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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Introduction to Economics and Finance Foundation Examination – Autumn 2008

General:

In the paper of Introduction to Economics and Finance (IEF) the theoretical knowledge of
students is tested. The paper was set keeping in view the students’ lack of practical
experience in the field. However, lack of preparation, especially of macroeconomics, was
evident amongst most of the students. Another reason and usually the most common
reason for poor performance in each examination is the habit of selective studies. The
students must have realized by now that usually all the areas are covered in any particular
paper and their chances of passing the examination reduce significantly if they ignore
certain areas.

Question-wise analysis is given below:

Q.1 The question was based on microeconomics and macroeconomics and the
differences between the two fields. Most of the students were able to point out
just one difference, i.e. that microeconomics deals with the behaviour of an
individual and a firm whereas macroeconomics studies the economy as a whole.
The students elaborated on this point only and did not mention other important
differences related to the objective, equilibrium analysis and time.

Q.2 This was one of the easier questions of the paper on the topic of price elasticity
of demand. While explaining the elasticity, the students generally failed to
elaborate when the demand of a product is considered to be elastic or inelastic.
However, most of them managed to identify the factors that determine the price
elasticity of demand such as necessity of use, presence of substitutes, the ratio of
the products price to the consumers income and time lag etc.

Q.3 (a) This was also an easy question about characteristics of a market under
perfect competition. Most of the students were able to identify the
characteristics such as large number of buyers and sellers, free entry and
exit, homogenous products, perfect knowledge of prices, minor or no
transport costs but many of them were found lacking in the explanations.
For example, many students identified the characteristic as “There are large
number of buyers and sellers”, while in their explanations they simply
wrote “There are large number of buyers and sellers in a market under
Perfect Competition”. Obviously in such situations the candidates got the
marks for identification of the characteristics but no marks for the
explanations. On the other hand, some of the students produced very
lengthy explanations for each of the characteristics although the question
contained a total of five marks only.

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Examiners’ Comments on Introduction to Economics and Finance – Autumn 2008

(b) In this part the requirement was to explain the equilibrium of a firm under
perfect competition with the help of a diagram. Majority of the candidates
drew the diagram correctly but failed to give comprehensive explanation.
They were expected to explain at least the following key points:

• As no buyer and seller is in a position to influence the price therefore
whatever the quantity may be, MR=AR = Price.

• The firm will produce as long as MR>MC. The profit of the firm will
maximize when MR=MC which is also the point of equilibrium of the
firm. However, there may be more than one such points, hence another
condition was important that MR Curve should cut the MC Curve from
below.

Most of the students used the Marginal Cost approach as discussed above
whereas few of them also used the Total Cost and Total Revenue approach.
However, those who used the latter approach, found it difficult to prepare
an appropriate diagram.

Q.4 This was a very easy question and required the students to explain briefly the
factors that affect the inflow of investments in a country. Some of the factors that
the students were expected to quote included, level of income, level of demand,
state policy, political situation, growth and size of population and interest rates
etc. A large majority of the students produced good answers probably because
many of the points were quite straightforward and could have been written using
common sense.

Q.5 This question was based on law of increasing returns and its application in a
manufacturing industry. While many students performed well in this simple
question, a vast majority lost marks on account of various discrepancies. Some of
the common mistakes are discussed below:

• According to the law, when a variable factor of production is employed while
other variable factors remain the same, the marginal production increases or
in other words the production increases at a higher rate. Candidates did not
mention the word “marginal” or the words “at a higher rate” without which
the meaning of the statements changed altogether. Such mistakes are made
mostly because the students resort to rote learning or memorizing from the
notes without understanding the main concept. Moreover, the students also
failed to point out that the law will not continue to operate for ever and to
give examples of situations in which the operation of law may discontinue

• While describing the application of the law in a manufacturing industry most
of the students gave specific examples from the industries. Very few of them
discussed the economies of scale on account of large scale buying and
selling, division of labour and specialized machinery etc.

Q.6 This question covered the topic of Marginal Rate of Substitution (MRS) and the
reasons on account of which, it diminishes. Many students were able to define
MRS correctly and illustrated it with a table. However, some of them failed to
mention an important element, that the substitution should take place in such a
way that the level of satisfaction remains the same.

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Examiners’ Comments on Introduction to Economics and Finance – Autumn 2008

Most of the good students were able to mention the following important reasons
on account of which MRS diminishes:

• As a consumer consumes more and more of a certain item, its utility
diminishes.
• Goods are imperfect substitutes of one another.

Q.7 (a) The three methods for measurement of National Income were correctly
identified but the explanation were often incorrect and in most cases
incomplete.

(b) The difficulties faced in measuring National Income generally related to
non-marketed production, barter transactions, lack of trained staff,
unreliable records, black economy etc. The students were generally found
to be well prepared.

Q.8 The question required students to explain the determinants of supply other than
demand. Many students did not read the question carefully and mentioned
demand as the main determinant and wrote lengthy notes on demand supply
relationship. Some of the important determinants of supply are, seasonal effects,
technological progress, price expectations, input prices, government policy,
supply of related goods and non-economic factors such as war, drought, flood
etc.

Q.9 It was observed that the students were not well prepared to attempt this question
which required them to describe the factors which influence the efficiency of
labour. Probably it was believed to be unimportant as it had not been examined
for many attempts. Some of the students gave irrelevant replies based on general
knowledge, such as:

• Workers of Developed Countries are more efficient
• Workers of Northern areas are more efficient

Such answers were a mere waste of time and secured no marks.

Some of the qualities that the students generally knew were education, work
environment, monetary returns. However, only a few managed to mention factors
like climate, racial qualities, personal factors like physique and age, social and
political environment, use of latest technology and equipment and whether the
work is well organized or not.

Q.10 This was one of the easier questions but not well attempted at all. Surprisingly
only 10% candidates managed to secure pass marks. Probably, this area of the
syllabus does not get adequate attention of the students as the weightage of such
questions in the paper is low.

Performance in Part (a) was relatively better as the candidates were able to
mention at least some of the factors that affect the rate of interest in an economy,
such as, supply of money, monetary policy, rate of inflation, balance of payments
of a country, demand for borrowings and liquidity preference etc.

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Examiners’ Comments on Introduction to Economics and Finance – Autumn 2008

In part (b) very few of the students were able to explain the term real rate of
interest, which is the difference between nominal interest rate and rate of
inflation.

Q.11 Deficit financing is a commonly talked about concept these days and refers to the
differences between government’s revenues and expenses or in other words it is
the part of government expenditure which is made either by borrowing or by
consuming existing cash balances available with the government. Whereas the
majority was able to explain it correctly there were many students who confused
it with adverse balance of payment.

Very few of the students were able to mention the effects of deficit financing on
an economy such as increase in money supply, rise in incomes and inflation.

Q.12 According to the Classical theory of wages and employment, the economy
automatically adjusts itself to full employment via wage-price flexibility.

On the other hand Keynes introduced the following concepts in his theory of
wages and employment:
• employment varies inversely with real wages
• reduction in money wages results in decrease in total out-lay, demand and
prices so that real wages remain the same. Unless real wages are reduced,
employment cannot increase.
• to increase employment, aggregate demand must be increased with money
wages being constant.

Very few students managed to highlight the above points in their answers.

(THE END)

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