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Q.1 Define the equilibrium of a market. Also explain the equilibrium

of a firm in case of short-run (or perishable) nature commodities with
the help of a hypothetical example in the form of table and diagram.

EQUILIBRIUM
Equilibrium is the state in which market supply and demand balance each other,
and as a result prices become stable. Generally, an over-supply of goods or
services causes prices to go down, which results in higher demand—while an
under-supply or shortage causes prices to go up resulting in less demand.

SHORT-RUN EQUILIBRIUM OF THE FIRM:

The short run is a period of time in which the firm can vary its output by changing
the variable factors of production in order to earn maximum profits or to incur
minimum losses. The number of firms in the industry is fixed because neither the
existing firms can leave nor new firms can enter it.

Its Conditions:
The firm is in equilibrium when it is earning maximum profits as the difference
between its total revenue and total cost. For this, it essential that it must satisfy
two conditions: (1) MC = MR, and (2) the MC curve must cut the MR curve from
below at the point of equality and then rise upwards.

The price at which each firm sells its output is set by the market forces of demand
and supply. Each firm will be able to sell as much as it chooses at that price. But
due to competition, it will not be able to sell at all at a higher price than the
market price. Thus the firm’s demand curve will be horizontal at that price so that
P = AR = MR for the firm.
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Determination of Equilibrium:
Given these assumptions, suppose that price OP in the competitive market for the
product of all the firms in the industry is determined by the equality of demand
curve D and the supply curve S at point E in Figure 1 (A) so that their average
revenue curve (AR) coincides with the marginal revenue curve (MR).

At this price, each firm is in equilibrium at point L in Panel (B) of the figure where
(i) SMC equals MR and AR, and (ii) the SMC curve cuts the MR curve from below.
Each firm would be producing OQ output and earning normal profits at the
maximum average total costs QL. A firm earns normal profits when the MR curve
is tangent to the SAC curve at its minimum point. If the price is higher than these
minimum average total costs, each firm will be earning supernormal profits.
Suppose the price rises to OP2 where the SMC curve cuts the new marginal
revenue curve MR2 (=AR2) from below at point A which now becomes the
equilibrium point. In this situation, each firm produces OQ2 output and earns
supernormal profits equal to the area of the rectangle P2 ABC.

If the price falls below OP1 the firm would make a loss because the SAC would be
higher than the price. In the short-run, it would continue to produce and sell OQ1
output at OP1 price so long as it covers its AVC. S is thus the shut-down point at
which the firm is incurring the maximum loss equal to SK per unit of output. If the
price falls below OP1 the firm will close down because it would fail to cover even
the minimum average variable cost. OP1 is thus the shut-down price.
We may conclude from
the above discussion
that in the short-run
each firm may be
making either
supernormal profits, or
normal profits or losses
depending upon the
price of the product.
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Q.2 What is a firm? Also compare the equilibrium of a firm working

under perfect competition and monopoly.
What Is a Firm?
A firm is a for-profit business organization—such as a corporation, limited liability
company (LLC), or partnership—that provides professional services. Most firms
have just one location.
Equilibrium of Industry under Perfect Competition:
The industry will be in equilibrium when industry has no tendency to either
increase or decrease its level of output. An industry is said to be in equilibrium
when industry is no tendency for it to expand or contract. It means demand for
the product of industry and supply of it are in equilibrium. The industry has no
tendency to vary its output.

If at a prevailing price, demand for the commodity is more than supply, the
industry will try to expand its output. On the other hand, if at prevailing price,
quantity demanded of a product falls short of quantity supplied, the price and
output of the industry will tend to fall.

When demand for the commodity is equal to supply of commodity, then industry
will have no tendency to vary its output. Thus, we conclude that industry will be in
equilibrium at that level of price end output, where demand curve and supply
curve intersect each other.
Conditions of Equilibrium of the Industry:
For the industry to be in equilibrium following three conditions should be fulfilled:

(i) Demand for and supply of product of the industry must be equal.
(ii) All the firms in the industry should be in equilibrium.
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(iii) There should be no tendency to change the number of firms in the industry,
i.e., the firms are earning only normal profits.

Short Run Equilibrium of the Industry:

In the short run, new firms can neither enter in the industry nor the old firms exit
from the industry. Therefore, industry will be in equilibrium when above given
first two conditions are fulfilled. The short-run equilibrium of industry has been
shown in the Fig.
In part A of the Figure, the equilibrium of the industry has been shown. Demand
curve and supply curve of the industry intersect each other at point E. 0P is the
equilibrium price and 0Q is the equilibrium output.
The firm will take 0P price as given and adjust its output in such a way that it may
earn maximum profit. In part B of the diagram equilibrium of the firm has been
shown. E0 is the firm’s equilibrium. 0M is the equilibrium output. Average
revenue and average cost are equal to E0M and CM, respectively.
Since average revenue is greater than average cost, the firm is earning super
normal profit equal to area EoCGP. Suppose; cost of all the firms are identical, all
the firms are earning normal profit. If the demand for the product declines, the
price of the product will also decline and the equilibrium will be at lower level of
output. The industry will be in equilibrium, although firms might be incurring
losses.
In this case too the industry will be in short-run equilibrium.
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Q.3 Define labor and its importance. Also discuss its characteristics,
mobility and determinations in details.
Meaning of Labour:
In simple meaning by ‘Labour’ we mean the work done by hard manual labour
mostly work done by unskilled worker.But in Economics, the term labour mean
manual labour. It includes mental work also.
Definition of Labour:
According to Prof. Marshall – “Any exertion of mind or body undergone partly or
wholly with a view to earning some good other than the pleasure derived directly
from the work.”
IMPORTANT FACTS REGARDING LABOUR ARE:
(i) Only the work of man is included under Labour.
(ii) The physical and mental work undertaken for some monetary reward is
included under Labour.
(iii) Any work done for entertainment or for self-satisfaction is not included under
Labour in economics.
(iv) In Economics Labour has no relation with morality.
Meaning of Mobility of Labour:
Mobility of labour means the ability and the capacity of labour to move from one
place to another or from one occupation to another or from one job to another or
from ne industry to another.
LABOR AFFECTS THE U.S. ECONOMY
The U.S. has a highly skilled and mobile labor force that can respond quickly to
changing business needs. But it's facing more competitive labor from other
countries that can pay its workers less. They can do this because they have a
lower standard of living. The U.S. Department of Labor manages compliance with
labor laws and the U.S. minimum wage. It also provides job training and enforces
workplace safety.
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The U.S. Bureau of Labor Statistics is a DOL division that measures labor. It
provides the monthly employment report and the nation's unemployment rate.
CHARACTERISTICS OF LABOUR AS A FACTOR OF PRODUCTION
1] Perishable in Nature
Labour is perishable in nature. This simply means that it has to storage capacity,
i.e. labour cannot be stored. If a worker does not turn up to work for one shift his
labour of that shift is lost completely. It cannot be stored and utilized the next
day. That labour is lost permanently. A laborer cannot store his labour to use at
another time. So we say labour as a factor of production is highly perishable.
2] Labour is Inseparable from the Labourer
This means the physical presence of the laborer is compulsory. To sell his services
the laborer has to be physically present at the place of production of goods or
services. We cannot separate him and his labour power. So we cannot expect a
welder to do his work from home, he has to present at the site of the work.
3] Human Effort
Labour is a unique factor of production in comparison with others. It is directly
related to human effort, unlike the others. So there are certain special factors we
must take into consideration when it comes to labour. Fair treatment of workers,
rest times, suitable work environment, idle time, etc are just some such factors.
4] Labour is Heterogeneous
We cannot expect labour to be uniform. Every laborer is unique and so his labour
power will also differ from the others. The quality and the efficiency of the labour
will depend on the skills, work environment, incentives and other inherent
qualities of the laborer.
5] Labour has Poor Bargaining Power
Labour as a factor of production has a very week bargaining power with the buyer
of the services. It cannot be stored, isn’t very mobile and has no standard or
reserve price. So generally laborers are forced to work for whatever wages the
employer offers. In comparison to the employer, the laborers have very little
bargaining power.
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Q.4 What is meant by interest? How many kinds of interest are

there? Why is interest paid? How is the rate of interest determined?
Also prove with arguments that interest is a social and economic evil.
MEANING OF INTEREST
Interest is the price you pay to borrow money or the cost you charge to lend
money. Interest is most often reflected as an annual percentage of the amount of
a loan. This percentage is known as the interest rate on the loan.

KINDS OF INTEREST
Simple (Regular) Interest
Simple or regular interest is the amount of interest due on the loan, based on the
principal loan outstanding.
Example:
For example, if an individual borrows $2,000 with a 3% annual interest rate, the
loan would require a $60 interest payment per year ($2,000 * 3% = $60).
Accrued Interest
Accrued interest is accumulated interest that is unpaid until the end of the period.
If a loan requires monthly payments (at the end of each month), interest steadily
accumulates throughout the month.
Example:
If $30 is the interest expense each month, the loan is accruing $1 of interest each
day that requires payment once the end of the month is reached. In this example,
by day 15, the loan will have accumulated $15 in accrued interest (but require
payment once $30 is reached).
To learn more about how accrued expenses are recorded in accounting, click
here.
Key Difference (Simple Interest vs. Accrued Interest):
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The difference between these two types of interest are that regular interest is
paid periodically (determined by the loan agreement), and accrued interest
continues to be owed to the lender over time.
Compound Interest
Compounding interest essentially means “interest on interest.” The interest
payments change each period instead of staying fixed. Simple interest is based
solely on the principal outstanding, whereas compound interest uses the principal
and the previously earned interest.
Example:
If a person borrowed $1,000 with 2% interest and has $100 of accrued interest,
then that year’s interest would be $22. It is because the interest is paid on the
principal ($1000) and the accrued interest ($100), for a total of $1100. 2% of
$1100 is $22.

INTEREST IS A SOCIAL AND ECONOMIC EVIL

Interest, the most powerful instrument of social exploitation:
In a non-Islamic society a group of people claims a portion of other's income by
way of interest. The debtor is bound to pay interest whether he earns a profit or
not. He is forced to pay the money back with interest selling everything he has.
The law of the land is in favour of the creditor, not the debtor. He becomes
poorer. The social class discrimination further accentuates. As the creditors or the
money lenders claim the fruits of the debtors' hard work they have no real
contribution to the society. On the contrary, they are the parasites of the society.
Fact is that these money lenders have no positive participation in any economic
activity.
Interest discourages investment in socially necessary sectors:
All economic activities, be it production or service, do not yield profit at the same
rate. In some cases, the rate of profit is higher than the rate of interest while in
some cases it is equal to the rate of interest and still in some cases it is lower than
that. Generally the rate of profit is higher in the cases of luxurious goods and
goods those are harmful to the society. Cosmetics, fancy goods, alcoholic drinks
and cigarettes are the best examples to the point. On the contrary, the rate of
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profit is usually low for goods and services those are essential for the society.
Even it can be less than the prevailing interest rate. As a result, in the interest
based economy where the rate of profit is higher than the rate of interest
investment takes place.
Investors are not willing to take part in the initiatives where the rate of profit is
equal or less than the rate of interest. Because after the payment of interest the
entrepreneur will have nothing left for him. The situation inevitably leads to the
contraction of production and supply of socially necessary goods and services. But
investment in this sector is very essential in the interest of the society. If there
were no interest investors and the suppliers of capital would have invested at the
available rate of profit, however low it may be. Thus the welfare of the society
and expansion of the essential sectors along with employment would have been
ensured.
Interest, a cause for moral degradation:
In an interest based economy capital is invested in unsocial and unIslamic
activities. It ensures a fixed income for the creditors. For example, huge capital is
invested for hoarding, speculation, share market, amusement, even in
pornography. As income is much higher than the interest to be paid the
entrepreneurs make a huge profit. Hence they can easily pay the interest. This
leads to expansion of unsocial and exploitative activities in the society. Eventually
values and norms get shattered and moral degradation gradually takes root in the
society. As the rate of profit is comparatively lower in the socially desirable goods
and services getting finance for such ventures is always very difficult.
Interest creates hatred and malice in the society:
By means of lending money the capitalists and village mahajans unjustly
appropriates a big chunk of the hard earned income of hundreds and thousands
of people. Moreover, many people seek loans to meet the burning consumer
need which is essentially unproductive. As the loan does not yield any income the
debtors eventually become the worst sufferers. They are forced to sell their
movable and immovable belongings to pay off the dubt. Even the ancestral
properties are sold in auction by the court to pay for the debts along with the
interest due. Thus the mahajans and the creditors turn into blood-sucker
vampires. Social hatred silently mounts against them.
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Q.5 What are simultaneous equation? Discuss the simultaneous equations

possessing one and two unknowns with the help of examples. Also show how
these equations can be solved by substitution and elimination methods. Give
one example for each method.
What are simultaneous equations?
Simultaneous equations are two or more algebraic equations that share variables
e.g. x and y.
They are called simultaneous equations because the equations are solved at the
same time.
For example, below are some simultaneous equations:
2x + 4y = 14 4x − 4y = 4
6a + b = 18 4a + b = 14
3h + 2i = 8 2h + 5i = −2

Systems of Equations (Simultaneous Equations)

If you have two different equations with the same two unknowns in each, you can
solve for both unknowns. There are three common methods for solving:
addition/subtraction, substitution, and graphing.

Addition/subtraction method

This method is also known as the elimination method.

To use the addition/subtraction method, do the following:

1. Multiply one or both equations by some number(s) to make the number in

front of one of the letters (unknowns) the same or exactly the opposite in
each equation.
2. Add or subtract the two equations to eliminate one letter.
3. Solve for the remaining unknown.
4. Solve for the other unknown by inserting the value of the unknown found
in one of the original equations.
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Solving simultaneous equations

When solving simultaneous equations you will need different methods
depending on what sort of simultaneous equations you are dealing with.

There are two sorts of simultaneous equations you will need to solve:
 linear simultaneous equations

 quadratic simultaneous equations

A linear equation contains terms that are raised to a power that is no higher
than one.
E.g.
2x+5=02x+5=0

Linear simultaneous equations are usually solved by what’s called

the elimination method (although the substitution method is also an option
for you).
Solving simultaneous equations using the elimination method requires you
to first eliminate one of the variables, next find the value of one variable,
then find the value of the remaining variable via substitution. Examples of
this method are given below.
A quadratic equation contains terms that are raised to a power that is no
higher than two.
E.g.
x2−2x+1=0x2−2x+1=0

Quadratic simultaneous equations are solved by the substitution method.