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PRINCIPLES OF ECONOMICS
Q1:- Explain the subject matter of economics? Or Explain briefly various concepts of economics? Ans: There is no single definition of economics. Different economists at different times defined it in different ways. We may broadly classify them into following three headings: 1. Wealth definition:This concept was given by Adam Smith. Adam Smith who is also known as father of economics published his famous book entitled An enquiry in to the nature and causes of wealth of nations in 1776, where he defined economics as, the great object of political economy of every country is to increase the riches and power of that country. In other words economics is the science of wealth. Besides Adam Smith other classic economists like J.B. Say, J S Mill, and Walker etc. too regarded economics as science of wealth. Criticism: Distribution of wealth had been ignored. Religious sentiments of people had been ignored. 2 Welfare definition:this concept was propounded by Prof. Marshall, according to him, Economics is the study of mankind in the ordinary business of his life thus it is on one side the study of wealth and on the other and more important side the study of man. He said that wealth is only a means and the end being the welfare of man. But in the later stage he totally ignored the services side, as he said that welfare can only be gained from the things which are made of some material. More precisely his definition is material welfare definition. He has been criticized on the ground that he had ignored services. 3 Scarcity Definition:As per this definition, Economics is a science of scarcity. This definition was propounded by Prof. Robbins. He not only criticized Marshalls definition but also Adam smith and his followers. He gave a new definition of economics in 1931 which is stated as, Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Q2:- Define economic problem? What are the reasons which give rise to the economic problem? Ans: - Economic problem is essentially a problem arising from the necessity of choice; choice of manner in which limited resources with the alternative uses are disposed off. It is the problem of husbandry of resources. Economic problem arises because of the following reasons: Unlimited wants. Limited resources. Limited resources with alternative uses.
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Page | 2 Different priorities.

Q3:- Is economics a science or an art? Ans: - Economics is both a science and an art. Art is the practical side of science. Every art is backed by scientific knowledge and every science manifests itself through art. Art enables us to realize out objectives. Therefore, art and science are not competitive but complementary. Q4:- Explain whether economics is a positive or a normative science? Ans: - Economics is basically a social science. In economics we study the economic aspect of mans life. However science is of two types: (a) Positive Science (b) Normative Science Positive Science: - A positive science studies the facts as they are and not as they ought to be. It is lighter giving. Positive science makes a critical analysis of the existing facts and draws conclusions without bothering as to what should be or what should not be. In other words positive science is the study of cause and effect relationship. Normative Science: - It studies the facts not as they are but as they ought to be, it is not neutral between ends. It lays down certain norms and objectives and efforts are made to attain these objectives. Marshall and his pupil Pigou assigned to economics the role of normative science. Economics is a social science, as such; it can not ignore the norms- the betterment of mankind. As per Frazer Economics is concerned with value theory or equilibrium analysis or resource allocation.. Q5:- What do you mean by goods? Discuss various kinds of goods? Ans: - according to Dr. Marshall Goods are desirable things. All things that satisfy human wants are called goods in economics these are mainly of the following types: Material and non material goods:- material goods can be explained as those which are made of some material, that is those things which can be touched and seen. In other words all those things are called goods which are in physical form. Non material goods are those goods which can neither be seen nor touched but can simply be felt. These are more precisely called as services. These are not in definite form such as the ability of a teacher, goodwill of a business etc. Economic and non-economic goods:- economic goods are those goods for which we need to pay some price, only then we can acquire some units of it. On the other hand non economic goods are those for which we need not to pay any price to acquire some units of it like air, oxygen, sunlight. Consumer and Producer Goods:- consumer goods are those goods which are directly used for the satisfaction of wants. The utility of consumer goods are destroyed immediately after their use if they are not durable, on the other hand producer goods are those goods which are used for further production like machines and tools and seeds. Q6:- Define utility, what are the characteristics and types of utility?

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Page | 3 Ans:- Utility can be defined as want satisfying power of a good. The power or capacity of a good to satisfy human wants is called utility. So we can say that power becomes the cause and the satisfaction is the result. We want different goods at different intervals of time because our wants are diverse. Characteristics of Utility: Utility is subjective: - subjective means something which differs from person to person. When same thing is having more utility for one person and less utility for other. A person who is busy with playing foot ball, water is having more utility for him than a person who is at rest. Utility is different from pleasure:- More often utility is confused with pleasure. Goods are used at times that do not have any pleasure but still are used, e.g. medicine is used by patients even if it does not provide any pleasure. Utility has no social consideration: - Utility means the benefit that a consumer gets after using a commodity. It has no social consideration. Alcohol is used by the consumer because he draws a utility out of it, it is in its essence having deleterious affect on the society. Types of Utility:1. Form utility: - when the shape of a thing is changed, it creates its utility. When the soil is converted in to bricks its form is changed and utility is created, it is called form utility. 2. Place utility: - when we change the place of certain goods, utility is created, suppose we bring the forest wood to cities it is used most efficiently, hence utility is created. This utility is called place utility. In other words when goods are transported from the place of abundance to the place of scarcity, place utility is created. 3. Time utility: - when same good is having more utility at one time than at other time, it is called time utility. Woollen clothes has hardly any utility in the summers and are having great utility in winters in the same way ice creams are having less utility in winter but more utility in summer. Price: - value of a good in terms of money is called price. Price of different goods can go up or down simultaneously, but value can not as it is expressed in relative terms. Value: - value of a thing is the amount of other good which the first can command. In economics value means value in exchange. According to Marshall, the value that is the exchange value is the amount of the second thing which can be got there and then in exchange for the first. Thus, the term value is relative and expresses the relationship between two things at a particular time and place. Any thing is having value if the following three attributes are found: Utility. Any thing which possesses value must have utility. Utility means want satisfying power of a good. Scarcity. Scarcity is an essential feature of a good before it can have value. In other words its supply must be less than demand. Water is available every where that is why it is having no price or very little price.

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Page | 4 Transferability. It is one of the distinct features of a thing to have value. It is also called marketability. It means to change the ownership of a thing. Those who sell their goods must feel less quantity of the same, other wise it is not having value in economics e.g. honesty or good will of a business. Wealth: - All goods which have value are called wealth in economics. According to Lord Keynes, All those goods which have value and the capacity to satisfy human wants are called wealth in Economics. In other words goods having utility, scarcity and transferability are called wealth. Wealth which is in the possession of an individual is called private or individual wealth. Wealth which is possessed by the society is called social wealth like public parks. When wealth is possessed by the whole country it is called national wealth like petroleum, iron, minerals etc. when the whole countries of the world are having the right over a certain wealth it is called international wealth like IMF, IBRD etc. Capital: - capital is that part of wealth which is used for further production. If a person is having a house but he is not residing in it but uses it for earning rent, it is called capital. On other words capital is called Produced means of production. Money used as capital is called money capital or financial capital in economics.

Q: - What do you understand by consumption, gives various types of consumption? Ans:- Every process of production is backed by consumption, consumption as per Dr. Marshall is sole end and purpose of all production. Consumption can best be defined as destruction of utility provided it serves your purpose and purpose being the satisfaction of the consumer. Mere destruction of utility will not mean consumption. According to Ely, Consumption in its broadest sense means the use of economic goods and personal service in the satisfaction of human wants. Kinds of consumption:(a): Slow and Fast Consumption:- Slow consumption can be defined as the consumption where utility gets destroyed over a period of time e.g. pen, book, chair etc. on the other hand when the utility is destroyed at a point of time it is called as quick consumption e.g. fruits, food etc. (b): Direct and indirect consumption:- when goods are directly consumed for the satisfaction of current wants. On the other hand when goods are consumed now but the satisfaction is attained in future, it is called future consumption. In the former case it is also called as current consumption and in the later case it is called postponed consumption. (c): Wasteful Consumption:there are generally two opinions about the wasteful consumption, while on the one hand some economists said that it is consumption while as others said that it is not consumption. If a newly constructed house caught fire, its utility gets destroyed, some are in favour of calling it be consumption while others do not. Consumption has assumed a great importance in the theory of economics. We study consumption even before production. It is said that necessity is the mother of

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Page | 5 invention. That is why every consumer is treated like a sovereign by the producers. The line of production is always determined by the tastes of the consumers. Q: - Explain Wants, what are the types of wants? Also mention its characteristics? Ans: - According to Penson, All those desires for the satisfaction of which a man has the means and the willingness to use those means for satisfaction are called wants. Thus wants can be simply explained as the desires backed by the purchasing power. There are generally three types of wants taking in to consideration the income of the consumers; these are Necessities, Comforts, and Luxuries. Necessities: - Those things the consumption of which is necessary for each and every consumer irrespective of the level of income. These are generally food, shelter and clothing; these are the things which are required by the population as a whole. There is no doubt that if these are not used by the consumers, will result in the loss of efficiency of the same. Comforts: - comforts are those articles of consumption, the use of which does not increase our efficiency but it simply adds to our comforts and welfare. These are generally perceived when the necessities are fulfilled. As the income of the consumer is above the amount required for the fulfilment of necessaries, the remaining amount can be spent on these goods. Luxuries: - these are those goods which do not increase our welfare but are having more demonstration effect. These articles include costly cars, gold ornaments, diamond etc. according to Sydney Chapman, luxuries are things which when consumed do not appreciably add so and may detract from a persons efficiency. These include the articles like wine, opium, dancing etc. In short these goods are used for self display.

Q:- Explain law of Equi-Marginal ? Ans:- This law is very important law of consumption. The law of diminishing Marginal Utility is applicable only when the consumer is utilizing only one commodity or is having only one want. But normally we find that individuals have more than one want to satisfy with a little income. This law gives us an idea of how the consumer allocates his limited resources on the purchase of different commodities in the market. This law is known by different names such as; law of substitution, law of indifference, and law of maximum satisfaction. The law of equi-margnal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from last rupee spent on each good is equal. Lets illustrate the law of equi-marginal with the help of a table given below:
Units 1 2 3 4 5 Marginal Utility of Good X and Y (table1) MUx (utils) MUy (utils) 20 24 18 21 16 18 14 15 12 9

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6 10 3

Let the price of good X be Rs 2 and of good Y be Rs 3 and the person having Rs 24 as his income. Reconstructing the above table by dividing marginal utilities of X by Rs 2 and MUy by Rs3, we get the following table: Marginal Utility of Money Expenditure table (2) Units MUx/Px MUy/Py 1 10 8 2 9 7 3 8 6 4 7 5 5 6 3 6 5 1 By looking at table 2 it will become clear MUx/Px is equal to 5 utils when the consumer purchases 6 units of good X and MUy/Py is equal to 5 utils when he buys 4 units of good Y. Therefore consumer will be in equilibrium spending 2x6 + 3x4= 24 on them. At this combination all the conditions are fulfilled i.e. he is getting maximum satisfaction of 71 utils, using both the goods simultaneously, and is indifferent about other combinations which are available. Q: - Define consumer surplus? Explain it with suitable example? Ans:- The law of consumer surplus is one of the most important contributions of Dr. Marshall to economic theory. According to him, the excess of the price which a consumer would be willing to pay rather than to go with out the thing over that which he actually does pay, is the economic measure of consumer surplus. In other words the difference between potential payment and actual payment is called the consumer surplus or it may be defined as; price which a consumer is willing to pay price what he actually pays. A consumer continues to use the good as soon as he gets more utility from the consumption of the good and will stop consumption at a point where the price is equal to the utility he draws. Market price is always somewhat fixed and constant while utility drawn is more in the first instance and starts falling there after as per law of diminishing marginal utility. Lets give a table Commodities 1 2 3 4 Total Marginal Utility 60 40 20 10 MU=130 Market Price 10 10 10 10 P=40 Consumer Surplus 60-10=50 40-10=30 20-10=10 10-10=0 CS=90

The consumer is willing to pay Rs 60 for the first unit but he actually pays Rs 10, in this case consumer surplus is 50 utils and so on.

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When the consumer uses the first unit he is ready to pay Rs 60, but he actually pays only Rs10 thus gets a surplus utility of 50 utils and so on, this excess utility is called consumers surplus.

PRODUCTION
Q: - What do you mean by production? There are mainly 4 factors of production, comment? Ans:- As consumption means destruction of utility, production means creation of utility. So far as the natural science is concerned, matter in this world is fixed. It can neither be created nor can it be destroyed, what can be done simply is that we can arrange appropriate quantities of the matter in order to create the utility out of the given matter, in other words we change the form and make it more useful. It is thus clear that production consists in crating utility in goods for the satisfaction of human wants. This utility may be created by either changing the form, by changing the place or by changing the time. According to Fairchild, production consists of creation of utility in wealth. There is long debate on the number of factors of production. If we take separately each and every factor in to consideration then there are thousands of

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Page | 8 factors of production. According to Dr. Benham, anything which helps in the process of production is a factor of production. According to J S Mill, Land and Labour are the main two factors of productio n Finally there was a consensus that there are only four factors of production these are; Land, Labour, Capital, Entrepreneur. Q: - What do you mean by Land? Give its characteristics? Ans:- All those things which are bestowed by the God or nature upon the human beings as free gifts of nature are included in land. It does mean only the mere surface of soil. According to Dr. Marshall, by land is meant not merely land in the strict sense of the word, but whole of the materials and forces which nature gives freely for mans aid in land and water, in air and light and heat. Thus we see that minerals, air, light, sunshine, water, soil etc. are all included in land which is both under and above the earth. Characteristics of land:Land has been described as the most important factor of production. Without land there would be no concept of other factors of production. Land is the only source of food and shelter. However there are certain other characteristics of land which are as under: Land is free gift of nature, it is fixed and unchangeable. We can not increase the supply of land; it is independent of needs of man. Land is the passive factor of production, it does not play direct role in production. Land is the original factor of production. Its qualities can not be destroyed. Economic development of a country depends up on its land and natural resources. Q: - What do you mean by intensive and extensive cultivation? Ans: - Intensive cultivation is that method of production in which same land is used for more and more production. This type of production is feasible for those countries where there is scarcity of land like Brittan, Denmark, and Germany etc. In these countries there is no scarcity of other factors. Newer methods of cultivation are used like new technology and high yielding varieties are used. On the other hand Extensive cultivation is that cultivation where in order to increase the production new and new land is taken in to cultivation. Countries like, USA, Canada, Australia etc. in these countries vast areas of land are lying uncultivated and land is cheaply available.

Q:-

What is labour? Also comment on its role in production?

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Page | 9 Ans:- labour is any activity done mentally or physically, but is done not for the sake of pleasure but with a view to earning money for the satisfaction of material wants. According to Dr. Marshall, By labour is meant the economic work of man whether with hand or head. Labour like land is treated as the basic factor of production. Land and labour when combined in a right proportion produce wealth. Labour is treated as the most active factor of production. The various types of labour are:1. Mental and Manual Labour:- Mental labour can be explained as the labour which is done by professionals like Teachers, Lawyers, Doctors etc. On the other hand physical labour is the labour which is done by ordinary men. 2. Skilled and Unskilled Labour:- skilled labour is done by skilful persons while the rest of the labour is unskilled labour, it needs no training and can be done with out spending too much time on acquiring techniques of production. 3. Direct and Indirect Labour:- The labour which is done for producing goods which satisfy directly human wants is called direct labour while as labour which creates utility for people is called indirect labour like banking and insurance services. Characteristics of Labour: Labour cannot be accumulated like land or capital. It must be rendered now and neither can nor is saved for tomorrow. Labour can not be separated from the labourer i.e. why it is taken as most immobile factor of production. Labour can nor be increased with the increase in the demand for labour. Labour can be increased by migration or immigration. Labourer is a means of production as well as an end because he is the consumer too. Whatever is produced is also consumed by the labour force. It is regarded as the most active factor of production compared to land or capital. Q: - Explain Malthusian theory of population? Give its various features? Ans:- T R Malthus was an English clergyman. He made a scientific study in to the problem of the quantitative aspect of population and formulated the theory of population in the year 1798 published in his book An essay on population he was an expert in Maths History and polity. He made a detailed study of Europe and USA. The following are the main conclusions of his theory: 1. Contact between men and women are natural, as a result population increases in geometric progression and that of food supply increases in arithmetic progression. 2. The growth of population can be checked by two ways either by positive checks or preventive checks. Preventive checks are those which are practised by man himself while as positive checks are those which are practised by the nature. 3. Man should make use of preventive checks otherwise he has to bear the pain of positive checks.

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P a g e | 10 4. If population growth remains unchecked then population will double after every 25 years. 5. The law of diminishing returns operates on land hence food growth slow. This upsets the balance population and food supply giving rise to hue and cry. Criticism: The view of Malthus regarding arithmetic progression of food is invalid as he ignores new technology. His contention of population doubles in 25 years is also invalid He was severely criticized on the grounds that man does not come only with a mouth but with two hands also. He describes poverty in his own way and held the increasing population as mainly responsible for poverty. Q: - Define capital? Explain its characteristics and role in the production? Ans:- All that which is possessed by a man and helps him in the process of production is called capital. In other words we can explain capital as produced means of production. In ordinary language capital means riches or money. But in economics it means money capital or financial capital. Hence all machinery, tools, equipments and all the things which help us in further production is called capital. According to Dr. Marshall, Capital consists of those kinds of wealth, other than the free gifts of nature, which yield income. According to Adam Smith, Capital is that part of his stock from which he expects to derive an income. Characteristics of Capital: 1. Capital is the result of accumulation; it is the result of saving of man. 2. Value of capital can be depreciated or appreciated over time, if as a result of the use of capital it gets depreciated. 3. Capital has been explained as the most mobile. 4. It is passive factor of production, but it results in the massive production. 5. It is the most flexible factor of production as it can be altered at will. Role of capital:Capital plays a very vital role in the process of development. With out capital massive production would not have been possible, it is only because of capital that industrialization had become possible and the standard of life had increased of the world as a whole. However its role can best be explained with the help of following points: Because of capital the subsistence of lower class or labour class has become possible. Capital means produced means of production like modern appliances and other tools increases the productivity of the labour. It is only because of the capital that goods can be transported from the place of abundance to the place of scarcity. Q:- What are the different kinds of capital?

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P a g e | 11 Ans:- there are generally two types of capital which can be named as fixed and variable capital, but there are other types of capital as well taking in to consideration the function of capital, these are: 1. Fixed capital is that capital which remains fixed through out the process of production. On the other hand circulating capital is that capital which can be used for production but for once. 2. Sunken capital is that capital which is specialized and has taken a definite shape, while as capital may be defined as floating; it is that capital which can be in the use in which we want. 3. That part of capital which is used for the purpose of giving payments and wages to the labourers is called remuneratory capital. 4. Human capital is that capital which is an acquired capacity by the people like certain techniques of production e.g. Doctors and Engineers, Teachers and Artisans. 5. Loanable, Business and Working capital, capital which is invested in business is called business capital and capital used for payment of wages and purchase of raw materials is called working capital and the capital used for giving loans is called Loanable capital. Q:- Explain the relationship between Economic development and Innovation? Ans:- there is a great relationship between economic development and innovation. According to Rostow, The propensity to innovate and apply science and technology for purpose of economic growth is one of the basic conditions of economic development. Schumpeter tried to show that the main source of private profit is successful innovation and this in turn is the essence of economic development. Q: - Explain the meaning of entrepreneur and its role in the over all production? Ans: - It will not be desirable to say that production is a function of land labour and capital alone, there must be some one who will organise the functions of these factors in right proportion and initiate the process of production and also bear the risk involved in it. This factor is known as entrepreneur. The entrepreneur is also called organiser, risk lover, risk taker and also risk bearer. He is also called the manager, but in these days of specialization, the task of manager and organiser has become different from that of the entrepreneur. The real task of the entrepreneur is to initiate the production work and not to manage the business affairs. Role or functions of entrepreneur: There is controversy about the role or functions of entrepreneur. Various economists have laid stress on the different functions of the entrepreneur. According to Schumpeter, the function of the entrepreneur is to introduce the innovation, while Knight emphasized the uncertainty bearing function of the entrepreneur. In the short the following are the main functions of an entrepreneur:

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P a g e | 12 Planning becomes the basis of any economic activity; an organiser imagines and prepares a plan for the business. Then he gives it a practical shape by executing the same. It is the most important function of the organiser to collect and organise the other factors in right proportions so that production can be effected properly. In most of the production processes, it must be borne in mind by the entrepreneur either to start the production at small or at large scale. One of the functions of the organiser is to provide the market to the production for that he hires people for its marketing. In the process of production, he must take care of the quantity and quality of the product. He must offer the remuneration to labourers as per their productivity so that they must feel comfortable because it is the industry of these labourers that production becomes possible. As is discussed above that the chief activity of the organiser is innovation and research n development.

Q: - Explain law of returns to a variable factor? Or Explain law of variable proportions? Or Explain short-run production function? Ans:- the law of variable proportions or returns to a variable factor occupies an important place in the modern economic analysis. The law expresses the relationship between the units of a variable factor and output in the short run, keeping other things as constant. According to this law if one factor of production is kept variable and all other are kept constant, the total output will increase a an increasing rate in the first instance, and then at a diminishing rate, or the average and the marginal product will rise up to a certain stage, and then eventually decline. The law assumes that there is no change in the techniques of production. In order to understand the stages, it is better to first numerically and then graphically illustrate the production function with one factor variable: Fixed Facto r Variable Factor Total Product Marginal Product Average Product

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P a g e | 13 10 10 10 10 10 10 10 10 1 2 3 4 5 6 7 8 100 220 270 300 320 330 330 320 100 110 90 75 64 55 47 40 100 120 50 30 20 10 0 -10

I II
TP

III

AP MP MP

MP MP

If we look at the table carefully we will find three stages operating in the table these are: 1. Stage First. The first stage goes from the origin to the point where the average product and the marginal product are equal. The marginal product first increases and then starts decreasing in the region. However the total product increases first at an increasing rate and then at a diminishing rate. 2. Stage Second. The second stage begins from a point where average and the marginal product curves intersect each other. And ends at a point where MP becomes zero. This is a stage where TP reaches its maximum. 3. Stage Third. The stage begins from the point where the marginal product becomes zero and ends at the point where the total product and average product also becomes zero. In other words, in this stage the increasing use of labour yields smaller total product. This stage is also called the stage of negative returns. If we look at the table carefully we will find three stages operating in the table these are: 4. Stage First. The first stage goes from the origin to the point where the average product and the marginal product are equal. The marginal product

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P a g e | 14 first increases and then starts decreasing in the region. However the total product increases first at an increasing rate and then at a diminishing rate. 5. Stage Second. The second stage begins from a point where average and the marginal product curves intersect each other. And ends at a point where MP becomes zero. This is a stage where TP reaches its maximum. 6. Stage Third. The stage begins from the point where the marginal product becomes zero and ends at the point where the total product and average product also becomes zero. In other words, in this stage the increasing use of labour yields smaller total product. This stage is also called the stage of negative returns. Q:-Explain law of returns to scale? Or Explain Long run production function? Ans:- The law expresses the functional relationship between the quantities of out put and the scale of production in the long run when all factor inputs are increased in the same proportion. In short returns to scale refers to the effect of scale relationship. Now the question arises as to what rate the output increases when all factor inputs are varied in the same proportion. According to this law there can be three possibilities in this regard. The increase in output may be more than, equal to or less than proportionate increase in factor input. Accordingly returns to scale are of three types; 1. Increasing returns to scale 2. Constant returns to scale 3. Diminishing returns to scale. The concept of law of returns to scale can be explained with the help of the following table however it is to be remembered that we take into consideration physical units of input and output.

A B C D E F G

Units of labour 1 2 3 4 5 6 7

REURNS TO SCALE Capital + 1 + 2 + 3 + 4 + 5 + 6 + 7

Total Returns 10 21 33 45 57 68 78

Marginal Returns 10 11 Increasing 12 12 Constant 12 11 Decreasing 10

This can be explained with the help of the following diagram.

C
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P a g e | 15

Marginal Returns

As is clear from the above diagram, as scale of production increases, marginal returns go up from A to B then becomes constant from B to C and finally begins to fall from C to D. Lets explain the three stages separately: 1. Increasing Returns To Scale. When proportionate increase in the total output is more than proportionate increase in inputs is called increasing returns to scale. In the above example this stage runs from combination A to C when with the proportionate increase in combination of factor inputs, total product increases more than proportionate increase in factor inputs and marginal product also increases. 2. Constant Returns To Scale. When total product increases at a constant rate and therefore marginal product remains constant, it is called constant returns to scale. In the above example this stage runs from combination D to E where proportionate increase in factor inputs leads to proportionate increase in output and hence marginal product remains constant. 3. Diminishing Returns To Scale. When total product is increasing at decreasing rate and thus marginal product starts diminishing, it is called diminishing returns to scale. In the above example this stage runs from combination F onwards where proportionate increase in inputs leads to less than proportionate increase in total product and hence M P starts diminishing.

COSTS
Q: - Define cost or explain cost of production? Ans:- Cost refers to the sacrifice that must made to do or to acquire some thing what is sacrificed may be money, goods, leisure, time, power etc. Cost of production refers to the expenditure made by a firm on the purchase of raw material and factor services for producing a commodity. Q: - Define Money Cost or Nominal Cost and Real Cost?

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P a g e | 16
Ans: - Money Cost. When the cost of production of a commodity is expressed in terms of money is called money cost. When a producer starts business, he makes payments to the factors of production and raw material in terms of money, this is called money cost or nominal cost. Real Cost. The efforts, sacrifice, discomfort, pain etc. undergone for producing a commodity is called real cost for example land lord sacrifices use of land and waits for rent, labour sacrifices his services for wages etc. Q: - Define total cost and average cost? Ans: - Total Cost. Total cost is that cost which is incurred on the production of given output. It is the sum total of variable and fixed costs. Symbolically; TC= TVC+ TFC It can be calculated when total number of units produced is multiplied by cost of production per unit of commodity i.e. average cost Thus TC= no. of units produced X average cost Average Cost. Average cost is the cost of production per unit of output produced. It can be calculated by dividing the number of units produced by total cost as; AC = Total Cost/Q Q: - Define total fixed cost and total variable cost? Ans: - total fixed cost. Fixed cost is also called as over head cost or supplementary cost. Fixed costs are those costs which are independent of the level of output i.e. they do not change with the change in output. Even if the firm closes down for some time, these costs are still borne by it. These costs include charges such as contractual rent, insurance fee, maintenance costs, salaries of permanent employees etc. C O S T 0 PRODUCT

FC

Total Variable Costs. Variable cost is also called as prime cost. It may also be called as direct cost. It includes expenditure made in the purchase of raw materials used for making a commodity, depreciation of machinery etc. in short variable costs are those costs which varies with the volume of output i.e. if production increases variable costs also increases and vice-versa.
VC C O S T O PRODUCT

Q: - Define marginal cost? Ans: - marginal cost refers to the additional cost for producing one additional unit of commodity. In other words, marginal cost is the increase in total cost resulting from one unit increase in output. It is calculated by using the following formula; MC = TCn TCn-1

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P a g e | 17 Where n stands for any volume of output, for example, if the total cost of producing 5 units is Rs. 35 and the total cost of producing 6 units is Rs. 43, MC i.e. the cost of the 6th unit will be RS. 43 35 = 8. It should be remembered that MC has nothing to do with fixed cost. Q: - Define Average Fixed Cost and Average Variable Cost? Ans: - Average Fixed Cost. It is obtained when we divide total fixed cost by the number of units produced thus; AFC = TFC/Q Here total fixed cost is the cost incurred on the production of commodity here it must be noted that it remains fixed thorough out the production. Y

Average Fixed Cost

AFC

OUTPUT

Average Variable Cost. It is obtained when we divide total variable cost by the number of units of output produced thus; AVC = TVC/Q Here it must be noted that total variable cost is the cost which is having direct relationship with production and it increases with the increase in the scale of production. These costs will be zero if the production is zero. Q: - Explain the relationship between Marginal Cost and Average Cost? Ans: - The relationship between average and marginal cost can be explained with the help of following table and diagram: Units Total Marginal Average of Cost Cost Cost output (TC) (MC) (AC) 1 18 18 18 2 30 12 15 3 40 10 13.34 4 52 12 13 5 65 13 13 6 82 17 13.67 7 106 MC 24 15.14 AC 8 140 34 17.5

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P a g e | 18

COST

OUTPUT

From the above table and diagram following points of relationship between AC and MC are obtained: Average cost falls when marginal cost remains below it, hence MC < AC in this range of output. When marginal cost becomes equal to average cost, marginal cost curve cuts average cost curve from below. AC starts rising when marginal becomes higher than average cost hence MC > AC. Q: - What do you mean by the term Market? Ans: - in ordinary language or sense market means any particular place or locality where goods are bought and sold. But in economics market does not mean a particular place where goods are bought and sold. In economics market means existence of close contact between buyers and sellers, so that transaction i.e. sale and purchase of a commodity at an agreed price takes place. According to Cournot, Economists understand by the term market not any particular place in which things are bought and sold but the whole of any region in which buyers and sellers are in such a free intercourse with one another that the price of some good tends to be equality and quickly. Q: - Define perfect competition? Also discuss its features? Ans: - Perfect competition market is a market situation where there are large number of buyers and sellers of a homogeneous product. In a perfect competitive market, the potential buyers and sellers are fully aware of the price so that no buyer or seller can individually effect the price. Thus under perfect competition market a firm is price taker rather than price maker. Features of perfect competition: 1. Large number of buyers: - there is large number of buyers, each buyer buys a small fraction of total output and no buyer is in position or is so strong to influence the price in his own favour. 2. Large number of sellers: - there is large number of sellers of a commodity, each seller sells a small fraction the total output and no seller is in a position to influence price in his favour. In other words every seller is a price taker. 3. Homogeneous product: - All firms sell and produce homogeneous product in the market, homogeneity may be in the form of packing, style, technique etc. 4. Free entry and exit: - There if free entry and exit i.e. any new firm can enter in to the industry and any old firm can leave the industry at any time there is

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P a g e | 19 no restriction, as the contribution of every single firm is very small to the total output. 5. Uniform price: - all the firms in the market are price taker and no one is price maker. This means that only one price prevail in the whole market. 6. Perfect Knowledge: - All buyers and sellers have perfect knowledge about the market situation. It is working on the principle of caveat emptor which means let the buyer know. 7. Perfect Mobility of the factors of production: - Labour and capital move easily from one place to other place. As there prevails only one remuneration for the whole of factors of production. 8. Normal Profit: - Firms under perfect competition earns only normal profits due to competition. Since there is free entry for all the potential firms who want to enter the market, if there is any situation of abnormal profits the new firms will enter the market and will vanish it automatically. Q: - Define Monopoly and discuss its features? Ans: - The word Monopoly is made of two Greek words Mono and Poly which means single and seller respectively. Thus monopoly is that market situation where there is only one seller or producer of a product. The good which monopoly sells has no close substitutes. This implies that monopoly has sole control over the supply of the product and its price. Since monopoly is a price maker and not price taker and hence earn abnormal profits. Features of Monopoly Single Seller: - The first and the important feature of monopoly is that there is a single seller or producer producing the commodity in the market. No Close Substitute: - The second important feature of monopoly is that the monopoly produces that commodity which has no close substitute, as there is only one seller and is the person who produces it. Barrier To Entry: - The entry of new firms into the industry in monopoly market is completely prohibited or made impossible. If new firms inter into the industry, monopoly itself breaks down. Price Discrimination: - The monopoly charges different prices for the same product from different consumers. As there is only seller in the market the buyers has no other choice to choose than to accept the price. Full Control over Price: - The contraction and extension of the supply of the producty is in the hands of monopoly. Earns Abnormal Profits: - Monopolist earns abnormal profits because he has sole control over the price and supply of the product. Q: - What do you mean by Monopolistic Competition, discuss briefly its features? Ans: Monopolistic Competition market is a market situation where there are large number of sellers selling differentiated products which are close substitutes to each other. The firm under this competition has some control over the price and supply of its product as it has monopoly power over his own product. This power manifests itself

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P a g e | 20 Features of Monopolistic Competition: 1. Large Number of Sellers: - There are large numbers of sellers or firms producing commodity in the market. Each firm controls a very small share of total output. 2. Freedom of Entry and Exit: - Every firm is free to enter into the industry and come out from the industry whenever it wishes. The total output in the market is so high that each firm contributes a very small portion of total product. 3. Product Differentiation: - Each firm produces a product that is somewhat different from the products of its competitors. The product may be differentiated in many ways for example by changing brand name, trade mark, design, size, weight etc. 4. Each firm is monopolist for its product: - Every firm has monopoly over its product i.e. no other firm can manufacture the product of his brand name e.g. Dettol is a brand manufactured by its own firm and no other firm can produce it. 5. Selling Cost: - Every firm seeks to modify consumers preference through ads, this gives rise to what is known as selling cost thus there is no price competition. 6. Some control over the price: - As a result of differences in the brands every firm has a monopoly over the product and as result of this they enjoy some control over the price. The difference in the price cannot be so big, as it can divert the consumers to its substitutes which are available at a cheap price. Q: - Explain how price is determined under perfect competition? Or Explain Determination of equilibrium price under perfect competition? Ans: - There was a dispute among economists about how the price is determined of the commodity in the perfect market. Some economists were of the opinion that price of the commodity depends on marginal utility and is determined by demand. Others were of the opinion that price of a commodity depends on cost of production and is determined by supply. It was Marshall who subside this dispute by saying that price of a commodity is determined by both demand and supply of a commodity in the perfect competition. He gave a famous example of a pair of scissors, We might be reasonably disputed whether it is under blade or upper blade which cuts the paper, but actually both together cuts it. Similarly both demand and supply determine price. The determination of equilibrium price under perfect competition can be Y explained with the help of following table and diagram. D Price/unit of Quantity Quantity Price Trend comm. Demanded Supplied 30 10 20 Falling P2 M 20 15 15 Balance P E 10 20 10 Rising P1 G S 0 S D
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Quantity Demanded & Supplied

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P a g e | 21

It is clear from the above table that at the price of Rs. 30 Quantity demanded is 10 and supplied is 20 units; this creates the situation of excess supply. This excess supply pushes the price below so that equilibrium between demand and supply is maintained. Now price falls to Rs. 20, at this price demand is 15 units and supply is also 15 units. Thus Rs. 20 is equilibrium price and quantity 15 is equilibrium quantity. If price falls to Rs. 10 demand becomes more than supply this excess demand pushes the price back to equilibrium level. In the above diagram DD is demand curve and SS is supply curve. DD and SS curves meet each other at point E where OP is Equilibrium price and OQ is Equilibrium quantity. If price rises to OP1, excess supply LM will bring down price back to OP similarly if price falls to OP2, excess demand BG will push up price back to OP. Thus equilibrium price will be maintained by the forces of demand and supply.

NATIONAL INCOME
Q: - Define National Income? Ans: National Income can be defined as the sum of total of income earned by various factors of production viz, land, labour, capital and entrepreneur in an economy during one year. In other words national income is the money value of all final goods and services produced in the economy in an accounting year. According to Pigou, That part of objective income of the commodity including of course income earned from abroad which can be measured in terms of money. Thus national income of a country can be defined as the value expressed in monetary terms. It is therefore, the monetary measure of the current flow of net final goods and services resulting from the production activities of the normal residents of a country in the year. Q: - Explain the various concepts of national income? Ans: - there are generally eight alternative concepts of national income which can be explained as follows: 1. Gross Domestic Product at Market Price (GDPMP): - Gross domestic product at market price is the market value of all final goods and services produced within the domestic territory of a country in an accounting year. Gross domestic product has following components: (1)Value of final consumer goods produced in one year by house holds denoted by C

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P a g e | 22 (2)Value of new capital goods produced and addition to inventories called gross private investment denoted by I (3)Govt. purchases of goods and services denoted by G (4)Net exports X-M which is equal to value of exports x minus imports m Thus GDPMP = C+I+G+(X-M) Gross National Product at Market Price (GNPMP): - Gross domestic product at market price is the market value of the final goods and services produced within the domestic territory of country by; the normal residents during an accounting year along with net factor income from abroad and consumption of fixed capital or depreciation. GDPMP becomes GNP if net factor income from abroad is added to it. Thus GDP MP + Net Factor Income from abroad = GNPMP Net Domestic product at Market Price (NDPMP): - Net domestic product at market price is the market value of the final goods and services produced within the domestic territory of a country, exclusive of depreciation. NDPMP = GDPMP Depreciation Net National Product at Market Price (NNP MP): - Net national product at market price is the market value of all final goods and services produced within the domestic territory of a country along with net factor income from abroad during an accounting year. Some capital goods are used up in the production process largely as wear and tear. The cost to replace these capital goods is called capital consumption or depreciation. Deducting the depreciation from GNP MP we get NNPMP Thus, NNPMP = GNPMP Depreciation Net Domestic Product at factor Cost or Net Domestic Income (NDP FC): Net domestic product at factor cost is the sum total of factor incomes generated within the domestic territory of a country during a period of time. It is briefly called domestic income, it is equal to net domestic product at factor cost. Thus NDPFC = NDPMP INDIRECT TEX + SUBSIDIES OR NDPFC = NDPMP - NET INDIRECT TEXES While Net Indirect Taxes = Indirect Tax Subsidies Gross Domestic Product at Factor Cost (GDP FC): - Gross domestic product at factor cost is the sum total of factor incomes (rent + interest + wages + profit) generated within the domestic territory of a country, along with consumption of fixed capital during a year. Thus GDPFC = NDPFC + Depreciation Net National Product at Factor Cost(NNPFC): - Net national product at factor cost is the sum total of factor incomes generated within the domestic territory of a country, along with the factor incomes from the rest of the world during a year. This is also called as National Income. NNPFC = NDPFC + Net Factor Income from abroad. Gross National Product at Factor Cost (GNPFC): - Gross national product at factor cost is the sum total of factor incomes earned by normal residents of country, along with consumption of fixed capital during a year. In other words

2.

3.

4.

5.

6.

7.

8.

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P a g e | 23 when the depreciation is not deducted from the national income it remains gross income. Thus GNPFC = NNPFC + Depreciation Q: - Explain various methods of National Income? What are the difficulties faced by this method? Ans: There are generally three methods of measuring national income namely; Income Method, Product Method and Expenditure Method. 1. Income Method: - this method is also called as Distributive Share Method or Factor Payment Method. It is that method which measures national income from the side of payments made in the form of wages , rent, interest and profits to the primary factors of production i.e. labour, land, capital and entrepreneur respectively for their productive services in an accounting year. Thus income method measures the national income from the distribution side. Difficulties of Income Method: Determination of factor share: - there is no unique way to determine and estimate the contribution of entrepreneur in the process of production . Change in price: - in the period of boom and inflation, price rise is experienced which affects the value of stocks with the producers. Allocation of mixed income: - This is another hurdle in the computation of national income by the income method. As the income of the farms is included in factor income, the income from ownership of farm buildings as well as financial assets is not included in the factor income. Allocation of dividends: - allocation of dividends also poses another threat in the computation of national income. Dividends paid to households, govt., and non-profit making organizations etc. are included in factor income. But on the other hand, inter corporate dividends are not regarded as a part of national income. 2. Product Method: - this method is also called as value added method; it is that method which measures the national income by estimating the contribution of each producing enterprise to production in the domestic territory of the country in an accounting year. According to this method, national income is the sum total value of all final goods and services produced. These totals are known as the net domestic product at market price. Difficulties of Product Method: Problem of double counting: - This method only includes final goods and services in the calculation of national income, but if the value of intermediate goods is also included in the national income, there exists the problem of double counting. Problem of imputed values: - In national income accounting goods and services for self consumption are also included, but to compute value of these goods and services is really a difficult job. Insufficient Data: - In countries like India there is lack of data which poses a severe threat to the national income accounting.

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P a g e | 24 3. Expenditure Method: - The third method of measuring the national income is expenditure method. This is also called Income Disposal Method. This method measures the final expenditure on gross domestic product at market price during an accounting year. This total final expenditure is equal to the gross domestic product at market price. Difficulties in Expenditure Method: Consumer durable goods are a serious problem. Some times it becomes difficult to differentiate between government consumption expenditure and government investment expenditure. Interest on national debit paid by govt. is not included in govt. expenditure. There is not sufficient data regarding consumption expenditure and investment expenditure particularly in unorganized sector Q. Inflation- Meaning Inflation is a phenomenon of excess demand. It is a state of affairs in which there is excess demand for goods in the economy as a whole. It means that the level of spending directed towards the home produced goods exceeds the maximum output of goods which is attainable in the long period, given the existing productive resources. According to Emele James, Inflation is a self-perpetuating and irreversible upward movement of prices caused by an excess of demand over capacity to supply. According to Keynes, Inflation is the result of the excess of aggregate demand over the available aggregate supply and true inflation starts only after full employment. According to A.J. Hagger, By inflation we shall mean a situation, in which there is persistent upward movement in the general price level, or in which there would be such a persistent upward movement, but for the presence of direct control over prices. Thus, it is clear from the above that inflation may be defined as a sustained rise in the general level of commodity prices over some period of time.

Q. Causes of Inflation Inflation may be due to the operation of one or more of the following factors. Some of them result in increased demand for goods, while others result in shortage of goods on the supply side. These factors are: (a) Increase in money supply- This may take place in two ways like more currency may be issued, Banks may create more credit. Both may increase simultaneously. (b) During wars, need of the military have to be met with first of all. The supply of goods for the civilians is reduced. Prices look up. (c) Sometimes, producer and traders may stock commodities to charge higher prices in future. This creates artificial scarcity and prices rise in the market. (d) Strong trade unions may be able to increase their wages without an equal increase in productivity. Wage rise pushes up cost, which, in turn, pushes up prices, which again pushes up costs and so on the expanding spiral.

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P a g e | 25 (e) Hoarded money may be brought into the market in the form of greater demand for consumers goods and for investment goods. Such increase in demand may push up prices. (f) The government spends, more than its revenues. This often results in the putting of new notes. Quantity of money increases. A price goes up. (g) The government may be repaying old debts. This increases the purchasing power of the people. (i) As population increases demand for goods and services, increases, prices rise. (j) There may, too much rain or too little rain. Agricultural goods decline in supply. Their prices rise. (k) If there is lack of industrial peace in the country, strikes and lock-outs are common, then production falls in the country and prices go up Q. Effects of Inflation Inflation affects different people, differently. This is because of the fall in the value of money. When the value of money falls or prices rise, same groups of the society gain some lose and some stand in between. (a) During periods of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the same amount, but they pay less in terms of goods and services. This is, because the value money is less than, when they borrowed the money. Thus, the burden of the debt is reduced and debtors gain. On the other hand creditors lose. Although they get back the same amount of money, which they lent, they receive less, in real terms, because the value of money falls. (b)Salaried workers such as clerks, teachers, and other white collar people lose, when there is inflation. The reason is that their salaries are slow to adjust, when prices are rising. (c) Pensioners, recipient of interest and rent. Similarly, the rentier class, consisting of interest and rent receivers, get fixed payments. The same is the case with the holders of fixed interest bearing securities, debentures and deposits. All such persons lose, because they receive fixed payments, while the value of money continues to fall with rising prices. (d) When prices start rising, production is encouraged. Producers earn windfall profits in the future. They invest more in anticipation of higher profits in the future. This tends to increase employment, production and income. But, this is only, possible up to the full employment level. Further increase in investment beyond this level, will lead to severe inflationary pressures within the economy, because prices rise, more than the production as the resources are fully employed. So, inflation, adversely affects production after the level of full employment. (e) Inflation affects, adversely, the balance of payments of a country, when prices rise, more rapidly, in the home country than in foreign countries. Our products become costly compared to foreign products. This tends to increase imports and reduces export, thereby making the balance of payments unfavourable for our country. (f) Inflation encourages speculation. During inflationary periods, the energies of the business community are dissipated in speculative activities to earn quick profits.

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P a g e | 26 Q. How inflation can be controlled As we know that inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore be controlled by increasing the supplies and reducing money incomes in order to control aggregate demand. The various measures taken to control inflation are as follows: (a) One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose it raises the bank rate, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures. (b) However, one of the monetary measures is to demonetize currency of higher denominations. (C) The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for number of notes of the old currency. Q. Deflation Deflation is just the opposite of inflation. It is associated with falling prices. According to Prof. Paul Einzing, It is a state of disequilibrium in which a contraction of economic power tends to cause, or is the effect of a decline of price level. Thus deflation refers to a situation where prices fall causing thereby increase in unemployment, reduction in output and decrease in the incomes of the factors of production. Q.Consequences of deflation The consequences and result of deflation are just the opposite of inflation. During periods of deflation the total expenditure of the community is less than the value of current output. This generates a deflationary gap. When prices fall the producers suffer heavy losses and thus curtail output and employment. Hence, deflation has adverse effects on employment and production. During deflationary period, the market is gutted with commodities but there are no customers. This creates a situation of poverty amidst plenty. Deflation also affects the distribution of income and wealth in the economic system. Deflation distributes income in favour of the middle classes and adversely, affects the interests of businessmen, debtors, etc. during deflation, there is a tendency to save as the value of money appreciates but due to the falling level of income, power to save is reduced. Deflation is considered to be worse than inflation due to its adverse effects on production and employment.
Q.Types of Inflation (a) Creeping Inflation: It is the mildest form of inflation and is not considered to have any dangerous effects on the economy. As a matter of fact, creeping inflation is thought to be the inevitable consequence of economic development. It is argued that creeping inflation does not allow the economy to fall a prey to economic stagnation. According to Kent, When prices rise by not more than 3% per annum, the situation may be described as that of creeping inflation. (b) Walking Inflation: The next stage, from the point of view of rapidity of inflation, is the walking inflation. When, over a decade the prices rise above from 30% to 40% this may be described as walking inflation. It is significant in so far as it gives us the red signal of hyperinflation.

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P a g e | 27
(c) Running Inflation or Galloping Inflation: When the sped of price rise accelerates walking inflation gets converted into running inflation. Running inflation would record a 100% increase in prices over a period of ten years. In galloping inflation, prices rise every moment. (d) Deficit Induced Inflation: Is that which is the result of deficit financing by the government i.e., spending more than revenue either by taking resort to printing press or by borrowing from the banking system etc. (e) Wage Induced Inflation: Is that which is caused by an increase in money wages. (f) Profit Induced Inflation: Is that which is due to an increase in the profits of the manufacturers.

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