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Chapter-5
Economic Theory
1*. If peoples income of a country is denoted in a curved line
spacethat it has increased, then what does it denote?a) the income
is increasingb) the income is decreasingc) dissimilarity is
decreasing in income distributiond) dissimilarity in income
distribution is increasing
2*. Multiplier process in economic theory is conventionally
takento meana) the manner in which prices increaseb) the manner in
which banks create creditc) income of an economy grows on account
of an initial investmentd) the manner in which government
expenditure increases
3*. A financial instrument is called a primary security if it
repre-sents the liability ofa) some ultimate borrowerb) the
Government of Indiac) a primary cooperative bankd) a commercial
bank
4*. Personal disposable income isa) always equal to personal
incomeb) always more than personal incomec) equal to personal
income minus direct taxes paid by householdd) equal to personal
income minus indirect taxes
5*. Which of the following most closely approximates our
defi-nition of oligopoly?a) The cigarette industry b) The barber
shopsc) The gasoline stations d) Wheat farmers
6. Who said Supply creates its own demand?a) Adam Smith b) J B
Sayc) Marshall d) Ricardo
7*. One of the essential conditions of perfect competition isa)
product differentiationb) multiplicity of prices for identical
products at any one timec) many sellers and a few buyersd) Only one
price for identical goods at any one time
8*. The theory of distribution relates to which of the
following?a) The distribution of assetsb) The distribution of
incomec) The distribution of factor/paymentsd) Equality in the
distribution of the income and wealth
9*. If an industry is characterised by economies of scale thena)
barriers to entry are not very largeb) long-run unit costs of
production decreases as the quantity the
firm produces increasesc) capital requirement are small due to
the efficiency of the large
scale operationd) the costs of entry into the market are likely
to be substantial
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10*. Says Law of Market holds thata) supply is not equal to
demandb) supply creates its own demandc) demand creates its own
supplyd) supply is greater than demand
11*. Movement along the same demand curve is know asa) Extension
and Contraction of Demandb) Increase and Decrease of Demandc)
Contraction of supplyd) Increase of supply
12*. When there is a change in demand leading to a shift of
theDemand Curve to the right, at the same price as before,
thequantity demanded willa) decrease b) increasec) remain the same
d) contract
13*. The income elasticity of demand being greater than one,
thecommodity must bea) a necessity b) a luxuryc) inferior goods d)
None of these
14*. Marginal efficiency of capital isa) expected rate of return
on new investmentb) expected rate of return of existing
investmentc) difference between rate of profit and rate of
interestd) value of output per unit of capital invested
15*. When there is one buyer and many sellers then, that
situationis calleda) Monopoly b) Single buyer rightc) Down right d)
Double buyers right
16*. The measure of a workers real wage isa) The change in his
productivity over a given timeb) His earnings after deduction at
sourcec) His daily earningsd) The purchasing power of his
earnings
17*. Average Revenue meansa) the revenue per unit of commodity
soldb) the revenue from all commodities soldc) the profit realised
from the marginal unit soldd) the profit realised by sale of all
commodities
18*. Economic rent refers toa) Payment made for the use of
labourb) Payment made for the use of capitalc) Payment made for the
use of organisationd) Payment made for the use of land
19*. If the price of an inferior goods falls, its demanda) rises
b) fallsc) remains constant d) can be any of the above
20*. The Marginal Utility Curve slopes downward from left to
rightindicatinga) A direct relationship between marginal utility
and the stock of
commodityb) A constant relationship between marginal utility and
the stock
of commodity
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c) A proportionate relationship between marginal utility and
thestock of commodity
d) An inverse relationship between marginal utility and the
stockof commodity
21*. Capital output ratio of a commodity measuresa) its per unit
cost of productionb) the amount of capital invested per unit of
outputc) the ratio of capital depreciation to quantity of outputd)
the ratio of working capital employed to quantity of output
22*. In equilibrium, a perfectly competitive firm will equatea)
marginal social cost with marginal social benefitb) market supply
with market demandc) marginal profit with marginal costd) marginal
revenue with marginal cost
23*. An economy is in equilibrium whena) planned consumption
exceeds planned savingsb) planned consumption exceeds planned
investmentc) intended investment equals intended savingsd) intended
investment exceeds intended savings
24*. What is book-building?a) Preparing the income and
expenditure ledgers of a company (book-
keeping)b) Manipulating the profit and loss statements of a
companyc) A process of inviting subscriptions to a public offer of
securities,
essentially through a tendering processd) Publishers
activity
25*. The method of calculating the national income by the
productmethod is otherwise known asa) Income method b) Value added
methodc) Expenditure method d) Net output method
26*. Entrepreneurial ability is a special kind of labour thata)
is hired out to firms at high wagesb) organises the process of
productionc) produces new capital goods to earn interestd) manages
to avoid losses by continual innovation
27*. What is narrow money?a) The sum of currency in circulation
and the demand deposits in
banksb) The sum of M1 money and the time depositsc) The sum of
currency in circulation with the public and the cash
reserves held by banksd) The market value of the stocks held by
all the holders excluding
the promoters28*. Transfer earning or alternative cost is
otherwise known as
a) Variable cost b) Implicit costc) Explicit cost d) Opportunity
cost (economic cost)
29*. Which of the following concepts are most closely
associatedwith J M Keynes?a) Control of money supplyb) Marginal
utility theoryc) Indifference curve analysisd) Marginal efficiency
of captial
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30*. Devaluation of money meansa) decrease in the internal value
of moneyb) decrease in the external value of moneyc) decrease in
both internal and external values of moneyd) the government takes
back currency notes of any denominations
31*. Demand of commodity mainly depends upona) Purchasing will
b) Purchasing powerc) Tax policy d) Advertisement
32*. Basic infrastructure facilities in Economics are known asa)
Human capital b) Physical capitalc) Social overheads capital d)
Working capital
33*. Evaluating all the options to find out most suitable
solution tobusiness problems is inter-disciplinary activities. It
is calleda) Professional research b) Management researchc)
Operational research d) Commercial research
34*. A seller or buyer protects his business or holdings from
changingprices and takes action against it. It is known asa)
defence b) bettingc) inter-trading d) mortgage
35*. Devaluation usually causes the internal prices toa) fall b)
risec) remain unchanged d) None of the above
36. According to Keynesian theory of income determination, at
fullemployment, a fall in aggregate demand causesa) a fall in
prices of output and resourcesb) a fall in real gross national
product and employmentc) a rise in real gross national product and
investmentd) a rise in prices of output and resources
37*. When aggregate supply exceeds aggregate demanda)
unemployment falls b) prices risec) inventories accumulate d)
unemployment develops
38*. Equilibrium price meansa) Price determined by demand and
supplyb) Price determined by cost and profitc) Price determined by
cost of productiond) Price determined to maximise profit
39*. When marginal utility is zero, the total utility isa)
Minimum b) Increasingc) Maximum d) Decreasing
40*. Which unit of valuation is known as Paper Gold?a)
Eurodollar b) Petrodollar c) SDR d) GDR
41*. Dear Money meansa) low rate of interest b) high rate of
interestc) depression d) inflation
42*. Sellers market denotes a situation wherea) commodities are
available at competitive ratesb) demand exceeds supplyc) supply
exceeds demandd) supply and demand are evenly balanced
43*. Legal Tender Money refers toa) Cheques b) Draftsc) Bill of
exchange d) Currency notes
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44*. The sum total of incomes received for the services of
labour,land or capital in a country is calleda) Gross domestic
product b) National incomec) Gross domestic income d) Gross
national income
45*. Greshams Law meansa) Good money replaces bad money in
circulationb) Bad money replaces good money in circulationc) Good
money promotes bad money in the systemd) Bad money promotes good
money in the system
46*. Bull and bear are related to which commercial activity?a)
Banking b) E-commercec) International trade d) Stock market
47*. The share broker who sells shares in the apprehension of
fallingprices of shares is calleda) Bull b) Dog c) Bear d) Stag
48*. The fixed cost on such factors of production which are
neitherhired nor bought by the firm is calleda) social cost b)
opportunity costc) economic cost d) surcharged cost
49*. The break-even point is wherea) marginal revenue equals
marginal costb) average revenue equals average costc) total revenue
equals total costd) None of these
50*. One of the essential conditions of Mono-polistic
competitioni sa) Many buyers but one sellerb) Price
discriminationc) Product differentiationd) Homogeneous product
51*. In a Laissez-Faire economya) the customers take all the
decisions regarding production of all
the commoditiesb) the Government does not interfere in the free
functioning of
demand and supply forces in the marketc) the private-sector
takes all the decisions for price-determination
of various commodities producedd) the Government controls the
allocation of all the factors of
production52*. A firm is in equilibrium when its
a) marginal cost equals the marginal revenueb) total cost is
minimumc) total revenue is maximumd) average revenue and marginal
revenue are equal
53*. Given the money wages, if the price level in an
economyincreases, then the real wages willa) increase b) decreasec)
remain constant d) become flexible
54*. The outcome of devaluation of currency isa) increased
export and improvement in balance of paymentb) increased export and
foreign reserve deficiencyc) increased import and improvement in
balance of paymentd) increased export and import
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55*. What is referred to as Depository Services?a) A new scheme
of fixed depositsb) A method for regulating stock exchangesc) An
agency for safe-keeping of securitiesd) An advisory service to
investors
56*. The Interest Rate Policy is a component ofa) Fiscal Policy
b) Monetary Policyc) Trade Policy d) Direct Control
57*. A mixed economy works primarily through thea) market
mechanismb) central allocative machineryc) market mechanism
regulated by Government policyd) market mechanism guided by
Government participation and
planning58*. In Economics, production means
a) manufacturing b) makingc) creating utility d) farming
59*. According to modern thinking, the Law of Diminishing
Returnsapplies toa) agriculture b) industryc) mining d) all fields
of production
60*. The concept that under a system of free enterprise, it
isconsumers who decide what goods and services shall be producedand
in what quantities, is known asa) Consumer Protection b) Consumers
Decisionc) Consumer Preference d) Consumers Sovereignty
61*. Seawater, fresh air, etc are regarded in Economics asa)
Giffen goods b) Inferior goodsc) free goods d) normal goods
62*. If the price of tea falls, demand for coffee willa)
increase b) decreasec) remain same d) None of these
63*. Which of the following does not determine supply of
labour?a) Size and age-structure of populationb) Nature of workc)
Marginal productivity of labourd) Work-leisure ratio
64*. Prime cost is equal toa) Variable cost plus administrative
costb) Variable cost plus fixed costc) Variable cost onlyd) Fixed
cost only
65*. The practice of selling goods in a foreign country at a
pricebelow their domestic selling price is calleda) diplomacy b)
discriminationc) dumping d) double pricing
66*. Who propounded the market law?a) Adam Smith b) J B Sayc) T
R Malthus d) David Recardo
67*. The national income consists of a collection of goods
andservices reduced to common basis by being measured in termsof
money. Who says this?
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a) Samuelson b) Kuznetsc) Hicks d) Pigou
68*. Capital-Output Ratio measuresa) its per unit cost of
productionb) the amount of capital invested per unit of outputc)
the ratio of capital depreciation to quantity of outputd) the ratio
of working capital employed to quantity of output
69*. Engels Law states the relationship betweena) quantity
demanded and price of a commodityb) quantity demanded and price of
substitutesc) quantity demanded and tastes of the consumersd)
quantity demanded and income of the consumers
70*. The demand curve for Giffen goods isa) upward risingb)
downward fallingc) parallel to the quantity axisd) parallel to the
price axis
71*. All of the goods which are scarce and limited in supply
arecalleda) Luxury goods b) Expensive goodsc) Capital goods d)
Economic goods
72*. Which is the most essential function of an entrepreneur?a)
Supervision b) Managementc) Marketing d) Risk bearing
73*. Knowledge, technical skill, education etc in economics,
areregarded asa) social-overhead capital b) human capitalc)
tangible physical capital d) working capital
74*. Purchasing Power Parity theory is related witha) Interest
rate b) Bank ratec) Wage rate d) Exchange rate
75*. Imputed gross rent of owner-occupied buildings is a part
ofa) capital formation b) final consumptionc) intermediate
consumption d) consumer durable
76*. Economies of Scale means reduction ina) unit cost of
prouction b) unit cost of distributionc) total cost of production
d) total cost of distribution
77*. With which form of economy is the term
Laissez-faireassociated?a) Capitalist economy b) Socialist
economyc) Mixed economy d) Command economy
78*. The supply of agricultural products is generallya) elastic
b) inelasticc) perfectly elastic d) perfectly inelastic
79*. Who among the following is not a classical economist?a)
David Ricardo b) John Stuart Millc) Thomas Malthus d) John Maynard
Keynes
80*. The process of curing inflation by reducing money supply
iscalleda) Cost-push Inflation b) Demand-pull inflationc)
Disinflation d) Reflation
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81*. The main determinant of real wage isa) extra earning b)
nature of workc) promotion prospect d) purchasing power of
money
82*. A refrigerator operating in a chemists shop is an example
ofa) free goods b) final goodsc) producers goods d) consumers
goods
83*. When average cost production (AC) falls, marginal cost
ofproduction must bea) Risingb) Fallingc) Greater than the average
costd) Less than the average cost
84*. Production function expressesa) technological relationship
between physical inputs and outputb) financial relationship between
physical inputs and outputc) relationship between finance and
technologyd) relationship between factors of production
85*. Interest is a reward for parting with liquidity is
according toa) Keynes b) Marshallc) Haberler d) Ohlin
86*. Extension or contraction of quantity demanded of a
commodityis a result of a change in thea) unit price of the
commodityb) income of the consumerc) tastes of the consumerd)
climate of the region
87*. Cross elasticity of demand between petrol and car isa)
infinite b) positivec) zero d) negative
88*. The Law of Demand expressesa) effect of change in price of
a commodity on its demandb) effect of change in demand of a
commodity on its pricec) effect of change in demand of a commodity
over the supply of its
substituted) None of the above
89*. A situation where we have people whose level of income is
notsufficient to meet the minimum consumption expenditure
isconsidered asa) Absolute Poverty b) Relative Povertyc) Urban
Poverty d) Rural Poverty
90*. Full convertibility of a rupee meansa) purchase of foreign
exchange for rupees freelyb) payment for imports in terms of
rupeesc) repayment of loans in terms of rupeesd) determination of
rate of exchange between rupee and foreign
currencies freely by the market forces of demand and supply91*.
An exceptional demand curve is one that moves
a) upward to the right b) downward to the rightc) horizontally
d) vertically
92*. Production function explains the relationship betweena)
initial inputs and ultimate outputb) inputs and ultimate
consumption
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c) output and consumptiond) output and exports
93*. The term stagflation refers to a situation wherea) growth
has no relation with the change in pricesb) rate of growth and
prices both are decreasingc) rate of growth is faster than the rate
of price increased) rate of growth is slower than the rate of price
increase
94*. In Economics the Utility and Usefulness havea) same meaning
b) different meaningc) opposite meaning d) None of the above
95*. If two commodities are complements, then their
cross-priceelasticity isa) zero b) positivec) negative d) imaginary
number
96*. Opportunity cost of production of a commodity isa) the cost
that the firm could have incurred when a different
technique was adoptedb) the cost that the firm could have
incurred under a different method
of productionc) the actual cost incurredd) the next best
alternative output
97*. Surplus earned by a factor other than land in the short
period oftime referred to asa) economic rent b) net rentc)
quasi-rent d) super-normal rent
98*. Price theory is also known asa) Macroeconomics b)
Development Economicsc) Public Economics d) Microeconomics
99*. A want becomes a demand only when it is backed by thea)
Ability to purchase b) Necessity to buyc) Desire to buy d) Utility
of the product
100*. The terms Microeconomics and Macro-economics were
coinedbya) Alfred Marshall b) Ragner Nurksec) Ragner Frisch d) J M
Keynes
101*. Economics is what it ought to be, This statement refers
toa) Normative economics b) Positive economicsc) Monetary economics
d) Fiscal economics
102*. The excess of price a person is to pay rather than forego
theconsumption of the commodity is calleda) Price b) Profitb)
Producers surplus c) Consumers surplus
103*. When the price of a commodity falls, we can expecta) the
supply of it to increaseb) the demand for it to fallc) the demand
for it to stay constantd) the demand for it to increase
104*. The most distinguishing feature of oligopaly isa) number
of firmsb) interdependencec) negligible influence on priced) price
leadership
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105*. Which of the following cost curve is never U-shaped?a)
Marginal cost curveb) Average variable cost curvec) Average fixed
cost curved) Average cost curve
106*. Kinked demand curve is a feature ofa) Monopoly b)
Oligopolyc) Monopsony d) Duopoly
107*. Demand for complementary goods is known asa) Joint demand
b) Derived demandc) Direct demand d) Cross demand
108*. Plant and machinery area) Producers goods b) Consumers
goodsc) Distributors goods d) Free goods
109*. The addition to total cost by producing an additional unit
ofoutput by a firm is calleda) Variable cost b) Average costc)
Marginal cost d) Opportunity cost
110*. In a perfectly competitive market a firmsa) Average
Revenue is always equal to Marginal Revenueb) Marginal Revenue is
more than Average Revenuec) Average Revenue is more than Marginal
Revenued) Marginal Revenue and Average Revenue are never equal
Answers1. c 2. c 3. a 4. c 5. a 6. b7. d 8. d 9. b 10. b 11. b
12. b13. b 14. a 15. b 16. d 17. a 18. d19. a 20. d 21. b 22. d 23.
c 24. c25. d 26. b 27. a 28. d 29. d 30. b31. b 32. c 33. c 34. a
35. c 36. a37. c 38. a 39. c 40. c 41. b 42. b43. d 44. c 45. b 46.
d 47. c 48. a49. b 50. c 51. b 52. a 53. b 54. a55. c 56. b 57. d
58. c 59. d 60. d61. c 62. b 63. c 64. a 65. c 66. b67. c 68. b 69.
d 70. a 71. d 72. d73. b 74. d 75. b 76. a 77. a 78. b79. d 80. c
81. d 82. b 83. d 84. a85. a 86. a 87. d 88. a 89. a 90. d91. b 92.
a 93. d 94. b 95. c 96. d97. c 98. d 99. a 100. c 101. a 102. c103.
d 104. b 105. c 106. b 107. a 108. a
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109. c 110. a
Explanatory Notes1. It shows inequality in income distribution.
Inequality indices can
also be derived directly from the Lorenz curve. Perhaps the
mostcommonly used inequality index is the Gini coefficient,
whichranges from 0 (perfect equality) to 1 (perfect inequality). It
is theratio of the area enclosed by the Lorenz curve and the
perfect equal-ity line to the total area below that line.
2 . In economics, a multiplier is a factor of proportionality
that measureshow much an endogenous variable changes in response to
a changein some exogenous variable. For example, suppose a one-unit
changein some variable x causes another variable y to change by M
units.Then the multiplier is M. In monetary macroeconomics and
banking,the money multiplier measures how much the money supply
increasesin response to a change in the monetary base. The
multiplier mayvary across countries, and will also vary depending
on what measuresof money are considered.
3. Instruments (certificates) issued by the ultimate borrower
are calledprimary securities. Instruments issued by intermediaries
on behalfof the ultimate borrower are called indirect securities.
The marketfor instruments (also called securities) issued for the
first time, iscalled the primary market. Primary security is the
asset createdout of the credit facility extended to the borrower
and/or which aredirectly associated with the business/project of
the borrower forwhich the credit facility has been extended.
4. Disposable income is total personal income minus personal
currenttaxes. In national accounts definitions, personal income
minuspersonal current taxes equals disposable personal
income.Subtracting personal outlays (which includes the major
category ofpersonal (or, private) consumption expenditure) yields
personal (or,private) savings.
5. An oligopoly is a market form in which a market or industry
isdominated by a small number of sellers (oligopolists). Because
thereare few sellers, each oligopolist is likely to be aware of the
actionsof the others. The decisions of one firm influence, and are
influ-enced by, the decisions of other firms. Businesses that are
part ofan oligopoly, share some common characteristics: they are
less con-centrated than in a monopoly, but more concentrated than
in acompetitive system. This creates a high amount of
interdependencewhich encourages competition in non-price-related
areas, like ad-vertising and packaging. The tobacco companies, soft
drink compa-nies, and airlines are examples of an imperfect
oligopoly.
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7. The fundamental condition of perfect competition is that
there mustbe a large number of sellers or firms. Homogeneous
Commodity isthe second fundamental condition of a perfect market.
The productsof all firms in the industry are homogeneous and
identical. In otherwords, they are perfect substitutes for one
another. There are notrademarks, patents etc to distinguish the
product of one sellerfrom that of another. Under perfect
competition, the control overprice is completely eliminated because
all firms produce homogeneouscommodities. This condition ensures
that the same price prevailsin the market for the same
commodity.
8. In economics, distribution theory is the systematic attempt
to accountfor the sharing of the national income among the owners
of thefactors of productionland, labour and capital.
Traditionally,economists have studied how the costs of these
factors and the sizeof their returnrent, wages, and profitsare
fixed. The theory ofdistribution involves three distinguishable
sets of questions. First,how is the national income distributed
among persons? Second,what determines the prices of the factors of
production? Third,how is the national income distributed
proportionally among thefactors of production?
9. In microeconomics, economies of scale are the cost advantages
thatan enterprise obtains due to expansion. There are factors that
causea producers average cost per unit to fall as the scale of
output isincreased. Economies of scale is a long run concept and
refers toreductions in unit cost as the size of a facility and the
usage levelsof other inputs increase.
10. Says Law, or the Law of Market, is an economic principle
ofclassical economics named after the French businessman
andeconomist Jean Baptiste Say (1767-1832), who stated that
supplycreates its own demand. Supply creates its own demand is
theformulation of Says Law by John Maynard Keynes.
11. A shift in the demand curve is caused by a factor affecting
demandother than a change in price. If any of these factors change
thenthe amount consumers wish to purchase changes whatever the
price.The shift in the demand curve is referred to as an increase
ordecrease in demand. A movement along the demand curve occurswhen
there is a change in price. This may occur because of a changein
supply conditions. The factors affecting demand are assumed tobe
held constant. A change in price leads to a movement along
thedemand curve and it referred to as a change in quantity
demanded.
12. In economics, the demand curve is the graph depicting
therelationship between the price of certain commodity and the
amountof it that consumers are willing and able to purchase at that
givenprice. The shift of a demand curve takes place when there is
achange in any non-price determinant of demand, resulting in a
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new demand curve. There is movement along a demand curve whena
change in price causes the quantity demanded to change. Whenthere
is a change in an influencing factor other than price, theremay be
a shift in the demand curve to the left or to the right, as
thequantity demanded increases or decreases at a given price.
Forexample if there is a positive news report about the product
thequantity demanded at each price may increase as demonstrated
bythe demand curve shifting to the right.
13. In economics, income elasticity of demand measures
theresponsiveness of the demand for the goods to a change in
theincome of the people demanding the goods, ceteris paribus. It
iscalculated as the ratio of the percentage change in demand to
thepercentage change in income. For example, if in response to a
10%increase in income, the demand for the goods increased by
20%,
the income elasticity of demand would be 2%10%20
. A positive income
elasticity of demand is associated with normal goods; an
increasein income will lead to a rise in demand. If income
elasticity ofdemand of a commodity is less than 1, these are
necessity goods. Ifthe elasticity of demand is greater than 1,
these are luxury goods orsuperior goods.
14. The volume of investment depends upon the following two
factors:(a) rate of interest; and (b) marginal efficiency of
capital. Beforeinvesting the money businessman compares interest
with the rateof marginal efficiency capital. If they expect that
rate of profit willbe greater than the rate of interest, then they
invest the moneyotherwise not. The expected rate of return on
capital is called themarginal efficiency of capital. In other
words, marginal efficiencyof capital is a return on investment
which is based partly onexpectations of future yields and partly on
the actual price of thecapital goods concerned.
15. In economics, a monopsony (mono: single) is a market form
inwhich only one buyer faces many sellers. It is an example of
imperfectcompetition, similar to a monopoly, in which only one
seller facesmany buyers. As the only purchaser of goods or
services, themonopsonist may dictate terms to its suppliers in the
same mannerthat a monopolist controls the market for its buyers. It
is also knownas Single Buyer Right. A single-payer universal health
care system,in which the government is the only buyer of health
care services,is an example of a monopsony. Another possible
monopsony coulddevelop in the exchange between the food industry
and farmers.
16. A real wage rate is a nominal wage rate divided by the price
ofgoods and is a transparent measure of how much of the goods
anhour of work buys. It provides an important Indicator of the
livingstandards of workers, and also of the productivity of
workers. Whiledifferences in earnings or incomes may be misleading
indicators ofworker welfare, real wage rates are comparable across
time andlocation. Nominal wages are not sufficient to tell us if
workers gain
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since, even if wages rise, the price of one of the goods also
riseswhen moving to free trade. The real wage represents the
purchasingpower of wages that is, the quantity of goods the wages
willpurchase
17. Average revenue is the revenue per unit of the commodity
sold.Since the demand curve shows the relationship between price
andthe quantity demanded, it also represents the average revenue
orprice at which the various amounts of a commodity are sold,
becausethe price offered by the buyer is the revenue from sellers
point ofview. Therefore, average revenue curve of the firm is the
same asdemand curve of the consumer.
18. Rent refers to that part of payment by a tenant which is
made onlyfor the use of land, ie, free gift of nature. The payment
made by anagriculturist tenant to the landlord is not necessarily
equals to theeconomic rent. A part of this payment may consist of
interest oncapital invested in the land by the landlord in the form
of buildings,fences, tube wells, etc. The term economic rent refers
to that partof payment which is made for the use of land only, and
the totalpayment made by a tenant to the landlord Is called
contract rent.Economic rent is also called surplus because it
emerges withoutany effort on the part of a landlord.
19. Some goods are known as inferior goods. With inferior goods,
thereis an inverse relationship between real income and the demand
forthe goods in question. If real incomes rise, the demand for
inferiorgoods will fall. If real incomes fall (in a recession, for
instance), thedemand for inferior goods will rise. For example, bus
travel. Aspeople get richer, they are more likely to buy themselves
a car, oruse a taxi, rather than rely on the more inferior bus, so
the demandfor bus travel falls as real incomes rise.
20. The Marginal Utility Curve is a curve illustrating the
relationbetween the marginal utility obtained from consuming an
additionalunit of goods and the quantity of the goods consumed. The
negativeslope of the marginal utility curve reflects the law of
diminishingmarginal utility. The marginal utility curve also can be
used to derivethe demand curve. Marginal Utility is the utility
derived from thelast unit of a commodity purchased. One of the
earliest explanationsof the inverse relationship between price and
quantity demanded isthe law of diminishing marginal utility. This
law suggests thatas more of a product is consumed the marginal
(additional) benefitto the consumer falls; hence consumers are
prepared to pay less.
21. Capital Output Ratio is the ratio of capital used to produce
anoutput over a period of time. This ratio has a tendency to be
highwhen capital is cheap as compared to other inputs. For
instance, acountry with abundant natural resources can use its
resource inlieu of capital to boost its output; hence the resulting
Capital OutputRatio is low. The Capital Output Ratio tends to
increase if the capitalavailable in country is cheaper than the
other inputs. Therefore the
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countries that are rich in natural resources have a low capital
outputratio. This is because they can easily substitute the capital
withnatural resource in order to increase the output. When
countriesuse their natural resources instead of capital then
Capital OutputRatio (COR) reduces.
22 . A perfectly competitive firms supply curve is that portion
of itsmarginal cost curve that lies above the minimum of the
averagevariable cost curve. A perfectly competitive firm maximises
profit byproducing the quantity of output that equates price and
marginalcost. In that price equals marginal revenue for a perfectly
competitivefirm, price is also equal to marginal cost. In other
words, the firmproduces by moving up and down along its marginal
cost curve. Themarginal cost curve is thus the perfectly
competitive firms supplycurve.
23. In economics, economic equilibrium is a state of the world
whereeconomic forces are balanced and in the absence of
externalinfluences the (equilibrium) values of economic variables
will notchange. The condition of equilibrium of income is the
equality ofintended savings and intended investment. An economy is
inequilibrium when total savings equals total investment.
24. Book-building refers to the process of generating,
capturing, andrecording investor demand for shares during an IPO
(or othersecurities during their issuance process) in order to
support efficientprice discovery. Usually, the issuer appoints a
major investmentbank to act as a major securities, underwriter or
book-runner. Thebook is the off market collation of investor demand
by the book-runner and is confidential to the book-runner, issuer,
andunderwriter. Book-building is a process of price discovery used
inpublic offers. The issuer sets a base price and a band within
whichthe investor is allowed to bid for shares.
25. Primarily there are three methods of measuring national
income.Which method is to be employee depends on the availability
of dataand purpose. The three methods are Product Method, Income
Methodand Expenditure Method. According to Product Method the
totalvalue of final goods and services produced in a country during
ayear is calculated at market prices. According to this method
onlythe final goods and services are included and the intermediary
goodsand services are not taken into account. In this method,
NationalOutput National Expenditure (Aggregate Demand) =
NationalIncome.
26. In economics, factors of production are the inputs to the
productionprocess. Factors of production may also refer
specifically to theprimary factors, which are stocks including
land, labour (the abilityto work), and capital goods applied to
production. Many economiststoday consider human capital (skills and
education) as the fourthfactor of production, with entrepreneurship
as a form of human
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capital. In markets, entrepreneurs combine the other factors
ofproduction, land labour and capital, in order to make a profit.
Oftenthese entrepreneurs are seen as innovators, and developing
newways to produce new products. In a planned economy,
centralplanners decide how land, labour and capital should be used
toprovide for maximum benefit for all citizens.
27. The four main monetary aggregates of measures of money
supplywhich reflect the state of the monetary sector are:(i) M1
(Narrow money) = Currency with the public + demand depositsof the
public, (ii ) M2 = Ml + Post Office Savings deposits;(iii) M3
(Broad money) = Ml + time deposits of the public with banksand (iv)
M4 = M3 + Total post office deposits. So Narrow Money issimply a
category of money supply that includes all physical moneylike coins
and currency along with demand deposits and other liquidassets held
by the central bank. This category of money is consideredto be the
most readily available for transactions and commerce.
28. Opportunity cost is the cost of any activity measured in
terms ofthe value of the next best alternative forgone (that is not
chosen). Itis the sacrifice related to the second best choice
available to someone,or group, who has picked among several
mutually exclusive choices.When economists refer to the opportunity
cost of a resource, theymean the value of the next-highest-valued
alternative use of thatresource. If, for example, we spend time and
money going to a movie,we cannot spend that time at home reading a
book, and we cannotspend the money on something else. If our
next-best alternative toseeing the movie is reading the book, then
the opportunity cost ofseeing the movie is the money spent plus the
pleasure we forgo bynot reading the book.
29. The Marginal Efficiency of Capital (MEC) is that rate of
discountwhich would equate the price of a fixed capital asset with
its presentdiscounted value of expected income. The term marginal
efficiencyof capital was introduced by John Maynard Keynes in his
GeneralTheory, and defined as the rate of discount which would make
thepresent value of the series of annuities given by the returns
expectedfrom the capital asset during its life just equal its
supply price.
30. Devaluation refers to a decline in the value of a currency
in relationto another, usually brought about by the actions of a
Central Bank orMonetary Authority. Devaluation is sometimes used
more generallyto describe any significant drop in a currencys
internationalexchange rate, although usually a decline caused by
market forceswith no government intervention is termed
depreciation.Devaluations are most often associated with
developingcountries that dont allow their currency prices to float
freelyon the open market.
31. The demand of commodity mainly stems from the
consumptioncapacity of the buyer. Demand is equal to desire plus
ability to pay
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plus will to spend. Demand for a commodity depends upon numberof
factors called determinants.
32. Social overheads capital is the capital spent on social
infrastructure,such as schools, universities, hospitals, libraries.
They are capitalgoods of types which are available to anybody,
hence social; and arenot tightly linked to any particular part of
production, henceoverhead. Because of their broad availability they
often have to beprovided by the government. Examples of social
overhead capitalinclude roads, schools, hospitals, and public
parks.
33. Operational research is a discipline that deals with the
applicationof advanced analytical methods to help make better
decisions.Employing techniques from other mathematical sciences,
such asmathe-matical modeling, statistical analysis, and
mathematicaloptimisation, operation research arrives at optimal or
near-optimalsolutions to complex decision-making problems. In a
nutshell,operation research (OR) is the discipline of applying
advancedanalytical methods to help make better decisions.
34. It is known as defence. It is a type of resistance against
danger,attack, or harm to business or holding. A seller or buyer
resorts todefence as a means of protection.
35. Devaluation reduces the export price in term of foreign
currenciesin the world market. As a result the exports are
increased so as toincrease the revenue of the country. When the
exports are increasedall efforts are made to increase the
production of the country.However, devaluation of currency is in
relation to external currenciesand external trade. It has effects
on a countrys international tradeby alluring traders. But, internal
prices remain unaffected.
37. Deflation and recession set in when aggregate supply
exceedsaggregate demand. This will lead to a buildup in stocks
(inventories)and this sends a signal to producers either to cut
prices (to stimulatean increase in demand) or to reduce output so
as to reduce thebuildup of excess stocks. Either way, there is a
tendency for outputto move closer to the current level of
demand.
38. Equilibrium price is a state in economy where the supply of
goodsmatches demand. When a major index experiences a period
ofconsolidation or sideways momentum, it can be said that the
forcesof supply and demand are relatively equal and that the market
is ina state of equilibrium. In short, it is the market price at
which thesupply of an item equals the quantity demanded.
39. Marginal utility measures the extra utility (or
satisfaction) fromconsuming an additional unit of a product. Total
utility is the totalsatisfaction from the consumption of the
product. According to theLaw of Diminishing Marginal Utility, total
utility increases at adiminishing rate. When marginal utility is 0
this means there is noincrease in total satisfaction from the
consumption of that unit. So
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the total unit is at maximum.
40. Paper Gold is a measure of a countrys reserve assets in
theinternational monetary system. It is also called Special
DrawingRights (SDRs) which is an international reserve asset,
created bythe IMF in 1969 to supplement its member countries
official reserves.Its value is based on a basket of four key
international currencies,a n dSDRs can be exchanged for freely
usable currencies. SDRs mayactually represent a potential claim on
IMF member countries non-gold foreign exchange reserve assets which
are usually held inthose currencies.
41. Dear Money, also Known as tight money, is money which has
tobe borrowed at a high interest rate, and so restricts expenditure
bycompanies. This situation can be a result of a restricted
moneysupply, causing interest rates to be pushed up due to the
forces ofsupply and demand. Businesses may have a tough time
raising capitalduring a period of dear money.
42. Sellers market is a market which has more buyers than
sellers.High prices result from this excess of demand over supply.
Theopposite of the sellers market is the buyers market, where
supplygreatly exceeds demand.
43. Legal Tender is a medium of payment allowed by law or
recognisedby a legal system to be valid for meeting a financial
obligation. Papercurrency and coins are common forms of legal
tender in manycountries. Legal Tender Money is a type of payment
that is protectedby law. A legal tender, also known as the forced
tender, is a verysecured and it is impossible to deny the legal
tender while subsidinga debt which is assigned in the same medium
of exchange. Theterm legal tender does not represent the money
itself; rather it is akind of status which can be bestowed on
certain types of money.
44. The Gross Domestic Income (GDI) is the total income received
byall sectors of an economy within a nation. It includes the sum of
allwages, profits, and taxes, minus subsidies. Since all income
isderived from production (including the production of services),
thegross domestic income of a country should exactly equal its
grossdomestic product (GDP).
45. Greshams Law is an economic principle that states: When
agovernment compulsorily overvalues one type of money
andundervalues another, the undervalued money will leave the
countryor disappear from circulation into hoards, while the
overvaluedmoney will flood into circulation. It is commonly stated
as: Badmoney drives out good. More exactly, if coins containing
metal ofdifferent value have the same value as legal tender, the
coinscomposed of the cheaper metal will be used for payment,
whilethose made of more expensive metal will be hoarded or
exportedand thus tend to disappear from circulation.
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46. Both the terms are related to stock market. Investors who
take abull approach purchase securities under the assumption that
theycan be sold later at a higher price. A bear is considered to be
theopposite of a bull. Bear Investors believe that the value of a
specificsecurity or an industry is likely to decline in the
future.
47. A bear market is a market condition in which the prices of
securitiesare falling, and widespread pessimism causes the negative
sentimentto be self-sustaining. As investors anticipate losses in a
bear marketand selling continues, pessimism only grows. Bear
investors believethat the value of a specific security or an
industry is likely to declinein the future.
48. Social cost is defined as a sum of the private cost and
externalcosts. The social cost is generally not borne by an
individual. It maybe borne by entire society, city or even country.
This is not a one-time cost like private cost. This cost is
recurrent and it is verydifficult to calculate due to the inclusion
of external costs. The costmay result from an event, action, or
policy changes. Social costs arenot calculated whenever a seller
sells any product or item to buyer.This cost is added up from the
use of that product.
49. The Break-Even Point (BEP) is the point at which cost or
expensesand revenue are equal there is no net loss or gain, and one
hasbroken even.
50. Monopolistic competition is a type of imperfect competition
suchthat many producers sell products that are differentiated from
oneanother as goods but not perfect substitutes (such as from
branding,quality, or location). In monopolistic competition, a firm
takes theprices charged by its rivals as given and ignores the
impact of itsown prices on the prices of other firms. In a
monopolisticallycompetitive market, firms can behave like
monopolies in the short-run, including by using market power to
generate profit. In thelong-run, however, other firms enter the
market and the benefits ofdifferentiation decrease with
competition; the market becomesmore like a perfectly competitive
one where firms cannot gaineconomic profit.
51. Laissez Faire is an economic theory from the 18th century
that isstrongly opposed to any government intervention in business
affairs.Sometimes it is referred to as let it be economics. It is
an economicenviron-ment in which transactions between private
parties arefree from tariffs, government subsidies, and enforced
monopolies,with only enough government regulations sufficient to
protectproperty rights against theft and aggression.
52. A consumer is in a state of equilibrium when achieves
maximumaggregate satisfaction on the expenditure that he makes
dependingon the set of conditions relating to his tastes and
preferences,income, price and supply of the commodity etc.
Producers equilibriumoccurs when he maximises his net profit
subject to a given set of
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economic situations. A firms equilibrium point is when it has
noinclination in changing its production. In short-run
Marginalrevenue = Marginal cost is the condition of
equilibrium.
53. If workers receive a higher nominal wage and the price level
doesnot change, then the real purchasing power of their wages is
higherand they are inclined to increase the quantity of labour
supplied. Ifthe workers receive the same nominal wage, but the
price levelincreases, then the real purchasing power of their wages
is lowerand they are inclined to decrease the quantity of labour
supplied.Any combination of changes in nominal resource prices or
the pricelevel that changes the purchasing power of resource price
enticesresource owners to change quantities supplied.
54. Devaluation is a reduction in the exchange value of a
countrysmonetary unit in terms of gold, silver or foreign currency.
Bydecreasing the price of the home countrys exports abroad
andincreasing the price of imports in the home country,
devaluationencourages the home countrys export sales and
discouragesexpenditures on Imports, thus improvising its balance of
payments.
55. It is a service offered by a securities depository under
which thedepository maintains book accounts recording the ownership
ofsecurities held on behalf of the depositorys participants, for
eligiblesecurities.
56. Monetary policy is the process by which the monetary
authority ofa country controls the supply of money, often targeting
a rate ofinterest for the purpose of promoting economic growth and
stability.The official goals usually include relatively stable
prices and lowunemployment. The contraction of the monetary supply
can beachieved indirectly by increasing the nominal interest
rates.Monetary authorities in different nations have differing
levels ofcontrol of economy-wide interest rates.
57. Mixed economy is an economic system in which both the
Stateand Private Sector direct the economy, reflecting
characteristics ofboth market economies and planned economies. The
basic idea ofthe mixed economy is that the means of production are
mainly underprivate ownership; that markets remain the dominant
form ofeconomic coordination; and that profit-seeking enterprises
and theaccumulation of capital remain the fundamental driving force
behindeconomic activity. However, unlike a free-market economy,
thegovernment would wield considerable indirect influence over
theeconomy through fiscal and monetary policies designed to
counteracteconomic downturns and capitalisms tendency towards
financialcrises and unemployment, along with playing a role in
interventionsthat promote social welfare.
58. All factors of production like land, labour, capital and
entrepreneurare required in combination at a time to produce a
commodity.
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Production means creation or an addition of utility. Factors
ofproduction (or productive inputs or resources) are any
commoditiesor services used to produce goods and services.
59. The Law of Diminishing Returns (also Law of
DiminishingMarginal Returns or Law of Increasing Relative Cost)
states thatin all productive processes, adding more of one factor
of production,while holding all others constant (ceteris paribus),
will at somepoint yield lower per-unit returns. The law of
diminishing returnsdoes not imply that adding more of a factor will
decrease the totalproduction, a condition known as negative
returns, though in factthis is common.
60. Consumer Sovereignty means that buyers ultimately
determinewhich goods and services remain in production. While
businessescan produce and attempt to sell whatever goods they
choose, if thegoods fail to satisfy the wants and needs, consumers
decide not tobuy. If the consumers do not buy, the businesses do
not sell and thegoods are not produced.
61. Free goods are what are needed by the society and are
availablewithout limits. The free goods is a term used in economics
to describethe goods that are not scarce. Free goods are available
in as great aquantity as desired with zero opportunity cost to
society.
62. Tea and coffee are substitutes to each other to a great
extent. Hence,the rise in price of one causes the increase in
demand of the otherand vice-versa.
63. The term supply of labour refers to the number of hours of
agiven type of labour which will be offered for hire at different
wagerates. Usually, it is found that higher the wage rates larger
is thesupply indicating a direct relationship that exists between
the wagerate ie the price of labour and labour hours supplied. The
supply oflabour is very much affected by the work leisure ratio
which in turnis affected by the changes in wage rates. The supply
of labour in aneconomy depends on various economic and non-economic
factorssuch as population, sex composition, age composition of
thepopulation, willingness to work, wage rates, migration
andimmigration, working hours, social attitude and standard,
legalbarriers, education and training, employers attitude,
laboursupply and leisure, efficiency of workers, etc. In economics,
theMarginal Product of Labour (MPL) is the change in output
thatresults from employing an added unit of labour. It has nothing
to dowith the supply of labour.
64. The Prime Cost refers to a Businesss expenses for the
materialsand labour it uses in production. Prime cost is a way of
measuringthe total cost of the production inputs needed to create a
givenoutput. By analysing its prime costs, a company can determine
howmuch it must charge for its finished product in order to make
aprofit. Variable costs are expenses that change in proportion to
theactivity of a business. Variable cost is the sum of marginal
costs
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over all units produced. It can also be considered normal
costs.Fixed costs and variable costs make up the two components
oftotal cost. Prime Cost = Direct Materials + Direct Labour +
DirectExpenses. This comes to Variable cost + Administrative
cost.Administrative cost is the cost associated with the
generalmanagement of organisation in accounting.
65. In economics, dumping is a kind of predatory pricing,
especiallyin the context of international trade. It occurs when
manufacturersexport a product to another country at a price either
below the pricecharged in its home market, or in quantities that
cannot be explainedthrough normal market competition.
66. Says Law, or the Law of Market, is an economic principle
ofclassical economics named after the French businessman
andeconomist Jean-Baptiste Say (1767-1832), who stated that
productsare paid for with products and a glut can take place
onlywhen there are too many means of production applied to onekind
of product and not enough to another.
67. Brit ish economist John Hicks said that National income is
acollection of goods and services reduced to a common basis by
beingmeasured in terms of money. Hicks was one of the most
importantand influential economists of the twentieth century. The
most familiarof his many contributions in the field of economics
were hisstatement of consumer demand theory in micro-economics, and
theIS/LM model (1937), which summarised a Keynesian view
ofmacroeconomics. His book Value and Capital (1939)
significantlyextended general-equilibrium and value theory.
68. Capital-Output Ratio (COR) is the ratio of capital used to
producean output over a period of time. This ratio has a tendency
to be highwhen capital is cheap as compared to other inputs. For
instance, acountry with abundant natural resources can use its
resources inlieu of capital to boost its output; hence the
resulting Capital-OutputRatio is low.
69. Engels Law is an observation in economics stating that as
incomerises, the proportion of income spent on food falls, even if
actualexpenditure on food rises. In other words, the income
elasticity ofdemand of food is between 0 and 1. Engels Law doesnt
imply thatfood spending remains unchanged as income increases. It
suggeststhat consumers increase their expenditures for food
products (in %terms) less than their increases in income.
70. The Giffen goods are the goods whose consumption increases
asits price increases. (For normal goods, as the price
increases,consumption decreases.) Thus, the demand curve will be
upwardinstead of downward sloping. The Giffen goods have an
upwardsloping demand curve because these are exceptionally
inferior. Ithas a strong negative income elasticity of demand such
that when aprice changes the income effect outweighs the
substitution effect
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and this leads to perverse demand curve.
71. In economics, the goods are something that are intended to
satisfysome wants or needs of a consumer and thus has economic
utility.The economic goods are consumable items that are useful to
peoplebut scarce in relation to their demands, so that human effort
isrequired to obtain them. In contrast, free goods (such as air)
arenaturally in abundant supply and need no conscious effort to
obtainthem.
72. An entrepreneur performs a series of functions necessary
rightfrom the genesis of an idea up to the establishment and
effectiveoperation of an enterprise. The functions of an
entrepreneuras risk bearer are specific in nature. The entrepreneur
assumesall possible risks of business which emerges due to the
possibilityof changes in the tastes of consumers, modern
techniquesof production and new inventions. Such risks are not
insurableand incalculable. In simple terms such risks are known
asuncertainty concerning a loss.
73. Human capital is the stock of competencies, knowledge,
socialand personality attributes, including creativity, embodied in
theability to perform labour so as to produce economic value.It is
an aggregate economic view of the human being acting
withineconomies, which is an attempt to capture the social,
biological,cultural and psychological complexity as they interact
in explicitand/or economic transactions.
74. Purchasing Power Parity (PPP) is an economic theory and
atechnique used to determine the relative value of
currencies,estimating the amount of adjustment needed on the
exchange ratebetween countries in order for the exchange to be
equivalent to (oron par with) each currencys purchasing power. It
asks how muchmoney would be needed to purchase the same goods and
services intwo countries, and uses that to calculate an implicit
foreign exchangerate. Using that PPP rate, an amount of money thus
has the samepurchasing power in different countries.
75. The figure of final private consumption expenditure includes
theimputed gross rent of owner-occupied dwellings, consumptionof
own-account production and payment by households of wagesand
salaries in kind valued at cost, eg, provision for food, shelterand
clothing to the employees, wherever they exist. Production
forself-consumption is a part of production and hence an income
andis also a part of final consumption expenditure.
76. In microeconomics, economies of scale are the cost
advantagesthat an enterprise obtains due to expansion. Economies of
scale isa long-run concept and refers to reductions in unit cost as
the sizeof a facility and the usage levels of other inputs
increase.
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77. In economics, laissez-faire means allowing industry to be
free ofstate intervention, especially restrictions in the form of
tariffs andgovernment monopolies. The growth of industry in England
in theearly 19th century and American industrial growth in the late
19thcentury both occurred in a laissez-faire capitalist
environment. Thelaissez-faire period ended by the beginning of the
20th century,when large monopolies were broken up and government
regulationof business became the norm.
78. In the conditions of a free market, the terms of trade are
constantlychanging. The supply of agricultural products is
generallyinelastic in the sense that a rise in prices cannot call
forth, beforea year has passed, a commensurate increase in sales.
At the sametime, demand is inelastic, in the sense that a rise in
prices offoodstuffs does not cause purchases to be reduced
proportionately.
79. Classical economics is widely regarded as the first modern
schoolof economic thought. Its major developers include Adam Smith,
Jean-Baptiste Say, David Ricardo, Thomas Malthus and John
StuartMill. John Maynard Keynes was a British economist whose
ideashave profoundly affected the theory and practice of
modernmacroeconomics, and formed the economic policies of
governments.He built on and greatly refined earlier work on the
causes of businesscycles and is widely considered to be one of the
founders of modernmacroeconomics and the most influential economist
of the 20thcentury. His ideas are the basis for the school of
thought known asKeynesian economics, as well as its various
offshoots.
80. Disinflation is a decrease in the rate of inflationa
slowdown inthe rate of increase of the general price level of goods
and servicesin a nations gross domestic product over time. It is
the opposite ofreflation. Disinflation occurs when the increase in
the consumerprice level slows down from the previous period when
the priceswere rising. Disinflation is the reduction in the general
price levelin the economy but for a very short period of time.
Disinflationtakes place only when an economy is suffering from
recession.
81. The term real wages refers to wages that have been adjusted
forinflation. This term is used in contrast to nominal wages
orunadjusted wages. Real wages provide a clearer representation
ofan individuals wages. The real purchasing power of income ormoney
is the key determinant of real wages. It is an indication of
anindividuals actual purchasing power. Real wages are a
usefuleconomic measure, as opposed to nominal wages, which
simplyshow the monetary value of wages in that year. However, real
wagesdoes not take into account other compensation like benefits or
oldage pensions.
82. Final goods are goods that are ultimately consumed rather
thanused in the production of another goods. For example, a car
sold toa consumer is an example of the final goods; the components
suchas tires sold to the car manufacturer are not; they are
intermediategoods used to make the final goods.
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83. Average cost is the total cost per unit of output. Marginal
cost, onthe other hand, is the addition to the total cost by
producing onemore units of output. Economies of scale are said to
exist if anadditional unit of output can be produced for less than
the averageof all previous unitsthat is, if long-run marginal cost
is belowlong-run average cost, so the latter is falling.
Conversely, there maybe levels of production where marginal cost is
higher than averagecost, and average cost is an increasing function
of output.
84. Production involves transformation of inputs into outputs.
The outputis a function of input. The functional relationship
between physicalinputs and physical outputs of a firm is called
production function.The word function in mathematics means the
precise relationshipthat exists between one dependent variable and
a number (or one) ofindependent variables. The production function
states the maximumquantity of output that can be produced from any
given quantities ofvarious inputs during a given period of
time.
85. In macroeconomic theory, liquidity preference refers to the
demandfor money, considered as liquidity. The concept was first
developedby John Maynard Keynes in his book The General Theory
ofEmployment, Interest and Money (1936) to explain determinationof
the interest rate by the supply an demand for money. The demandfor
money as an asset was theorised to depend on the interestforegone
by not holding bonds. Interest rates, he argues, cannot bea reward
for savings as such because, if a person hoards his savingsin cash,
keeping it under his mattress say, he will receive no
interest,although he has nevertheless refrained from consuming all
hiscurrent income. Instead of a reward for savings, interest in
theKeynesian analysis is reward for parting with liquidity.
86. Demand for a commodity refers to the quantity of the
commoditythat people are willing to purchase at a specific price
per unit oftime, other factors (such as price of related goods,
income, tastesand preferences, advertising, etc) being constant.
Demand includesthe desire to buy the commodity accompanied by the
willingness tobuy it and sufficient purchasing power to purchase
it. So changesin the unit price of a commodity leads to either
extension orcontraction in demand. The law of demand states that
there is aninverse relationship between quantity demanded of a
commodityand its price, other factors being constant. In other
words, higherthe price, lower the demand and vice versa, other
things remainingconstant.
87. In economics, the cross elasticity of demand or the
cross-priceelasticity of demand measures the responsiveness of the
demandfor the goods to a change in the price of another goods. It
is measuredas the percentage change in demand for the first goods
that occursin response to a percentage change in price of the
second goods.For example, if, in response to a 10% increase in the
price of fuel,the demand of new cars that are fuel inefficient
decreased by 20%,the cross elasticity of demand would be 2. A
negative cross elasticitydenotes two products that are complements,
while a positive cross
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elasticity denotes two substitute products.
88. The Law of Demand states the inverse relation that comes to
existof between price in one hand and quantity demanded on the
other.The law of demand portrays that demand is the function of
price.Price is the key determinant of demand. Fluctuations in price
leadsto changes in the quantity demanded. In other words, the
higherthe price of a product, the lower the quantity demanded.
89. Absolute poverty is defined as a situation in which the
individualsbasic needs are not covered. In other words, there is a
lack of basicgoods and services (normally related to food, housing
and clothes).This concept of poverty is strongly linked to
destitution which isan inability to meet the minimum consumption
expenditure. It is alevel of poverty as defined in terms of the
minimal requirementsnecessary to afford minimal standards of food,
clothing, health careand shelter. According to a UN declaration
that resulted from theWorld Summit on Social Development in
Copenhagen in 1995,absolute poverty is a condition characterised by
severe deprivationof basic human needs, including food, safe
drinking water, sanitationfacilities, health, shelter, education
and information. It dependsnot only on income but also on access to
services.
90. The Full Convertibility of the Indian Currency means that
therupee would be made freely exchangeable into other currencies
andvice versa. The rupee was made partially convertible in
1994.Currently, it can be changed freely into foreign currency for
businessand trade expenses but not freely for activities like
acquiring overseasassets. Full converted of the currency means the
local currency canbe exchanged to foreign currency without any
governmental control.Presently, the issue of capital account
convertibility is in thediscussion stage.
91. A Demand Curve that violates the law of demand is termed as
anexceptional demand curve. If a household expects the price of
acommodity to increase, it may start purchasing a greater amount
ofthe commodity even at the presently increased price. Similarly,
ifthe household expects the price of the commodity to decrease,
itmay postpone its purchases. Thus, law of demand is violated
insuch cases. In this case, the demand curve does not slope
downfrom left to right; instead it presents a backward slope from
the topright to down left. This curve is known as an exceptional
demandcurve.
92. Production function explains the relationship between factor
inputand output under given technology. It explains as to for
increasingthe output, in which proportion of various inputs or
factors may beemployed under given technological conditions. In
short, productionfunction may be defined as a technological
relationship that tellsthe maximum output producible from various
combinations of inputs.Production function explains the physical
relationship betweeninput and output under given technology.
93. In economics, stagflation is a situation in which the
inflation rate
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is high, the economic growth rate slows down, and
unemploymentremains steadily high. Stagflation occurs when the
economy is notgrowing but prices are, which is not a good situation
for a countryto be in. This happened to a great extent during the
1970s, whenworld oil prices rose dramatically, fueling sharp
inflation indeveloped countries. For these countries, including the
USA,stagnation increased the inflationary effects.
94. In economics, utility is a representation of preferences
over someset of goods and services. Preferences have a utility
representationso long as they are transitive, complete and
continuous. Usefulnessrefers to which extent something is useful
and the utility is thequality of that piece in practical use. Both
are inter-related terms.Utility is a factor of usefulness term.
Usefulness means havingpractical utility of a piece which is
beneficial, pertinent andfunctional.
95. In economics, the cross elasticity of demand or
cross-priceelasticity of demand measures the responsiveness of the
demandfor the goods to a change in the prices of another goods. It
is measuredas the percentage change in demand for the first goods
that occursin response to a percentage change in price of the
second goods. Anegative cross elasticity denotes two products that
are complements,while a positive cross elasticity denotes two
substitute products.
96. The concept of opportunity cost is based on scarcity and
choice.The opportunity cost of a commodity is the next best
alternativecommodity sacrificed. In other words, opportunity cost
of a commodityis forgoing the opportunity to produce alternative
goods and services.If one commodity is produced another commodity
is sacrificed. Soopportunity cost of producing the goods is equal
to the cost of notproducing another commodity.
97. Quasi-rent is the surplus which is received in the short
periodbecause of demand exceeding the supply by the man made
factorsbesides land. It is an analytical term in economics, for the
incomeearned, in excess of post-investment opportunity cost, by a
sunkcost investment. In general, an economic rent is the
differencebetween the income from a factor of production in a
particular use,and either the cost of bringing the factor into
economic use (Classicalfactor rent), or the opportunity cost of
using the factor, whereopportunity cost is defined as the current
income minus the incomeavailable in the next best use.
98. Price theory is also known as micro-economics and is
concernedwith the economic behaviour of individual consumers,
producersand resource owners.
99. Need, Want and Demand are the three key concepts
ofmarketing. Needs are the basic human requirements. These
needsbecome wants when they are directed to specific objects that
mightsatisfy the need, though these wants in themselves are not
essentialfor living. Wants are therefore shaped by ones society
andsurroundings. The third concept, demands, are wants for
specific
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products backed by an ability to pay.
100. The terms microeconomics and macroeconomics were coined
byProfessor Ragnar Frisch of Oslo University for the first time
in1933 and since then they gained popularity and were widely usedby
other economists. Now they have become an integral part ofeconomic
terminology.
101. Normative economics (as opposed to positive economics) is
thatpart of economics that expresses value judgements
(normativejudgements) about economic fairness or what the economy
ought tobe like or what goals of public policy ought to be. It is
the study orpresentation of what ought to be rather than what
actually is.Normative economics deals heavily in value judgements
andtheoretical scenarios.
102. Producers Surplus is an economic measure of the
differencebetween the amount that a producer of the goods receives
and theminimum amount that he or she would be willing to accept for
thegoods. The difference, or surplus amount, is the benefit that
theproducer receives for selling the goods in the market.
103. In economics, the Law of Demand is an economic law,
whichstates that consumers buy more of goods when its price is
lowerand less when its price is higher. The Law of Demand states
thatthe quantity demanded and the price of a commodity are
inverselyrelated, other things remaining constant. That is, if the
income ofthe consumer, prices of the related goods, and preferences
of theconsumer remain unchanged, then the change in quantity of
goodsdemanded by the consumer will be negatively correlated to the
changein the price of the goods.
104. An oligopoly is a market form in which a market or industry
isdominated by a small number of sellers, (oligopolists). Because
thereare few sellers each oligopolist is likely to be aware of the
actions ofthe others. The decisions of one firm influence, and are
influencedby, the decisions of other firms. Some of its
characteristics are:Profit maximisation conditions. Number of f
irms; Productdifferentiation: Interdependence. Non-Price
Competition, etc Thedistinctive feature of an oligopoly is
interdependence. Oligopoliesare typically composed of a few large
firms. Each firm is so largethat its actions affect market
conditions. Therefore, the competingfirms will be aware of a firms
market actions and will respondappropriately. This means that in
contemplating a market action, afirm must take into consideration
the possible reactions of allcompeting firms and the firms
countermoves.
105. Average fixed cost curve is never U-shaped. Since total
fixed costsare unchanged as output rises, the average fixed cost
curve fallscontinuously as output is increased.
106. The kinked demand curve theory is an economic theory
regarding
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oligopoly and monopolistic competition. Kinked demand was
aninitial attempt to explain sticky prices.
107. Demand for complementary goods is called Joint Demand.
JointDemand is the demand in which goods are related in such a
waythat an increase in the demand for one causes an increase in
thedemand for the other.
108. Plant and machinery are Producers goods. Together with
stocksand work in progress, these goods are collectively termed
Capital.
109. The addition to total cost by producing an additional unit
of outputby a firm is called marginal cost. Average cost is the
total cost ofproducing a given output divided by that output.
110. Average Revenue is the amount of money received by a firm
perunit of output sold. Marginal Revenue is the change in total
revenueresulting from a small change in the quantity sold. In a
perfectlycompetitive market, a firms Average Revenue is always
equal toMarginal Revenue.