TASK 1

Banking is not really a competitive industry. In reality, it's more like an oligopoly -- a
scenario in which an industry is controlled by a small number of firms. An oligopoly is a lot
like a monopoly, where one firm controls the whole show. An oligopoly is a market structure
in which a few firms dominate. When a market is shared between a few firms, it is said to be
highly concentrated. Although only a few firms dominate, it is possible that many small firms
may also operate in the market. Australia's major banks are an "oligopoly"- Commonwealth
Bank of Australia (CBA.AX), Australia and New Zealand Banking Group (ANZ.AX),
Westpac Banking Corp (WBC.AX) and National Australia Bank (NAB.AX). Firms that are
interdependent cannot act independently of each other. A firm operating in a market with just
a few competitors must take the potential reaction of its closest rivals into account when
making its own decisions. Oligopolies frequently maintain their position of dominance in a
market might because it is too costly or difficult for potential rivals to enter the market.
Spending money on Research and Development (R & D) is often a signal to potential entrants
that the firm has large financial reserves. In order to compete, new entrants will have to
match, or exceed, this level of spending in order to compete in the future. This deters entry,
and is widely found in oligopolistic markets such as pharmaceuticals and the chemical
industry. The reaction of rivals to a price change depends on whether price is raised or
lowered. The elasticity of demand, and hence the gradient of the demand curve, will be also
be different. The demand curve will be kinked, at the current price. However, Oligopolies can
be criticised on a number of obvious grounds, including:

High concentration reduces consumer choice.

Cartel-like behaviour reduces competition and can lead to higher prices and reduced output.

Given the lack of competition, oligopolists may be free to engage in the manipulation of
consumer decision making.

By making decisions more complex - such as financial decisions about mortgages -

individual consumers fall back on heuristics and rule of thumb processes, which can lead to
decision making bias and irrational behaviour, including making purchases which add no
utility or even harm the individual consumer. Firms can be prevented from entering a market
because of deliberate barriers to entry. There is a potential loss of economic welfare.
However, oligopolies may provide the following benefits:

Oligopolies may adopt a highly competitive strategy, in which case they can generate similar
benefits to more competitive market structures, such as lower prices.

Even though there are a few firms, making the market uncompetitive, their behaviour may be
highly competitive.

Oligopolists may be dynamically efficient in terms of innovation and new product and
process development.

The super-normal profits they generate may be used to innovate, in which case the consumer
may gain.

Price stability may bring advantages to consumers and the macro-economy because it helps
consumers plan ahead and stabilises their expenditure, which may help stabilise the trade
cycle.

Oligopolists may be allocatively and productively inefficient. These hurdles are called
barriers to entry. The four lenders together control four-fifths of the industry in Australia and
have enjoyed years of record profits thanks largely to their dominance of the mortgage
market. Australia’s largest four banks dominate an oligopoly that gives them a durable
structural competitive advantage, ensuring they’ll earn excess returns over the very long term.
This enables the banks to prosper compared with major banks elsewhere in the world and
gives Morningstar’s analysts confidence that the banks will have global sector-leading returns
on equity for the foreseeable future. They’re well established and efficiently service and
control a market of limited size so potential competitors have little incentive or financial
means to compete on an equal footing because it would cause poor returns for all players.
The banks’ strong and trusted brands also support their “economic moat”, and the underlying
ingrained perceptions of safe banking and high customer satisfaction ratings. The pricing
power of the four major banks reflects the strength of their brands and their dominant market
positions. The big banks charge more for loans and less for deposits than smaller bank. The
banks have low customer turnover due to meaningful switching costs, high customer
satisfaction and the fact that most retail customers hold an average of three products
including long-dated home loans. The banks’ have strong pricing power that comes from
their dominant market positions within a limited and regulated market, high-entry barriers,
large-scale and low-cost operations, access to lower-cost funding, a large sticky customer
base and high-profile brands. Cost advantage, coming from a combination of low funding
costs, low operating costs and low credit losses, comes a close second to efficient scale in
lifting the banks’ competitiveness. The major banks enjoy a 50 basis point funding cost
advantage over the smaller domestic banks thanks to strong balance sheets, strong
profitability, tight risk management and high credit ratings. Their increased investment in
technology, product innovation and business simplification will see their cost-to-income
ratios improve from around 43 per cent to 40 per cent over the next five years, while their
broad range of activities means their operating costs are spread over a wide variety of
products.

The reason new entrants seldom come in to disrupt the market is that oligopolistic industries
tend to have high barriers to entry. Wireless carriers, for example, must either build and
maintain towers, requiring massive capital expenditures, or lease the incumbents'
infrastructure at vampiric rates. Carriers also tend to have strong, instantly recognizable
brands. Even if these brands carry certain negative associations (ie, "cartel"), they provide a
distinct advantage over unknown new entrants. Other industries that have commonly seen
oligopolies also have high barriers to entry: oil and gas drillers, airlines, grocers and movie
studios are a few examples.

TASK 2

ANS1.

a) CLASSICAL ECONOMIC THEORY: Classical economics is a broad term that refers to

the dominant economic paradigm of the 18th and 19th centuries. The earliest classical
economists developed theories of value, prices, supply, demand and distribution. Classical
thinkers were not completely unified in their beliefs or understanding of markets, though
there were notable common themes in most classical literature. The majority favored free
trade and competition among workers and businesses. Classical economists wanted to
transition away from class-based social structures in favor of meritocracies.

b) KEYNASIAN ECONOMICS THEORY: An economic theory of total spending in the

economy and its effects on output and inflation. Keynesian economics was developed by the
British economist John Maynard Keynes during the 1930s in an attempt to understand the
Great Depression. Keynes advocated increased government expenditures and lower taxes to
stimulate demand and pull the global economy out of the Depression. Subsequently, the term
“Keynesian economics” was used to refer to the concept that optimal economic performance
could be achieved – and economic slumps prevented – by influencing aggregate demand
through activist stabilization and economic intervention policies by the government.
Keynesian economics is considered to be a “demand-side” theory that focuses on changes in
the economy over the short run.

c) SUPPLY SIDE ECONOMICS THEORY: Supply-side economics is better known to

some as "Reaganomics," or the "trickle-down" policy espoused by 40th U.S. President
Ronald Reagan. Supply-side economics tries to explain both macroeconomic phenomena and
- based on these explanations - offer policy prescriptions for stable economic growth. In
general, supply-side theory has three pillars: tax policy, regulatory policy and monetary
policy. The supply-side theory is typically held in stark contrast to Keynesian theory which,
among other facets, includes the idea that demand can falter, so if lagging consumer demand
drags the economy into recession, the government should intervene with fiscal and monetary
stimuli.

ANS2.

a) MORTGAGE AND INTEREST RATES: Mortgages are a particular type of loan,

useful for the purchase of a house. The loan is secured against the value of the house.

ANS3. A capital requirement is the standardized requirement in place for banks and other
depository institutions that determines how much liquidity is required to be held for a certain
level of assets. These requirements are set by regulatory agencies, such as the Bank for
International Settlements.

These requirements are set to ensure that banks and depository institutions are not holding
investments that increase the risk of default. They also ensure that banks and depository
institutions have enough capital to sustain operating losses while still honoring withdrawals.
A capital requirement is also known as regulatory capital.

ANS4. The capital asset pricing model (CAPM) is a model that describes the relationship
between systematic risk and expected return for assets, particularly stocks. CAPM is widely
used throughout finance for the pricing of risky securities, generating expected returns for
assets given the risk of those assets and calculating costs of capital. The general idea behind
CAPM is that investors need to be compensated in two ways: time value of money and risk.
The time value of money is represented by the risk-free (rf) rate in the formula and
compensates the investors for placing money in any investment over a period of time. The
risk-free rate is customarily the yield on government bonds like U.S. Treasuries. The cost
model (carry an asset at cost less accumulated depreciation/impairments).

ANS5. The revaluation model (carry an asset at its fair value at the revaluation date less
subsequent accumulated depreciation impairment). If the revaluation policy is adopted this
should be applied to all assets in the entire category, i.e. if you revalue a building, you must
revalue all land and buildings in that class of asset. Revaluations must also be carried out
with sufficient regularity so that the carrying amount does not differ materially from that
which would be determined using fair value at the reporting date. A gain on revaluation is
always recognised in equity, under a revaluation reserve (unless the gain reverse’s
revaluation losses on the same asset that were previously recognised in the income statement
– in this instance the gain is to be shown in the income statement). The revaluation gain is
known as an unrealised gain which later becomes realised when the asset is disposed of
(derecognised).

ANS6.

a) Compound interest (or compounding interest) is interest calculated on the initial principal
and also on the accumulated interest of previous periods of a deposit or loan. Thought to have
originated in 17th-century Italy, compound interest can be thought of as “interest on interest,”
and will make a sum grow at a faster rate than simple interest, which is calculated only on the
principal amount. There can also be variations in the time frame in which the accrued interest
is actually credited to the existing balance. Interest on an account may be compounded daily
but only credited monthly. It is only when the interest is actually credited, or added to the
existing balance, that it begins to earn additional interest in the account.

b) Net Present Value (NPV) is the difference between the present value of cash inflows and
the present value of cash outflows. NPV is used in capital budgeting to analyze the
profitability of a projected investment or project. A positive net present value indicates that
the projected earnings generated by a project or investment (in present dollars) exceeds the
anticipated costs (also in present dollars). Generally, an investment with a positive NPV will
be a profitable one and one with a negative NPV will result in a net loss. This concept is the
basis for the Net Present Value Rule, which dictates that the only investments that should be
made are those with positive NPV values.

c) Internal rate of return (IRR) is a metric used in capital budgeting measuring the
profitability of potential investments. Internal rate of return is a discount rate that makes the
net present value (NPV) of all cash flows from a particular project equal to zero. IRR
calculations rely on the same formula as NPV does. IRR is uniform for investments of
varying types and, as such, IRR can be used to rank multiple prospective projects a firm is
considering on a relatively even basis. Assuming the costs of investment are equal among the
various projects, the project with the highest IRR would probably be considered the best and
undertaken first.IRR is sometimes referred to as "economic rate of return” (ERR).

ANS 7. The different products in a bank can be broadly classified into:

1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a credit line-
money made available by the card issuer (bank) and gives one a grace period to pay. If the
amount is not paid full by the end of the period, one is charged interest. A credit card is
nothing but a very small card containing a means of identification, such as a signature and a
small photo. It authorizes the holder to change goods or services to his account, on which he
is billed. Credit cards are joining popularity for online payments.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value. Debit
Cards quickly debit or subtract money from one’s savings account, or if one were taking out
cash. Every time a person uses the card, the merchant who in turn can get the money
transferred to his account from the bank of the buyers, by debiting an exact amount of
purchase from the card. Debit Card holder need not carry a bulky check book or large sums
of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get
debit card facility as debit cards use one’s own money at the time of sale, so they are often
easier than credit cards to obtain. The major limitation of Debit Card is that currently only
some shops in urban areas accept it. Also, a person can’t operate it in case the telephone lines
are down.

3) Automated Teller Machine: The introduction of ATM’s has given the customers the
facility of round the clock banking. The ATM’s are used by banks for making the customers
dealing easier. ATM card is a device that allows customer who has an ATM card to perform
routine banking transaction at any time without interacting with human teller. It provides
exchange services.

4) E-Cheques: The e-cheques consists five primary facts. They are the consumers, the
merchant, consumer’s bank the merchant’s bank and the e-mint and the clearing process. This
chequing system uses the network services to issue and process payment that emulates real
world chequing. The payer issue a digital cheques to the payee ant the entire transactions are
done through internet. Electronic version of cheaques are issued, received and processed.

5) Electronic Funds Transfer (EFT): Many modern banks have computerized their cheque
handling process with computer networks and other electronic equipment’s. These banks are
dispensing with the use of paper cheques. The system called electronic fund transfer (EFT)
automatically transfers money from one account to another. This system facilitates speedier
transfer of funds electronically from any branch to any other branch. In this system the sender
and the receiver of funds may be located in different cities and may even bank with different
banks. Funds transfer within the same city is also permitted.

6) Telebanking: Telebanking refers to banking on phone services.. a customer can access

information about his/her account through a telephone call and by giving the coded Personal
Identification Number (PIN) to the bank. Telebanking is extensively user friendly and
effective in nature.To get a particular work done through the bank, the users may leave his
instructions in the form of message with bank.

7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of mobile
banking. On-line banking is now moving to the mobile world, giving everybody with a
mobile phone access to real-time banking services, regardless of their location. But there is
much more to mobile banking from just on-lie banking. It provides a new way to pick up
information and interact with the banks to carry out the relevant banking business.

ANS8. The Code of Banking Practice is the banking industry's customer charter on best
banking practice standards. The Code sets out the banking industry's key commitments and
obligations to customers on standards of practice, disclosure and principles of conduct for
their banking services. The Code applies to personal and small business bank customers.
Each code sets out individual rights for consumers, including to lodge a complaint that a
financial services provider may not have met their obligations under their industry’s code.
Insurance industry: The Code, which is written in plain English, sets out the standards that
general insurers must meet when providing services to their customers, such as being open,
fair and honest. It also sets out timeframes for insurers to respond to claims, complaints and
requests for information from customers. The Code covers many aspects of a customer's
relationship with their insurer, from buying insurance to making a claim, to providing options
to those experiencing financial hardship, to the process for those who wish to make a
complaint. The Code’s standards apply to many features of a customer’s relationship with
their insurer including when buying insurance, what to expect when making a claim,
including timeframes for making a claim decision, and processes for making complaints.

ANS9.

1. Mean: The arithmetic mean, more commonly known as “the average,” is the sum of a list
of numbers divided by the number of items on the list. The mean is useful in determining the
overall trend of a data set or providing a rapid snapshot of your data. Another advantage of
the mean is that it’s very easy and quick to calculate.

2. Regression: Regression models the relationships between dependent and explanatory

variables, which are usually charted on a scatterplot. The regression line also designates
whether those relationships are strong or weak. Regression is commonly taught in high
school or college statistics courses with applications for science or business in determining
trends over time.

3. Hypothesis Testing: Also commonly called t testing, hypothesis testing assesses if a certain
premise is actually true for your data set or population. In data analysis and statistics, you
consider the result of a hypothesis test statistically significant if the results couldn’t have
happened by random chance. Hypothesis tests are used in everything from science and
research to business and economic

4. Standard Deviation: The standard deviation, often represented with the Greek letter sigma,
is the measure of a spread of data around the mean. A high standard deviation signifies that
data is spread more widely from the mean, where a low standard deviation signals that more
data align with the mean. In a portfolio of data analysis methods, the standard deviation is
useful for quickly determining dispersion of data points.

ANS10. The Australian economy has grown at around 2½ per cent on average in the past two
years. Declining mining investment has continued to weigh on activity, though growth of
mining activity overall has remained firm, supported by an increase in resource exports. Over
the past year, non-mining activity has picked up slightly. Dwelling investment has
strengthened relative to a year ago, supported by low interest rates and rising housing prices,
and consumption growth has picked up from its lows. While non-mining business investment
remains subdued, conditions are in place to support growth. Mining investment is expected to
have declined further, while exports continued to expand. Survey measures suggest that
business conditions and capacity utilisation have remained around average. The decline in
commodity prices will have reduced resource sector profits and growth of labour income is
likely to have remained weak.

4.3

ANS1.

BANKING INDUSTRY

1. Frame a central regulatory body that must have a mandate to maintain financial stability.

2. Monetary policy is the appropriate tool with which to recapitalise banks.

3. Regulation and supervision should encompass all entities that carry out banking activities.

4. Institutions that play a key role in the financial system (where the too-big-to-fail doctrine is
applied) should be regulated.

5. Regulatory standards should be uniform and accompanied by internationally coordinated

supervision.

6. Competition policy should be coordinated also with financial regulation

7. It is necessary to establish mechanisms to prevent delay of the supervisor’s intervention

(regulatory forbearance) while the balance sheets of financial institutions deteriorate and
capital declines.

INSURANCE INDUSTRY

1. Insurers must measure and manage non-diversifiable risk faced by creditors and borrowers
more efficiently than other financial institutions, facilitating the provision of credit.

2. Life insurers must be an important source of long-term finance.

3. Insurance facilitates investment in infrastructure and high-risk/return activities, by
generating sources of long-term finance, and helping measure and manage high-risk
exposures.

4. By mobilizing substantial funds through contractual savings products, and investing them
in bonds and stocks, insurers help stimulate the growth of debt and equity markets.

5. As institutional investors, insurers pressure equity markets to adopt stronger corporate

governance measures and greater transparency.

ANS2.

1. Working on a Budget: The constraints of a budget influence nearly all economic decisions,
since the sum of all expenditures should never exceed the availability of capital. Cash
availability is not always a direct limiting factor in economic decision making, since credit
arrangements can allow people to spend more than they have.

2. Maximizing Value: The fundamental basis of economic decision making is individuals' or

organizations' desire to maximize benefits while minimizing costs. This balancing act is
referred to as maximizing value, and it is a skill that takes practice to master. For individuals,
value maximization decisions may include choosing between name-brand products and
generic products, and choosing between small or bulk sizes.

3. Rational Decision Making: Nearly all economic models and theories have one
irreconcilable flaw: they assume that all economic decision makers act logically and
rationally, taking all available information into account in an objective manner before making
a decision. While it is true that most people and organizations attempt to do this, the reality of
economic decisions is slightly different. Emotional theory in the stock market is a prime
example of people's inability to make purely rational decisions on a consistent basis.

ANS3.A

Timing: Timing relates to both the timing of the evaluation and evaluating timing in relation
to the employee. In terms of the my abilities, timing will relate to how long it takes the me to
complete certain tasks, such as completing a customer transaction, amount of time each
customer waits to be seen, and how regularly documentation is delivered on time.
2. Evaluation of performance against clear objectives: Achievable and known objectives to
the me prior to being assessed. It is not ethically possible to measure someone against
objectives of which they are unaware.Measurable objectives include areas such as errors,
customer satisfaction, attendance, and even timekeeping.

3. Knowledge and Understanding: It is just as important that I am aware of why I undertake

certain actions, as it is that they can complete them competently. Specific questions can be
asked to ascertain the depth of their knowledge.

B. In environments such as finance industry performance reviews tend to make more sense if
done when projects are complete, rather than on a fixed annual cycle. In other work
environments, more frequent reviews, such as on a quarterly or even monthly basis, has been
suggested by some who have studied the issue. However, the administrative burden would be
too onerous if anywhere near the amount of form filling associated with the usual annual
review were part of a more frequent review cycle. Factoring in feedback from subordinates,
peers and managers in other departments(and also, in appropriate circumstances, from clients
and other people outside the firm with whom the employee in question interacts regularly)
holds some theoretic attractiveness and is the essence of so-called 360-degree evaluation
processes. However, the downside to 360-degree reviews is that, if used as input in decisions
about bonus awards and promotions, participants have incentives to give low grades to their
competitors for these and other rewards.

ANS4.

1. News Websites

Many major newspapers and televisions stations have dedicated news websites that are
updated throughout the day.

2. RSS Readers

RSS (Rich Site Summary or Really Simple Syndication) is another method to customize the
content that you read on the Internet. Many news sites and financial analysts provide RSS
feeds for their content.

3. Google Alerts
If you want to get all the news about a certain subject regardless of the source, you can sign
up for Google alerts on Google.com. Whenever there is a new internet posting about the
subject you choose, Google will send you an email alert. You can set your preferences to get
updates as they are found or in a daily journal format.

4. News Tickers

Several news websites give you the option of downloading a program to your computer that
runs a news ticker along the top or bottom while you are working. You can customize many
of these tickers to only include certain types of news, such as business or celebrity news. This
allows you to passively monitor news headlines while you are working on something else.

ANS5. Positive economics (as opposed to normative economics) is the branch of economics
that concerns the description and explanation of economic phenomena. It focuses on facts and
cause-and-effect behavioural relationships and includes the development and testing of
economics theories. Positive economics is objective and fact based, while normative
economics is subjective and value based. Positive economic statements do not have to be
correct, but they must be able to be tested and proved or disproved. Normative economic
statements are opinion based, so they cannot be proved or disproved.

ANS6. Principles of microeconomics

1. Supply and demand is an economic model of price determination in a perfectly competitive

market. It concludes that in a perfectly competitive market with no externalities, per unit
taxes, or price controls, the unit price for a particular good is the price at which the quantity
demanded by consumers equals the quantity supplied by producers. This price results in a
stable economic equilibrium.

2. Elasticity is the measurement of how responsive an economic variable is to a change in

another variable. It is a tool for measuring the responsiveness of a variable, or of the function
that determines it, to changes in causative variables in unitless ways. Frequently used
elasticities include price elasticity of demand, price elasticity of supply, income elasticity of
demand, elasticity of substitution between factors of production and elasticity of
intertemporal substitution.

3. Perfect competition describes markets such that no participants are large enough to have
the market power to set the price of a homogeneous product. A good example would be that
of digital marketplaces, such as eBay, on which many different sellers sell similar products to
many different buyers.

4. A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists
when a single company is the only supplier of a particular commodity.

5. An oligopoly is a market form in which a market or industry is dominated by a small

number of sellers (oligopolists). Oligopolies can create the incentive for firms to engage in
collusion and form cartels that reduce competition leading to higher prices for consumers and
less overall market output.

The five fundamental principles of macroeconomics:

1. The overall level and growth of income and output in a nation are determined by the
interaction of households, firms, and governments as they produce, exchange, consume, save
and invest. Economic interaction between these sectors typically takes place through markets.

2. Physical and human capital accumulation and technological advances are the primary
means by which the standard-of-living grows in modern economies.

3. In the long-run, market prices balance supply and demand, so that resource availability
determines production and income independently of aggregate demand.

a) Real wages and employment are determined by the scarcity of labor and labor’s value in
the production of goods.

b) Real interest rates are determined by borrowing and lending in financial markets, and
influence saving, consumption, and the allocation of resources over time.

c) Money reduces the costs of transactions. In the long-run, the quantity of money is neutral.

4. In the short-run, fluctuations in aggregate demand and the quantity of money can cause
recessions and unemployment owing to market rigidities.

5. Monetary policy and fiscal policy are tools available to the government to stabilize the
economy. But expectations of policy can profoundly influence how macro policies work.

ANS7. NPV is the acronym for net present value. Net present value is a calculation that
compares the amount invested today to the present value of the future cash receipts from the
investment. In other words, the amount invested is compared to the future cash amounts after
they are discounted by a specified rate of return.

For example, an investment of $500,000 today is expected to return $100,000 of cash each
year for 10 years. The $500,000 being spent today is already a present value, so no
discounting is necessary for this amount. However, the future cash receipts of $100,000 for
10 years need to be discounted to their present value. Let's assume that the receipts are
discounted by 14% (the company's required return). This will mean that the present value of
the those future receipts will be approximately $522,000. The $522,000 of present value
coming in is compared to the $500,000 of present value going out. The result is a net present
value of $22,000 coming in. Investments with a positive net present value would be
acceptable. Investments with a negative net present value would be unacceptable.

ANS7. $285,860

ANS8. Internal rate of return (IRR) is a metric used in capital budgeting measuring the
profitability of potential investments. Internal rate of return is a discount rate that makes the
net present value (NPV) of all cash flows from a particular project equal to zero. IRR
calculations rely on the same formula as NPV does.

ANS9. Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of
the benefits and costs to the community of projects to establish whether they are worthwhile.
These projects may be dams and highways or can be training programs and health care
systems.

1. There Must Be a Common Unit of Measurement: In order to reach a conclusion as to the

desirability of a project all aspects of the project, positive and negative, must be expressed in
terms of a common unit; i.e., there must be a "bottom line." The most convenient common
unit is money. This means that all benefits and costs of a project should be measured in terms
of their equivalent money value.

2. CBA Valuations Should Represent Consumers or Producers Valuations As Revealed by

Their Actual Behavior: The valuation of benefits and costs should reflect preferences
revealed by choices which have been made. For example, improvements in transportation
frequently involve saving time.
3. Benefits Are Usually Measured by Market Choices: When consumers make purchases at
market prices they reveal that the things they buy are at least as beneficial to them as the
money they relinquish. Consumers will increase their consumption of any commodity up to
the point where the benefit of an additional unit (marginal benefit) is equal to the marginal
cost to them of that unit, the market price. Therefore for any consumer buying some of a
commodity, the marginal benefit is equal to the market price.

4. Gross Benefits of an Increase in Consumption is an Area Under the Demand Curve:

The increase in benefits resulting from an increase in consumption is the sum of the marginal
benefit times each incremental increase in consumption. As the incremental increases
considered are taken as smaller and smaller the sum goes to the area under the marginal
benefit curve. But the marginal benefit curve is the same as the demand curve so the increase
in benefits is the area under the demand curve.

ANS10. National income, output, and expenditure are generated by the activities of the two
most vital parts of an economy, its households and firms, as they engage in mutually
beneficial exchange. The circular flow of income and spending shows connections between
different sectors of an economy

It shows flows of goods and services and factors of production between firms and households

The circular flow shows how national income or Gross Domestic Product is calculated

Businesses produce goods and services and in the process of doing so, incomes are generated
for factors of production (land, labour, capital and enterprise) – for example wages and
salaries going to people in work.

ANS11. Capitalism is an economic system based on private ownership of the means of

production and their operation for profit. Characteristics central to capitalism include private
property, capital accumulation, wage labor, voluntary exchange, a price system, and
competitive markets. Fundamentally, modern capitalism was a system for indigenous
innovation- while mercantile capitalism didn’t have much innovation at all. Perhaps more
importantly- the innovations that did occur during the mercantile period were, in essence,
applications of scientific and navigational discoveries outside the economic system

Ans12.
a) An intrinsic theory of value (also called theory of objective value) is any theory of value in
economics which holds that the value of an object, good or service, is intrinsic or contained in
the item itself.

b) The labor theory of value (LTV) is a heterodox economic theory of value that argues that
the economic value of a good or service is determined by the total amount of socially
necessary labor required to produce it, rather than by the use or pleasure its owner gets from
it.