Professional Documents
Culture Documents
3 Day Workshop
on
Capacity Building in Economics
for PGTs (Economics)
9 11 2016
()
3
: ( )
Venue: KENDRIYA VIDYALAYA HINOO RANCHI (RANCHI REGION)
1|Page
ZIET BHUBANESWAR
OUR PATRONS
Shri Santosh Kumar Mall (IAS)
Commissioner KVS New Delhi
Shri. U. N. Khaware
Additional Commissioner (Acad) KVS New Delhi
Dr. Shachikant
Joint Commissioner (Training) KVS New Delhi
Dr. Vijayalakshmi
Joint Commissioner (Acad) KVS New Delhi
Dr. E. Prabhakar
Joint Commissioner (Pers) KVS New Delhi
Shri M. Arumugam
Joint Commissioner (Fin.) KVS New Delhi
Shri S. Vijaykumar
Joint Commissioner (Admn) KVS New Delhi
Special thanks
Shri A. V. L. J. Rao, Deputy Commissioner, KVS RO Bhubaneswar
Shri N. Goyal, Deputy Commissioner, KVS RO Ranchi
Shri N. R. Murli, Deputy Commissioner, KVS RO Kolkata
Shri C. Neelap, Deputy Commissioner, KVS RO Guwahati
Shri Ajay Pant, Deputy Commissioner, KVS RO Tinsukia
Shri P. K. Koul, Deputy Commissioner, KVS RO Silchar
2|Page
ZIET BHUBANESWAR
Acknowledgement
Course Director
Shri A. V. L. J. RAO
Deputy Commissioner &Director, ZIET Bhubaneswar
Associate Course Director
Shri A. P. S. Brar
PRINCIPAL KV ROURKELA
Resource Persons
Shri PARSURAM SHUKLA
PGT (Economics) & FACULTY ZIET BHUBANESWAR
Mrs. Sujata Mishra
PGT (Economics)
Technical Support:
Dr. SANTOSH GUPTA
LIBRARIAN ZIET BHUBANESWAR
3|Page
ZIET BHUBANESWAR
( ) : / KVS ZIET
BHUBANESWAR
/ LIST OF PARTICIPANTS
/ NAME OF WORKSHOP :
CAPACITY BUILDING FOR NEWLY RECRUITED/PROMOTED PGT (ECO)
:
S.
NO
NAME OF
PARTICIPANT
REGION
MOBILE
NO.
E-mail id
(IN CAPITAL)
Dipatoli
RANCHI
9431352897
drsudhaupadhyay@gmail.com
Namkum
RANCHI
9431107956
eratirkey2013@gmail.com
MAITHON DAM
RANCHI
7050843354
manjaree08@gmail.com
GOMOH
RANCHI
8986736210
archnaprasad67@gmail.com
NO.1 DNANBAD
RANCHI
9431725367
pandeykamna27@yahoo.in
HINOO(2ND SFT)
RANCHI
9472739394
vk9472739394@gmail.com
HINOO(1ST SFT)
RANCHI
9471127190
valeriankujur@gmail.com
SILCHAR
SILCHAR
9401245848
ravishankar.saini25@gmail.co
m
AIZAWL
SILCHAR
9716073901
ranjit796@gmail.com
10
LOKTAK
SILCHAR
8014050516
badalramjangid76@gmail.com
11
OIL, DULIAJAN
TINSUKIA
9897403618
amitsingh8848@gmail.com
12
NAMRUP
TINSUKIA
7896661313
aloksingheco@gmail.com
13
ONGC,
SIVASAGAR
TINKUKIA
8721082849
bipul.vikash1717@gmail.com
14
LOKRA
TINSUKIA
8723954981
rpsonwal@gmail.com
15
NO.1 CUTAK
8093126400
pani74@rediffmail.com
16
BALASORE
9635170888
rpandapgt@gmail.com
17
NO.1
SAMBALPUR
9861586146
pramodbarik2003@gmail.com
18
Mr.PRAGYAN PAramita
DHAL
Puri
9439391845
pragyanpdhal@gmail.com
19
GAJAPATI
9040551623
niranjansah863@gmail.com
20
KHURDA ROAD
7504004808
patra_kv@rediffmail.com
4|Page
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
BHUBANESH
WAR
ZIET BHUBANESWAR
S.
NO
NAME OF
PARTICIPANT
21
22
23
24
STEEL PLANT
VISHAPATANAM
NO.2 KV, SVN
VISAKHAPATNAM
CMERI
DURGAPUR
COMMAND
HOSTIPAL
25
26
NAME OF K.V.
REGION
MOBILE NO.
E-mail id
(IN CAPITAL)
BHUBANESHWAR
8184835264
deo23april@yahoo.co.in
BHUBANESHWAR
8912526822
kv2svngar.ap.nic.in
KOLKATA
9475323087
KOLKATA
9635560626
CRPF DURGAPUR
KOLKATA
8927726576
kk.saini4me@gmail.com
BKS (AFS)
KOLKATA
9007815252
shyamali-shaw@gmail.com
27
DR. KALPANA
CHATTOPADHYAYA
BARRACKPORE
(ARMY)
KOLKATA
9477448906
drkc2803@yahoo.com
28
BURDWAN
KOLKATA
9415600052
sheela.yadav8@gmail.com
29
KOLKATA
8420507514
seemamarandi@gmail.com
30
GUWAHATI
96474111656
nimairamesh70@gmail.com
31
NO.2 BINNAGURI
GUWAHATI
8900526162
bijendr2009@gmail.com
32
NFR MALIGAON
GUWAHATI
7089251970
adityabhardwajsiingh@gmail
.com
33
NAGAON
GUWAHATI
9609603392
ashishsmart83@gmail.com
34
PANBARI
GUWAHATI
7875467659
rajesh.kvnrc@gmail.com
35
MR. ABHISHEK
CHATURVEDI
NTPC, SINGTAM
EAST SIKKIM
GUWAHATI
7031774205
9307338846abhi@gmail.com
KV No.1
KANCHPRAPARA
NO.1 KALAI
KUNDA AFS
rameshmandal71@ymail.com
kuberachandrap@yahoo.co
m
Rourkela
9438143255
apsbrar78@gmail.com
ZIET
9938649454
parsuram.shukla@gmail.com
Ranchi
9438488662
sm_sujata@rediffmail.com
Ranchi
Resource Persons
MR. PARSURAM
SHUKLA
ZIET
Bondamonda
5|Page
ZIET BHUBANESWAR
Give notes to students while teaching.Verify whether the students are writing in their notebook.
Ensure that the monthly test is conducted every month with a proper time table.
The month, in whichHYE/PBE is conducted; monthly test should not be conducted in that month.
Provide answer to each and every question asked in every exam, after each exam.
Revision schedule should be prepared and implemented after the completion of syllabus.
During the revision time conduct sample test and keep proper record.
Solve last nine years (2008-2016) CBSE question papers; ensure that each and every child knows
the answer to each and every question asked in all these years.
Ask every child to prepare file in which they will keep all the question papers discussed during the
year and they be asked to maintain separate copy in which the solution to each and every
question be recorded.
Utilise those days judiciously before the day of exam e.g.the students especially the underachiever should be called to attain classes during the days when there is no exam, it should be
done for those days before the Economics exam only if possible.
Emphasis should be on the syllabus not on the books, for example NCERT texts should not be
followed blindly rather it should be supplemented from other sources.
Identify the easy portion from the syllabus for the underachievers.
Always keep track on the CBSE syllabus to know the latest change.
Inform the students about the mark distribution unit wise, total no of questions, question wise
mark distribution etc. before every exam.
6|Page
ZIET BHUBANESWAR
Time / Date
09.08.16
10.08.16
11.08.16
9.00-9.15 Hrs
Registration
Assembly
Assembly
9.15-10.45 Hrs
Inauguration:
1.Objectives of WS
2.Need Analysis
Determination of Income
and Employment
{Class XII}- RP
10.45-11.00
Hrs
11.0013.00Hrs
Tea Break
National Income and
Related Aggregates
{Class XII}-
13.00-14.00
Hrs
14.00-15.45
Hrs
Lunch Break
National Income and
Related Aggregates
(Cont)
{Class XII}-RP
15.45-16.00
Hrs
16.0017.30Hrs
Determination of Income
and Employment (Contd.)
{Class XII}- RP
Group workWorsheetprearation:
Coordinator/RPs
Forms of Market{ClassXII}
Tea Break
Group work-Worksheet
preparation: Coordinator/
RPs
Plenary Session
Director
ZIET BHUBANESWAR
7|Page
ZIET BHUBANESWAR
INDEX
Our Patron .......................................................................................................................................................2
Acknowledgement ...........................................................................................................................................3
Details of Teachers ..........................................................................................................................................4
Road Map for Teachers of Class XII .................................................................................................................6
Time-Table .......................................................................................................................................................7
Index ................................................................................................................................................................8
TOPIC 1: Meaning of Micro and Macro Economics, Central Problems of an Economy .................................10
By DR. SUDHA UPADHYAY
Topic 2: Concepts of Production Possibility Curve and Opportunity Costs ...................................................15
By MS. ERA TIRKEY PGT. Economics K. V. Namkum, Ranchi
Topic 3: Consumers Equilibrium ...................................................................................................................18
By Manjaree Anand, PGT(Economics), Kendriya Vidyalaya Maithon Dam, Ranchi Region
Topic 4: INDIFFERENCE CURVE .....................................................................................................................22
By ARCHANA PRASAD,PGT(ECO),K.V.GOMOH
Topic 5: Demand ............................................................................................................................................26
BY Kamana Pandey ( PGT ECO), K V NO 1 Dhanbad
Topic 6: PRICE ELASTICITY OF DEMAND ........................................................................................................30
By Vijay Kumar (PGT-Eco), KV Hinoo Ranchi
Topic 7: Production function-Meaning and Type of Production Function ...................................................40
BY:VALERIAN KUJUR PGT(ECONOMICS) KV HINOO, RANCHI
TOPIC 8: RETURNS TO A FACTOR ...................................................................................................................45
By RAVI SHANKAR SAINI PGT ECONOMICS K.V.SILCHAR (SILCHAR REGION)
TOPIC 9- REVENUE .........................................................................................................................................51
By Badal Ram Jangid, PGT (Eco), K.V. LOKTAK , NHPC MANIPUR (SILCHAR REGION)
TOPIC 10 : SUPPLY .........................................................................................................................................56
BY Amit Kumar Singh, PGT (Economics), K.V OIL Duliajan, Assam (Tinsukia Region)
Topic11: Producers Equilibrium....................................................................................................................59
By: Alok Kr. Singh PGT (Economics), Kendriya Vidyalaya Namrup (Tinsukia Region )
Topic 12: Monopolistic Competition .............................................................................................................63
By Niranjan Pani, PGT (Economics), KV Kankinara
TOPIC 13: PERFECT COMPETITION ................................................................................................................66
BY BIPUL VIKAS, PGT (ECONOMICS), KV ONGC SIVASAGAR, ASSAM
Topic 14: MONOPOLY ....................................................................................................................................68
BY: RAJENDRA PRASAD SONWAL, PGT (ECONOMICS), KENDRIYA VIDYALAYA LOKRA, TINSUKIA REGION
TOPIC 15: SIMPLE APPLICATION TOOLS OF DEMAND AND SUPPLYPRICE CEILING AND PRICE FLOUR .........72
BY RAGHUNATH PANDA, PGT (Economics), KV BALASORE
8|Page
ZIET BHUBANESWAR
TOPIC 17: Some Basic Concepts: Consumption Goods, Capital Goods, Final Goods, Intermediate Goods ..77
BY: PRAGYAN PARAMITA DHAL, PGT (ECONOMICS), K.V. PURI
Topic 18: SOME BASIC CONCEPTS STOCKS AND FLOWS, GROSS INVESTMENT AND DEPRICIATION .........80
BY: NIRANJAN SAHOO, PGT (ECONOMICS), K.V, GAJAPATI
Topic 19: ASSIGNMENT ON CIRCULAR FLOW OF INCOME, ...........................................................................83
BY: ARUN KUMAR PATRA, PGT(ECONOMICS), K.V. KHURDA ROAD
Topic 20: EXPENDITURE METHOD OF CALCULATING NATIONAL INCOME ....................................................87
BY: RAJIV KUMAR PANDEY
Topic 21: Aggregates related to National Income: GNP, NNP, GDP, and NDP at MP & FC, National
Disposable Income (Gross & Net) ..................................................................................................................96
BY: RAMESH MANDAL, PGT (Eco), KV CMERI Durgapur
Topic 22: AGGREGATES RELATED TO NATIONAL INCOME, PRIVATE INCOME PERSONAL INCOME
PERSONAL DISPOSABLE INCOME REAL AND NOMINAL GDP........................................................................99
BY KUBERA CHANDRA PRADHAN, PGT (ECONOMICS), K V COMMAND HOSPITAL, KOLKATA
Topic 23: GDP AND WELFARE ......................................................................................................................103
BY: From: KAMAL KISHORE, PGT (ECONOMICS), K V CRPF DURGAPUR
Topic 24: MONEY-MEANING & FUNCTIONS ................................................................................................106
BY: From: KAMAL KISHORE, PGT ECONOMICS ,KV CRPF DURGAPUR
TOPIC: MONEY AND BANKING ....................................................................................................................110
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
Topic 26: Money Supply and Credit Creation ..............................................................................................114
BY: Shyamali Shaw, PGT (Economics), KV Barrackpore AFS
Topic 27 : CENTRAL BANK ITS FUNCTION ...................................................................................................117
BY: Dr. KALPANA CHATTOPADHYAYA, PGT (ECONOMICS), K.V. BARRACKPORE (ARMY)
Topic 28: Aggregate Demand and Its Components, Propensity To Consume And Propensity To Save ......121
BY: Mrs.Sheela Yadav, PGT (Economics), KV Burdwan
Topic 29: Short Run Equilibrium of Output , Investment Multiplier and Its Mechanism ............................124
BY: Seema Marandi, PGT (Economics), KV No. 1 Kancharapara
Topic 30: ASSIGNMENT ON MEANING OF FULL EMPLOYMENT AND INVOLUNTARY UNEMPLOYMENT ..127
BY: From: RAMESH NIMAI, PGT (ECO.), K.V.NO. 1 AFS KALAIKUNDA
TOPIC 31: Government Budget- Meaning and Components, Revenue Receipts and Capital Receipts ......131
BY: ADITYA BHARDWAJ, PGT (ECONOMICS), K.V. NFR MALIGAON
Topic 32: Government Budget: RE, CE, Meassures of Government Deficit, RD, FD, PD .............................135
BY: Dr. Ashish kumar, PGT (ECO), K.V. NAGAON (GUWAHATI REGION)
Topic 33:BALANCE OF PAYMENT AND FOREIGN EXCHANGE DETERMINATION ..........................................139
9|Page
ZIET BHUBANESWAR
MCQ QUESTIONS
Q1. PPC will shift to the left when there is
(a) Underutilization of resources
(b) (C) technological improvement
(b )growth of resources
(d) loss of resources due to natural calamities
Ans-(d)
MLL Questions
Q.4 Define marginal rate of transformation.
Ans. MRT/MOC of a good along a PPC is defined as the amount of one good that needs to be
sacrificed per unit increase in production of the other good.
Q.5 what is the problem of what to produce ?
Ans.-It is the problem of selection of different goods and their quantities with available
resources.
Q.-6 Explain the problem of how to produce ?
Ans.- This is also called problem of choice of technique of production. There are two techniques:
(A)
Labor Intensive-Under this technique, more of labor and less of capital are used .With
this technique, more employment can be generated for the society.
(B)
Capital Intensive Technique-In this technique, more of capital and less of labour is
required per unit of output. It produces goods on large scale with the use of high technology.
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ZIET BHUBANESWAR
Short Answer Questions:Q.7 How PPC will rotate when there is an improvement in technique of production of Y good ?
Ans.- If there is an improvement in technique of production of Y good PPC will rotate to its right
from AF To A1F (fig-1.1).It will mean that economy will produce more of Y good with given
resources.
Fig 1.1
Q.8 Giving reason comment on the shape of PPC based on the following schedule:
Good X (Units)
Good Y (Units)
0
30
1
27
2
21
3
12
4
0
Ans.Good X
Good Y
MRT
(Units)
(Units)
0
30
1
27
3Y :1X
2
21
6Y : 1X
3
12
9Y : 1X
4
0
12 : 1X
Since MRT is increasing, the PP curve downward sloping concave to the origine.
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Basis
Microeconomics
Macroeconomics
Meaning
It is the study of
individual economic unit.
Central
Problems
Instruments of
study
Alternative
name
It is also known as
Theory of income and
employment.
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ZIET BHUBANESWAR
HOTs Questions
Q. 10 What is likely to be the impact of efforts towards reducing unemployment on the
production potential of the economy?
Ans.- Reducing unemployment has no effect on the production potential of the country. It is
because production p0tential is determined assuming full employment.
Unemployment indicated that the country is operating below potential. Reducing unemployment
simply helps in reaching potential.
Q. 11 What are the reasons for increasing MOC ?
Ans. As we move along PPC, more and more units of a good are sacrificed to get an additional unit
the other good. This rate of sacrifice is called marginal opportunity cost. MOC is always increasing.
It is because of the following reasons:
(a)
Resources are not equally efficient in the production of all goods:- Resources are not
equally efficient in the production of all goods. Therefore as we draw more and more resources
from the production of one good to the production of other good, it implies that we have
transferred resources from more productive use to less productive use. Thus MOC increase.
(b)
Law of diminishing returns:- The law of diminishing returns states that as more and more
output of one good is produced, the marginal productivity of factors of production used in its
production decreases. As a result of it, more quantity of the factors needs to be applied to produce
the same quantity of the good. In other words to raise output of one commodity, more and more
output of another good has to be sacrificed.
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14
12
ZIET BHUBANESWAR
Table and figure indicate that if the economy decides to use all its resources in the production of
cloth, it can produce 5 thousand meters of cloth. And if it decides to use all its resources in the
production of wheat it can produce maximum 15 thousand quintals of wheat. There are also other
possible combinations of two goods that can be produced with full and efficient utilization of
resources. These combinations in the table and diagram are A, B, C, D, and E. The economy has to
choose out of the combinations. If more of resources are used in the production of cloth, less
resource are available for the production of wheat and vice-versa.
All points on PPC indicate full and efficient utilization of resources. Any point inside the PP curve
such as K in the figure shows the situation of inefficient or under utilization of resources. In other
words economy is not utilizing its productive capacity fully. Any movement from point K to any
point on PP curve AF will indicate production of more cloth or more wheat. On the other hand,
any point above the PP curve (point H in the figure) is unattainable for the economy. When
economy succeeds in achieving combinations like H, it indicates situation of growth of resources.
Q.13 Write two properties of PPC.
Ans. A typical production possibility curve has the following two properties:(a)
PPC is downward sloping from left to right:- A production possibility curve slopes
downwards from left to right. Movement along a PPC from one point to another indicates change
in combination of two goods. It shows that more of one good can be produced only after
sacrificing some quantity of the other good. Since PPC is based upon the assumption of full
employment, production of both the goods cannot be increased simultaneously.
(b)
PPC is concave to the point of origin :- The PPC is concave because marginal opportunity
cost increases continuously as more and more of one good is produced only by reducing the
quantity of the other good .It means that to produce more and more units of one good each time
the quantity of the other good is sacrificed at an increasing rate.
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MLL QUESTIONS:
1. What does rightward shift of PPC indicate?
Ans: The rightward shift of PPC indicates growth of resources or technological progress.
2. Define opportunity cost. OR Give the meaning of opportunity cost.
Ans: Opportunity cost is the cost of the next best alternative foregone.
3. Define Marginal Rate of Transformation.
Ans: Marginal Rate of Transformation is the ratio of units of one good scarficed to
produce one more unit of the other good.
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Output of Y
Output of X
10
10
7
11
When some resources are shifted from Use-Y to Use-X, there is a loss of output of 3 units
of Y for a unit more of good X. MRT= = 1 =3. [ Here, refers to loss of output of good
Y. refers to loss of output of good X.]
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Y
A
b
PPC
Cloth
c
.U
o
D
X
Wheat
Refer to the above figure; on a point anywhere in the PPC the resource are fully and efficiently
employed. On point U, below the PPC or any other point but below the PPC, the resources are
either underutilized or in efficiently utilized or both. Any point below the PP curve thus highlight
the problem of unemployment and inefficiency in the economy.
2. A lot of people died and many factories were destroyed in an earthquake. How will it affect
the PPF of the economy?
Ans: PPF of the economy will shift to the left. It happens because the number of possible
combinations available with the economy has decreased due to destruction of resources
in the economy.
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MCQ
1.
Diminishing MRS
(b)
Increasing MRS
(c)
Constant MRS
(d)
Ans.
2.
The law of diminishing marginal utility states that with the consumption of
successive units of a good,
(a)
MU decreases
(b)
MU increases
(c)
MU remains constant
(d)
None of these
Ans.
(a) MU decreases
MLL
1.
2.
18 | P a g e
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3.
Define price elasticity of demand. Give any three factors affecting elasticity of
demand.
Ans. Price elasticity of demand is the degree of responsiveness of the change in the
quantity demanded of a commodity to a change in its price while other things
being constant.
Factors affecting price elasticity of demand:
1) Nature of the commodity
2) Number of substitutes available
3) Number of uses of the commodity
SAQ
1.
2.
3.
19 | P a g e
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LAQ
1.
Write and explain any four factors affecting demand for a commodity.
Ans. Factors affecting demand are as following:
1)Own price of the commodity:- Others things being constant there exist inverse
relationship between price of the commodity and its quantity demanded. This
implies that if price of good increases its quantity demanded decreases and
vice-versa.
2) Price of related good :- related commodity can be of two types:
a) Substitute good:- These are goods which can be substituted for each other,
such as tea and coffee. In case of substitute goods, increase in price of good
cause increase in the demand for other good and vice-versa.
b) complementary good :- These are goods which complete the demand for
each other therefore demanded together, such as bread and butter. In case of
complementary good fall in price of a god leads to rise in demand of other good
and rise in price of good leads to fall in demand of other good.
3)Income of the consumer:- Demand for normal goods increases with increase
in income of the consumer and vice-versa. On the other hand the demand for
inferior goods like coarse grain tends to decrease with increase in income and
vice-versa.
4) Tastes and preferences :- Tastes & preferences of the consumer are
influenced by advertisement, change in fashion, climate, new inventions etc.
Other things being equal, demand for those goods increases for which
consumers develop strong taste and preferences. Contrary to it, if taste and
preferences for a product is fading, its demand will decrease.
2.
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on Y by reducing spending on X. This leads to fall in MUy and rise in MUx. This
shift of spending from x to y continues till MUx/Px = MUy/Py..
2) Marginal utility falls as more is consumed i.e. Law of Diminishing
Marginal Utility is operating. This ensure fulfillment of first condition.
2.
What price the consumer is ready to pay for a commodity in a state of his
equilibrium?
Ans. In a state of equilibrium, the price that the consumer is ready to pay for a
commodity is the marginal utility of the commodity (estimated in terms of
money). Because in state of equilibrium Px=MUx (in terms of money).
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Indifference curve
(b)
Utility curve
(c)
Budget line
(d)
Transformation curve
Px/Py
(b)
Py/Px
(c)
X/Y
(d)
Y/X
Ans. Y/X
MLL
1.
2.
3.
1.
22 | P a g e
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2.
3.
What is budget set ?Explain what can lead to change in budget set?
Ans. Budget set refers to attainable combinations of a set of two goods given prices
of goods and income of the consumer .The budget set equation is
P1X1+P2X2<=Y.Here P1 is price of good 1,X1 quantity of good 1,P2 price of good
2,X2 is quantity of good2,Y total expenditure or total budget. Budget set
depends on P1,P2 and Y.change in any of these variables will lead to a change in
the budget set.
LAQ
1.
Explain the concept of diminishing marginal rate of substitution with the help of
numerical example. Also explain behavior along an indifference curve.
Ans. Combinations
MRS= Y/X
4.5
-1.5/1= -1.5
-1.5/2= -0.75
2.5
-0.5/2= -0.25
A
B
C
D
IC
ZIET BHUBANESWAR
2.
What are monotonic preferances? Explain why an IC to the right shows higher utility.
Ans. Monotonic Ypreferences of the consumer are the basic assumption of IC analysis.
It means that consumer preferences are such that greater consumption of a
commodity always offers him a higher level of satisfaction , implying that the
consumer is never over supplied with a commodity. In the diagram point A
offers 4 units of good Y and 2 units of good X. Point B offers 4 units of good Y
and 2 units of good X. Since point B offers greater amount of good X it must
yield higher level of satisfaction than point A. The assumption of monotonic
preference of the consumer permits us to conclude that greater the
consumption higher must be the level of satisfaction. Implying that point B on
IC2 yields higher satisfaction than point A on IC1.
IC2
IC1
If IC is not convex at the point of equilibrium, the consumer cannot reach the point
of stable equilibrium .Comment.
Ans. True if IC is not convex at the point of equilibrium, the consumer cannot reach
the point of stable equilibrium. In case IC is concave, it implies that MU tends to
rise as more of a commodity is consumed. If MRS is not declining the law of
diminishing MUis not in operation. In which situation the consumer will
continue to consume more and more of one commodity getting higher MU from
its successive units. In such a situation any equilibrium will never be a stable
equilibrium.
24 | P a g e
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2.
Ans. (a)The consumer should move downward to the right along the IC. Convexity of
the IC ensures that as the consumer moves downward to the right along the IC
,MRSxy ,tends to fall. Implying that the consumer should start consuming more
of X in place of Y.
(b)The consumer should be consuming more of X in place of Y. That is he should
move upward to the left along the IC .Convexity of the IC ensures that as the
consumer moves upward to the left along his IC ,MRSxy tends to rise . He should
stop at a point where MRSxy=Px/Py.
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Topic 5: Demand
BY Kamana Pandey (PGT ECO), K V NO 1 Dhanbad
MCQ
1.
When the income of consumer falls, the impact of price demand curve of an inferior
good is
(a)
Shifts to right
(b)
Shifts to left
(c)
(d)
Ans.
2.
Expansion of demand
(b)
Contraction of demand
(c)
Increase in demand
(d)
Decrease in demand
Ans.
1.
2.
Increase in fashion.
Increase in income of consumer.
Increase in taste of consumer.
3.
I)
II)
III)
26 | P a g e
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SAQ
1.
How is the price elasticity of demand of a commodity affected by the number of its
substitutes? Explain.
Ans. The demands for a commodity will be vary elastic if it has greater number of
close substitutes. A small rise in the price of such a commodity will induce
consumers to use substitute. For example, gas, kerosene oil coal etc. Will be use
more as fuel if the price wood increases. On the other hand, the demand of such
commodity is inelastic which have no substitutes such as salt.
2.
Explain the effect of rise in the income on the demand of related goods.
Ans.
3.
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LAQ
1.
The demand function of commodity X is given by QX= 30-4px the value of Px is given
as 6,5,4,3,2,1 and 0. Find the demand schedule.
Ans. Given Qx=30-4px
When
Px = 6
Qx = 30 4 x 6 = 6
Px = 5
Qx = 30 - 4 x 5 =10
Px = 4
Qx = 30 4 x 4 = 14
Px = 3
Qx = 30 4 x 3 = 18
Px = 2
Qx = 30 4 x 2 = 22
Px = 1
Qx = 30 4 x 1 = 26
Px = 0
Qx = 30 4 x 0 = 30
2.
Price
Demand
10
14
18
22
26
30
Does a rise in price of other good have same effect on demand for a commodity?
Ans. No, rise in price of other goods does not have same effect on demand for a
commodity.
(i)
(ii)
(iii)
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2.
Does a fall in income have the same effect on demand for the given commodity?
Ans. NO, fall in income does not have the same effect on demand for the given
commodity.
(i)
(ii)
(iii)
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29 | P a g e
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d.) Infinite
d.) Infinite
Price elasticity of demand has five major components, which are as followed:
i.)
ii.)
iii.)
iv.)
v.)
Ed = 0
Ed< 1
Ed= 1
Ed> 1
Ed=
Q2.) Explain about the Expenditure method to calculate Price elasticity of Demand.
ANS: In this method to find price elasticity of demand, if there is any change in price of the good,
then the total expenditure of the consumer may also change.
With this method, exact value of the Ed cannot be determined. The price elasticity of demand
can be obtained only in terms of less than 1 , equal to 1 or more than 1.
These can be estimated by the following observations:
1. If Price increases and Total Expenditure also increases
Or
30 | P a g e
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As we know that,
= ()
= ()
4
12
2
24
= 1
Therefore, the Price elasticity of demand is Unitary Elastic in nature.
Q1.) Explain about the Point method / Geometric method to calculate price elasticity of
demand.
ANS : In this method, the elasticity of demand is measured by using the formula:
Ep =
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Diagrammatically,
AB is a negatively slopped straight line
demand curve joining X-axis and Y-axis as
shown in the diagram.
At point
At point A, Ep =
At point E, Ep =
At point D, Ep =
At point C, Ep =
At point B, Ep =
C,
Ep < 1
At mid point D,
Ep = 1
At point
E,
Ep > 1
At point
B,
Ep = 0
At point
A,
Ep =
Ep =
Ep =
AB
Ep =
0
EB
Ep > 1 ( EB > EA )
EA
Ep =
Ep =
Ep =
DB
DA
CB
CA
0
BA
Ep = 1 ( DB = DA )
Ep < 1 (CB < CA )
Ep = 0
Q2.) Explain about the Proportionate method / Percentage method to calculate price elasticity
of demand.
ANS: Price elasticity can be precisely measured by dividing the percentage change in quantity
demanded by the percentage change in price. Thus, we can measure price elasticity by using the
following formula:
Ep =
32 | P a g e
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=
Ep =
(Q Q) Q
(P P)P
QQ
= PP
= P x Q
Where,
Q = Q-Q = Change in quantity demanded ; Q = Original quantity demanded.
P = P-P = Change in price ; P = Original Price.
Ep = Co-efficient of price elasticity of demand. Ep is negative, as the ratio is a negative number
because price and quantity demanded are inversely related.
To eliminate this negative sign, we use modulus, and thus all numbers and percentage are treated
as positive.
Thus, the formula for the price elasticity of demand can be written as follows:
= |
Q3.) A Consumer buys 18 units of a good at a price of Rs. 9 per unit. The price elasticity of
demand for the good is (-) 1. How many units the consumer will buy at a price of Rs. 10 per
unit? Calculate.
ANS: Given, Initial Price (P) = Rs. 9
()1 =
(Q 18)
9
1
18
()1 =
(Q 18)
1
1
2
()2 = ( 18)
= 18 2 = 16
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Q1.) Explain briefly about the different degrees of price elasticity of demand.
ANS: There are FIVE types/degrees of the price elasticity of demand, which are as follows:
1. Perfectly Inelastic Demand ( ep = 0)
2. Inelastic Demand / Less than Unitary Elastic Demand ( ep < 1)
3. Unitary Elastic Demand ( ep = 1)
4. Elastic Demand / More than Unitary Elastic Demand ( ep > 1)
5. Perfectly Elastic Demand ( ep = )
Explanation: all degrees of price elasticity of demand as explained as follows:
4. Perfectly Inelastic Demand ( ep = 0) :
Price Elasticity of Demand is said perfectly inelastic or equal to zero, when there is no change is
the quantity demanded due to any percentage change in price of the good or commodity.
Diagrammatically,
Here there will be no any change in the quantity
demanded of the good. Whatever is the price either
increased or decreased; quantity demanded remains
fixed. This happens with the necessities or compulsory
goods like salt, water, food, medicines etc.
In this case demand curve becomes parallel to the Yaxis.
This is shown in the adjacent figure
that with increased in price by PP2 as well as
decreased in price by PP1, quantity demanded is fixed
as OQ.
So, here ep = 0
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35 | P a g e
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Diagrammatically,
When price changes, quantity demanded also
changes, but the percentage change in quantity
demanded is more than the percentage change in
the price.
In this case demand curve becomes more flattened.
This is shown in the adjacent figure that with
decreased in price by PP1, quantity demanded is
increased by OQ1. But the percentage of increase in
quantity demanded is more than the percentage of
decrease in price.
As, QQ1 > PP1
So, here ep > 1
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Q2.) What are the factors which may affect the price elasticity of demand? Explain in brief.
ANS: Following are the factors affecting price elasticity of demand.
a) Nature of the commodity.
b) Level of income.
c) Availability of substitutes.
d) Tastes and preferences.
e) Possibility of postponement of use.
f) Various uses of the commodity.
g) Habits.
h) Time period.
i) Portion of expenditure.
Etc.
a.) Nature of the commodity: Commodities are broadly divided into two groups- necessities and
luxuries. Necessities have highly inelastic, while Luxuries have highly elastic demand.
b) Level of income: Elastic of demand is less in the case of consumers having either a very income
or very low income. The demand of middle income consumers is more elastic.
c.) Availability of substitutes: The demand for commodities having a large number of close
substitutes is more elastic than the commodities having smaller number of substitutes.
If a commodity has a large number of substitutes, its elasticity of demand is high. Because, when
there is rise in its price, consumers easily switch over to other substitutes in a big way.
d.) Tastes and preferences: If the consumers tastes and preferences are in favour of the goods,
then elasticity of demand for that good will be inelastic.
e.) Possibility of postponement of use: The commodity whose consumption can easily be
postponed has more elastic demand, and the commodity whose consumption cannot be easily
postponed has less elastic demand.
f.) Various uses of the commodity: If a commodity has many alternative uses, demand is highly
elastic and if it has only limited uses, demand is less elastic.
g.) Habits: If a consumer has become habitual for a particular commodity, its demand is inelastic.
h.) Time period: Elasticity of demand for goods is more in the long run than in the short run.
i.) Proportion of expenditure: Elasticity of demand is less with regard to those goods on which
consumer spends a very small fraction of his total expenditure. For example: salt, match box,
alpins, etc.
On the other hand, elasticity will be greater to those goods on which consumer spends a larger
portion of his total expenditure.
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Q1.) Consider the Demand Curve D(p) = 10 3p . what is the Elasticity at Price 5/3?
ANS: Given, D(p) = 10- 3p
i.e. Q = 10 3p
Ed = ? at Price (p) = Rs. 5/3
As, Q = 10 3p
Differentiating both sides with respect to price.
(10 3)
=
= 3 . (I)
At p = 5/3, as, Q = 10 3p
Q= 10 3
5
3
= 10 5 = 5 ( II)
= ()
5/3
5
5
35
= 1
Q2.) A consumer spends Rs. 1000 on a good priced at Rs. 8 per unit. When price rises by 25
percent, the consumer continues to spend Rs. 1000 on the good. Calculate price elasticity of
demand by percentage method.
ANS : Given, Initial Expenditure (TE) = Rs. 1000
Therefore, Initial Quantity (Q) =
1000
8
= 125 units
8 25
100
= 8 + 2 = 10
38 | P a g e
1000
10
= 100
ZIET BHUBANESWAR
So,
Change in Price (P) = 10 8 = Rs. 2
Change in Quantity (Q) = 100 125 = (-) 25units
As we know that,
= ()
= ()
()25
8
2
125
1
4
1
5
= 0.8
As, Price elasticity of demand is less than 1. Therefore Ed is less elastic or inelastic.
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MCQ
1.
(b)
(c)
(d)
AP
(b)
TP
(c)
Zero
(d)
One
Ans. AP
MLL
1.
3.
40 | P a g e
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SAQ
1.
2.
inputs
Output(in units)
% increase
inputs
in % increase
output
16k+32L
2400
32K+64L
4200
100%
75%
64K+124L
7350
100%
75%
in
Variable factor
10
18
26
TPP
APP
MPP
--
--
10
18
26
6.5
Ans.
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LAQ
1.
MPP
TPP
10
Phase -1
12
-5
IRF
Phase-2
DRF
Phase-3
NRF
a)In the ist phase both MPP and TPP are increasing at increasing rate. Therefore
this stage is known as increasing returns to a factor. The first stage is over when
MPP is at its maximum.
b) In the second stage MPP is falls but TPP still increases but at diminishing rate.
Since
MPP is diminishing at this stage, this stage is known as diminishing returns to a
factor.
c) In the third stage MPP is negative and TPP also starts falling, therefore this
stage is known as Negative returns to a factor.
Assumptions:1. It operates in short run.2.The law applies to all fixed factors including land.3.
It is assumed that factors of production become imperfect substitutes.4. The
law applies
To the field of production only.
( Needs Diagram in support to the answer)
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2.
TPP(units)
MPP(kg)
APP (kg)
3.0
3.5
12
4.0
16
4.0
19
3.8
The above schedule and diagram show that so long as MPP curve is above APP
curve, APP curve is rising. This is up to point M. When MPP curve lies below
APP curve, APP starts falling.
(Diagram to be drawn in support to the answer)
To increase the production of a good, only one input is increased while other inputs
are held constant. Explain its effect on total physical product. Give reasons.
Ans. When the amount of only one input is increased, while other inputs are held
constant, the total physical product in the beginning increases at the increasing
rate. This is the first phase of increasing marginal returns to the variable input.
Beyond a point with increase in the variable input, total physical product
starts increasing at the diminishing rate.
Eventually, further increase in the variable input causes the TPP to decline. This
is the third phase of negative marginal returns to a variable inputs.The following
schedule illustrate the point:
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Land
Labour
TPP
Phases
12
TPP increases at
the
increasing
rate
(phase I)
ZIET BHUBANESWAR
16
19
TPP rises at
diminishing rate
21
(phase II)
22
22
21
TPP falls
10
20
(phase III)
Can a producer increase his production without changing the quantities of fixed
inputs in the long run?
Ans. In short run a producer can only change the quantity of variable inputs and the
fixed inputs. In long run none of the factor inputs remain fixed but rather all
factors are subject to change. Every rational producer tries to reduce the cost
of production and may follow the practice of becoming spendthrift but will end
up with less and less saving which further lead to fall investment and without
investment output will cannot be increased. However it is not possible for a
producer to increase production without increasing the units of fixed factors .It
is possible only by increasing the units of working capital such as raw material
and money that too only for a short span of time and not in the long
run.Therefore, we can say that a producer cannot increase the production
without increasing/changing the units of fixed inputs.
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44 | P a g e
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MP>AP
(b)
MP<AP
(c)
MP =AP
(d)
all of these
Ans. (C)
2.
Decreases
(b)
Increases
(c)
Is also maximum
(d)
Is zero
Ans. (d)
MLL
1.
2.
3.
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SAQ
1.
Returns to scale
(i)Returns to a factor are studied are (i)Returns to scale are studied with
with
reference
to
variable reference to constant proportion
proportions type production.
type production function.
(ii)Returns to a factor are studied Returns to scale are studied when all
when one factor alone is variable and factors of production are variable and
other factors remain constant.
change in the same proportion.
(iii)In case of returns to a factor, scale (iii)In case of returns to scale, scale of
of production does not change.
production ought to change.
2.
Land
acre)
46 | P a g e
TPP
Qtls.)
(in APP
Qtls.)
(in MPP
Qtls)
12
16
18
3.6
18
14
(-)4
(in
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1
3.
(-)6
TP
AP
MP
20
16
12
-4
Ans. TP = MP or MP1+MP2+MP3+..MPn
AP = TP Q, MP = TPn-TPn-1
Where, TP = Total Product, AP = Average Product, MP = Marginal product
Q = Units of Labor, MP = Sum of marginal Product
47 | P a g e
Units of Labor
TP
AP
MP
20
20
20
36
18
16
48
16
12
56
14
60
12
60
10
56
-4
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LAQ
1.
State the behaviour of Marginal Product (MP) in the law of variable proportions.
Explain the causes of this behaviour.
Ans. Law of variable proportion-It states that the marginal product of a variable
factor input initially rises with its employment level. But after reaching a certain
level of employment, it starts falling.
Explanation of Law
This low may be explained with the help of following schedule and diagramUnits
Land
of Units
Labor
of Total
Product
Marginal
Product
Stage
Ist stage
12
14
15
15
14
-1
11
-3
IInd stage
IIIrd stage
Diagram:-
48 | P a g e
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Following observations can be made from the given table(i) Marginal product (MP) rises till 3rd unit of labor, in this condition Total
Product (TP) increases at an increasing rate, this situation is called increasing
returns to factors.
(ii)With the use of 4thunit of labor, MP starts decreasing and TP increases only
at decreasing rate, this situation is called diminishing returns to factors.
(iii)When decreasing MP reduces to zero, TP is maximum.
(iv)When MP is negative, TP starts declining.
Law of variable proportions basically depends on diminishing returns to
marginal factor.
Its main cause are(a) Fixity of the factor.
Explain the behaviour of total product under the law of variable proportions. Use
diagram
Ans. Law of variable proportions states that as more and more of the variable factor
is used with the fixed factors, a stage must come when marginal product of a
variable factor starts diminishing.
Diminishing marginal product may become zero or negative.
Of course, initially marginal product may rise owing to better coordination
between the factors and better utilisation of the factor. But, continuous
increase of the variable factor must cause mismatch between the variable and
the fixed factor, and must ultimately decline.
Following Fig. further explains the behaviour of total product (TP) under the
law of variable proportions.
49 | P a g e
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Behaviour of TP:(i) TP tends to rise at an increasing rate OL units of variable factor are used with
the constant application of fixed factor. This occurs till point K on the TP curve.
This corresponds to the situation of increasing returns to a factor.
(ii)Beyond OL units of variable factor, TP increases only at diminishing rate. This
occurs between point K and point T on TP curve. This corresponds to a situation
of diminishing returns to a factor.
(iii)TP reaches its maximum (i.e.,TS) at OS units of variable factor.
(iv)Beyond OS units of variable factor, TP starts declining. Economists
sometimes refer to this situation as a situation of negative returns.
Value Based Question OR HOTs
1.
2.
MP can be negative, but not AP. Comment 2.Do the terms diminishing or
constant mean that the output decreases or remains constant in the context
of the law of variable proportions?
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TOPIC 9- REVENUE
By Badal Ram Jangid, PGT (Eco), K.V. LOKTAK , NHPC MANIPUR (SILCHAR
REGION)
MCQ
1.
2.
Increasing
(B)
Decreasing
(C)
Constant
(d)
Zero
Ans.
(C) Constant
(B)
Price = AR = MR
(C)
MR curve is negative
(d)
Ans.
(B) Price = AR = MR
MLL
1.
Fill in he blanks
Ans-
2.
Output
AR
TR
MR
--
--
15
--
24
--
10
--
--
--
28
--
Output
AR
TR
MR
15
15
15
12
24
10
30
28
51 | P a g e
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3.
Find the fall in the market demand for the commodity when TR of the monopoly firm
reduces from Rs. 5000 to Rs. 4500 and AR increases from Rs. 50 to Rs. 90.
Ans-
1.
The statement is not correct since marginal revenue simply refers to a additional
revenue when an additional unit of a commodity is sold. It happens to be equal to
price under perfect competition. But, under monopoly and monopolistic
competition MR and price are definitely different from each other.
Explain the economic value of a horizontal straight line price line for a firm.
Ans
3.
TR = 5000
Price = AR = 50
So, Q= 5000/ 50 = 100
When TR = 4500 then Q = 4500/90 =50
Hence market demand falls by 50 100 = 50 units.
SAQ
Marginal revenue is always the price at which the last unit of a commodity is sold. Comment.
Ans.-
2.
Given,
Horizontal straight price line indicates the price of the product is constant for a firm,
or it is given to a firm. At the given price, a firm can sell any quantity. However if the
firm increases the price it will sell nothing. It would lose its all buyers to other firms
in the market. It implies that the elasticity of demand for the firms product is equal
to infinity. It is situation of perfect competition in the market.
A monopolist never allows MR to fall because he is the only producer of a commodity in the
market. Comment.
Ans-
No. Marginal revenue is always falling in case of monopoly because monopolist can
sell more only at lower price of the commodity. A monopolist has to follow the law
of demand even if he is a sole producer of the good. Decreasing average revenue
implies decreasing marginal revenue.
LAQ
1.
Draw TR and MR curves under monopoly market with schedule and explain their
relationship.
Ans.
Definition:Total Revenue (TR) :- total revenue is the sum of money receipts of producer
corresponding to given level of output.
Or
Total revenue is product of price and quantity sold by the producer at that price.
=
Marginal Revenue:- marginal revenue is the change in total revenue resulting from
change in sale of an additional unit of output.
= 1
Marginal revenue is ratio of change in total revenue to change in sale.
52 | P a g e
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Schedule :P=AR
TR
MR
11
10
10
10
18
24
28
30
30
28
-2
24
-4
DiagramREVENUE
TR Increa ses a t
d iminishing ra te
TP
Ma ximum
TP d eclines
TR
O
QUANTITY
MP d ecrea ses
b ut p ositive
REVENUE
MP= 0
O
MR
MP is
nega tive
QUANTITY
53 | P a g e
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2.
Draw TR , AR and MR curves under perfect competition along with suitable schedule.
Ans-
Price= AR
TR=PQ
MR
10
15
20
TR curve -In perfect competitive market total revenue curve is a positively slopped
straight line starting from origin.
REVENUE
TR
O
QUANTITY
P= AR= MR
P
O
QUANTITY
54 | P a g e
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Average revenue :- is per unit revenue received from the sale of one unit of a
commodity. Average revenue is ratio of total revenue to quantity sold.
=
= ,
Since
Therefore
=
Hence average revenue is always equal to price.
Total revenue is the product of price and quantity sold by the producer at that price.
=
And
=
= - 2bq
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TOPIC 10 : SUPPLY
BY Amit Kumar Singh, PGT (Economics), K.V OIL Duliajan, Assam
(Tinsukia Region)
MCQs
1. What causes a movement along the supply curve of a commodity?
a) Rise in the price of a commodity
b) Fall in the price of a commodity
c) Both a) and b)
d) None of these
Ans. c) both a) and b)
2. What causes a rightward shift of the supply curve?
a) An improvement in technology
b) A rise in the price of inputs
c) A rise in the rate of excise duty
d) Both b) and c)
Ans. a) an improvement in technology
MLL
1. Define market supply.
Ans. Market supply of a commodity is the total amount of a given good offered for sale by all
the individual firms in the market at different prices during a period of time.
2. State the law of supply.
Ans. Law of supply states that other things remaining constant, there is a direct relationship
between the price of a commodity and its quantity supplied. The quantity supplied of a
commodity rises with the rise in its price and falls with a fall in its price.
3. What is meant by a change in supply?
Ans. When change in supply is caused by change in factors other than price, it is called change
in supply. Change in supply indicates shift in supply curve.
SAQs
1. Explain the supply of a commodity is affected by the change in price of other commodities?
Ans. Any change in the prices of other products would influence the supply of a given product
by causing substitution of one product for another. For example, if the market price of wheat
rises, it will lead to the reduction in the production and supply of sunflower by the farmers as
they would withdraw some land and other resources from the production of sunflower and
56 | P a g e
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devote them to the production of wheat. This will cause the supply of the sunflower to
decrease implying the supply curve of the sunflower would shift to the left.
2. How does an increase in the rate of excise duty shift the supply curve and why?
Ans. When there is an increase in excise duty on the production of goods by the government,
the unit cost of production will rise and consequently the firm would supply less than before
at the given price. The supply would decrease implying that the supply curve would shift to
the left.
3. How does a change in the price of inputs affect the supply curve of a commodity?
Ans. Changes in the price of inputs used affect the supply of a product by altering the cost of
production. A fall in the price of inputs used causes a fall in the cost of production and
consequently brings an increase in supply. For example, if either wages of labour falls or prices
of raw materials comes down, the unit cost of production will fall. With less unit cost of
production, more would be supplied than before at the given price. That is, the supply would
increase implying that the supply curve would shift to the right.
LAQs
1. Explain any three determinants of supply of a commodity.
Ans. Following are the factors (determinants) that affect the supply of a commodity:
i.
ii.
Prices of inputs: The supply of a commodity is also affected by change in price of inputs
used in the production of the good. If the price of inputs (wages of labour, prices of
raw materials and fuel) goes up, the gross cost of production will rise and a result, the
supply of the commodity decrease. On the other hand, if the price of inputs declines,
unit cost of production declines and as a result, the supply of the commodity increases.
iii.
Price of other goods: The supply of a commodity depends upon the price of other
goods. Suppose, a farmer is growing wheat and rice. If the price of wheat rises, it will
be probable for the farmer to grow more wheat. The farmer would withdraw some
land and other resources from the production of rice and devote them to production
of wheat. This will cause a decrease in the supply of rice, the price of which has not
changed. The supply curve of rice shifts to the left.
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ii.
iii.
iv.
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TR>TC
(b)
MR>MC
(c)
TR=TC
(d)
TR <TC
Ans. TR=TC
2.
TR=TC
(b)
TR=TFC
(c)
AR=AVC
(d)
TC=MC
Ans. AR=AVC
MLL
1.
Who is a producer?
Ans. A producer is a producing unit who uses factor inputs to produce goods which
have exchange value.
2.
3.
Will a profit maximizing firm in a competitive market ever produce a positive level
of output in the range where MC is falling? Explain
Ans. NO, because the necessary condition of equilibrium is that MC >MR after
equilibrium.
SAQ
1.
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(a) MC = MR
(b) MC cuts the MR curve from below.
2.
3.
1.
(a) MC = MR Every producer aims to maximise the total profit. For this a firm
compares its MR with its MC. Profit will increase as long as MR exceeds MC.
So, equilibrium cannot be achieved when MC<MR as it is still possible to earn
profits by increasing production. Producer would also not like to produce when
MC>MR because this implies that benefit is less than cost, i.e., the firm will be
in equilibrium only when MC=MR
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(b) MC> MR after equilibrium This condition also has to be fulfilled because
MR=MC may occur at more than one output level. But equilibrium output level
will be the one after which MC becomes greater than MR because than it will
not be possible to earn any profit.
2.
On the basis of the information given below, determine the level of output at which
the producer will be in the equilibrium. Use the marginal cost and marginal revenue
approach. Give reason of your answer.
Output
AR(Rs.)
TC (Rs.)
15
22
28
33
40
48
Ans.
Output
MR(Rs.)
MC (Rs.) -
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2.
If MC is more than MR at a particular level of output, then how will a producer react
to maximize the profit?
Ans. Producer will decrease the production to maximize the profit. Reduction in the
production will be done till he reaches when MR =MC.
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MCQ
1.
one
(b)
few
(c)
very large
(d)
Large
Normal profit
(b)
Abnormal profit
(c)
(d)
2.
3.
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SAQ
1.
2.
3.
1.
2.
Explain the price and output of the Monopolistically Competitive Firm in the Short
Run and long run.
Ans. The Monopolistically Competitive Firm in the Short Run
Short-run economic profits encourage new firms to enter the market. This:
Increases the number of products offered.
Reduces demand faced by firms already in the market.
Incumbent firms demand curves shift to the left.
Demand for the incumbent firms products fall, and their profits decline.
In the long run
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Firms will enter and exit until the firms are making exactly zero economic
profits.
2.
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b) Monopoly
c) Monopolistic competition
d) Oligopoly
Ans: a
2.In which form of market AR=MR
a)Perfect competition
b) Monopoly
c) Monopolistic competition
d) Oligopoly
Ans.a
MLL:
1. Define perfect competition.
Ans:- Perfect competition is a market with large number of buyers and sellers , selling
homogeneous product at same price.
Monopoly
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Long Answer:
1. Explain any four characteristics of perfect competition market.
Ans:-Large number of buyers and sellers : The number of buyers and sellers are so large in this
market that no firm can influence the price.
i) Homogeneous products: Products are uniform in nature. The products are perfect
substitute of each other. No seller can charge a higher price for the product. Otherwise he will
lose his customers.
ii) Perfect knowledge: Buyers as well as sellers have complete knowledge about the product.
iv) Free entry and exit of firm: Under perfect competition any firm can enter or exit in the
market at any time. This ensures that the firms are neither earning abnormal profits nor
incurring abnormal losses.
2. Explain the process of price determination under perfect competition with the help of
Ans:-Equilibrium price is that price which is determined by market forces of demand and supply.
At this price both demand and supply are equal to each other. Diagrammatically it is determined
at the point where demand curve and supply curve intersect each other. At this point price is
known as equilibrium price and quantity is known as equilibrium quantity.
Price (Rs.)
M.D (Units)
M.S (Units)
10
10
HOTS
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In which of the following markets, in the long run firm earns supernormal profits
(a)
Monopoly
(b)
Monopolistic Competition
(c)
(d)
Oligopoly.
Ans. Monopoly
2.
Diseconomics Scale
(b)
No close substitutes
(c)
(d)
Barriers to entry
MLL
1.
3. Define monopoly.
Ans. Monopoly is a market situation dominated by a single seller who has full
control over the price.
2.
3. What are the reasons which give emergence to the monopoly market?
Ans.
i)
ii)
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3.
SAQ
1.
2.
3.
1)
2)
3)
4)
LAQ
1.
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substitutes of railways are buses & airlines but these are not close
substitutes.
4) Firm is also an industry: in monopoly there is only one firm, so firm is also
an industry.
5) Both a Price-maker & Price taker: The firm itself determines the price of
the commodity & firm is also an industry, so price-taker & price-maker both
are same.
6) Perfect immobility: Factors of production are perfectly immobile, because
these factors are under single seller.
7) Example: Railways is the best and the only example in India.
2.
MC
AR
O
OUTPUT
MR
AC
MC
P
PROFIT
C
E
AR
MR
O
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OUTPUT
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Y
SMC
SAC
A
P
LOSSES
E
O
AR
OUTPUT
MR
2.
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Demand by consumers
(ii)
Supply by producers
(iii)
(iv)
None of these.
Consumers
(ii)
Producers
(iii)
(iv)
None of these
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9. Looking at the high cost of production of wheat the Govt. of India fixed the support price of
wheat per quintal as Rs 2000. How will it affect the economy ?
(i) Farmers will be encouraged for wheat cultivation
(ii) Country will achieve self-sufficiency in wheat
(iii) Increase the buffer stock capacity
(v) Increase our export capacity
10. Government of India is planning to withdraw essential goods from price ceiling . Will the
economy be affected ? If so then how ?
(i) Around 20 % people who are below the poverty line can not afford for essential goods
(ii) Poverty will be aggravated
(iii) Starvation may cause social unrest and may some anti social activities.
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OLIGOPOLY
BY Mr. Pramod Barik , PGT (Economics), KV No.1, Sambalpur
KVS Bhubaneswar Region
MCQ
1.
(b)
(c)
(d)
Less elastic
Perfectly elastic
(b)
Highly elastic
(d)
Indeterminate
Ans. d- Indeterminate
MLL
1.
Define oligopoly.
Ans. Oligopoly refers to a market situation in which there are a few firms selling
homogeneous or differentiated products.
2.
3.
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SAQ
1.
How are the firms in an oligopoly market interdependent on each other? Explain.
Ans. The firms under an oligopoly are interdependent. Interdependence means that
actions of one firm affect the actions of other firms.
A firm considers the action and reaction of the rival firms while determining its
price and output levels.
A change in output or price by one firm evokes reaction from other firms
operating in the market.
Examples: market for cars in India is dominated by few firms like
Maruti,Tata,Hyundai,Ford,Honda etc.
2.
3.
LAQ
1.
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b] Barrier to the entry of firms: The main reason for few firms under oligopoly
is the barriers, which prevent entry of new firms into the industry.
Patents,requirement of large capital,control over crucial raw materials, etc are
some of the other reasons which prevent new firms from entering into
industry.
2.
Only those firms enter into the industry which are able to cross the barriers. As
a result firms can abnormal profits in the long run.
Explain the following implications in an oligopoly market:
a. Role of selling costs
b. A few large firms
Ans. a)Role of selling costs: due to severe competition and interdependence of the
firms various sales promotion techniques are used to promote sales of the
product.
Advertisement is in full swing under oligopoly. Selling costs are more important
under oligopoly than under monopolistic competition.
b]A few large firms:Under oligopoly there are few large firms. Each firm
produces a significant portion of the total output.
There exists severe competition among different firms and each firm try to
manipulate both prices and volume of production .
Example: The number of automobile firms in India is so small that an action by
any one firm is likely to affect the rival firms. So every firm keeps a close watch
on the activities of rival firms.
Under oligopoly though firms are free to take decisions about price and quantity to
be sold but they do not change the price and hence buyers are deprived of the
benefit of fall in price. Comment.
Ans. Oligopoly firms are mutually dependent and therefore while fixing the price
the output they are guided by the reactions of other firms. As such price
tends to be rigid and the consumers suffer.Value-critical thinking.
2.
Firms in oligopoly form cartel and in this way these firms can control over
prices. Value-Critical thinking.
Although there are few firms in oligopoly they can enjoy monopoly power. How?
Firms in oligopoly form cartel and in this way these firms can control over
prices. Value-Critical thinking.
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TOPIC 17: Some Basic Concepts: Consumption Goods, Capital Goods, Final
Goods, Intermediate Goods
BY: PRAGYAN PARAMITA DHAL, PGT (ECONOMICS), K.V. PURI
MCQS
1. Bread purchased by a bakery shop is
a]Consumer good
b]Capital good
c]Intermediate good
d]Final good
2. ----------------------------are used for further production
a] Intermediate good
b] Capital good
c] Producer good
d] All of the above
MLL
3. What are consumption goods ?
Ans-The final goods used directly by their final users for the satisfaction of wants.
4. Define capital goods.
Ans- The final goods used for further production as fixed asset by the producer.
5. Define intermediate good.
Ans-The goods used up in the production of final goods or used for resale.
SA
6. Differentiate between consumption goods and capital goods.
Ansconsumption goods
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capital goods.
1.
Definition
Definition
2.
3.
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intermediate goods
Definition
Definition
8. What are final goods ? Name two types of final goods with example.
Ans- Definition
Final goods are of two types.
A]Consumption goods- Refrigerator purchased by a household
B]Capital goods- Refrigerator purchased by a restaurant.
HOTS
9. All capital goods are producer goods but all producer goods are not capital goods.
Comment.
Ans- All capital goods are producer goods but all producer goods are not capital goods
because producer goods are all those goods which are used for the production of other goods
but capital goods are the fixed assets used for further production.
Ex: raw materials used in production are producer goods but not capital goods.
10. Though both intermediate and final goods are produced by an economy during a given
financial year, value of only final goods are included for estimation of national income.
Why?
Ans- Because the value of intermediate goods are already added up in the value of the final
goods.
So, addition of the value of both intermediate and final goods will lead to the overestimation
of NI of the economy resulting out of double counting.
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LA
11. Distinguish between final goods and intermediate goods. Explain the importance of this
distinction in the study of NI.
Ans- Combined answer of Q7 and Q10
12. State true/ false with reason.
A] Machines purchased by a dealer of machines are final goods.
Ans- False. They are intermediate goods as to be used for resale.
B] A computer purchased by a household is a capital good
Ans- False. A computer purchased by a household does not lead to any further value addition
in the process of any other goods or services. It is consumer durable good.
C]Furniture purchased by a school is final good.
Ans- True. This is a part of investment expenditure used to build up the stock of capital goods.
D] Chalk purchased by a school is intermediate good.
Ans- True. It is used up in the process of generation of teaching services.
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MCQ
1.
savings
(b)
Wealth
(c)
GNP
(d)
investment
100cr
(b)
200cr
(c)
400cr
(d)
300cr
MLL
1.
2.
3.
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SAQ
1.
the
following
into
stock
and
flow
Ans. LOSSES- It is a flow variable since losses are incurred over a period of time.
PRODUCTION- It is a flow concept because it accrues over a period of time.
CAPITAL It is a stock concept because it is measured at a point of time already
accumulated.
2.
3.
LAQ
1.
2.
STOCK
FLOW
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2.
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(b)
(c)
(d)
Rent
(b)
Wages
(c)
Money income
(d)
Goods
Ans. Goods
MLL
1.
What are the main precautions required to be taken in estimating national income
by value added method?
Ans. The following precautions are to be taken while estimating national income by
value added method.
I)
II)
III)
2.
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3.
SAQ
1.
Explain the concepts of leakages and injections in the circular flow of income.
Ans. Leakage- A leakage is a withdrawal of income from the circular flow. Leakages
from the circular flow are of different types-like (i) Taxes (ii) Savings (iii) Imports
etc. Leakages cause contraction of circular flow as money is taken out of the
flow process.
Injections- An injection is an addition to the circular flow. This addition arises
in different forms- like (i) investment (ii) Exports (iii) Govt. expenditure etc.
Injections cause expansion of circular flow because money is injected in to the
flow process.
2.
Sales
Closing stock
Purchase of raw material
Import of raw material
Import of machines
Opening stock
600
40
200
100
200
10
Ans. Value added by firm X = Sales + Closing Stock - Opening Stock Purchase of
raw material =600+40-10-200=Rs. 430 lakhs.
3.
Calculate net value added by market price from the following data.
(Rs. in Lakhs)
i)
ii)
iii)
iv)
v)
vi)
vii)
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Opening stock
Net indirect tax
Subsidy
Intermediate cost
Closing stock
Depreciation
Sales
10
7
2
12
8
5
40
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Ans. NVAmp = Sales + Closing stock Opening stock intermediate cost depreciation
= 40 + 8 -10 12 - 5 = Rs. 21 lakhs
LAQ
1.
ii)
iii)
iv)
v)
2.
From the following data, calculate gross domestic product at market price:
(Rs. in crores)
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
2000
800
1000
20
300
1400
1800
600
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Money flows are opposite to real flows. Do you agree with the statement? Give reason in
support of your answer.
Ans.
Money flows are opposite to real flows. I do agree with the statement becauseMoney flows are generally in response to real flows. If there is a real flow of goods and
services from the producers to the households; it is in response to it, that the
households make payments to the producers. Likewise, if there is a real flow of factor
services from households to the producers; it is in response to it, that the producers
make payments to the households. So that, money flows from producers to the
households in terms of factor payments.
2.
Explain the economic value of using value added method for the estimation of GDP.
Ans.
Value added method refers to the net output method of estimation of GDP.
Value added=Value of output - Intermediate consumption.
When we estimate value added by each producing unit in the country, we make an
assessment of the level of production in the economy. Low value added implies low
level of output and therefore, low level of income and employment. It points to low
quality of life of the people.
Since value added is estimated across different sectors of the economy we are also
able to access the relative contribution of these sectors in GDP. This helps the
government to formulate sector wise policies for growth and development.
Value added tax is based on the value added method of estimation of GDP.
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2.
Closing stock
(b)
(c)
Increase in livestock
(d)
Investment in shares
Ans.
(b)
(c)
(d)
None of these
Ans.
MLL
1.
2.
Define GDP?
Ans.
3.
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SAQ
1.
2.
3.
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domestic
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LAQ
1.
ii)
iii)
iv)
v)
2.
by
Consumer durable- goods like TV , car are not used up in a year , should
be treated as consumption expenditure or investment expenditure .
e.g. Expenditure on purchase of a car is treated as consumption
expenditure whereas on purchase of a taxi is considered as
investment expenditure . Moreover, it is almost impractical to
measure the value of services rendered by goods like washing
machines, tv
Government consumption- sometimes it becomes difficult to
differentiate govt. consumption expenditure from government
investment expenditure. E.g. govt. expenditure on roads ,dams ,
irrigation canals is treated as investment expenditure whereas
expenditure on defence is treated as consumption expenditure.
Interest on National debt paid by the govt. It is not included in
government expenditure about which some economists have
reasonable and justifiable doubts
Expenditure in Private sector- it is difficult to get data about
consumption expenditure and investment expenditure in the private
sector
Change in inventories- Production process is a continuous process
where change in stocks or inventories is also continuous. It is ,
therefore, very difficult to find out changes in the value of inventories.
Explain the main steps involved in measuring national income through Expenditure
method?
Ans.
[a] Classify the economic units incurring final expenditure into distant groups
like households, government, firms etc.
[b] Estimate the following expenditure on final products by all economic
units
* private final consumption expenditure :( household final consumption
expenditure in home country + Direct purchases made by resident
households abroad + Expenditure of Private non-profit institutions serving
household Direct purchases made by non resident households in home
country
* Government final consumption expenditure: it represents final
expenditure of the govt. on purchase of various goods and services within
and outside the country.It also includes COE paid by the govt.
* Gross domestic Capital Formation:
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2.
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MCQ
Q1]In expenditure method we calculate Final Expenditure on Gross Domestic Product at
I] MP
ii] FC
iii] Both
Ans. I] MP
Q2] Another name of Investment Expenditure is
I] GDCF ii] change in stock iii] BFI (business fixed investment)
Ans. I] GDCF
MLL
Q1] Define Gross Investment:
It includes
(a) All final purchase of machinery, equipment, and tools by business enterprise in given
time period-change incapital stock (b) all current construction (c) changes in inventories:
changes in stocks of finished goods and goods in process as well as changes in the raw
material that businesses keep on hand. Inventories can be negative, positive or zero
(a)
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This consists of all goods and service purchased by households. This is broken down even
farther into services, nondurable goods, and durable goods. As interest rates increase, people
begin to save more and consume less in relation to their spending/saving habits with lower
interest rates, so C decreases.
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require this help from the government, hence only productive expenditure should be incurred by
the government.
HOT QUESTIONS
Q1Why should the aggregate final expenditure of an economy be equal to the aggregate factor
payments? Explain.
Ans. The sum of final expenditure in the economy must be equal to the income received by all the
factors of production. It is because that the revenues earned by all the firms put together must be
distributed among the factors of production as salaries , wages , profits, interest and rent in the
economy as their services are exchanged for factor payments.
Q2] calculate GDPmp
particulars
Rs. In crores
1]
15000
2]
Government consumption
expenditure
11500
3]
1000
4]
Increase in stocks
200
5]
Exports
500
6]
Imports
700
7]
650
8]
500
Ans- GDPmp= private final consumption exp+ government final consumption exp+ gross domestic
capital formation+ net exports
= PFCE+GFCE+ ( GDFCF+ CHANGE IN STOCKS)+ (X M)
= 15000 + 11500 + ( 1000 + 200) + ( 500 700 )= Rs 27500
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Topic 21: Aggregates related to National Income: GNP, NNP, GDP, and NDP
at MP & FC, National Disposable Income (Gross & Net)
BY: RAMESH MANDAL, PGT (Eco), KV CMERI Durgapur
MCQ
1.
Externalities
(b)
Distribution of GDP
(c)
Non-monetary transaction
(d)
All of these.
Ans.
2.
(b)
GDP at MP = NDP at MP +
Depreciation
(c)
(d)
2.
3.
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SAQ
1.
2.
3.
1.
Calculate net national product at factor cost and gross national disposal income
from the following.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(Rs in crore)
2,000
(-)200
150
60
70
200
150
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2.
Will the following factor income be a part of Net Domestic Product of India? Give
reasons for your answer.
(i) Profit earned by foreign bank from their branch in India.
(ii)Salary received by Indian residents, working in American embassy in India
(iii) Profit earned by Indian company from its branch in Singapore.
Ans. .(i) It is a part of domestic product of India because the branch is within the
domestic territory of India.
(ii)It is not a part of domestic product of India because American embassy in
India is not a part of domestic territory of India.
(iii) Profit earned by Indian company from its branch in Singapore is not a part
of domestic product of India because the branch of Indian company in
Singapore is not a part of domestic territory of India.
Value Based Question OR HOTs
1.
2.
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MCQ
1.
Fixed Investment
(b)
Inventory Investment
(c)
Gross investment
(d)
Net Investment
Ans. b
2.
Intermediate Goods
(b)
Final Goods
(c)
Capital Goods
(d)
Consumer Goods
Ans. b
MLL
1.
2.
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3.
SAQ
1.
2.
Investment: It is the net addition made to the existing stock of physical assets
of the economy during a given period of time like structures,equipment etc.
Gross investment:It refers to total addition of capital goods to the existing
stock of capital during a given period.. It includes depreciation which means
normal wear and tear and foreseen obsolence.
Net Investment:On the other hand, it refers to net availability of new capital
after taking into account the wear and tear of existing capital.
It means ( Gross investment Depreciation)=Net investment.
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3.
GNPmp:It is the money value of all final goods and services produced within
the domestic territory of a country in an accounting year including net factor
income from abroad. It includes consumption of fixed capital and net indirect
taxes.
NDPfc:From GNPmp,if depreciation,net indirect taxes and NFIA is
subtracted,we get NDPfc.
NDPfc=GNPmp-depreciation-NFIA-NIT.
The difference between the two arises due to depreciation,NFIA and Net
indirect taxes.
LAQ
1.
GDP:It is the money value of all final goods and services produced within the
domestic territory of a country in an accounting year .
Nominal GDP:When goods and services included in GDP are valued at current
prices is called nominal GDP.It is calculated at market prices prevailing in the
year for which GDP is measured.
Real GDP:When GDP is measured at base price or constant prices is called real
GDP.It truly reflects the level of economic growth. It is a better and reliable
index of growth of an economy.
2.
ITEMS
Rs.Crs.
200
150
400
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4,000
50
(-)40
vii.Corporation tax
60
140
SUPPORT MATERIAL IN ECONOMICS FOR CLASS - XII (2016-17)
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Solution:
Private Income=i+iii+v+vi
=4000+150+50+(-)40
=Rs.4160crs.
Personal Disposable Income=Private Income-iv-vii-viii
=4160-400-60-140
=Rs.3560 crs.
Which two items are to be subtracted from income from domestic product
accruing to private sector to get private income.
Ans.
2.
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(b)
(c)
profit maximization
(d)
none of the
Non-monetary transactions
(b)
(c)
externalities
all of these
MLL
1.
2.
With every increase in the level of GDP, social welfare definitely increases in the
economy.
Ans.
3.
False. If increase in the level of GDP is associated with higher level of income
inequality, social welfare may not increase.
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SAQ
1.
2.
Define externalities.
Ans. Externalities refer to positive and negative impact of an economic activity on
the other without involving any price or penalty.
3.
LAQ
Explain shortcomings of GDP/GNP as a measure of welfare.
Ans. 1. Many non-market transactions such as the services of housewives increase
welfare but these transactions are not included in the estimation of GNP. This
is so because GNP only includes the transactions which can be evaluated in the
market.
2. GNP estimate does not reflect the capacities of different goods for providing
different levels of satisfaction to the society. For instance, the same amount of
money spends on destructive weapons or on milk production will have the
same effect on national income, but they will provide different levels of
satisfactions to the society.
3. GNP estimate cannot catch the standard of living effect of population.
Mostly, economics welfare is determined by the standard of living of the
people. The same amount of GNP may show a large endowment of capital
goods production or a small endowment of capital goods production. The
welfare in these two cases will not be the same. Other things remaining the
same, the GNP which accompanies the production of more consumptions
goods and less capital goods will show a better welfare content than the GNP
which accompanies the production of more capital goods and less
consumption goods. The standard of living aspect cannot be gauged from the
GNP as such.
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2.
National income Rose by 8% during the year 2011 does it represent the growth of
every Indian discuss.
Ans. No because national income includes the factor income of all the factors of a
nation. It does not analyze the distribution of income of every Indian some
people have very high income while others income might be negative is
negligible thus 8% growth of national income does not mean equal and growth
of every Indian.
2.
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(b)
credit money
(c)
fiat money
(d)
Fiduciary money
Fiat money
(b)
(c)
fiduciary money
(d)
credit money
MLL
1.
2.
Lack of value store-it difficult to store wealth for future use in form of
goods like cattle, wheat, potatoes etc.
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3.
SAQ
1.
3.
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LAQ
1.
So,
(a) Currency : it includes coins and paper notes of different denominations. It
is
most liquid asset.
It is a legal tender produced by the central bank of the country. Currency has
general
acceptability and all economic and business transactions can be
performed by it.
(b) Demand Deposit : Deposit which can be withdrawn by the account holder
at any time are called demand deposits. Current account deposit qualify this
condition.
Savings bank accounts do not qualify it, so it is not included in demand deposit.
Broader definition of money supply is based upon lesser liquidity of money.
M2 in addition to M1
includes term deposits which also includes savings bank deposits
M2 = M1 + Term deposit (includes savings bank)
People want to store money as an asset. Time deposits which also include
saving deposits are also liquid. There can also be withdrawn by the account
holder, but the depositor has to lose some interest. This broad money supply
includes currency with the public, demand and time deposit with bank.
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2.
2.
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MCQs
1. Money which is accepted as a medium of exchange because of the trust between the payer
and payee is called:
(a) Full bodied money (b) credit money (c) fiat money (d) Fiduciary money
Ans. (d)
2. Money that is issued by the authority of govt.of India is called:
(a) Fiat money
(b) full bodied money (c) fiduciary money (d) credit money
Ans. (a)
3. In case of credit money:
(a) Money value=commodity value (b) money value>commodity value
(c) money value<commodity value (d) none of these
Ans. (b)
MLL QUESTIONS
Q.1. What were the difficulties in Barter System?
Ans.These were the Following difficulties in barter system:
Problem of double coincidence of wants-it is very rare when owner of some good could
find someone else who wanted his goods and also having that good.
Lack of value store-it difficult to store wealth for future use in form of goods like cattle,
wheat, potatoes etc.
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Medium of Exchange: It means that money acts as a medium for the sale and purchase of
goods and services.
Standard of Differed Payment: Differed payment refers to those payments which are
made some time in the future.
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Ans:- High liquidity of money is referred to as narrow definition of money supply. The most liquid
assests are :
(a) Currency in the form of coins and paper notes.
(b) Demand deposits with bank (Only current account)
M1 = Narrow Money
C = Currently with public
DD = Demand Deposit
So,
M1 = C + DD
most
It is a legal tender produced by the central bank of the country. Currency has general
acceptability and all economic and business transactions can be performed by it.
(b) Demand Deposit : Deposit which can be withdrawn by the account holder at any time
are called demand deposits. Current account deposit qualify this condition.
Savings bank accounts do not qualify it, so it is not included in demand deposit.
Broader definition of money supply is based upon lesser liquidity of money.
M2 in addition to M1
includes term deposits which also includes savings bank deposits
M2 = M1 + Term deposit (includes savings bank)
People want to store money as an asset. Time deposits which also include saving deposits
are also liquid. There can also be withdrawn by the account holder, but the depositor has
to lose some interest. This broad money supply includes currency with the public, demand
and time deposit with bank.
Q2:-
Ans:- As per Crowther, money is anything that is generally accepted as a means of exchange
and that at the same time, acts as a measure and as a store of value. The important
functions are :
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1. Primary Functions
(a ) Medium of Exchange
(b ) Measure of Value
2. Secondary Functions
(a) Store of Value
(b) Standard of Deferred Payment
( c) Transfer of Value
3. Contingent Functions
(a) Basis of Credit Creation
(b) Liquidity
(c ) Distribution of National Income
(d) Maximum Utilisation of resources
(e) Guarantor of Solvency
HOTS
Q1:-
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MCQ
1. Credit creation is also known as
(A) Money creation
(C) A and B
(D) RBI
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8. Explain the process of money creation by commercial banks. Use numerical example.
Ans. Credit or money creation is an important function of commercial bank.
When commercial bank gives loan to consumers and producers then Credit creation
process starts.
Primary Deposits
Legal Reserve Ratio It is the minimum ratio of deposits legally required to be kept
by the commercial banks with themselves (i.e., SLR) and with the Central Bank (CRR)
CRR is the amount kept by the Commercial banks with the Central bank.
EXAMPLE
Stage
Deposit in Rs.
LRR in Rs.(10%)
Loans/Credit
Creation in Rs.
Initial
1000
100
900
I Round
900
90
810
II Round
810
81
729
III Round
729
72.9
656.1
Total
10000
1000
9000
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9. If money multiplier =10 and initial deposit is Rs 4000. Then find total deposit.
Ans. Total Deposit = Initial Deposit x Money Multiplier
= 4000x10=Rs 40,000
10. In a particular year RBI instructed the commercial banks not to advance loan to people
whose annual income is above Rs 6 lakh. Is it justified . Why?
Ans. Justification depends on phases of trade cycle.
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Buy securities
market.
in the
open (b)
(c)
(d)
Who is the fiscal agent and adviser to government in monetary and financial
matters in India?
(a)
SBI
(b)
IDBI
(c)
ICICI
(d)
RBI
Ans. d) RBI
MLL
1.
2.
Currency authority
Banker, Agent and adviser to the government
Bankers bank and supervisor.
Controller of money supply and credit.
Principal instruments of monetary policy or credit control of the central
bank of a country are broadly classified as
A. Quantitative instrument as,
i. Bank rate
ii. Open market operations
iii. Varying Reserve requirements
B. Qualitative instruments as,
i. Imposing margin requirement on secured loans
ii. Moral suasion
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3.
1.
How does the central bank control the availability of credit by open market
operation?
Ans. Open market operation is the policy of the central monetary authority to sell
and buy the government securities in the market.
RBI purchases government securities from commercial banks and general
public in a bid to increase the stock of high powered money in the economy.
Similarly, RBI sells the government securities to commercial banks and general
public in a bid to decrease the stock of high powered money in the economy.
2.
3.
What is bank rate policy? How does it work as a method of credit control?
Ans. Bank rate is the rate at which central bank lends funds as a lender of last
resort to banks, against approved securities or eligible bills of exchange.
The effect of a change in the bank rate is to change is the cost of securing funds
from the central bank. And increase in the bank rate increases the cost of
borrowing from the central bank. This will reduce the ability of banks to create
credit. A rise in the bank rate will then cause the commercial banks to increase
the rates at which they lend. This will then discourage business man and others
from taking loans. Thus it will reduce the volume of credit. A decrease in the
bank rate will have opposite effect.
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LAQ
1. Distinguish between central bank and commercial bank.
Ans.
S.N.
CENTRAL BANK
COMMERCIAL BANK
1.
2.
3.
4.
5.
6.
7.
It controls credit.
It creates credit.
8.
The central bank has the sole monopoly to issue currency notes.
Commercial banks cannot issue currency notes. Currency notes and cons
issued by the central bank are the legal tender money.
Central bank has an issue department, which is solely responsible for the
issue of notes and coins.
However, the monopoly of the central bank to issue the currency notes
may be partial in certain countries.
For example, In India, one rupee notes are issued by the government and all
other notes are issued by the Reserve Bank of India.
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What is a main reason for giving monopoly right of note-issue to the central bank?
Ans. The main reason for giving monopoly right of note-issue to the central bank are
as follows:
1) It brings uniformity in note circulation.
2) It gives distinctive prestige to the note issue. As a result, public develop
faith in the currency.
3) It enables the government to have supervision and control over the
supply of money in the country.
It enables the central bank to exercise the control over the creation of credit by
the commercial bank.
2.
ii.
Central bank gets opportunity to exercise control over the entire banking
system of the country.
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(b)
(c)
(d)
4.5
Ans. 4
2.
(b)
(c)
(d)
Ans. 1
MLL
1.
2.
3.
Define MPS?
Ans. It is a ratio of change in saving to change in income.
MPS=S/Y
SAQ
1.
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Consumption
Investment
Government expenditure
Net export
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AD=C+I+G+(X-M)
2.
3.
LAQ
1.
Explain the concept of inflationary gap. What is its impact on output, employment
and price level in the economy?
Ans. In a situation of excess demand, the level of output does not rise. Infact it
cannot raise because factors are already full employed. Output level remains
constant corresponding to the full employment level. Only price tend to rise.
Impact:
1- When AD increases beyond its full employment level, output remains
constant. But the pressure on demand on the existing supply starts
mounting up.
2- Mounting pressure on demand on the existing output causes a rise in
the prices.
3- Excess demand also generates pressure of demand on existing
resources, further it cause rise in the general price level.
2.
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Y= C+I
We use the consumption function to substitute C with the expression
C +b y, to give
Y=C +b y+I
Y-b Y = C +I
Or Y (I-b)= C+I
Or Y= 1/(1-b)( C +I)
Since b is nothing but the MPC, we have
Y= 1/(1-mpc)( C +I)
To find out the effect of a change in investment on income, we differentiate
the equation to get:
MPS=S/ Y= 1/1-mpc. I
Or ( change in income) =(Multiplier)X ( Change in investment)
Y/ I = 1/1-MPC= 1/MPS
The multiplier is equal to 1/1-MPC. It is the number by which the change in
investment must be multiplied in order to determine the resulting change in
output.
As we can see, the size of the multiplier depends on the value of the MPC.
What will be the value of multiplier if entire additional income is converted into
additional consumption?
Ans. In such a situation C=Y ( change in consumption= change in income )
Symbolically, MPC= C/Y=1
Accordingly, K would be,
K= 1/1-mpc= 1/1-1=1/0=
The multiplier value would tend towards infinity.
2.
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Topic 29: Short Run Equilibrium of Output , Investment Multiplier and Its
Mechanism
BY: Seema Marandi, PGT (Economics), KV No. 1 Kancharapara
MCQ
1.
2.
750
(b)
0.75
(c)
250
(d)
0.25
Ans.
0.25
1/MPS
(b)
1/1-MPS
(c)
1/1-MPC
(d)
Both A and C
Ans.
Both A and C
MLL
1.
2.
3.
Equilibrium income is that level of income where AS=AD, but full employment is
not achieved.
1.
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2.
3.
If disposable income is rs. 1000 crore and consumption expenditure is rs. 750 crore , find
out average propensity to save.
Ans.
1.
Explain the concept of underemployment equilibrium with the help of a diagram. Show
on the same diagram the additional investment expenditure required to reach full
employment equilibrium.
Ans.
AD =AS
AD 1
expenditure
AD 2
E
S
equilibrium
Under employment
45
L
L1
Income /output
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An increase in investment leads to total rise in national income by RS. 500 Crores. If MPC
is 0.9 what is the increase in investment? Calculate.
Ans.
1.
Shouldnt greater saving imply greater investment and greater flow of goods and
services?
Ans.
2.
Relationship between greater saving and greater investment holds good on poor
economies where that is lacking in the capacity to produce or aggregate supply
in relation to aggregate demand. It does not hold good in affluent economies
where what is lacking is aggregate demands or AD in relation to aggregate
supply. In these economies, greater saving would mean lesser consumption,
lesser demand and lesser production even when capacity to produce exist in
Economy.
No, excess of AD over AS does not always imply a situation of inflationary gap.
Inflationary gap occurs only when AD is more than AS corresponding to the full;
employment level of output.
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There is full employment in an economy, when there exists no ________on current wages
(a)
Involuntary unemployment
(b)
Voluntary unemployment
(c)
Disguised Unemployment
(d)
None of these
Ans.
(a)Involuntary unemployment
(c)
none of these
Ans.
(d)
MLL
1
3.
No, According to Keynes, the equilibrium is normally decided before the stage of
full employment and underemployment is a normal situation.
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Excess demand refers to a situation in which the Aggregate Demand is more than
the Aggregate Supply at the full employment level of output.Here, Actual
Aggregate Demand is greater than required Aggregate Demand.
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SAQ
1.
2.
Underemployment equilibrium
1. Situation where AD=AS and all 1. Situation where AD=AS but all those
those who are willing to work get who are able to work and willing to
work.
work do not get work.
2. Full employment equilibrium 2.Under employment equilibrium does
corresponds to the highest possible not correspond to the highest possible
level of output in the economy under level of output in the economy.
the given circumstances.
3.Attempt to increase production 3. Attempt to increase production
beyond full employment equilibrium beyond underemployment does not
causes inflationary gap.
cause inflationary gap.
3.
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LAQ
1.
Explain the meaning of underemployment equilibrium with the help of a diagram. Explain
two measures by which full employment equilibrium can be reached.
Ans.
Underemployment equilibrium refers to the situation where AD=AS but all those
who are able to work and willing to work at the prevailing wage rate do not get
Work.
(ii)The Central bank should decrease the repo rate .A decrease in repo lower the
market rate of interest, promoting a rise in demand for credit, an expansion in the
demand for credit leads to a rise in aggregate demand. Accordingly the situation
of full employment will reached
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2.
Ans. Classical theory was proved wrong during the period of great depression as
it could not answer the question raised by it. Keynes who was a British Economist,
started his carrier as a supporter of classical economics but when in 1930 all
assumption of classical economics proved wrong he left it .During the period of
great Depression he published many articles and 1936 published his great book
The General Theory of Employment ,Interest and Money.
Keyness theory of employment is a part of Modern Macroeconomics Analysis.
According to him level of employment in economy depend on the size of effective
demand which is decided by the equilibrium of aggregate demand and aggregate
supply. It is the aggregate demand which is more important. So if the
Economy likes to increase the level of employment has to increase the AD, which
in turn will increase the effective demand.
2.
It is not necessary that full employment occur when AD=AS or S=I. It means that
full employment may or may not occur at AD=AS or S=I. (ch)
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Fines
(b)
Interest received
(c)
Excise duty
(d)
Donations received
Corporation Tax
(b)
(c)
Wealth Tax
(d)
Income Tax
MLL
1.
Explain any three major sources each of revenue receipts and capital receipts.
Ans. Revenue receipts- a) Tax receipts- direct tax such as income tax, corporation tax
and indirect tax such as excise duty, value added tax.
b) non-tax receipts- dividends on investment in PSUs, interest received, fee and
fine etc.
Capital receipts Recoveries of loans, borrowings from the market or other
sources, receipts from disinvetment.
2.
Distinguish between direct tax and indirect tax. Give example of each.
Ans.
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DIRECT TAX
INDIRECT TAX
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3.
SAQ
1.
2.
3.
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LAQ
1.
CAPITAL RECEIPTS
2.
Giving reasons, categorize the following into revenue receipts and capital receipts1.
2.
3.
Ans.
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Tax on essential items has been reduced and tax on luxury goods has been increased.
Which economic value does it reflect? Explain.
Ans. Reduction in tax of essential goods by the government would benefit poor the
most as their consumption of such goods will increase, so the welfare. Higher
tax revenue collected from increasing tax on goods consumed by rich could also
be used for providing subsidies and facilities to the weaker section of the society
and development of the country. So, the resources can be re-distributed to
promote equality in the country.
2.
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(b)
Disinvestment
(c)
(d)
Ans. d
2.
Revenue deficit
(b)
Fiscal deficit
(c)
Primary deficit
(d)
None of these
Ans. b
MLL
1.
2.
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3.
SAQ
1.
Indirect tax
2.
State three sources each of revenue receipts and capital receipts in government
budget.
Ans. Sources of revenue receipts in government budget :
1. Direct and indirect tax
2. Fees and fines.
3. Profits from PSU.
Sources of capital receipts in government budget:
1.Recoveries of loan from state government, U.T. and other parties.
2.Borrwing from market, RBI and other sources.
3.Disinvestment.
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3.
LAQ
1.
1.Giving reason ,categories the following into revenue receipts and capital receipts
I.
II.
III.
IV.
V.
VI.
Ans.
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II.
III.
IV.
V.
VI.
Financial help from Microsoft for the victims of flood affected area: It
is revenue receipt as it neither creates any liability nor reduces any asset
of the government.
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2.
Giving reason categories the following into revenue expenditure and capital
expenditure
i.
ii.
iii.
iv.
v.
vi.
Ans.
ii.
iii.
iv.
v.
vi.
1.
2.
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(b)
(c)
(d)
Ans. b
2.
(b)
(c)
Tariffs
(d)
Ans. c
3.
Comparative advantage
(b)
Comparative scale
(c)
Economies of advantage
(d)
Ans. a
4.
(b)
(c)
(d)
Ans. b
5.
(b)
(d)
Ans. C
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6.
If there were a balance of payments deficit then in a floating exchange rate system:
(a)
(c)
(b)
(d)
Ans. a
7.
(b)
(c)
(d)
Ans. c
8.
Exports
(b)
Imports
(c)
both a and b
(d)
Nither a nor b
Ans. b
9.
Credit
(b)
Debit
(c)
Either a or b
(d)
Neither a nor b
Ans. a
10. Export and import of goods is also known as(a)
Invisible trade
(b)
Visible trade
(c)
One-sided transactions
(d)
Unrequited transfers
Ans. b
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ZIET BHUBANESWAR
The net balance of visible trade, invisible trade and of unilateral transfers is the balance on current
account.
Q14. Are exports and imports recorded as positive or negative items in foreign exchange?
Ans. Exports cause an inflow of foreign exchange into the country so they are entered as positive
items. Imports cause an outflow, so they are entered as a negative item.
Q15. Give an example of private unrequited transfers.
Ans. Gifts that domestic residents receive from or make to foreign residents eg. An Indian resident
working in Dubai sending back money to their relative in India.
Q16. Give an example of official unrequited transfers.
Ans. Receipt of or giving of foreign aid from development countries to developing countries.
Q17. What is meant by Portfolio Investment in the capital account transactions?
Ans. Portfolio Investment is the acquisition of an asset that does not give the purchaser control
over the asset. For eg. Investment in the purchase of shares in a foreign company or of bonds
issued by a foreign govt.
Q18. What is meant by Direct Investment in the capital account transactions?
Ans. Direct investment is the act of purchasing an asset and at the same time acquiring control of
it. For example, acquisition of a firm in one country by a firm in another country.
Short Answer Questions :Q1. Differentiate between balance of payment and balance of trade.
Ans.
Balance of Trade
1. Balance of trade is a record of
only visible items i.e. exports and
imports of goods.
2. Balance of trade is a narrower
concept as it is only a part of the
balance of payments account.
3. Balance of trade can be in a
deficit, surplus or balanced
Balance of Payments
1. Balance of payments is a record of
both visible items (goods) and
invisible items (services)
2. Balance of payments is a wider and
more useful concept as it is a record
of all transactions in foreign
exchange.
3. Balance of payments must always
balance
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Various forms of capital account transactions :1) Private Transactions :- There are transactions that effect the liabilities and assets of
individuals.
2) Official Transactions :- Transactions affecting assets and liabilities by the govt. and its
agencies.
3) Portfolio Investment :- It is the acquisition of an asset that does not give the purchaser
control over the asset.
4) Direct Investment :- It is the act of purchasing an asset and at the same time acquiring
control of it. The net value of the balance of direct and portfolio investment is called the
balanced on Capital Account.
Q3. Differentiate between autonomous and accommodating items.
Ans.
Autonomous Items
Accommodating Items
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Autonomous items in BOP refer to international economic transactions that take place due to
some economic motive. Such as profit maximization. These items are often called above the line
items in BOP.
The BOP is in deficit if autonomous receipts are less than autonomous payments. The monetary
authorities may finance a deficit by depleting their reserves of foreign currencies or by borrowing
from the IMF.
Accommodating Items :- Accommodating items in the BOP refer to transactions that occur
because of other activities in the BOP, such as government financing. Accommodating items are
also referred to as below the line items.
Question2: How the foreign exchange rate is determined? Explain with help of diagram?
Ans-Foreign exchange rate is determined by market firces of demand and supply.
Component of Demand for foreign exchange1.) Import of goods and services
2.) Servicesn of tourism used by the domestic country
3.) Unilateral transfers sent to abroad
4.) Purchases of assets in foreign countries
5.) Speculation activities
Demand curve for foreign exchange
Demand curve of foreign exchange slopes downwards due to inverse relationship between
demand for foreign exchange and foreign exchange rate.
Supply of foreign exchange-The supply of foreign exchange comes from those people whom
receive it due to following reasons.
1.) Export of goods and services
2.) Foreign investment
3.) Remittances from abroad(unilateral transfer)
4.) Speculation
Determination of exchange rateThe equilibrium exchange rate is determined by the interaction of demand and
ZIET BHUBANESWAR
In above diagram DD is the demand curve of foreign exchange and SS is the supply curve of foreign
exchange.At point E the equilibrium is established because at point E demand of Dollar is equal to
Supply of dollar. At point R there is excess supply of dollar and at point R there is excess demand
of dollar.
HOTS with model answersQ1 State which type of exchange rate has no official intervention in the foreign exchange
market? How it is determined?
Ans. Flexible exchange rate has no official intervention. It is determined by the interaction
of supply and demand in the foreign exchange market.
Q.2 State which of the following is a visible item and which is an invisible item in Balance of
payments.
(a) Export of jute product (b) Software services exports.
Ans. (a) Export of jute product - Visible Item
(b) Software services exports - Invisible Item
Q.3 Name the items which are not included in the current account of Indias Balance
of payment,
Ans. The capital transactions in the form of direct and portfolio investment that take
place between the countries are not included in the current account of Indias Balance
of payments.
Q.4 In which account of balance of payment tourism services to tourist are included?
Ans. Tourism services to tourist are included in current account of Balance of payments.
ZIET BHUBANESWAR
Q.7 What are the factors responsible for inflow of foreign currency?
Ans.
ii) Foreigners investment in home country through joint ventures and through
financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and speculators
Q.8 When exchange rate of foreign currency falls its supply also falls. Explain how?
Ans. When exchange rate falls, experts become less profitable hence supply of foreign
currency through exports falls.
Q.9 When exchange rate of foreign currency falls, its demand rises. Explain how?
Ans. When exchange rate falls, imports become cheaper, demand for imports rises and so
rises the demand of foreign exchange to purchase more imports.
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