Eco Past Papers

XI - Economics Past Papers Solution Page 1 of 46 Prepared By: Muhammad Asad Ali(MBA, M.A (Eco), (CA))

ECONOMICS

Principles of

XI COMMERCEPast Paper Solutions

(Microeconomics)

Year Page number

2014 - REGULAR 3

2014 – PRIVATE 16

2013 – REGULAR 21

2013 – PRIVATE 29

2012 – REGULAR 33

2012 – PRIVATE 39

2011 – REGULAR 42

2011 – PRIVATE 46

2010 REGULAR AND PRIVATE 46


2014 - RegularQ2 (i) Compare the features of Perfect Competition and Monopoly. (4 Marks)

COMPARISON BETWEEN PERFECT COMPETITION AND MONOPOLY Perfect Competition Monopoly

Number of Firms:In perfect competition there are so large number of firms in the market.

In Monopoly there is only one seller i.e monopolist.

Product differentiation:In perfect competition there is no differentiation in goods and they are homogenous.

In monopoly there are highly differentiated goods with no close substitute.

Entry and exits of Firms:In perfect competition there are no entry barriers in the market. Any individual firm can enter and exit the market.

Since the monopolist have control over the market there are very high entry barriers to entry in the market.

Demand Curve:The demand curve in perfect competition is perfectly elastic.

The demand curve in monopoly is relatively inelastic

Mobility of resources:The factors of production are perfectly mobile. There is restriction in mobility of resources in

monopoly.Dissemination of information:There is free flow of information in the perfect competitive market that is the buyers and sellers may have complete knowledge of the market.

There is restriction in flow of information in monopoly.

Q2 (ii) Distinguish between Micro and Macroeconomics. (4 Marks)

DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS Microeconomics Macroeconomics

1. It is that branch of economics which deals with the economic decision-making of individual economic agents such as the producer, the consumer, etc.

2. It takes into account small components of the whole economy.

3. It deals with the process of price determination in case of individual products and factors of production.

4. It is known as price theory (since it explains the process of allocation of economic resources along alternative lines of

1. It is that branch of economics which deals with aggregates and averages of the entire economy, e.g., aggregate output, national income, aggregate savings and investment, etc.

2. It takes into consideration the economy of any country as a whole.

3. It deals with general price-level in any economy.

4. It is also known as the income theory (since it


production on the basis of relative prices of various goods and services.)

5. It is concerned with the optimisation goals of individual consumers and producers (e.g., individual consumers are utility-maximisers, while individual producers are profit maximisers.)

6. It studies the flow of economic resources or factors of production from any individual owner of such resources to any individual user of these resources, etc.

7. Microeconomic theories help us in formulating appropriate policies for resource allocation at the firm level.

8. It takes into account the aggregates over homogeneous or similar products (e.g., the supply of steel in an economy.)

explains the changing levels of national income in any economy during any particular time period.)

5. It is concerned with the optimisation of the growth process of the entire economy.

6. It studies the circular flow of income and expenditure between different sectors of the economy (say, between the firm sector and the household sector.)

7. Macroeconomic theories help us in formulating appropriate policies for controlling inflation (i.e., rising price-level), unemployment, etc.

8. It takes into account the aggregates over heterogeneous or dissimilar products (say, the Gross Domestic Product of any country during any year.)

Q2 (iii) Explain the Internal and External Economies of scales. (4 Marks)

ECONOMIES OF SCALE Economies of scale are the advantages that arise for a firm because of its larger size, or scale of operation. These advantages translate into lower unit costs or improved productive efficiency, although some economies of scale are not so easy to quantify.Internal Economies of ScaleThe internal economies of scale are the benefits which a firm gets individually from change of scale of production. Some of the main kinds of internal Economies of Scale are Decrease in purchase cost due to bulk purchases, Advancement in production machinery and Specialization of labourExternal economies of scale External economies of scale arise from firms in related industries operating in a concentrated geographical area; suppliers of services and raw materials to all these firms can do so more efficiently. Infrastructure such as roads and sophisticated telecommunications are easier to justify. Q2 (iv) Mention the degrees of Elasticity of Demand (4 Marks)

DEGREES OF ELASTICITY OF DEMAND: A small fall in the price of a product may lead to a considerable increase in the quantity demanded, but sometimes even a considerable fall in price may not lead to any increase in demand. The degree of responsiveness of demand to small change in price differs from commodity to commodity. Degrees of elasticity of demand are classified into five types:Degrees


1. UNIT ELASTICITY (ED = 1):

Demand is unit elastic when percentage change in quantity demand and percentage in price are equal. In case of unit elastic demand the demand curve is a Rectangular Hyperbola. In practice it is difficult to find such commodities as have a demand curve whose elasticity is unit throughout.

2. RELATIVELY ELASTIC DEMAND (ED > 1):

The demand is relative elastic or more than unity when relative change in quantity demanded is more than the relative change in price. In such cases the demand curve is of less slope.

3. RELATIVELY INELASTIC DEMAND (ED < 1):

Demand is said to be relatively inelastic or less than unity when proportionate change in demand is less than proportionate change in price. In such cases the slope of demand curve falls rapidly.

4. PERFECTLY INELASTIC DEMAND (ED = 0):

When there is no change in demand as a result of increase or decrease in price then the demand is perfectly inelastic. The demand curve is vertical on OX axis

5. PERFECTLY ELASTIC DEMAND (ED = OC):

The demand is perfectly elastic when even a small change in price cause an infinite large change in amount demanded. A small rise in price on the part of a seller reduces the demand to zero. In such cases the demand curve is parallel to OX axis.Q2 (iv) Explain the relationship between Average Cost and Marginal Cost. (04 Marks)Marginal cost is the addition made to the total cost by adding additional unit of output. Marginal cost is used for decisions regarding production of additional output. Its formula is MC = ΔTC / ΔQ.Whereas, Average cost is per unit cost of all the units produced by a firm. It is used for pricing decisions. It is U shaped curve. Its formula is AC = TC / Q

RELATIONSHIP BETWEEN MARGINAL COST AND AVERAGE TOTAL COST Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average-total-cost curve at the efficient scale which minimizes

Average Total Cost. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost

Q2 (v) Explain the Characteristics of Monopoly (04 Marks)


CHARACTERISTICS OF MONOPOLY: SINGLE SELLER

Under monopoly, there is a single producer of a particular commodity or service in the market accruing to a rather large number of buyers.

RESTRICTED ENTRY

Free entry of new organizations in this market arrangement is prohibited, that is, other sellers cannot enter the market of monopoly. Few of the primary barriers, constricting the entry of new sellers are:1. Government license or franchise2. Resource ownership3. Patents and copyrights4. High start-up cost5. Decreasing average total cost

NATURE OF PRODUCT

A monopoly firm manufactures a commodity that has no close substitute. With the absence of availability of a substitute, the buyer is bound to purchase what is available at the tagged price.

PRICE MAKER

A monopolist is a price maker as its product has no close substitute.Q2 (vi) What are the assumptions and exceptions of Law of Demand? (04 Marks)

ASSUMPTIONS OF THE LAW OF DEMAND 1. There is no change in income of consumers.2. There is no change in quality of product. 3. There is no substitute of the commodity. 4. The prices of related commodities remain the same.5. There is no change in customs. 6. There is no change in taste and preference of consumers. 7. The size of population remains the same.8. The climate and weather conditions are same.9. The tax rates and other fiscal measures remain the same

EXCEPTIONS TO THE LAW OF DEMAND: Status Symbol Goods: The exception relates to certain prestige goods which are used as status symbols. For example, diamonds, gold, antique paintings, etc. are bought due to the prestige they confer upon the possessor.


Fear of Shortage: If the consumers expect a shortage or scarcity of a particular commodity in the near future, then they would start buying more and more of that commodity in the current period even if their prices are rising.Ignorance: Consumers may buy more of a commodity at a higher price when they are ignorant of the prevailing prices of the commodity in the market.Necessities of Life: Another exception occurs in the use of such commodities, which become necessities of life due to their constant use.Q2 (vi) Differentiate between Stock and Supply (04 Marks)

DIFFERENCE BETWEEN SUPPLY AND STOCK: Supply refers to that quantity of the commodity which is actually brought into the market for sale at a given price per unit of time. While Stock is meant the total quantity of a commodity this exists in a market and can be offered for sale at a short notice.The supply and stock of a commodity in the market may or may not be equal if the commodity is perishable, like vegetables, fruits, fish, etc; then the supply and stock is generally the same. But in case of a product find that the price of his product is low as compared to its cost of production, he tries to withhold the entire or a part of a stock. In case of a favorable price, the producer may dispose of large quantities or the entire stock of his commodity; it will all depend upon his own valuation of the commodity at that particular time.Q2 (vii) With the help of a schedule, draw TFC, TVC and STC curve (04 Marks)

TFC, TVC AND STC CURVE

Unit of Output

Total Fixed Cost (TFC)

Total Variable

Cost (TVC)

Total Cost

0 15 0 151 15 10 252 15 18 333 15 23 384 15 25 405 15 26 416 15 26 417 15 27 428 15 29 449 15 34 49

10 15 42 5711 15 52 67

Q4 (i) Which definition of the economics is the best in your opinion? Give arguments in support of your answer. (10 Marks)


0 1 2 3 4 5 6 7 8 9 10 110

10

20

30

40

50

60

70

80 TVC, TFc, STC

Units of Output

TVC,

TFC

, STC

The best definition is that by Lionel Robins, "Economics is the social sciences which studies human behavior as a relationship between ends and scare means which has alternative uses"

ARGUMENTS IN FAVOUR POSITIVE SCIENCE

Lord Robbins has tried to make economics a more definite science. According to this definition, economics is a positive science instead of normative science. It tells us what the economics activities are. In this – way, it is the study of reality. Economics has no relationship whatsoever with the goodness or meanness of the economic activities. It is unbiased regarding welfare, or neutral regarding the ends.

STUDY OF HUMAN BEHAVIOUR

The definition has made economics a study of human behaviour instead of the study of social man. Economics studies the economic activities of all the people living in or outside the society.

ANALYTICAL

Lord Robbins has made the study of economics analytical. Economics problems of man are analyzed in economics. Economics problems are created because of the unlimited human wants and the scarce means to satisfy these wants. Moreover, these means can be used in various ways. Man has to make a choice regarding his ends and means. In this way, this definition is a scientific analysis of beginning and end of the economic problem.

WIDER SCOPE

This definition has widened the scope of economics. In economics, economic activities of man related to all kinds of scarce means are studied. These means can be both material goods and non – material services. They may or may not promote welfare.

UNIVERSAL

Robbins’ definition is a universal definition of economics. It is concerned with the problem of unlimited wants and scarce means. This problem is found at every economy, such as, Capitalism, Socialism, etc. According to Eric Roll, “The laws based on the definition of Robbins are applicable to all types of society.”

STUDY OF SCARCITY

This definition has discussed the economic problem more logically and property. The main reason of the creation of the wants. Air and water are physical (material) goods, but these are not scarce or limited. So, generally no economic problem is created regarding these. As a result of the scarcity of means, the problem of choice or valuation is created. This is, in fact, the major problem of economics. Thus, economics is the study of scarcity.


Q4 (ii) Explain with the aids of diagrams, equilibrium of a firm in perfect competition during short run. (10 Marks)

SHORT RUN EQUILIBRIUM OF A FIRM UNDER PERFECT COMPETITION The main goal of the firm is to maximise its profit. This means that the firm will continuously produce output at a level where MR = MC. Hence, the firm will be in an equilibrium state when it fulfils this rule. In the short-run, the firm might gain normal profit, supernormal profit, subnormal profit/normal loss, and Super loss or gets shutdown point.

SUPERNORMAL PROFIT

From the explanation above, we have understood about the rule that needs to be fulfilled by the firm in determining the output that will maximise its profit. We can draw a diagram to illustrate the level of output that will maximise profit of the firm. In a perfectly competitive market, since marginal revenue is equivalent to market price, hence the marginal revenue curve is a horizontal line at the market price level of RM6. This also indicates that the demand curve of the firm is also the marginal revenue curve. The firm will gain RM6 for every unit of output sold and this is also the average revenue for the firm. Average revenue (AR) is total revenue divided by quantity, or AR/Q. Thus, the demand curve of the firm (D) is also the marginal revenue (MR) curve and average revenue (AR) curve. In conclusion, D is the demand curve, marginal revenue curve and average revenue curve of the firm, that is, D=MR=ARA firm achieves equilibrium in the short-run when it produces output at the level where MR = MC. Referring to the above figure, we find that the firm achieves equilibrium at point e. At this level of equilibrium, the firm must produce 5 units of output in order to maximise its profit.

If the output level is less than 5 units, it is noted that the marginal revenue exceeds marginal cost. Therefore, the firm needs to increase production to increase profit.

On the other hand, if output produced is more than 5 units, the firm needs to reduce production to increase profit since the marginal cost exceeds marginal revenue.


At the equilibrium point, it is found that average cost (AC) curve is situated below the demand curve. This indicates that the firm gains supernormal profit. Profit gained by firm is denoted by the shaded area. Total profit is

Total Revenue – total Cost or (Price – Average Cost) x Quantity= (P X Q) – (AC x Q) = (6 – 4.6) × 5= (6 × 5) - (4.6 × 5) = 1.4 × 5= 30 – 23 = 7= 7

NORMAL PROFIT

Normal profit is a condition where the total revenue gained by a firm is only enough to cover its total production cost, or when price of one unit of output is equivalent to its average cost.Referring to the figure, observe that the firm achieves equilibrium at point e, that is, when MR = MC. Assume at that equilibrium level, the firm produces 5 units of output with the price of RM6 per unit. The firm’s cost per unit is also equal to the price, that is, RM6. This is indicated by average cost (AC) curve touching the demand curve at point e. This is because

Total Revenue – total Cost or (Price – Average Cost) x Quantity= (P X Q) – (AC x Q) = (6 – 6) × 5= (6 × 5) - (6 × 5) = 0 × 5= 30 – 30 = 0= 0

Since total revenue is equivalent to total cost, hence the firm will only gain normal profit in the short-run.

SUBNORMAL PROFIT / NORMAL LOSS

Firms in a perfectly competitive market might experience subnormal profit in the short-run. Normal Loss is a condition where the price of one unit of output is lower than the production Total cost per unit of output, but is greater than Average Variable Cost per unit so total cost exceeds total revenue of firm. This situation is shown in the figure. It depicts that the


firm achieves equilibrium at point e. At that point of equilibrium, the firm will produce 5 units of output in order to maximise its profit. Firm imposes a price of RM6 per unit. However, the production cost per unit is higher than the price per unit, that is, RM6.50. This is indicated by the average cost (AC) curve that is above the demand curve. In conclusion, the firm gains subnormal profit in the short-run. The shaded area in the diagram denotes the loss faced by firm.Total Revenue - Total Cost or (Price -Average Cost) × Quantity= (P × Q) - (AC × Q) = (6 - 6.50) × 5= (6 × 5) - (6.5 × 5) = - 0.50 × 5= 30 - 32.50 = -RM2.50= -RM2.50Note: Here Price is less then total cost but a part of fixed cost is being recovered by sales. That means variable cost is less than price. The difference of price and variable cost per unit contributes towards fixed cost. It is also called contribution margin. The firm is in normal loss when it has positive contribution margin i.e

MR > AVC and TR<TC

SUPERLOSS

Firms in a perfectly competitive market might experience subnormal profit in the short-run. Normal Loss is a condition where the price of one unit of output is lower than the production Total cost per unit of output, but is greater than Average Variable Cost per unit so total cost exceeds total revenue of firm. This situation is shown in the figure. It depicts that the firm achieves equilibrium at point e. At that point of equilibrium, the firm will produce 5 units of output in order to maximise its profit. Firm imposes a price of RM6 per unit. However, the production cost per unit is higher than the price per unit, that is, RM6.50. This is indicated by the average cost (AC) curve that is above the demand curve. In conclusion, the firm gains subnormal profit in the short-run. The shaded area in the diagram denotes the loss faced by firm.

Total Revenue - Total Cost or (Price -Average Cost) × Quantity= (P × Q) - (AC × Q) = (6 - 6.50) × 5= (6 × 5) - (6.5 × 5) = - 0.50 × 5= 30 - 32.50 = -RM2.50= -RM2.50


Note: Here Price is less then total cost and no fixed cost is being recovered by sales. That means variable cost is equal to price. The difference of price and variable cost per unit contributes towards fixed cost. It is also called contribution margin. The firm is in Super normal loss when it has zero contribution margin i.e

MR = AVC and TR<TC

SHUT DOWN POINT

Firms in a perfectly competitive market might experience shut down point in the short-run. It is a condition where the price of one unit of output is lower than the Variable production cost per unit of output.We know that the variable costs exist when production is being carried out. Therefore, if production is stopped, the firm will only have to bear its fixed costs. In conclusion, the firm will close down its operations if it faces a condition of price being lower than the average variable costs, or P < AVC. Since fixed cost is beyond the control of firm in the short-run, TR gained must at least be able to cover the variable costs. If not, there is no use for the firm in paying the salary of workers and the costs of raw materials if TR is unable to cover the expenditure for purchasing variable inputs

REASON FOR CLOSURE OF PRODUCTION:Total Revenue:

TR = Price x QuantityTR = P x QTR = 6 x 5TR = 30Total Variable cost (cost of producing 5 units):VC = Variable cost per unit x quantityVC = AVC x QVC = 6.1 x 5VC = 30.5Means producing 5 units will give loss of 0.5 in addition to fixed cost. So it is better to stop production and bear loss of only fixed cost.Q4 (ii) Explain the laws of Returns and Laws of Costs with the help of schedule and diagrams. (10 Marks)

LAWS OF COSTS AND LAWS OF RETURNS:

There are three laws of costs in terms of cost against the three laws of returns. These are:

1. Law of decreasing cost which is also called law if increasing returns.2. Law of constant cost which is also called law of constant returns.


3. Law of increasing costs which is also called law of decreasing returns.

These laws are briefly explained below:

LAW OF DECREASING COSTS AND INCREASING RETURNS:

In terms of returns the law states , “If varying quantity of one or two variable factors of production are combined with a fixed factor, the marginal (additional) output increases at an increasing rate, to a certain point”In terms of costs, the law of increasing returns means the declining of the marginal costs as successive units of variable factors are employed. Se we are moving towards the optimum business point. It is called law of decreasing costs. Therefore, the other name of law of increasing returns is the law of decreasing costs.

LAW OF CONSTANT COSTS AND CONSTANT RETURNS:

In terms of returns the law states, “When all of the productive services are increased in a given proportion, the product in increased in the same proportion”In terms of costs, the law of constant returns means the constant marginal costs as the industry is expanded by employing more units of variable factors. By constant costs, the industry moves on the path of optimum business unit. Therefore, the other name of the law of constant is known as the law of constant costs.

LAW OF INCREASING COSTS AND DIMINISHING MARGINAL RETURNS:

In the terms of returns the law states, “If the quantity of one or more factors of production is kept constant (fixed), while the quantities of other factors of production are gradually increased, then after a point, the corresponding returns to every additional unit of the Variable factor will begin to diminish.”The law of decreasing returns means the increasing of the marginal cost. So we are moving afterwards the optimum business unit. The tendency on the part of marginal cost to rise is called the law of increasing cost. Therefore, the other name of law of decreasing returns is known as the law of increasing costs.

SCHEDULE:

The three laws of costs and returns are explained with the help of the schedule. Let us suppose that the cost of each unit of factor applied is worth Rs 10 only.

Units of variable factor (labor, capital)

Marginal product (MP)

Total product (TP) Marginal cost (MC) Phases

1 2 2 5.00 (I)Decreasing Cost and Increasing Returns

2 4 6 2.503 6 12 1.664 8 20 1.25 (II)

Constant Returns and Constant Cost

5 8 28 1.256 8 36 1.25


http://www.managedstudy.com/micro/law_of_diminishing_returns.htm

http://www.managedstudy.com/micro/law_of_increasing_returns.htm

7 6 42 1.66 (III)Increasing cost and decreasing returns

8 4 46 2.509 2 48 5.00

By employing successive units of variable factors, the marginal cost goes on decreasing up to 4th unit. At the optimum level of production, the marginal productivity remains constant. Therefore the marginal cost also remains constant till the 6th unit of variable factor. When we employ more units of labor and capital the marginal productivity comes down which causes the increase in marginal cost.

DIAGRAM:


ConstantReturns

Decreasing ReturnsIncreasing Returns

ConstantCost

Increasing CostDecreasing Cost

In the above two diagrams, we have plotted units of labours on x-axis and Marginal Products and Marginal Cost on y-axis. We can see as the units of labour increase the cost has decreasing behavior and the marginal returns have increasing behavior till the application of fourth unit of labour. After fourth unit both the marginal cost and marginal returns have are constant and after sixth unit of labour the marginal cost is increasing and marginal returns are decreasing.

2014 – PrivateQ2 (i) Write the definitions of Economics as given by Adam Smith, Marshall and Robbins. (04 Marks)

DEFINITIONS OF ECONOMICS ADAM SMITH’S DEFINITION OF ECONOMICS

Adam Smith, considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth. The central point in Smith’s definition is wealth creation. Implicitly, Smith identified wealth with welfare. He assumed that, the wealthier a nation becomes the happier are its citizens. Thus, it is important to find out, how a nation can be wealthy.

MARSHALL’S DEFINITION OF ECONOMICS

Prof. Alfred Marshall defined, “Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisite of well being.”In his book “Economics of Welfare”, Marshall says, “it is on the one side a study of wealth but on the other and more important side a part of the study of man.”

ROBBIN’S DEFINITION OF ECONOMICS

Another great economist, Lionel Robbins in his book named ‘Nature and Significance of Economic Science’ published in 1932, defined economics as follows,“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative use.”Q2 (ii) Write the assumptions and exceptions of law of diminishing marginal utility. (04 Marks)

ASSUMPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY Following are the assumptions of the law of diminishing marginal utility.


1. The utility is measurable and a person can express the utility derived from a commodity in qualitative terms such as 2 units, 4 units and 7 units etc.

2. A rational consumer aims at the maximization of his utility.3. It is necessary that a standard unit of measurement is constant4. A commodity is being taken continuously. Any gap between the consumption of a commodity should

be suitable.5. There should be proper units of a good consumed by the consumer.6. It is assumed that various units of commodity homogeneous in characteristics.7. The taste of the consumer remains same during the consumption o the successive units of commodity.8. Income of the consumer remains constant during the operation of the law of diminishing marginal

utility.9. It is assumed that the commodity is divisible.10. There should be no change in fashion. For example, if there is a fashion of lifted shirts, then the

consumer may have no utility in open shirts.11. It is assumed that the prices of the substitutes do not change. For example, the demand for CNG

increases due to rise in the prices of petroleum and these price changes affect the utility of CNG.

EXCEPTIONS OR LIMITATIONS OF LAW OF DIMINISHING MARGINAL UTILITY The limitations or exceptions of the law of diminishing marginal utility are as follows:

1. The law does not hold well in the rare collections. For example, collection of ancient coins, stamps etc.2. The law is not fully applicable to money. The marginal utility of money declines with richness but never

falls to zero.3. It does not apply to the knowledge, art and innovations.4. The law is not applicable for precious goods.5. Historical things are also included in exceptions to the law.6. Law does not operate if consumer behaves in irrational manner. For example, drunkard is said to enjoy

each successive peg more than the previous one.7. Man is fond of beauty and decoration. He gets more satisfaction by getting the above merits of the

commodities.8. If a dress comes in fashion, its utility goes up. On the other hand its utility goes down if it goes out of

fashion.9. The utility increases due to demonstration. It is a natural element.

Q2 (iii) Distinguish between Fixed Cost and Variable Cost. (04 Marks)

DIFFERENCE BETWEEN FIXED COST AND VARIABLE COSTS All the costs faced by a firm can be broken into two main categories: fixed costs and variable costs. The difference between the two is as follows.

Fixed Cost Variable CostFixed costs are costs that are independent of output. Variable costs are costs that vary with output.The Total Fixed Cost for a firm always remains The Total variable Costs for a firm is not fixed. It


constant throughout the relevant range for a firm. increases in total as the total output of a firm increases.

The Total Fixed Cost Curve has zero slope and is parallel to x-axis.

The Total Variable Cost Curve has positive slope with variable magnitudes.

The Average Fixed Cost (AFC) Curve has an ever declining negative slope.

The Average Variable Cost (AVC) curve has a U shaped curve.

Q2 (iv) Explain the relation between TR, AR and MR in perfect competition. (04 Marks)

RELATION BETWEEN TR, AR AND MR Under perfect competition, TR is an upward sloping straight line starting from the origin and rises at a constant rate, i.e., proportional to increase in output. Here, AR and MR are identical and remain constant and both are equal to Price because no individual buyer and seller can influence the price.The relationship among AR, MR and TR in such case can be explained with the help of an imaginary schedule and diagram as follows.

Output(Q)

PriceTR

= P x QAR

= TR / Q

MR= ΔTR / Δ

Ql 5 0 5 -2 5 10 5 53 5 15 5 54 5 20 5 55 5 25 5 56 5 30 5 5

Q2 (v) State the law of Substitute. (04 Marks)

LAW OF SUBSTITUTE The law of Substitute/substitution is the other name of law of maximum satisfaction or The law of equi-marginal utility. This law was developed by H.H Gossen so it is also called the second law of Gossen. We know human wants are unlimited but the resources to fulfill the wants are limited. A rational consumer always tries to maximize his satisfaction by spending his limited money income. Consumer can maximize his satisfaction if he is able to equalize the marginal utility derived from the consumption of different units of several commodities by spending his all limited money income so that this law is known as law of maximum satisfaction or law of equi-marginal utility.This law is also known as law of substitution because consumer can maximize his/her satisfaction when he/she substitutes the commodities having high marginal utility instead of commodities having the low marginal utility.Q2 (vi) Name the Laws of Returns and The Laws of Costs. (04 Marks)


The names of the Laws of Returns and The Laws of Costs are given as under.

LAWS OF RETURNS. Law of Increasing Returns,Law of Constant ReturnsLaw of Decreasing Returns.

LAWS OF COSTS. Law of Decreasing Cost,Law of Constant Cost,Law of Increasing Cost.The Law of Increasing return and the law of decreasing Cost have same interpretation with different names and so on for other two as well.Q2 (vii) Describe the relative importance of Factors of Production. (04 Marks)

RELATIVE IMPORTANCE OF FACTORS OF PRODUCTION Factors of production are land, labour, capital and enterprise. While all are likely to be needed to some degree their relative importance differs within and between economies. Advanced economies may rely more on capital with more emphasis on enterprise, developing economies may focus on land and labour. An economy relying on manufacturing will have a different pattern from those relying on agriculture and services. The nature and productivity of the factors will also differ between economies. They are unlikely to be of equal importance either within or between countries.Q4 (i) Economics is “Study of Material Welfare” Explain.

Give practical importance of Study of Economics. (10 Marks)

ALFRED MARSHALL’S DEFINITION OF ECONOMICS Prof. Alfred Marshall rehabilitated the image of economics by shifting the emphasis from wealth to welfare. In his book “Economics of Welfare”, Marshall says, “it is on the one side a study of wealth but on the other and more important side a part of the study of man.”This reveals that the man is more important than the wealth. Though wealth is important, man is more important because the wealth generated for the material welfare of the human being. In his book “Principles of Economics”, Prof. Alfred Marshall defined, “Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisite of well being.”A.C. Pigou gives another important definition under this group. According to him, “The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with measuring rod of money.”


SALIENT FEATURES

ECONOMICS IS A SOCIAL SCIENCE

According to Marshall Economics studies only the activities of human beings living in the society. Hence, it is a social science.

ECONOMICS DEALS ONLY WITH ECONOMIC ASPECT OF LIFE

According to Marshall Economics studies only the “economic activities” of a man i.e. the attainment and use of material requisites. It studies only that part of human behaviour, which can be measured in terms of money.

SCIENCE OF WELFARE

According to Marshall Economics tells us how to produce consumer goods to maximize human welfare.

PRACTICAL IMPORTANCE OF STUDY OF ECONOMICS Practical importance of the study reflects the fruit-bearing aspects of Economics. Practical advantages and importance of study of economics are as follows.

REMOVING ECONOMIC BACKWARDNESS

The most important practical advantage of Economics is that it helps in removing the main causes of economic backwardness of a country. A poor country can break through the vicious cycle of poverty with the help of the ways and means of economic planning devised by economists.

IMPORTANCE TO STATESMEN

The study of economics enables statesmen to understand the socio-economic problems which confront the people of their country. It helps them understand the working process of economic system of their state.

IMPORTANCE TO BUSINESSMEN

Study of Economics also has immense value to businessmen. It enables them to learn the procedures and practices followed in the trade and commerce. They also get necessary information regarding banking, international trade and insurance which facilitates them.

IMPORTANCE TO ENTREPRENEURS

As the function of entrepreneurs is to combine the factors of production, the study of Economics enables them to get an ideal combination of factors of production leading maximum profitable and efficient production.


IMPORTANCE TO CONSUMERS

Consumers in their daily life face many problems of meeting their limitless and varied wants with limited income. Here, the Economics also come forward to help them. It guides them how to distribute their limited income in purchasing different goods.Q4 (ii) Differentiate between Monopoly and Monopolistic Competition. Describe the equilibrium of a firm in monopolistic competition during short run. (10 Marks)

DIFFERENCE BETWEEN MONOPOLY AND MONOPOLISTIC COMPETITION NUMBER OF SELLERS

In monopoly there is only a single seller while there are many sellers in monopolistic competition.

FIRM AND INDUSTRY

There is no distinction between a firm and industry in the case of monopoly whereas under monopolistic competition there are numerous firms and their total collection is called industry.

PRODUCT DIFFERENTIATION

Product differentiation is not found in monopoly because there is only one product with no close substitute, while it is the main characteristic of monopolistic competition because every product has substitute with a little differentiation.

SELLING COSTS

Normally selling costs are absent in monopoly while such costs account for a large share of cost in monopolistic competition.

PRESENCE OF SUBSTITUTE

Close substitutes are very rare in monopoly which makes the demand less elastic while in monopolistic competition products of various firms are close substitutes.

PRODUCT PRICING

Monopolist is free to fix any price of his choice. This freedom is of a restricted nature in monopolistic competition.

CONTROL OVER SUPPLY

Effective control of the firm over supply and price makes the entry of rival firms difficult. Contrary to this new firms can have easy access to the market in the case of monopolistic competition.


ENTRY AND EXIT OF NEW FIRMS

A monopolist is free from the fear of potential competitors which affords it to earn excess profits even in the long period. The firm under monopolistic competition on the other hand can earn only normal profits as new firms may enter the market or old firms may leave the market according to changing conditions.

2013 – RegularQ2 (i) Discuss the main points of Marshall’s definition of Economics. (04 Marks)

MAIN POINTS OF MARSHALL’S DEFINITION OF ECONOMICS Marshall the founder of neo-classical school of thoughts or welfare school of economics and his followers are of the view that on the one hand economics is the study of wealth and on the other hand it is the study of man who is more important than wealth. The Main points of its definition are:

STUDY OF AN ORDINARY MAN

According to Marshall Economics does study of an ordinary man who lives in society.Not a useless study of WealthWealth is only a mean to the fulfillment of an end which is human welfare, so welfare and not wealth is, therefore of primary importance to man.

STUDY OF MATERIAL WELFARE

Each man applies his knowledge, uses his skill for the satisfaction of his material welfare and economics has nothing with immaterial thing.Q2 (ii) Differentiate between ‘A change in Demand’ and ‘A change in Quantity demanded’

(04 Marks)

DIFFERENCE BETWEEN CHANGE IN QUANTITY DEMANDED AND CHANGE IN DEMAND Change in quantity demanded refers to movement along demand curve. It occurs in response to a change in price, holding other things constant.Change in demand refers to a change in demand curve itself that occurs with a change in factors besides price such as income, the price of related goods, and preferences that affects the quantity demanded at each possible price. For example if the income of the consumer is increased he will buy more quantity of goods. The factors that lead to change in demand includes

Real Income of the consumer, Taste, Preference and Fashion, Weather or Climate, Population,


Price of related goods, Expectations and Anticipations, Psychology of the consumer, Technology.

Let’s explain both of them by the following graph.

Q2 (iii) Write the Characteristics of a perfectly competitive market structure. (04 Marks)

CHARACTERISTICS OF PERFECT COMPETITION Number of Firms:In perfect competition there are so large number of firms in the market.Product differentiation:In perfect competition there is no differentiation in goods and they are homogenous.Entry and exits of Firms:In perfect competition there are no entry barriers in the market. Any individual firm can enter and exit the market.Demand Curve:The demand curve in perfect competition is perfectly elastic.Mobility of resources:The factors of production are perfectly mobile. Dissemination of information:There is free flow of information in the perfect competitive market that is the buyers and sellers may have complete knowledge of the market.

Q2 (iv) Why does the law of Diminishing Marginal Returns apply specially on agriculture?


0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.50

1

2

3

4

5

6Change in Qd

Quantity Demanded

Price

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.50

1

2

3

4

5

6Change in Demand

Quantity Demanded

Price

(04 Marks)The law of diminishing returns specially applies to agriculture and other extractive industries because one thing that is common to agriculture is the supremacy of nature.It is therefore often remarked that the part that nature plays in production corresponds to diminishing returns and the part which man plays confirms to the law of increasing returns. The reason is that, nature where it is supreme is subject to diminishing returns, while industry where man is supreme is subject to increasing return. The agricultural operations are spread out over a wide area, and supervision cannot be very effective.Q2 (v) Distinguish between Micro and Macroeconomics. (04 Marks)

Same as 2014 – Regular Q 2 (i)Q2 (vi) What do you mean by fixed cost and Variable cost? (04 Marks)

Same as 2014 – P Q2 (iii) 2013 – R Q2 (vi) 2012 – R Q2 (iii) 2011 – R Q2 (vii)2011 – P Q2

Q2 (vii) State the main points of criticism on the Marginal Productivity Theory. (04 Marks)

CRITICISM ON MARGINAL PRODUCTIVITY THEORY OR OBJECTIONS ON ASSUMPTION

HOMOGENOUS UNITS

This theory is based on wrong assumption that all the units of factors of production are homogenous. For example all the workers ability and efficiency cannot be equal.

NO CLOSE SUBSTITUTE

It is also wrong to assume that the factor of production are close substitute for one another. Labour cannot be perfect substitute for capital.

PERFECT COMPETITION AND FULL EMPLOYMENT

This theory assumes that the reward of each factor of production is determined under the conditions of a perfect competition and full employment. While in actual world it is not possible.

LAW OF DIMINISHING RETURNS

It is also wrong to assume that the law of diminishing returns applies to the business organization.

DIFFICULTY IN MEASUREMENT

It is very difficult to measure the marginal production and its value.

SUPPLY FACTOR IGNORED

In this theory demand factor has given much importance while the supply factor has been ignored. While both have an equal importance.


WITHDRAWAL MAY CAUSE A LOSS

Each factor of production works in co-operation with other factors, if one is withdrawn it will disorganize the whole business and may cause a lossQ4 (i) State Marshall’s definition of Economics. How is it different from Robbin’s definition? (10 Marks)

MARSHALL’S DEFINITION The Marshall’s definition of Economics is as under“Economics is the study of man in ordinary business of life. It enquires how he gets his income and where he uses it. It examines that part of individual and social action, which is most closely connected with the attainment and with the use of material requisites of well-being………………..It is the study of wealth on one side and on the other side, which is more important, it is a part of the study of man.”

DIFFERENCE BETWEEN MARSHALL’S AND ROBBIN’S DEFINITION OF ECONOMICS We observe the following dissimilarities between the two definitions.

1. ECONOMIC ACTIVITY – MATERIAL / IMMATERIAL:

Marshall believes in only material activities which promote material welfare. Robbins believes in both material and immaterial activities to tackle the problem of choice.

2. SOCIAL SCIENCE / NATURAL SCIENCE:

For Marshall, Economics is a social science. On the other hands, Robbins is of the view that Economics is natural science like Physics, Chemistry etc.

3. NORMATIVE SCIENCE / POSITIVE SCIENCE:

Marshall is of the opinion that in Economics, we not only consider the problems as they are but we also suggest that how the given problem should be tackled. It means according to Marshall, Economics is basically a normative science. Robbins thinks otherwise. He says that economists must be just neutral observers of economic events around them, ignoring their personal likings. They can talk of facts only. Hence Robbins believes that Economics is basically a positive science in which the economists describe the economics facts as they are.

4. CLASSIFICATION / UNIVERSALITY:

Marshall has classified the goods into material / non-material and Individuals into social / isolated. Robbins does not believe in such artificial classification. He has analyzed economic problem which appears due to multiple wants and scarce means. It is a universal phenomenon.

5. PRACTICAL / THEORETICAL:

Marshall’s definition is practical in nature. This definition is useful for economic policies.


Robbins definition is theoretical in nature.

6. SOCIAL / ISOLATED INDIVIDUAL:

Marshall considers only the activities of a social person. It ignores the activities of an isolated person. Robbins considers activities of both the persons, i.e. activities of a social person and activities of an isolated person.

7. APPRECIABLE / NON-APPRECIABLE ACTIVITIES:

Marshall considers only appreciable activities of a social person. Robbins considers both appreciable and inappreciable activities of both the social person and isolated person.

8. HUMAN TOUCH:

Marshall concentrates on human material welfare. He gives due importance to man. Robbins focuses on scarcity of resources. He gives no importance of man.

9. WELFARE / SCARCITY:

Marshall’s definition is based on the concept of human material welfare. Robbin’s definition is based on the concept of scarcity of resources.

10. SCOPE OF ECONOMICS:

Marshall considers only material aspects of human welfare. It reflects limited scope of Economics. Robbins makes no difference between material and non-material aspects. It indicates wider scope of Economics.

11. MORAL VALUES:

Marshall’s definition makes a direct link of economic activities with moral values. Robbin’s definition has nothing to do with moral or ethical values. It is the problem of social reformers, politicians etc.

12. SUBJECTIVE / OBJECTIVE:

The concept of welfare in Marshall’s definition is subjective and it varies from person to person and place to place. The concept of scarcity in Robbins’ definition is objective and applicable equally to every person or to every place.

13. QUALITATIVE / QUANTITATIVE:

The concept of welfare is a qualitative phenomenon in Marshall’s definition and we cannot measure it. The concept of scarcity is a quantitative phenomenon in Robbin’s definition and we can measure it.


14. CAUSE / EFFECT:

In Marshall’s definition, major concern is of material welfare which is the effect of economic development. Robbin’s definition is primarily concerned with allocation of scarce resources which is the cause of economic development.

15. VAGUE / CLEAR:

The pivot of Marshall’s definition is welfare which is a vague concept and its indicators change with the passage of time. Robbin’s definitions is based on a clear concept of scarcity and its basic indicator, i.e. excess demand sustains.

16. MACRO / MICRO APPROACH:

In Marshall’s definition, material welfare is a macro phenomenon. In Robbin’s definition, major macro problems like unemployment, inflation etc. has not been considered. It concentrates only on micro aspects of economic activities.

CONCLUSION

On the basis of above-mentioned facts, it is concluded that though Marshall’s definition of Economics has a remarkable status in economic literature, yet Robbin’s definition is logically better. That is why modern economists own it and prefers it to classical and neo-classical definition of Economics.Q4 (ii) State and Explain the Law of Diminishing Returns with the help of a schedule and a diagram. (10 Marks)

LAW OF DIMINISHING RETURNS STATEMENT

According to Stigler

"As equal increments of one input are added, the inputs of other productive services being held constant, beyond a certain point, the resulting increments of produce will decrease i.e., the marginal product will diminish".

According to Paul Samuelson,

"An increase in some inputs relative to other fixed inputs will in a given state of technology cause output to increase, but after a point, the extra output resulting from the same addition of extra inputs will become less".

The law of diminishing returns states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative.


Following table explains the working of law.

SCHEDULE:

Constant Factor(Land) (Acre)

Variable Factor(Labour) (units)

Total Products Marginal Products

Average Products

30 1 10 10 1030 2 25 15 12.530 3 37 12 12.330 4 47 10 11.830 5 55 8 1130 6 60 5 1030 7 63 3 930 8 63 0 7.930 9 62 -1 6.8

DIAGRAMMATIC REPRESENTATION OF LAW.

This law has THREE stages1.Increasing Returns .2. Diminishing Returns.3. Negative Returns.

INCREASING RETURNS:

In this stage, Average Product increases, Marginal Product increases and also Total Product. TP increases at more proportionate rate . TP increases from 10 to 25 units. This stage is known as increasing returns. This stage of increasing output by increasing labour does not last for a long time. This continues upto 3rdunits. The point F onwards TP increases at a diminishing rate. In the first stage, marginal product curve of a variable factor rises in a part and

then falls. The average product curve rises throughout and remains below the MP curve. MP reaches maximum in this stage.

DIMINISHING RETURNS:

This is the most important stage in the production function. In stage 2, the total production continues to increase at a diminishing rate until it reaches its maximum point where the 2nd stage ends. In this stage both the marginal product (MP) and average product of the variable factor are diminishing but are positive. When TP reaches the maximum, MP is zero.MP intersects the X axis in this stage.As more and more variable factors are used on fixed factor, marginal and average product begins to decrease. Factors of production are indivisible. Economically this is the most viable area of production.


http://wikieducator.org/File:Jaya.jpg

NEGATIVE RETURNS:

In the 3rd stage, the TP decreases. The TP, curve slopes downward (From point H onward). The MP curve falls

to zero at point L2 and then is negative. When we increases the labour even after MP becomes zero, then MP

becomes negative and it goes below the X axis.This is the most unviable region. In our table from 8 th unit onwards, this stage starts.Any sensible producer will stop the production in the second stage where AP and MP begins to decrease, but MP has not become negative.The producer will employ the variable factor (say labor) up to the point where the marginal product of the labor equals to the wage rate.

2013 – PrivateQ2 (i) Distinguish between Micro and Macroeconomics. (04 Marks)

Same as 2014 – Regular Q 2 (i) and 2013 – Regular Q (v)

Q2 (ii) What do you understand by price elasticity of demand? (04 Marks)

PRICE ELASTICITY OF DEMAND It can be defined as,“Price elasticity of demand is the degree of responsiveness or rate of response of quantity demanded due to a relative change in price of a goods.”Mathematically,

Ed=% change in quantity demanded% change in Price

Ed=

Δqq0

×100

Δpp0

×100

Ed=

q1−q0

q0

×100

p1−p0

p0

×100

Ed=q1−q0

q0

×p0

p1−p0

Q2 (iii) Write the main features of perfect competition. (04 Marks)


Ed=q1−q0

p1−p0

×p0

q0

CHARACTERISTICS OF A PERFECTLY COMPETITVE MARKET A particular market is said to be operating under perfect competition if it has the following characteristics.

A LARGE NUMBER OF SELLERS AND BUYERS:

The market consists of a large number of sellers and buyers. Therefore, any action by a single seller or buyer will not influence price.

GOODS PRODUCED ARE HOMOGENEOUS

Every firm in the perfectly competitive market produces homogenous goods. This means that buyers are not able to differentiate the goods sold in the market.

FIRMS AS A PRICE TAKER

The most important implication of this characteristic is firms are not given any power in determining the price. Therefore, firms act only as the “price taker”.

FREEDOM TO LEAVE OR ENTER MARKET

This means that there are no restrictions for a firm to enter or leave the market. If the existing firm experiences positive economic profit, it cannot prevent new firms from entering the market. On the other hand, if the existing firm faces loss, it is free to leave the market.

PERFECT INFORMATION

Every firm and buyer is assumed to have perfect information regarding the goods available in the market and the price fixed.Q2 (iv) Distinguish between Stock and Supply. (04 Marks)

Same as 2014 – Regular Q 2 (vi)Q2 (v) Differentiate between ‘A change in Demand’ and ‘A change in Quantity demanded’

(04 Marks)Same as 2013 – Regular Q 2 (ii)

Q2 (vi) Define Explicit costs and Implicit costs. (04 Marks)

EXPLICIT AND IMPLICIT COSTS EXPLICIT COSTS

Explicit costs are expenses for which one must pay with cash or equivalent. Because a cash transaction is involved, they are relatively easily accounted for in analysis. These costs are never hidden, one has to pay separately.Example- Electricity Bill, wages to workers etc.


IMPLICIT COST

Implicit costs do not involve a cash transaction, and so we use the opportunity cost concept to measure them. Implicit costs are related to forgone benefits of any single transaction. These are intangible costs that are not easily accounted for.Example, the time and effort that an owner puts into the maintenance of the company rather than working on expansion.Q2 (vii) Differentiate between Perfect competition and Monopoly. (04 Marks)

Same as 2014 – Regular Q 2 (i)Q4 (i) Mention and Compare definition of Economics stated by Prof. Robbins and Prof. Marshall. (10 Marks)

Same as 2013 – R Q4 (i)

Q4 (ii) Explain the Law of Demand with the help of schedule and Diagram and also describe the assumptions of the law (10 Marks)

DEMAND Demand means the ability or power to buy a product along with willingness to buy

LAW OF DEMAND The law of demand simply expresses thatIf the price of a goods rises, the quantity demanded (NOT DEMAND) for the goods falls and vice versa holding other things constant.

SCHEDULE AND DIAGRAM

It is common phenomenon that if price of a goods increases you buy less of that goods. Take the example of your household matters. When you go to shopping and see that tomatoes are being sold at the rate of Rs 15/= per kg, you may buy 10 kg of it by keeping in mind that you will store them for future. You will also increase consumption of it such as in salad, in curry in sauce. Now let’s suppose if you go to the market next time, the prices of per kg tomatoes rises to Rs 60 per kg. What will you do? Of course you will buy the quantity which is very much necessary for you, say for curry. You will consume a very less quantity in salad and sauces. This follows law of demand.This can also be understood by the following schedule and graph.


The above table shows that when

the price of tomatoes is Rs 1 per kg, the consumer buys 4 kgs of tomatoes. As the price rises to Rs 2 per kg, the consumer buys only three kg, and so on. The graph on the left side also depicts the table.On x axis we measure quantity demanded whereas on y axis we have put price of tomatoes. Plotting the coordinates of the above table we get the line (or curve) DD as shown above by joining the given points. This curve is called demand curve. Here we can see the change of price and its effect on quantity demanded along the curve DD

ASSUMPTIONS OF THE LAW OF DEMAND As it is mentioned in the statement of the above law “remaining other things constant”the “other things” are the assumptions of the law of demand. They are also called the factors affecting law of demand. They must be kept constant unless the law if demand will not operate. They are,

REAL INCOME

It is the assumption of the law that the real income of the consumer should be kept constant. If the real income of the consumer changes his preference will also be changed for specific goods.

TASTE, PREFERENCE AND FASHION

If the taste and preference of a consumer changes he will change the quantity of consumption of a particular goods although the price is not changed.

WEATHER OR CLIMATE

If the weather or climate is changed, the quantity of consumption is also effected even the price is constant.

POPULATION

If the population of a particular area changes due to birth, death or migration, the consumption of goods also changes even the price is constant.


D

D

0.5 1 1.5 2 2.5 3 3.5 4 4.50

1

2

3

4

5

Demand Curve

Quantity Demanded

Price

Price per kg Quantity demandedin Kgs

1 42 33 24 1

PRICE OF RELATED GOODS

If the price of related goods changes, the quantity demanded for another related goods also changes even its own price is unchanged. Increase in the price of substitutes causes increase in quantity demanded of another substitute because the consumer will shift to its closest substitute and vice versa whereas increase in price of complimentary goods causes decrease in quantity demanded for other complimentary goods.

EXPECTATIONS AND ANTICIPATIONS

If the expectations and anticipations about any behaviour of a goods in changed the law of demand does not operate.

PSYCHOLOGY OF THE CONSUMER

If the psychology of a consumer changes towards a product, the price change will not affect the consumption.

TECHNOLOGY

It is a human psyche to adapt new and advanced technological changes. So, if there is a change in technology, the existing products become obsolete and people opt for new and latest technology. The oldest technological goods will not be bought in the same quantity after introduction of new one even the price is unchanged.

2012 – RegularQ2 (i) State the law of Diminishing Marginal Utility. (04 Marks)

LAW OF DIMINISHING MARGINAL UTILITY: DEFINITION OF THE LAW:

"Other things remaining the same when a person takes successive units of a commodity, the marginal utility diminishes constantly".The marginal utility of a commodity diminishes at the consumer gets larger quantities of it. Marginal utility is the change in the total utility resulting from one unit change in the consumption of a commodity per unit of time.Q2 (ii) Draw the demand curve with the help of a schedule. (04 Marks)


DEMAND CURVE The demand curve is negatively sloped. It can be drawn with the help of a schedule of a commodity’s price and quantity demanded schedule.Let the subject commodity be Tomatoes. The schedule and diagram for its price and quantity demanded is as under.

Q2 (iii) Differentiate between Fixed Cost and Variable Cost.

(04 Marks)

Same as 2014 – P Q2 (iii) 2013 – R Q2 (vi) 2012 – R Q2 (iii) 2011 – R Q2 (vii)

2011 – P Q2Q2 (iv) Mention the features of Monoppoly. (04 Marks)

Same as 2014 - Regular Q 2 (v)Q2 (v) State the law of Supply (04 Marks)

LAW OF SUPPLY The law of Supply states, all other factors being constant, as the price of any goods or services increases, the quantity of goods or services that suppliers offer will increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.Q2 (vi) Name the laws of Returns and laws of Costs. (04 Marks)

Same as 2014 – Regular Q 2 ( vi)Q2 (vii) Define Production. Name the factors of production. (04 Marks)

FACTORS OF PRODUCTION PRODUCTION

Production means conversion of raw material into finished goods.


0.5 1 1.5 2 2.5 3 3.5 4 4.50

1

2

3

4

5

Demand Curve

Quantity Demanded

PricePrice per kg

(in 10s)Quantity demanded

in Kgs1 42 33 24 1

FACTORS OF PRODUCTION

In economics, “factors of production” are the inputs used to create finished goods. In other words, these are the scarce resources that we must choose how to allocate. Ideally, we would do so in a way that maximizes our wellbeing. The factors of production are:

1. Land (which includes land itself as well as other natural resources and phenomena — water, forests, fossil fuels, weather, etc.),

2. Labor (the human work necessary to produce and deliver goods),3. Capital (manmade goods used to produce other goods — factories, machinery, highways, electrical

grid, etc.).4. Entrepreneur (the knowledge and skills that make workers productive and allocate capital and land)

Q4 (i) “Economics is the science of scarcity and Choice” Examine Critically. (10 Marks)

CRITICISM ON ROBBIN’S DEFINITION The definition of Economics given by Robbins has been criticized on the following grounds.

i. Ignores Social Aspect of Economic Activities Robbins definition ignores the social aspect of economic activities. Robbin is wrong when he holds that the activities of those who live outside the society also form part of the study of economics. Need of the study of economics is felt only when economic problems assume social significance.

ii. Economics is not neutral as regards Ends Economics is social science. Economists have to pronounce their judgment as to which ends are noble and which ones are base and so need be discarded. In the words of Thomas, “The function of an economist is not only to explore and explain, but also to advocate and condemn”.

iii. Concealed Concept of Welfare This definition refers to maximization of satisfaction or welfare as relates to the study of economics to allocating the scarce means into alternative uses in such manner as to get maximum satisfaction.

iv. Very Wide scope of Economics It has unnecessarily widened the scope of economics. If economics is to be considered as the study of choice of all sorts of scarce means, then it would become difficult to decide which action of man is to be studied and which is to be left out.

v. Not only a Positive Science Definition asserts that economics is a positive science that concerns itself with mere choice – making valuation and that it has nothing to do with ethics or welfare of man.

vi. Division of Personality The definition has splitted the personality of economists into two parts: as an economist where he simply analyses economic phenomenon and does not bother about its good or bad effects, and as a citizen when he expresses its good or bad effects. But personality cannot be so divided. As when the economic phenomenon is analyzed, its good or bad effects are also judged.

vii. Impractical This definition has rendered economic as impractical subject. It is known to all of us that want are unlimited and means are scarce. Economic cannot give any advice in this respect. If it is so, then economics has no practical utility.


viii. Scarcity is not the cause of Economic Problem This definition is based on wrong assumption that scarcity is the main cause of arousal of economic problems. Many important problems such as the problem of unemployment and depression are economic problem but they arise not due to scarcity.

ix. Study of Static Condition According to this definition means and ends are assumed to be constant. Consequently, this definition has made economics a static study. As in real life means and ends are always changing. Economic growth is mainly due to continuous change in the means.

x. Not fully applicable to Rich Countries This definition does not apply to rich countries because in those countries many economic problem arise due to plenty and not scarcity.

xi. Not applicable to under – developed Countries this definition is inapplicable to under developed economies as the problem in these economies is to make proper use of their resources.

xii. Not applicable to Centrally Planned Economics This definition has little relevance to centrally planned economics because the responsibility of choice making vets with the society as a whole and not with an individual. Under planned economies man’s economic actions are not always based on his rational behavior, rather the same are determined by the government policies.

xiii. Complex and Abstract This definition has made economics a complex and emotionless subject. It is a definition of economics for economists. It has no utility for an ordinary man.

xiv. Use of Words ‘Means’ and ‘Ends’ The difference between the words ends and means is not clear. A thing may be a mean at one time and an end at another time.

In short, Robbins definition is a scientific and analytical definition of economics. Its main defect is it has treated economics as a mere theoretical study. It has ignored the practical or welfare aspect of economics. In fact, economics cannot be separated from its welfare content.

Q4 (ii) Define Price Elasticity of Demand. Explain the methods of its measurement. (10 Marks)

PRICE ELASTICITY OF DEMAND “Elasticity of demand is the degree of responsiveness or rate of response of quantity demanded due to a relative change in another variable such as price, income or price of related goods.”Thus, mathematically it can be written as,


Ed=

Δqq0

×100

Δpp0

×100


Ed=

q1−q0

q0

×100

p1−p0

p0

×100

Ed=q1−q0

q0

×p0

p1−p0

Where qo = initial quantity demanded, q1 = quantity demanded after a price changePo = initial price, and p1 = changed price or new price.

MEASUREMENT OF ELASTICITY OF DEMAND There are the following three methods of measurement of elasticity of demand.

POINT METHOD

This method is used to measure elasticity of demand from one point to another point. It derivation would be,


Ed=

Δqq0

×100

Δpp0

×100

Ed=

q1−q0

q0

×100

p1−p0

p0

×100

Ed=q1−q0

q0

×p0

p1−p0

ARC OR GEOMETRIC METHOD,

The Arc or Geometric method is used when there are significant changes in quantity demanded and prices. This method reduces the changes of error.

Ed=% change in quantity demanded over average quantity% change in Price over average price


Ed=q1−q0

p1−p0

×p0

q0

Ed=q1−q0

p1−p0

×p0

q0

Ed=

Δqq0+q1

2

×100

Δpp0+ p1

2

×100

Ed=

q1−q0

q0+q1

2

×100

p1−p0

p0+ p1

2

×100

Ed=q1−q0

q1+q0

×p1+ p0

p1−p0

TOTAL OUTLAY METHOD

The total outlay method is a simple way of measuring price elasticity. It looks at the effect of changes in price on the total revenue earner by the producer. Total outlay (or revenue) is found by multiplying the price by the quantity that would be demanded at that price. In effect, the total outlay (or total expenditure) by consumers on a certain product is equivalent to the total revenue that sellers of the product would receive at that price.

Price(Rs)

Quantity demanded (units)

Total outlay(price x quantity)

Elasticity

5 50 2506 45 270 Elastic7 40 280 Elastic8 35 280 Unitary9 30 270 Inelastic

10 25 250 Inelastic

If total outlay moves in the same direction as the price change, demand in that price range would be relatively inelastic. Consumers demand 50 units at a price of Rs 5, so total outlay is Rs 250. When the price rises to Rs 6, demand falls to 45 units, but the total outlay increases to Rs 270. Total outlay has moved in the same direction as the price change – the price increase would lead to an increase in total revenue for firms, therefore demand is said to be relatively inelastic over this price range.If total outlay moves in the opposite direction to the price change, demand in that price range would be relatively elastic. At a price of Rs 8, consumers demand 35 units, so the total outlay is Rs 280. If the price rises


Ed=q1−q0

p1−p0

×p1+p0

q1+q0

to Rs 9, demand falls to 30 units, and total outlay decreases to Rs 270. Total outlay has moved in the opposite direction to the price change – the quantity demanded is highly responsive to price changes.If total outlay remains the same following a price change, then the demand would be said to be unitary elastic. At price Rs 7, consumers demand 40 units, so the total outlay is Rs 280. When the price rises to Rs 8, demand falls to 35 units, but the total outlay remains the same at Rs 280. Total outlay has remains the same, so demand has unitary elasticity over this price range.

2012 – PrivateQ2 (i) What are the main functions of an Entrepreneur? (04 Marks)

ENTREPRENEUR Entrepreneur is one of the four factors of production. The other factors of production i.e land, labour and capital are scattered at different places. This work is done by entrepreneur.

FUNCTIONS OF ENTREPRENEUR

An entrepreneur performs the following functions. He brings the other factors of production together for production He conceives the idea of launching the project. He mobilizes the resources for efficient utilization of resources. The decision of what, where and how to produce are taken by the entrepreneur. He undertakes the risk involve in production. He is an innovator. He innovates the new techniques of production, new products and improvement in

the quality of existing products.

Q2 (ii) State the key features of Monopoly. (04 Marks)

CHARACTERISTICS OF MONOPOLY The characteristics of Monopoly are as follows.

SINGLE SELLER

In Monopoly, there exists only one seller. That is why the firm is itself the industry.

NO CLOSE SUBSTITUTES

Goods produced by a monopoly do not have close substitutes in terms of the consumption of the good.

BARRIERS TO ENTRY INTO INDUSTRY

Unlike the perfectly competitive market, monopoly has the power to restrict the entry of other firms into the industry. This restriction is due to several reasons such as:


(i) license given by the government;(ii) control over production resources; and(iii) having the benefits of economies of scale, and others.

FIRM AS THE PRICE MAKER

As mentioned from the beginning, a monopoly market consists of only one firm that controls the whole market. This enables the monopolist to solely determine the price of goods or services provided.

Q2 (iii) Write the main features of Marshall’s definition of Economics. (04 Marks)Same as 2013 – Regular Q 2 (i)

Q2 (iv) Mention the degrees of Elasticity of Demand. (04 Marks)Same as 2014 – Regular Q 2 (iv)

Q2 (v) Give the Assumptions and Exceptions of the Law of Diminishing Marginal Utility.(04 Marks)

Same as 2014 – Regular Q 2 (ii)Q2 (vi) Describe the Factors of Production. (04 Marks)

Same as 2012 – Regular Q 2 (vii)Q2 (vii) State and briefly explain the law of Increasing Returns. (04 Marks)

LAW OF INCREASING RETURN: STATEMENT:

In a given state of technology when the units of variable factors are increased with the units of other fixed factors, the marginal productivity increases, it is called law of increasing returns.

ASSUMPTIONS OF THE LAW:

The assumptions of this law are as follows:

1. At least one factor of production is assumed to be indivisible.2. Some factors (labor and capital) are assumed to be divisible.3. There is a scope of further improvement in the technique of production.4. There is no change in the prices of factors of production.5. All units of variable factors are equally efficient.

SCHEDULE:

In the light of above assumptions the following schedule is presented for law of increasing returns.

Fixed Factor (Land)Units of variable factor

(labor, capital)Marginal product (MP) Total product (TP)


10 units 1 2 210 units 2 4 610 units 3 6 1210 units 4 8 2010 units 5 10 30

In the above schedule, the units of variable factors (labor and capital) are employed with fixed 10 units of land. The producer goes on expanding his business by investing successive units of inputs, and then marginal productivity goes on increasing up to the fifth unit of the variable inputs. At the 5th unit, the plant is working to its full capacity and it is not possible further to reap the economies of large scale of production. Thus the total productivity increases at increasing rate.

DIAGRAM:

In terms of cost, the law of increasing returns means the lowering of the marginal costs as industry expanded. So, by increasing returns, we are moving towards the optimum business unit.The units of labor and capital (variable inputs) are measured on X-axis, while marginal productivity of these inputs on y-axis. By schedule we have taken A, B, C, D and E points in the figure above. By joining these points we get the desired marginal productivity curve of increasing returns to scale having positive slope.Q4 (i) State and Explain Robbin’s definition of Economics. (10 Marks)

ROBBIN’S DEFINITION OF ECONOMICS A great economist, Lionel Robbins in his book named ‘Nature and Significance of Economic Science’ published in 1932, defined economics as follows,“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative use.”


FEATURES:

Unlimited Wants or Ends By Ends, Robbins means wants. In economics, wants of man are concerned with goods and services. These are called economic wants. There are no limits of these wants. As one is satisfied another one crops up. This chain of wants is endless. Economics is concerned with the satisfaction of economic wants irrespective of their being virtuous or otherwise.

Limited or scarce Means Wants are greater than means. As the Demand is more than the supply. W = Wants M = Means > = Greater Than

Alternative Uses of Means These Scarce means have alternative uses. Eg. Milk we know means, is a means. It can used for preparing Butter, curd, cheese etc.

Wants Differ in Urgency Man has several wants, but at any given time one of these wants may be more urgent and important than other wants. As such wants differs in urgency. A person wants for his sick child, medicine, milk and fruit.

Economic Problem When all four characteristics of human life; namely, unlimited wants, scarce means, alternative uses of means and different urgency of wants become operative, there arises the problem of choice. One has to make a choice as to which want to be satisfied first and by what means. Problem of choice making is called economic problem.

Opportunity Cost Definition tells us that it is due to the problem of choice that in order to fulfill one want we have to forego another. We cannot fulfil all our wants(ends) simultaneously. The opportunity cost of a thing is always expressed in terms of the next best alternative foregone.

Q4 (ii) Explain with the help of diagram how a firm achieves equilibrium under perfect competition in the short run. (10 Marks)

Same as 2014 – R Q4(ii)

2011 – RegularQ2 (i) Distinguish between Demand and Supply. (04 Marks)

DIFFERENCE BETWEEN DEMAND AND SUPPLY

Points of Difference

Supply Demand

Definition Supply is the amount of a product Demand is the consumer’s ability and


W > M

producers are willing and able to sell at a certain price.

willingness to pay for a price for a certain product or service.

Background Supply is a basic principle that is used to determine the price of a product. It is most commonly used in economics.

Demand is a principle that is also used to determine the price of the product based on the consumer’s desire. It is also most

commonly seen in economics.Affecting factors Goods own price, price of related goods,

technology used, price of inputs, expectations, number of suppliers and government policies and regulations.

Good's own price, price of alternatives available, price of related goods, personal disposable income, tastes or preferences and consumer expectations about future

prices and income.Law The law of supply states that the higher

the price the higher the quantity supplied. This is because a higher price allows the

supplier to get increased revenues, giving him capital to produce more.

The law of demand states that if all other factors are constant, the higher the price

of a good, the less demand it will have among people.

Curve A basic supply curve is depicted as an upward slope.

A basic demand curve is depicted as a downward slope

Q2 (ii) Explain the characteristics of Perfect Competition. (04 Marks)Same as 2013 – Regular Q 2 (iii)

Q2 (iii) Define the Marginal Productivity Theory. (04 Marks)

MARGINAL PRODUCTIVITY THEORY The Marginal Productivity theory states that the share or reward or price of each factor of production, in perfect competitive market, in long run, tends to be equal to its marginal productivity. Marginal Productivity of a factor of production means the addition made to the total production by increasing unit factor. If the reward or price is paid at the rate lower than the marginal productivity, then it will not be preferable to move to the factor to continue in that industry, so it will prefer another industry. And if the price is higher than the produce will go for relatively cheap factor. Thus the price of marginal factor of production tends to be equal to its marginal productivity.Q2 (iv) Explain the Internal Economies and External Economies. (04 Marks)

Same as 2014 – Regular Q 2 (iii)Q2 (v) State the Law of Diminishing Marginal Utility. (04 Marks)

LAW OF DIMINISHING MARGINAL UTILITY: STATEMENT OF THE LAW:

"Other things remaining the same when a person takes successive units of a commodity, the marginal utility diminishes constantly".


The marginal utility of a commodity diminishes at the consumer gets larger quantities of it. Marginal utility is the change in the total utility resulting from one unit change in the consumption of a commodity per unit of time.

Q2 (vi) Describe the relative importance of the factors of production. (04 Marks)Same as 2014 – Regular Q 2 (vii) 2011 – P Q2 (ii)

Q2 (vii) Differentiate between Fixed Cost and Variable Costs. (04 Marks)Same as 2014 – P Q2 (iii) 2013 – R Q2 (vi) 2012 – R Q2 (iii) 2011 – R Q2 (vii)2011 – P Q2

Q4 (i) Compare Robbin’s and Marshall’s definitions of Economics. Which of the two is better and why? (10 Marks)

Same as 2013 – R Q4 (i), 2013-P Q4(i)

Q4 (ii) Explain the law of Diminishing Marginal Returns with the help of schedule and diagram. (10 Marks)

LAW OF DIMINISHING MARGINAL RETURNS: STATEMENT:

In a given state of technology when the units of variable factors of production are increased with the units of other fixed factor, the marginal productivity decreases it is called law of diminishing marginal returns.

ASSUMPTIONS:

The assumptions of the law of diminishing returns are as follows:1. Units of capital and labor are used as variable factors.2. The prices of the factors do not change.3. All units of variable factors are equally efficient.4. There is no change in technique of production.5. Best combination of factors of production has crossed the level of optimum point.6. There is no change in the fixed factor of production.

SCHEDULE:

The following schedule explains this law:

Fixed Factor (Land)Units of variable factor

(labor, capital)Marginal product (MP) Total product (TP)

10 units 1 10 1010 units 2 3 1810 units 3 6 24


10 units 4 4 2810 units 5 2 30

In the above schedule the marginal rate of return is at its maximum i.e. 10 tons. When an additional unit of labor and capital is employed, the marginal productivity comes down from 10 tons to 8 tons and so on decreasing. This tendency of marginal productivity to decrease as successive units of variable factors are employed to fixed factor is called the law of diminishing returns.

DIAGRAM:

APPLICATION:

The law of diminishing returns has its wide application. But it is especially applicable to agricultural sector. In this sector, there is the supremacy of nature plays in production corresponds to diminishing returns. Due to the following reasons, the agricultural sector is subject to law of diminishing returns.

1. The natural factors have more role than human factors in agricultural sector and marginal productivity decreases.

2. The sector has very wide area and supervision cannot be very effective.3. Scope of specialized machinery is limited.4. There are other limitations of seasonal nature e.g. rain, climate changes etc.5. The fertility land also declines

The application of this law is not confined to agriculture but it applies everywhere. If the industry is expanded too much, the supervision will become inefficient and costs will go up. In agriculture it sets in earlier and in industry much later. Agriculture has also increasing returns in the beginning.


2011 – PrivateQ2 (i) Distinguish between Perfect Competition and Monopoly. (04 Marks)

Same as 2014 – Regular Q 2 (i)Q2 (ii) Describe the relative importance of Factors of Production. (04 Marks)

Same as 2014 – Regular Q 2 (vii)Q2 (iii) Name the laws of Returns and Laws of Costs. (04 Marks)

Same as 2014 – Regular Q 2 (vi)Q2 (iv) State the Law of Diminishing Marginal Utility. (04 Marks)

Same as 2011 – Regular Q 2 (v)Q2 (v) Differentiate between Stock and Supply. (04 Marks)

Same as 2014 – Regular Q 2 (vi) 2013-P Q2 (iv)Q2 (vi) Distinguish between Fixed Cost and Variable Cost (04 Marks)

Same as 2014 – P Q2 (iii) 2013 – R Q2 (vi) 2012 – R Q2 (iii) 2011 – R Q2 (vii)2011 – P Q2

Q2 (vii) Differentiate b/w Change in Demand and Change in Quantity demanded (04 Marks)

Same as 2013 – R Q2 (vii)Q4 (i) Economics is the science of Scarcity and Choice. (10 Marks)

Same as 2012-P Q4(i) Q4 (ii) State the Law of Demand and explain it with the help of a schedule and diagram. Also state its Assumptions. (10 Marks)

Same as 2013-P Q4(ii)

2010 Regular and PrivateQ2 (i) Distinguish between Microeconomics and Macroeconomics. (04 Marks)

Same as 2014 – R Q2 (ii)Q2 (ii) State the Law of Supply. (04 Marks)

Same as 2012 – R Q2 (v)Q2 (iii) Explain the relative importance of Factors of Production. (04 Marks)

Same as 2014 – P Q2 (vii)Q2 (iv) Mention the Factors that determine the scale of production. (04 Marks)

FACTORS DETERMINING SCALE OF PRODUCTION Following are the factors that determine the scale of production


FINANCIAL RESOURCES

First of all financial resources of the entrepreneur decide what kind of scale of production he should prefer to attain. If large amount of capital is at his disposal, he would prefer to attain production at large scale and vice versa.

AVAILABLE PRODUCTION TECHNIQUES

Large scale of production will be preferable if available production is complicated. In case, production technique is simple and straight forward, the production will be preferred at small scale.

MEANS OF COMMUNICATION AND TRANSPORTATION

If the means of transportation and communication are easily available, large scale of production would be preferred because it will boost up the business operation cycle.

AVAILABILITY OF MARKET

The selection of scale of production also depends upon the size and availability of market. Large scale of production would be preferred if large, vast and good market is available.

RISK

If the entrepreneur is a risk taker and is having full confidence and is efficient in his work, he will opt for large scale production.Q2 (v) Describe the Salient features of Perfect Competition. (04 Marks)

Same as 201 – R Q2 (iii) Q2 (vi) State the Law of Diminishing Marginal Utility. (04 Marks)

Same as 2011 – Regular Q 2 (v) 2011 – P Q2 (iv)Q2 (vii) Define Price Elasticity of Demand. (04 Marks)

Same as 2013-P Q2(ii)Q4 (i) State and Explain Robbin’s definition of Economics and state the importance of study of Economics. (10 Marks)

Combination of 2012-P Q4(i) and 2014-P Q4(i)Q4 (ii) Explain with the help of a schedule and diagram the Law of Diminishing Marginal Returns. (10 Marks)

Same as 2013-R Q4(ii)


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