a.

Define Micro ecomonics

• "Micro economics is the study of particular firms, particular households, individual
prices, wages, incomes, individual industries, particular commodities."

• "Micro economics deals with the division of total output among industries, products,
firms and the allocation of resources among competing groups. It considers problems of
income distribution. Its interest is in relative prices of particular goods and services."

• "Micro economics is concerned with specific economic units and detailed consideration
of the behaviour of these individual units."

b. Business economics is also known_______

a) Decisional Economics
b) Analytical Economics
c) Managerial Economics
d) Decision Science

c. The relationship between price and demand is______

a. Normative
b. Positive
c. Negative
d. Horizontal
d. Normative economics is also known as_______
a) Decisional Economics
b) Positive Economics
c) Applied Economics
d) Prescriptive economics

e. Product flow is also known as_______

a) Real Flow
b) Output Flow
c) Profit Flow
d) Both A & B

f. A large number of buyers and sellers in a homogeneous market, free entry and exit are the
characteristics of ________
a) Duopoly
b) Oligopoly
c) Monopoly
d) Perfect Competition

g. Demand for a commodity refers to______

a) Need for the commodity
 b) Quantity of the commodity demanded at a certain price during any particular period of
time
c) Desire for the commodity
d) Quantity demanded of that commodity

h. Indian economy is _______ type of economy.

a) A. Socialist
b) B. Socialist
c) C. Mixed
d) D. Idealistic

Q.2 Answer any 2 out of 3 (5 marks each)

a. Write short notes on Cost Volume Profit Analysis

Defination
Cost-Volume-Profit Analysis (CVP analysis), also commonly referred to as Break-Even
Analysis, is a way for companies to determine how changes in costs (both variable and
fixed) and sales volume affect a company’s profit. With this information, companies can
better understand overall performance by looking at how many units must be sold to break
even or to reach a certain profit threshold or the margin of safety.
Explanation:
• Cost Volume Profit Analysis includes the analysis of sales price, fixed costs,
variable costs, the number of goods sold, and how it affects the profit of the business.
• The aim of a company is to earn a profit, and profit depends upon a large number of
factors, most notable among them is the cost of manufacturing and the volume of
sales. These factors are largely interdependent.
• The volume of sales is dependent upon production volume, which in turn is related
to costs that are affected by the volume of production, product mix, internal
efficiency of the business, production method used, etc.
• CVP analysis helps management in finding out the relationship between cost and
revenue to generate profit.
• CVP Analysis helps them to BEP Formula for different sales volume and cost
structures.
• With CVP Analysis information, the management can better understand the overall
performance and determine what units it should sell to break even or to reach a
certain level of profit.
 Importance of Cost Volume Profit Analysis
CVP analysis helps in determining the level at which all relevant cost
is recovered, and there is no profit or loss, which is also called the breakeven point. It is that
point at which volume of sales equals total expenses (both fixed and variable). Thus CVP
analysis helps decision-makers understand the effect of a change in sales volume, price, and
variable cost on the profit of an entity while taking fixed cost as unchangeable.

b. Write short notes on Elasticity of demand

Elasticity of demand is the responsiveness of the quantity demanded of a commodity to
changes in one of the variables on which demand depends. In other words, it is the
percentage change in quantity demanded divided by the percentage in one of the variables
on which demand depends.”

The variables on which demand can depend on are:

Price of the commodity

Prices of related commodities
Consumer’s income, etc.

Price Elasticity
The price elasticity of demand is the response of the quantity demanded to change in the
price of a commodity. It is assumed that the consumer’s income, tastes, and prices of all
other goods are steady. It is measured as a percentage change in the quantity demanded
divided by the percentage change in price.
 Income Elasticity
The income elasticity of demand is the degree of responsiveness of the quantity demanded
to a change in the consumer’s income. Symbolically,

Cross Elasticity
The cross elasticity of demand of a commodity X for another commodity Y, is the change in
demand of commodity X due to a change in the price of commodity Y. Symbolically,

c. Discuss Adam Smith and invisible hand

The invisible hand is a term that Scottish moral philosopher and political economist Adam
Smith (1723-1790) used to describe the unintended social benefits of individual actions.
The term refers to the free market’s ability to allocate factors of production, products and
services to their most valuable use. If we all act from self-interest, motivated by profit, then
the economy will function more efficiently and productively, than it would if economic
activity were directed by some kind of central planner.

In other words, Mr. Smith’s ‘invisible hand’ described how individuals making selfish
decisions could collectively and unwittingly contribute to an effective economic system that
was in the public interest.

Mr. Smith, who is known today as the ‘father of modern economics’, used ‘the invisible
hand’ with respect to income distribution in 1759 and production in 1776 in his papers The
Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of
Nations respectively.

Mr. Smith explained that it was as if an invisible hand guided the actions of individual people
to combine for the common good. He also recognized that this invisible hand was not
flawless, and that sometimes government action was required. Examples he included of
government action were laws to protect consumers from monopolistic behaviors, i.e.
antitrust legislation, the enforcement of property rights, and to provide national defense and
policing.
 Smith did not believe there was a real invisible hand. He used the term as a metaphor for
how, in a market that is allowed to function freely, basically selfish people operate through
a system of mutual interdependence, which overall benefits society.

Smith’s interpretation of the invisible hand

In Mr. Smith’s interpretation, if each consumer is allowed to choose freely what to purchase,
and each supplier or producer is allowed to choose freely what to sell and how to make it,
the market will settle on the best possible balance of product distribution and prices, which
benefits society as a whole.

Self-interest drives the players to beneficial behavior in a case of serendipity (fortunate

coincidence). Producers’ desire to maximize profits leads to efficient methods of production.

Producers’ desire to gain market share are achieved by offering the lowest prices possible.
Investors invest in those businesses that provide the best returns, and remove their capital
from those that are less efficient in creating value.

All these effects – efficient production, low prices, growth of successful businesses that
make lots of things we want – occur dynamically and automatically.

Mr. Smith used the metaphor in context of an argument criticizing government regulation of
markets and protectionism. Protectionism is a policy some governments adopt to reduce
imports by imposing tariffs, quotas and other barriers.

In general, the ‘invisible hand’ can apply to any individual action that has unintended and/or
unplanned consequences, particularly those that arise from actions not organized or
orchestrated by a central command, and that have an evident, patterned effect on society.

Q.3 a. Discuss the regulatory role of RBI and SEBI (10 marks)
SEBI (security and exchange board of India):
It is a vital part of regulatory bodies in India. The growing IPO market in the country is
how SEBI became the regulatory body of the Indian capital market. The SEBI holds the
responsibility to maintain the balance in the stock exchange market of India. SEBI
incorporated the charge under the SEBI ACT1992.

Functions of SEBI:
There are many exciting and informative functions of SEBI. According to it, the body
regulates the stock market of India.
Protective functions:
SEBI regulates the stock market and its trading with all the adjacent aspects in the Indian
bank’s regulatory body. These functions include investment protection with interest and
the prevention of insider trading techniques. The protective functions of SEBI have the
charge to spread awareness against any deception among the investment traders.

Development functions:
The SEBI develops the platform of the Indian stock market by promoting the growth
aspects of investment securities methodologies. Presently, the department empowers
investors’ knowledge to attract foreign investment for economic growth. The SEBI also
runs various training programs for investment development and motivates innovation and
research.

Powers:
These powers relate to the responsibility for how SEBI became the regulatory body of the
Indian capital market to prevent scams and provide the enormous rise in economic growth.

SEBI can access all the transaction information from the exchange markets.
It has the power to reform the laws relative to the functioning of the stock exchange.
Intermediaries regulation
SEBI can analyse the case for any malpractice and fraud report.

RBI (reserve bank of India)

The central bank of India established the RBI bank in 1935. The RBI regulates all the
monetary functions and policies which act effectively in the Indian market. The RBI has a
governor under which all the officers regulate the financial market and monetary funding.

Functions:
Below are the functions of the RBI according to the regulations and power. The governor
of RBI signs the currency notes of India. The function of RBI regulates the Indian monetary
structure.

Functions:
RBI bank issues the license to all the active banks in India. It has the bank policy according
to which each bank body should function and follow the regulation.
Citizens have their financial accounts in banks. RBI holds the power to manage and check
the financial account of the bank. RBI regulates the statement, fund transactions, and all
the other details.
RBI balances the accurate amount of currency supply and regulates it.
 OR
Q.3 b. Explain the role of WTO in International Market.
World trade is defined as an agreement between two or more nations that may operate their
business in different parts of the world. This business is done by importing and exporting goods
and services. In short, buying and selling of products and services irrespective of national
boundaries.

Given below are five elements that make international trades possible −
1. The agreement over sale of items.
2. The agreement over carriage of items.
3. The agreement over insurance of the items.
4. The consent from the exports and imports authorities to fulfill legal formalities.
5. The mode of payment as agreed by the buyer and the seller.

It is not possible for any country to fulfill all its needs by itself. International market is a channel
through which nations source the products and services they lack or do not have in sufficient
quantities. Apart from this, international politics play a pivotal role in achieving, promoting or
maintaining peace between international trading partners or nations.

The WTO regulates international trade, formulates tariffs globally, and also resolves conflicts
among member countries.

The major functions of WTO are as follows

1. To facilitate the implementation, administration and operation and further the objectives of
this Agreement and of the Multilateral Trade Agreements, and also provide the frame work
for the implementation, administration and operation of the multilateral Trade Agreements.
2. To provide the forum for negotiations among its members concerning their multilateral
trade relations in matters dealt with under the Agreement.
3. To administer the Understanding on Rules and Procedures Governing the Settlement of
Disputes.
4. To administer Trade Policy Review Mechanism.
5. To cooperate, as appropriate, with the international Monetary Fund (IMF) and with the
International Bank for Reconstruction and Development (IBRD) and its affiliated agencies
with an aim to achieve greater coherence in global economic policy making.
The WTO helps maintain peaceful trans-boundary trades and also resolves the conflicts among the
participating countries. It is not possible to imagine international trade in the absence of WTO. All
the participating nations are bound to abide by the protocols set by WTO.
Q.4 a. Explain the elasticity of supply. Discuss type and practical importance of elasticity of supply
(10 marks)
The elasticity of supply establishes a quantitative relationship between the supply of a
commodity and it’s price. Hence, we can express the numeral change in supply with the
change in the price of a commodity using the concept of elasticity. Note that elasticity can
also be calculated with respect to the other determinants of supply.

However, the major factor controlling the supply of a commodity is its price. Therefore, we
generally talk about the price elasticity of supply. The price elasticity of supply is the ratio
of the percentage change in the price to the percentage change in quantity supplied of a
commodity.

Es= [(Δq/q)×100] ÷ [(Δp/p)×100] = (Δq/q) ÷ (Δp/p)

Δq= The change in quantity supplied
q= The quantity supplied
Δp= The change in price
p= The price

Elasticity from a Supply Curve

Along with the method mentioned above, there are two more ways to calculate the price elasticity
of supply, both of which make use of the supply curve. We can either calculate the elasticity at a
specific point on the supply curve, known as point elasticity or between two prices, known as arc-
elasticity.

The formula for calculating the point elasticity of supply is:

Es= (dq/dp)×(p/q)
Here dq/dp is the slope of the supply curve.

The formula for calculating the arc-elasticity of supply is:

Es= [(q1 – q2)/( q1 + q2)] × [( p1 + p2)/(p1 – p2)]

Types of Elasticity of Supply

1. Perfectly Inelastic Supply
A service or commodity has a perfectly inelastic supply if a given quantity of it can be supplied
whatever might be the price. The elasticity of supply for such a service or commodity is zero. A
perfectly inelastic supply curve is a straight line parallel to the Y-axis. This is representative of the
fact that the supply remains the same irrespective of the price.

The supply of exclusive items, like the painting of Mona Lisa, falls into this category. Whatever
might be the price on offer, there is no way we can increase its supply.

2. Relatively Less-Elastic Supply

When the change in supply is relatively less when compared to the change in price, we say that
the commodity has a relatively-less elastic supply. In such a case, the price elasticity of supply
assumes a value less than 1.

3. Relatively Greater-Elastic Supply

When the change in supply is relatively more when compared to the change in price, we say that
the commodity has a relatively greater-elastic supply. In such a case, the price elasticity of supply
assumes a value greater than 1.

4. Unitary Elastic
For a commodity with a unit elasticity of supply, the change in quantity supplied of a commodity
is exactly equal to the change in its price. In other words, the change in both price and supply of
the commodity are proportionately equal to each other. To point out, the elasticity of supply in
such a case is equal to one. Further, a unitary elastic supply curve passes through the origin.

5. Perfectly Elastic supply

A commodity with a perfectly elastic supply has an infinite elasticity. In such a case the supply
becomes zero with even a slight fall in the price and becomes infinite with a slight rise in price.
This is indicative of the fact that the suppliers of such a commodity are willing to supply any
quantity of the commodity at a higher price. A perfectly elastic supply curve is a straight line
parallel to the X-axis.
OR
Q.4 b. Explain short term equilibrium of firm under perfect competition
Q5 a. Explain various stages of business cycle with diagram.
(10 marks)
Q5 b. M/s. Bloemfontein Cookies conducted a survey to find out the daily demand for cookies and found
that the average daily demand for cookies was given in the form of the following demand equation: DC =
10,000 – 50 PC Questions:
(1) How many kilograms of cookies will be sold daily, if the price of cookies per kilogram is Rs. 120/–?
(2) What price should be fixed if M/s. Yorkshire cookies wants to sell 7500 kgs of cookies per day?
(3) What will be price if the daily average demand for cookies is 5000 kilograms?
(4) At what price the daily average demand for cookies will be zero?
(5) Draw a demand curve on the basis of the demand equation: DC = 10,000 – 50 PC