KENDRIYA VIDYALAYA ANDREWS GANJ NEW DELHI
(Important Questions with solution from Exam point of view for the subject Economics)
1. Define economics.
Economics is a subject matter that focuses on rational management of scarce resource in a manner such
that our economic welfare is maximized.
2. Define micro economics.
It is the study of individual economic unit of an economy.
3. Define macroeconomics.
It is the study Economic problems relating to economy as a whole.
4. State reasons why does an economic problem arises.
1) Resources are scarce .2) Resources have alternative uses.
5. What is meant by production possibility curve?
PPC show the different combination of two goods which can be produced with given and resources and
technique of production.
6. What does the slope of PPC show?
Slope of PPC shows marginal opportunity cost/ marginal rate of transformation.
7. Give one reason for rightward shift in PPC.
When resources are increased.
8. Define opportunity cost.
It is the Value of the factor in its next best alternative use.
9. Define marginal opportunity cost /Marginal Rate of Transformation.
It is defined as the units sacrificed of one good to produce an additional unit of another good.
10. Why is PPC concave to the origin?
Due to increasing marginal rate of transformation / marginal opportunity cost
11.Define Marginal utility.
It is change in total utility when an additional unit of a commodity is consumed.
MUn = TUn – TUn-1
12.What is an indifference curve?
A curve that shows various combinations of two goods that give a consumer equal level of satisfaction.
13.Why is IC convex to the origin?
Due to diminishing marginal rate of substitution (MRS).
14.What does the law of diminishing marginal utility state?
It states that as more and more units of a commodity are consumed, marginal utility derived from
every additional unit declines.
15. What is a budget line?
It shows various combinations of two goods that a consumer can purchase with his given income and
prices of the both goods.
16.What is individual demand?
It is demand for a commodity by single consumer
17. Give two causes of rightward shift in demand curve.
(1). Decrease in price of complementary goods (2).Increase in price of substitute goods.
18.What causes upward movement along the demand curve?
Increase in price of commodity.
19.What is shape of demand curve in case of perfectly inelastic demand?
Vertically straight line parallel to Y-axis.
20.What will be shape of demand if price elasticity of demand is unitary ?
Rectangular Hyperbola
21.Name two factors affecting price elasticity of demand?
Time Period, Availability of Substitutes.
22. What is production function?
It is functional relationship between physical inputs and physical output.
23. Define marginal product?
It is change in total product when an additional unit of a variable factor is used.
24. What is marginal cost?
It is change in total cost / total variable cost when an additional unit of an output is produced.
25. Define supply.
Quantity supplied of a commodity at various price levels in a given period of time.
26.What causes downward movement along the Supply curve?
Decrease in price of commodity.
27.What is elasticity of supply?
It is ratio of percentage change in quantity supplied to percentage change in price of the commodity.
28. Supply curve is upward sloping begins from X- axis what is elasticity of Supply?
Inelastic supply (less than unitary elastic)
29.What cause in leftward shift in supply curve?
Increase in taxes by govt, increase in price of intputs.
30. Supply curve in upward sloping at 45 degree starting from origin. What is elasticity of supply?
Unitary elastic
31. Define perfect competitive market.
It is a market in which there are large number of buyers and sellers, selling homogeneous goods,
which are perfect substitutes.
32. Define monopolistic competition market.
It is a market in which there are large number of buyers and sellers, selling differentiated goods, which
are close substitutes.
33.Define monopoly market.
It is a market where there is only one seller selling a good which does not have any substitute. Firm is
the price maker and there is restricted entry into and exit from the market.
34.What is the shape of demand curve of perfect competition market?
Horizontal straight line.
35. In which market form, a firm is price taker?
Perfectly competitive market.
36. In which market firm, there is product differentiation?
Monopolistic competition.
37. What is shape of demand curve is case of monopoly market?
Downward sloping demand curve.
38. What is oligopoly market?
A market which has a few big sellers ,selling homogenous or differentiated goods.
39. What is equilibrium price?
Equilibrium price is that price where market demand equals market supply of the commodity.
40. Why is AC/AVC/MC curve U-shaped?
Due to application of the law of variable proportions.
41. Define Marginal revenue.
It is change in total revenue when an additional unit of a commodity is sold.
42. In which market AR= MR.
Perfectly competitive market.
43. Which cost curve has Rectangular hyperbola shape?
Average fixed cost (AFC).
44. Define fixed factors.
Fixed factors refer to those factors which can’t be changed in short run, they remain fixed.
45.If TP is increasing at an increasing rate, what can you say about MP?
MP is rising
46. What is the shape of TFC curve?
TFC curve is a straight line parallel to horizontal X-axis
47. Give the meaning of involuntary unemployment.
Involuntary unemployment occurs when those who are able and willing to work at the prevailing
wage rate but do not get work.
48.What is the relationship between marginal propensity to save and marginal propensity to consume?
The sum of MPC and MPS is equal to one.
49. State the two components of money supply.
Currency held by the public and demand deposits with commercial banks.
50.What is Cash Reserve Ratio?
Cash Reserve Ratio is the ratio of bank deposits that commercial banks must keep as reserves with the
Central Bank.
51. Define money.
It is anything which is generally acceptable as a medium of exchange and at the same time acts as a
measure of value, store of value and means of deferred payments.
52.What is Deficient Demand or deflationary gap?
Deficient Demand is a situation, where aggregate demand is less than aggregate supply at the full
employment level. It creates deflationary gap
53.What is Excess demand or inflationary gap?
Excess demand is a situation, where aggregate demand is more than aggregate supply at the level of
full employment. It creates inflationary gap
54. What is Aggregate demand?
AD is the total amount of goods and services demanded by all the sectors in an economy during a
financial year.
55. Define Revenue Deficit.
It refers to the excess of total revenue expenditure of the government over its total revenue receipts.
Revenue deficit = Total Revenue expenditure - Total Revenue receipts.
56. Define Fiscal Deficit.
Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings.
Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts
Excluding borrowings)
57. Define Fiscal Deficit
Primary deficit is defined as fiscal deficit minus interest payments.
58. What is Foreign exchange rate?
It is the rate at which currency of one country can be exchanged for currency of another country. For
example 1$ = Rs. 60
59.What is Flexible Exchange Rate/ Floating Exchange Rate?
In a system of Flexible exchange rate the exchange rate is determined by the forces demand and
supply of foreign exchange.
60.What is Fixed Exchange Rate System?
It is the exchange rate which is officially fixed by the Govt. or monetary authority or central banks of a
country.
61. What is devaluation of currency?
When the central monetary authority decreases value of domestic currency in terms of foreign
currency.
62. What is the balance of visible items in the balance of payments account called?
Balance of trade.
63.What is the relationship between APC and APS?
APC+APS= 1
64. Define open market operations.
It refers to the process of buying and selling of securities by central bank in open market.
65. What are the components of BOP Accounts?
1. Visible Trade (Goods only) 2. Invisible Trade (Services) 3. Unilateral Transfers 4. Capital Transfers
3/4 Marks Questions
1. Explain the problem ‘how to produce’ with the help of example.
How to produce refer to choice of technique of production. There are two types of technique of
production: (i) labour intensive technique (ii) capital intensive technique. The choice between labour
intensive and capital intensive becomes a problem because the producers need to minimize their cost
and at the same time maximize their efficiency.
2. Explain the circular flow of income in a two sector model.
1. Real Flow - It refers to the flow of factor services from households to firms and the corresponding
flow of goods and services from firms to households.
2. Money Flow - It refers to flow of factor payments from firms to households for their factor services
and corresponding flow of consumption expenditures from households to firms for purchase of goods
and services produced by the firms. It is also called nominal flow.
CIRCULAR FLOW IN A TWO SECTOR ECONOMY
Factor Payments
(Rent, Wages, Interest and Profit)
Factor Services
(Land, Labour, Capital and Enterprise)
Household
sector
Household Sec
tor
FIRMS
Consumption Expenditure
(On goods and services)
Purchase of Goods and Services
3.
Differentiate between consumption goods and Capital goods.
Consumer goods or consumption goods
1. These are directly used by ultimate
consumer household for satisfaction of
wants.
2. These are final goods
3. They are not used in production
by
producer.
4. They may be changed during use by
consumer like tea leaves are used to make
tea.
5.eg: Durable goods- car, washing machine
Capital goods
1. These are fixed assets used by the
producers in the production process.
Final goods
1. These are ready for final use
by consumer for consumption or
By producer for investment.
Intermediate goods
1. These are not ready for use; they are
for resale or used for further
production.
2.These are:(a)Consumer goods used for satisfaction of
wants. They may change during use.
(b) Capital goods which help in production
process. Thy do not transform during use,;
2.
These are purchased by one firm
from another for following purpose:(a)
Resale during the year
(b)
Use as raw material in production
process. So they may change during
production process
2. These are final goods.
3. They help in production of other goods.
4. They do not change during production
process.
5. eg: machines ,
Plants and equipment used in production
process.
4. what is the difference between Final goods and Intermediate Goods?
3. Once sold these pass out of production
3. These are inside the production
boundary.
boundary.
4. These are included in national income
4. These are not included in national income.
5.
Differentiate between Stocks and Flows variables.
Stocks
1. Stock variables are measured at a
particular point in time.
2. They do not have a time dimension,
3. Eg: Capital stock, inventory, wealth on a
particular day.
4. Stock is static concept
6.
Flows
1. Flow variables are measured over
a period of time,
2. They have a time dimension,
3. Eg: Capital formation during a
year, change in stock, national
income during a year.
4. Flow is dynamic concept.
Differentiate betweenFactor income and Transfer Income.
Factor income or Factor payment
Transfer Income or Transfer payment
1.
It is the income received in return for It is the income received without any
rendering factor services by the factors of corresponding services.
production.
2.
These are included in national income.
These are not included in national income
3.
Example: Rent, wages, interest, and profit.
Retirement pension.
Example: old age pension, scholarship of students,
unemployment
allowance,
charity
,gifts,
expenditure on birthday / Marriage, pocket
money, remittances from abroad, financial help
to earthquake victims, beggars, meals to
beggars, compensation given to accident victims
etc.
7. Explain the relationship between AC and MC.
Relationship between AC and MC





Both AC & MC are derived from TC
Both AC & MC are “U” shaped (Law of variable proportion)
When AC is falling ,then AC >MC
When AC is rising ,then AC < MC
When AC = MC ,then AC will be minimum.
8. Why is AC curve U-shaped?
AC curve is U-shaped in short run due to operation of laws of returns to factor ( LAW OF VARIABLE
.
PROPORTION) Initially production is subject to law of increasing returns, then law of constant return and
ultimately to law of diminishing return. As output is increased, AC first falls, reaches its minimum and then rises.
9. State the distinction between explicit cost and implicit cost. Give an example of each
Implicit cost is the estimated value of inputs supplied by the owner of the firm, like imputed salaries of the
owners, imputed rent of the building, imputed interest on the money invested by the owners, etc.
Explicit cost is the actual monetary expenditure on inputs hired from outside, like expenditure on Purchases
of raw materials, on payment of wages, interest, rent, etc
10. Explain the implication of ‘homogenous product’ feature of perfect competition.
Homogenous product means that the buyers treat products of all the firms in the industry as identical.
Therefore, the buyers are willing to pay only the same price for the products of all the firms in the industry. It
also implies that no individual firm is in a position to charge a higher price for its product. This ensures
uniform price in the market.
11. Explain the implication of ‘product differentiation’ feature of monopolistic competition
Product differentiation means that the buyers of a product differentiate between the same products produced
by different firms. Therefore, they are also willing to pay different prices for the same product produced by
different firms. This gives an individual firm some monopoly power to influence market price of its product
12. How can budgetary policy be used for reducing inequalities in income?
To reduce inequalities in income and wealth government can use progressive taxation policy. The government puts a
higher rate of taxation on rich people and lower rates of taxation on lower income groups. This reduces disparities in
income and wealth. The government can provide subsidies and other amenities to people whose income levels are low.
This increases their disposable income and thus reduces the inequalities.
13. Differentiate between Micro Economics and Macro Economics.
Micro Economics
(i)
Macro Economics
It studies the individual units or (i)
Macro Economics studies the
the economy like the study of
aggregates of the economy such
an individual firm
as ‘General price level, National
income etc.
(iii)
Its
main
individual
(iv)
instruments
demand
are (iii)
Its
main
instruments
are
and
aggregate demand aggregate
individual supply.
supply.
It is also called as ‘Price Theory’. (iv)
It is also known as ‘Theory of
Income, output & employment’.
14. Difference between direct and indirect taxes.
Direct Taxes
Indirect Taxes
1.
They are directly paid to 1. They
are
paid
to
the
government by the person
government by one person but
on whom it is imposed
their burden is borne by another
person
2.
It cannot be shifted
3.
Direct taxes are generally 3. They are progressive nature
progressive
(The rate of tax decreases as
Income Increases)
4.
Examples:
Income
Tax, 4. Examples: Sales Tax and Excise
Wealth Tax and Corporation
duty.
tax
2. Cab be shifted to other person
15. Difference between balance of payments and balance of trade.
Balance of trade
Balance of Payments
Balance of trade is a record of 1.
only visible items i.e. export
and imports of goods.
Balance of Payments is a record
of both visible items (goods) and
invisible items. (Services).
It is a narrow concept as it is a 2.
component
of
balance
payments.
It is a wider concept as it is a
record of all transactions.
Deficit in balance of trade can 3.
be met by balance of
payments.
Deficit in the balance of payments
cannot be met by the balance of
trade.
16. Distinguish between autonomous and accommodating items.
Autonomous items
Accommodating Items
Autonomous items refer to 1. This refers to transactions that
international
economic
occur because of government
transactions that take place
financing.
due to some economic
motive such as profit
maximisation.
These items are called above 2. These items are called below
the line items in the BOP.
the line items.
This includes all transactions 3. This includes only
of BOP.
reserve transactions.
official
17. Distinguish between Changes in Quantity Demand and Change in Demand.
Change in Quantity Demanded
Change in Demand
i) Other things being equal if the quantity i) If more or less quantity of commodity is
demanded increases with the fall in the price demanded at the same price due to charge in
of a product and decrease with the rise in the factors other than the price of the commodity is
price of commodity, it is known as movement called shift in the demand curve. Or change in
along a demand curve or change in quantity demand.
demanded.
ii) The movement is either upward or ii) There is either rightward shift or leftward
downward along the same demand curve. shift of the demand curve itself.
iii) Downward movement along the demand iii) Rightward shift indicates increase in demand
curve is called extension in demand.
and leftward shift shows the decrease in
demand
18. Briefly explain any four factors affecting elasticity of demand.
1)
Availability of substitute goods -Demand of a commodity will be highly elastic if it has many substitutes.
2)
Nature of commodity -Demand of necessary and essential goods are always inelastic because
consumers are restricted to buy those goods.
3)
Different uses of the commodity: If the commodity has different uses, its demand will be elastic.
4)
Taste & preferences -If the consumer is bound to use particular brand of a commodity then its demand
will be inelastic because consumer will buy that particular commodity only even at higher price.
19. What is the difference between cardinal and ordinal utility analysis.
S.No.
1
2
3
Cardinal Utility
Given by Prof. Alfred
Marshall
Utility can be measured
numerically
Unit of measurement is ‘utils’
Ordinal Utility
Given by Prof. J.R. Hicks
It cannot be measured
numerically
Possible for a consumer to
scale his preferences.
20. Explain any three determinants of demand for a commodity.
Following are the three determinants of demand for a commodity.
i)
Price of the commodity:- When the price of a commodity increases the demand for that
commodity decreases and vice versa.
ii)
Income of the consumer:- When the income increases the demand for that commodity
also increases and vice-versa.
iii)
Price of related goods :a) In complementary goods demand rises with fall in price.
b) In substitute goods demand for a commodity falls with a fall in the price of other
substitute goods.
21. Distinguish between perfect competition and monopoly .
Perfect competition market
1. Large number of buyers and sellers.
2. There is free entry into and exit from
the market.
3. Firm is price taker and industry is price
maker.
4. Average Revenue (AR) curve perfectly
elastic & horizontal.
Monopoly
1. There is only one seller.
2. There is restricted entry into and exit from
the market.
3. Firm is the price maker
4. Average Revenue (AR) curve is downward
sloping & inelastic.
22. Explain the objectives of the Government Budget.
These below are the main objectives of the Government Budget.
a) Activities to secure reallocation of resources: - The Government has to reallocate resources with
social and economic considerations.
b) Redistributive Activities: - The Government redistributes income and wealth to reduce inequalities.
c) Stabilizing Activities: - The Government tries to prevent business fluctuations and maintain
economic stability.
Management of Public Enterprises: - Government undertakes commercial activities that are of the
23. Why is foreign exchange demanded?
Foreign exchange is demanded for the following purposes.
a)
b)
c)
d)
Payment of International loans
Gifts and grants to rest of the world
Investment in rest of the world.
Direct purchases abroad for goods and services as well as imports from rest of the world.
24. Why does the demand for foreign exchange rise, when it price falls?
With a fall in price of foreign exchange , the exchange value of domestic currency increases and that of
foreign currency falls. This implies that foreign goods become cheaper and their domestic demand
increases. The rising domestic demand for foreign goods implies higher demand for foreign exchange.
So there is inverse relationship between price and demand for foreign exchange.
25. What are the sources of Supply of foreign exchange?
1.
2.
3.
4.
5.
When foreigners purchase home countries goods and services through exports
When foreigners invest in bonds and equity shares of the home country.
Foreign currencies flow into the economy due to currency dealers and speculators.
When foreign tourists come to India
When Indian workers working abroad send their saving to families in India.
26. What are the components of current account of Balance of payments?
a) Visible items of trade: The balance of exports and imports of goods is called the balance of visible
trade.
b) Invisible trade: The balance of exports and imports of services is called the balance of invisible
trade E.g. Shipping insurance etc.
c) Unilateral transfers: Unilateral transfers are receipts which resident of a country receive (or)
payments that the residents of a country make without getting anything in return e.g. gifts.
27. What are the components of capital account of Balance of payments?
1. Private transactions: These are transactions that are affecting assets (or) liabilities by individuals.
2. Official transactions: Transactions affecting assets and liabilities by the government and its
agencies.
3. Direct Investment: It is the act of purchasing an asset and at the same time acquiring and control of
it.
4. Portfolio investment: It is the acquisition of assets that does not give the particular control over the
asset.
28. Why does the demand curve slope downward?
(i) Law of diminishing marginal utility- As consumer consumes more quantity of goods, according to
the Law of diminishing marginal utility satisfaction goes on decreasing. So consumer is willing to buy
more & demand more only at lower price as satisfaction is low. & vice versa
(ii) Income effect-as price of a good decreases purchasing power of the consumer increases so real
income of consumer rises, so due to this income effect he demands more.
(iii) Substitution effect- As price of a good decrease consumer substitutes the good by relatively
cheaper substitute good so his demand decreases.
(iv) Change in Number of consumers –as price of a good falls number of consumers who were not
buying it will now be able to afford it so they demand rises.
29. Distinguish between fixed cost and variable cost.
fixed costs
Fixed costs are those which do not change
when output is increased or decrease
These are cost of fixed factor inputs
For example Rent of Land, Insurance
charges
variable costs
Variable costs are those costs which vary
with output
These are cost of variable factors inputs.
For example. Cost of raw material used in
production, wages paid to labor
30. Briefly explain determinants of a supply of a commodity?
1. Price of the commodity-There is a direct and positive relationship between supply
and price. Generally, higher the price, larger would be the supply and lower price
results into lesser supply.
2. Prices of factors of production-with the rise in prices of factors of production, cost
of production may also rise. It lowers producer’s profits, which results into a
decrease in its supply.
3. Goals of the firms –Supply of a commodity are also guided by the firm’s goal of
profit maximisation or sales maximisation. If the firm has the goal of profit
maximization, it will supply more goods at a higher price.
4. Change in technology-If producers make use of new technology that helps in
reducing its cost of production and higher profits, it ensures a higher level of
production and its supply
31. Differentiate between Perfect competition market and Monopolistic competition .
Perfect competition market
1 .Large number of buyers and sellers.
Monopolistic competition market
1. There are large number of buyers and
large number of small sellers.
2. Firm is price taker and industry is price 2.Firm is the price maker
maker.
3. Average Revenue (AR) curve is perfectly 3. Average Revenue (AR) curve is downward
elastic & horizontal.
sloping & elastic.
4. There is no Selling cost
4. Selling costs are high.
32. Differentiate between monopoly market and Monopolistic competition
Monopoly market
1. There is only one seller.
Monopolistic competition market
1. There are large number of buyers and
large number of small sellers.
2. There is restricted entry into and exit from 2. There is free entry into and exit from the
the market.
market.
3.Selling costs are low & are onetime costs
3. Selling costs are very high.
4 .Average Revenue (AR) curve is downward 4. Average Revenue (AR) curve is downward
sloping and inelastic.
sloping elastic.
5. Goods in this market have no close 5. Goods in this market have very close
substitutes.
substitutes.
33. Will the following be included or net in the domestic factor income of India? Give reasons for
your answer:i) Salaries of non-residents working in India Embassy in Russia.
ii) Salaries to Indian residents working in Russian Embassy in India.
Iii) Salaries received by Indian workings in American Embassy in India.
iv) Profit earned by an Indian company from its branch in Singapore.
Ans. (1) Yes it will be included because Indian embassy is a part of domestic territory of India.
(2)No it will not be included in the domestic factor income as the Russian embassy is not
a part of domestic territory of India.
(3)No it will not be included in the domestic factor income as the American embassy is
not a part of domestic territory of India.
(4) No it will not be included in domestic factor income of India because Singapore is not
a part of domestic territory of India.
34. Explain Functions of Money.
(1) Medium of Exchange:- It is generally accepted means of payment for exchange of goods and services.
- Facilitates trade, widens area of market by separating act of sale and purchase.
(2) Measure of Value or Unit of Value:- All goods and services can be given one unique value (Price) by expressing them in terms of money.
-It is common unit of measurement of all goods. Thus makes exchange easier.
-Its value remains constant.
(3) Store of Value
-It is liquid store of value.
-It comes in convenient denominations.
-Value remains constant, it is not perishable easily portable, requires less place to store& there is no
storage cost.
(4)Standard of deferred Payments -Or future payments like salaries, pension, interest etc.
-Facilitates borrowing and lending.- Itovercomes disagreements and risks that are there is
Barter system regarding future payments to be made as value of money remains constant.
35. What are the various sources of non-tax revenue ?
(a) Fees-Payment received for providing certain services for public interest like Govt. college or
hospital fees
Fines & penalties charged for breaking of laws or disobeying rules & regulations
(b)License fee & Permit - Payment received for giving privileges or permits to perform a service.
Like registration and license fee for industries or automobile.
(c) Escheat-income Govt. gets by taking possession of property which has no claimant or legal
heir.
(d) Profits of PSU’s –Profits earned by public sector enterprises or dividend received by Govt.
on investment made by it.
36. Differentiate between Revenue expenditure and capital expenditure.
Revenue Expenditure - It consists of those Government expenditures which neither Create Assets
nor Reduce Liabilities. EX.Borrowings,Recovery of loans
Capital Expenditure - It consists of those Government expenditures which either Create Assets or
Reduce Liabilities.Ex-Repayment of loan,Expenditure on construction & purchase of Assets.
37. Differentiate between Revenue receipts and capital receipts.
Revenue Receipts: - It refers to the receipts of the govt. Which don’t create any liability and cause
any reduction in the assets of the govt. It may be divided into two, tax revenue and non-tax
revenue
CAPITAL RECEIPTS: - It refers to those receipts of the govt. which create a liability / cause reduction
in its assets. Loans raised by the govt. from the public, Loans received from foreign govt and
international financial institutions, PSU disinvestment – selling shares /securities of PSU.
38. What is the relationship between TU and MU
Relationship between MU and TU:
i) When MU is positive TU rises.
ii) When MU is zero TU is maximum.
iii) When MU is negative, TU falls
UNITS
TU
MU
1
8
8
2
14
6
3
18
4
4
20
2
5
20
0
6
18
-2
Diagram:
TU
Y
TU/MU
X
(-)MU
6 Marks Questions
1. How is equilibrium achieved with the help of indifference curve analysis?
Consumer equilibrium refers to a situation where a consumer gets maximum satisfaction
through his scarce resources; he has no tendency to change his available budget
constraint.
Conditions:i)
Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py
OR
Slope of indifference curve = slope of Budget line
ii)
Indifference curve must be convex to the origin.
This may be explained with the help of following diagram;-
A
p
Good ‘y’
q
O
IC3
r
IC1
Good x
B
IC2
X
Diagram Explanation:
‘AB’ is the budget line. It is sure that consumer’s equilibrium will lie on some point on ‘AB’.
Indifference map (set of IC1,IC2, IC3) shows consumers scale of preferences between different
combinations of good ‘x’ and good ‘y’.Consumers equilibrium will achieve where budget line (AB) is
tangent to the IC2.
Consumers cannot achieve the following:
i) P and ‘r’ points on budget line give satisfaction, but, choosing point ‘q’ puts him on a higher IC2 that
gives more satisfaction.
ii) He cannot move on IC3, as it is beyond his money income.
So, the consumer will be in equilibrium at point q where both of the conditions are
satisfying.
2. Explain the law of variable proportions with the help of TP and MP curves.
Statement of law of variable proportion: In short period,When one variable input is increased
keeping other factor inputs constant, marginal product of variable factor increases then
decreases becomes zero & then negative. It can be explained with the help of a following
schedule
Fixed factor
Variable factor
Total product
Land in acres
1
1
1
1
1
1
Labour
1
2
3
4
5
6
Units
5
15
30
40
45
45
Marginal
product
Units
5
10
15
10
5
0
1
7
40
-5
TPP
Y
MPP/TPP
3rd
2nd
1st
X
X
O
Units of variable factor
MPP
Phase I / Stage I / Increasing returns to a factor.

TPP increases at an increasing rate

MPP also increases.
Phase II / Stage II / Diminishing returns to a factor

TPP increases at decreasing rate

MPP decreases / falls

This phase ends when MPP is zero & TPP is maximum
Phase/stage
I Increasing returns
II – diminishing returns
to a factor
III - Negative returns
to a factor
Phase III / Stage III / Negative returns to a factor

TPP diminishes / decreases

MPP becomes negative.
3. Differentiate between CHANGE IN QUANTITY SUPPLIED and CHANGE IN SUPPLY.
CHANGE IN QUANTITY SUPPLIED:- It is caused by a rise/fall in the price of a commodity. It is expressed
either in form of an expansion in supply or contraction in supply. Expansion and contraction in supply are
represented diagrammatically in the form of a movement along a given supply curve. Contraction is due to
fall in price .(see fig.(A))
CHANGE IN SUPPLY:- A change in supply of a commodity caused by factors other than (Income of the
consumer ii) Price of related goods and iii) Tastes and preferences of the individual/ consumer) the price of a
commodity. Change in supply is represented graphically by a rightward or leftward shift. Decrease is due to
fall in other factors than the price. Leftward shift shifting of supply curve leads to decrease the supply. .(see
fig.(B))
4. Explain the following functions of central Bank:A. Issue of Currency
B. B. Banker to Government
C. C. Bankers Bank & Supervisor
Issue of Currency:The Central Bank is given the monopoly of issuing currency in order to secure control
over volume currency and credit. These notes are circulated throughout due country as legal tender
money. It has to keep a reserve in the form if gold and foreign securities as per the statutory rules against
the notes issued by it. It issues notes above Rs.2/-. One Rupee coins and other small coins are issued by
the mints of Government.
Bankers to Government: Central Bank acts as the bank of Central and State governments. It carries out al
banking business of Government. Government keep their cash balances in the current account with
Central Bank. Similarly central bank accepts receipts and makes the payment on behalf of the Government.
Also Central bank carries out exchange, remittances and other banking operation on behalf of Government.
Central Bank gives the loans and advances for a short period to the Governments. It also manages the
public debt of the country.
Bankers Bank & Supervisor:
All the scheduled banks are controlled and supervised by the Central
Bank. These banks are required to keep certain percentage of their deposits with Central Bank. They can
take loans from the Central Bank.
5. Using diagrams explain the concepts of excess demand and deficient demand.
OR
Using diagrams explain the concepts of inflationary gap and deflationary gap.
Excess demand refers to a situation where AD is more than AS corresponding to full
employment equilibrium level. It also means that actual AD is more than what required to
maintain full employment equilibrium level. It creates inflationary gap.
Inflationary Gap= Actual AD- AD required for full emp.
C+I+G(AD)
Inflationary
gapgap
Aggregate demand
y
AD`
C+I+G(AD)
F
450
O
QG Output/ employment
x
Deficient Demandrefers to a situation where AD is less than AS corresponding to full employment
equilibrium level. It also means that actual AD is less than what required to maintain full employment
equilibrium level. It creates Deflationary gap.
Deflationary Gap= AD required for full emp - Actual AD
AS=Y=C+S
AD &AS
ADF
F
G
P
E
Q
O
M
Income, output & Employment
N
AD actual
6. There is a simultaneous ‘decrease’ in demand and supply of a commodity.When it will result
in (1)No change in equilibrium Price.
(2)A fall in equilibrium price
Decrease means less quantity at the same price. Decrease in demand shift the demand curve to the left
downwards. Decrease in supply shifts the supply curve to the left upwards.
(I)If decrease in demand is equal to decrease in supply, there will be no change in the equilibrium price
.In the figure, both demand and supply decrease by E’E = Q’Q at a given price OP.
(ii)If decrease in demand is greater than decrease in supply, the equilibrium price will fall. In the figure,
decrease in DD=AE. While decrease in supply is lower i.e. BE’’. Therefore, equilibrium price falls from
OP to OP’.
7.
Explain producer’s Equilibrium using MR and MC approach.
Producer’s Equilibrium:- A producer (a firm) is said to be in equilibrium when it earns maximum
profits. Profit maximization of a firm means maximizing the difference between total revenue and total
cost. When the profits of the firm are maximum, the firm is in equilibrium.
According to MC-MR approach, the conditions of producer’s equilibrium are1) MR= MC
2. MC Should greater MR after equilibrium level of output
Level of Output
MR
MC
1
10
9
2
9
7
3
8
6
4
7
7
5
6
8
6
5
9
8. Explain the equilibrium level of income with the help of savings and investment function. If
planned savings exceed planned investment what changes will bring about the equality
between them.
Economy is said to be in equilibrium when planned savings is equal to planned investment.
As we know, AD=AS
C+I=C+S
I=S
But we know savings and investment activities are generally done by different sections of the society.
Therefore very often we can see a difference between planned saving and planned investment. It means
that when S>I or S<I economy will experience disequilibrium as shown in the fig. given below.
S
Saving
&Investment
E
I
Income
0
Y
P
As shown in the diagram at point E, S= I. Up to point E, S<I and after point E, S>I. Both show situations
of disequilibrium in the economy.
When S>I, it means that the households are savings more than what the firms desires to invest i.e., both
household consumption demand and firm’s investment are less. This will induce the producers to reduce
production and this will reduce the employment opportunities. National Income will be reduced from
OP to OY and thus the economy will regain equilibrium.
By
Nand lal Jangid
PGT-Economics
K V PAndrews Ganj