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SYJC (XII)ECONOMICS

Marks : 80 PRELIMINARY TEST PAPER - 1 Date : 14.12.2019

Q.1 [A] Fill in the blanks with appropriate alternatives given in the bracket.1. Social 2. Perishable3. Personal 4. Competition5. Central Bank

[B] Match the columns

Group A Answers1. Entry Barriers. Monopoly2. Entrepreneur Profit3. D-mat Account Share Broker4. RBI Central Bank5. Monopolistic Competition. Prof. E.H. Chamberlin

[C] State whether the following statements are TRUE or FALSE.1. (False) 2. (False)3. (True) 4. (True)5. (False) 6. (False)

Q.2 [A] Define the following. (3 out of 6).Derived Demand: When a commodity or a service is demanded indirectly i.e. to produce

consumer goods, it is known as indirect demand. In other words, when demand for a particular commodity gives rise to

demand for another commodity, then it is said tobe a derived demand. All factors of production have indirect demand. For e.g. Demand for land, labour, capital, etc.Competitive Demand: Competitive demand is said to occur when demand for a commodity

competes with its substitutes. When two or more commodities can be used inter changeably to satisfy a

single want, then such types of commodities are known as substitute goods. For e.g. Pepsi and Coke, Taj Mahal Tea and Society Tea, etcPartial equilibrium: Micro economic analysis is a partial equilibrium analysis Partial equilibrium analyses equilibrium position of an individual economic

unit i.e. individual consumer, individual firm, individual industry etc.

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Time : 3 Hrs.SOLUTIONS


SYJC (XII) It isolates an individual unit from other forces and proceeds with the

assumption "Other things remaining the same" (Ceteris Paribus). Many theories of macroeconomics are based on such assumptions

Partial equilibrium also neglects the interdependence between economic variables

Market Demand: Market Demand is the sum total or aggregate of all quantities purchased by

all buyers of a commodity at different prices during a given period of time In simple terms, market demand is the sum total of all individual demands Market Demand Schedule is a tabular representation of quantities of a

commodity demanded or purchased at different possible prices by all the consumers in the market, during a given period of time

It is obtained by the horizontal summation of demand of all individuals at various prices

It is to be noted that, market demand will always be greater than individual demand and also vary with change in price.

Economic Efficiency Theory of economic welfare is concerned with efficiency in allocation of

resources. Efficiency in allocation is achieved when peoples satisfaction is maximized. It is summarized as follows-

Efficiency in production – Producing maximum possible goods and services from available services

Efficiency in consumption – Distribution of produced goods and services among the people for their consumption such that total satisfaction of the society is maximum

Efficiency in direction of production of production – producing those goods which are most desired by people

Form Utility: When utility of a commodity increases due to the change in the shape or

structure of existing material, it is called as form utility. Here, the raw materials and semi finished goods are converted to produce

final consumer goods.For e.g. The utility increases when wood is transformed into furnitureSimilarly, the utility increases when clay is transformed into toys

[B] Give reasons ( 3 out of 6).1. The term Macro is derived from Greek word Makros which means large or

aggregate (total) Prot. K E Boulding defined Macro-Economics as follows: "Macro-Economics

deals not with individual quantities as such, but with the aggregates of these quantities, not with the individual incomes but with the national income, not with the individual prices but with the price level, not with individual output but with the national output

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SYJC (XII) Macro Economics is a study of aggregates covering the entire economy

such as total employment, national income, national output, total investment, total savings, total consumption, aggregate supply, aggregate demand etc.

It is aggregative economics. It does not involve study of individual units Thus, Macro economics gives an overall view of the economy.

2. The facility of overdraft is provided to current account holders. In this facility, the customer is allowed to withdraw more than what is

currently outstanding (i.e. account balance) in the account upto an agreed limit.

The withdrawal limit depends on the collateral security. NO separate overdraft account needs to be opened. Interest is charged on the amount withdrawn.

3. Tax is a compulsory payment made by people and various business organizations in the country

Tax revenue is collected from two types of taxes - direct taxes and indirect taxes

Direct tax is the tax on income of individuals and profit of business organizations.

Indirect tax is the tax on commodities or services which are manufactured or produced by business organizations.

Payment of tax is compulsory and non-payment of tax is a punishable of tence.

Thus, tax is collected on income as well as on the goods & services which are purchased with the income.

Hence, income collected from tax is the main source of government revenue.

4. According to Prof. Crowther, "Money is anything that is generally acceptable, as a means of exchange and which, at the same time, acts as a measure and store of value.

Money is being used as a medium of exchange. Money serves as a store of value.

The value of goods and services is also expressed in terms of money. Due to its general acceptability, it can be used to buy any goods and

services. Thus, it can be said that money has general purchasing power

5. Transfer income refers to the income received by a person without being a factor of production i.e. Without contributing to the process of production for that particular year.

Old age pension is received by a person post his retirement. It is generally paid by the government to people who were earlier in government service.

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SYJC (XII) The persons receiving old age pension do not contribute anything to the

production of the current year. Therefore, old age pension is transfer income.

6. Stock is the total quantity of goods that are available for sale at a particular point of time. It is the outcome of production.

Stock includes the current output and also the balance of the previous output (i.e. unsold goods).

Stock is the basis of supply. An ability of a seller to supply depends on the availability of stock.

Generally, stock Supply. However, a seller may not be willing to supply the entire quantity if he is not getting the right price for it.

Thus, at such times stock can exceed supply.Q.3 [A] Distinguish between (3 out of 6).

1. Utility V/S Usefulness

Sr. No.

Utility Usefulness

i. Utility is the want satisfying power of a commodity.

Usefulness is the benefit derived by a consumer by using a particular commodity.

ii. A commodity will have utility as long as it can satisfy wants, irrespective of the fact that it is good or bad, moral or immoral, desirable or undesirable.

A commodity is useful only when it is desirable or beneficial and does not harm anyone.

iii. Utility changes from person to person, from place to place etc.

Usefulness is absolute in nature i.e. it never changes.

iv. It expresses level of satisfaction. It indicates value in use of a commodity.

2. Expansion of Demand V/S Contraction of Demand

Sr. No.

Expansion of Demand Contraction of Demand

i. With a fall in price, when more of a commodity is bought, there is expansion or extension of demand, other things remaining constant.

With a rise in price, when less of a commodity is bought, there is contraction of demand, other things remaining constant.

ii. When there is expansion of demand, the equilibrium point of price and demand moves downward along the same demand curve.

When there is contraction of demand, the equilibrium point of price and demand moves upward along the same demand curve.

3. Relatively Elastic Demand V/S Relatively Inelastic Demand

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SYJC (XII)Sr. No.

Relative Elastic Demand Relatively Inelastic Demand

i. When the percentage change in demand for a commodity is greater than the percentage change in its price, it is called as a relatively elastic demand.

When the percentage change in demand for a commodity is les than the percentage change in its price, it is called as a relatively demand.

ii. It is written symbolically as Ed > 1. It is written symbolically as Ed < 1.iii. The demand curve is relatively

flatter.The demand curve is relatively steeper.

iv. Diagrammatically, it is down as : Diagrammatically, it is shown as:

4. Perfect Competition V/S Pure Competition

Sr. No.

Perfect Competition Pure Competition

i. Perfect competition refers to a market situation where there are large number of sellers selling homogeneous products at a single uniform price.

Pure competition refers to a market situation where there is no monopoly at all.

ii. Perfect competition has the following features :(a) Large number of sellers(b) Large number of buyers(c) Freedom of entry and exit(d) Homogeneous product(e) Perfect knowledge(f) Single or uniform price(g) Perfect mobility of factors of

production(h) Absence of transport cost(i) Absence of government

intervention

Pure competition is a part of perfect competition. It has certain conditions or features of perfect competition which includes:(a) Large number of sellers(b) Large number of buyers(c) Free entry and exit(d) Homogeneous product(e) Single price

iii It is an imaginary or hypothetical It is a real market structure.5


SYJC (XII)concept and unreal.

iv. Perfect competition is a much broader concept as compared to pure competition.

Pure competition is a part and parcel of perfect competition. Hence, pure competition is a narrow concept when compared to perfect competition.

5. GNP and GDP

Sr. No.

Gross National Product (GNP) Gross Domestic Product (GDP)

i. GNP refers to the gross market value of all final goods and services that are produced in an economy during a year. It includes net income from abroad.

GDP is the monetary value of all the finished goods and services produced within a country’s borders, during a period of one year.

ii. It is a board and comprehensive concept.

It is a narrow concept.

iii It is calculated as :GNP : C + I + G + (X – M) + (R – P)

It is calculated as :GDP = C + I + G + (X – M)

iv. GNP includes net income from abroad.

GDP excludes net income from abroad.

6. Commercial Bank V/S Central Bank

Sr. No.

Commercial Bank Central Bank

i. Commercial Bank functions as per the rules and regulations set by the Central Bank.

Central Bank is the apex monetary and banking authority and occupies a pivotal position in the banking structure of the country.

ii. The main aim of the Commercial Bank is to earn profit.

The main aim of the Central Bank is not to earn profit, but to promote public welfare.

iii It deals with the public. It does not deal with the public directly.

iv. There can be many commercial banks in a country.

There is only one Central Bank in a country.

v. It enjoys monopoly right to print and issue currency notes.

Commercial banks do not possess any such rights.

[B] Short Notes (2 out of 4).1. Explain Factors Determining Elasticity of Demand

Elasticity of demand refers to the responsiveness of quantity demanded to a change in factor/s affecting demand of that particular

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SYJC (XII)commodity. The factors which influence the elasticity of demand are as below:

(a) Habits: Habits influence elasticity of demand. The demand, which satisfies the habits, is normally inelastic in

nature For e.g. Even if the price of alcohol increases, the drunkard

would not mind paying a high price for his drink(b) Availability of substitutes:

The demand for commodities having larger number of substitutes such as cold drinks, chocolates, etc. is elastic in nature

Here, if the price of a commodity having many substitutes increases, the consumers may switch to ts cheaper substitutes

On the other hand, the demand for commodities having less substitutes such as salt, match box, etc. is inelastic.

Here, if the price of a commodity having fewer substitutes increases, the consumers have no option but to buy it.

(c) Nature of commodities: Elasticity of demand depends on the nature of commodities. Commodities can be either luxuries or necessities Necessary

goods such as salt, water, etc. are essential, and hence the demand for these goods is inelastic

The increase / decrease in price of necessary goods will have no impact on the quantity demanded i.e. the demand would remain constant, irrespective of the change in price.

On the other hand, the demand for luxurious goods such as expensive cars, diamonds etc. is elastic.

Here, the change in price will have an impact on the demand for commodities.

(d) Durability of goods: The demand for durable commodities such as tables, fans, etc. is

elastic in nature. Here, the consumer can delay his demand, if the price of a

durable commodity increases. On the other hand, the demand for less durable goods or

perishable goods such as flowers, fruits, etc. is inelastic in nature Even if the price of less durable/perishable commodity increases,

the consumers still cannot delay its demand. This is because, the commodity may get spoilt.

(e) Income level: Elasticity of demand depends on income level

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SYJC (XII) When income level is high, demand is normally inelastic This is because, even if the prices of commodities increase, a

consumer with high income level wouldn't mind paying for the commodities.

On the other hand, when income level is low, demand is elastic. Here, if the prices of commodities increase, a consumer with low

income level will prefer cutting down his wants(f) Complementary goods:

The demand for complementary goods such as car and petrol, ink and pen, etc. is inelastic in nature.

For e.g. The person possessing a car will have an inelastic demand for petrol.

(g) Alternative use of a commodity: (Composite goods) The demand for commodities having alternative uses is elastic in

nature. For e.g. Electricity can be used for a number of purposes like

heating, lighting, cooking, cooling, etc. Thus, the demand for electricity is elastic

(h) Price level: Both, high priced commodities (such as diamonds, BMW car, etc)

as well as low priced commodities (such as match box, water, salt, etc.) have inelastic demand.

Here, the quantity demanded is not dependent on the price levels of commodities.

(i) Proportion of income Spent: Elasticity of demand also depends on the proportion of income

spent on different goods If the consumers spend a large amount of income on

consumption of various goods and services, then the demand is said to be inelastic in nature

On the other hand, if they opt to spend a small amount of their income for certain goods, then the demand is said to be elastic in nature

2. What are the secondary functions of Commercial Banks? Secondary functions are alo known as non-banking functions. These are broadly classified into two types viz Agency functions /

Agency services and General functions / General utility services.

(a) Agency Functions / Agency Services: Commercial banks perform certain functions on behalf of their

customers The bank acts as agents while performing these functions for

their account holders. Some of these functions are as follows: (i) Dematerialization (Demat) Account:

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SYJC (XII) The bank provides demat services to its customers who

invests in shares. It is helpful for the customers as:i. It helps to keep a record of the shareholding of the

customers in electronic form; ondii. it facilitates the customer to buy and sell shares in the

market easily. The bank issues a statement of holding to the account

holder periodically for their information and records.(ii) Payments / Periodical Payments:

Banks also make payments on behalf of their customers such as payment of insurance premium, rent, electricity bill, telephone bill, taxes etc.

A nominal commission is charged for such services. This payment is made out of the balance outstanding in

the account of the customer. This service is popularly known as ECS or Electronic

Clearing Service(iii) Purchase and Sale of Securities:

Commercial banks buy and sell securities, debentures, shares as per the instructions and authority given by their customers

The banks also send a detailed account statement on a regular basis to the clients.

Moreover, bank provides them with various analysis and recommendation reports to aid them in decision making.

(iv) Acting as Trustee, Executor, Administrator or Attorney: As a trustee, the bank is the custodian of the customer's

fund. In case of death of a customer, the bank acts as the

executor of the customers will As an attorney, the bank signs the documents on behalf of

the customer Commission is normally charged for such services

(v) Collection of Money: Commercial banks accept standing instructions from their

customers regarding collection of money such as cheques, drafts, interest, dividend, bills, promissory notes, rents demand drafts etc. and credit them into their accounts.

Against this service, the bank charges a nominal commission from their customers.

(vi) E-banking (Electronic Banking): E-banking is a facility by which a customer can operate his

bank account through internet safely and with total confidentiality.

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SYJC (XII) He can transfer money from one place to another. He can also make payments of various bills like telephone

bills, electricity bills etc. E-banking helps businessmen, traders and merchants to

carryout their transactions smoothly. The customer can also obtain an up-to-date status of his

accounts and savings, via E-banking(vii) Other functions:

Commercial banks also work as an agent for any government or local authority or any other persons i.e. clearing and forwarding of goods

(b) General Functions General Utility Services:Commercial banks also perform certain General Functions. General Utility Services to the general public. These are as follows: Remittance of Funds/Transfer of Money: Commercial banks remit money from one place to another or

even from one country to another. Remittance of fund is done by telegraphic transfer, mail transfer,

demand draft etc.Underwriter/Underwriting: Commercial banks provide underwriting services. Here, the bank acts as a guarantor to companies in case of issue

of shares. If the shares issued by the company are not sold, the bank will

take the responsibility for the shares which are unsold The bank charges commission for underwriting the sharesReference/Status Report: Commercial banks also provide confidential reports on third

party about its financial standing, mode and frequency of payments etc.

ATM Facility, Credit Cards, Debit Cards: ATM is an electronic delivery system. By using this system,

customers can withdraw money at any hour of the day without going to the bank.

Credit card/Debit card is a plastic card issued by the bank to its customers.

Credit card facilitates the card holder to use it for purchase on credit or draw cash

Debit card on the other hand can be used for purchase of goods and services wherein the amount directly gets debited from the debit card holder's account

Letters of Credit: Letter of Credit helps the traders to buy goods on credit from

foreign countries.

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SYJC (XII) This document is issued by the customer's bank in one country

to the supplier's bank in another country to honour the drafts or the cheques of the person whose name is written on it.

This document basically serves the purpose of giving an assurance to the supplier that he will get the payment of the goods sent by him

The bank provides the Letter of Credit after considering the credit standing of the customer.

For the said service, the bank charges a certain percentage of the LC amount as commission.

Dealings in Foreign Exchange: Customers can convert their currency with some other country's

currency at commercial banks, as these banks deal in purchase and sale of foreign currency

Banks make profit in foreign exchange transactions. While giving this service, the banks are strictly required to

comply with the RBI Exchange Control RegulationsSafe Deposit Vault: Banks provide the "safe deposit vaults" or "lockers" facility to

the customers for safekeeping of their valuables like jewels, documents etc. (Lockers are small cabinets which ore fitted in steel racks and kept in strong rooms known as vaults.)

The customer during the banking hours can have access to these lockers.

The lockers can be assessed with keys, pin-numbers or some other security code/pass.

For this service, banks charge half yearly or annual fee (rent)Compilation of Statistics/Publishing Information: Some commercial banks publish information related to trade,

commerce and industry. Some banks also publish bulletins or journals on research giving

information about economic and commercial matters.3. Components of budget are explained as below:

(A) Budget Receipts: Budget Receipts refer to the budgeted estimated receipts of the

government, from all sources, during a given fiscal year. It includes 'revenue receipts' and 'capital receipts(1) Revenue Receipts:

Revenue receipts are those money receipts which neither create any liability nor lead to any reduction / depletion in government assets

They are regular and recurring in natureThe two types of revenue receipts viz. "Tax Revenue' and 'Non-Tax Revenue' are explained below(i) Tax Revenue:

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SYJC (XII) Tax revenue refers to the sum total of receipts from

taxes and other duties levied by the government. It is the main source of regular receipts of the

government. It is a compulsory payment made by the public and

the organization to the government without references to anything in return

The government further uses such receipts for public welfare.

Tax revenue is further classified into Direct Tax and 'indirect Tax:

(*) Direct Tax: Direct tax refers to that type of tax which is levied

on the 'income of individuals and 'profits of business organizations'

Direct tax is to be borne by the tax payer. Here, the tax bearer and tax payer is one and the

same Thus, it can be concluded that, direct tax is non-

transferable in nature.For e.g. Income tax, corporate tax, property tax, wealth tax, etc.(*) Indirect Tax: Indirect tax refers to that type of tax that is levied

on commodities (goods) and/or services that are manufactured by the business organizations.

These organizations transfer the burden of tax to the end customer

In other words, the tax payer will be the business organization and the tax bearer will be the end customer

Thus, it can be concluded that, indirect tax is transferable in nature

For e.g. Service tax, VAT (value added tax), custom duty, excise duty, etc

(ii) Non-Tax Revenue: It includes the government receipts from all sources

other than those of tax receipts. The various sources of non-tax revenue include the

following:(*) Interest and Dividend: It is an important source of non-tax revenue. The government receives interest on the loans

provided to the state governments, union territories and private enterprises

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SYJC (XII) It also receives dividends from its investment in

other companies(*) Fees, Licence Fee: Fees refer to the income generated from the

charges imposed by the government to provide various services(such as passport and visa fees, court fees, registration fees etc.) to the public.

By this way, the costs incurred for rendering the services are also met.

(*) Gifts and Grants: These refer to the monetary gifts and/or grants that

the government receives from other nations or from some international funds.

Also, individuals and/or companies sometimes voluntarily donate money to support the various initiatives of the government or during a calamity (such as flood, earthquake etc.)

(*) Fines and Penalties: These refer to that source of monetary income

which comes from the general public or organizations in the event of any violation of law and order system of the country.

For e.g. Fine for jumping a signal, wearing headphones while riding a bike etc. Penalty for not disclosing proper financial status, etc

(*) Escheats: It refers to the government's claim on any

unclaimed property in the event of demise of the property owner without a legal heir or will

(2) Capital Receipts: Capital receipts refer to those monetary receipts that

either create a liability or cause a reduction in the asset of the government

Capital receipts can be broadly classified into the following three groups:

(*) Borrowings: Borrowings refer to loans availed by the government from

general public, Reserve Bank India, international organizations like World Bank, International Monetary Fund), in order to fund its exceeding expenditure requirements, in lieu of interest payment

(*) Recovery of Loans: Government provides loans to state governments, union

territories, public sector undertakings, etc. to cope with their financial requirements.

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SYJC (XII) Recovery of loans takes place when the loan amount is

repaid by these entities to the government. Recovery of loans forms a capital receipt and leads to a

reduction in assets of the government.(*) Other receipts:- Other receipts involve:(*) Disinvestment: Disinvestment refers to the act of selling shares of

selected Public Sector Undertakings held by the government

When government sells such shares, it leads to transfer of ownership from the public sector units to the private sector units

Disinvestment forms a capital receipt and leads to a reduction in assets of the government.

(*) Small Savings: Small Savings refer to the funds raised from general

public in the form of post office deposits, national savings certificate, public provident fund, etc.

Such savings form a capital receipt and increase the liability of the government

(B) Budget Expenditure: Budget Expenditure refers to the estimated proposed

expenditure of the government for a given fiscal year. It includes the following segments:

(*) Plan Expenditure: It is the expenditure incurred for various plans programmes

initiated by the government. For e.g. Expenditure on irrigation, transport energy, agriculture

allied activities, general economic social services, communication, etc.

(*) Non-plan Expenditure: It is the expenditure that arises out of incidents that lie outside

the scope of plans made by the government. For e.g. Expenditure on relief and rescue operations during

natural calamities(*) Developmental Expenditure: It is the expenditure that is directly associated with the

socioeconomic development of the country For e.g. Expenditure on health, education, social welfare,

scientific research etc.(*) Non-developmental Expenditure:

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SYJC (XII) The expenditure made by the government that doesn't create

any productive asset is known as non developmental expenditure.

For e.g. Expenditure on administrative services, defence, etc.Budget expenditure can be further classified as:(1) Revenue Expenditure:

Revenue expenditure refers to that type of expenditure which neither creates any asset nor reduces the liability of the government and is recurring in nature.

It is incurred by the government for running of the various departments and providing services.

Revenue expenditure is met out of revenue receiptsIt includes expenditure on: General Services (includes defence services, collection of

taxes, judiciary and interest payments) Social and Community Services includes medical and

public health, education, labour and employment). Economic Services (includes agriculture, industries, trade,

transportation etc.) Grants (includes all grants extended to the store

government and Union territories.)(2) Capital Expenditure:

Capital expenditure refers to that type of expenditure which either creates an asset or reduces the liability of the government.

Most of the capital expenditure is developmental in nature Capital expenditure is met out of capital receiptsIt includes expenditure on: Expenditure on land and building, infrastructure projects

such as road construction, irrigation facility in rural areas, power generation etc

Machinery and investment Investment in stock (shares)Loans extended to state government & government companies

4. The law of equi-marginal utility, also known as law of maximum satisfaction, is an extension of the law of diminishing marginal utility. It explains consumer equilibrium, when the consumer spends his

income on various goods to maximize his satisfaction.Statement of Law: According to Dr. Alfred Marshall, "Other conditions being equal a

consumer will distribute his money income on different goods in such a way that the ratio of marginal utilities and their prices tend to be equal

The consumer's equilibrium can be presented with the help of the following formula:

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SYJC (XII)MU A

PA =

MUB

PB =

MUC

PC =MU M

Where1. MU A,MU B andMUC refer to marginal utility derived from

commodities A, B and C respectively2. PA , PB∧PCrefer to prices of commodities A, B and C respectively3. MU Mrefers to marginal utility of money.4. The law can be explained with the help of the following schedule:

Equi-marginal Utility Schedule

Units of commodit

y

MU of A Ratio=MU A

PA

MU of B Ratio =MUB

PB

MU of C Ratio =MUC

PC

1 24 24/2=12 30 30/3=10 32 32/4=82 20 20/2=10 24 24/3=8 24 24/4=63 16 16/2=8 18 18/3=6 16 16/4=44 12 12/2=6 12 12/3=4 8 8/4=25 08 8/2=4 6 6/3=2 0 0/4=0

Here, it is assumed that the consumer has limited income of 25 and he spends his income on three commodities, viz. A, B and C Prices of commodities A, B and C are assumed to be 2, 3 and 4 respectively. According to the law, the consumer would get maximum satisfaction

when:Hence a consumer would get maximum satisfaction whenMU A

PA =

MUB

PB =

MUC

PC =MU M

12/2 =18/3=24/3=66=6=6=6

Hence a consumer would get maximum satisfaction when MU A

PA =

MUB

PB

=MUC

PC =MU M= 6

Therefore, it is clear from the above schedule, that theconsumer in order to maximize his total utility will purchase 4units of commodity A, 3 units of commodity B and 2 units of commodity C

Commodity No of Units Total spend Total utilityA 4 4 x2=8 24+20+16+12=72B 3 3x3 =9 30+24+18=72C 2 2x4=8 32+24=56

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SYJC (XII)Total 25 200

Therefore, the consumer by spending 25, derives 200 units of total utility

Here, no other combination could render him more than 200units of total utility.

Thus, the law of EMU explains how a rational consumer could maximize his total satisfaction from the income provided by arranging his total expenditure.

4. Assumptions of the Law of Equi-Marginal Utility: Consumer's behaviour must be rational and should aim at attaining

maximum satisfaction. A consumer should know the Marginal Utility Schedule and prices of the

available commodities. A consumer should spend his entire income on purchasing the

available commodities. Income of consumer must be fixed. Respective commodity should be put to the same use only Utility is expressed cardinally There should be continuity in the consumption of the units. Respective units of respective commodity must be homogeneous. Marginal utility of money should be constant to the consumer

throughout the operation of law. Prices of the goods and services consumed by consumer should remain

unchanged The tastes and preferences of the consumer shouldn't change

throughout the operation of law.Q.4. Answer the following (3 out of 6).

1. Different types of Money. According to Prof. Crowther, "Money is anything that is generally

acceptable, as a means of exchange and which, at the same time, acts as a measure and store of value". The different types of Money are explained as follows:

(a) Commodity Money: In the initial stage of human development, different commodities such

as cattle, feathers, tusks, animal skin, salt, shells, etc. were used as money.

However, the use of such money depended upon various factors such as climatic conditions, location, culture, economic development etc.

For e.g. People in cold countries used skins and furs of animal as money whereas, people residing near seashore used shells as a medium of exchange.

However, commodity money had certain limitations. They are:i. Some commodities like cattle were not divisible into pieces and

hence were not suitable for small transactions

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SYJC (XII)ii. Some commodities such as fish were perishable and could not be

stored for long time.iii. There was difficulty of portability in case of non-divisible and heavy

goodsiv. Some commodities were not commonly accepted

To overcome these problems, commodity money was then replaced by Metallic money.

(b) Metallic Money: The introduction of metallic coins (made of gold, silver, bronze, copper,

nickel, iron, etc.) is considered as an important stage in the evolution of modern monetary system.

It helped to overcome the limitations of commodity money such as perishability, indivisibility, non-portability, heterogeneity, lack of uniformity etc.

Such money served as a good medium of exchange because of its continuous supply, high and stable price, scope for division etc

Initially, rulers of various kingdoms minted metallic coins but later on, it was minted by private bankers.

They used to affix their seal on these coins, certifying the weight and purity of the metal.

However, with time, the monopoly of issue of metallic coins was given to the government authorities.

Metallic coins can be classified into two categories viz Standard or Full bodied coins and Token coins.

Standard or Full Bodied Coins: Standard/Full bodied coins are those coins whose face value is equal to

their intrinsic value. Here, face value' indicates the exchange value and 'intrinsic value' indicates the value of the metal content present in the coin.

These coins were made out of standard metals like gold and silverToken Coins: Token coins are those coins whose face value is higher than their

intrinsic value. These coins are made out of cheaper metals like aluminium, nickel,

etc. In India, all coins in circulation are token coins.

(c) Paper Money or Paper Currency: There were many disadvantages of metallic money such as:

- Difficulty in transferring large sums of metallic money. Supply of gold and silver lagging far behind the demand for money.

- Loss of weight and value of coins due to wear and tear, etc. These disadvantages of metallic money gave rise to Paper Money Paper money refers to the currency notes made of paper. Paper money was introduced as a substitute for metallic money by

private bankers.18


SYJC (XII) Later, the issue of such money was monopolized by the Central Bank Paper currency consists of the notes issued by the Government or

Central Bank of the country. In India, one rupee currency notes and all coins are issued by the

Government of India whereas, all other currency notes are issued by the Reserve Bank of India.

Paper money can be classified into three types, namely, Representative Paper Money, Convertible Paper Money and Inconvertible Paper Money.

Representative Paper Money:- When the issuing authority keeps 100% reserves in the form of

precious metals (e.g. gold and silver) against the issue of currency notes, it is known as Representative Paper Money

Convertible Paper Money:- When the issuing authority promises to convert currency notes into

standard money on demand, it is known as convertible paper money.- Under this system, a fixed percentage of the value of the currency in

circulation is kept in the form of metallic reserves. Whereas, the remaining part of the currency is covered by government securities.

Inconvertible Paper Money:- This type of money cannot be converted into standard money on

demand.- It is not entirely backed by metallic reserves.- It is declared as legal tender by government order- Inconvertible paper money is also known as 'Fiat Money' Fiat means

government order or command of the sovereign- As per the law, it is obligatory to accept this money for the purchase of

goods and services or to discharge debts.- Today's Indian currency comes under this type

(d) Credit Money (Bank Money): Bank money refers to the bank deposits kept by the people with the

banks and which can be withdrawn as and when required This money can also be transferred to some other person byway of

cheque. Cheque by itself is not money, but it is a credit instrument which

transfers the deposits(e) Plastic Money:

Plastic money is in the form of plastic cards, i.e. debit and credit cards. It is a modern day concept whereby the use of these cards involves

only the transfer of funds in the bank account and not literally the cards

At present, plastic money is used on a large scale. However, it does not have general acceptability.

19


SYJC (XII)(f) Near Money:

It indicates those assets, which are not perfect medium of exchange even though they are valuable and can be easily converted.

They need to be converted into money first and then they can be used for purchasing other goods and services.

For e.g. Bills of exchange, equity shares of various companies, government securities etc.

2- The law of supply was introduced by Dr. Alfred Marshall, in his book 'Principles of Economics'; published in 1890

The law intends to explain the producer's behaviour with reference to change in price. It explains the functional relation between quantity supplied and price

2. Statement of Law: Law of Supply states that "Other things being constant, the higher the price of

the commodity, greater is the quantity supplied and lower the price of the commodity, smaller is the quantity supplied.

The law of supply can be explained with the help of the following schedule and diagram:

Supply Schedule:

Price of Oranges (Rs) per Kg Supply of Oranges (Kg)10 10020 20030 30040 40050 500

In the table, it can be seen that, when the price of oranges increases, its supply also increases

Whereas, when the price of oranges decreases, its supply also decreases Thus, it shows a direct relationship between price and quantity supplied.

In the diagram, X-axis represents the quantity supplied for oranges, whereas Y-axis represents its price.

20


SYJC (XII) SS is the supply curve which slopes upwards from left to right. The supply slope is positive as there is a direct relationship between price and

quantity supplied.Assumptions of the Law of Supply: The law of supply is conditional in nature. The law assumes that price alone changes the supply of commodities and all

the other factors affecting supply remain constant. These assumptions are as below:(a) Cost of production remains unchanged:

It is assumed that there is no change in the cost of production. If cost of production changes, profit of the seller changes which further

increases decreases the supply.(b) Weather Conditions Remain Unchanged:

The law assumes that the weather conditions remain the same. If there are natural calamities like earthquake, floods etc., then the

supply will decrease without decrease in price.(c) Government Policies Remain Constant:

It is assumed that government policies such as taxation policy, subsidies, industrial policies etc. remain constant.

If the government charges high rate of tax on certain commodities, then their supply will eventually decrease without a decrease in price

(d) No Change in Technique of Production: It is assumed that there is no change in the method /technique of

production Improvements in technology may increase the supply at the same

price.(e) Scale of Production Does Not Change:

The law assumes that the scale of production remains constant during the given period of time.

(f) No Change in Transport Cost: It is assumed that there is no change in the condition of transport

facilities and costs. Better transport facilities would increase the supply at the same price

(g) No Future Expectations: The law assumes that the sellers do not expect any change in the price

of the product in the near future, If the seller assumes that the prices may rise in the future, then he

would withhold the stock of goods even when the prices, at present, are high.

(h) No Changes in The Prices of Other Goods: If there is a change in the price of other goods, then the law of supply

will not operate because the producer may transfer the resources in the production of other commodities.

21


SYJC (XII) Hence, prices of other goods are assumed to remain constant 3- The qualitative measures are adopted by the Central Bank to control

the use of credit. They do not affect the entire economy. However, they help to divert

the flow of funds to their desirable and productive uses.3. The qualitative measures of credit control are as follows:

(a) Regulation of Margin Requirements: Before granting a loan to a customer, commercial bank asks for some

collateral security The security can be in the form of shares, securities, gold, silver,

precious metals, etc It must be noted that, the bank will never grant a loan equal to the

amount of collateral security. The bank usually prefers to keep a certain percentage of margin. This is basically kept by the bank to safeguard itself in case off all in

value of the collateral security or the default made by the customer while repayment of loan

For e.g.: If the market value of 10 grams of gold is 30,000and the margin requirement is 25%, then the loan value of 10grams of gold as a collateral security will be 22,500.

A change in the margin requirement changes the loan value of security During inflation, the margin requirement is increased, in order to

discourage the demand of loans. Whereas, during deflation, the margin requirement is decreased, in

order to encourage the demand for loans.Thus, it is a very effective tool for controlling speculative activities in the commodity, money and capital market.

(b) Issuing Directives: The Central Bank may issue directives to the commercial banks to

follow a particular course of action The directives may be in the form of oral or written statements or

declarations in the newspapers, appeals and warnings It may ask the commercial banks to be liberal or stringent in

accordance with the monetary policy as planned by the Central Bank This helps to maintain harmony in the monetary system.

(c) Credit Rationing: This method is usually applied during monetary shortage and declining

gold reserves. Under this method, the Central Bank puts a limit on loans and

advances in order to regulate the purpose for which credit is supplied by the commercial banks.

Thus, credit is rationed by limiting the amount available to each applicant

This is done so that the industries do not indulge in speculation and black marketing.

(d) Regulation of Consumer Credit:

22


SYJC (XII) The technique of Regulation of Consumer Credit is used to regulate the

terms and conditions under which consumer installment credit and hire purchase finance is provided by the banks

In both developed as well as developing countries, substantial part of the credit is used for purchasing consumer durable goods like cars, motorcycles, televisions, refrigerators, etc

Excess as well as insufficient demand for these items disturb their production

This forces the Central Bank to regulate consumer credit. This method is implemented by determining the minimum down

payment and maximum period of payment, le Maximum Equated Monthly Installments (EMI)

An increase in the minimum down payment and reduction of Equated Monthly installments (EMI) discourages the prospective buyers to demand for credit whereas, a lower down payment and more number of installments encourages them

(e) Direct Action: Direct action is usually adopted by the Central Bank against

commercial banks who voilates the directives issued by the Central Bank.

The following actions could be taken by the Central Bank against defaulting commercial banks:1. Refuse to provide rediscounting facilities to the commercial banks2. Restrain the commercial banks from granting loans against

collateral securities of certain commodities.3. Charge a penal rate of interest to banks who borrow from the

Central Bank beyond prescribed limit4. Threaten the commercial banks to be taken over by it, if it

continues to default.(f) Moral Suasion:

Moral Suasion is a psychological instrument of monetary policy used by the Central Bank to persuade the commercial banks in following a proper credit policy in the favour of the economy

The Executive Head (Governor) of the Central Bank calls a meeting of the heads of commercial banks and there he explains them the need of adopting a particular monetary policy under prevailing economic conditions and appeals them to co-operate with the Central Bank

In recent years, this method has become more effective as the commercial banks are apprehensive of stronger measures, that may be taken by the Central Bank of the credit policy is not followed.

(g) Publicity: The Central Bank may use publicity as an instrument of credit control

not only for influencing the credit policies of commercial banks, but also to educate and influence public opinion in the country.

The information published by the Central Bank makes it easy for commercial banks and the public at large to anticipate future changes in monetary and credit policies

23


SYJC (XII) Through these publications, the Central Bank provides a guideline to

commercial banks regarding their credit creation activities4. Monopoly is that form of market, where there is a single seller who has complete

control over the supply of the commodity and there are no close substitutes of the commodity.The various types of monopoly are as follows:(a) Natural Monopoly:

Natural monopoly arises due to availability of natural resources in some regions.

Monopoly may be acquired due to natural advantages such as good location, favourable climate, etc.

(b) Public Monopoly/Welfare Monopoly: When government manages, owns and controls the supply of goods or

services, it is called public monopoly. The intention of such type of monopoly is not to earn profits but to

maximize welfare and provide service. For e.g: Indian Railways

(c) Private monopoly: When private organizations manage, own and control the production

and supply of goods and services, it is known as private monopoly The main motto of such organizations is to earn profits. For e.g. Reliance group.

(d) Legal monopoly: Legal monopoly is said to occur when a seller enjoys monopoly position

due to the legal permission provided by the government. The government may grant certain permissions such as granting a

patent, trademark, copyright or any such right to the monopolist. Post giving such right, no other competitor can produce or sell the

commodity.(e) Simple monopoly:

Under simple monopoly, there is no price discrimination among the consumers.

Here, the firm charges uniform price from all its customers.(f) Discriminating monopoly:

Under this type of monopoly, a firm charges different prices from different customers for the same product or service.

For e.g. A lawyer may charge different fees to the people.(g) Voluntary Monopoly/Joint Monopoly:

When two or more major firms in the industry acquire monopoly through a voluntary agreement, it is called as voluntary/joint monopoly.

These firms generally form cartels through which they control the supply of the commodity and also the market price.

Mergers and amalgamations may also lead to voluntary monopoly.24


SYJC (XII)

5. Meaning of Monopolistic Competition: Monopolistic Competitive Market is a type of market structure where there

are large number of producers or sellers selling differentiated products which are close substitutes of each other

Here, the producers or sellers engage in non-price competition. Such type of market is very realistic in nature. It is a mix of both, monopoly and perfect competition i.e. it has features of

both the type of markets. Prof. E. H. Chamberlin coined this concept in his book, "Theory of

Monopolistic Competition" which was published in 1933. According to him, "Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes.

Features of Monopolistic Competition:(a) Fairly Large Number of Buyers:

Under Monopolistic competition, there are large number of buyers Here, no single buyer can influence the price of the commodity by

changing his individual demand.(b) Free Entry and Exit:

Under Monopolistic Competitive market, there is freedom of entry and exit

The new firms can voluntarily enter the market, if there is super normal profit

Similarly, they can even leave the market, if they find it difficult to survive

(c) Selling Cost: As the products in a monopolistic competitive market are close

substitutes of each other, they may possess certain differentiating feature/quality as compared to the other Products

In order to highlight the differentiating feature, the firm has to incur selling cost

Selling cost can be in the form of advertisements, exhibitions, radio, newspapers, magazines etc

The price of the product includes the cost of production as well as selling cost.

(d) Concept of 'Group': Chamberlin introduced the concept of group as the substitute for

industry concept As per this concept, the firms producing identical products are clubbed

together in one industry But, in Monopolistic competition, there is product differentiation. Hence, in a monopolistic competitive market, all the firms producing

close substitutes are taken together in a group conceptFor e.g. Group of firms producing cloth, paper, cement etc.

(e) Demand Curve of the Seller25


SYJC (XII) The demand curve faced by a monopolistic competitive firm is highly

price elastic and downward sloping The demand is elastic due to availability of close substitutes. Here, even a slight increase in the price of a product, would result in

decreased demand of that particular product.(f) Fairly Large Number of Sellers:

In a monopolistic competitive market, there are large number of sellers.

However, its not as large as the number of sellers in a perfectly competitive market.

Since the number of sellers is large, each seller has a limited control over the supply

But, he has complete control over his brand. This is due to patents, trade mark, copyrights etc., that the seller or producer possesses

Therefore, each producer enjoys an element of monopoly but they also have to face competition from sellers selling close substitutes of their products.

(g) Close Substitute: In Monopolistic competition, goods have close substitutes for each

other For e.g. Pepsi and Coca Cola

(h) Product Differentiation: Under Monopolistic competition, each product is different from other

product with respect to size, shape, colour, packing, weight, wrapper, after-sales-services etc.

The products though different, are close substitute to each other. For e.g. Liril soap is a close substitute to Godrej soap.

To increase the sales, the producers or sellers can adopt various techniques such as gifts, discount, advertisement, etc.

Here, it can be observed that the producers compete with each other on the basis of 'product differentiation' and not on the price differentiation'.

Product differentiation may take place in the form of brand name and trade mark.

Therefore, Monopolistic competition is also known as non-price competition.

6. Subjective Factors: Subjective factors are internal factors and they vary from individual to

individual. They are human factors which affect the consumption pattern of an

individual. According to Keynes, individual's nature compels them not to spend their

entire income. Hence, they tend to save a part ofFollowing are the motives which induce people to save and hence influence consumption levels(a) Motive of Improvement:

26


SYJC (XII) In order to enjoy a better standard of living and higher status, people

may prefer sacrificing the non-urgent or non-required consumption Thus, they may reduce the current consumption and save for the

future(b) Motive of Independence:

In order to avoid dependency in future, individual's tend to save during their present time, as they can be used for future consumption.

(c) Motive of Pride: Many people save money and leave substantial wealth for their

children People also save to donate for a cause. Such motives result in reduced present consumption.

(d) Motive of Foresight: Every individual has to save for their future needs such as child's

education, child's marriage, healthcare, old age provisions, etc. Thus, an individual sacrifices his/her present consumption for the

future.(e) Motive of Precaution:

Many individuals save money as a precaution against future unforeseen contingencies.

As a result, such people reduce their current consumption to save more for the future.

(f) Motive of Avarice: It is in relation to miserly people. Such people save money with an intention to save without any specific

reason Due to which, the present consumption expenditure is reduced

(g) Motive of Calculation: Many-a-times, people calculate the quantum of money that they will

require so as to fulfill their future financial needs. For this, they start investing certain amounts in shares, securities,

debentures or any other income earning asset. Thus, in order to invest in these assets, current consumption

expenditure is reduced.(h) Motive of Enterprise:

An intention to start a business affects consumption of the present. This is because, business requires capital and savings which would

contribute to capital formation.Thus, it leads to decrease in present consumption

Q.5. State with reasons whether you agree or disagree with the following statements.1. Yes I agree.

27


SYJC (XII) National income reters to the monetary value of goods and services produced

in a country, during a given period of time, generally a year. In India, the calculation of national income is undertaken by Central Statistical

Organisation (CSO) since 1955. There are various practical and theoretical difficulties in measurement of

national incomeThe following are certain difficulties in measurement of national incomei. There is no proper mechanism to collect and record data pertaining to

unorganized sector, small enterprises, service providers, animal husbandry etc.

ii. It is difficult to sometime distinguish between final product and intermediate product.

iii. It is difficult to estimate the production for self consumption.iv. Due to ignorance, small producers do not keep any account of their

production. Due to such various difficulties, national income estimates are not accurate in

India.2. Yes I agree with the above statement

Commercial banks also perform certain General Functions .General Utility Services to the general public. These are as follows: Remittance of Funds/Transfer of Money: Commercial banks remit money from one place to another or even from one

country to another. Remittance of fund is done by telegraphic transfer, mail transfer, demand

draft etc.Underwriter/Underwriting: Commercial banks provide underwriting services. Here, the bank acts as a guarantor to companies in case of issue of shares. If the shares issued by the company are not sold, the bank will take the

responsibility for the shares which are unsold The bank charges commission for underwriting the sharesReference/Status Report: Commercial banks also provide confidential reports on third party about its

financial standing, mode and frequency of payments etc.ATM Facility, Credit Cards, Debit Cards: ATM is an electronic delivery system. By using this system, customers can

withdraw money at any hour of the day without going to the bank. Credit card/Debit card is a plastic card issued by the bank to its customers. Credit card facilitates the card holder to use it for purchase on credit or draw

cash Debit card on the other hand can be used for purchase of goods and services

wherein the amount directly gets debited from the debit card holder's account

28


SYJC (XII)Letters of Credit: Letter of Credit helps the traders to buy goods on credit from foreign

countries. This document is issued by the customer's bank in one country to the

supplier's bank in another country to honour the drafts or the cheques of the person whose name is written on it.

This document basically serves the purpose of giving an assurance to the supplier that he will get the payment of the goods sent by him

The bank provides the Letter of Credit after considering the credit standing of the customer.

For the said service, the bank charges a certain percentage of the LC amount as commission.

Dealings in Foreign Exchange: Customers can convert their currency with some other country's currency at

commercial banks, as these banks deal in purchase and sale of foreign currency

Banks make profit in foreign exchange transactions. While giving this service, the banks are strictly required to comply with the

RBI Exchange Control RegulationsSafe Deposit Vault: Banks provide the "safe deposit vaults" or "lockers" facility to the customers

for safekeeping of their valuables like jewels, documents etc. (Lockers are small cabinets which ore fitted in steel racks and kept in strong rooms known as vaults.)

The customer during the banking hours can have access to these lockers. The lockers can be assessed with keys, pin-numbers or some other security

code/pass. For this service, banks charge half yearly or annual fee (rent)Compilation of Statistics/Publishing Information: Some commercial banks publish information related to trade, commerce and

industry. Some banks also publish bulletins or journals on research giving information

about economic and commercial matters.3. Yes, I agree with the above statement.

Monopoly refers to the form of a market where there supply of the commodity is under the control of a single seller or producer.

The product which is sold by the monopolist has no close substitute. There is no other seller producing or selling a close substitute to the commodity.

Therefore, the buyers have no other alternative and have to buy the product from the monopolist.

Since, the monopolist has complete control on the supply and there is no close substitute, he himself fixes the price. He is the price maker.

Further, the monopolist can charge different prices from different buyers. He may charge higher price from the rich and lower price from the poor.

4. No, I do not agree with the above statement. The central bank is not a profit making institution but works for the welfare of the society as a whole.

29


SYJC (XII) Central Bank is a universal monetary institution. It is a universal institution

because t is found in each and every country of the world. It is monetary institution because it performs functions which are related to

money and money supply. The central bank is a banker to the government. It is an apex monetary &

banking authority and occupies a pivotal position in the banking structure of the country.

It supervises and regulates the activities of the commercial banks. It is a banker's bank.

It is responsible for safeguarding the financial and economic stability of the country.

It controls and regulates the flow of money (liquidity) in the economy. According to Prof. Paul A. Samuelson, a central bank is "a bank of bankers. Its

duty is to control the monetary base and through the control of high powered money, to control the community's supply of money."

Thus, the central bank is not a profit making institution but works for the welfare of the society as a whole.

5. Yes I agree with the above statement Micro-Economics is derived from the Greek work "Mikros" which means 'small. Hence it-is a branch or approach of Economics which deals with the small or

individual units or parts of an economy like a consumer, a particular family, a firm etc.

According to Prof. K.E. Boulding, "Micro Economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities".

In simple terms, it is examination of the 'tree' and not the forest. Micro Economics involves study or examination of the behaviour of these

individual units with regards to allocation of limited resources.6. I disagree with the statement

National income refers to the monetary value of goods and services produced in a country, during a given period of time, generally a year.

Illegal income refers to income received from illegal activities like kidnapping, extortion, smuggling, gambling etc.

It actually fits in the term "monetary value of services produced in the country during the year."

However, since it is illegal income, there are no proper records of such transaction.

Further, it is very difficult to determine the illegal income generated in the country during the year.

Therefore, illegal income is not included in national income.Q.6. Answer in detail (2 out of 4).

1. Explain the types of Elasticity of Demand. Elasticity of demand refers to the responsiveness of quantity demanded to a

change in factor/s affecting demand of that particular commodity. There are three different types of elasticity of demand viz Price elasticity,

Income elasticity and Cross elasticity. They are explained as follows:(a) Price Elasticity of Demand:

30


SYJC (XII) It refers to the percentage change in quantity demanded of a

commodity due to percentage change in price only. Here, other factors such as income, population, tastes, habits, fashions,

price of substitute and complementary goods etc. are assumed to be constant.

According to Dr. Alfred Marshall, "Price elasticity of demand is a ratio of proportionate changes in the quantity demanded of a commodity to a given proportionate change in its price"

It is measured by the ratio:% change∈quantity demanded% change∈ price

Symbolically, Ed=ΔQ /QΔ P/ P

Where,Ed=Price Elasticity of demandQ =Original quantity demandedΔQ = Change in quantity demanded (New Quantity – Original Quantity)P= Original Price of the commodityΔ P=¿ Change in Price (New Price Original Price Price elasticity of demand can have five values viz. infinite, zero, unity,

greater than one and less than one. For e.g The demand for a commodity is 100 units, when its price is10.

When the price is increased to 15, its demand reduces to 75 units. Calculate the price elasticity.

Sol:

Ed=Δ QQΔ PP

= -25x100/5x10= 0.5 (negative sign to be avoided Here, the elasticity of demand is 'less than one'.

(b) Income Elasticity of Demand: It refers to the percentage change in quantity demanded of a

commodity due to percentage change in income. Here, other factors such as taste, habits, size of population, price of

substitute goods etc. are assumed to be constant. It is measured by the ratio : % change∈quantity demanded

% change∈income

Symbolically, E y=Δ QQΔ yy

Where,

31


SYJC (XII)Ey = Income elasticity of demandQ = Original quantity demandedY = Original incomeΔQ = Change in quantity demanded (New demand after change in income-Original demand)ΔY = Change in the income of the consumer (Revised income-Original income) For e.g. When the income of Mr. Raj increases from 20,000 to 50,000,

the demand for commodities increases from 15 kg to 25 kg. Calculate the income elasticity of demand.

Sol:E y=Δ QQΔ yy

=10x 15/30000x20000=0.44 Mr. Raj has responded favorably to the demand due to the increase in

his income. income elasticity of demand is positive when quantity demanded

increases with increase in income. This happens in case of normal goods.

Income elasticity is negative when quantity demanded decreases with increase in income This happens in case of inferior goods (ie. Giffen goods).

income elasticity of demand is zero when demand does not change with an increase in income.

(c) Cross Elasticity of Demand: It refers to a percentage change in quantity demanded of one

commodity, due to percentage change in the price of are lated commodity

Such type of elasticity is found in case ofSubstitute goodsPepsi and Coke, Taj Mahal tea and society tea, munch and perk, sundaram notebook and classmate notebook etc. are examples of substitute goods. Here, if the price of one commodity increases, it would result not only in the decrease in demand of that particular commodity but would also increase the demand of the substitute commodityWhen the two goods are substitutes of each other, then the cross elasticity of demand between them will be greater than zeroComplementary goodscar and petrol, pen and refil, mobile phone and sim card, etc. are examples of complementary goods. Here, if the price of one product increases, the demand of the other (complement) product will decrease

32


SYJC (XII)When the two goods are complements of each other, then the cross elasticity of demand between them will be less than zero.Non-related goods (These are the goods that have a zero cross elasticity of demand. Changes in the price of one good will have no effect on the demand for an independent good. Thus, such types of goods are neither complements nor substitutes For e.g. A person's de for cold drink is usually independent of his or her demand for bread, since they are two unrelated types of goods. Cross elasticity of demand is measured by the ratio:Percentage Change in the demand of a commodityPercentage Change in the price of related commodity

Symbolically, Ec=(Δ Qof X )/Q(Δ P of Y )/P

WhereEc= Cross elasticity of demandX = Original commodityY =Related commodity .it can be a complementary or a substitute product)Q= Original quantity demanded of XP =Original price of Y∆Q= Change in quantity demanded of commodity X (New demand after change in price of related commodity Original demand)∆P=Change in price of related commodity i.e. Y (New price Original price) For e.g. When price of Munch is 10, the demand for Perk is 100pieces.

When the price of Munch is decreased to 7, the demand for Perk is 80 pieces. Calculate the cross elasticity of demand.

Sol: ( ΔQ of perk )/Q(Δ P of Munch)/ P

= -20x 100/(-3x10)=0.66

As the cross elasticity of demand is greater than zero, the two goods viz. munch and perk are substitutes of each other

When the price of refill is 2, the demand for pens is 100units. When the price of refill is increased to 3, the demand of pen falls to 50 units. Calculate the cross elasticity of demand.

Sol: (ΔQ of Pen)/Q(Δ P of reffil)/ P

As the cross elasticity of demand is less than zero, the two goods viz. pen and refill are complements of each other

2. State and explain the Law of Demand. The law of demand was given by Dr. Alfred Marshall.

33


SYJC (XII) The law intends to explain the consumer behaviour with reference to change

in price It also explains the inverse relationship between price and demand It describes the functional relation between demand and price. It can be expressed as D= f (P) i.e. demand is a function of price.Statement of Law: Law of Demand states that "Other things being constant, the higher the price

of a commodity, smaller is the quantity demanded and lower the price of the commodity er is the quantity demanded"

The law of demand can be explained with the help of the following schedule and diagram:

Demand Schedule:

Price of Apples (per kg) (rs) Demand for aples (kg)40 130 220 310 4

In the table, it can be seen that, when the price of apple decreases, its demand increases.

Whereas, when the price of apple increases, its demand decreases Thus, it shows an inverse relationship between price and demand.Demand Curve

In the diagram, X-axis represents the quantity demanded for apples, whereas Y-axis represents its price.

DD is the demand curve which slopes downwards from left to right The demand slope is negative as there is an inverse relationship between

price and demandQuestion -What are the assumptions of the Law of Demand? Marshall's Law of Demand: "Other things being constant, the higher the

price of commodity, smaller is the quantity demanded and lower the price of the commodity, larger is the quantity demanded". The law intends to explain

34


SYJC (XII)the inverse relationship between price and demand. The law of demand is based on the following assumptions:(a) Tastes and habits remain Constant:

The law assumes that the taste, habit and preference for a commodity remains unchanged and also do not move in favour of new products.

(b) Prices of Substitute and complementary goods remain constant: The prices of substitute and complementary goods are assumed to

be constant. If their price falls in greater proportion, consumer's demand for the

substitute will increase and that of the said commodity will decrease

(c) Size and composition of population remains constant: The law of demand assumes that the size and composition of

population remains constant If there is a change in the size, the law of demand would not hold

true as the demand for all goods and services would rise/fall accordingly.

(d) Government Policy remains constant: Taxation and fiscal policy of the government should not Change A change in policy may cause sudden change in consumers

disposable income. This would, in turn, result in change in demand(e) Income of the consumer remains constant:

The law of demand assumes that an individual's income remains constant

If there is a change in the income, the law will not operate This is because, if income increases, consumer's purchasing power

increases and hence demand may increase even if there is a rise in the price.

(f) No change in expectation regarding future prices: It is assumed that there is no change in the expectations regarding

future change in prices of a commodity. If consumers expect that the price of a commodity will rise or fall in

future, they will change their present demand even though the price is constant.

3. What is the meaning of 'Land' in economics? Also explain its characteristics. In economics, land comprises all naturally occurring resources whose supply

is fixed and which can be used as a factor of production. It is considered to be the "original and inexhaustible gift of nature.

35


SYJC (XII) According to Dr. Alfred Marshall, "By land we surface mean not merely land

in the strict sense of the word but the whole of surface materials and forces which nature gives freely for men's aid in land, water, air, light and surface heat"

Thus according to Dr. Alfred Marshall, land includes all the natural resources that are available:On the surface of earth. For e.g. water, river, forest, agricultural land, mountains etc.Below the surface of earth. For e.g. coal, gold, silver etc.Above the surface of earth. For e.g. air, sunlight, heat etc.

The characteristics of land are as follows: (a) Free gift of nature:

Land is not created by mankind. It bears no cost of production It is, on the other hand, a material resource which is provided by

nature free of cost(b) Passive Factor of production:

Land is a passive factor of production, i.e. it cannot produce anything by itself.

It becomes productive only when the other factors of production such as labour, capital etc. are used with it

(c) Perfectly Inelastic Supply: The supply of land is perfectly inelastic in nature i.e. the total volume

of land cannot be increased or decreased. In other words, the availability of land at any time is fixed. It should be noted that, the utility of land can be increased by applying

labour and capital.(d) No geographical mobility:

Land has no geographical mobility i.e. it can't move from one place to another

It is the least mobile factor of production. But, it should be noted that, land has occupational mobility ie. it can be put into some other alternative use

For e.g. Farming area can be used to build residential plots.(e) Permanent and Indestructible factor:

Land is an indestructible factor of production i.e. it can never be destroyed completely.

However, the fertility of land may reduce over a long period of time(f) Site Value:

The value of land depends on its location.

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SYJC (XII) A land situated near an urban area will have higher site value as

compared to the land located near a rural area. For e.g. A plot of land near the sea shore in Mumbai will have higher

site value as compared to the plot located far away from the sea(g) Heterogeneous factor:

All lands differ from each other in terms of their fertility One cannot expect to get same quantity or quality of production from

different pieces of lands. Also, there are different grades in land. Due to the grading factor, the superior land will command a higher

price in the form of rent as compared to inferior one Thus, it is rightly said that, land is a heterogeneous factor.

(h) Diminishing marginal returns: Land is subject to the law of diminishing marginal returns. As more and more inputs (ike labour, capital, etc) are employed on the

same piece of land, the total output increases However, the output increases at a diminishing rate. In other words, the productivity of land decreases /diminishes with

time.(i) Derived demand:

The demand for land is derived i.e. indirect This is because; land cannot satisfy a want directly. Its demand depends on the demand of other goods and services. For e.g. The demand for agricultural land is derived from the demand

for agricultural products4. Question -What is meant by Perfect Competition? State its features

Meaning of Perfect Competition: Perfect competition refers to a market situation where there are large number

of sellers selling homogeneous products at a single uniform price In such type of market, the number of buyers and sellers is so large that, a

single buyer/seller can't influence the price of a commodity. Here, the price of the commodity is determined by the forces of demand and

supply. It is an imaginary or hypothetical concept and unreal According to Joan Robinson, "Perfect Competition prevails when the

demand for the output of each producer is perfectly elastic." The definition indicates that the number of sellers is large Hence, a single

seller's output is a negligible small portion of the total output of the commodity.

Features of Perfect Competition:37


SYJC (XII)The various features of Perfect Competition are as follows:(a) Perfect Mobility of Factors of Production:

In a perfectly competitive market, the factors of production are perfectly mobile i.e. they are free to move from one place to another and from one occupation to another.

This implies an optimum use of factors which can be easily available to the producers.

(b) Free Entry and Exit: Under such type of market, there are no entry barriers Hence, a new firm can easily enter the market without any restrictions Similarly, any firm can exit the market.

(c) Perfect Knowledge: The buyers as well as sellers have perfect knowledge about the market

conditions Because of this knowledge, no seller will charge a higher price from the

buyer or bear a loss himself by selling the commodity at a lower price.(d) Constant Transport Cost:

It is assumed that all the firms under perfect competition are close to each other and are equidistant from the place of production

Thus, the transport cost will be constant for all the firms. Here, it can be observed that, no firm is affected by the transport costs

and hence uniform price prevails.(e) Homogeneous Product:

In a perfectly competitive market, all the firms sell homogeneous products

These products are identical in all aspects such as size, weight, colour, shape, quality etc.

Here, it can be concluded that the commodities have perfect substitutes for each other.

(f) No Government Intervention: In a perfectly competitive market, Laissez faire policy prevails. This means that there is no government intervention in respect to

transportation, price determination, production of goods etc(g) Large Number of Sellers:

Under perfect competition, there are large number of potential sellers. Their number is so large that a single seller cannot influence the

market price because each seller sells a small fraction of total market supply

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SYJC (XII) Here, each seller is a price taker and not a price maker. This is

because, he has to accept the price which is determined on the basis of market demand and market supply of the commodity.

(h) Large Number of buyers: Under perfect competition, there are many buyers in the market The number of buyers is so large that a single buyer cannot influence

the price of a commodity because individual demand is a small fraction of total market demand.

(i) Single or Uniform Price: In a perfectly competitive market, all the buyers and sellers are price

takers. Here, a single or uniform price prevails This uniform price is determined by the forces of demand and supply.

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