# AP Inter 1st Year Economics Model Paper Set 1 with Solutions

The strategic use of AP Inter 1st Year Economics Model Papers Set 1 allows students to focus on weaker areas for improvement.

## AP Inter 1st Year Economics Model Paper Set 1 with Solutions

Time: 3 Hours
Maximum Marks: 100

Section – A

I. Answer any Three of the following questions in not exceeding 40 lines each. (3 × 10 = 30)

Question 1.
Explain the law of Diminishing marginal utility and what are its limitations.
Hermann Heinrich Gossen was the first economist to explain the law of diminishing marginal utility in 1854. It is also known as Gossen’s ‘first law’. In 1890 Marshall in his principles of economics developed and popularised this analysis. This law explains the functional relationship between the stock of commodity the marginal utility of commodity.

According to Marshall “The additional benefit which a person derives from a given increase of his stock thing diminishes with every increase in stock that he already has”. “A consumer increases the consumption of any one commodity keeping constant the consumption of all other commodities the marginal utility of the variable commodity must eventually decline”. Kenneth E. Boulding.

The law says that as we gone consuming a commodity satisfaction derives from its additional units goes on diminishes. Assumptions :

1. Rationality: Consumer is a rational man which means he always tries to get maximum satisfaction.
2. Cardinal measurement of utility: Utility is a cardinal concept, i.e., utility can be measured and compared numerically.
3. Utilities are independent: It implies that utility of any commodity depends as its own quantity.
4. Homogeneous : Units of the commodity are similar in quantity, size, taste and colour etc.
5. No time gap : There should not be any time gap between the consumption of one unit and other it.
6. Constant marginal utility: It is assumed that the marginal utility of money remains constant.
7. Total & marginal utility :
• Total utility : Total satisfaction obtained by the consumer from the consumption of a given quantity of commodity.
TUn = f(Qn)
Where TUn = Total utility of n commodity
F = functional relationship
Qn = Quantity of n commodity
• Marginal utility: Marginal utility is the addition made to the total utility by consuming one more unit of the commodity.
It can be explained as.
MUn = TUn – TUn-1
MUn = Marginal utility of nth unit
TUn = Total utility of nth unit
TUn-1 = Total utility of n-1 units
MU may also be expressed as follows .
Marginal utility is the additional utility derived from the consumption of an extra unit of commodity.
MU = $$\frac{\Delta \mathrm{TU}}{\Delta \mathrm{C}}$$
Where ΔTU = change in total utility
ΔC = change in number of units consumed.

Explanation of the law :
The law of diminishing marginal utility explains the relation between the quantity of good and its marginal utility. If a person goes on increasing his stock of a thing, the marginal utility derived from an additional unit declines. We show this tendericy with an imaginary table given below.

 Unit of x apples Total utility Marginal utility 1 40 40 – 0 = 40 2 70 70 – 40 = 30 3 90 90 – 70 = 20 4 100 100 – 90 = 10 5 100 100 – 100 = 0 6 90 90 – 100 = -10

In this table let us suppose that one is fond of apples. As he consumes one apple after another he derives less and less satisfaction. The first unit consumed with atmost pleasure. For the second, the intensity of his desire diminishes. The third will be still less and so on. The total utility increasing until the consumption of fourth unit of good but diminishing rate. Fifth unit of apple gives him maximum total utility. But marginal utility becomes zero. Further consumption of sixth unit TU diminishes and MU becomes negative. The relationship between total utility and marginal utility is explained in the following three ways.

1. When total utility increases at diminishing rate, marginal utility falls.
2. When total utility is maximum, marginal utility becomes zero.
3. When total utility decreases, marginal utility becomes negative.

This can be shown in the following diagram.

In the diagram on ‘X’ axis measures units of apples and OY axis measures total utility and marginal utility. TU curve represents total utility and MU curve represents marginal utility. TU curve is maximum at 5th unit where MU curve will become zero. TU curve slopes downwards from 6th unit, while MU will become negative.

Limitations or Exceptions :

1. Hobbies:
This law does not operate in the case of hobbies like collection of stamps, old paintings, coins etc. Greater the col-lections of a person, greater is his satisfaction. Marginal utility will not diminish.
2. Drunkers:
It is pointed out that the consumption of liquor is not subject to the law of diminishing marginal utility. The more a person drinks liquor, the more he likes it.
3. Miser:
This law does not apply to money. The more money a person has the greater is the desire to acquire still more of it.
4. Further this law does not hold good if any change in in-come of the consumer, tastes and preferences.

Question 2.
Explain the law of variable proportions.
The law of variable proportions has been developed by the 19th century economists David Ricardo and Marshall. The law is associated with the names of these two economists. The law states that by increasing one variable factor and keeping other factors constant, how to change the level of output, total output first increases at increasing rate, then at a diminishing rate and later decreases. Hence this law is also known as the “Law of diminishing returns”.

Marshall stated in the following words. “An increase in capital and labour applied in the cultivation of land causes in general less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture”.
Assumptions :

1. The state of technology remain constant.
2. The analysis relates to short period.
3. The law assumes labour in homogeneous.
4. Input prices remain unchanged.

Explanation of the Law :
Suppose a farmer has ‘4’ acres of land he wants to increase output by increasing the number of labourers, keeping other factors constant. The changes in total production, average product and marginal product can be observed in the following table.

In the above table total product refers to the total output produced per unit of time by all the labourers employed. Average product refers to the product per unit of labour marginal product refers to additional product obtained by employ-ing an additional labour. In the above table there are three stages of production.

1st stage i.e., increasing returns at 2 units total output increases average product increases and marginal product reaches maximum

2nd stage i.e., diminishing returns from 3rd unit onwards TP increases diminishing rate and reaches maximum, MP becomes zero, AP continuously decreases.

3rd stage i.e., negative re¬turns from 8th unit TP decreases AP declines and MP becomes negative. This can be explained in the following diagram.

In the diagram on ‘OX’ axis shown units labourer and ‘OY axis show TR MP, and A.P 1st stage TP AP increases MP is maxi-mum. In the 2nd stage TP maximum, AP decrease MP is zero. At 3rd stage TP declines, AP also declines, MP becomes negative.

Question 3.
Describe Price determination under perfect competition. Answer: Perfect competition is competition in which the number of buyers and sellers are very large. All engaged in buying and selling a homogeneous without any restrictions.

Under this competition there are large number of buyers and sellers no buyer and seller can’t influence market price. All products are homogeneous. There is a freedom of free entry and exit. There is a perfect mobility of factors of production. There is no transport cost. These are the main features of perfect competition.

Price determination :
Under perfect competition sellers and buyers can’t decide the price. Industry decides the price of the good. In the equilibrium price is determined at a point where the demand for and supply of the total industry are equal to each other. The quantity bought and sold at this price is the equilibrium output. The process of price determination is shown through a table.

 Price Quantity supplied Quantity demanded (Kgs) 1 (Kgs) 60 2 20 50 3 30 40 4 40 30 5 50 20

In the table where demand and supply both are equal at that point price and output are determine. In the table changes in price always lead,to a change in supply and demand. As price increases there is a fall in the quantity demanded. It means, price and demand

have a negative relationship. The relation between price and supply v of goods is positive. It can be observed from the table when the price is ₹ 1/- market demand is 60 kgs. and supply is 20 kgs. When price is increases from ₹ 1 to ₹ 5/- supply increased 60 kgs. and demand decreases 20 kgs. When price is ₹ 3/- the demand supply are equal at 40 kgs. This price is called equilibrium price. This process is explained with the help of a diagram.

In the diagram ‘OX’ axis shown demand and supply. ‘OY’ axis represented price. ‘DD’ is demand curve. ‘SS’ is supply curve. In the diagram the demand curve and supply curve intersect at point E. Where price is ‘OP’ and output is ‘OQ’ both are equal.

Question 4.
Explain the various methods of calculating national income.
There are three methods of measuring national income.
1) Output method or Product method
2) Expenditure method
3) Income method
‘Carin cross’ says national income can be looked in any one of the three ways. As the national income measured by adding up everybody’s income by adding up everybody’s output and by adding up the value of all things that people buy and adding in their savings.

1) Output method (Product method):
The market value of total goods and services produced in an economy in a year is considered for estimating National Income. In order to arrive at the value of the product services, the total goods and services produced are multiplied with their market prices.

Then National Income = (P1Q1 + P2Q2 + …. PnQn)
Depreciation – Indirect taxes + Net income from abroad.
Where P = Price
Q = Quantity

1,2, 3……. n = Commodities & services There is a possibility of double counting. Care must be taken to avoid this. Only final goods and services are taken to compute national. Income but not the raw materials or intermediary goods. Estimation of the national income through this method will indi¬cate the contribution of different sectors, the growth trends in each sector and the sectors which are lagging behind.

2) Expenditure method:
In this method we add the per¬sonal consumption expenditure of households, expenditure of the firms, government purchase of goods and services net exports plus net income from abroad.

NI = EH + EF + EG + Net exports + Net income from abroad. Here National Income = Private final consumption expen-diture + Government final consumption expenditure + Net domestic capital formation + Net exports + Net income from abroad..
EH = Expenditure of households
EF = Expenditure of firms
EG = Expenditure of government
Care should be taken to include spending or expenditure made on final goods and services only.

3) Income method :
In this method, the incomes earned by all factors of production are aggregated to arrive at the national Income of a country. The four factors of production receive incomes in the form of wages, rent, interest and profits. This is also national income at factor cost.

NI = W + I + R + P + Net income from abroad
NI = National income
W = Wages
I = Interest
R = Rent
P = Profits
This method gives us National Income according to distribute shares.

Question 5.
Explain the Keynesian theory of employment.
Keynesian theory of employment is the principle of effective demand. He called his theory, general theory because it deals with all levels of employment. Keynes explains that lack of aggregate demand is the cause of unemployment. He used the terms aggregate demand, aggregate supply. It means total. The term effective demand is used to denote that level of aggregate demand which is equal to aggrerate supply.

According to Keynes where aggregate demand and aggregate supply are intersected at that point effective demand is determined. This effective demand will determine the level of employment.

Aggregate supply schedule:
The aggregate supply schedule shows the various amounts of the commodity that will be offered for sale at a series of price. As the level of output increases with the level of employment. The aggregate supply price also increases with every increase in the level of employment. The aggregate supply curve slopes upwards from left to right. But when the economy reaches the level of the full employment, the aggregate supply curve becomes vertical.

Aggregate demand schedule:
The various aggregate demand prices at different level of employment is called aggregate demand price schedule. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. The aggregate demand curve slopes upward from left to right

Equilibrium level of income :
The two determinants of effective demand aggregate supply and aggregate demand prices combined schedule is shown in the following table.

 Level of employment (in lakhs of workers) Aggregate supply price (in crores of T) Aggregate demand price (in crores of ?) 20 200 175 30 250 225 40 300 300 AD = AS 50 350 325 60 400 425

The table shows that so long as the demand price is higher than the aggregate supply price. The level of employment 40 lakh workers aggregate demand price is equal to aggregate supply price i.e., 300 crores. So effective demand in the above table is ₹300 crores. This can be shown in the following diagrams.

In the diagram ‘X’ axis represents the employment and V axis represents price. AS is aggregate supply curve AD is aggregate demand curve. The point of intersection between the two ‘E1‘ and ‘E2‘. points. This is effective demand where all workers are employed at this point the entrepreneurs expectation of profits are maximised. At any other points the entrepreneurs will either incur losses or earn sub-normal profits.

Section – B

II. Answer any Eight of the following questions in not exceeding 20 lines each.  (8 × 5 = 40)

Question 6.
Explain the Jacob Viners definition of economics.
Jacob Viner’s definition of economics is considered as modem definition of economics. He is an American economist known for his short run and long run cost curve analysis. According to Jacob Viner” Economics is what economists do”. The problem of the economy are.

1. What to produce and in what quantities : The economy has to decide whether to produce consumer goods and capital goods. These decisions are influence by individuals as well as government.
2. How to produce these goods : A decision has to be made whether to use labour intensive or capital intensive techniques.
3. For whom to produce these goods and services : It is concernned with the distribution of income and wealth among different sections of the society.
4. How efficient the productive resources are in use : This refers to the efficiency of economic system.
5. Whether the available resources are fully utilised : If resources are fully utilised that it can provide more employment opportunities.
6. Is the economy growing or static over a period of time.

Question 7.
Distinguish between free goods and economic goods.
Economic goods are products of human labour. They are not freely available in nature. Goods which are not free are called economic goods. These goods are also called scarce goods. Ex : Books, pen etc.

 Free goods Economic goods 1) Free goods are nature’s gift. Ex : Air, Sunshine etc. 1) Economic goods are man made. Ex : Book, Pen etc. 2) Their supply is abandant. 2) Supply is always less than their demand. 3) They do not have price. 3) These goods command price. 4) Then goods don’t have cost of production. 4) Economic goods have cost of production. 5) Free goods have only value in use. 5) Economic goods have both use value and exchange value. 6) These goods are not included in national income. 6) Economic goods are included in national income.

Question 8.
What are the properties of indifference curves.
It represents the satisfaction of a consumer from two goods of various combinations.  The important properties of indifference curves are :

1. Indifference curves slopes downwards from left to right there exists negative slope.
2. Indifference curves are convex to the origin because of diminishing marginal rate of substitution.
3. Indifference curves can never intersect each other.
4. Higher indifference curve represent higher level of satisfaction. Indifference curve to the right represents higher satisfaction.

Question 9.
Why a demand curve has a negative slopes or downward slope from left to right.
According to Marshall “The amount demanded increases with a fall in price and diminishes with rise in remain the same”.The law of demand explains inverse relationship between the price and quantity demanded of a commodity. Therefore the demand curve slopes downward from left to right.

There are some other reasons also responsible for downward sloping demand curve. They are :

1) Old and new buyers :
If the price of good falls, the real income of the old buyers will increase. Hence the demand for the good will increase. In the same way, the fall in price attracts new buyers and will be able to built after a fall in its price. So the demand curve slopes downwards from left to right.

2) Income effect:
Fall in price of commodity the real income of its consumers increase. The increase in real income encourages demand for the commodity with reduced price. The increase in demand an account of increase in real income is known as income effect.

3) Substitution effect:
When the price of commodity falls, it will become relatively cheaper than its substitutes. The increase in demand on account of increased in real income is known as income

4) Law of Diminishing marginal utility :
According to this law, if consumer goes on consuming more units of the commodity, the additional utility goes an diminishing. Therefore, the consumer prefers to buy at a lower price. As a result the demand curve has a negative slope.

Question 10.
Explain the total outlay method of measuring elasticity of demand.
This method was introduced by Alfred Marshall. Price elasticity of a demand can be measured on the basis of change in the total outlay due to a change in the price of a commodity. This method helps us to compare the total expenditure from a buyers or total revenue from a seller before and after the change in price. Total outlay = Price x Quantity demanded According to this method the price elasticity of demand is expressed in three forms, they are elastic demand, unitary elastic and in elastic demand. This can be explained with the help of table.

 Price Quantity demand Total expenditure or outlay Ed nature 6 100 600 Elastic demand 5 200 1000 Ed > 1 4 300 1200 Unitary demand 3 400 1200 Ed = 1 2- 500 1000 Inelastic demand 1 600 600 Ed < 1

In this table shows that:

1. If the total expenditure increases due to a fall in price is known as relatively elastic demand.
2. If total expenditure remains constant even the price falls is known as unitary elastic demand.
3. If the total expenditure decreases due to a fall in price is known as relatively inelastic demand.

This can be shown in the following diagram.

In the diagram ‘OX’ axis represents total expenditure and ‘OY axis represents price. The total outlay curve ‘AD’ is shown in three parts i.e., A to B; B to C; and C to D

Question 11.
What is meant by real wages. And what are the factors that determine real wages.
The amount of goods and services that can be purchased with the money wages at any particular time is called real wage. Thus real wage is the amount of purchasing power received by worker through his money wage.

Factors determining the real wage :
1. Methods of form of payment : Besides money wages, normally the labourers get same additional facilities provided by their management. Ex : Free housing, free medical facilities etc. As a result this real wage of the worker will be high.

2. Purchasing power of money: An important factor which determines the real wage is the purchasing power of money which depends upon the general price level. A rise in general price level will mean a full in the purchasing power of money, causes decline in real wages.

3. Nature of work : The working conditions also determine the real wages of labourer. Less duration of work, ventilation fresh air etc., result in high real wages, lack of then facilities real wages are low eventhough money wages are high.

4. Future prospects: Real wage is said to be higher in those jobs where there is possibility of promotions hike in wages and vice-versa.

5. Nature of work : Real wages are also determined by the risk and danger involved in the work. If work is risky wages of labourer will be low though money wages are high. Ex : Captain in a submarine.

6. Timely payment: If a labourer receives payment regularly and timely the real wages of the labourer is high although his money wage is pretty less and vice-versa.

7. Social prestige: Real wage depends on social prestige. The money wages of Bank officer and judge are equal, but the real wage of a judge is higher than bank officer.

8. Period and expenses of education: Period and expenses of training also affect real wages.

Question 12.
What are the factors that determine national income.
National Income is the total market value of all goods and services produced in a country during a given period of time. There are many factors that influence and determine the size of national income country.
a) Natural resources:
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of national income.

b) Quality and Quantity of factors of production:
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.

c) State of technology:
Output and national income are in-fluenced by the level of technical progress achieved by the coun-try. Advanced techniques of production help in optimum utiliza-tion of a country’s national resources.

d) Political will and stability:
Political will and stability in a country helps in planned economic development and for a faster growth of national income.

Question 13.
What are the sources of public revenue.
Revenue received by the government from different sources is called public revenue. Public revenue is classified into two kinds.
1) Tax revenue
2) Non-tax revenue.
1) Tax Revenue:
Revenue received through collection of taxes from the public is called tax revenue. Both the state and central government collect taxes as per their allocation in the constitution. Taxes are two types.

a) Direct taxes:
i) Taxes on income and expenditure.
Ex : Income tax, Corporate tax etc.

ii) Taxes on property and capital assets.
Ex : Wealth tax, Gift tax etc.

b) Indirect taxes : Taxes levied on goods and services.
Ex : Excise duty, Service tax.

2) Non – tax revenue:
Government receives revenue from sources other than taxes and such revenue is called non-tax rev-enue. They are

b) Commercial revenue:
Modem governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products. Ex : Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals Ltd., Indian Railways, State Road Transport Corporations, Indian Air lines etc.,

When the revenue received by the government from taxes and from the above non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial insti-tutions operating within the country and also from the public. Modem government also taken loans from inter-national financial institutions.

d) Grants-in-aid:
Grants are amount received without any condition of repayment. They are not repaid. These are two types.
1. General grant
2. Specific grant.

Question 14.
List out various items of public expenditure.
Public expenditure is an important constituent of public finance. Modem governments spend money from various welfare activities. The expenditure incurred by the government on various economic activities is called public expenditure. Governments incur expenditure on the following heads of accounts.

1. Defence
2. Internal security
3. Economic services
4. Social services
5. Other general services
6. Pensions
7. Subsidies
8. Grants to state governments
9. Grants to foreign governments
10. Loans to state governments
11. Loans to public enterprises
12. Loans to foreign governments
13. Repayment of loans
14. Assistance to states on natural calamities etc.

Question 15.
Explain the functions of money.
Money plays a vital role in modern economy. A modern economy is rightly known as monetary economy because of the crucial position that money occupies.

1. According to ‘Robertson’: “Anything which is widely ac-cepted in payment for goods or it discharges of other kinds of busi-ness obligations”.
2. According to ‘Seligman’: “One that possesses general acceptability”.
3. According to ‘Waker’: “Money is what money does”.

Functions of money:
1. Primary functions :
a) Medium of exchange :
Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodi-ties without double coincidence wants. Any commodity can be ex-change for money. People can exchange goods and services through the medium of money.

b) Measure of value:
Money serves as a measure of the value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transac-tions simple and easy. The value of each commodity is expressed in the units of money. We call if the price.

2. Secondary functions:
a) Store of value:
The value of commodities and services can be stored in the form of more. Certain commodities are perish-able. If they are exchanged for money before they perish, their value be preserved in the form of money.

b) Standard of deferred payments:
Money serves as a stan-dard of deferred payments. The modem economies most of the business transactions take place on the basis of credit. An indi¬vidual consumer or a business man may now purchase a commod¬ity and pay for it in future as this function makes it possible to express future payments in terms of money.

c) Transfer of money:
Money can be transferred from one person to another at any time at any place.

3. Contingent functions:
a) Measurement and distribution of National income:
Na-tional income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making payment them in money.

b) Money equalises marginal utilities/productivities:
The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors erf production and maximize profits.

c) Basis of credit:
Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is de-pendent on the supply of nominal money.

d) Liquidity:
Money is the most important liquid asset. Interms of liquidity, it is superior other assets. Money is centpercent liquid.

Question 16.
State the types of inflation.
Inflation means a general rise in prices. Based on the rate of inflation, it may be divided into four types.

1. Creeping inflation :
When rise in the prices is very slow and small, it is called creeping inflation.
2. Walking inflation:
This is the second stage of inflation. The inflation rate will be between 2% and 4%.
3. Running inflation:
When the rate of inflation is in the range of 4 -10% per annum, it is called running inflation.
4. Galloping inflation or hyper inflation:
If the inflation rate exceeds 10%, galloping inflation occurs. It may also called hyper inflation.

Question 17.
What is relationship between economics and statistics.
There is close relationship between statistics and economics. In the words of Tugwell ‘The science of economics is becoming statistical in its method”. All the economic laws are pronounced on the basis of statistical facts and figures. The theory of population of Malthus, law of family expenditure of engels etc., were propounded after statistical tests. Statistics helps the economics to become an exact science.

In the study of theoretical economics, the application and use of statistical methods are of great importance. Most of the doc-trines of economics are based on the study of a large number of units and their analysis. This is done through statistical methods. Law of demand was formulated because of statistical methods.The importance statistics is felt in all branches of knowledge in accountancy and auditing in banking, in insurance in research and many fields,. Without statistics no branch of knowledge is complete.

Section – C

III. Answer any fifteen of the following questions in not exceeding 5 lines each. (15 × 2 = 30)

Question 18.
Economic goods.
Economic goods are man made. They have cost of production and price. They are limited in supply. They have both value in use and value in exchange. Ex : Pen, Book etc. Economic goods are also called scarce goods.

Question 19.
Intermediary goods.
Goods which are under the process of production and semi finished goods are known as intermediary goods. They occupy a stage between raw material and final product. Ex : cotton and fibre etc.

Question 20.
Cardinal utility
Alfred Marshall developed cardinal utility analysis. According to this analysis the utilities derived from consumption of different commodities can be measured in terms of arbitary units called utils. 1, 2, 3, 4 are called cardinal numbers.

Question 21.
Individual demand schedule
Individual demand schedule explains the relationship between various quantities purchased at various prices by a single consumer in the market.

Question 22.
Giffen goods.
It means necessary goods. Sir Robert Giffen in mid 19th century observed that the low paid workers in England purchased more bread when its price increase by decrease in the purchase of meat. The increase in demand for bread when price increased is an exception to the law of demand, it is known as Giffen’s pardox.

Question 23.
Marginal cost.
Marginal cost is the additional cost of production producing one more unit in other words it is the addition made to total cost by producing one more unit of a commodity.

Question 24.
Equilibrium price.
The term ‘equilibrium’ is derived from the latin word ‘acqui’ , meaning ‘equal’ and ‘libra’ means balance. Thus it means equal balance. A price where supply is equal to the demand in the market is called equilibrium price.

Question 25.
Price discrimination.
Monopolist will charge different prices for the same commodity or service in the market. This is known as discriminating monopoly or price discrimination.

Question 26.
Contract rent.
It is the hire charges for any durable good. For example cycle rent, room rent etc. It is a periodic payment made for the use of any material good. The amount paid by the tenant cultivator to the landlord annually may be also be called contract rent. Such payments include besides the price of the use of land, interest on investment made by the landlord on land to improve its productivity, service charges, profits and incidental charges. Thus contract rent is a gross rent.

Question 27.
Transfer earnings.
Transfer earnings was introduced by Mrs. John Robinson. It is also called as the ’opportunity cost’ in explaining rent. Transfer earnings means what a factor production may be earning in its present employment over what it could earn in its next best employment or what a factor can earn in its next best alternative use.

Question 28.
Percapita income.
It is average income received by a citizen of a country in a year. We arrive at percapita income by dividing the national income with the population of a country.
Percapta income = $$\frac{\text { National income }}{\text { Population }}$$

Question 29.
Say’s law of market.
J.B. Say a French economist advocated the famous ‘Law of markets1 on which the classical theory of employment is based. According to this law “supply creates it’s own demand”. According to this law whenever additional output is created. The factors of production which participate in that production receive incomes equal to that value of that output. This income would be spent either on consumption goods or on capital goods. Thus additional demand is created matching the additional supply.

Question 30.
Aggregate demand function.
The schedule showing aggregate demand prices at different levels of employment in the economy is called as Aggregate demand function.

Question 31.
Liquidity
Liquidity means the ease with which one can convert a financial asset into a medium of exchange. Liquidity is greatest for money as an asset into a medium of exchange. It is greatest for money as an asset because money itself is a medium of exchange. Infact money is the only asset which possess perfect liquidity.

Question 32.
Near money
The near money refers to those highly liquid assets which are not accepted as money but then can be easily converted into money within a short period. Ex : Saving bank deposit, shares, treasury bills, bonds etc.

Question 33.
Overdraft
Overdraft is permissable on current account only. The current account holders are given the facility overdrafts by which they are allowed to draw an amount above their balances. However they can overdraw the amount upto a certain limit fixed by the bank.

Question 34.
Cost-push inflation.
Inflation caused by the rise in cost of production is called cost push inflation. Cost of production may rise due to the increase in wages forced by the trade unions of government.

Question 35.
What is a Pie-diagram?