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The strategic use of TS Inter 1st Year Economics Model Papers Set 6 allows students to focus on weaker areas for improvement.

TS Inter 1st Year Economics Model Paper Set 6 with Solutions

Time: 3 Hours
Maximum Marks: 100

Section – A

Question 1.
Discuss the consumer’s equilibrium with the help of Law of equi-marginal utility.
Answer:
Law of equi-marginal utility is an important law of consumption. It is called as “Gossen’s Second Law”, as its formulation is associated with the name of H.H. Gossen. According to Marshall, “If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all uses. If it had a greater marginal utility in one use than in another, he would gain by taking away some of it from the second and applying it to the first”‘

According to this law the consumer has to distribute his money income on different uses in such a manner that the last rupee spent on each commodity gives him the same marginal utility. Equalisation of marginal utility in different uses will maximise his total satisfaction. Hence, this law is known as the “Law of equi-marginal utility”. The fundamental condition for consumer’s equilibrium can be explained in the following way.

\(\frac{\mathrm{MU}_{\mathrm{x}}}{\mathrm{P}_{\mathrm{x}}}=\frac{\mathrm{MU}_{\mathrm{y}}}{\mathrm{P}_{\mathrm{y}}}=\frac{\mathrm{MU}_{\mathrm{z}}}{\mathrm{P}_{\mathrm{z}}}=\mathrm{MU}_{\mathrm{m}}\)

Where, MU_x, MU_y, MU_z, MU_m = Marginal utilities of com¬modities x, y, z, money (m), and P_x, P_y, P_z = Prices of x, y, z goods.

This law can be explained with the help of a table. Suppose the consumer is prepared to spend his money income is ₹ 26/ – on two goods say X and Y. Market prices of two goods are ₹ 4/- & ₹ 5/- respectively. Now the marginal utilities of good X, good Y are shown below.

links U<sub>x</sub>	MU<sub>x</sub>	Units	MU<sub>y</sub>
1	44	1	45
2	40	2	40
3	36	3	35
4	32	4	30
5	28	5	25

For explaining consumer’s maximum satisfaction and consequent equilibrium position we need to reconstruct the above table by dividing marginal utilities of X by its price ₹ 4/- and marginal utility of Y by ₹ 5/-. This is shown in the following table.

In the table it is clear that when consumer purchases 4 units of goods X & 2 units of good Y. Therefore, Consumer will be in equilibrium when he is spending (4 × 4 = 16 + 2 × 5 = 10) ₹ 26/- on them.

Assumptions of the law: The law of equi-marginal utility depends on the following assumptions.

1. This law is based on cardinal measurement of utility.
2. Consumer is a rational man always aiming at maximum satisfaction.
3. The marginal utility of money remains constant.
4. Consumer’s income is limited and he is proposed to spent the entire amount on different goods.
5. The price of goods are unchanged.
6. Utility derived from one commodity is independent of the utility of the other commodity.

Limitations of the law: The law of equi-marginal utility has been subject to certain limitations which are as given below:

1. The law assumes that consumer is a rational man and always tries, to get maximum satisfaction. But, in real life, several obstacles may obstruct rational behaviour.
2. his law is not applicable when goods are indivisible.
3. The law is based on unrealistic assumptions like cardinal measurement of utility and marginal utility of money remains constant. In real world, MU of money does not re¬main constant.
4. This law will not be applicable to complementary goods.
5. Another limitations of this law is that there is no fixed accounting period for the consumer in which he can buy and consume goods.

Importance of the Law : The law of equi-marginal utility is of great practical importance in economics.

1. Basis of Consumer Expenditure:
   The expenditure pat-tern of every consumer is based on this law.
2. Basis for Savings and Consumption:
   A prudent consumer will try to distribute his limited means between present and future consumption so as to have equal marginal utility in each. This is how the law guides us.
3. In the Field of Production:
   To the businessman and the manufacturer the law is of special importance. He works towards the most economical combination of the factors of production. For this he will substitute one factor for another till their marginal productivities are the same.
4. Its application to Exchange:
   In all our exchanges, this law works. Exchange is nothing but substitution of one thing for another.
5. Price Determination:
   This principle has an important bearing on the determination of value and price.
6. Public Finance:
   Public expenditure of a government conforms to this law. Taxes are also levied in such a manner that the marginal sacrifice of each tax payer is equal.

Question 2.
Explain the law of demand and examine its exceptions.
Answer:
Demand means a desire which is backed up by ability to buy and willingness to pay the price is called Demand in Economics. Thus demand will be always to a price and time. Demand has the following features.

1. Desire for the commodify.
2. Ability to buy the commodity.
3. Willing to pay the price of commodity.
4. Demand is always at a price.
5. Demand is per unit of time i.e., per day, week etc. Therefore, the price demand may be expressed in the form of small equation. D_x = f(P_x)

Price demand explains the relation between price and quantity demanded of a commodity. Price demand states that there is an inverse relationship between price and demand.

Law of demand:
Marshall defines the law of demand as, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things remain the same”. So, the law of demand explains the inverse relationship between the price and quantity demanded of a commodity.

Demand schedule:
It means a list of the quantities demanded at various prices in a given period of time in a market. An imaginary example given below.

Pricein ₹	Quantity Demanded units
5	10
4	20
3	30
2	40
1	50

The table shows that as the price falls to ₹ 1/- the quantity demanded 50 units, when price ₹ 5/- he is buying 10 units. So, there is inverse relationship between price and demand. Price is low demand will be high and price is high demand will be low. We can illustrate the above schedule in a diagram.

In the above diagram on X-axis demand is shown and price is on Y-axis. DD is the demand curve. Demand curve slopes downwards from left to right. Assumptions :

1. No change in the income of consumer.
2. The taste and preferences consumers remain same.
3. The prices of related goods remain the same.
4. New substitutes are not discovered.
5. No expectation of future price changes.

Exceptions:
In certain situations, more will be demanded at higher price and less will be demanded at a lower price. In such cases the demand curve slopes upward from left to right which is called an exceptional demand curve. This can be shown in the following diagram.

In the diagram when price increases from OP to OP₁ demand also increases from OQ to OQ₁ This is opposite to law of demand.

1) Giffen’s Paradox:
This was stated by Sir Robert Giffen. He observed that poor people will demand more of infe-rior goods, if their prices rise. Inferior goods are known as Giffen goods. Ex : Ragee, Jowar etc. He pointed out that in case of the English workers, the law of demand does not apply to bread. Giffen noticed that workers spend a major portion of their income on bread and only small portion on meat.

2) Veblen Effect (Prestigious goods):
This exception was stated by Veblen. Costly goods like diamonds and precious stones are called prestige goods or veblen goods. Generally, rich people purchase those goods for the sake of prestige. Hence, rich people may buy more such goods when their prices rise.

3) Speculation:
When the price of a commodity rises the group of speculators expect that it will rise still further. Therefore, they buy more of that commodity. If they expect that there is a fall in price, the demand may not expand. Ex : Shares in the stock market.

4) Illusion:
Sometimes, consumer develop to false idea that a high priced good will have a better quality instead of low priced good. If the price of such good falls, demand decreases, which is contrary to the law of demand.

Question 3.
What are the various definitions of National income? De-scribe the determining factors of National Income?
Answer:
National Income has been defined in a number of ways. National income is the total market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are :
i) traditional definitions advocated by Marshall, Pigou and Fisher, and ii) modern definitions.
1) Marshall’s Definition:
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities; material and non-material including services of all kinds. This is the true net annual income or revenue of the country”. In this definition, the word ‘net’ refers to deduction of depreciation from the gross national income and to this income from abroad must be added.

2) Pigou’s Definition:
According to A.C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition:
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regarded it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

4) Kuznets’ Definition:
From the mpdem point of view, according to Kuznets, “national income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers”.

Determining Factors of National income:
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries.

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 influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural 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 4.
Discuss the concept of public finance. Describe the sources of public revenue.
Answer:
Public finance deals with the income and expenditure of public authorities (government). The word public is used to denote state of government: central, state and local bodies. According to Prof. Hugh Dalton “it is concerned with the income and expenditure of public authorities and with the adjustment of one to another”.

Modern governments play a major role in creating economic and social infrastructure. They spend lots of money on construction of roads, railways, on creating communication systems, education and health, on providing irrigation facilities and electricity etc. Of late modern governments have been spending huge amounts on various welfare measures to ameliorate the difficulties of poor and downtrodden sections of their population.

Public Revenue:
As explained in the previous paragraphs, a modern government has many functions to perform. It needs huge revenue for the performance of all its functions efficiently. Therefore it collects revenue by imposing taxes and also receives money from the people in many other forms. Revenue received by the government from different sources is called public revenue. Public revenue is broadly classified into two kinds :
1) Tax revenue and
2) Non-Tax revenue.

1) Tax Revenue:
Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the Constitution. Broadly taxes are divided into two categories :
a) direct taxes,
b) indirect taxes.

a) Direct Taxes:
i) Taxes imposed on individuals and companies based on income and expenditure. Ex : Personal income tax, corporate tax, interest tax and expenditure tax.

ii) Taxes imposed on property and capital assets of individuals and companies. Ex : Wealth tax, gift tax, estate duty.

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

2) Non – Tax Revenue : Government receives revenue from sources other than taxes and such revenue is called the non-tax revenue. The sources of non-tax revenues are as follows:

a) Administrative Revenue:
Government receives money for certain administrative services. Ex : License fee, Tuition fee, Penalty etc.

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. Some of the examples of the public sector units are Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Air India etc.

c) Loans and Advances:
When the revenue received by the government from taxes and from non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modern government can also obtain loans from foreign government and international financial institutions.

d) Grants-in-Aid :
Grants are amounts received without any condition of repayment. They are not repaid. State governments receive such grants from the central government. The central government may receive such grants from foreign governments or any international funding agency.

Grants are of two types :

1. General Grants:
   When a grant is given to meet shortage of funds in general without specifying a purpose, it is called general grant.
2. Specific Grants:
   When a grant is given for a specific purpose it is called a specific grant. It cannot be spent on any other purpose. Ex : education grant and family planning grant etc.

5. Discuss the evolution of money. Explain its types.
Answer:
Money occupies a unique place in any economic system. Society needs money for a variety of transactions undertaken by the people and the government in the day to day life. Now¬, a-days, we cannot imagine a society without a role for money. Evolution of money:

The term ‘money’ was derived from the name of goddess Juno Moneta of Rome. Prior to the introduction of money, the barter system was in vogue. In that system one commodity was exchanged for another commodity. Money was coined in order to overcome the difficulties of the barter system. In the initial stages, animal was used in place of money. Gradually metallic money in the form of gold, silver, bronze and nickel replaced it. In the third stage coins came into use. That was followed by paper money. The latest stage is the credit money in the form of drafts, cheques, debit cards, credit cards etc. Thus, money has undergone different stages in the process of evolution.

Types of money:
1) Commodity Money and Representative Money:
Commodity money includes metallic coins whose face value and intrinsic value are same. It is also called as full-bodied money. Representative money includes coins and paper money whose intrinsic value is less than their face value.

2) Legal Tender Money and Optional Money:
On the basis of legality, money is divided into legal tender money and optional money. Legal tender money is the money which is accepted as per the law by everyone in payment for commodities and services. Credit creation by the commercial banks in the form of drafts, cheques etc., are called as optional money.

3) Metallic Money and Paper Money:
Metallic money is made up of metals such as silver, nickel, steel etc. All coins are metallic money. Paper money is money printed on paper. Currency notes in the form of ₹ 1,000, ₹ 500, HOO, ₹ 50 and ₹10 are paper money.

4) Standard Money and Token Money: Standard money is the money whose face value and intrinsic value are same. Token money is money or unit of currency whose face value is higher than the intrinsic value, e.g. 50 paisa, 1 rupee coins etc.

5) Credit Money:
This is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 6.
Explain the scarcity definition of economics.
Answer:
Marshall’s welfare definition until the publication of Lionel Robbins’ book “An Essay on the Nature and Significance of Economic Science” in 1932. Robbins’ definition brought out the logical inconsistencies and inadequacies of the earlier definitions and formulated his own definition of economics. He has given a more scientific definition of economics. In the words of Robbins, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.'”

I. Main Features :
1. Human Wants are Unlimited: The fulfillment of one want gives rise to a number of new wants.

2. Means are Scarce : The means of a person by which his wants may be satisfied are limited. It leads to economic problems as all wants cannot be satisfied by these limited means.

3. Alternative Uses of Scarce Means : Resources are not only scarce but also have multiple uses. For example, electricity can be used in homes and also in industries . A piece of land can be used to produce rice or wheat. If a scarce factor is used for the satisfaction of one want, less of it will be available for other wants. Hence, man has to make a decision regarding the alternative uses of resources.

4. Man has therefore, to choose between wants. Problem, of choice arises.

II. Superiority of Robbins’ Definition:
Robbins’ definition is superior to the earlier definition in more than one way. The reasons are given below :

1. It is non-classificatory, as it includes all human activi-ties whether they promote human welfare or not.

2. This is universally accepted definition. It is applicable to all types of societies, because the scarcity of re-sources is felt by individuals as well as by societies.

3. Robbins’ definition of economics is neutral between ends. Being a positive science it does not pass any value judgements regarding ends.

Question 7.
Examine the limitations of the law of diminishing Marginal utility. Analyse its importance.
Answer:
The law of diminishing marginal utility was originally explained by Hermann Heinrich Gossen in 1854. Jevans called it as Gossen’s first law. But Alfred Marshall popularised this law and analysed it in a scientific manner.

Meaning:
The law says that as a consumer takes more units of good, the extra satisfaction that he derives from extra unit of a good goes on falling. The relationship between quantity consumed and utility derived from each successive unit con¬sumed is called the law of diminishing marginal utility. Limitations of the Law :

The following are some of the exceptions to the law of di-minishing marginal utility:

1) Rational Consumer:
The consumer should be an economic human being with rational behaviour. If he is un-der the influence of an intoxicant, the utility of the later units will rise in the beginning but ultimately it falls and even becomes negative.

2) If goods are not independent, this law will not work. Complimentary goods can be one of the example.

3) Marginal utility of money is not constant. Our desire for money increases as we have more of it. The marginal utility of money will not be zero, but definitely it falls, when a person acquires more and more money.

4) If the goods are not homogeneous, this law will not work.

5) If the goods are too big or too small in size, problem arises. If the size is too big, consumer may not require second unit and similarly if the size is too small. Utility of the subsequent units may increase.

6) In the case of durable goods, it is not possible to calculate their utility because their use is spread over a period of time. A consumer does not buy more durable goods for personal consumption.

7) If there is any change in consumer’s income or tastes or habits, this law does not hold good.

8) If the goods are not ordinary, like diamonds or hobby goods like stamps and Coins, the utility of the additional units may be greater than the earlier units. Infact law is applicable in these cases also. The collector of stamps or coins never like to have innumerable pieces. The person may not collect more than one or two of the same coin or same stamp.

Importance of the Law:

1. The law of diminishing marginal utility is the basic law of consumption and it is the basis for the law of demand, the law of equi-marginal utility etc.
2. The changes in design, pattern and packing of goods will be brought by the producers by keeping this law in view.
3. The law explains the theory of value that the price of a good falls when supply increases. Because with the in-crease in the stock of a good, its marginal utility dimin-ishes.
4. Diamond-water paradox can be explained with the help of this law. Due to relative scarcity, diamonds possess high exchange value and less use value. Similarly, water is rela¬tively abundant and so it posseses low exchange value but more use value.

Question 8.
What is elasticity of Demand?
Answer:
In Economic theory, the concept of elasticity of demand has a significant role. Elasticity of demand means the percentage change in quantity demanded in response to the percentage change in one of the variables on which demand depends. Elasticity of demand changes from person to person, place to place, time to time and one commodity to another.

According to Marshall, “The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price”.

The concept of elasticity of demand explains how much or to what extent a change in any one of the independent variables leads to a change in the dependent variable. There are three kinds of elasticity of demand.

1. Price Elasticity of demand
2. Income,Elasticity of demand
3. Cross Elasticity of demand.

Question 9.
What are the merits and demerits of Divisions?
Answer:
It is an important feature of modem industrial organization. It refers to scheme of dividing the given activity among workers in such away that each worker is supposed to do one activity or only a limited and narrow segment of an activity. Thus, division of labour increases output per worker on account of higher efficiency and specialized skill.

Advantages:	Disadvantages:
i) Increase in productivity,	i) Leads to monotony,
ii) Inventions are facilitated,	ii) Retards human development,
iii) Saving in time,	iii) Loss of skill,
iv) Diversity of employment,	iv) Possibility of unemploy-ment,
v) Mechanization is possible,	v) Hindrance to mobility of labour.
vi) Increase in dexterity and skills,
vii) Large scale production is possible,
v) Mechanization is possible,

Question 10.
Explain the concept of duopoly and its characteristics.
Answer:
Duopoly (from greek duoayi (two) + polein(to sell)) is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominance over a market.

It is also called as a limited form of oligopoly. The goods produced by the producers may be homogeneous or differentiated. As there are only two producers, both are aware that the decisions of one will affect the other. Rivalry and collusion of the producers are both possible in this market
situation. In the market both firms have noteworthy control. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity.

The earliest duopoly model was developed in 1838 by the French economist Augustin Cournot. Cournot illustrated his model with the example of two firms. According to this . model, the two sellers will have a naive behaviours and they never learn from past patterns of reaction of rivalry. As a result each firm produces one third of the output. Together they cover two-thirds of the total market. Each firm maximizes its profits but industry profit will not be maximized. This happens due to non recognition of their interdependence. Characteristics of Duopoly:

a) There will be two sellers.
b) Homogeneous product.
c) Zero production cost.

Question 11.
How the per capita income in calculated ? What is the relationship between population and per capita income?
Answer:
The per capita income is the average income of the people in a country in a particular year. It is calculated, by dividing national income at current prices by population of the country in that year.

Per capita income for 2010 -11 =
\(\frac{\text { National Income (at current prices) for } 2010-11}{\text { Population in } 2010-11}\)

This refers to the measurement of per capita income at current prices. This concept is a good indicator of the average income and the standard of living in a country. But it is not reliable because actual income may be more or may be less when compared to the average income. This per capita income will also be measured at constant prices and so we get real per capita income. By dividing real
national income in a particular year by population of that year we will get real per capita income for that year.

Per Capita Income = \(\frac{\text { Real National Income }}{\text { Population }}\)

Relationship Between Per Capita Income and Population:
There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of national income is 6% and rate of growth of population is 3% the rate of growth of per capita income will be 3% and it can be expressed as follows:

g_pc = g_ni – g_p
where,
g_pc = Growth rate of per capita income
g_ni = Growth rate of national income
g_p = Growth rate of population

A rise in the per capita income indicates a rise in standard of living. The rise in per capita income is possible only when the rate of growth of population is less than the rate of growth of that national income.

NIA – Net Income from Abroad
D = Depreciation
ID = Indirect Taxes
Sub = Subsidies
UP = Undistributed Profits
CT = Corporate Taxes
TrH = Transfers received by Households
PTP = Personal Tax Payments
GDP = Gross Domestic Product
GNP = Gross National Product
In fig. we have presented the relation between the various concepts of national income.

Question 12.
Explain the concept’s of gross profits.
Answer:
Gross profit is considered as a difference between total revenue and cost of production. The following are the components of gross profit:

1. The rent payable to his own land or buildings includes gross profit.
2. The interest payable to his own business capital.
3. The wage payable to the entrepreneur for his management includes gross profit.
4. Depreciation charges or user cost of production and insurance charges are included in gross profit.

Net profits : Net profits are reward paid for the organiser’s entrepreneurial skills.

Components:

1. Reward for Risk Bearing : Net profit is the reward for bearing uninsurable risks and uncertainties.
2. Reward for Co-ordination : It is the reward paid for co-ordinating the factors of production in right proportion in the process of production.
3. Reward for Marketing Services : It is the profit paid to the entrepreneur for his ability to purchase the services of factors of production.
4. Reward for Innovations : It is the reward paid for innovations of new products and alternative uses to natural resources.
5. Wind Fall Gains : These gains arise as a result of natural calamities, wars and artificial scarcity are also included in net profits.

Question 13.
Discuss the concept of public finance. Describe the sources of public revenue.
Answer:
Public finance deals with the income and expenditure of public authorities (government). The word public is used to denote state or government: central, state and local bodies. According to Prof. Hugh Dalton “it is concerned with the income and expenditure of public authorities and with the adjustment of one to another”.

Modern governments play a major role in creating eco-nomic and social infrastructure. They spend lots of money on construction of roads, railways, on creating communica- . tion systems, education and health, on providing irrigation facilities and electricity etc. Of late modem governments have been spending huge amounts on various welfare measures to ameliorate the difficulties of poor and downtrodden sections of their population.

Public Revenue:
As explained in the previous paragraphs, a modern gov-ernment has many functions to perform. It needs huge rev-enue for the performance of all its functions efficiently. There¬fore it collects revenue by imposing taxes and also receives money from the people in many other forms. Revenue received by the government from different sources is called public revenue. Public revenue is broadly classified into two kinds:

1) Tax revenue and
2. Non-Tax revenue.

1) Tax Revenue:
Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the Constitution. Broadly taxes are divided into two categories : a) direct taxes, b) indirect taxes.

a) Direct Taxes:
i) Taxes imposed on individuals and companies based on income and expenditure. Ex : Personal income tax, corporate tax, interest tax and expenditure tax.

ii) Taxes imposed on property and capital assets of individuals and companies. Ex : Wealth tax, gift tax, estate duty.

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

2) Non – Tax Revenue : Government receives revenue from sources other than taxes and such revenue is called the non-tax revenue. The sources of non-tax revenues are as follows:

a) Administrative Revenue: Government receives money for certain administrative services. Ex : License fee, Tuition fee, Penalty etc.

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.

Some of the examples of the public sector units are Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Air India etc.

c) Loans and Advances:
When the revenue received by the government from taxes and from non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modern government can also obtain loans from foreign government and international financial institutions.

d) Grants-in-Aid:
Grants are amounts received without any condition of repayment. They are not repaid. State governments receive such grants from the central govern¬ment. The central government may receive such grants from foreign governments or any international funding agency.

Grants are of two types :
1. General Grants: When a grant is given to meet shortage of funds in general without specifying a purpose, it is called general grant.

2. Specific Grants:
When a grant is given for a specific purpose it is called a specific grant. It cannot be spent on any other purpose. Ex : education grant and family planning grant etc.

Question 14.
Explain different kinds of deposits accepted by the commercial banks.
Answer:
Commercial banks pay a very important role in the economic growth of a country. Commercial banks are the most impor- . tant’source of institutional credit in the money market. Banks attract savings from the people and encourage investment in .industry, trade and commerce. Bank is a profit seeking busi-ness firm dealing in money and credit.

The word bank is derived from the “German” word “bankco” which means joint stock or joint fund. Banking in Britain originated with the lending of money by wealthy individuals to merchants who wished to borrow.

According to ’Richard Sydney’ sayers – “Banks are institu¬tions whose debts usually referred to as “Bank deposits” are commonly accepted in final settlement of other people’s debts”.
Accepting deposits: The commercial bank just like any other money lender is doing money lending business . Bank receives public money in the form of deposits. The deposits mainly are of the following types.

a) Current deposits: These deposits have two characteristics.
1) There are no restrictions with regard to the amount of withdrawal and number of withdrawals.
2) Banks normally do not pay any interest on current account deposits.
b) Savings deposits: The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups.

They have the following characteristics :
1) Two or three withdrawals per week are permitted.
2) Banks pay 4% to 5% interest per annum on savings deposits.

c) Recurring deposits:
People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the saving deposits.

d) Fixed deposits:
Deposits of fixed accounts are called fixed or time deposits they are left with the bank for a fixed period. The following are the characteristics.
1) The amount cannot be withdrawn before expiry of fixed period.
2) Bank pay high rate of interest than any deposits.

Question 15.
Identify the causes of Inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :

According to Pigou, “inflation exists when money income is expanding more than in proportion to increase in earning activity”. Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Causes of Inflation:
Broadly speaking, inflation may occur due to the following reasons. Inflation is caused either by excess demand or supply shortage or increased cost of production.

1. Factors Causing Increase in the Aggregate Demand of Commodities:
   • High rate of population growth.
   • Increase in non-plan and plan expenditure of the government.
   • Rise in the per capita income of the people due to economic development.
   • Increased spending by the government on employment programmes and welfare schemes.
   • Heavy investment on development projects with long gestation period.
   • Increase in the money supply in the economy.
   • Liberal availability of credit for unproductive economic activities.
   • Deficit financing by the government.
   • Conspicuous spending by the people having bjack money.
   •  Reduction in direct tax rates.
2. Factors that Increase the Cost of Production:
   • Increase in costs of lands, rents, wage rates and interest rates.
   • Rise in the price of capital equipment and raw materials due to their shortage.
   • Increase in indirect tax rates.
   • Excessive wear and tear of machinery and lack of modernization.
   • Import of machinery and equipment at higher prices.
   • Lack of optimum allocation of resources.
   • Devaluation of domestic currency.
3. Inefficiency in management and lack of control over wasteful expenditure. actors Causing Inadequate Supply:
   • Failure of monsoons, floods, pests, use of spurious seeds etc., in agriculture.
   • Shortage of investment due to inadequate availability of institutional credit.
   • Non-availability or inadequate availability of inputs and raw materials.
   • Underutilization of productive capacity due to power shortage, labour unrest etc.
   • Long gestation period of certain industries.
   • Exports at the cost of domestic supply.
   • Artificial scarcity due to black-marketing.

Question 16.
Enumerate the assumptions and major aspects of classical theory of employment.
Answer:
The classical theory of employment is based on the Say’s law of markets. The famous law of markets, propounded by the J.B Say states that “Supply creates its own demand”. Assumptions : The Say’s law is based on the following assumptions.

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible. .
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as medium of exchange.

Aspects of Classical Theoiy:
The classical theory of employment can be discussed with three dimensions.

A) Goods Market Equilibrium :
The classical theory of employmet is based on the Say’s Law of Markets. The first part of Say’s market law explains the goods market equilibrium. The famous law of markets, propounded by the J.B. Say states that, “Supply creates its own demand”.

B) Money Market Equilibrium (Saving Investment Equilibrium):
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assuiried that equality between savings and investment (S=I) is brought by the flexible rate of interest.

C) Labour Market Equilibrium :
Pigou’s Wage Cut Policy : . According to the classical economists, unemployment may
occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions or the interference of government. A.C. Pigou suggested that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

Question 17.
What is median?
What are it’s merits and drawbacks?
Answer:
Median (M) : Median is the middle element when the data set is arranged in order of the magnitude. Median is that positional value of the variable which divides the distribution into two equal parts. In the ungrouped data, the median is computed as follows :

i) The values of the variate are arranged either in ascending or in descending order.

ii) The middle – most value is taken as the median. If the number of values ‘n’ in the raw data is odd, then the Merits and Drawbacks of Median:

1. Merits of Median:
   • It is rigidly defined.
   • Even if the value of extreme item is much different from other values, it is not much affected by these values.
   • It can be located graphically.
   • It can be easily calculated and is also easy to under-stand.
2. Drawbacks of Median:
   • Even if the value of extreme items is too large, it does not affect too much, due to this reason, sometimes median does not remain the representative of the series.
   • Median cannot be used for further algebraic treatment.
   • In a continuous series it has to be interpolated.
   • If the number of series is even, we can only make its estimate; as the AM. of two middle terms is taken as Median.

Section – C

Question 18.
Explain the merits of mode.
Answer:
Merits :

1. Mode is the term that occur most in the series hence, it is neither an isolated value like Median nor it is a value like mean that may not be there in the series.
2. It is not affecteed by extreme values hence is a good representative of the series.
3. It can be found graphically also.
4. For open end intervals it is not necessary to know the length of open intervals.
5. It can also be used in case of quantitative phenomenon.
6. With only just a single glance on data we can find its value. It is simplest.
7. It is the most used average in day-to-day life, such as average marks of a class, average number of students in a section, average size of shoes, etc.

Question 19.
What are the uses of Arithmetic mean?
Answer:
Uses of A.M.

1. It can be easily calculated; and can be easily understood.
2. As every item is taken into calculation, it is affected by every item.
3. As the mathematical formula is rigid one, therefore, the result remains the same.
4. It is useful for further algebraic treatment.
5. It is mostly used for comparing the various issues.

Question 20.
What are the dynamic functions of money?
Answer:
The function of money which influence output consumption, distribution and the given price level are known as dynamic functions. They make the entire economy into dynamic. The contingent function explained about under the perview of dynamic functions.

Question 21.
What is meant by discounting of bills of exchange?
Answer:
Bills of exchange are undertakings written by the buyers and . given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date. The traders who posses such bills of exchange with them may approach the banks for discounting of the bills of exchange when they need money. The commercial banks pay advances by discounting the bills of exchange with or without security.

Question 22.
What is the significance of vote on account budget?
Answer:
Vote on account is an interim budget presented for a few months pending presentation at the regular budget.

Question 23.
Distinguish between revenue account and capital account.
Answer:
Revenue account consists of the current transactions and in-cludes value of transactions relating to export import travel expenses, insurance, investment, income etc. The capital ac¬count refers to the transactions of capital nature such as borrowing and lending of capital repayment of capital sale and purchase of shares and securities etc.

Question 24.
How National Income is estimated in India?
Answer:
After independence the Government of India appointed a National Income Estimates Committee in the year 1949, Under the chairmanship of Sri PC. Mahalanobis to claculate the national income of India. At present the Central Statistical Organization (CSO) has been entrusted with the responsibility of preparing national income estimates. The CSO has divided the Indian economy into 13 sectors and grouped them under five heads. They are

1. Primary Sector.
2. Secondry Sector.
3. Transport, Communication and Trade.
4. Finance and Real Estate.
5. Community and Personal Services.

Question 25.
Mention the factors that determine National Income.
Answer:
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries,

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. For example, the quantity of agricultural production and hence, the size of National income.

c) State of Technology:
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

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

Question 26.
What is Contract rent?
Answer:
It is the hire charges for any durable good. Ex : Cycle, rent, room rent etc. fit 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 called contract rent. Ex. : The rent that a tenant pays to the house owner monthly as per an agreement made earlier or the hiring charges of a cycle ? 10 per hour is also contract rent.

Question 27.
What are piece wages ?
Answer:
Piece wage is the amount paid for labourers according to volume of work, done by them.

Question 28.
Give a note on the Competitions based market.
Answer:
Based on the nature of the competition, markets are classified into two perfect competition and imperfect competition.

a) Perfect Competition:
A perfectly competitive market is one in which the number of buyers and sellers is very ‘ large, all engaged in buying and selling a homogeneous product without any artificial restrictions. Hence, there is absence of rivalry among the individual firms in perfect competition.

b) Imperfect Competition:
It is a market situation where competition is not perfect either amongst the buyers or amongst the sellers. Hence, there will be a different price for the same product. These markets are divided into monopoly, monopolistic competition, oligopoly and duopoly.

Question 29.
Define monopoly.
Answer:
Mono means single, Poly means seller. In this market single seller and there is no close substitutes. The monopolist is a price maker.

Question 30.
Explain the nature of AR and MR curve in Monopoly.
Answer:
Under monopoly, there is a single seller. The commodity offered by a monoplist may be or may not be homogenous. Monopolist can control price and output of the commodity, but he can’t determine both simultaneously due to existance of left to right downward sloping demand curve in the market. He can sell more quantity at lower pric e and less quantity at higher price. The relationship between TR, AR and MR is shown in table.

Output	Price	Total Revenue PQ	Average Revenue = TR/Output	Marginal Revenue
1	10	10	10	10
2	9	18	9	8
3	8	24	8	6
4	7	28	7	4
5	6	30	6	2

The table reveals that as price falls, sales may improve and total revenue also increases but average revenue (AR) and marginal revenue falls continuously. Here, MR declines at faster rate than that of AR. Thus, MR curve lies below the AR as shown in the figure.

Question 31.
Define Law of Supply.
Answer:
The law of supply explains the functional relationship between price of a commodity and its quantity supplied. The law of supply can be stated as follows “Other things remaining the same, as the price of a Commodity rises its supply is extended and as the price falls its supply is contracted”.

Question 32.
Explain Relatively Inelastic Demand.
Answer:
When the proportionate change in price leads to a less than proportionate change in quantity demanded is called relatively inelastic demand.

Question 33.
What is Cross Demand?
Answer:
Cross demand refers to the relationship between any two goods which are either complementary to each other or substitute of each other at different prices. D_x = f(P_y)

Question 34.
Explain Law of diminishing marginal utility.
Answer:
The law of diminishing marginal utility is based on the fact that though human wants are unlimited, but any particular want is satisfiable. This law analyses consumers’ behaviour in case of a single good. If a person goes on consuming more and more units of a commodity, the additional utility he derives from the additional units of the commodity goes on diminishing. This phenomenon of human behaviour is explained by this law. The law of diminishing marginal utility explains the relationship between the quantity of goods cqnsumed and the utility derived.

Question 35.
What is scale of preference?
Answer:
Guides the consumer in his purchases.

Question 36.
What is Income Concept?
Answer:
Income is a flow of satisfaction from wealth per unit of time. In every economy income flows from households to firms and vice versa. Income can be expressd in two types.

1. Money income which is in terms of money.
2. Real income which is in terms of goods and services.

Question 37.
Explain the wealth definition.
Answer:
Wealth means stock of assets held by an individual or institution that yields has the potential for yielding income in some form. Wealth includes money, shares of companies, land etc. Wealth has three properties.

1. Utility
2. Scarcity
3. Transferability.

The strategic use of TS Inter 1st Year Economics Model Papers Set 5 allows students to focus on weaker areas for improvement.

TS Inter 1st Year Economics Model Paper Set 5 with Solutions

Time: 3 Hours
Maximum Marks: 100

Section – A

Note : Answer ANY THREE out of the following five questions in not exceeding 40 lines each. (3 × 10 = 30 )

Question 1.
Examine the wealth and welfare definitions of economics.
Answer:
Wealth Definition :
Adam Smith was the first person to give a precise definition of Economics and separate this study from other social sciences. Adam Smith is considered as ‘Father of Economics’. He defined it in his famous book Wealth of Nations’, as “An enquiry into the nature and causes of wealth of nations”. Most of the economists in the 19th century held this view.

j.B. Say states that “The aim of political economy is to show the way in which wealth is produced, distributed and consumed”. The other economists who supported this definition are J.B. Say, J.S. Mill, Walker and others. The main features of Wealth definition:

1. Acquisition of wealth is considered as the main objective of human activity.
2. Wealth means material things.
3. Human beings are guided by self-interest, whose objec-tive is to accumulate more and more wealth.
4. Economics deals with the activities of wealth production, consumption, preservation and increasing.

Criticism : The Wealth definition was severely criticised by many writers due to its defects.

1. Economists like Carlyle and Ruskin pointed out that economics must discuss ordinary man’s activities. So they called it as a ‘Dismal Science’.
2. In Adam Smith’s definition, wealth was considered to consist of only material things and services are not included. Due to this the scope of economics is limited.
3. Marshall pointed out wealth is only a means to an end but not an end in itself.
4. This definition concentrated mainly on the production side and neglected distri- bution side.

Welfare definition:
Alfred Marshall tried to remedy the defects of wealth definition in 1890. He shifted emphasis from production of wealth to distribution of wealth. According to Marshall, “Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being. Thus, Economics is on one side, a study of wealth and on the other and more important side, a part of study of man”.

Edwin Cannan defined it as ‘The aim of political economy is the explanation of the general causes on which the material welfare of human beings depends”. In the words of Pigou, “The range of enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”.

The main features of Welfare definition:

1. Economics as a social science is concerned with man’s ordinary business of life.
2. Economics studies only economic aspects of human life and it has no concern with the social, political and religious aspects of human life. It examines that part of individual and social action which is closely connected with acquisition and use of material wealth for promotion of human welfare.
3. According to Marshall, the activities which contribute to material welfare are considered as economic activities.
4. He gave primary importance to man and his welfare and to wealth as means for the promotion of human welfare.

Criticism:

1. Robbins criticised Marshall’s economics as a ‘social sci-ence’ rather than a human science, which includes the study of actions of every human being.
2. Marshall’s definition mainly concentrated on the welfare derived from material things only. But non – materialistic goods which are also very important for the well being of the people. Hence, it is incomplete.
3. Critics pointed out that quantitative measurement of welfare is not possible. Welfare is a subjective concept and relative concept and changes according to time, place and persons.
4. According to Marshall, economics deals with those ac-tivities which will promote human welfare. But produc-tion of alcohol and drugs do not promote human welfare. Hence, the scope of economics is limited.
5. Another important criticism is that it is not concerned with the fundamental problem of scarcity of resources. According to Robbins the economic problem arises due to unlimited wants and limited resources. These factors are ignored in this definition.

.

Question 2.
What is a Demand Function ? What are the factors that de-termine the demand for a good ?
Answer:
The functional relationship between the demand for a commodity and its various determinants may be explained mathematically in terms of a demand function.
D_x = f(p_x, p₁ …… P_n< Y, T) .
Where, D_x = Demand for good X;
P_x = price of X;
P₁ …. P_n = Prices of substitutes and complementaries
Y = Income,
T = Taste of the consumer.

Determinants of demand:

1. Price of commodity:
   The demand for any good depends on its price, more will be demanded at lower price and vice-versa.
2. Prices of substitutes and complementaries :
   Demand is influenced by changes in price of related goods either substitutes or complementary goods. Ex : Increase in the price of coffee leads an increase in the demand for tea in the case of substitutes positive relation and complementaries negative relationship between price and demand.
3. Income of the consumer:
   Demand always changes with a change in the incomes of the people. When income increases the demand for several commodities increases and vice-versa.
4. Population:
   A change in the size and composition of population will effect the demand for certain goods like food grains, clothes etc.
5. Taste and preferences:
   A change in the taste and the fashions bring about a change in the demand for a commodity.
6. Technological changes:
   Due to economic progress technological changes the quantity the quality of goods available to the consumers increase. Ex: Demand for cell phones reduced the demand for landline phones.
7. Change in the weather:
   Demand for commodity may change due to a change in climatic condition. Ex : During summer demand for cool drinks, in winter demand for woollen clothes.
8. State of business:
   During the period of prosperity, de-mand for commodities will expand and during depression demand will contract.

Question 3.
Describe the internal and external economics.
Answer:
conomies of large scale production can be grouped into two types.
1. Internal economies
2. External economies.

1. Internal Economies:
Internal economies are those which arise from the expansion of the plant, size or from its own growth. These are enjoyed by that firm only. “Internal economies are those which are open to a single factory or a single firm independently of the action of other firms.” Cairncross

i) Technological Economies:
The firm may be running many productive establishments. As the size of the productive establishments increase, some mechanical advantages may be obtained. Economies can be obtained from linking process to another process i.e., paper making and pulp making can be combined. It also uses superior techniques and increased specialization.

ii) Managerial Economies:
Managerial economies arises from specialisation of management and mechanisation of managerial functions. For a large size firm it becomes possible for the management to divide itself into specialised departments under specialised personnel. This increases efficiency of management at all levels. Large firms have the opportunity to use advanced techniques of communication, computers etc. All these things help in saving of time and improve the efficiency of the management.

iii) Marketing Economies:
The large firm can buy raw mate-rials cheaply, because it buys in bulk. It can secure special concession rates from transport agencies. The product can be advertised better. It will be able to sell better.

iv) Financial Economies:
A large firm can arise funds more easily and cheaply than a small one. It can borrow from bankers upon better security.

v) Risk Bearing Economies:
A large firm incurs unrisk and it can also reduce risks. It can spread risks in different ways. It can undertake diversifications of output. It can buy raw materials from several firms.

vi) Labour Economies:
A big firm employs a large number of workers. Each worker is given the kind of job he is fit for.

2. External Economies:
An external economy is one which is available to all the firms in an industry. External econo mies are available as an industry grows in size.

i) Economies of Concentration :
When a number of firms producing an identical product are localised in one place, certain facilities become available to all Ex: Cheap transport facility, availability of skilled labour etc.

ii) Economies of Information:
When the number of firms in an industry increases collective action and co-operative effort becomes possible. Research work can be carried on jointly. Scientific journal can be published. There is a possibility for exchange of ideas.

iii) Economies of Disintegration: When the number of firms increases, the firm may agree to specialise. They may divide among themselves the type of products of stages of production. Ex : Cotton industry. Ex : During summer demand for cool drinks, in winter demand for woollen clothes.

Question 4.
What are the characteristic features of perfect competitions?
Answer:
Perfect competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

The following are the features of perfect competition :
1) Large Number of Buyers and Sellers:
Under perfect competition, the number of buyers and sellers is large. The share of each seller and buyer in total supply or total de¬mand is small. So, no buyer and seller cannot influence the price. The price is determined only by demand and supply. Thus, the firm is price taker.

2) Homogeneous Product:
The commodities produced by all the firms of an industry are homogeneous or identical. The cross elasticity of products of sellers is infinite. As a result, single price will rule in the industry.

3) Free Entry and Exit:
In this competition there is a free-dom of free entry and exit. If existing firms are getting profits new firms enter into the market. But when a firm gets losses, it would leave the market.

4) Perfect Mobility of Factors of Production:
Under perfect competition the factors of production are freely mobile between the firms. This is useful for free entry and exit of firms.

5) Absence of Transport Cost: There are no transport cost. Due to this, price of the commodity will be the same throughout the market.

6) Perfect Knowledge of the Economy:
All the buyers and sellers have full information regarding the prevailing and future prices and availability of the commodity. Information regarding market conditions is also available.

Question 5.
Explain about the gross interest and net interest.
Answer:
The concept of interest are two types namely, gross interest and net interest.
Gross Interest:
The payment which the lender receives from the borrower excluding the principal is gross interest. It comprises the following payments :

Net Interest: It is the payment for the service of capital or money only. This is the interest in economic sense.

Keynes’ Liquidity Preference Theory:
Keynes proposed a monetary explanation of the rate of interest. He said that interest is determined by both the demand for and supply of money. According to J.M. Keynes, “Interest is the reward paid for parting with liquidity for the specified period”.

A. Supply of Money:
Supply of money refers to the total quantity of money in circulation. Though the supply of money is a function, of the rate of interest to a degree, supply of money is fixed or perfectly inelastic at a given point of time. It is determined by the central bank of a country.

B. Demand for Money:
Keynes coined a new term liquidity preference. People demand money for its liquidity. The desire to hold ready cash is liquidity preference. The higher the liquidity preference, the higher will be the rate of interest to be paid to induce them to part with their liquid assets. The lower the liquidity preference, the lower will be the rate of interest that will be paid to the cash holders. People demand money basically for three reasons :

1. Transactions motive
2. Precautionary motive
3. Speculative motive.

1) Transaction Motive:
People desire to keep cash for the current transactions of personal and business exchanges. The amount kept for this purpose depends upon the income and business motives.

2) Precautionary Motive:
People keep cash in reserve to meet unforeseen expenses like illness, accidents, unemployment etc. Businessmen keep cash in reserve to gain from unexpected deals in future. Therefore, both individuals and businessmen keep cash in reserve to meet unexpected needs.

3) Speculative Motive:
Speculative motive for money relates to the desire to hold cash to take advantage of future changes in the rate of interest and bond prices. The price of bonds and the rate of interest are inversely related. If the prices of bonds are expected to rise then the rate of interest is expected to fall, as businessmen will buy bonds to sell them when their prices rise and vice versa. Low bond prices are indicative of high interest rates, and high bond prices reflect low interest rates. The demand for money is inversely related to the rate of interest.

The transaction and precautionary motives are relatively interest inelastic, but are highly income elastic. In the determination of rate of interest, these two motives do not have any role. Only the speculative motive is interest elastic and this plays very important role in determining the rate of interest with the given supply of money. When the demand for money and supply of money are equal, along with the equilibrium, rate of interest also be determined.

Section – B

Question 6.
What is Micro economics ? What is its importance?
Answer:
The term ‘Micro Economics’ is derived from the Greek word ‘MIKROS’ which meahs ‘small’. Thus, Micro Economics deals with individual units like individual demand, price, supply etc. It was popularised by Marshall. It is also called as ‘Price Theory’ because it explains pricing in product market as well ‘as factor market.

Importance:

1. Micro Economics provides the basis for understanding the working of the economy as a whole.
2. This study is useful to the government to frame suitable policies to active economic growth and stability.
3. This study is applicable to the field of international trade in the determination of exchange rates.
4. Micro Economics provides an analytical tool for evaluating the economic policies of the government.
5. It can be used to examine the condition of economic welfare and it suggests ways and means to bring about maximum social welfare.

Question 7.
Explain the concept of indifference curve. Discuss its properties.
Answer:
An indifference curve can be defined as the locus of points each representing a different combination of two goods yielding the same utility or level of satisfaction. Therefore, a consumer is indifferent between any two combinations of goods when it comes to making a choice between them. It is also called iso – utility curve or equal utility curve.

Indifference Schedule:
An indifference curve is drawn on the basis of an ‘indifference schedule’. It may be defined as a schedule of various combinations of two goods which yields same level of satisfaction.

Combinations	Commodity X	Commodity Y
1	1 +	15
2	2 +	11
3	3 +	8
4	4 +	6
5	5 +	5

The table shows five combination of two goods, X and Y, which give the same utility. The consumer’s satisfaction from

1^st combination (1 unit of X + 15 units of Y) is the same as that of other combination i.e., 2^nd, 3^rd, 4^th and 5^th. Since all
combinations yield the same level of satisfaction, the con- ; sumer is indifferent among these combinations.

In the above figure, good X is measured on the OX – axis. Good Y is measured on OY-axis. Consumer’s utility at point a on the IC with I unit of good X and 15 units of good Y, is equal to the utility at point b with 2 units of X and 11 units of Y or at point C with 3X and 8Y and so on. These combina-tions give him the same level of satisfaction. If we join the r points a, b, c, d and e, we get an indifference curve (IQ and utility as all points on this curve are same. Hence, the con-sumer is indifferent regarding the combinations. When the consumer moves from A to B on IC, he gives up AS of Y (AY).for SB of X (AX).

Properties of Indifference Curves:
Indifference curves have the following basic properties :
1) An indifference curve is negatively sloped towards down. It implies that when the amount of one good in combination is increased, the amount of other good is reduced.
This is essential if the level of satisfaction is to remain the same on an indifference curve. It is neither positively sloped towards up nor horizontal.

2) Indifference curves are always conyex to the origin. The convexity rule implies diminishing marginal rate of substitution. Indifference curves cannot be concave to the origin.

3) Indifference curves can never intersect each other. If two IC curves intersect, it would imply that an indifference curve indicates two different levels of satisfaction. It is not proper.

4) A higher indifference curve represents a higher level of satisfaction than a lower indifference curve. In other words, an IG to the right represents more satisfaction. This is because of combinations lying on a higher IC con¬tain more of either one or both’goods. Similarly, an indifference curve to the left represents less satisfaction.

Question 8.
Discuss the concept of income demand.
Answer:
Income demand:
It explains the relationship between consumers income and various quantities of various levels of income assuming other factors like price of goods, related goods, taste etc; remain the same. It means if income increases quantity demand increases and viceversa. This can be shown in the following form.

D_x = f(Y)
The functional relationship between income and demand may be inverse or direct depending on the nature of the commodify. This can be shown in the following table.

Income	Demand
	Superior good	Inferior good
2000	4	12
4000	6	10
6000	8	8
8000	10	6
10,000	12	4

Superior goods:
In case of superio goods quantity de-manded will increase a when there is an increase in the income l
of consumers.

In the diagram ‘X’ axis represents demand, OY axis represents income, YD represents the income demand curve. It is showing positive slope whenever income increased from OY to OY₁ the demand of superior or normal goods increases from OQ to OQ₁ Demand This may happen in case of Veblen goods.

Inferior goods:
On the contrary quantity demanded of inferior goods decreases with the increase in incomes of consumers. In the diagram, on ‘OX’ axis measures demand and OY axis represents income of the consumer. When the consumer income increases from OY to OY₁ the demand for a commodity decreases from OQ to OQ₁ So the ‘YD’ curve is negative sloping.

Question 9.
Explain the Diminishing Returns.
Answer:
Diminishing Returns: After the stage of increasing returns, stage of diminishing returns will take place. This is known as the law of diminishing returns. Diminishing returns stage starts when the average product is maximum and continues upto the level of zero marginal product and maximum total product. Table shows this stage when the workers are employed from four to seven. From Q to Qj on OX axis shows the diminishing returns stage. In this stage, the total product increases at a diminishing rate and the average and marginal products decline. In this stage TP > AP > MP. Production is profitable only in the stage of diminishing returns.

Question 10.
What is Oligopoly? Explain its characteristics.
Answer:
The term ‘Oligopoly is derived from two Greek word “Oligoi” meaning a few and “Pollein” means to sell. Oligopoly refers to a market situation in which the number of sellers dealing in- a homogeneous or differentiated product is small. It is called competition among the few. The main features of oligopoly are the following.

1. Few sellers of the product.
2. There is interdependence in the determination of price.
3. Presence of monopoly power.
4. There is existence of price rigidity.
5. There is excessive selling cost or advertisement cost.

Question 11.
What are the determining factors of real wages?
Answer:
Real wages refer to the purchasing power of money wages received by the labourer. Real wages are expressed in terms of goods and services that a worker can buy with his money wages. The real wage is said to be high when a labourer obtains larger quantity of goods and services with his money income. Factors Determining Real Wages: Real wages depend on the following factors:

1) Price Level:
Purchasing power of money determines the real wage. Purchasing power of money depends on the price level. If price level is high, purchasing power of money will be low. On the contrary, if price level is low, purchasing power of money will be high. Similarly, given the price level, if money wage is high real wage will also increase and when money wage decreases real wage also decreases.

2) Method of Payment:
Besides money wages, labourers get certain additional facilities provided by their management.
Like free housing, free medical facilities, free education facilities to children, free transport etc. If such facilities are high, the real wages of labourers will also be high.

3) Regularity of Employment:
Real wages depend on the regularity of employment. If the job is permanent, his real wage will be high even though his money wage is low. In case of temporary employment, his real wage will be low though his money wage is high. Thus, certainty of job influences real wages,

4) Nature of Work:
Real wages are also determined by the risk and danger involved in the work. If the work is risky real wages of labourer will be low though money wages are’high. For instance, a captain in a submarine, miners etc., always.face danger and risk.

5) Conditions of Work:
The working conditions also determine the real wage of a labourer. Less duration of work, ventilation, light, fresh air, recreation facilities etc., certainly result in the high real wages. If these facilities are lacking, real wages are low even though money, wages are high.

6) Subsidiary Earnings:
If a labourer earns extra income in addition to his wage, his real wage will be higher. For instance, a government doctor may supplement his earnings by undertaking private practice.,

7) Future Prospects :
Real wage is said to be higher in those jobs where there is a possibility of promotions, hike in wage and vice-versa.

8) Timely Payment:
If a labourer receives payment regularly and timely, the real wage of the labourer is high although
t his money wage is pretty less and vice versa.

9) Social Prestige: Although money wages of a bank officer and Judge are equal, the real wage of a Judge is higher than the bank officer due to social status.

10) Period and Expenses of Education: Period and expenses of education also affect real wage. For example, if one person is a graduate and the other is an undergraduate who are working as clerks, the real wage of the undergraduate is high because his period of learning and ex¬penses on education are lower than the graduate labourer.

Question 12.
What are National Income at market prices and National at factor cost?
Answer:
National Income is the value of all the final goods and services produced in a year of a country.
National Product at Market Prices (NNP) : The country’s stock of fixed capital undergoes certain amount of wear and tear in producing goods and services over a period of time.

This ‘user cost’ or depreciation or charges for renewals and repairs must be substracted from the GNP at market prices to obtain net national product at market prices.NNP at market prices = GNP at market prices – Depreciation.

National Product at Factor Cost: It is aslo called as national income. It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a year. NNP at market prices is hot available for distribution among the factors of production. The amount of indirect taxes (which are included in the prices) are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government. Hence, the goods are sold in the market at a lower price than the actual cost of production. Therefore, this volume of subsidies has to be added to the net national income at market prices. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies.
In another way,
NNP at factor cost = GNP at market prices – Depreciation – Indirect taxes + Subsidies.

Question 13.
Explain the criticism against the classical theory of employ-ment
Answer:
The classical theory of employment came in for severe criticism from J.M. Keynes. The main points of Criticism are as follows :

1. The assumption of full employment is unrealistic. It is rare phenomenon and not a normal features.
2. The wage cut policy is not a practical policy in modem times. The supply of labour is a function of money wage and not real wage. Trade unions would never accept any reduction in the money wage rate.
3. Equilibrium between savings and investment is not brought about by a flexible rate bf interest. Infact, saving is a function of income and not interest.
4. The process of equilibrium between supply and demand is not realistic. Keynes commented the self adjusting mechanism doesn’t always operate.
5. Long run approach to the problem of unemployment is also not realistic. Keynes commented, “we are all dead in the long run”. He considered unemployment as a short- run problem and offered immediate solution through his employment theory.
6. It is not correct to say that money is neutral. Money acts not only as a medium of exchange but also as a store of value. Money influences variables like .consumption, investment and output.

Question 14.
Explain the budget deficits.
Answer:
Generally speaking, budget deficit arises when the total expenditure in the budget exceeds the total receipts (income), Technically there are four types of deficits with reference to a budget:

1) Revenue Deficit:
Revenue deficit arises when revenue expenditure exceeds revenue receipts.
Revenue deficit = revenue receipts – revenue expenditure.

2) Budget Deficit:
Budget deficit is the difference between the total receipts and the total expenditure.
Budget deficit = Total receipts – Total expenditure.

3) Fiscal Deficit: Fiscal deficit is the difference betweeri the total expenditure and the total revenue plus the market borrowings.
Fiscal deficit = (Total revenue – Total expenditure) + Market borrowings & Other liabilities.
(or)
Fiscal deficit = Budget deficit + Market borrowings and Other liabilities.

4) Primary Deficit:
Primary deficit is the fiscal deficit minus interest payments.
Primary deficit = Fiscal deficit – Interest payments. Modem governments have been resorting to deficit budgets in order to meet the growing expenditure needs to finance for economic development. But it is not desirable to have large deficits, particularly fiscal deficit as it would have adverse effects on the economy.

Question 15.
What is Barter system? What are its dificulties?
Answer:
Barter system means exchange of goods. This system was followed in olden days. But the population and its require-ments are increasing, the system became very complicated. The difficulties of barter system are :

1) Lack of coincidence of wants:
Under the barter system, the buyer must be .willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller just coincide. This is called
double coincidence of wants. Suppose the seller has a good and he is willing to exchange it for rice. Then the buyer – must have rice and he must be willing to exchange rice for goat. If there is no such coincidence direct exchange between the buyer and the seller is not possible.

2) Lack of store value:
Some commodities are perishables. They perish within a short time. It is not possible to store the value of such commodities in their original form un¬der the barter system. They should be exchanged before they actually perish.

3) Lack of divisibility of commodities:
Depending upon its quantity and value, it may become necessary to divide a commodity into small units and exchange one or more units for other commodity. But all commodities are not divisible.

4) Lack of common measure of value:
Under the barter system, there was no common measure value. To make exchange possible, it is necessary to determine the value of every commodity interms of every other cpmmodity.

5) Difficulty is making deferred payments:
Under barter system future payments for present transaction was not possible, because future exchange involved some difficulties. For example suppose it is agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view the recent value of the goat. But the value of goat may decrease or increase by that date.

Question 16.
Distinguish between different types of money.
Answer:
Money can be grouped into various items based on the value, material used and the legal status. They are :
1) Commodity money and representative money:
Money is classified into commodity money and representative money on the basis of the intrinsic value it possess. If the intrinsic value is equal to the face value of coin is called commodity money and if the value is less than the face value, it is called representative money.

2) Legal tender money and optional money:
On the basis of legality money is divided into legal tender money and optional money. If money is accepted as per law by every one is called legal tender money. If the acceptance is optional and not according to law is called optional money. Ex: Cheques.

3) Metallic money and paper money:
Based on the material used money can be divided into metallic and paper money. If money is made up of metals such as silver, nickel, steel etc., all coins are metallic money and if money is printed on papers is called paper money.

4) Standard money and token money:
If the face value and intrinsic value are same, then the money is called standard money and if the face value is higher than the intrinsic value is called token money.

5) Credit money:
It is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and can be transferred from one person to other through cheques.

Question 17.
What is median? What are it’s merits and drawbacks?
Answer:
Median (M) : Median is the middle element when the data set is arranged in order of the magnitude. Median is that positional value of the variable which divides the distribution ‘into two equal parts. In the ungrouped data, the median is computed as follows:

i) The values of the variate are arranged either in ascending or in descending order.

ii) The middle – most value is taken as the median. If the number of values ‘n’ in the raw data is odd, then the Median will be the \(\left(\frac{\mathrm{n}+1}{2}\right)^{\mathrm{th}}\) value arranged in order of magnitude. In this case, there will be one and only one value of Median. On the other hand, if n is even, and when the data arranged in order of magnitude, there will be two middle

most values, \(\left(\frac{\mathrm{n}}{2}\right)^{\mathrm{th}}\) and \(\left(\frac{\mathrm{n}}{2}+1\right)^{\text {th }}\) values. Median is the average of the
\(\frac{\mathrm{n}^{\text {th }}}{2} \text { and }\left(\frac{\mathrm{n}}{2}+1\right)^{\text {th }}\)values

Merits and Drawbacks of Median:

1. Merits of Median:
   • It is rigidly defined.
   • Even if the value of extreme item is much different from other values, it is hot much affected by these values.
   • It can be located graphically.
   • It can be easily calculated and is also easy to understand.
2. Drawbacks of Median:
   • Even if the value of extreme items is too large, it does not affect too much, due to this reason, sometimes median does not remain the representative of the series.
   • Median cannot be used for further algebraic treatment.
   • In a continuous series it has to be interpolated.
   • If the number of series is even, we can only make its estimate; as the A.M. of two middle terms is taken as Median.

Section – C

Question 18.
Discuss the importance of statistics for the study of econo-mics.
Answer:
Statistical analysis render valuable assistance in the understanding of the economic problems and the formulation of economic policy. Economic problems are capable of being expressed numerically. The nature of many economic problems like poverty, unemployment, rise in prices, volume of trade, output of manufacturing, mining, agriculture etc.’, cannot be analysed without the help of statistics.

Question 19.
Compute median for the following data. 5, 7, 7, 8, 9, 10, 12, 15 and 21
Answer:

Here N =
Median = \(\frac{N+1}{2}=\frac{9+1}{2}=\frac{10}{2}\)
5^th value is 9.
Hence, Median (Q₂) = 9.

Question 20.
What is currency?
Answer:
Currency is the form in which money is circulated in the .economy by the monetary authority. Currency includes coins and paper notes. It is only one component of money.

Question 21.
Which Bank is called as bankers bank and why?
Answer:
Banker’s Bank: Reserve Bank serves as a banker not only to the government but also to the banks. According to Banking Regulation Act, 1934 all the scheduled banks are bound by the law to maintain with the Reserve Bank of India a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR). Reserve Bank provides financial assistance to the commercial banks in times of their financial stringency by giving loans or rediscounting the bills of exchange. It acts as clearing house for settlement of inter-bank accounts.

Question 22.
Write about Fifteenth Finance Commission.
Answer:
Fifteenth Finance Commission : The Government of India
appointed the Fifteenth Finance Commission on November 27,2017 with N.K. Singh as Chairman. The recommendations of the Commission will cover the five year period 2020 – 25. The Commission has been asked to submit its report by October 30,2019.

The Commission has been instructed to use the population data of 2011 census as the base for calculating the expen-diture needs of various states. This is the first Commission which is required to present its recommandations in the post GST era.

Question 23.
What is meant by primary deficit?
Answer:
Primary deficit is the fiscal deficit minus the interest payments.

Question 24.
What is the importance of National income estimations?
Answer:
Importance of national income estimations:

1. The national income estimates or statistics are very important for preparing economic plans and for framing national economic policies.
2. The national income data are useful in research and distribution of income in the country. .
3. It enables us to assess the performance of each sector in the economy and inter-relationship among the sectors.?
4. It is more useful in making budgetary allocations.
5. It gives us an idea of the standard of living in the country.

Question 25.
What is Personal Income?
Answer:
It is the total of income received by all persons in a year before payment of all direct taxes. The whole of National Income is not availabe to them. Corporate taxes have to be paid by firms. Firms, may keep a part of its profits for expansion. Salaried employees may make contributions for social security. Hence,

PI = NI(NNP at factor cost) – (Undistributed corporate profits + Corporate taxes + Social security payments) + Transfer earnings

Question 26.
What is Economic rent?
Answer:
The ordinary use of the term ‘rent’ means any periodic payment for the hire of anything such as garriages, buildings etc. Economic rent is the pure rent payable as a reward for utilising the productivity of land. It is derived by subtracting the elements like interest, wages, profits and depreciation from the gross rent or contract rent. To David Ricardo, it is surplus over costs or expenses of cultivation.

Question 27.
What are Money wages?
Answer:
Money wages are the remuneration received by the labourer in the form of money for the physical and mental service rendered by him or her in the production process. Ex : If a labourer is paid ₹ 30/- per day. ₹ 30/- is the money wage.

Question 28.
Explain equilibrium price.
Answer:
Equilibrium price is that price where demand and supply are equal in the market.

Question 29.
What is perfect competition?
Answer:
In this market there are large number of buyers and sellers . who promote competition. In this market goods arc homogeneous. There is no transport fares and publicity costs. So price is uniform of any market.

Question 30.
What is Capital Accumlation?
Answer:
Capital accumulation typically refers to an increase in assets from investment or profits. Individuals and complanies can accumulate capital through investment. Investment assets usually earn profit they contributes to a capital base.

Question 31.
What is the Importance of capital?
Answer:
Importance of Capital: The importance of capital in brief:

1. Capital plays a very vital role in the modem productive system. Production without capital is almost impossible.
2. The productivity of workforce depends upon the amount of capital available per worker. The greater the capital per worker, the greater the efficiency and productivity of the worker.
3. Capital occupies a central position in the process of eco-nomic development.
4. It promotes the technological progress.
5. It helps in the creation of employment opportunities.

Question 32.
Define Inferior Goods.
Answer:
The goods whose income elasticity of demand is negative for levels of income are termed as inferior goods. In case of inferior goods if income increases demand decreases and vice- versa. The income emand for inferior goods has a negative slope.

Question 33.
What are the types of price elasticity of demand?
Answer:
If the price of a commodity increases, its quantity demanded will fall. The rate of change in demand is not always propor-tionate to the rate of change in price. For some commodities a smaller change in price leads to a greater change demand, here the demand is elastic. A greater change in price many lead to only a smaller change in quantity demanded, here the demand is inelastic. The following are the types of elasticity of demand.

a) Perfectly elastic demand,
b) Perfectly inelastic demand.
c) unitary elastic demand.
d) Relatively elastic dejmand.
e) Relatively inelastic demand.

Question 34.
Explain Law of equtanainal utility.
Answer:
The law states that a consumer having a fixed incpme and facing given market prices of goods will achieve niaximum satisfaction when the marginal utility pf the last rupee spent on each good is exactly the same as the marginal utility of the last rupee spent on any other good. Equalisation of marginal utilities will maximize the consumer’s satisfaction and consumer attains equilibrium. The fundamental condition for consumer’s maximum satisfaction and equilibrium of the consumer.

Question 35.
Explain the relation ship between total utility and marginal utility.
Answer:
The relationship between total utility and marginal utility is explained in three ways. They are :

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

Question 36.
Explain the Gonsumer Goods.
Answer:
Consumer good is an economic good or commodity purchased by househ?olds for final consumption. Thus, consumer goods are those goods which directly satisfy human wants. For Ex: Fruits, Milk, Pen, Clothes etc. Consumer goods are divided into two types.

a) Perishable goods : Which loose their value in single use, Ex : Milk, fruits etc.
b) Durable goods : Which yields service over time. Ex: TVs & Computers.

Question 37.
What is Positive Economics?
Answer:
A positive science is defined as a body of systematised knowledge concerning ‘what it is’. The classical school economists were of the opinion that economics is purely a positive science which had no right to comment upon the rightness or wrongness of economic policy. Here, economists cannot give any final judgement on any matter.

The strategic use of TS Inter 1st Year Economics Model Papers Set 4 allows students to focus on weaker areas for improvement.

TS Inter 1st Year Economics Model Paper Set 4 with Solutions

Time: 3 Hours
Maximum Marks: 100

Section – A

Note : Answer ANY THREE out of the following five questions in not exceeding 40 lines each. (3 × 10 = 30 )

Question 1.
Explain the concepts of Cardinal Utility, Ordinal Utility, Total Utility and Marginal Utility.
Answer:
The concept of utility was introduced in economic thought by Jevans in 1871. In a general sense, utility is the ‘want satisfying power’ of a commodity or service. In economic sense, utility is a psychological phenomenon.

1) Cardinal utility:
Utility is cardinal in the sense that utility is measurable in terms of units called utils. According to the concept of cardinal utility, the utility derived from the consumption of a good can be expressed in terms of numbers such as 1, 2, 3, 4 and so on. For example, a person can say that he derives utility equal to 10 utils from the consumption of one unit of commodify A and 5 utils from the consumption of one unit of commodity B. He can compare different commodities and express which commodity gives him more utility or satisfaction and by how much. Alfred Marshall fol-lowed this approach. The law of diminishing marginal utility and the law of equi-marginal utility are based on cardinal utility approach.

2) Ordinal utility:
Utility is ordinal in the sense that utilities derived from the consumption of commodities cannot be measured quantitatively but can be compared by giving ranks. It means that the utilities obtained by the consumer from different commodities can be arranged in a serial order such as 1^st, 2^nd, 3^rd, 4^th etc. These numbers tell us that the second number is more than the first number. But, it is not possible to tell how much, because they are not measurable. J.R. Hicks and R.J.D. Allen have used the ordinal approach. The indifference curve analysis is based on ordinal utility approach.

3) Total Utility and Marginal Utility :
a) Total Utility : Total utility is the total amount of satisfaction which a person gets from the consumption of all units of the commodity. Let us assume that a consumer consumed 3 apples and first apple gave him 20 utils of utility, second one 15 utils and the third one 10 utils of utility. By adding these utilities we get the total utility, ie., 20 + 15 + 10 = 45. When the quantity of consumption increases total utility also increases but at a diminishing rate. The total utility is a function of total quantity.
TU_n = f(Q_n)
Where TU_n = Total utility of n commodity,
f = functional relationship, and
Q_n = Quantity of n commodity.

b) Marginal Utility:
Marginal utility is the addition made to the total utility by consuming one more unit of the commodity. Let us assume that one apple gives 20 utils of utility and 2 apples gives 35 utils of utility. It means that the additional utility from the second apple is 15 utils i.e., 35 – 20 = 15. This is called marginal utility.’It can be expressed as
MU_n = TU_n – TU_n-1
where, MU_n = Marginal utility of n^th unit,
TU_n = Total utility of n^th Units, and
TU_n-1 = Total utility of n – 1 units.

In the example, marginal utility of the second unit is equal toMU₂ = TU₂-TU₁ = 35 – 20 = 15
Marginal utility can also be expressed in the following way:

MU = \(\frac{\Delta \mathrm{TU}}{\Delta \mathrm{C}}\) = \(\frac{Change in total utility }{Change in quantity consumed}\) = \(\frac{15}{1}\) = 15
By adding all the marginal utilities of different units of the commodity, we get total utility.

Question 2.
Explain the law of returns to scale.
Answer:
The law of returns to scale relate to long run production function. In the long run it is possible to alter the quantities of all the factors of production. If all factors of production are increased in given .proportion the total output has to increase in the same proportion. Ex : The amounts of all the factors are doubled, the total output has to be doubled, increasing all factors in the same proportion is increasing the scale of operation. When all inputs are changed in a given proportion, then the output is changed in the same proportion. We have constant returns to scale and finally arises diminishing returns. Hence, as a result of change in the scale of production, total product increases at increasing rate, then at a constant rate and finally at a diminishing rate.

Assumptions :
1. All inputs are variable.
2. It assumes that state of technology remains the same. The returns to scale can be shown in the following table.

The above table reveals the three patterns of returns to scale. In the 1st place, when the scale is expanded upto 3 units, the returns are increasing. Later and upto 4th units, it remains constant and finally from 5th onwards the returns go on diminishing.

In the diagram, on ‘OX’ axis shown scale of production, on ‘OY’ axis shown total product. RR₁ represents increasing returns R₁S – Constant returns; SS₁ represents diminishing returns.

Question 3.
What is meant by real wages ? What are the factors that determine real wages?
Answer:
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 some 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 these facilities then the real wages are low even though if 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 4.
Explain equilibrium of the firm in the shortrun and longrun under perfect competition.
Ans:
Perfect competition is a market structure characterized by a complete absence of rivalry among the individual firms. Thus, perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. In practice, businessmen use the word competiton as synonymous to rivalry. In theory, perfect competition implies no rivalry among firms. Perfect competition may be defined as that market situation, in which there are large number of firms producing homogeneous product, there is free entry and free exit, perfect knowledge on the part of buyer, perfect mobility of factors of production and no transportation cost at all.

Equilibrium of a Firm:
We have learnt that the price of a commodity is determined by the market demand and market supply under perfect competition. An increase in price of a product acts as an incentive in increasing production. As a firm aims at maximizing profit, it chooses that output which maximizes its profits. When the firm is in equilibrium, it has no desire to change its output.

Equilibrium output is explained with the help of cost and revenue curves of a firm. In perfect competition, average and marginal cost curves are ‘U’ shaped one and average revenue and marginal revenue curves are parallel to OX axis. Since AR = MR, both these curves will merge into a single line.

1) Short Period Equilibrium:
Firms are in business to maximize profits. During short period, a firm cannot change fixed factors like machinery , buildings etc. However, it produces more output by increasing variable factors. Equilibrium output is produced in the short period where short period marginal cost (SMC) is equal to short period marginal revenue (SMR). The firm will be in equilibrium, when marginal cost curve cuts marginal revenue curve from below. During short period, a firm may get super normal, normal profits or losses. Two conditions are necessary for firm s equilibrium. They are : i) MC = MR and ii) MC curve should cut MR curve from below. The figure shows the firm’s short period equilibrium.

In the figure quantity demanded and supplied are shown on OX axis and price of the commodity on OY axis. The diagram shows that the equilibrium price OP is determined by the industry at point E where the industry demand is equal to industry supply. The price, so, determined by the industry is passed on to the firm. This is shown by the horizontal dernand curve of the firm.

This line is also known as the price line. Since, competition is perfect, the AR curve (demand curve) of the firm is also the MR curve of the firm. The firm’s SAC curve and SMC curve are also shown respectively. The profits of the firm are maximum at the output where MC = MR, that is, at output OQ, SMC = MR. At any output than OQ, MR exceeds MC, which would mean that if the production is more its profits will increase. At any output more than OQ, MR becomes less than MC, which would mean a loss to the firm. Thus, OQ is output of maximum profits. At the equilibrium point ‘E’, the price is equal to OP or AQ, while AC per unit equals QB, profit per unit is equal to B. Total supernormal profits will be equal to PABC, i.e., BA x OQ.

2) Long Period Equilibrium:
We have seen that under short period, a firm can adjust its output, within limits, by varying the factors of production. But in the long period the firm can adjust its output to any extent because it can vary all the factors of production. Thus, it is certain that the firm will not incur losses in the long period. In the long period, the free entry of the new firms into the industry will wipe out the supernormal profits of the firm. Hence, in the long period, the frim wil be at optimum size where there is no profit – no loss. Firm gets only normal profits which are included in the long period average cost. In other words, under perfect competition, the individual firm at equilibrium earns normal profits only.
Therefore, AR = MR = LAC = LMC
The figure illustrates the long period equilibrium of the firm. The quantity of a good is depicted on OX axis and price, costs and revenues are on OY axis in the diagram.

The point of equilibrium will be established at which the firm’s MR curve touches its LAC curve at its minimum point. At this point LMC = LAC. Thus, when a firm is in long period equilibrium the following conditions exist:
At point E;P = AR = MR = LMC = LAC.

Question 5.
Describe the concept, components and types of budget.
Answer:
Budget is an annual statement showing the estimated receipts (revenue) and expenditure of a government for a financial year (April – March). The governments present to the legislature an annual budget every year for its approval. The budget is presented by the finance minister. The government cannotincur any expenditure unless it has the prior approval of the legislature.

Sometimes a vote on account budget is presented by the government when it is not possible to present the full budget. It is an interim budget for a few months. This will facilitate the government to incur expenditure pending approval of the regular budget.

Objectives:
The main purpose of the budget is to obtain approval of the legislature for the tax proposals and allocation of resources to various government activities. The government utilizes the occasion to state its policies and programmes.

Budget Estimates:
In the budget, budget estimates for the ensuing financial year are shown along with’”the actual expenditure of the preceding financial year, and budget estimates and revised estimates for the current financial year. For a clear understanding of these estimates, budget at a glance for the year 2013-14.

Components of the Budget: The budget consists of both receipts (income) and expenditure of the government. The budget of the Government of India consists of two main components :

1. Budget Receipts:
   • Revenue Receipts: This consists of tax revenue and non-tax revenue and
   • Capital Receipts: This consists of recoveries of loans, other receipts and borrowings and other liabilities.
2. Budget Expenditure:
   In the Union budget of India, the budget expenditure is classified into plan expenditure and non-plan expenditure. Each category is further divided into revenue account and capital account. Let us enlist them as hereunder:
   • Plan Expenditure:
     • a) Plan expenditure on revenue account.
     • b) Plan expenditure on capital account.
   • Non-plan Expenditure:
     • a) Non-Plan expenditure on revenue account.
     • b) Non-Plan expenditure on capital account.

Again the plan expenditure and the non-plan expenditure is summed up and shown as revenue expenditure and capital expenditure. Types of Budget: There are three types of budgets based on the difference between the receipts and expenditure:

1. Surplus Budget:
   This refers to the budget in which the total revenue is more than the total expenditure (R>E).
2. Deficit Budget:
   This refers to the budget in which the total expenditure exceeds the total revenue (R<E).
3. Balanced Budget:
   This refers to the budget in which the total expenditure and the total revenue are equal (R = E).

Section – B

Question 6.
Examine the welfare definition of economics.
Answer:
Alfred Marshall raised economics to a dignified status by advancing a new definition in 1890. He shifted emphasis from production of wealth to distribution of wealth (welfare). In the words of Marshall, “political economy or economics is a study of mankind in the ordinary business of life; it exam¬ines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well – being. Thus, it is on the one side, a study of wealth and on the other and more important side, a part of the study of man”.

I. Important Features of Welfare Definition:
1) Marshall used the term “Economics” for “Political economy” to make it similar to physics. He assumed that economics must be a science even though it deals with the ever changing forces of human nature.

2) Economics studies only economic aspects of human life and it has no concern with the political, social and reli¬gious aspects of life. It examines that part of individual and social action which is closely connected with acquisi¬tion and use of material wealth which promotes human welfare.

3) Marshall’s definitions considered those human activities which increased welfare.

4) This definition has given importance to man and his welfare and recognised wealth as a mean for the promotion of human welfare.

II. Criticism:
Marshall’s definition is not free from critics. Robbins in his “Essay on the Nature and Significance of Economic Science” finds fault with the welfare definition of economics.

1) Economics is a human science rather than a social science. The fundamental laws of economics apply to all human beings and therefore, economics should be treated as a human science and not as a social science.

2) Lionel Robbins criticized it as classificatory. It distinguishes between materialistic and non materialistic goods and not given any importance to non-materialistic goods which are also very important. Therefore, it is incomplete.

3) Another serious objection is about the quantitative mea-surement of welfare. Welfare is a subjective concept and changes according to time, place and persons.

4) Marshall includes only those activities which promote hu¬man welfare. But the production of alcohol and drugs do not promote human welfare. Yet economics deals with the production and consumption of those goods.

5) Robbins has taken serious objection for not considering ‘scarcity of resources’. According to Robbins’ economic problem arises due to limited resources which are to be used to satisfy unlimited wants.

Question 7.
Define the law of diminishing Marginal Utility. State its assumptions.
Answer:
The law of diminishing marginal utility was originally ex-plained by Hermann Heinrich Gossen in 1854. Jevans called it as Gossen’s first law. But Alfred Marshall popularised this law and analysed it in a scientific manner.

Definitions of the law:
“The additional benefit which a per-son derives from a given increase of his stock of a thing di-minishes with every increase in stock that he already has” – Alfred Marshall. Assumptions : The law is based on the following assump-tions :

1. Rationality: The consumer is a rational human being in the sense that he seeks to maximize his satisfaction.
2. Cardinal Measurement of Utility : Utility is a cardinal concept, i.e. utility is measurable quantitatively. It can be measured in cardinal numbers.
3. Independent Utility: The utility of any commodity de-pends on its own quantity, i.e. utility of goods are inde-pendent.
4. Constant Marginal Utility of Money : The marginal util¬ity of money remains constant.
5. Homogeneous Goods: Goods are homogeneous in the sense that they are alike both quantitatively and qualita-tively.
6. Uniform Size of Goods: Goods should be of suitable size, i.e. neither too big nor too small. They should be identical.
7. No Time Lag: There is no time lag between the consump¬tion of one unit to another unit.
8. Divisible Commodity: Commodity is divisible.
9. No Change in Consumer Behaviour: The income, tastes and preference of the consumer should remain constant.
10. Full Knowledge of the Market: Consumer will have full knowledge of market.

Question 8.
Illustrate the reasons for negative sloping demand curve.
Answer:
According to Marshall, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things 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 down¬ward sloping demand curve.

1) Old and New Buyers:
If the price of a good falls, the real income of the old buyers will increase. Hence, the de¬mand 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 on account of increased 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 increase in real income is known as income effect.

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

Question 9.
Discuss about the changes in supply.
Answer:
The supply function explains the relationship between the determinants of supply of a commodity and the supply of that commodity. Supply of a commodity depends upon its price, the prices of related goods, the prices of factors of production, the state of technology, the goals of firm and polity of the government. These can be written in the form a supply function as :

Q_x = f(P_x>P_r.P_fT,G_f,Gp)
Where, Q_x = quantity of good X supplied, P_x = price of good X, P_r = prices of related goods (substitutes, comple- mentaries), P_f = prices of factors of production, T = technical knowhow, G_f = goal of the firm / seller, G_p = government policy, f = functional relationship.

In the above equation, supply of commodity is a depen¬dent variable on many aspects. Change even in one variable of the determinants of supply brings a change in the supply. In determining the supply of a good, price of this good is more important among all the determinants. Hence, if we assume all other aspects will not change, then the supply function will be as:

Img-1

Determinants of Supply:
Supply function explains the rela¬tionship between supply of a commodity and its determi¬nants. Let’s discuss about the determinants of supply,

i) Price of a Good:
In determining the supply of a good, price of this good is more important and this price deter¬mines the profit of the firm. Other things being constant, the supply of commodity increases with an increase in its price and vice versa. Thus, there exist a positive relation¬ship between price and supply,

ii) Prices of its Related Goods:
Goods comprise substitutes and complementaries. Any change in the prices of these goods exerts influence on production of the good in consideration. For instance, if the price of a substitute good goes up, the producers may try to produce that substitute good or demand for the substitute good which has higher price may decrease and therefore, producer may increase supply of the good which he was producing initially. Similarly, producer may decide the supply of his product on the basis of the prices of complementaries and demand for them.

iii) Prices of Factors of Production:
Increase in the prices of factors of production would lead to an increase in the cost of production. As a result, supply of the commodity may decline. The reverse will happen in the case of a fall in the prices of factors of production.

iv) State of Technology:
New and improved methods of production, inventions and innovations help to save factors, costs and time and thus, technology contributes to increase the supply of goods.

v) Goals of producer and other determinants: Goals of producer, means of transport and communication and natural factor etc., will equally influence the supply of a commodity

vi) Government policy:
Imposition of heavy taxes on a commodity discourages the production of goods and as a result supply diminishes in goods are given, supply of goods will increase.

Question 10.
What are the characteristics of monopolistic competition ?
Answer:
It is a market with many sellers for a product but the products are different in certain respects. It is mid way of monopoly and perfect competition. Prof. E.H. Chamberlin and Mrs. Joan Robinson pioneered this market analysis.
Characteristics of Monopolistic Competition:

1. Relatively Small Number of Firms: The number of firms in this market are less than that of perfect competition. No one can control the output in the market as a result of high competition.
2. Product Differentiation:
   One of the features of monopo-listic competition is product differentiation. It takes the
   form of brand names, trade marks etc. Its cross elasticity of demand is very high.
3. Entry and Exit:
   Entry into the industry is unrestricted. New firms are able to commence production of very close substitutes for the existing brands of the product.
4. Selling Cost: Advertisement or sales promotion technique is the important feature of Monopolistic competition. Such costs are called selling costs.
5. More Elastic Demand:
   Under this competition the de-mand curve slopes downwards from left to the right. It is highly elastic.

Question 11.
What are the factors that determine the factor prices?
Answer:
The demand and supply of a factor of production determine its price. The demand for a factor of production depends on the following.

1.  It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors or co-operative factors determine the demand for a factor.
4. Technological changes determine the demand for a factor.
5. The demand for a factor increases due to increase in its production.

Factors that determine the supply of a factor of production :

1. The size of the population and it’s age composition.
2. Mobility of the factor of production.
3. Efficiency of the factor of production.
4. Geographical conditions.
5. Wage also determines the supply of this factor.
6. Income.

Question 12.
What are the various methods of calculating national income? Explain them.
Answer:
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 + ….. P_nQ_n) – 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 indicate 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 personal 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 expenditure + 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 income earned by all factors of production is aggregated to arrive at the National Income of a country. The four factors of production receives income 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
Where, NI = National income
W = Wages
I = Interest
R = Rent
P = Profits
This method gives us National Income according to distribution of shares.

Question 13.
Enumerate the assumptions and major aspects of classical theory of employment.
Answer:
The classical theory of employment is based on the Say’s law of markets. The famous law of markets, propounded by the J.B Say states that “Supply creates its own demand”. Assumptions : The Say’s law is based on the following assumptions.

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible.
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as medium of exchange.

Aspects of Classical Theory: The classical theory of employment can be discussed with three dimensions.

A) Goods Market Equilibrium:
The classical theory of employmet is based on the Say’s Law of Markets. The first part of Say’s market law explains the goods market equilibrium. The famous law of markets, propounded by the J.B. Say states that, “Supply creates its own demand”.

B) Money Market Equilibrium (Saving Investment Equi-librium):
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment (S = 1) is brought by the flexible rate of interest.

C) Labour Market Equilibrium: Pigou’s Wage Cut Policy:
According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions or the interference of government. A.C. Pigou suggested that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

Question 14.
List out various items of public expenditure.
Answer:
Public expenditure is an important constituent of public finance. Modern governments spend money from various welfare activities. The expenditure incurred by the govern-ment 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.
Point out the agency and general utility functions of commercial banks.
Answer:
The following are agency functions and general utility functions.

Agency Function:
Commercial banks perform certain agency functions also. On certain occasions they act as agents of the customers. Some of the important agency functions are :

a) Collection of cheques, drafts, bills of exchange etc., of their customers from other banks.

b) Collection of dividends and interest from business and industrial firms.

c) Purchase and sale of securities, shares, debentures, government securities on behalf of the customers.

d) Acting as trustees and keeping their funds in safe custody.

e) Making payments such as insurance premium, income tax, subscriptions etc., on behalf of their customers as per their request.

General Utility Functions:
Besides the agency functions, commercial banks provide certain utility services to their customers. They are:

a) Provision of locker facility for the safe custody of the silver, gold ornaments and important and valuable documents for which service rent is collected.

b) Transfer of money of the customers from one bank to the other by way of demand drafts, mail transfer by collecting commission from them.

c) Provision of online transfer facility of money from one bank to the other.

d) Issue of letters of credit to enable the customers to purchase commodities on the basic of credit.

e) Endorsing and providing guarantee to the shares issued by the joint stock companies.

f) Issue of traveler’s cheques to customers to avoid the risk of carrying of cash.

g) Providing foreign exchange to the customers for exports and imports in connection with their business.

h) Conveying information on behalf of their customers to the businessmen operating in other places and also collecting information of such businessmen and provide it to the customers. Thus they act as referees’.

Question 16.
State the contingent, static and dynamic functions of money.
Answer:
Money plays a vital role in modem economy.
According to Waker’ – “Money is what money does”. According to ‘Robertson’ – “Anything which is widely accepted in payment for goods discharge of other kinds of business obligations”.

Contingent functions :
a) Measurement and distribution of National income:
National 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 then in money.

b) Money equalizes marginal utilises / 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 of 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 dependent on the supply of nominal money.

d) Liquidity:
Money is the most important liquid asset. Interms of liquidity it is superior than other assets. Money is cent percent liquid. Static and Dynamic Functions of money : Paul Engig classified functions of money as static and dynamic functions.

i) Static Functions:
We have learnt the medium of exchange, measure of value, store of value and standard of deferred payment are the traditional or technical functions of money. Engig called them static functions. These functions facilitate emergence of price mechanism. They do not show any effect on the economic development,

ii) Dynamic Functions :
The functions of money which influence output, consumption, distribution and general price level are called dynamic functions. They make the entire economy dynamic. The functions shown as contingent functions come under dynamic functions.

Question 17.
What is mode? What are its merits and demerits?
Answer:
Mode (Z) : Mode is the most frequently observed value in the data or an observation with the highest frequency is called the mode of the data. Mode is defined as that value in series which occurs most frequently. Mode is a point of maximum concentration on a scale of values, i.e., it is the most typical or most fashionable value of series.

Merits and Drawbacks of Mode: i) Merits or uses of Mode:

1. Mode is the term that occur most in the series hence, it is neither an isolated value like Median nor it is a value like mean that may not be there in the series.
2. It is not affected by extreme values hence, is a good representative of the series.
3. It can be found graphically also.
4. For open end intervals it is not necessary to know the length of open intervals.
5. It can also be used in case of quantitative phenomenon.
6. With only just a single glance on data we can find its value. It is simplest.
7. It is the most used average in day-to-day life, such as average marks of a class, average number of students in a section, average size of shoes, etc.

ii) Drawbacks of mode:

1. Mode cannot be determined if the series is bimodal or multimodal.
2. Mode is based only on concentrated values; other values are not taken into account inspite of their big difference with the mode. In continuous series only the lengths of class intervals are considered.
3. Mode is most affected by fluctuations of sampling.
4. Mode is not so rigidly defined. Solving the problem by different methods we won’t get the same results as in case of mean.
5. It is not capable of further algebraic treatment. It is impossible to find the combined mode of some series as in case of Mean.
6. If the number of terms is too large, only then we can call it as the representative value.

Section – C

Question 18.
Compute Harmonic means for 4, 6 and 12.
Answer:
Harmonic mean for 4, 6, 12

N	X
1	4
2	6
3	12

Question 19.
Explain the drawback of Mode.
Answer:
Drawbacks of mode :

1. Mode cannot be determined if the series is bimodal or multimodal.
2. Mode is based only on concentrated values; other values are not taken into account inspite of their big difference with the mode. In continuous series only the lengths of class intervals are considered.
3. Mode is most affected by fluctuation of sampling.
4. Mode is not so rigidly defined. Solving the problem by different methods we won’t get the same results as in case of mean.
5. It is not capable of further algebraic treatment. It is impossible to find the combined mode of some series as in case of Mean.
6. If the number of terms is too large, only then we can call it as the representative value.

Question 20.
What is token money?
Answer:
Token money is money or unit of currency whose face value is higher then the intrinsic value. Ex. 1,2 and 5 rupees coins, etc.

Question 21.
What are the uses of overdrafts?
Answer:
Overdraft: This is a facility allowed by the bank to the current account holders. They are allowed to withdraw money, with or without security, in excess of the balance available in their account, up to a limit. This facility is available as a temporary measure to the borrowers to meet their short needs in case of shortage of regular funds. Interest is charged on the amount of actual withdrawal.

Question 22.
What is budget?
Answer:
Budget is the annual statement showing the estimated receipts and expenditure of tne government for a financial year in the budget. The budget estimates and revised estimates of the current financial year and actual expenditure of the preceding financial year are shown.

Question 23.
What is Fiscal deficit?
Answer:
Fiscal deficit is the difference between total revenue and total expenditure plus the market borrowings.
Fiscal deficit = (Total revenue – total expenditure) + Other borrowing and other liabilities.

Question 24.
WTiat is Depreciation?
Answer:
Firms use continuously machines and tools for the production of goods and services. This results in a loss of value due to wear and tear of fixed capital. This loss suffered by fixed capital is called depreciation.

Question 25.
Explain the concept of GNP (Gross National Product).
Answer:
It is the total value of all final goods and services produced in the economy in one year.
GNP = C + I + G + (x-m) where,
C = Consumption
I = Gross National Investment
G = Government Expenditure
X = Exports
M = Imports
x – m = Net foreign trade.

Question 26.
What is Gross interest?
Answer:
The payment which the lender receives from the borrower excluding the principal is gross interest.
Gross interest = Net interest + [Reward for risk taking + Reward for Inconvenience + Reward for management]

Question 27.
What are the determining factors of the demand for a factor?
Answer:

1. The demand for the factors of production is derived demand. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors which will help in the production also determine the demand for a factor.
4. Technology determines the demand for the factors. For instance, increase in technology reduces the demand for labourers.
5. Returns to scale will determine the demand for the factors of production. The demand for the factors increases due to increasing returns in the production.

Question 28.
Give a note on the Time Raised Markets.
Answer:
Supply of a good can be adjusted depending on time factor. On the basis of time, markets are divided into three types, i.e., very short period, short period and long period.

a) Market Period or Very Short Period:
This is a period where producer cannot make any changes in the supply of a good. Hence, the supply is fixed. As we know supply can be changed by making changes in inputs. Inputs cannot be changed in the very short period. Supply remains constant in this period. Perishable goods will have this kind of markets.

b) Short Period:
It is a period in which supply can be changed to a little extent. It is possible by changing certain variable inputs like labour.

c) Long Period:
The market in which the supply can be changed to meet the increased demand, producer can make changes in all inputs depending upon the demand in the long period. It is possible to make adjustments in supply in long period.

Question 29.
Define Oligopoly.
Answer:
A market with a small number of producers is called oligopoly. The product may be homogeneous or may be differences. This market exists in automobiles, electricals etc.

Question 30.
Explain the nature of AR and MR curves in perfect competition.
Answer:
Under perfect competition, there exist large number of sell-ers and large number of buyers. In this market neither sell-ers nor buyers have any control on the price of the product. The seller can sell any amout of the good and buyers can buy any amount of the good at the ruling market price. Here the goods are sold at single price under perfect competition therefore, additional units are also sold at the same price. Hence, under perfect competition the AR = MR, because of this P = AR – – MR. Since P = At = MR, the AR and MR curves will be parallel to OX axis as shown in the following diagram.

Question 31.
Explain the Characteristics of land.
Answer:
Land means not only earth’s surface alone but also refers to all free gits of nature which include soil, water, air, natural vegetation etc. Characteristics of Land – The following are the characteristics of land as a factor of production
a) Free gift of nature.
b) Supply of land is perfectly inelastic.
c) Cannot be shifted from one place to another place.
d) Land provides infinite variation of degree of fertility.

Question 32.
Define Superior goods.
Answer:
In case of superior or normal goods, quantity demanded in-creases when there is an increase in the income of consumers. Income demand for superior goods exhibits a positive relationship between the income and quantity demanded. In such a case, the demand curve slopes upwards from left to right.

In figure OX-axis represents quantity demanded for su-perior goods and OY-axis represents the income of the consumer. YD represents the income demand curve showing a positive slope. Whenever income increases from ‘OY’ to OY₁ the quantity demanded of superior or normal goods increases from OQ to OQ₁ This may happen in case of Veblen goods.

Question 33.
What is Income Demand?
Answer:
It shows the direct relationship between the income of the consumer and quantity demanded when the other factors remain constant. There is direct relationship between income and demand for superior goods. Inverse relationship between income and demand for inferior goods.
D_x = f(Y)

Question 34.
Define Marginal utility.
Answer:
Marginal utility is the additional utility obtained from the consumption of additional unit of the commodity.
MU_n = TU_n – TU_(n-1)
(or)
MU = \(\frac{\Delta \mathrm{TU}}{\Delta \mathrm{Q}}\)

Question 35.
Write in brief, about properties of indifferences curves.
Answer:
It represents the satisfaction of a consumers from two goods of various combinations. It is drawn an the assumption that for all possible combinations of the two goods on an indifference curve, the satisfaction level remains the same.

Question 36.
What is Macro Economics?
Answer:
The word Macro’ is derived from Greek work ‘Makros’ which means ‘Large’. It was developed by J.M. Keynes. It studies aggregates or economy as a whole like national income, employment, general price level etc. It is also called “Income and Employment” theory.

Question 37.
What is Income concept?
Answer:
Income is a flow of satisfaction from wealth per unit of time. In every economy income flows from households to firms and vice versa. Income can be expressd in two types.

1. Money income which is in terms of money.
2. Real income which is in terms of goods and services.

The strategic use of TS Inter 1st Year Economics Model Papers Set 3 allows students to focus on weaker areas for improvement.

TS Inter 1st Year Economics Model Paper Set 3 with Solutions

Time: 3 Hours
Maximum Marks: 100

Section – A

Note : Answer ANY THREE out of the following five questions in not exceeding 40 lines each. (3 × 10 = 30 )

Question 1.
Illustrate the consumer’s equilibrium using indifference curve analysis.
Answer:
A consumer is said to be in equilibrium with given his tastes, prices of the two goods and income on the purchase of two goods in such a way so as to get the maximum satisfaction :

I. Assumptions : The analysis of consumer’s equilibrium is based on the following assumptions :

1. Consumer has an indifference map showing his scale of preferences which remains the same throughout the analysis.
2. Money income is given and constant.
3. Prices of the two goods are given and constant.
4. The consumer is rational and thus maximizes his satis-faction.
5. There is no change in tastes, preferences and habits of the consumer.
6. There is a perfect competition in the goods market.

II. Conditions of Equilibrium : There are two conditions that must be satisfied for the consumer to be in equilibrium. These are:
i) At the point of equilibrium, the budget / price line must be tangent to the indifference curve at its minimum point, ii) At the point of equilibrium, the consumer’s MRSxy and the price ratio must be equal, i.e. MRS_xY = P_x/P_Y. This can be shown in the following diagram.

In the diagram ‘AB’ is consumer’s budget or price line. IC, IC₁, IC₂ are indifference curves. In the diagram the consumer is equilibrium at OM of x and ON of y. At point E the price line touches to ‘O’ IC₁ At point ‘S’ consumer will be on lower indifference curve IC and will be an get¬ting lesser satisfaction than at E on IC. IC₂ is beyond the capacity of consumer. So it is outside to the budget line.

Question 2.
Critically examine the law of variable proportions.
Answer:
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 it in the following words.

“An increase in capital and labour applied in the cultiva-tion of land causes in general less than proportionate in-crease 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 employing an additional labour.

In the above table there are three stages of production :
1^st stage i.e., increasing returns at 2 units total output increases average product increases and marginal product reaches maximum.

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

3^dr stage i.e., negative returns from 8th unit TF* 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 TP, MP and A.P. 1st stage TP, AP increases and MP is maximum. In the 2^nd stage TP is maximum, AP decreases and MP is zero. At 3rd stage TP declines, AP also declines, MP becomes negative.

Question 3.
What is monopoly ? Explain how price is determined under monopoly.
Answer:
Monopoly is one of the market in the imperfect competition. The word Mono’ means ‘single’ and ‘Poly’ means ‘seller’. Thus, monopoly means single seller market. In the words of Bilas, “Monopoly is represented by a market situation in which there is a single seller of a product for which there are no close substitutes, this single seller is unaffected by and does not affect, the prices and outputs ofother products sold in the economy”.

1. Monopoly exists under the following conditions :
   • There is a single seller of product.
   • There are no close substitutes.
   • Strong barriers to entry into the industry exist.
2. Features of Monopoly :
   • There is no single seller in the market.
   • No close substitutes.
   • There is no difference between firm and industry.
   • The monopolist either fix the price or output.

Price Determination”:
Under monopoly, the monopolist has complete control over the supply of the product. He is price maker who can set the price to attain maximum profit. But he cannot do both things simultaneously. Either he can fix the price and leave the output to be determined by consumer demand at a particular price. Or he can fix the output to be produced and leave the price to be determined by the consumer demand for his product. This can be shown in the diagram.

In the above diagram, on ‘OX’ axis measures output and ‘OY axis measures cost. AR is Average Revenue curve, AC is Average Cost curve. In the above diagram, at point E where MC = MR at that point the monopolist determines the out-put. Price is determined where this output line touches the AR line. In the above diagram for producing OQ quantity cost of production is OCBQ and revenue is OPAQ.
Profit = Revenue – Cost
= PACB shaded area is profit under monopoly.

Question 4.
Explain critically the marginal productivity theory of distri-bution.
Answer:
This theory was developed by J.B.Clark. According to this theory, the remuneration of a factor of production will be equal to its marginal productivity. The theory assumes perfect competition in the market for factors of production. In such a market, average cost and marginal cost of each unit of factor of production Eire the same as they are equal to the price or cost of a factor of production.

For example, if four tailors can stitch ten shirts in a day and five tailors can stitch thirteen shirts in a day, then the marginal physical product of the 5th tailor is 3 shirts. If stitching charge for a shirt is ₹ 100/-, then the marginal value product of three shirts is ₹ 300/-. According to this theory, the 5th person will be remunerated ₹ 300/-. Marginal physical product is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get marginal value product or marginal revenue product.

At first stage when additional units of labour are employed the marginal productivity of labourer increases up to certain extent due to economies of scale. If additional units of labour are employed beyond that point the marginal productivity of labour decreases. This can be shown in the given figure. In the figure, OX axis repre-sent units of labour and OY represent price/revenue/cost. At a given price,

OP the firm will employ OL units of labour where price OP = L. If it employs less than ‘OL! i.e., OL₁ units, MRP will be E₁L₁, which is higher than the price OP If firm employs more than OL units upto OL₂, price is OP is more than E₂L₂. So the firm decreases employment until price = MRP till OL. At that point ‘E’ the additional unit of labour is remunerated equal to his marginal productivity.

Question 5.
Critically examine the classical theory of employment.
Answer:
The theory of output and employment developed by economists such as Adam Smith, David Ricardo, Malthus is known as classical theory. It is based on the famous “Law of markets” advocated by J.B. Say. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources. The classical economists ruled out any general unemployment in the long run. These views are known as the classical theory of output and employment.

The classical theory of employment can be three dimensions.
A. Goods market equilibrium
B. Money market equilibrium
C. Equilibrium of the labour market (Pigou wage cut policy).

A) Goods market equilibrium:
The 1st part of Say’s law of markets explains the goods market equilibrium. According to Say “supply creates its own demand”. Say’s law states that supply always equals demand. Whenever additional output is produced in the economy, the factors of production which participate in the process of production. The total income generated is equivalent to the total value of the output produced. Such income creates additional demand for the sale of the additional output. Thus there could be no deficiency in the aggregate demand in the economy for the total output. Here every thing is automatically adjusting without need of government intervention.

The classical economists believe that economy attains equilibrium in the long run at the level of full employment. Any disequilibrium between aggregate demand and aggregate supply equilibrium adjusted automatically. This changes in the general price level is known as price flexibility.

B) Money market equilibrium:
The goods market equili-brium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that total income spent the classical economists agree that part of the income may be saved. But the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment is brought by the flexible rate of interest. This can be explained by the following diagram.

In the diagram savings and investment are measured on the ‘X’ axis and rate of interest on ‘Y’ axis. Savings and investments are equal at ‘Oi’ rate of interest. So money market equilibrium can be automatically brought through the rate of interest flexibility.

C) Labour market equilibrium :
According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions. A.C. Pigou suggests that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

According to the classical theory supply of and demand for labour are determined by real wage rate. Demand for labour is the inverse function of the real wage rate. The supply of labour is the direct function of real wage rate. At a particular point real wage rate the supply of and the demand for labour in the economy become equal and thus equili-brium attained in the labour market. Thus there is full employment of labour. This can be explained with the help of diagram.

In the above diagram supply of and demand for labour is measured on the X – axis. The real wage rate is measured on the Y axis. If the wage rate is OWp the supply of labour more than the demand for labour. Hence the wage rate falls. If the real wage rate is OW₂ the demand for labour is more than supply of labour. Hence the wage rate rises. At OW, real wage rate the supply and demand are equal. This is equilibrium.

Assumptions:
1. There is no interference of government of the economy.
2. Perfect competition in commodity and labour market.
3. Full employment.

Section – B

Question 6.
Analyze the characteristics of wants.
Answer:
Human wants are starting point of all economic activities. They depend on social and economic conditions of individu-als. Characteristic features of wants :

1. Unlimited wants: Human wants are unlimited. There is no end to human wants. When one want is satisfied an-other want takes its place. Wants differ from person to person, time to time and place to place.
2. A Particular Want is Satiable: Although a man cannnot satisfy all his wants, a particular want can be satisfied completely in a period of time. Ex : If a person is thirsty he can satisfy it by drinking a glass of water.
3. Competition: Human wants are unlimited. But the means to satisfy them are limited of scarce. Therefore, they complete with each other in priority of satisfaction.
4. Complementary: To satisfy a particular want we need a group of commodities at the same time. Ex: Writing need is satisfied only when we have pen, ink and paper together.
5. Substitution: Most of our wants can be satisfied by dif-ferent ways. Ex: If we feel hungry, we can eat rice or fruits satisfy this want.
6. Recurring: Many wants appear again and again though they are satisfied at one point of time.
7. Habits: Wants change into habits, which cannnot be given up easily. Ex: Smoking cigarettes for joke results into a habit if it is not controlled.
8. Wants vary with time, place and person : Wants go on changing with the passage of time. They are changing from time to time, place to place and person to person. Human wants are divided into 1. Necessities, 2. Comforts and 3. Luxuries.

Question 7.
Explain the concept of utility analysis. What are its short comings?
Answer:
The concept of utility was introduced in economic thought by Jevans in 1871. In a general sense, utility is the ‘want sat-isfying power’ of a commodity or service. In economic sense, utility is a psychological phenomenon. It is a feeling of satis-faction, a consumer derives from the consumption of a com-modity. Utility has nothing to do with usefulness. Utility and usefulness are different. A commodity may satisfy a human want but it may not be useful. For example, wine is harmful to health but satisfies the want of a drunkard. Whether the good is useful or not, if it satisfies a human want we can say that it possesses utility.

Utility is a subjective concept. It differs from person to person, from time to time and place to place. As regards to the measurement of utility, there are two different approaches :

1. Cardinal utility and
2. Ordinal utility. Let us introduce then in brief.

Shortcomings of Utility Analysis: The following are the main defects pointed out on utility analysis.

1. Cardinal measurement is not possible.
2. Assumption of rational consumer is not correct.
3. Wrong assumption of independent utilities. Utility of a good depends on other goods also.
4. Assumption of constant marginal utility of money is wrong.
5. One commodity model is unrealistic.
6. Income effect, price effect and substitution effect are not clearly brought out.
7. This analysis fails to explain the demand for indivisible goods.

Question 8.
Explain the Law of Demand.
Answer:
Demand means a desire which is backed up by ability to buy and willingness to pay the price is called demand in Eco-nomics. Thus, demand will be always to a price and time. Demand has the following features.

1. Desire for the commodity.
2. Ability to buy the commodity.
3. Willing to pay the price of commodity.
4. Demand is always at a price.
5. Demand is per unit of time i.e, per day, week etc. – Therefore the price demand may be expressed in the form of small equation. Dx = f(Px)

Price demand explains the relation between price and quantity demanded of a commodity. Price demand states that there is an inverse relationship between price and demand.

Law of demand :
Marshall defines the law of demand as, “The amount demanded increases with a fall in price and diminishes with a rise in price when other things remain the same”. So, the law of demand explains the inverse relationship between the price and quantity demanded of a commodity.

Demand schedule:
It means a list of the quantities demanded at various prices in a given period of time in a market. An imaginary example is given below.

Pricein?	Quantity Demanded in units
5	10
4	20
3	30
2	40
1	50

The table shows that as the price falls to ₹1/- the quantity demanded is 50 units, when price ₹ 5/- he is buying 10 units. So, there is inverse relationship between price and demand. Price is low demand will be high and price is high demand will be low. We can illustrate the above schedule in a diagram.

In the above diagram, on X-axis demand is shown and price is on Y-axis. DD is the demand curve. Demand curves slopes downward from left to right.

Assumptions :

1. No change in the income of consumer.
2. The taste and preferences of the consumers remain same.
3. The prices of related goods remain the same.
4. New substitutes are not discovered.
5. No expectation of future price changes.

Question 9.
Discuss the types of costs.
Answer:
Cost analysis refers to the study of behaviour of production costs in relation to one or more production criteria, namely size of output, scale of operations, prices of factors of pro-duction and other relevant economic variable. In other words, cost analysis is concerned with financial aspects of production relations as against physical aspects considered in production analysis. A useful cost analysis needs a clear under¬standing of the various cost concepts which are dealt here under.

Types of Costs:
Broadly, types of costs can be classified into three types, namely, money costs, real costs and opportunity costs.

1) Money Costs:
The money spent by a firm in the process of production of its output is money cost. These costs would be in the form of wages and salaries paid to labour, expenditure on machinery, payment for materials, power, light, fuel and transportation. These costs are further divided into explicit costs and implicit costs. The amount paid to all factors of production hired from outside by the producer is called as explicit cost. And the amount of own resources and services applied by the producer in the production process is called as implicit cost.

2) Real Costs:
According to Alfred Marshall, “the pains and sacrifices made by labourers and entrepreneurs / orga¬nizers in the process of production activity are real costs”. The amount of crop (produce) sacrificed by the landlord by giving his land to tenants, the amount of leisure sacri¬ficed by the labourer in extending labour to produce goods, the amount of consumption sacrificed by the in¬vestor by saving his money for investment are some of the examples of real costs.

3) Opportunity Costs:
It is also called as alternative cost or economic cost. Opportunity cost is next best alternative of factors of production. The alternate uses capacity of factors of production signifies opportunity costs. If a fac-tor possesses alternative uses, the factor can be used.only in one activity by forgoing other possibilities. In other words, opportunity cost is nothing but next best alterna-tive foregone by a factor. For example, if a farmer decides to grow wheat instead of rice, the opportunity cost of the wheat would be the rice, which he might have grown rather. Thus, opportunity cost is the cost of foregone alternative.

Short-Run Cost Curve analysis:
In shortrun, the costs faced by a firm can be classified into fixed and variable costs.

4) Fixed Costs:
The fixed costs of a firm are those costs that do not vary with the size of its output. It is due to this, the value of fixed cost is always positive even if production activity does not take place or it is zero. The best way of defining fixed costs is to say that they are the costs which a firm has to bear even when it is temporarily shut down. Alfred Marshall called these costs as ‘Supplementary costs’ or Overhead costs’. E.g. : costs of plant and equipment, rent on buddings, salaries to permanent employees are part of fixed costs.

5) Variable Costs:
On the other hand, Variable costs are those costs which change with changes in the volume of output. Marshall called these costs as ‘prime costs’. Daily wages to employees, payments to raw materials, fuel and power, excise taxes, interest on short-term loans etc., are examples for variable costs.

Question 10.
Compare perfect Competition and Monopoly.
Answer:

Perfect competition	Monopoly
1. There are large number of sellers.	1. There is only one seller.
2. All products are homoge neous.	2. No close substitutes.
3. There is freedom of free entry and exist.	3. There is no freedom of free entry and exist.
4. There is a difference be-tween the industry and firm.	4. Industry and firm both are same.
5. Industry determines the price and firm receives the price.	5. Firm alone determines the price.
6. There is universal price.	6. Price discrimination is possible.
7. The AR, MR curves are parallel to ‘X’ axis	7. The AR, MR curve? are different and slopes downs from left to right.

Question 11.
Explain the concepts of gross profits.
Answer:
Gross profit is considered as a difference between total revenue and cost of production. The following are the components of gross profit:

1. The rent payable to his own land or buildings includes gross profit.
2. The interest payable to his own business capital.
3. The wage payable to the entrepreneur for his management includes gross profit.
4. Depreciation charges or user cost of production and insurance charges are included in gross profit.

Net profits: Net profits are reward paid for the organiser’s entrepreneurial skills. Components :

1. Reward for Risk Bearing:
   Net profit is the reward for bearing uninsurable risks and uncertainties.
2. Reward for Co-ordination:
   It is the reward paid for coordinating the factors of production in right proportion in the process of production.
3. Reward for Marketing Services:
   It is the profit paid to the entrepreneur for his ability to purchase the services of factors of production.
4. Reward for Innovations:
   It is the reward paid for innovations of new products and alternative uses to natural resources.
5. Wind Fall Gains:
   These gains arise as a result of natural calamities, wars and artificial scarcity are also included in net profits.

Question 12.
Discuss the three definitions of National Income.
Answer:
National Income has been defined in a number of ways. National income is the total market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are :
i) traditional definitions advocated by Marshall Pigou and Fisher, and
ii) modern definitions.

1) Marshall’s Definition:
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and non-material including services of all kinds. This is the true net annual income or revenue of the country’’. In this definition, the word ‘net’ refers to deduction of depreciation front the gross national income and to this income from abroad must be added.

2) Pigou’s Definition:
According to A.C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition:
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regared it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

Fisher definition is better than that of Marshall and Pigou. Because, Fisher’s definition has considered economic welfare which is depending on consumption and consumption represents standard of living.But the definitions advocated by Marshall, pigou and Fisher are not flawless. The Marshallian and Pigou’s defini-tions deal with the reasons for economic welfare. But Fisher’s definition is useful to compare economic welfare in different years.

Question 13.
“Supply creates its own demand”. Explain the statement of J.B. Say.
Answer:
Classical theory of employment or the theory of output and employment developed by economists such as Adam Smith, David Ricardo, Robert Malthus etc., it is based on the J.B Say’s law of market’. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources.

According to this law the supply always equals to demand it can be expressed as S=D. Whenever additional output is produced in the economy. The factors of production which participate in the process of production. Earn income in the form of rent, wages, interest and profits. The total income so generated is equivalent to the total value of the additional output produced. Such income creates addition demand necessary for the sale of the additional output. Therefore the question of addition output not being sold does not arise.

Question 14.
What are the characteristics of federal finance?
Answer:
Federal finance means the finance of the central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free make expenditure on their respective heads and to get revenue from their respective sources.

Characteristics of a Federal Finance: The following are some of the important characteristic features of federal finance :

1. In the federal finance, the sources of income and heads of expenditure are distributed between the central and state government according to the constitution. Their jurisdiction and rights are clearly defined in the constitution.
2. In the federal system the central government provides financial aid to states.
3. Although the state government have administered autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.
4. In case of any financial dispute arising between the central and the state governments, the solution thereof is sought according to the constitutional provisions. India with a federal form of government has a federal finance system.

Question 15.
Explain the effects of inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :
According to Pigou, “inflation exists when money income is expanding more than in proportion to increase in earning activity”. Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Effects of Inflation:
Inflation affects economic activities such as production, distribution, social and political relations in an economy adversely.
A) On Production:
a) Mild inflation stimulates production as it increases the profit margin entrepreneurs.
b) High inflation rate of hyper inflation hinders production.
c) Inflation discourages savings. This affects the capital formation which intum affects products.

B) On Distribution:
The impact of inflation is not uniform on all sections of people. It affects certain sections of the people adversely while certain other sections gain because of inflation. This can be elaborated as follows:
1) Fixed Income Groups:
People belonging to fixed income groups suffer due to inflation because their incomes do not increase as prices of commodities rise.

2) Working Class:
Workers and wage earners in the informal
sector normally work for subsistence living. Even otherwise their wages do not rise as and when prices rise. Such people suffer because of inflation. .

3) Debtors and Creditors:
Inflation results a decline in the value of money. Therefore, creditors lose as the value of money is higher when they have lent and less when they are repaid. But debtors gain because the value of money is high when they borrowed but low when they repay.

4) Consumers and Entrepreneurs:
Consumers lose but entrepreneurs gain because of inflation.

C) On Social Justice Front : Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) On Political Front:
Inflation widens social and economic disparities which cause frustration among the sufferers. This provides opportunity for political movements and if the government is not responsive, the movements may threaten the stability of governments.

Question 16.
Discuss money related concepts.
Answer:
Money was invented to overcome the difficulties of the barter system. Several economists have given definitions for money. Some of them are listed hereunder :

1. Robertson defined money as ‘anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.
2. According to Seligman’s definition, ‘money is one that possesses general acceptability”.

Related Concepts of Money:
When we discuss about money, we come across certain terms like currency, liquidity and near-money. They have different meanings. These concepts are related to money. It is necessary to know them clearly without any conceptual ambiguity.

i) Currency:
Currency is the form in which money is circulated in the economy by the monetary authority i.e., the government and the central bank. Currency includes ns and paper notes. It is only one component of money. Money comprises of not only currency but demand deposit a ‘me deposits also.

ii) Liquidity:
The ability of an asset to be converted into money is termed as liquidity. In other words, conversion takes place with ease. Hence, liquidity may be defined as the ability of any asset to act as a direct medium of exchange.

Money acts as a direct medium of exchange. Hence money is considered as the perfect liquid asset. Other assets are not as liquid as money because they are not accepted by the public as medium of exchange. They have to be converted into money to facilitate exchange to take place. They have liquidity but the degree of liquidity varies from asset to asset.

iii) Near Money:
The term near-money refers to those highly liquid assets which are not accepted as money, but can be easily converted into money within a short period.

Here are some examples of near money :

1. savings deposits and time deposits in the commercial banks,
2. savings deposits in the post offices, and post office bonds,
3. stock and shares of joint stock companies.
4. d) units of UTI.
5. savings bonds and certificates.
6. treasury bills, and
7. bills of exchange and government securities and securities guaranteed by the government.

These assets are close substitutes of money. Hence, they are called near money or quasi-money.

Question 17.
Explain simple and subdivided bar diagrams with examples.
Answer:
The following are the common types of diagrams, which are used in statistical analysis.

1. One Dimensional Diagrams:
In such diagrams only one dimensional measurement, i.e, height is used, the width is not considered.

1) Simple Bar Diagrams:
Simple bar diagrams are used to present individual observations, time series and spatial series. The method of drawing simple bar diagram is explained with the help of the example.

Example:
Draw the simple diagram from the following data relating to Censs of India from 1901 to 2011.
Population from 1901 to 2011

Population from 1901 to 2011

Year	Population (Million)	Year	Population (Million)
1901	238.4	1961	439.2
1911	252.1	1971	548.2
1921	251.3	1981	683.3
1931	279.0	1991	846.4
1941	318.7	2001	1028.7
1951	361.1	2011	1210.2

2. Subdivided Bar Diagram: Component bar diagram charts are also called as sub-divided bar diagrams, which are very useful in comparing the sizes of different component parts. The following data relates to the number of companies registered in a country.

Registered Companies

Sector	1970	1971	1972	1973	1974
Public	125	133	140	150	150
Private	75	82	90	90	95
Total	200	215	230	240	245

Public and Private Sector Companies Registered

Section – C

Question 18.
What is Price?
Answer:
The price of anything is its value measured in terns of money Ex : A commodity is exchanged for 50 rupees then the price of commodity is 50 rupees.

Question 19.
Explain Economic Goods.
Answer:
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.

Question 20.
Define Utility.
Answer:
The want satisfying power or capacity of a commodity or service is known as utility. It is the basis of consumer’s de-mand for a commodity.

Question 21.
Explain Cardinal Utility.
Answer:
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 22.
Prepare Individual Demand Schedule.
Answer:
It explains the relationship between various quantities pur-chased at various prices by a single consumer in the market.

Question 23.
Explain Cross Elasticity of Demand.
Answer:
It is the percentage change in the quantity demanded of a commodity as a result of proportional change in the price of related commodity.
\(\mathrm{Ec}=\frac{\text { Percentage change in quantity demanded of } \mathrm{X}}{\text { Percentage change in the price of } \mathrm{Y}}\)

Question 24.
What are Money Costs?
Answer:
The money spent by a firm in the process of production of its output is money cost. These costs would be in the form of wages and salaries paid to labour, expenditure on machinery, payment for material, power, light, fuel and transportation. These costs are further divided into explicit costs and implicit costs.

Question 25.
Explain the relationship between AC and MC.
Answer:
Average.Cost: Average Cost (AC) is the sum of the Average Variable Cost (AVC) and Average Fixed Cost (AFC). It is to-tal cost divided by the number of units produced. In short, cost per unit is known as average cost (AC).
AC = TC / Q = TFC / Q + TVC / Q = AFC + AVC.

Marginal Cost:
Marginal Cost (MC) is the addition made to the total cost by the production of additional units of output. It is the change in total cost associated with a change in output. We can therefore, write
MC = Change in Total Cost / Change in Output or MC_n = TC_n-TC_n-1

Question 26.
What is product differentiation?
Answer:
One of the main features of monopolistic competition is product differentiation. This is a market situation in which there are many firms of a particular product, but the product of each firm is in some way or the other way differentiated from the product of the other firms in the market. They are heterogeneous rather than homogeneous. Product differentiation may take the form of brand names, trademarks etc. This means that the products of the firms will have close substitutes and their cross elasticity of demand will be very high.

Question 27.
Give a note on the Area Based markets.
Answer:
On the basis of area, markets are classified into local, national and international. These markets tell us the size or extent of ’ the market for a commodity. The size of the market for a good depends upon demand for the good, transportation facilities and durability of the good etc.

a) Local Market:
When a commodity is sold at its produced -area it is called local market. Perishable goods like vegetables, flowers, fruits etc., may be produced and marketed in the same area.

b) National Market:
When a commodity is demanded and supplied by people throughout the country it is called national market. Examples are wheat, rice, cotton etc.

c) International Market:
When buying and selling of commodities take place all over the world, then it is called international market. Ex. gold, silver, petrol etc.

Question 28.
What are the determining factors of the surplus of Labour?
Answer:
Supply of labour depends on:

1. Size of the population and its age composition.
2. Mobility of the factors of production.
3. Efficiency of the factors of production.
4. Geographical conditions will determine the supply of factors of production.
5. Price of the factor determines its supply.
6. The supply of a factor depends on its opportunity cost – the minimum earning which it can earn in the next best alternative use.

Question 29.
What is Gross Profit?
Answer:
Gross profit is considered as a difference between total revenue and cost of production.
Gross profit = Net profit + [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance prer.

Question 30.
What is National Income?
Answer:
National income is the market value of goods and services produced annually in a country.

Question 31.
What are transfer payments? Give examples.
Answer:
The government may provide social security allowances like pensions, unemployment allowances, scholarships etc. These are incomes for some sections of the society even though no productive services are made by them. These are called transfer payments.

Question 32.
What is public Debt?
Answer:
Public Debt: When the government’s expanding expenditure on various activities exceeds its revenue it has one option i.e., is to go for public debt. A government can borrow funds rom various sources within the country or from abroad. This creates public debt. The instruments of public debt are in the form of various types of government bonds and securities.

Question 33.
What do you mean by full employment?
Answer:
Full employment is a situation in which all those who are willing to work at the existing wage rate are engaged in work.

Question 34.
What is cash credits?
Answer:
Cash credit is a type of loan given by the commercial bank. which facilitates with- drawal of loan amount in instalments as and when necessary.

Question 35.
What is Net Banking? Explain the merits of its.
Answer:
Net banking also called internet or online banking. It is the process of conducting banking transactions over the internet. Viewing bank statements and the status of a bank account online comes under the definitions of net banking.

Question 36.
Explain the concept of Geometric mean.
Answer:
Geometric mean (G.M.):
The Geometric mean is a special type of average where we multiply the numbers together and then take a square root (root two numbers), cube root (for three numbers), fourth root (for four numbers) etc., and for ‘n’ numbers n^th root \((\sqrt[n]{ })\). It is technically defined as ‘the n^th root product of ‘n’ numbers’. For instance, the geometric mean ‘ of two numbers, say 2 and 8, is the square root of their product, i.e., \(\sqrt{2.8}\) = 4 As another example, the geometric mean of three numbers, say 2, 3 and 6 is the cubic root of their product, i.e., \(\sqrt[3]{2.3 .6}\) = 3.3
Symbolically G.M. = \(\sqrt[n]{X_1, X_2, X_3 \ldots . . X_n}\)
Where, G.M. = geometric mean; n = number of items and X = values of the variable.

Question 37.
What is a Pie diagram?
Answer:
Pie – Diagram : This diagram enables us to show the parti-tioning of total into component parts. It is also called a pie chart.