any governmental control Presently, the issue of eapital account convertibility is in the discussion stage [A Demand Curve that violates the law of demand is termed as an exceptional demand curve, If a household expects the price of a fommodity to increase, it may start purchasing a greater amount of the commodity even at the presently increased price. Similarly, if the household expects the price of the commodity to decrease, it may postpone ite purchases. Thus, law of demand is violated in such eases. Tp this case, the demand curve does not slope down from left to right; instead it presents a beckward slope from the top right to down lef, This curve is known aa an exceptional demand Production function explains the relationship between factor input and output under given technology. It explains as to for increasing the output, in which proportion of various inputs oF factors may be employed Under given’ technological conditions. In short, production function may be defined az a technological relationship that tells the maximum output pradueible from various combinations of inputs Production function explains the physical relationship between input and output under given technology. Im economics, stagflation is a situation in which the inflation rateEconomie Theory 469 94, 95, 96, 97, 98, 99, is high, the economic growth rate slows down, and unemployment remains steadily high. Stagflation occurs when the economy is not growing but prices are, which is not a good situation for a country to be in, This happened (0 a great extent during the 1970s, when World oi] prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the USA, Stagnation increased the inflationary effects In economics, ‘utility’ is @ representation of preferences over some set of goods and services. Preferences have a uliity representation so long as they are transitive, complete and continuous. Usefulnes refers to which extent something is useful and the wility is the quality of that pieee ip practical use. Both are inter-related terms Utility is a factor of usefulness term, Usefulness means having practical utility of a piece which is beneficial, pertinent and functional In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for the goods to a change in the prices of another goods. It ¢ measured fa the percentage change in demand for the first goods that occurs in response to a percentage change in price of the second goods. A negative cross elasticity denotes two products that are complements, While a positive cross elasticity denotes two substitute products. ‘The concept of opportunity cost is based on scarcity and choice. ‘The opportunity cost of a commodity is the next best alternative commodity sacrificed. In other words, opportunity cost of a commodity is forgoing the opportunity to produce alternative goods and services. If one commodity is produced another commodity is sacrificed. So ‘opportunity cost of producing the goods is equal to the cost of not producing another commodity Quasi-rent is the surplus which is received in the short period because of demand exceeding the supply by the man made {actors besides land. IL is an analytical term in economies, for the income fearned, in excess of post-investment opportunity cost, by a sunk cost investment. In general, an economic rent is the difference between the income from a factor of production in a particular use, and either the cost of bringing the factor into econamic use (Classical factor rent), or the opportunity cost of using the factor, where opportunity cost is defined as the current income minus the income Svallable in the next best use, Price theory is also known as micro-economies and is concerned with the economic behaviour of individual consumers, producers ‘and resource owners, seed, “Want” and “Demand” are the three key concepts of marketing, Needs are the basie human requirements, These needs become wants when they are directed to specific objects that might satisfy the need, though these wants in themselves are not essential for living. Wanta are therefore shaped by one’s society and surroundings. The third concept, demands, are wants for specific470 100, 101. 102, 103. 104, 10s. 106 Objective Banking and Economic Awareness products backed by an ability to pay. ‘The terme microeconomics and macroeconomics were coined by Professor Ragnar Frisch of Oslo University for the firet time in 1933 and since then they gained popularity and were widely used by other economists. Now they have become an integral part of economic terminology Normative economics (as opposed to positive economics) is that part of economies that expresses value judgements (normative Jiudgements) about economic fairness or what the economy ought to bye like or what goals of public poliey ought to be. It it the study oF presentation of “what ought to be" rather than “what actually is” Normative economics deals heavily in value judgements and theoretical scenarios ‘Producer's Surplus’ is an cconomic measure of the difference between the amount that a producer of the goods receives and the ‘minimum amount that he or she would be willing to accept for the goods. The difference, or surplus amount, ie the benefit that the Producer receives for selling the goods in the market. In economics, the Law of Demand is an economic law, which states that consumers buy more of goods when its price is lower and less when its price is higher, The Law of Demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of goods demanded by the consumer will be negatively correlated to the change Jn the price of the goods, Aan oligopoly is a market form in which a market or industry is dominated by a small number of sellers, oligopaliste|. Because there fare few sellers each oligopolist is likely to be aware of the actions of the others, The decisions of one firm infiuence, and are influenced by, the decisions of other firms. Some of its characteristics are Profit maximisation conditions. Number of firms; Product differentiation: Interdependence. Non-Price Competition, ete The distinctive feature of an oligopoly is interdependence. Cligopolies are typically composed of a few large firma. Sach firm ia so large that ita actions affect market conditions. Therefore, the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves, Average fixed cost curve is never U-shaped. Since total fixed costs fare unchanged as output rises, the average fixed cost curve falls continuously as output is increased. ‘The kinked demand curve theory is an economic theory regardingEconomie Theory an 107, 108. 108. no. oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices. Demand for complementary goods is called Joint Demand. Joint Demand is the demand in which goods are related in such a way that an increase in the demand for one causes an increase in the demand for the other Plant and machinery are Producers’ goods. Together with stocks ‘and work in progress, these goods are collectively termed ‘Capital’ ‘The addition to total cost by producing an additional unit of output by a firm is called marginal cost, Average cost is the total cost of producing a given eutput divided by that output. Average Revenue is the amount of money received by a firm per unit of output sold, Marginal Revenue is the change in total revenue resulting from a small change in the quantity sold. In a perfectly competitive market, a firm's Average Revenue is always equal 10 Marginal Revenue.