1) Define Economics. Explain Scope, Importance, nature & Subject Matter of Economic.
Wealth defination of economics (Adam Smith Father of economics)
An enquiry into the nature and causes of wealth of nations. known as economics.
Book = Wealth of Nations.
OR
A Social Science: Economics deal with the activities of people living in an organized community or
society, in such activities which relate to the earning and use of wealth or with the problems of scarcity, choice and exchange. Hence it called a social science.
Scope of Economics-
1. Subject matter of economics -
2. Economics as social science-
3. Economics is a science or an out-
4. Economics is positive or normative science-
Economics can be studied through a) traditional approach and (b) modern approach.
a) Traditional Approach: Economics is studied under five major divisions namely consumption, production, exchange, distribution and public finance.
1.Consumption: The satisfaction of human wants through the use of goods and services is called consumption.
2.Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean creation of utility or producing (or creating) things for satisfying human wants. For production, the resources like land, labour, capital and organization are needed.
3. Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes exchange.
4. Distribution: The production of any agricultural commodity requires four factors, viz., land, labour, capital and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The land owner gets rent, the labourer earns wage, the capitalist is given with interest and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest and profit is called distribution.
5. Public finance: It studies how the government gets money and how it spends it. Thus, in public finance, we study about public revenue and public expenditure.
b) Modern Approach
The study of economics is divided into: i) Microeconomics and ii) Macroeconomics.
1. Microeconomics analyses the economic behaviour of any particular decision making unit such as a household or a firm. Microeconomics studies the flow of economic resources or factors of production from the households or resource owners to business firms and flow of goods and services from business firms to households. It studies the behaviour of individual decision making unit with regard to fixation of price and output and its reactions to the changes in demand and supply conditions. Hence, microeconomics is also called price theory.
2. Macroeconomics studies the behaviour of the economic system as a whole or all the decision-making units put together. Macroeconomics deals with the behaviour of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.
2) Define Inflation. Explain the causes of Inflation. Write about anti-inflationary measures.
Inflation is defined as an increase in the average level of prices. When the supply of output is less, the rise in prices is described as inflationary.
1. Increase in Money Supply: Inflation is caused by an increase in the supply of money which leads to increase in aggregate demand. The higher the growth rate of nominal money supply, the higher is the rate of inflation.
2. Increase in Disposable Income: When the disposable income of the people increases, it raises their demand for goods and services. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people.
3. Increase in Public Expenditure: In modern world government activities have been expanding which resulted in increase government expenditure. This raised the aggregate demand for goods and services, thereby causing inflation.
4. Increase in Consumer Spending: The demand for goods and services also increases when consumer spending increases due to conspicuous consumption or demonstration effect.
5. Cheap Monetary Policy: Cheap monetary policy or the policy of credit expansion also leads to increase in the money supply which raises the demand for goods and services in the economy thereby leading to inflation. This is also known as credit-induced inflation.
6. Deficit Financing: In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the public and even by printing more notes. This raises aggregate demand in relation to aggregate supply, thereby leading to inflationary rise in prices.
7. Increase in Exports: When the demand for domestically produced goods increases in foreign countries, this raises the earnings of industries producing export commodities. These, in turn, create more demand for goods and services within the economy. Apart from the above factors, expansion of the private sector, existence of black money and the repayment of public debt by the government also increases the aggregate demand for goods and services in the economy.
(a) Monetary measures
1) The central bank i.e., the Reserve Bank of India can increase the market rate of interest that will reduce the aggregate spending.
2) If the RBI can reduce the cash available to the banking system, the capacity of the banks to lend money to the borrowers will be reduced.
3) The RBI can sell the Government securities to the banks or to the public so that cash available with bank or public can be reduced.
4) Consumer credit control can reduce money supply.
b) Fiscal measures
1) Reduction of government spending
2) Imposition of new taxes
3) Encouragement of savings or introducing compulsory saving schemes
c) Physical or Non-monetary measures
1) Increasing output, increasing imports and decreasing exports so as to increase the availability of goods which are in short supply.
2) Controlling money wages to keep down costs.
3) Price control and rationing.
4) Control over speculation, hoarding and black-marketing.
5) Import of essential commodities and distribution of such goods through fair price shops.
3) State the Classification of Human Wants. Explain the different characteristics of human wants.
i) Necessaries: Necessaries are those goods and services that are essential for our existence and to maintain our efficiency. There are three kinds of necessaries, namely,
1) Necessaries for existence or life: These commodities are absolutely essential for the very existence of human beings, (E.g.) food (rice).
2) Necessaries for efficiency: Goods and services which are essential for maintaining the working capacity at a higher level, (E.g.) nutritious food (Horlicks), cycle, etc.
3) Conventional necessaries: Although some goods are not absolutely necessary, many people use them out of habit or long established customs and conventions, (E.g.) coffee or cigarette.
ii) Comforts : Comforts are goods that lead to easy living and make our life pleasant. They also improve our working efficiency. However, there is one important difference between necessaries for efficiency and comforts.
In case of necessaries for efficiency, the returns or benefits that we get from them are proportionately higher than the money spent on them. But in case of comforts, the additional benefit or satisfaction is not in proportion to the money spent on them, (E.g.) scooter.
iii) Luxuries: Luxuries are goods and services that are highly expensive and they do not in any way add to the efficiency of people. They are just meant for enhancing the prestige of a person, (E.g.) ornaments, bungalow, car, etc. However, it should be noted that necessaries, comforts and luxuries are all relative terms. They are subjected
Characteristics of human wants
1) Wants are unlimited in number and variety: As soon as one want is satisfied, another want arises. Thus, there is
no end to human desire.
2) Particular want is satiable: The quantity of a commodity that a man can enjoy at a particular time is limited by his physical and mental powers. If a person is hungry, he can satisfy his want fully by consuming sufficient quantity of food at a particular point of time.
3) Wants are recurrent: Wants recur. People want many things again and again, (E.g.) food and clothes. The frequency of consumption of goods and services depends upon the durability and necessity of the commodities.
4) Wants are competitive: Some wants are to be satisfied more urgently than others. A consumer should choose the most urgent want for satisfaction, as the means are always limited. For a hungry man, want for food is more urgent than anything else.
5) Wants are alternative: We have many alternatives to satisfy a particular want. E.g. If tea is not available, a person can drink coffee.
6) Wants are complementary: In order to satisfy a single want, we may require several goods together, (E.g.) betel-leaf and areca nut, pen, ink and paper, etc.
7) Wants tend to become habit: If we satisfy a want in particular way for quite sometime, it becomes a habit. (E.g.) Taking coffee after breakfast.
4) Define National Income. Explain Different concepts of National Income.
What are the methods of measuring National income?
National Income is that part of objective income of the community, including income derived from abroad, which can be measured in money” - Pigou.
The important concepts of National Income are:
1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) at Market Prices
4. Net National Product (NNP) at Factor Cost or National Income
5. Personal Income
6. Disposable Income
1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. It measures the market value of annual output of goods and services currently produced. This implies that GDP is a monetary measure. All goods and services produced in any given year must be counted only once so as to avoid double counting. It ignores the transactions involving intermediate goods.
2. Gross National Product (GNP): Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore,
GNP = GDP + Net factor income from abroad. Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.
3. Net National Product (NNP) at Market Price: NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore,
NNP =GNP – Depreciation Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.
4.Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.
5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment allowances, relief payments, etc. Thus, in moving from national income to personal income, the incomes earned but not received should be deducted and add incomes received but not currently earned. Therefore,
Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.
6.Disposable Income: It is the amount of money available with the private individuals to spend. From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,
Disposable Income = Personal income – personal taxes.
Disposable Income can either be consumed or saved. Therefore,
Disposable Income = consumption + saving. Importance of National Income
a) National income shows how the income is earned and spent. It shows the distribution of income among rent, wage, interest and profit.
b) Per capita income would indicate whether the country is making any economic progress or not.
c) It is an important instrument of economic planning.
d) It is also important in assessing the taxable capacity of the people
e) It is useful to compare the material standard s of living of the people in two countries by comparing their national incomes.
5) What do you mean by Tax? Explain Cannons of Taxation.
Definition: A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.
Canons of Taxation :
The characteristics or qualities, which a good taxation should possess, are described as canons of taxation. Adam Smith has given the following four canons of taxation:
1) Canon of equality: The amount of tax must be in proportion to the ability of the tax payer, i.e., progressive taxation should be followed.
2) Canon of certainty: The time of payment, the manner of payment, and the quantity to be paid should be made clear to the tax payer well in advance and arbitrary fixation of taxes should not be there.
3) Canon of convenience: Tax payment should be made convenient to the tax payer. The time of payment and the manner of payment should be made convenient to the tax payer. Land revenue can be paid in installments after the harvest of crops.
4) Canon of Economy: Cost of tax collection should be very low. Cost of tax collection should be a small portion of the actual amount of tax collected.
6) State & explain The Law of Diminishing Marginal Utility with Example. Enlist the exceptions to the Law of Diminishing Marginal Utility.
Statement and examination of the law:
A very important law in consumption relates to the fact that as we go on consuming a commodity, the satisfaction derived from its successive units goes on decreasing.
Example:
1. Dissimilar Units:- If the units are not identical, law will not apply. If the second rasgulla is much larger than the first one, it will yield more satisfaction than the first. The law will operate only if the units are similar.
2.Very Small Units:- If we are given water by spoonful will give, when we are very thirsty, each
successive spoonful will give more satisfaction. In the case of every small units, the law applies at a later stage. At the first utility will therefore increase instead of decreasing. But ultimately the utility must fall if the consumption is continued.
successive spoonful will give more satisfaction. In the case of every small units, the law applies at a later stage. At the first utility will therefore increase instead of decreasing. But ultimately the utility must fall if the consumption is continued.
3. Too long an interval:- Suppose you take your morning meal. If you eat nothing in between, the dinner will probably yield given greater satisfaction than your breakfast. But if you are asked to take another meal within an hour of first, the law undoubted applies. (the law therefore applies only when the units of the commodity are taken quickly one after another within a reasonable period of time.)
4. Rare collection: - The law does not apply in the case of rare collection. If a person has a hobby of
collecting rare coins the larger the number he collects the greater will be his pleasure, whereas according to this law it should be less and less.
collecting rare coins the larger the number he collects the greater will be his pleasure, whereas according to this law it should be less and less.
5. Abnormal persons: - We discuss this law in respect of the normal persons. But there are some abnormal people too e.g. Misers, The more money a miser have greater are the satisfaction that he desires. The law therefore does not apply to abnormal persons like misers, drunkards, musicians etc. Who want more and more of the commodity they are in love with.
7) State the Law of Demand. Discuss the factors determining Demand. Discuss exceptional cases to the law of Demand.
Statement
At any given time, the demand for a commodity or services at the prevailing price is greater than it would be at higher price and less than it would be at a lower price.
Example
Demand schedule
Explanation of law of demand
In the above diagram, prevailing price is OP whereas, quantity demanded is OQ. When price is OH, it means higher the price quantity demand would be OC which is less than OQ. It shows contraction in demand. On the contrary, when price is OL, at the lower price the quantity demanded will be OE. Hence, previous quantity OQ is less than OE. It shows extension in demand.
Factors determining Demand
1. Change in habits, tastes and custom
Change in any of these must bring about a change in
2. Change in real income demand.
In place of low price cereals peoples prefer processed foods, ready to consume products. As income increases, other things being equal, the demand for a commodity also increases. Comfort and luxurious goods belongs to this category.
3. Discovery of cheap substitute
Dairy farmers use plastic products in place of metal products, the demand for plastic products is increased.
4. Change in number of consumers
Larger the population more will be demand, for certain goods like food grains and pulses etc.
5. Expectation of future price changes
A person will increase or decrease his demand with future expectation of rise or fall in price.
6. Change in wealth distribution
Distribution of income affects consumption pattern and hence the demand for various goods.
7. Change in weather
Demand changes as weather changes eg. During summer demand for cold drinks and in winter demand for woolen cloths is increased.
8. State of business
During boom, demand will expand and during depression demand will contract.
9. Consumer innovativeness/ technical progress
With the new discoveries the old things are replaced with the new ones.
10. Advertisement
A clear and persistent campaign of advertisement may create a new type of demand.
11. Utility
Utility of commodity to the consumer is mainspring of demand.
8) What do you mean by Public Finance? Distinguish between Public finance & Private Finance.
Dalton defines public finance as the science that is concerned with the income and expenditure of public authorities and the adjustment of one to the other.
Public Finance deals with “Why Government takes money how it gets money and where it spends money?”
9) Explain the term Consumer Surplus. Discuss the Importance of Consumer Surplus.
Consumer’s Surplus: It is defined as the difference between a consumer prepared to pay & what he
actually pay.
Consumer’s Surplus = Total utility – [no. of units purchased – Price]
Importance of Consumer’s Surplus:
1) Distinction between value- in-use and value-in-exchange:
A commodity like salt has more utility but has only a small exchangeable value. In such cases, consumer’s surplus will be more. A commodity like diamond has only a limited utility but has a great exchange value. In this case, the consumer’s surplus will be less. Thus, the concept of consumer’s surplus is used to distinguish between value- in-use and value-in-exchange.
2) Helpful to monopolist in price fixation:
Monopolist fixes price of a commodity in such a way that it bears at least a part of consumer’s surplus. However, he cannot absorb the whole of the surplus, as there may be opposition from the consumers.
3) Helpful to policy makers:
The policy makers can impose tax, if the consumer’s surplus for a commodity is very high. Similarly, subsidy can be granted, if the consumer’s surplus is low.
10) Explain the Principles of Public Expenditure. Explain the need for Public Expenditure.
Public Expenditure: The expenditure incurred by public authorities is called public expenditure. Public expenditure has to provide not only social welfare but it has also to ensure economic stability and economic growth.
Principles Of Public Expenditure:
1. Principle of maximum social benefits
2. Principle of economy, i.e., wasteful expenditure should be avoided
3. Principle of sanction, i.e., authorized expenditure
4. Principle of balanced budget
5. Canon of elasticity, i.e., fairly flexible
6. Avoidance of unhealthy effects on production and distribution
Need for public expenditure
In order to bring about desired and balanced growth between backward and developed regions in the country, we require huge amounts of public expenditure.
1.Development of Agriculture and Industry
Agriculture sector- particularly on irrigation, electricity, farm supply industries etc.
Industrial sector-setting up of public enterprises viz. plants, electrical, heavy engineering etc.
2. Provision of public utilities
steel Public expenditure should be increased in order to enhance the provision of public utility services viz. water, transport, electricity etc.
3.Technological changes
New innovations and inventions in the production are possible and feasible through massive investment by public sector.
4. Requirements of employment
Public expenditure must increase through various public works, undertakings, projects etc. in the country to provide employment opportunities.
11) Define Direct & Indirect Tax. State and explain advantages and disadvantages of Direct Tax.
1. Direct Taxes: A tax is said to be direct, if the tax payer bears the burden of the tax. He cannot shift the burden to any other person. E.g. income tax, wealth tax and gift tax.
Advantages:
i) It varies according to the ability to pay and
ii) Cost of tax collection is low.
Disadvantages:
i) Tax rates are fixed arbitrarily by the government and
ii) There is a possibility of tax evasion.
2. Indirect Taxes:
Indirect tax is shifted by the payer to others. If sales tax is imposed on sugar, the producer or dealer who pays it passes it on to the next buyer and ultimately the burden is borne by the consumer. E.g. Sales tax
Advantages:
i) It is more convenient, i.e., those who consume the commodity alone need to pay the tax. ii) No tax evasion is possible.
Disadvantages:
i) Every consumer, rich or poor, pays the tax at the same rate. ii) Cost of tax collection is very high.
12) State & explain the Law of Equi-Marginal Utility with its Limitations & Practical importance.
Statement: if a person has a thing which can be put to several uses person will distribute it among these uses in such a way that it has the same marginal utility in all.
Tabular form
Suppose apples and oranges are two commodities to be purchased and we have got only seven rupees to spend. One unit is for one rupee. If we spend 4 rupees on apples and 3 rupees on oranges, the total utility will be 66.
Apples = 12+9+6+3=30 and oranges = 15+12+9=36
Instead of spending 4 rupees on apples if we spend 3 rupees on apples and 4 rupees on oranges the total utility will be 69.
Oranges = 15+12+9+6=42 and apples =12+9+6=27
We thus come to the conclusion that we obtain maximum utilities by substituting some units of the more useful for the less useful commodities.
On OY axis the marginal utility of orange is denoted and on OY' axis, marginal utility of apple is denoted. OO' is the marginal utility curve of orange and AA' is the marginal utility curve of apple. Point E is the point of equimarginal utility where marginal utility of orange and marginal utility of apple is equal ie. 6. At the point E total utility derived is higher than any other point.
Limitations of law of equimarginal utility
1. Ignorance
Ignorance may prevent a person from making rational use of money.
2. Insufficient organization
An incompetent organizer of business will fail to divert expenditure to more profitable channels.
3. Unlimited resources
The low has no place where the resources are unlimited.
4. Hold of custom and fashion
A person will be unable to derive maximum satisfaction from his expenditure. Frequent changes in prices
A consumer will be unable to make necessary adjustments in his expenditure.
Importance of low of equimarginal utility or low of substitution
1. Consumption
The consumer arranges his expenditure to get maximum satisfaction.
2. Production
The aim of the producer is to get maximum output with least cost.
3. Exchange
Exchange is nothing but substitution of one thing for another.
4. Distribution
The share of each factor of production is determined.
5. Public finance
The public revenues are so spent as to secure maximum social benefit.
6. Influences prices
When consumer prefer cheap substitute, prices of costly goods comes down.
7. Expenditure of time
The person should get equimarginal utility to the expenditure of his limited time.
8. Distribution of earnings between saving and consumption.
There should be equimarginal utility of the last rupee put in savings and that of on consumption.
13) Write short notes:
A) Consumer Surplus Importance.
1) Distinction between value- in-use and value-in-exchange:
Value-in-use of a commodity signifies the utility or satisfaction it provides to the consumer, while value-in-exchange means the price paid by the consumer for the commodity. A commodity like salt has more utility but has only a small exchangeable value. In such cases, consumer’s surplus will be more. A commodity like diamond has only a limited utility but has a great exchange value. In this case, the consumer’s surplus will be less. Thus, the concept of consumer’s surplus is used to distinguish between value-in use and value in-exchange.
2) Helpful to monopolist in price fixation:
Monopolist fixes price of a commodity in such a way that it bears at least a part of consumer’s surplus. However, he cannot absorb the whole of the surplus, as there may be opposition from the consumers.
3) Helpful to policy makers:
The policy makers can impose tax, if the consumer’s surplus for a commodity is very high. Similarly, subsidy can be granted, if the consumer’s surplus is low.
B) Elasticity of Supply.
The elasticity of supply measures the degree of responsiveness of quantities supplied to the changes in the price of a commodity. Elasticity of supply is the ratio between percentage change in quantity supplied and percentage change in price.
Types of Elasticity of Supply
a) Perfectly inelastic supply
b) Inelastic
c) Unit Elasticity
d) Elastic
e) Perfectly Elastic
C) Kinds of Demands. Kinds of Taxes.
D) Welfare Economics.
Lionel Robbins published a book “An Essay on the Nature and Significance of Economic Science” in 1932. According to him, “economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. The major features of Robbins’ definition are as follows:
a) Ends refer to human wants. Human beings have unlimited number of wants.
b) Resources or means, on the other hand, are limited or scarce in supply. There is scarcity of a commodity, if its demand is greater than its supply. In other words, the scarcity of a commodity is to be considered only in relation to its demand.
c) The scarce means are capable of having alternative uses. Hence, anyone will choose the resource that will satisfy his particular want. Thus, economics, according to Robbins, is a science of choice
E) Elasticity of Supply & its Causes.
The elasticity of supply measures the degree of responsiveness of quantities supplied to the changes in the price of a commodity. Elasticity of supply is the ratio between percentage change in quantity supplied and percentage change in price.
Types of Elasticity of Supply
a) Perfectly inelastic supply
b) Inelastic
c) Unit Elasticity
d) Elastic
e) Perfectly Elastic
F) Forms of Utility.
1. Form utility
2. Place utility
3. Time utility
4. Possession utility
1) form utility- By changing the form of an article we can given it greater utility. eg. transformation of log of wood into piece of furniture is called form utility.
2) Place utility- utility can be increased by transporting a good from one place to another.
3) Time utility- By storing a commodity & at a time of scarcity give greater utility this a time utility.
4) Possession utility- By Buying of selling activity give the possession utility
