Economic 12th Economics

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10 | Oswaal C.B.S.E. (Class XII), Economics

SOLUTIONS

good falls, its demand will increase. Besides,

there is positive relationship between income &

demand. Whenever income of the consumer

increase, the demand for good will increase.

Ans. (b) Inferior goods–In case of inferior goods there is inverse relationship between

income & demand. When income of the consumer

increase, the demand for such goods falls. More-

over, there is positive relationship between price

& demand for the product. It means, if price of a

good falls, its demand fall further.

Ans. 8. When a commodity has a large

number of substitutes, the demand for it will be

more elastic e.g. Modi Tyre has a number of

substitutes like J. K. Tyers, Appollo Tyre etc. If

the price of Modi Tyre rises, it is substituted byother tyres which become relatively cheaper, &

so the demand for Modi Tyre falls substantially.

On the other hand, demand for goods having less

or no substitutes is in elastic or less elastic e.g.

demand for cigarettes, newspaper, match sticks

etc. is less elastic as they have very few

substitutes.

Ans. 9. Increase in quantity supply—

When supply a commodity rises due to rise in its

price alone it is called increase in supply (or rise

in quantity supplied) Graphically if means anupward movement along the supply curve of a

commodity.

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In the above diagram, at price OP1, quantity

supplied is OQ. When price rise to OP, supply

rise to OQ1. The producer moves upward from A

to B but remains on the same supply curve.

Delhi Set-I

Section-A

Ans 1. (1) Determination of rent for a shop.

(2)Price determination of cloth by a textile mill. Ans. 2. If with change in price, There is no

change in demand at all, the demand is said to

be perfectly inelastic.

Ans. 3. It refers to the sum of expenses

incurred on all the fixed factors of production. It

remains unchanged irrespective of the level of

output.

Ans. 4. It is caused by fall in the price of the

commodity.

Ans. 5. Monopoly refers to a market situation

in which there is a single firm having full controlover the supply of a commodity which has no

close substitutes. It has its own price output

policy. It may charge uniform price from all the

buyers or may follow the policy of price

discrimination.

Ans. 6. Economic Problem

(i) Cause of Emergence—Economic problem

is basically the problem of making choices in the

use of scarce resources for satisfaction of

unlimited wants. This problem arises because

human wants are unlimited means (or resources)to satisfy them are scarce (limited)

OR

Problem of what to Produce—An economy

has to choice which goods & services should be

produced & in what quantities. In view of limited

resources, and economy cannot produce

everything for its citizens. This gives rise to the

problem of what to produce. Every economy has

to decided what should be produced. For example

it will have to decide between consumer goods

(e.g. cloth, sugar, wheat etc.) and capital goods(e.g. machines, tool, etc.). This problem in fact

relates to the allocation of resources. The

grinding principle here is to allocate resources

in a way that gives maximum aggregate social

advantage.

Ans. 7. (a) Normal Goods—Normal goods

are those goods which have inverse relationship

between price & demand. It means if price of a



Solved Paper, 2009 | 11

Increase in Supply—When the supply of

a commodity rise to other factors than price of

the commodity assuming price to be constant, it

is called increase in supply. Increase in supply at

the given price may be due to improvement in

technology, fall in the price of other goods, fall

in the price of inputs etc. Graphically it means

rightward shift of the supply curve of a

commodity.

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In the diagram, SS is the supply curve

before change. At price OP, the quantity supplied

is OQ. Now if price of inputs fall, the producer is

willing to supply more i.e. OQ1. at the same price

as a result the supply curve shift to the right.

The new supply curve is S1S1. Ans. 10. Under perfect competition, there are

no sellers (or firms) producing homogeneous

commodities. An individual firm in such a market

cannot affect the price of the commodity. Price

is fixed by the force of market demand & supply.

It is at this price that all the firms in the industry

sell their output. Thus, the firm under perfect

competition is a price maker. The following

figure illustrates the idea :

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Ans. 11.

OR

Output Average Total Marginal

(Units) variable Cost cost

Cost (Rs.) (Rs.) (Rs.)

4 9 36 –

5 8 40 4

6 7 42 2

7 6 42 0

8 5 40 – 2

Ans. (12) ES

of X = ES

of Y

For X For X

% Change in Quantity % Change in Price

= 100

100400

× = 8%

% Change in Price Let % Change in= 20% Quantity = Q

Esof X = E

sof Y

% Change in Quantity of X

% Change in price of X=

% Change in Quantity of Y

% Change in price of Y

25

20

=Q

8Q =

25×8

20= 10

OR

Ans. 13.

Output Price Total TR = Profit

(Units) (Rs.) Cost AR×Q = TR–TC

= AR (Rs.)

1 24 26 24 –2

2 24 50 48 –2

3 24 72 72 0

4 24 92 96 +4

5 24 115 120 +5

6 24 139 144 +5

7 24 165 168 +3

The output level in 5 where the producer is

in equilibrium become there it is earning

maximum profit.

Ans. 14. (1) Increase in income of the

consumers—As the income of the consumer

rises normally demand for most of the

commodities rise at a given price & as a result




the demand curve of a commodity shift to the

right which implies increase in demand.

(2) A rise in the price of substitute

goods—When the price of goods (say coffee)

rises, the demand of its substitute goods (say tea,)

rise & as a result, the demand curve of the

commodity shifts to the right which impliesincrease in demand.

(3) A fall in the Price of Complement

goods—When the price of a complementary

goods (say petrol) falls, not only its demand rises

but the demand for its related good (say car) also

rises & as a result the demand curve of the

commodity shift to the right of demand curve (or

decrease in demand.)

OR

Ans. 14. (1) Consumer Equilibrium in

Single Commodity—A consumer is inequilibrium when he gets minimum satisfaction

in present circumstances. In case of single

commodity his MU should be equal to price of

the commodity in the position of equilibrium. It

can be explained with a diagram given below :

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In this diagram consumer is shown to be in

equilibrium at point E, where price of commodity

is equal to its price.

(2) Consumer Equilibrium in two

commodities—When a consumer purchasestwo or more commodities he will be in

equilibrium when he equates MU & price

proportion for all the goods. It means that when

consumer wants to maximise satisfaction while

buying two goods, he should follow

proportionality rule, this equilibrium can be

shown through diagram in the following manner.

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Consumer is in equilibrium at point EO

& E1

Where MU for the goods is equal. If he shifts

from EO

& E1to To & T

1his losses are great than

gains. Therefore, MU for both the goods should

be equalised in order to maximised his

satisfaction.

Ans. 15. (i) True—Due to excessive use of the variable factor, the coordination between thetwo factors becomes very much poor.

(ii) True—Marginal product are directlyproportional to total product.

(iii) False—When MR = O then AR alwayspositive.

Ans. 16. Shift (or Change) in demand—Change in demand implies increase or decrease

in demand due to factors other than price. Incase of decrease in demand, demand curve shiftdownward to the left. We shall now explain theeffect of change in demand on equilibrium price& quantity. A change in demand, while supplyremaining the same, leads to changes inequilibrium price & quantity. This has been

illustrated in following figure :

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In the diagram, DD is the original demand

curve while SS is the supply curve. Their point

of intersection gives us the equilibrium price of

OP & quantity PE. When demand curve shift to

D2D

2(which implies decrease in demand) the

equilibrium price falls from OP to OP2

&

equilibrium quantity from PE to P2E2.Section-B

Ans. 17. Repayment of loan is a capital

expenditure because it reduces liabilities.

Ans. 18. When aggregate demand i.e. the

aggregate expenditure is in excess of the

available flow of goods and services at full

employment, the situation is termed as excess

demand.

Ans. 19. The minimum value of investment

multiplier (K) is 1

Ans. 20.Bank Rate—It is that minimum rate

of discount which central bank charges while

rediscounting first class approved securities of commercial banks and advances them credit on

this rate.

Ans. 21.Involuntary unemployment means a

situation in which all those workers who are

willing and able to work at the existing wage rate

but do not get the work.

Ans. 22.

Income Saving Consumption Marginal Average

(Y) (S) (C) = Y – S Propensity to Propensity to

Consume Save

MPC =C

Y

∆

∆ APS =

S

Y

0 – 12 12 —

12 –

0

=

∝20 – 6 2614

20

= 0.76

– 20

= – 0.3

40 0 40

14

20

= 0.7

0

40

= 0

60 6 54

14

20

= 0.7

6

60

= 0.1

Ans. 23. Difference between a central bank and a commercial bank.

Basis Central Bank Commercial bank

1. Nature Central bank is an apex institution of Commercial bank is a bank which deals in

the monetary and banking structure money and credit for the purposes of earn-

of the country. It regulates the entire ing profit. It operates under guidelines of

banking system of the country. the Central bank.

2. Object Its main objective is to promote social Its main objective is to earn profits.

welfere.

3. Ownership Central bank is generally a govern- Commercial banks may be both privatelyment owned institution. owned or government owned institutions.

Ans. 24. The budget policy can also be used to reduce in equalities in the distribution of wealth

and income. The imposition of progressive taxes and death duties would secure funds for the

government which could be utilised for the welfare of weaker sections of the society.

Ans. 25. The process of production is a continuous process. In it, various factors of production,

such as land, labour, capital and entrepreneurship are combined together for the production of

goods and services. The supply of these factors of production comes from the households. These




factors offer their services to the producers (also

known as firms) who in return produces goods

and services and make payments as reward in

the form of rent, wages, interest and profit. The

households spend this money on goods and

services produced by the firms. Thus, income or

money first flows from the firms to thehouseholds in from of factor payments and then

from household to the firms in the form of

consumption expenditure. The income continues

flow in a circular way, so it is called circular flow

of income. In the circular flow of income

production generates factor income and factor

income is converted into expenditure.

OR

takes into the exchange of only visible items (or

visible goods.) It does not consider the exchange

of services between the countries. Symbolically,

BOT = V x—V

m.

Ans. 27. Fixed foreign exchange rate—

Fixed exchange rate refers to the system in which

exchange transactions take place at a rate fixedby the government or by the monetary

authorities. They may fix the rate by legislation

or intervention in currency markets. They may

buy or sell currencies according to the needs of

the country.

Merits of Fixed Exchange Rates—

(i) Promotes World Trade—Fixed exchange

rates system ensures stability in exchange rate

and inspires confidence among exporters and

importers about the foreign payments. This helps

to promote world trade.(ii) Facilities Capital Movements—Fixed

exchange rate system attracts foreign capital

investments which promote economic growth.

OR

(i) Demand for Foreign Exchange—The

demand for foreign exchange say dollars by the

Indians arises due to many factors, like :

(a) The Indian individuals, firms or

Government who import goods from USA into

India.

(b) The Indians travelling and studying in theUSA require dollars to meet their travelling and

education expenses.

(ii) Supply of Foreign Exchange—The

supply of foreign exchange comes from :

(a) The domestic exports who receive

payments of foreign currency.

(b) The foreigner who invest and lend in the

home country.

Ans. 28. Money performs several important

functions which are discussed below.(i) Money as a measure of value.

(ii) Money as a medium of exchange.

(iii) Money as a standard for deferred

payments.

(iv) Money as a store of value.

Money as a standard for deferred

payments—Money also serves as a standard of

deferred payments. Deferred payments refer to

Intermediate

Goods1. Intermediate goods

are used for

producing other

goods. So value is

added to these

goods.

2. These goods have

derived demand.

3. The value of these

goods is not included

wh il e cal cu lat ing national income.

4. These goods remain

within the

production boun-

dary.

Final

Goods1. Final goods are used

for final consumption

and final investment

So, no value is added

to these goods.

2. These goods have

direct demand.

3. The value of these

goods is included in

national income.

4. These goods cross the

production boun-

dary.

Ans. 26. Items of the current account of

balance of payments account

(i) Exports and imports of goods, such as tea,

jute etc.

(ii) Exports and imports of services, such asshipping, insurance, banking.

(iii) Transfer receipts and payments, such as

gifts, donations.

(iv) Income receipts and payments, such as

investment income and wages and salaries.

Balance of Trade—It is defined as the

difference between the value of goods exported

and value of goods imported during an year. It




those payments which are made in future. When we borrow money from somebody in the present,

we have to return both the principal as well as interest amount at some future date. It is easy to

make such payments in terms of money because its price remains relatively stable compared to

other commodities.

Ans. 29. (i) Difference between Direct taxes & Indirect Taxes.

Ans. 30. (i) Remittances from non—resident

Indians to their families in Indian is not domestic

factor income of India because it is transfer

payment.

(ii) Rent paid the embassy of Japan in India to

a resident Indian is domestic factor income of

India because it is a factor income earned within

the domestic territory of India.

(ii) It is a factor income paid abroad and

therefore, not included in the domestic factor

income of India.

Ans. 31. C = 100 + 0.75 Y

I = Rs 1000(i) Y = C + I

Y = 100 + 0.75 Y + 1000

Y – 0.75 Y = 1100

0.25 Y = 1100

Y =

1100 100

25

×

= Rs. 4400

This is the equilibrium level of nationalincome.

Direct Taxes

1. Direct tax is imposed on persons.

2. They cannot be shifted on to other.

3. They are generally progressive. The rate of

tax increase with increase in income.

4. Examples : Personal Income Tax, Wealth Tax,

Corporation tax.

Indirect Taxes

1. Indirect tax is imposed on commodities

2. They can be sifted on to others.

3. They are generally regressive. The rate of

tax decrease as income increase.

4. Examples : Sale tax, Excise duty, Customs

etc.

(ii) Difference between Revenue deficit & Fiscal deficit

Basis

1. Definition

2. Indicator

3. Formulae

Revenue Deficit

Revenue deficits is the excess of

revenue expenditure over revenuesreceipt in a year.

It indicates the indebtness in the

current budget on account of total

revenue receipt of the govt & expenses

proposed in the budget.

Revenue Deficit = Revenue

Expenditure – Revenue receipts

Fiscal Deficit

Fiscal deficit is the excess of all the

anticipated govt. expenditures over the

anticipated govt. receipts in a year.

It indicates borrowing requirement of the

govt. It increase the liability in the form of

repayment of loan together with the

interest.

Fiscal Deficit = Total Expenditure Revenue

receipts – Capital receipts excluding

borrowing.

(ii) C = 100 + 0.75 Y

= 100 + 0.75 (4400)

= 100 +75

100(4400)

= 100 + 3300

= 3400

OR

(i) If planned savings are greater than

planned investment—Suppose the

entrepreneurs plan to invest Rs. 20,000 Crore

and the household plan to save only Rs. 15,000

Crore. In this case, aggregate demand will be

more than aggregate supply. To meet the excessdemand, the entrepreneurs well increase their

level of output by employing more factor services.

Then will increase the level of national income

and as a result both saving and investments will

become equal in equilibrium.

(ii) If planned savings are less then

planned investment—Suppose entrepreneurs

plan to invest Rs, 15,000 Crore but the household




plan to save Rs. 20,000 Crore. In this situation

aggregate supply will be more than the aggregate

demand. Due to excess supply, the entrepreneurs

will be compelled to pile up stocks of unsold goods.

They will, therefore, produce less by reducing

employment and finally the level of income will

also fall. Consequently, savings will tend to falltill they become equal to investment.

Ans. 32. I. Income Method

GNP(FC)

= Profit + Compensation of

employees + Rent + Consumption of fixed capital

+ Interest + NFIA + Net Indirect Taxes.

400 + 800 + 250 + 60 + 150 + (– 10) + 80

Rs. 1730 Crore

II. Expenditure Method

GNPFc

= Private final consumption Exp. + Net

domestic capital for formation + Govt. Final

Consumption expenditure + Net Factor income

from abroad + Net exports + Consumption of

fixed Cap.

= 1,000 + 200 + 500 + (– 10) + (– 20) + 60

= Rs. 1730.

Delhi Set-II

Section-A

Ans. 1. The opportunity cost of anything is

the next best alternative that could be produced

instead by the same factors or by an equivalentof factors, costing the same amount of money.

Ans. 11

Esx = Esy

X Y

% of Price =

2

10100×

% of price = 10 %

= 20% let % of quantity = Q

% of quantity = 16 %

Es of X = Es of Y


% Change in price of X=


% Change in price of X

16

20

=

Q

10

Q =

168

×10

2 0

Q = 8%

Ans. 13.

Output Average Total cost TR = Profit =

(units) Revenue (Rs.) AR×Q TR–TC

1 12 14 12 –2

2 12 26 24 –2

3 12 35 36 + 14 12 52 48 – 4

5 12 64 60 – 4

6 12 70 72 + 2

The level of output in 6 unit when a producer is in equilibrium position because there is acondition of maximum profit.

Ans. 15. (i) True—Because in both refers tothe effect on total output of changes in one factor alone with other factors being held as constant.

(ii) False—Because it is change in total

revenue of firm which result from the sale of one more or less unit of output.

(iii) False—Because when they arediminishing return factor marginal product fall& total product increase.

Section-B

Ans. 19. K =1

1–MPC

I =

1

1–MPC

I – MPC = I

MPC = 1 – 1MPC = 0

Ans. 22.

Income Saving C = Marginal Avg. pro-

Y X Y–S propern- pensity to

sity to

C

Y

∆

∆

consume

consume APC = C/Y

0 – 6 6 ——

∝

20 – 3 23 17/20=.85 23/20 = 1.15

40 – 0 40 17/20 = .85 40/40 = 1

60 3 57 17/20 = .85 57/60 = 0.95

Ans. 26. Two functions of Money are—

(i) Money as a medium of exchange—Money acts as a medium of exchange or as amedium of payment. Goods & Services areexchanged with money. So money acts as amedium of exchange.




(ii) Money as a measurement of value— An important function of money is to be a limitof value of a unit of account. Prices of the goods& services are find in terms of money. So, moneyis a unit in terms of which the value of all goods& services is measured & expressed.

Ans. 30 (i) Salaries received by the Indian

residents working Russian Embassy in India itis not national income because it is not factor income earned within the domestic territory.

(ii) Profit earned by an Indian bank from itsbranches abroad is a factor income received from abroad & therefore, included in the nationalincome of India.

(iii) Entertainment tax received by theGovernment is included in national incomebecause it is a part of profit.

Delhi Set-III

Section-A

Ans. 3. Microeconomic is the study of

particular firm, particular household, individual

price, wage, income, industry and particular

commodity.

Ans. 15. Causes of left ward shift of demand

curve—

(i) A fall in income of the consumers—As

the income of the consumers falls, the demand

for normal goods, normally falls at a given price

and as a result the demand curve of thecommodity shift to the left. It employes decreased

in demand.

(ii) A fall in the price of substitute

goods—When the price of substitute goods (say

coffee) falls, the demand curved of the commodity

shifts to the left. It implies decrease in demand.

(iii) A rise in the price of complementary

goods—When the price of a complementary

goods (say petrol) rises, not only its demand falls

but the demand for its related good (say car) alsofalls & as a result, the demand curve of the

commodity shifts to the left. It implies decrease

in demand.

Ans. 16 The process of price determination

under the following three heads :

(i) Demand—A large number of buyers make

demand for the product which is turn depends

upon MU of the commodity in question. With a

view to get maximum satisfaction consumer

would like to equate. MU with price while buying

a goods (Price = MU). Since MU tends to diminish

with an additional use of goods. Therefore,

demand curve has a negative slope. Jevons

emphasised the role of demand in determining

equilibrium price. Here demand means marketdemand.

(ii) Supply Side—The supply of a commodity

comes from its producers. According to the law

of supply producers supply more at a higher price

& less at a lower price. Sellers have a minimum

price to accept. This minimum price is governed

by the cost of production of the commodity. No

sellers will be ready to accept a price for his

product which is less than its marginal cost of

production.

(iii) Equilibrium between Market demand &

Market supply. Equilibrium between demand &

supply helps in determining equilibrium price &

equilibrium quantity bought & sold. The forces

behind demand & supply are MU & MC.

Therefore, at equilibrium price MU & MC are

equal to each other. It can be explained with the

help of following table :

Market Demand & Supply

Schedule of What

Price Market Market Remark(Rs.) demand supply

(In kgs) (In kgs)

10 20 100 Supply >Demand

8 40 80 Excess supply

6 60 60 Equilibrium price

4 80 40 Demand >Supply

2 100 20 Excess Demand

In above table, we find that both demand &supply are the function of price. Demand is aninverse function of price where as supply is apositive function of price. As price falls from Rs.10 to Rs. 8 per kgs. Its demand increase from 20kgs to 40 kgs & so on. Similarly, when price fallsfrom Rs. 10 per kg to Rs. 8 per kg, its supplydecrease from 100 kgs to 80 kgs. and so on.Equilibrium price is Rs. 6 per kg where demand& supply is 60 kg which can be called asequilibrium quantity. We can show it with thehelp of following diagram :




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In this figure an industry is in equilibrium of point E where quantity demands & supplied areequal to each other with of price. Thus, OP priceis equilibrium price & OM output is equilibrium quantity. If price is OP

1supply is P

1B & demand

is for P1 A. Since there is excess supply i.e. supplyis more than demand, there will be competitionamong sellers. Due to this competitions, price of the commodity will fall. As a result supply willcontract amd demand will expand. When pricefalls to OP than demand become equal to supply.Thus, OP is the equilibrium price. If due to somereasons, price falls to OP

2then demand will more

than supply. It will lead to competition among the buyers. As a result price will begin to rise tillit reaches OP again. At this price, once againequilibrium between demand & supply isestablished.

Section-B

Ans. 17 . Budget means the financial

statement containing and estimate of all

anticipated revenue & expenditure of the Govt.

for the coming financial year.

Ans. 22.

Income Con- S = Marginal Average

sum- Y – C Propen- Propen-

ption sity to sity to

Save Save

0 40 – 40 —

∝

50 70 – 20 20/50 –20/50 = –0.4

100 100 0 20/50

0

100

= 0

150 120 + 30 30/50

30

150

= + 0.2

Ans. 30 (i) Salaries paid to Russian working

in Indian embassy in Russia is not included

national income because it is a part of compen-

sation of employee.

(ii) Profit earned by an Indian company from

his branch in Singapore in a part of national

income because it is a factor income received

from abroad.

(iii) Capital gains to Indian residents form sale

of shares of a foreign company is not a point of

national income.

Ans. 31 Gross National Product at factor Cost

by Income.

Method = Compensation of Employee +

Compensation of fixed Capital + Rent + Interest

+ Profits + net factor income from abroad + Net

Indirect taxes.

1850 + 100 + 400 + 500 + 1100 + (– 50) + 250.

Rs. 4150 Crores.Gross National Produce + at factor cost by

expenditure

Method = Net domestic capital formation +Consumption of fixed capital + Government finalconsumption expenditure + Private finalconsumption expenditure + Net exports + Netfactor income from abroad.

500 + 100 + 1100 + 2600 + (– 100) + (– 50)

Rs. 4,150 Crores.

Outside Delhi Set-I

Section-A

Ans. 1. Opportunity Cost : OpportunityCost is the value of the next best alternativeforegone when availing a particular alternative.

Ans. 2. Inferior goods : Inferior goods arethose goods whose demand falls with the rise inthe income of the consumer e.g. peanuts.

Ans. 3. Marginal Cost : The addition to total variable cost or variable cost to produce one extraunit of output.

Ans. 4. Following is the reason of a rightwardshift of supply curve :

Increase in no. of firms : In market whenno. of firm increases, supply also increases. As aresult supply curve shift to the right side.

Ans. 5. Average total cost greater thanoverage variable cost because AVC is part of ATC

and ATC = AFC + AVC

Ans. 6. Law of demand states that there isan inverse relation between the price of acommodity and its quantity demanded. It meansthat when the price of a good falls, the demand




for the good rises and when price rises anddemand falls.

Law of demand may be explained with thehelp of the following demand schedule anddemand curve :

Demand Schedule

2 &

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Demand Curve

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The above data and diagram show that as theprice of the goods reduces from Rs. 5 to Rs. 4 andthe demand for a good increases from 100 to 200units.

Ans. 7. Under Geometric method, theelasticity of demand is measured by using theformula :

Elasticity of demand =

.QYGT UGIOGPV

QH FGOCPF EWTXG

7RRGT UGIOGPV

QH FGOCPF EWTXG

AB is negatively sloped straight line demandcurve joining the two axes. Elasticity at differentpoints on demand curve can be calculated asfollows :

At Point C =

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Ans. 8. Every economy has to face economicproblems relating to allocation of resources.Following are the main factors that lead toeconomic problems :

(i) Wants are unlimited having differentuses : All human wants are unlimited andrecurring. All human wants are not important.

(ii) Means are limited with alternativeuses : Our resources are limited. This gives riseto economic problem. The problem become more worse because the unlimited means havealternative uses.

(iii) Adjustment between means andwants : The economic problem arises becauseadjustment has to be made between limitedmeans with alternative uses and unlimited wants.

OR Ans. The problem ‘‘For whom to produce’’ isrelated to the question at a given level of variousgoods and services, who gets how much toconsume. This, implies that who earns how muchor who has more assets than other.

For example, how much a doctor consume isbased on his earnings compared to a clerk. Thepurchasing power depends mainly on thedistribution of national income among the factorsof production.




Ans. 9.

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Ans. 10. The supply of commodity dependsupon the price of other goods. Suppose, a farmer is growing wheat and rice. If the price of wheatfalls, then it would not be profitable for the farmer produce more wheat. The farmer would withdrawsome land and other resources from theproduction of wheat and devote them to theproduction of rice the price of which has notchanged. This would increase the supply of therice.

Ans. 11. Monopoly differs from monopolisticcompetition in the following way :

(i) In Monopoly, there is a single seller of aproduct, whereas under monopolistic competitioncurve there are large number of sellers (firms)selling a product.

(ii) A monopolists produces or sells a product which has no close substitutes. On the other hand, the various firms working under monopolistic competition produce and selldifferentiated products but they are closesubstitute of each other.

(iii) In case of monopoly, there are strong

barriers to the entry of new firms in the industry.Under monopolistic competition there is freeentry of new firms in the industry as there areno restriction on their entry.

OR

Ans. Following are the two main featuresof perfect competition :

(i) Large no. of buyers and sellers : Thefirst important features of perfect competition isthat there are large no. of buyers and sellers.The number of sellers is so large that anindividual seller produces a small portion of thetotal output of the market. As such no individual

seller can influence price in the market.Similarly, the number of buyers is so large thatan individual buyer purchases an insignificantportion of the total output in the market. Assuch, no individual buyer can influence the pricein the market. Thus, under perfect competition,no individual seller or buyer can affect the priceof the commodity.

(ii) Free Entry and Exit of firm : The mainfeature of perfect competition is that new firmsare free to enter and existing firms can leave at

any time they like. This ensures that there areneither abnormal profits nor losses by any firm in the long run. If the firms are making abnormalprofits, new firms enter and raises the total supplyof the industry. This reduces the market priceand wipes out profits. In case the firms areincurring losses, some existing inefficient firms will leave the industry and reduces the total

supply. Ans. 12. Price Elasticity of Supply of

Y =

1

2

(Price Elasticity of supply of X)

X

% Change in Price = 16%

% Change in Supply = 40%

Y

% Change in Price = 5%

% Change in Supply = ?

Es of Y =

1

2

Es of X

% Change in Price of Y

% Change in Supply of Y

=

1

2

% Change in Price of X


8


=1 16

2 40×

8 × 5 = % Change in supply of Y

Ans. = 40%

Ans. 13.

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Equlibrium indicates a situation or a point of rest. It thus, refer to a stage of no change.

In above schedule when output is 3 units and4 units then there is no change between MR. Itdoes not move forward or backward. Whenever a firms attain a stage from which it does not wantto move forward or backward, it is said to be inequilibrium.

Ans. 14. Excess Demand : When at a givenprice, quantity demanded of a commodity exceedsits supply, it is known as a situation of excessdemand. It leads to a rise in price.




We can explain the effect of shift in demandon equilibrium price in following three cases :

(i) Elastic supply(ii) Perfectly elastic supply(iii) Perfectly inelastic supply. Change in Demand & Equilibrium

price when it has elastic supply : The

demand curve can shift because all those factorsas income, tastes, fashion, etc. on which demanddepends, may undergo a change. If we assumesupply conditions to remain elastic, a newequilibrium position will be attained at higher or lower level depending upon whether demandhas done up or gone down. In Fig. the originalequilibrium with OP is price. Now increase indemand D1D1 is the new demand curve and SSis the supply curve remains the same. Now theequilibrium point shifts to E1 & the equilibrium price tends to be at a higher level OP1. Thus,upward shift in demand curve will, therefore,push up the price & increase the quantity shifted

from the market to OM1. Similarly, withdecrease, in demand the new demand curvebecomes D2D2. Now the quilibrium point shiftto E2 & the equilibrium price tends to be at alower level OP2 & quantity shifted from themarket is OM2.

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Price when there is perfectly elasticsupply : Supply is perfectly elastic in case of lowof constant return. In such a case shift in demandhas no effect upon equilibrium price, because when demand increase, supply is equallyresponsive to it. It is shown through adjoining

diagram. Here, SS supply curve is perfectly elastic& parallel to x-axis. Now when demand shifts toright as D1D1 shown in the diagram, equilibrium shifts to right causing no change in equilibrium price. Similarly, a leftward shift in demand curveas D2D2 shown in the figure keeps theequilibrium price as constant.

Shift in demand means an increase/decreasein demand that happens due to changes in other factors.

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Change in Demand & Equilibriumprice when there is perfectly inelasticsupply : Supply of a product is perfectly inelasticin case of perishable goods. A shift in demandcurve leads to proportionate shift in equilibrium price. A rightward shift in demand curve leadsto proportionate rises in price as shown throughadjoining diagram.

In this figure when demand curve has shiftedtowards right as D1D1 shown in the diagram,price has gone up as OP1 & a leftward shift indemand has resulted into a fall in its equilibrium price as OP2 shown in the diagram.

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Meaning of Equilibrium Price : The wordequilibrium means ‘a state of rest’ or a positionof no change or a balanced situation. Equilibrium price is that price at which forces of marketdemand & market supply are in balanced or equal

to each other. It is a stable price that tends toremain constant till market forces do not change. At equilibrium price quantity demanded equalsto quantity supplied.

Equilibruim Price Determination underPerfect Competition : Credit goes to AlfredMarshall who reconciled various school of thoughts & concluded that an equilibrium priceis determined with the market forces of demand& supply. In Marshall’s own words, ‘‘As we




need two blades of a scissors to cut a pieceof cloth, similarly, we need both demand &supply to determine price.’’

Equilibrium price is determine with theintersection of market & market supply curves.The amount of quantity demand & supplied atthis price is known as equilibrium quantity.

Accordingly, we need to explain demand & supplyof a commodity in the market.

(i) Demand side : A large number of buyersmake demand for the product, which in trundepends upon marginal utility (MU) of thecommodity in question. With a view to getmaximum satisfaction, consumer would like toequate MU with price while buying a goods (Price= MU). Since MU tends to diminish with anadditional use of goods, therefore, demand curvehas a negative slope. Javons emphasised the roleof demand in determing equilibrium price. Heredemand means market demand.

(ii) Supply Side : A large no. of sellers or firms, form supply side of a competitive market.It is guided by ‘Law of supply’—more goods aresupply at a higher price. However, Adam Smith,David Ricando, JS Mill believed that supply isequal to Marginal Cost (MC) which is turndetermines price (Price = MC). No seller wouldbe ready to accept a price less than MC of theproduct. It has a positively sloping curve as MCrises with additional output because law of diminishing returns apply upon production. Here,supply refers to market supply.

(iii) Equilibrium between Market Demand

& Market Supply : Equilibrium betweendemand & supply help in determining equilibrium price & equilibrium quantity bought & sold. Theforces behind demand & supply are MU & MC.Therefore, at equilibrium price MU & MC areequal to each other. It can be explained with thehelp of following table :

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In this table, we find that both demand &supply are the function of price. Demand is aninverse function of price where as supply is apositive function of price. As price falls from Rs.10 to Rs. 8 per kgs. Its demand increases from 20 kgs to 40 kgs & so on. Similarly, when pricefalls from Rs. 10 per kg to Rs. 8 per kg, its supply

decreases from 100 kgs to 80 kgs and so on.Equilibrium price is Rs. 6 per kg where demand& supply is 60 kg which can be called asequilibrium quantity.

Ans. 15. (i)False : When AC falls, MC is alwaysless then AC, but it is not necessary that MCshould also be falling.

(ii) True : The difference of ATC and AVC is AFC which is constant.

(iii) False : There is inverse relationshipbetween TR and MR.

Ans. 16. (i) We know that related commoditiesare of two types (i) complementary goods, (ii)substitute goods. Now we can study the effect of change in the price of related goods on thedemand of a particular commodity.

(ii) Demand for a commodity in relation for their price of complimentary goods :

Let us take the example of car & petrol ascomplementary goods.

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The figure shows that when price of car isOP, the no. of cars purchased is OQ.

(a) Now suppose that the price of car remainsconstant, but the price its complementary goodsi.e., petrol has increased. Now consumersbehaviour will undergo a change. They will reactto such a situation by buying less cars eventhough the price of car is constant OQ is no. of cars were purchased at a price of OP. Now theno. of car purchased has comedown to OQ1 even when the price of car is constant because priceof petrol has increased.




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(b) Now suppose the price of cars remainconstant, but the price of petrol decreases. People will react to such a situation by buying more carseven though the price of car in constant.

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OQ is the number of cars are demanded at aprice of OP. As the price of petrol decreases, thedemand for cars becomes OQ1 though the priceof car is constant.

(iii) Demand for commodity in relation

to the price of substitute goods : Take thecase of Limca & Coca Cola, the two substitute

goods. Suppose the quantity demanded of Coca-Cola is shown as under by fig. When the price of Coca Cola is OY, quantity purchased of Coca Colais OQ.

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(a) Now suppose the price of Coca Cola remainsconstant, but the price of Limca increases. The

consumers will react to this situation by deciding to substitute some quantity of Coca Cola in placeof Limca. In other words, they may buy morequantity of Coca Cola even when its price isconstant. It is shown by fig.

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Initially, OQ quantity of Coca Cola is pur-

chased at a price of OP. Now, when the price of Limca has increased, the people buy morequantity of Coca Cola i.e., OQ1 though the priceis constant.

(b) Similarly, if the price of Limca decreasespeople will substitute some Limca in place of Coca Cola i.e., they will demand less quantity of Coca Cola even when its price is constant. Thissituation is shown by fig.

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Initially, demand is OQ when price is OP. Now when price of Limca decreases the demand for

Coca Cola is reduced to OQ1. This is calleddecrease in demand. As a result, demand wereDD shifts downward to D1D1.

(iv) Change in the Number of its Buyers :

When the pr ice of a commodity fa lls, it sconsumption spreads to more & moreconsumers. Therefore, the no. of its consumersexpands & its demand increases. Similarly, whenprice increases, the commodity gets out of thereach of some consumers. Here, its demand falls.




Section B

Ans. 17. Aggregate supply refers to the total value of output available for purchase by theeconomy during a given period. It will amountto national income of the economy during a years.

AS = C + S

Or

Y = C + S Ans. 18. Because taxes is the major sources

of revenue of the Government and it do not createany liability for the Government.

Ans. 19. When aggregate demand i.e., the

aggregate expenditure is in excess of theavailable flow of goods & services at fullemployment, the situation is termed as excessdemand. AD > AS corresponding to fullemployment.

Ans. 20. Every Commercial Bank keeps aminimum proportion of cash reserve against itsdeposits. In the situation of excess demandcentral bank raises the rate of cash reserve ratio& therefore, restrict the capacity of offer loans.

Ans. 21. Involuntary unemployment is asituation in which people are willing to work atexisting wage rates but do not get work.

Ans. 22.

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While making a distinction between domesticfactor income & national income, net factor income from abroad is of great significance. It

refers to income attributable to factor servicesrendered by normal residents of the country tothe rest of the world less factor services renderedto them by rest of the world.

Ans. 24. Balance of Trade : It is defined asthe difference between the value of goodsexported & value of goods imported during an year. It takes into the exchange of only visibleitems (or visible goods). It does not consider theexchange of services between the countries.Symbolically, BOT = V

x– V

m.

Balance on Current Account : The currentaccount of BOPS records imports & exports of

visible itesm (goods) & invisible items (services)& unilateral transfers (gifts & donations). Thenet value of balances of visible trade & of invisibletrade and of unilateral transfers is the balanceof on current accounts.

Ans. 25 . Three main functions of acommercial bank are :

(1) Primary function

(2) Agency function

(3) General utility functions.

Agency Function : Banks also perform certain agency functions for & behalf of their customers.

(1) Remittance of Funds : Banks help their

customers in transferring funds from one placeto another through cheques, drafts etc. Onaccount of their network of branches throughoutthe country, they can easily provide thisremittance facility.

(ii) Collection & Making Payments forCredit Instruments : Banks collect or makepayment for bills, cheques, promissory notes for these services, some charges are usually madeby the banks.

(iii) Collection of Dividends on Shares :Banks collect dividends on shares & interest ondebentures of their customers.

(iv) Sale & Purchase of Securities : Bankundertake purchase & sale of various securitieslike shares, stocks, bonds, debentures etc. onbehalf of their customers.

(v) Trustee & Executor : Banks preserve the wills of their customers & execute them after their death.

Ans. 26. Revenue Deficit : Revenue deficitis the excess of revenue expenditure over therevenue receipts. It indicates the indebtness inthe current budget on account of total revenue




receipt of the Government & the expensesproposed in the budget. It is calculated as under :

Revenue Deficit = Revenue expenditure– Revenue Receipts

Fiscal Deficit : Fiscal deficit refers to theexcess of all the anticipated Governmentexpenditure (both on Revenue & Capital account)

over the anticipated Government receipts in the year both on revenue & capital account exceptborrowing. In short

Fiscal Deficit = Total expenditure – Revenue

Receipts – Capital Receipts

excluding borrowings

Primary Deficit : Primary deficit is thedifference between fiscal deficit & interestpayment. Infact, it is gross primary deficit. Butto arrive at net primary deficit, interest receiptare deducted from gross primary deficit. Thus,

(i) Gros Primary Deficit = Fiscal Deficit

– Interest Payment(ii) Net Primary Deficit = Gross Primary

Deficit – Interest

Receipts Ans. 27. Evolution of Money

(1) Animal Money : In primitive agriculturalcommunities, domestic animals were used asmoney. Cattles were considered as the commoninstrument of exchange. In ancient India,according to ‘Atharva veda’ go-dhan’ (Cow wealth) was accepted as a form of money.

(2) Commodity Money : In primitiveagricultural communities, money took the form of commodity money. A no. of commodities like wheat, leather, brass, sheep, goats, slaves etc were used as money.

(3) Metallic Money : With the growth of society, from pastoral to commercial stage, thecomposition of money also changed, form animal& commodities to metallic money. Gold & Silver were the metals, mostly used to form the metallicmoney. It resulted into the development of coinage system which remained popular for mostof the time.

(4) Paper Money : Paper money wasintroduced in 17th Century & has now become

most popular form of money. Metallic money wasreplaced by convertible paper currency. Paper money could be converted into metals. Now ithas developed as in convertible legal tender. Itis regulated & controlled by the central bank of the country.

(5) Bank Money : Bank money or creditmoney developed because of development of banking institutions. Its main instruments arecheques, demand drafts, electronic transfer of money etc. It performs all the functions of money

quickly & conveniently technically, this moneyis known as near money.

OR

Ans. 27. (1) Money as a Medium of Ex-change : Money acts as a medium of exchangeor as a medium of payments. Goods & servicesare exchanged with money, so money acts as a

medium of exchanges.(2) Money as a Store of Value : Moneyperforms the function of serving as a store of value. In the barter system, it was very difficultto store the perishable goods. But this problem has been solved with the help of money.

Ans. 28. (1) Success of Planning : Planning is considered to be a grand panacea of our age.Government budget translates the plan of actionin financial terms & gives it a practical shape.Budget spells out a year wise, time boundresponsibility of different departments alongwitha proper allocation of required funds. This thesuccess of planning lies in efficient budgeting of

national resources.(2) Equitable Distribution of Income &

Wealth : Inequality of wealth persists in growing economics at the early stages of economicgrowth. Government budget, through itsredistributive tax policy & development planexpenditure can bring positive effects on incomedistribution in favour of poor.

Ans. 29. Merits of Flexible ForeignExchange Rate are as follows :

(1)Promotes World Trade : Fixed ExchangeRates system ensures stability in exchange rateand inspires confidence among exporters and

importers about the foreign payments. This helpsto promote world trade.

(2) Removes Speculation : It eliminatesspeculative activities in the foreign exchangemarket. There is no possibility of panic flight of capital from one country to another under thesystem of fixed exchange rate.Merits of Flexible Exchange Rate are asfollows :

(i) Promotes Economic Development andEmployment : This system encourages eco-nomic development and employment as theexchange rate can be change as per therequirements of the monetary policy of thecountry.

(ii) Promotes International Trade : Sincethis system does not require exchange controland other restriction. There is a free movementof capital between countries which helps inpromoting international trade.

Ans. 30. (i) Rent of owner : Occupied housesshould be imputed on the basis of prevailing market price and included in the national income.

(ii) It is not included in national income




becuase it is not related to the flow of goods andservices.

(iii) It is not included in national incomebecause it is transfer payment.

Ans. 31. National Income by (a) IncomeMethod

National Income = Interest + Rent + Profit

+ Compensation of Employees

= 150 + 250 + 640 + 1000= Rs. 2,040 crores

National Income by (b) ExpenditureMethod

National Income = Government final con-

sumption expenditure +

Private final consump-

tion expenditure + Net

export + Net domestic

capital formation – Net

Indirect taxes= 600 + 1200 – 40 +

340 – 60= Rs. 2,040 Crores

Ans. 32. S = – 50 + 0.5 Y

(i) C = Y – SC = Y – (– 50 + 0.5 Y)

C = Y + 50 – 0.5 Y

C = 0.5 Y + 50

C = C + I Y = 0.5 Y + 50 + 7000

0.5 Y = 7,050 Y =

ª

=

(ii) C = 0.5Y + 50

= 0.5 × 14100 + 50

= 7050 + 50= 7100OR

Y = C + I Y = 200 + 0.9Y + 3000

Y – 0.9 Y = 32000.1Y = 3200

Y = 32000This is the equilibrium level of income(iii) S = Y – C

S = Y – 200 – 0.9 Y S = .1Y – 200

= .1 × 32000 – 200= 3200 – 200 = 3000

(iv) In case of monopoly, there are strong barriers to the entry of new firms in the industry.Under monopolistic competition there is free

entry of new firms in the industry as there areno restriction on their entry.

OR

Ans. Following are the two main featuresof perfect competition :

(i) Large no. of buyers and sellers : Thefirst important features of perfct competition is

that there are large no. of buyers and sellers.The number of sellers is so large that anindividual seller produces a small portion of thetotal output of the market. As such no individualseller can influence price in the market.Similarly, the number of buyers is so large thatan individual buyer purchases an insignificantportion of the total output in the market. Assuch, no individual buyer can influence the pricein the market. Thus, under perfect competition,no individual seller or buyer can affect the priceof the commodity.

(ii) Free Entry and Exit of Firm : The mainfeature of perfect competition is that new firms

are free to enter and existing firms can leave atany time.

Outside Delhi Set-II

Section-A

Ans. 3. Fixed costs are those costs which donot vary with the level of output.

Ans. 9. Statement is wrong. Ans. 13. Price of Commodity X = Rs. 20

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The level of output is 6 units where theproducer is in equilibrium, because in this levelprice and marginal cost is equal.

Under perfect competition Price (P) is equal

to Marginal Cost (MC) in the state of equlibrium.In cost schedule when output is 6 unit. MC andP is equal. It means there is the condition of producers equilibrium.

An s. 15 . (i) False : When there arediminishing returns to factor, marginal productdecrease but total product increases at adiminishing rate.

(ii) False : Because marginal revenue arealways falls.

(iii) True : Because AVC is part of ATC or AC.




Section B

Ans. 22.

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Ans. 29. Equilibrium in the foreign exchangemarket is determined by the forces of demandand supply in the international exchange market.

Demand Side : Demand for foreign

exchange is made to (a) purchase of goods andservices (b) send gifts and grants, (c) invest andpurchase financial assets in some other countryand (d) speculates on the value of foreigncurrencies. The demand curve for foreignexchange varies inversely with the exchange rate. As the exchange rate rises, less foreign exchangerate is demanded and vice-versa. The demandcurve for foreign exchange is downward sloping.

Supply Side : The supply of foreign exchangein a particular country comes from (a) foreigner’spurchasing home countries goods and servicesthrough exports (b) foreigner’s investment in thehome country and (c) flow of foreign exchangedue to speculation. The supply curve of foreignexchange varies directly with the exchange rate. As the exchange rate rises, the supply of foreignexchange increases and vice-versa. The supplycurve of foreign exchange is upward sloping.

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Equilibrium : The equilibrium exchange rateis determined at a point where the ‘demand for’

and ‘supply of ’ foreign exchanges are equal i.e.,

demand for foreign exchange (say dollars) =supply of foreign exchange (say dollars). Theabove diagram illustrate determination of

equilibrium exhange rate.The diagram show that demand for dollars.(D$) and supply of dollars (S$) curves intersect

each other at point E. The equilibrium exchangerate is OR and the equilibrium quantity is OQ.

Ans. 30. (i) It is not included in nationalincome because it does not create new flow of goods and services in current year. (ii) It is notincluded because it is effortless income. No inputsare used and no pains are taken here. (iii) It isnot included because it is not productive.

Outside Delhi Set-III

Section-A Ans. 7. Following are the two factors

that affect the price elasticity of demand :

(i) Nature of the Commodity : Priceelasticity for necessacities of life is very low incomparison to luxury goods where price elasticityis quite high. The consumers will buy almost thesame quantity of a necessary commodity per unitof time whether its price is somewhat higher or lower. Surely, the demand for butter, eggs ishighly elastic for a poor man as compared tomedicines, foodgrains etc.

(ii) Availability of Substitute : Demand for a commodity will be more elastic if its close

substitutes are available in the market. Ans. 9.

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Ans. 13. A producer is said to be in equilibrium when it is producing a level of output at whichprofits are maximum. Profit are defined as thedifference between total revenue (TR) and totalcost (TC). Thus, Profit = TR – TC. Profit will be

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maximum when the difference between totalrevenue and total cost is maximum. Thedifference between total revenue and total costis maximum at the level of output where the slopeof TR curve = Slope of TC curve. The diagram illustrates the equilibrium of a firm using TR andTC curve.

In the diagram, TR represents total revenuecurve and TC is total cost curve. PP is the profit

curve which is derived from the differencebetween TR and TC curve. A producer gets themaximum profits when he produces OQ units of output. If he produces OQ1, units he earns P1Q1

as profit which is less than PQ and in case of OQ2 units, he earns only P2Q2 as profit. Again itis less than maximum profit (PQ).

Ans. 14. Causes of Increase in demand :

(i) Increase in income of the consumer.(ii) Increase in price of the substitute.(iii) Fall in the price of complementary

commodity.(iv) Fear of the price increase of the

commodity in near future or reduction in supply.(v) Change in consumer’s tastes and

preferences in favour of the commodity.(1) Increase in income of the consumer :

As the income of the consumer rises normally,demand for most of the commodities rises at agiven price and as a result, the demand curve of the commodity shift to the right which empliesincrease in demand.

(2) Increase in price of substitute goods :

When the price of good (say coffee) rises, thedemand for its substitute goods (say tea) risesand as a result, the demand curve of hecommodity shifts to the rightward which impliesincrease in demand.

Section B

Ans. 22.

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Ans. 27. Implications of Revenue Deficit :There are two implications of revenue deficit.First, a part of revenue deficit is financed through

borrowed funds from the capital account. Thisemplies that governments investment or capitalexpenditure is reduced to the extent of deficit onthe revenue account. This affects economicgrowth of the economy. Second, because of highrevenue deficit, government has to borrow from the market which reduces the resources availablefor private investment. This again lowers the rateof economic growth.

Ans. 28. Sources of Supply of ForeignCurrency :

(a) Foreigner’s purchasing domestic country’sgoods and services through exports.

(b) Direct foreign investment in the domestic

country.(c) Flow of foreign exchange due to speculativepurchases by the non-residents in the domesticcountry.

Sources of demand for foreign currency :(a) To purchase goods and services from other

countries by the domestic residents.(b) To send gifts and grants to foreign

countries.(c) To invest and purchase financial assets in

some other country.

Economic 12th Economics

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Transcript of Economic 12th Economics