UNIVERSITY OF CALICUT ® SCHOOL OF DISTANCE EDUCATION B.A (OPEN STREAM) ENTRANCE EXAMINATION - 2012 STUDY MATERIALS & OBJECTIVE TYPE QUESTION BANK WITH ANSWER KEY PART Ii ECONOMICSUNIVERSITY OF CALICUT. SCHOOL OF DISTANCE EDUCATION Study Material & Question Bank with Answer Key: Patt III- Economics (Open Stream) Prepared By: N. Mohanadasan Lecturer, Selection Grade ‘The Zamorin’s Guruvayurappan College, Calicut ‘Type setting & Layout: Computer Section, SDE. —>T>____—‘The present work is an attempt to satisfy the requirements of students appearing for B.A. Economics (Open Stream) Entrance Examination. This work has been prepared based on Plus-Two syllabus and also keeping in mind the educational background of the students, Attempt has been made to present the topic in a lucid style, so that students even at the average level will be benefited. DIRECTOR SCHOOL OF DISTANCE EDUCATIONDear Student, ‘The present work is a humble attempt to satisfy the needs of sidents appearing for B.A. (Open Stream) Entrance Examination. The study material has been prepared with certain objectives: : L To give a brief view of the subject opted for B.A. Course 2 To facilitate attempt of objective type questions Around 500 questions of multiple choice questions find place in this work. Explanatory notes have been provided wherever necessary. The book in the present form shall serve as a complete revision book just prior to the examination. Any suggestion for the improvement of the book shall be thankfully acknowledged. Wish you all success (Mohanadasan N.)me Sched of Distance Education CONTENTS Page No. Part I Chapter 1. Introductory Microeconomic Theory 7 Chapter 2. Consumer Behaviour and Demand 9 Chapter 3. Producer Behaviour and Supply 12 Chapter 4. Forms of Market and Price Determination 15 Chapter 5. Factor Pricing and Distribution v7 Part It Chapter 1. Introductory Macroeconomics 21 Chapter 2. National Income and Related Aggregates 22 Chapter 3. Concepts of GDP, GNP, NDP and NNP 24 Chapter 4. Determination of Income and Employment 26 Chapter 5. Money and Banking 29 Chapter 6. Government Budget and Economy 31 Chapter 7. International Trade 34 Part II Chapter 1. Concepts of development 36 Chapter 2. Growth and Structural changes in the Indian Economy 38 Chapter 3. Infrastructure and Economic Development 39 Chapter 4. Development strategies till 1990 4 Chapter 5. Population, poverty and unemployment in India 42 Chapter 6. Emerging issues 47 Part IV Objective Type Question Bank with Answer key. 49 Economics (Open Stream)Seta of Dee Beton PARTI Chapter 1 INTRODUCTORY MICROECONOMIC THEORY NATURE AND SCOPE OF ECONOMICS Introduction: Economics is the science of economizing. It is concerned with choosing rationally amongst the alternative uses to which resources may be put. ‘Thus in economies, we are concemed with satisfaction of wants in the most efficient way. Economics deals with economy and economic activities. The most important economic activities are production, consumption, exchange and distribution. ‘The term Economics is derived from the Greck ‘word ‘oikonomia’ which means household management. Definition of Economics As an academic discipline economics is relatively new. Since its origin, different economists have tried to define economics in different manner. For the convenience of our study we classify these definitions into four main groups: (1) Wealth definition; (2) Welfare definition; (3) Scarcity definition; and (4) Growth definition. Wealth definition is associated with the name of Adam Smith and his followers. Adam Smith is known as the father of Economics. ‘The title of his book is “An Enquiry into the ‘Nature and Causes of the Wealth of Nations” (1776). He defined economics as the science of wealth, Adam Smith’s definition was criticized on the following grounds: (a) Narrow meaning of wealth; and (b) Gave more importance to wealth neglecting man, human welfare and moral values. Welfare definition is associated with the neo-classical economist Alfred Marshall. He published his book “Principles of Economics” in He defined economics as a study of ‘mankind in the ordinary business of life. It examines that part of individual and social action which is most closely concerned with the attainment and the use of material requisites of well- being. Scarcity definition was given by Lionel Robbins. According to Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have altemative uses”. Thus unlimited wants and limited resources with altemative uses give rise to the problem of choice. Economics is thus a study of the problems of choice” Growth definition was developed by P.A.Samuelson. Ezonomies (Open Stream) 1EE School of Distance Education ‘The Central Problems of an Economy: Alll economies face certain central problems. ‘The root cause of these problems lies in the mismatch between wants and resources. Main central problems are as under: 1. What to produce? 2. How to produce? 3. For whom to produce? 4. Problem of efficiency 5. The problem of fuller utilization of resources and 6. The problem of growth Solution of Central Problems: Different economic systems try to solve these problems differently. These problems are solved by the market mechanism in a capitalist economy. Central problems in a socialist economy are solved by a central planning authority through the mechanism of planning. ‘The solution of central problems in a mixed economy is a joint responsibility of market mechanism and planning process. Production Possibility Curve: A curve which shows the various production possibilities that can be produced with given resources and technology is called production possibility curve. It depicts society's menu of choices. PP Curve is concave to the origin. This is due to increasing opportunity cost of production. The opportunity cost of any thing is the cost of the next best alternative foregone. It is also known as transfer earnings. This curve is also known as éransformation Micro economics and Macro economics: Micro economics is the study of the economic behaviour of the individual units Macro economics is the study of the economy as a whole. Micro economies provides a worm’s eye view, whereas macto economics provide.-a bird's eye view of the economy. ele (Oe St a SS eeSehool of Distance Education ® Chapter? CONSUMER BEHAVIOUR AND DEMAND Consumers buy or demand goods and services to satisfy their wants. They want to maximize their satisfaction, Utility: Utility is the want satisfying power of a commodity or service. Utility is measured in units called utils. Utility may be either total utility or marginal utility. Total utility is the satisfaction that a consumer obtains from all units of a product consumed within a given period. Marginal utility is the change in total utility resulting from the consumption of one more or one less unit of a product, Law of Diminishing Marginal Utility The law of diminishing marginal utility states: other things being constant, as more and more units of a commodity are consumed, the additional utility derived fiom the consumption of each successive unit will decrease. ‘There are two approaches relating to utility. They are neo-classical cardinal approach and Hicksian ordinal approach. Cardinal approach assumes that utility can be quantitatively measured as 1, 2, 3, efe. Ordinal approach assumes that utility can only be rahked as 1", 2", 3%, ete, Consumer Equilibrium: Consumer's equilibrium may be defined as the position of maximum satisfaction. In the case of economic goods, the general principle of consumer’s equilibrium is stated as: Marginal utility of X / Price of X = Marginal utility of Y / Price of Y Goods and Services: Goods are material things that have utility. Services are non-material things that have utility. Goods are of two kinds: free goods and economic goods. Free goods are those which are available without paying price. Economic goods are those which are available only by paying price. Commodity: A commodity is any good produced for sale in the market, Market: In economics, market refers to all areas in which buyers and sellers are in contact with each other for purchase and sale of commodities. Demand: Demand is desire backed by willingness to pay and ability of pay. Demand for a commodity is the quantity of that commodity which consumers will be willing to buy in a given period of time at a given price. Demand may be individual demand or market demas Individual demand is the quantity of a commodity than an individual consumer is willing to buy in a jiven period of time at a given price. Market demand is the stim total of all individual demands in a market. zooms (Open Stream)uaa School of Distance Biucation Determinants of Demand: Demand depends upon: (1) Price of the commodity, (2) Prices of related commodities, (3) Income ofthe consumer, (4) tastes and preferences, (5) Interest rate, (6) Business condition, (7) Distribution of income and (8) Money supply. Demand Function; Demand function expresses the relationship between quantity demanded of a commodity and its determinants. It can be expressed as: Dx=f(Ps, Po, ¥,T) Where Dy = demand for good X P, = price of good X of related goods Y =consumer’s income T= taste of the consumer Demand Schedule: Demand schedule is a list showing the various prices of a commodity and the quantities demanded at those prices, Demand Curye: Demand curve is the graphical representation of the demand schedule. De »pes downwards from left to right. There are certain reasons for this, They arc: (9) Income effect; (b) Substitution effect; (e) Law of diminishing marginal utility; (d) New custou and (¢) Different uses. The Lay of D: cmand: ‘aw of demand states the inverse relationship between price and demand. ‘0 the Law of Demand: The law of demand does not operate in the following -e expectation and 5. Ignorance of consumers, Extension anc Contraction of Demand: Other things being equal, when more quantity is bought because of fall in its prieg, itis called extension of demand. When less quantity is doug! its price, it is termed as contraction of demand. se of tis Increase on: Decrease in Demand: Change in quantity demanded of a commodity caused changes in fuctors other than its price, it is known as shifts in demand. Shifts in demand can be either increase in demand or decrease in demand, When, because of the factors other than price of the commodity concemed, more quantity at the same price is demanded it is termed as increase in demand, Similarly, when, because of the factors other than ptice of the commodity concerned, less quantity at same price is demanded, it is termed as decrease in demand. Beonomies (Oper Srsan) 10School of Distance Euation The degree of responsiveness is called elasticity. Elasticity of demand is the response ) in demand to change in price. Price elasticity of demand is the response or change in demand because of initial change in price. $ d Price elasti = Percentage change in quantity demanded / Percentage change in price Degrees of Price Elasticity: Price elasticity of demand may be perfectly clastic, perfectly inelastic, unitary elastic, relatively elastic, and relatively inelastic. Demand is perfectly elastic when a small change in price causes a substantial change in quantity demanded. Demand is perfectly inelastic when there is no change in the quantity demanded with the changes in its price. Demand is unitary elastic when a given change in price causes an equi-proportionate change in quantity demanded. Demand is relatively elastic ‘when a given change in price causes more than proportionate change in quantity demanded. ‘When a given change in price causes a less than proportionate change in quantity demanded, then demand is said to be relatively inelastic. Measurement of Price Elasticity: ‘Thére are three methods of measuring price elasticity. ‘These are (a) Percentage method, (b) Expenditure method, and (c) Geometric method. Three Types of De (1) Price demand (2) Income demand (3) Cross demand Price demand refers to the relationship between the price changes and the changes in quantity demanded. Income demand refers to the relationship between changes in income and the changes in quantity demanded. Cross demand refers to changes in the quantity of a good demanded as a result of changes in the prices of related commodities. eons (Open Seam) — ($$a School of Distance Education fs Chapter 3 PRODUCER BEHAVIOUR AND SUPPLY Maximization of profit is an important objective of producer or firm. Production ‘means the creation of value. It is the transformation of inputs into output. Production function is the technological relationship between inputs and output. Production function can be written-as. Q=t(Fiy Fa Fd * Where Q is the quantity of output, F), Fo, ... , Fy are the various inputs used to produce the output, Production fimetion gives rise to three important concepts: (1) Total Physical Product (2) Marginal Physical Product, and (3) Average Physical Product Production function in the short run is called Jaw of variable proportions. Production function in the long run is known as refurns to scale, In the short run, some factors are fixed and some others are variable. More output can be produced by adding more variable inputs to xed inputs, In the long run, all factors are varicbles. Therefore, more output can be produced by changing all inputs. Returns to scale explains the changes in returns caused by changes in the scale of production. Returns 10 scale are of three kinds: (a) Increasing returns to scale {b} Constant returns to scale, and (© Diminishing retums to scale In the case of increasing returns to scale, a 20 % increase in all factors leads to a more than 20 % increase in output. In the case of constant retums to scale, a given proportionate increase (say 20 %) in factors causes equally proportionate inerease (20 %) in output. Diminishing retumns to scale means a situation in which a given increase in inputs causes a less than proportionate increase in output. Cost Concepts: Cost means the expenses incurred in production. Cost may be short run cost or long run cost. Short run eost means cost incurred in the short period, Long run costs are incurred means cost incurred in the short period. In the short run, some costs are fixed and others ate variable, Fixed costs are those which do not change with output. Variable costs will vary with output. Money Cost and Real Cosi. ‘The total monetary expenses incurred by a firm in producing a commodity are called money cost. Real costs refer to the pains and sacrifice undergone in production. + Beono rics OPEN SEEM anne 2ng xe ed 12 School of Distaice Education Private Costs and Social Cos Private costs are costs incurred by private firms. Social costs are costs incurred by the society as a whole. Explicit and Implicit Costs: Explicit costs are the payments made by a firm for purchasing resources from the factor owners. Implicit costs are the costs of self owned factors of production. Opportunity cost: Opportunity cost is the & Total cost: Total cost is the sum total of all costs incurred in production. Total cost = Total fixed cost + Total variable cost Average cost: Average cost is the cost per unit of output. Average cost equals total cost divided by the number of units of output. AC=TC/ Output st of foregone alternatives Average cost is the sum of average variable cost and average fixed cost. Average variable cost = Total variable cost / Output Average fixed cost = Total fixed cost / Output Marginal Cost: Marginal cost is the incremental cost. In other words, it is the change in total cost resulting from one unit change in output. Revenue: ‘The revenue of a firm is the receipts that it obtains from selling its products, Reven has three main concepts: (a) Total revenue (TR), (b) Average revenue (AR), and (c) Margin: revenue (MR). Total revenue refers to gross revenue, i.e. the total sale proceeds of the fir, TR=PxQ Where P = price and Q = quantity sold. Average revenue is the revenue per unit of output sold, revenue by the quantity sold. obtained by dividing total AR=TR/Q Marginal revenue is the change in total revenue resulting from one unit increase in the sales. MR=TR,~TRat Under perfect competition AR and MR curves will be the same. AR and MR curves will be horizontal straight lines. Under imperfect competition, average revenue and marginal revenue will decline with increase in sales. MR and AR cutves will be sloping downwards from left to right. . ‘The Break-Even Point: ‘The break-even point is the point at which total costs and tot revenue are equal. It is a no profit, no loss point, producer’s equilibrium is a point of ‘maximum profit. Supply: The amount of a commodity offered for sale at a given price and in a given period of time is called supply. Supply function expresses the functional relationship between the Feonomies (Open Steam) ~ 13Sti of Distance duction supply of a commodity and its various determinants. Various determinants of supply ae: price of the commodity, prices of other commodities, production techniques, price of inputs, price expectations etc. - Law of Supply: The law of supply states that, “other things remaining the same, the quantity of a commodity supplied varies directly with its price,ii., quantity rises when price rises and falls with price falls. Supply Schedule: A supply schedule is a table showing various quantities of a product offered for sale by sellers at various prices. : Supply Curve: The supply curve is the graphical representation of the supply schedule, Supply curve has a positive slope, i.., it slopes upwards from left to right. Expansion and Contraction of Supply: Changes ix quantity supplied because of changes in price are called expansion and contraction of supply. Increase and Decrease in Supply: Changes in quantity supplied because of factors other than the price of the commodity are known as increase and decrease in supply. Elasticity of Supply: Price elasticity of supply is the degree of responsiveness of quantity supplied due to changes in price. It can be expressed as = Percentage change in quantity supplied / Percentage change in price Degrees of Price Elasticity of Supply: ‘There are five degrees of elasticity of supply., They are: (1) Perfectly elastic supply (2) Perfectly inelastic supply (3) Unitary elastic supply (4) Relatively elastic supply, and (5) Relatively inelastic supply. “Beomomics (Open Streanp ag 5 ———Go are: puts, antity s and oduct edule. ages in s other antity 14, Schoo! ne Blwcaton Chapter 4 FORMS OF MARKET AND PRICE DETERMINATION In economics, market means all the places in which buyers and sellers arc in contact, with each other for the purchase and sale of any commodity or service. Forms of Market: Based on the number of buyers and sellers, nature of tt level of knowledge, degree of freedom of entry or exit, markets can be cl: categories: (1) Perfect Competition; (2) Monopoly; (3) Monopolistic Compe Oligopoly. Perfect Competition: Itis an extreme form of market which rarely exists in the real world. Perfect competition has the following characteristics: (.) Large number of buyers and sellers (b) Homogenous product (©) Freedom of entry and exit. ‘The market which possesses these three conditions is termed as pure compesition market. (@) Perfect knowledge (©) Perfect mobility of factors and products and (© Absence of transport cost Pure competition plus the last three conditions constitute perfect competition. A firm under perfect competition is said to be in equilibrium when two conditions are satisfied: 1, MC=MR 2, MC curve cuts MR from below Monopoly ‘The word monopoly is made of two words: MONO + POLY. ‘Mono* m and ‘poly’ means the seller. Thus monopoly means one seller or producer. Monopoly is « market, situation wherein a single firm producing a commodity which has no close substitute Features of Monopoly: 1, Single seller or producer 2. No Close substitutes 3. Barriers to the entry 4, Control over the price sectioned at Be —$—< << — $$ee Schoo of Disiance Education ‘But the monopolist cannot determine the price and quantity sold simultaneously. The demand curve of the monopolist is negatively sloped. It means that the monopoly firm can sell only a smaller quantity at higher prive. Price Discrimination: Price discrimination is the practice of charging different prices for the same product or service from different buyers. Monopolistic Competition The theory of monopolistic competition was first popularised by E.H.Chamberlin, Monopolistic Competition refers to the market situation in which there are many firms selling closely related but not identical products. Features of Monopolistic Competition: 1. Many sellers 2. Free entry and exit 3. Product differentiation 4, Selling cost ‘The demand curve facing a firm under monopolistic competition is negatively sloped. ‘This carve is flatter than that under monopoly. Oligopoly Oligopoly is a market situation wherein the number of producers (or firm or sellers) is so sma'l that every seller has significant effect on others and influences the market. Featur of Oligopoly: 1. A few sellers . interdependence among various firms orice war and price rigidity 2 3 4, Calling costs 5. | roduct may be homogeneous or differentiated 6, 1 batriers to entry, and 7, Ieleterminateness of demand curve. Equilibrium Price: Equilibrium price is the price at which the quantity demanded is equal to the quantity supplied Economics (Oper Sr. 2 ae geen 1GEbuaion School of Distonce Education demand only a s Chapt s for the antey § FACTOR PRICING AND DISTRIBUTION mberlin, Distribution can be of two types ~ Funetional distribution and Personal distribution, s selling ‘The division of national product among factors of production is called functional distribution, Personal distribution is the division of national product among different houscholds or persons in the economy. Functional distribution is mainly concerned with the determination of the factor price. Marginal Productivity Theory of Distribution: This theory was formulated by J.B.Clark, W.S.Jevons and L.Walras and later developed by Alfred Marshall. According to this theory, the price of the factor will be determined by the marginal productivity of that factor. Marginal physical product multiplied by price equal marginal revenue product (MPP X P = MRP). y sloped, Modern Theory of Distribution: According to the modern theory of distribution, the price of a factor is determined by the demand for and the supply of that factor. sellers) is ‘The demand for factors depends upon: 1, Demand for the product 2. Productivity of the factor, and 3. Prices of related factors. ‘The supply of factors mainly depends upon price, The most important factors are land, labour, capital and organization. ‘The reward or prices of these factors are rent, interest and profit respectively. Rent: In economics, rent is the “the reward paid for land”. ‘There are two theories which explain the determination of the reward for land, i.e. rent. They are Ricardian theory of rent and Modem theory of rent. Ricardian Theory of Rent; This theory is associated with the name of David Ricardo. s equal to According to him, “rent is that portion of the produce of the each which is paid to the landlord for the use of the original and indestructible powers of the soil”. Rent is a “differential surplus”. Rent does not determine price. Itis determined by price. Modern Theory of Rent: Modern theory of rent is associated with the name of Mrs. Joan Robinson, According to this theory rent arises in the case of all factors of production. — Economic rent is the excess earning that a unit of the factor actually earns over and above 2 transfer earnings. Transfer earning is nothing but the opportunity cost. Thus 2 Economic rent = Actual earning ~ Transfer earning : Rent arises due to the inelastic supply of the factor. g = 16 canis (Open Sevan) 17 ————ae Shoot Distance fcr Quasi-Rent: This concept was coined by Alfied Marshall. Quasi-rent is the surplus income camed by man-made appliances in the short run. It disappears in the long run. Wages ~ ‘Wages are the payments made for the production services of labour. Characteristics of Labour: 1. Labour cannot be separated from the labour Labour is perishable, Labour has weak bargaining power, There are differences in the quality or efficiency of labour, veer Labour is both means of production and source of consumption, 6. Changes in the supply of labour are slow. Wages may be nominal wages or real wages. Nominal wages mean wages paid in terms of money (money wages). Real wages are wages expressed in terms of purchasing power of money. Real wages are determined by purchasing power of money (price), extra income, extra facilities, working hours, working conditions, etc. Theories of Wages: ‘There are four theories which explain the determination of money wages. 1. Subsistence Theory of Wages ‘Modem Theory of Wages Marginal Productivity Theory of Wages and ‘The Wage Fund Theory. 1. Subsistence Theory of Wages was formulated by Physiocrats and later restated by David Ricardo. According to this theory, labour will be paid subsistence wages, ic. wages sufficient to maintain the labourer and his family, 2. Modern Theory of Wages: According to this theory, the reward of labour is determined by demand for and supply of labour. Equilibrium wage rate is set at a point where demand equals supply. 3. Marginal Productivity Theory: According to the version, wage rate should be equal z to the marginal revenue product. 4. The Wages Fund Theory: This theory was developed by J.S.Mill. According to this theory, wage rate will be determined by the wages fund. Wage rate will be equal to ‘wages fund divided by the number of workers. Reasons for wage differences: ‘Wages differ among different jobs due to the following reasons: (a) Differences (b) Trade union activities skill and productivity (©) Cost and time of training (@) Working hours Boones pe icy ee —e