SECTION – A ( Long answer questions )

1. Explain the law of diminishing marginal utility. What are its limitations?

Answer:

Law of Diminishing Marginal Utility (DMU):
This law states that as a person consumes more units of a good or service, the additional satisfaction (or utility) derived from each subsequent unit decreases, assuming all other factors remain constant. For example, the first slice of pizza may give great satisfaction, but by the fourth or fifth slice, the satisfaction gained from each additional slice decreases.

Explanation:

  • Marginal utility refers to the additional satisfaction or pleasure derived from consuming one more unit of a good or service.
  • The law suggests that when a person consumes successive units of the same good, the marginal utility of each additional unit falls.

Example:

  • If you’re eating ice cream, the first bite might be very satisfying, the second bite may be good, but by the third or fourth bite, you may feel less pleasure or even full.

Limitations of the Law of Diminishing Marginal Utility:

  1. Consumption over time: The law assumes that consumption happens continuously, but in reality, utility might increase or decrease based on different times or circumstances (e.g., hunger).
  2. Measurement difficulty: Measuring the exact amount of utility gained is subjective and can vary from person to person.
  3. Substitutes: The law doesn’t account for the fact that people may substitute one good for another when marginal utility decreases.
  4. Happiness and non-material goods: The law applies primarily to material goods and might not be valid for things like happiness or experiences, where marginal utility can continue to grow.

2. Explain price determination under perfect competition market.

Answer:

In a perfectly competitive market, price determination is driven by the forces of demand and supply. A perfect competition market is characterized by many buyers and sellers, homogeneous products, free entry and exit, and perfect information.

Price Determination Process:

  1. Demand and Supply:
    • The price of a good is determined by the interaction of demand and supply in the market.
    • The demand curve is downward sloping, meaning as the price falls, quantity demanded increases.
    • The supply curve is upward sloping, meaning as the price rises, quantity supplied increases.
  2. Equilibrium Price:
    • The equilibrium price is where the quantity demanded equals the quantity supplied.
    • At this price, there is no surplus or shortage in the market, and the market clears efficiently.
  3. Short-Run and Long-Run Adjustments:
    • In the short run, firms may earn abnormal profits or incur losses. However, in the long run, the entry and exit of firms will push the market towards a normal profit (zero economic profit).
    • If firms are earning profits, new firms will enter the market, increasing supply and driving prices down. Conversely, if firms are making losses, some will exit the market, decreasing supply and driving prices up.

Key Features:

  • Homogeneous Products: All firms sell identical products, and therefore, no single firm can influence the market price.
  • Price Taker: Firms are price takers, meaning they accept the market price as given and cannot charge above or below it.

Equilibrium Outcome:

  • Price is determined at the point where the market supply curve intersects the market demand curve. The price is the same for all firms in the market, ensuring competition drives prices down to the equilibrium point.

3. What are the internal economies of scale? Explain the law of returns to scale.

Answer:

Internal Economies of Scale:
These refer to the cost advantages that a firm experiences as it increases its production scale. These advantages arise from within the firm itself and are a result of factors like improved efficiency, specialization, and the utilization of resources.

Types of Internal Economies of Scale:

  1. Technical Economies:
    • Achieved through better use of technology or machinery, leading to more output per unit of input.
    • Example: A factory using automated machinery to produce goods more efficiently.
  2. Managerial Economies:
    • Larger firms can employ specialized managers for different departments, improving efficiency in operations.
    • Example: A large corporation may hire managers for finance, HR, marketing, etc., leading to better decision-making.
  3. Financial Economies:
    • Large firms can borrow at lower interest rates due to their higher creditworthiness and ability to spread risks.
    • Example: A large firm securing loans at lower interest rates than smaller competitors.
  4. Marketing Economies:
    • Large firms can spread advertising costs over larger quantities of goods, reducing the cost per unit.
    • Example: A national brand running a marketing campaign across the country, benefiting from economies of scale.
  5. Purchasing Economies:
    • Firms can buy raw materials in bulk at discounted prices, reducing the cost of production.
    • Example: A large supermarket chain purchasing products in bulk at lower prices.

Law of Returns to Scale:
This law describes how output changes as all inputs are increased in the production process.

  • Increasing Returns to Scale:
    When a firm increases all of its inputs (land, labor, capital, etc.) by a certain percentage and output increases by a larger percentage, it is experiencing increasing returns to scale. This typically happens when the firm becomes more efficient as it grows.
  • Constant Returns to Scale:
    When a firm increases all of its inputs by a certain percentage, and output increases by the same percentage, it is experiencing constant returns to scale. The firm operates at its most efficient level.
  • Decreasing Returns to Scale:
    When a firm increases all inputs by a certain percentage, and output increases by a smaller percentage, the firm is experiencing decreasing returns to scale. This happens when the firm becomes less efficient as it grows larger.

Example:

  • A small firm may experience increasing returns to scale as it expands production, leading to higher efficiency. But at some point, it may experience constant or decreasing returns to scale, where adding more workers or machines leads to inefficiencies.

4. What are the various methods of calculating national income?

Answer:

There are three main methods of calculating national income:

  1. Income Method:
    • This method calculates national income by adding up all the incomes earned by individuals and firms in the economy, including wages, rents, interest, and profits.
    • Formula: National Income=Wages+Rent+Interest+Profits\text{National Income} = Wages + Rent + Interest + Profits
  2. Expenditure Method:
    • This method calculates national income by adding up all the expenditures on goods and services in the economy. It includes consumption expenditure, investment expenditure, government expenditure, and net exports (exports minus imports).
    • Formula: National Income=C+I+G+(X−M)\text{National Income} = C + I + G + (X – M) Where:
      • CC = Consumption
      • II = Investment
      • GG = Government spending
      • X−MX – M = Net exports (exports minus imports)
  3. Output Method (or Production Method):
    • This method calculates national income by adding up the value-added at each stage of production in the economy. Value-added is the difference between a firm’s sales and the cost of intermediate goods.
    • Formula: National Income=Gross Value Added (GVA)−Depreciation\text{National Income} = \text{Gross Value Added (GVA)} – \text{Depreciation}

5. Explain the Keynesian theory of employment.

Answer:

The Keynesian Theory of Employment, developed by John Maynard Keynes, emphasizes the role of aggregate demand in determining the overall level of employment in the economy.

Key Principles of Keynesian Theory:

  1. Aggregate Demand Determines Employment:
    According to Keynes, the level of employment is determined by the level of aggregate demand in the economy (i.e., the total demand for goods and services). If aggregate demand is insufficient, there will be unemployment.
  2. The Role of Government:
    Keynes argued that government intervention is necessary to increase aggregate demand during periods of economic downturn. This could be achieved through government spending (fiscal policy), tax cuts, and investment incentives.
  3. Short-Run Focus:
    Keynes believed that in the short run, wages and prices are “sticky” (do not adjust quickly to changes in demand), meaning that market forces alone may not lead to full employment. If aggregate demand falls, firms will reduce production and lay off workers.
  4. Multiplier Effect:
    Keynes introduced the idea of the multiplier effect, which suggests that an increase in government spending can lead to a greater increase in national income and employment due to the successive rounds of spending.
  5. Involuntary Unemployment:
    According to Keynes, unemployment is not always voluntary. If aggregate demand is insufficient, firms may not hire workers even if they are willing to work at the going wage, leading to involuntary unemployment.

Conclusion:
Keynesian theory advocates for government intervention to boost demand and reduce unemployment, especially during recessions. This approach challenges the classical view, which held that markets are always self-correcting.

SECTION – B ( Short answer questions )

6. What is utility? What are the different types of utility?

Utility refers to the satisfaction or pleasure derived from the consumption of goods and services. In economics, utility is used to measure the usefulness or value of something to an individual.

Types of Utility:

  1. Form Utility: The value added to goods through a change in their form. For example, turning raw materials into finished products.
  2. Place Utility: The value added by making a product available in a location where it is needed or desired.
  3. Time Utility: The value added by making a product available at a time when it is needed.
  4. Possession Utility: The value derived from the ability to own or possess a product, enhancing its utility through ownership.

7. Distinguish between micro and macro economics?

Microeconomics deals with the behavior of individual economic agents, such as households, firms, and industries. It focuses on the allocation of resources and the determination of prices within individual markets.

Macroeconomics, on the other hand, looks at the economy as a whole. It focuses on aggregate economic variables like national income, unemployment rates, inflation, and fiscal and monetary policies.

Key Differences:

  • Focus: Micro focuses on individual units, macro focuses on the economy at a larger scale.
  • Scope: Micro deals with supply and demand in specific markets, macro deals with national and international economic trends.
  • Examples: Micro deals with pricing of individual products; macro looks at GDP, inflation, etc.

8. What are the properties of indifference curves?

Indifference curves represent different combinations of goods that provide the same level of satisfaction to the consumer. The main properties of indifference curves are:

  1. Downward Sloping: Indifference curves slope downward from left to right, indicating that as a consumer consumes more of one good, they must consume less of another to maintain the same level of satisfaction.
  2. Convex to the Origin: The curve is bowed inward, showing diminishing marginal rate of substitution.
  3. Non-Intersecting: Indifference curves do not intersect because each curve represents a different level of satisfaction. If they intersected, it would imply the same combination of goods provides two different levels of satisfaction, which is impossible.
  4. Higher Curves Represent Higher Utility: Indifference curves further away from the origin represent higher levels of satisfaction.

9. What are the determinants of demand?

The demand for a good or service depends on several factors:

  1. Price of the Good: As the price of a good increases, its demand typically decreases (law of demand), and vice versa.
  2. Income of the Consumer: Higher income usually increases demand for normal goods and decreases demand for inferior goods.
  3. Tastes and Preferences: Changes in consumer preferences can increase or decrease demand for particular goods.
  4. Prices of Related Goods:
    • Substitutes: An increase in the price of a substitute good may increase demand for the original good.
    • Complements: An increase in the price of a complementary good may decrease demand for the original good.
  5. Expectations: If consumers expect prices to rise in the future, they may purchase more now, increasing demand.
  6. Population: A larger population increases the potential demand for goods and services.

10. Explain Ricardian theory of Rent.

The Ricardian theory of rent was proposed by David Ricardo. According to this theory:

  • Rent is the payment made for the use of land.
  • It arises due to the differences in the fertility of land. The theory assumes that land is a fixed factor of production and that the supply of land is inelastic.
  • Rent is determined by the difference in productivity between the most fertile land and other land in use. The more fertile land generates a higher output, leading to a higher rent.
  • The theory states that rent is not a cost of production, but an unearned income for landowners.

11. Define inflation and types of inflation.

Inflation refers to the general increase in prices of goods and services in an economy over a period of time, leading to a decrease in the purchasing power of money.

Types of Inflation:

  1. Demand-pull Inflation: Occurs when demand for goods and services exceeds their supply, leading to higher prices.
  2. Cost-push Inflation: Occurs when production costs increase (e.g., higher wages or raw material costs), leading to an increase in prices.
  3. Built-in Inflation: Results from adaptive expectations, where workers demand higher wages to keep up with rising prices, leading to a wage-price spiral.

12. Explain any five functions of money.

Money serves several important functions in the economy:

  1. Medium of Exchange: Money facilitates transactions by acting as a medium through which goods and services can be exchanged.
  2. Unit of Account: Money provides a standard measure of value, allowing goods and services to be priced and compared.
  3. Store of Value: Money can be saved and used in the future without losing value over time (though inflation can erode this function).
  4. Standard of Deferred Payment: Money allows contracts to be made for future payments (e.g., loans, mortgages).
  5. Liquidity: Money is the most liquid asset, meaning it can easily be converted into other forms of wealth.

13. Describe various methods of redemption of public debt.

The government may use several methods to redeem public debt (pay off its borrowed funds):

  1. Repayment from Revenue: The government may use its annual revenue (taxes, etc.) to pay off the debt.
  2. Refinancing: The government may issue new bonds to pay off old ones, effectively rolling over its debt.
  3. Sinking Fund: A separate fund set aside by the government to accumulate money to redeem debt in the future.
  4. Privatization: The government may sell state-owned assets to raise funds for debt repayment.
  5. Inflation: By creating inflation, the real value of the debt is eroded, making it easier to repay.

14. Explain the relation between economics and statistics.

Economics and statistics are closely related:

  1. Data Collection and Analysis: Economics often uses statistical methods to collect and analyze data on consumer behavior, market trends, and economic indicators.
  2. Testing Theories: Statistics helps in testing hypotheses in economics by providing quantitative support for economic theories.
  3. Forecasting: Statistical models help economists predict future economic trends, such as inflation, unemployment, and GDP growth.
  4. Measurement of Economic Variables: Statistics is crucial in measuring variables like national income, unemployment rates, and inflation.

15. Explain the relation between average cost and marginal cost.

The relationship between average cost (AC) and marginal cost (MC) is as follows:

  1. When MC < AC: The average cost is falling, as adding an extra unit of output reduces the cost per unit.
  2. When MC = AC: The average cost is at its minimum point, as the additional cost of producing one more unit is equal to the average cost.
  3. When MC > AC: The average cost is rising, as producing an additional unit increases the cost per unit.

This relationship is crucial for firms in determining the level of output that minimizes costs.

16. Explain cross demand with suitable diagrams.

Cross demand refers to the demand for one good that is influenced by the price change of another good. There are two types of cross demand:

  1. Substitutes: If the price of one good increases, the demand for its substitute may increase (e.g., coffee and tea).
  2. Complements: If the price of one good increases, the demand for its complement may decrease (e.g., cars and petrol).

The relationship between goods in cross demand can be graphically shown using demand curves for the two related goods.

17. Explain the features of monopolistic competition?

Monopolistic competition is a market structure characterized by:

  1. Many Sellers: There are many firms selling similar but differentiated products.
  2. Product Differentiation: Each firm offers a slightly different product, which can be based on quality, branding, or features.
  3. Free Entry and Exit: Firms can freely enter or exit the market, leading to competition.
  4. Some Control Over Prices: Firms have some degree of pricing power due to product differentiation.
  5. Non-price Competition: Firms compete using advertising, brand loyalty, and other forms of promotion rather than just price.

SECTION – C ( Very short answer questions )

18. Capital goods

Capital goods are goods that are used in the production of other goods and services. They are not consumed directly but are used to produce consumer goods or other capital goods. Examples include machinery, tools, equipment, factories, and infrastructure.

19. Intermediary goods

Intermediary goods (also known as intermediate goods) are goods that are used as inputs in the production of other goods. They are not final goods and are not directly consumed by the end-user. Examples include raw materials, components, and parts that go into producing final goods like cars, electronics, or clothing.

20. Giffen paradox

The Giffen paradox refers to a situation in which a rise in the price of a good leads to an increase in its quantity demanded, which contradicts the law of demand. This paradox typically occurs for inferior goods with few substitutes, where the income effect outweighs the substitution effect, leading people to buy more of the good as its price increases. The classic example is the case of staple foods like bread or rice in impoverished economies.

21. Cardinal utility

Cardinal utility is the theory that utility (satisfaction or pleasure) can be measured in absolute terms. In this approach, individuals can assign a numerical value to the satisfaction derived from consuming goods and services. For example, a consumer might say they get “10 utils” from consuming one apple and “20 utils” from consuming two apples.

22. Production function

A production function shows the relationship between inputs (such as labor and capital) and the resulting output in the production process. It defines the maximum output that can be produced with a given set of inputs. Mathematically, it is often represented as:

Q=f(L,K)Q = f(L, K)

where QQ is output, LL is labor, and KK is capital.

23. Quasi rent

Quasi rent refers to the temporary excess returns earned by a factor of production (like land or capital) when its supply is fixed or inelastic in the short run. Unlike normal rent, quasi rent occurs when a factor of production’s supply is limited in the short term but can adjust over time.

24. Liquidity

Liquidity refers to how quickly and easily an asset can be converted into cash without affecting its price. Cash is the most liquid asset, while assets like real estate or long-term investments are less liquid. In financial markets, liquidity is vital for ensuring that transactions can occur efficiently.

25. Bar diagram

A bar diagram is a graphical representation of data using rectangular bars, where the length or height of each bar represents the value of a variable. Bar diagrams are commonly used to compare different categories or groups and visually display data, making trends and differences easier to understand.

26. Overdraft

An overdraft occurs when an individual or business withdraws more money from a bank account than the available balance. The bank covers the excess amount, but this results in the account being in debt. Overdrafts usually incur interest and fees.

27. Lorenz curve

The Lorenz curve is a graphical representation of income or wealth distribution within an economy. It shows the proportion of total income or wealth earned by cumulative percentages of the population. A perfectly equal distribution is represented by a 45-degree line, and the further the curve is from this line, the more unequal the distribution.

28. Per capita income

Per capita income is the average income earned by each person in a specific region or country. It is calculated by dividing the total income of the region by its population. It serves as an indicator of the economic standard of living in that region.

29. Perfectly elastic demand

Perfectly elastic demand refers to a situation where the demand for a good or service is infinitely sensitive to price changes. Even a small increase in price would lead to a complete drop in demand, while a decrease in price would result in an infinite increase in quantity demanded. The demand curve for perfectly elastic demand is horizontal.

30. Supply

Supply refers to the quantity of a good or service that producers are willing and able to sell at different prices during a given period of time. The law of supply states that, all else being equal, an increase in price leads to an increase in the quantity supplied.

31. Marginal product

Marginal product is the additional output produced by adding one more unit of a variable input, while keeping other inputs constant. It is a key concept in production theory and helps businesses determine the most efficient use of resources.

32. Federal finance

Federal finance refers to the management of financial resources by a federal government, including revenue generation (e.g., taxation), expenditure, budgeting, and the management of national debts. It also involves fiscal policies that can influence national economic activities.

33. Real wages

Real wages refer to the wages of workers adjusted for inflation. Unlike nominal wages, which represent the amount paid to a worker in current terms, real wages account for the purchasing power of the income received. They provide a more accurate measure of workers’ well-being.

34. Budget line

A budget line represents the combinations of two goods that a consumer can afford to buy given their income and the prices of the goods. The budget line is drawn on a graph, with quantities of the two goods on the axes, and it shows the trade-offs between different goods a consumer faces within their budget constraints.

35. Gross profit

Gross profit is the difference between sales revenue and the cost of goods sold (COGS). It represents the basic profitability of a company’s core business activities, excluding other expenses like administrative costs, taxes, and interest.

36. RBI

The RBI (Reserve Bank of India) is the central bank of India, responsible for regulating the country’s monetary and financial system. Its primary functions include controlling inflation, managing the money supply, issuing currency, and ensuring the stability of the financial system.

37. Partial equilibrium

Partial equilibrium is an economic analysis focusing on a single market or sector in isolation, without considering the impact of other markets. It assumes that other markets remain unchanged, and it helps in analyzing the price and quantity equilibrium in a particular market under certain assumptions.