economics (English)

8/9/2019 economics (English)

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ECONOMICS

CLASS XII

PART A: INTRODUCTORY MICROECONOMICS

Units No. Marks

1. Introduction 04

. Consu!"r #"$a%iour and D"!and 1&

'. Produc"r #"$a%iour and Su(()* 1&

4. +or!s o, Mark"t and Pric" D"t"r!ination 10

-. Si!()" A(()ication o, Too)s o, D"!and and Su(()*

PART #: INTRODUCTORY MACROECONOMICS

/. Nationa) Inco!" and R")at"d Ar"at"s 1-

. Mon"* and #ankin 0&

&. D"t"r!ination o, Inco!" and E!()o*!"nt 1

2. 3o%"rn!"nt #ud"t and t$" Econo!* 0&

10. #a)anc" o, Pa*!"nts 0

1


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MICRO ECONOMICS

UNIT I INTRODUCTION

Economics:A sci"nc" $ic$ studi"s t$" $u!an 5"$a%iour as a r")ations$i(

5"t""n "nds and scar" !"ans $ic$ $a%" a)t"rnati%" us"s.

To #ranc$"s o, Econo!ics

Sr.

No.

Points of

difference

Micro Economics Macro Economics

1. M"anin It studi"s t$""cono!ic 5"$a%iour

o, indi%idua) units o,

t$" "cono!*

It studi"s "cono!ic5"$a%iour o, ar"at"s o,

t$" "cono!* as a $o)".

. +ocus o, Stud* Pric" d"t"r!ination6

consu!"r7Produc"r

E8ui)i5riu!

D"t"r!ination o, )"%") o,

nationa) inco!" and

"!()o*!"nt

'. Instru!"nts7too)s D"!and and su(()* Ar"at" d"!and and

ar"at" su(()*

4. M"t$od o, stud* Partia) "8ui)i5riu!

ana)*sis

3"n"ra) "8ui)i5riu! ana)*sis

-. E9a!()" Indi%idua) d"!and6

Indi%idua) su(()*6

Pric" o, a co!!odit*

an "8ui)i5riu! o,

industr*6 "8ui)i5riu!

o, a ,ir! "tc.

Ar"at" d"!and

ar"at" su(()*6 nationa)

Inco!"6 "n"ra) (ric" )"%")

tota) in%"st!"nt "tc.

a) Tree T!"es of econom! :

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1. Mar#et$ca"ita%ist econom!: &In t$is t*(" o, Econo!* t$" ,actors o,

(roduction ar" on"d and o("rat"d 5* indi%idua)s or rou( o,

indi%idua)s.

. Main o5"cti%" o, (roduction is s"), int"r"st or (ro,it !a9i!i;ation.

'. C"ntra) (ro5)"!s ar" so)%"d 5* (ric" !"c$anis! or !ark"t ,orc"s o,

d"!and < su(()*.

'. P%anned$centra%%! "%anned$ socia%istic econom!

1. +actors o, (roduction ar" on"d and o("rat"d 5* 3o%t.

. Main o5"cti%" o, (roduction is socia) "),ar".

'. C"ntra) (ro5)"!s ar" so)%"d 5* c"ntra) ()annin aut$orit*.

Mi(ed Econom!: &

1. T$" Econo!* in $ic$ ,actors o, (roduction ar"

on"d and o("rat"d 5* 5ot$ 3o%. and (ri%at" s"ctor

. Main o5"cti%" is (ro,it !a9i!i;ation=(ri%at" s"ctor>

and socia) "),ar"=3o%. s"ctor>

'. C"ntra) (ro5)"!s ar" so)%"d 5* c"ntra) ()anninaut$orit*=in (u5)ic s"ctor> and (ric" !"c$anis! =in

(ri%at" s"ctor>

Scarcit! of Resorces:&

It i!()i"s t$at a%ai)a5i)it*7su(()* o, r"sourc"s is )"ss t$an t$"ir

r"8uir"!"nt7d"!and.

Economic Pro*%em:

Main "cono!ic (ro5)"! is $o to a))ocat" t$" scar" r"sourc"s so as to

satis,* !a9i!u! o, our un)i!it"d ants. Econo!ic (ro5)"! aris" !ain)*

5"caus" $u!an ants ar" un)i!it"d and r"sourc"s ar" )i!it"d and $a%"

a)t"rnati%" us"s. T$is cr"at"s t$" (ro5)"! o, c$oic".

Centra% Pro*%ems of an Econom!

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2nctiona% distri*tion:B ?$"n t$" nationa) Inco!"7Production is distri5ut"d

a!on di,,"r"nt ,actors o, (roduction )ik" and6 a5our6 ca(ita) and

Entr"(r"n"urs$i( ,or (ro%idin t$"ir s"r%ic" in t"r! o, r"nt6 a"s6 int"r"st and

(ro,it r"s("cti%")*.

3. Pro*%em re%ated to te efficient se and f%%er ti%i4ation of resorces

E,,ici"nc* o, (roduction !"ans t$" !a9i!u! (ossi5)" a!ounts o, oods and

s"r%ic"s ar" 5"in (roduc"d it$ a%ai)a5)" r"sourc"s. T$" r"sourc"s ar" a)r"ad*

scar" in r")ation to t$" n""d ,or t$"! and t$"r",or" an "cono!* $as to "nsur"

t$at its r"sourc"s do not r"!ain und"ruti)i;"d t$"ir und"r "!()o*!"nt is not$in

5ut asta" o, r"sourc"s.

5. Pro*%em re%ated to 6rot of Resorces

It is r")at"d to incr"as" in t$" (roduction ca(acit* o, t$" "cono!* so t$at t$"

8uantit* o, (roduction i)) ris".

Prodction Possi*i%it! Cr/e$ Transformation Cr/e$Prodction 2rontier

Cr/e

Meanin7: B T$" cur%" $ic$ s$os t$" %arious a)t"rnati%" (roduction

co!5inations o, to oods t$at can 5" (roduc"d it$ i%"n r"sourc"s and

t"c$no)o* $"n r"sourc"s ar" ,u))* and ",,ici"nt)* uti)i;"d.

Com*ination C%ot ,eat

A 0 1-

# 1 14

C 1D ' 2

E 4 -

+ - 0

2eatres of PPC:&

1. It is conca%" to oriin 5"caus" o, incr"asin !arina) o((ortunit* cost.

. I, t$" !arina) o((ortunit* cost is constant t$an PPC i)) 5" a strai$t

)in" and

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'. I, MOC is d"cr"asin t$an PPC i)) 5" con%"9 to oriin.

P1

Y P

Und"r uti)i;ation o, R"sourc"s =Un"!()o*!"nt>

?$"at 3rot$ o, R"sourc"s or T"c$no)oica) I!(ro%"!"nt

PPC Cur%"

C)ot$

O""ortnit! cost

It is t$" cost o, n"9t 5"st a)t"rnati%" ,or"on".

Mar7ina% O""ortnit! Cost$Mar7ina% Rate of Transformation

It is t$" a!ount o, a ood =ood Y> sacri,ic"d ,or t$" (roduction o, an

additiona) unit o, ot$"r ood =ood >

8estions for re/ision

1. D",in" scarcit*.

Ans : B Scarcit* !"ans s$orta" o, r"sourc"s in r")ation to t$"ir d"!and is

ca))"d scarcit*.

. ?$at is an "cono!*

Ans : B An "cono!* is a s*st"! 5* $ic$ ("o()" "t t$"ir )i%in.

'. D",in" c"ntra) (ro5)"!.

Ans : B C"ntra) (ro5)"! is conc"rn"d it$ t$" (ro5)"!s o, c$oic" =or> t$"

(ro5)"! o, r"sourc" a))ocation.

4. 3i%" on" r"ason $ic$ i%"s ris" to "cono!ic (ro5)"!s

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Ans : B Scarcit* o, r"sourc"s $ic$ $a%" a)t"rnati%" us"s.

-. Na!" t$" t$r"" c"ntra) (ro5)"!s o, an "cono!*.

Ans : B i> ?$at to (roduc"

ii> @o to (roduc"

iii> +or $o! to (roduc"

/. ?$at is o((ortunit* cost

Ans : B It is t$" cost o, n"9t 5"st a)t"rnati%" ,or"on".

. ?$* is t$"r" a n""d ,or "cono!i;in o, r"sourc"s

Ans : B R"sourc"s ar" scarc" in co!(arison to t$"ir d"!and6 t$"r",or" it is

n"c"ssar* to us" r"sourc"s in t$" 5"st (ossi5)" !ann"r it$out astin it.

&. ?$at is (roduction (ossi5i)it* ,ronti"r

Ans : B It is a 5oundar* )in" $ic$ s$os t$" %arious co!5inations o, to

oods $ic$ can 5" (roduc"d it$ t$" $")( o, i%"n r"sourc"s and

t"c$no)o*.

2. ?$* PPC is conca%" to t$" oriin

Ans :B PPC is conca%" to t$" oriin 5"caus" o, incr"as"d !arina)

o((ortunit* cost.

10. D",in" !arina) rat" o, trans,or!ation.

Ans :B MRT is t$" ratio o, units o, on" ood sacri,ic"d to (roduc" on" !or"

unit o, ot$"r oods. MRT F G* 7 G9

11. ?$at do"s a (oint insid" t$" PPC indicat"

Ans :B An* (oint insid" t$" (roduction (ossi5i)it* cur%" indicat"

und"ruti)i;ation o, r"sourc"s.

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-OTS

1. Do"s !assi%" un"!()o*!"nt s$i,t t$" PPC to t$" )",t

Ans:B Massi%" un"!()o*!"nt i)) s$i,t t$" PPC to t$" )",t 5"caus" )a5our ,orc"

r"!ains und"ruti)i;"d. T$" "cono!* i)) (roduc" insid" t$" PPC indicatin

und"ruti)i;ation o, r"sourc"s.

. ?$at do"s t$" s)o(" o, PPC s$o

Ans. T$" s)o(" o, PPC indicat"s t$" incr"asin !arina) o((ortunit* cost.

'. +ro! t$" ,o))oin PP sc$"du)" ca)cu)at" MRT o, ood 9.

Production (ossi5i)iti"s A # C D E

Production o, ood 9 units 0 1 ' 4

Production o, ood * units 14 1' 11 & 4

Prodction of

7ood X nits

Prodction of 7ood

9 nits

MRT ;! $ ;(

0 14 B

1 1' 1:1

11 :1

' & ':1

4 4 4:1

UTILIT9 ANAL9SIS

UTILIT9

Meanin7: B It !a* 5" d",in"d as t$" (roc"ss o, co!!odit* or s"r%ic" to satis,*

$u!an ants.

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Uti)it* !a* 5" HCardina) or HOrdina)

Cardina% Uti%it!:B It !"ans t$at uti)it* can 5" !"asur"d it$ t$" uti)s. 5ut it

con%"rt"d to t$" (ric".

Ordina% Uti%it!:B It !"ans t$at uti)it* can 5" rank"d accordin to t$"

(r","r"nc"s o, t$" indi%idua)s.

To conc"(ts o, uti)it* =i> Tota) uti)it* =ii> Marina) Uti)it*

Tota% Uti%it!: B Tota) a!ount o, satis,action o5tain"d ,ro! consu!in %arious

units o, co!!odit*

TUF MU

Mar7ina% Uti%it!: B C$an" in tota) uti)it* ,ro! t$" consu!(tion o, on"

additiona) unit o, oods.

MUF TUn TU nB1

OR

MU F GTUGJ

TUn F Tota) Uti)it* o, n units

TU nB1F Tota) Uti)it* o, nB1 units

GJ F C$an" in Juantit*

GTU F C$an" in Tota) Uti)it*

R")ations$i( 5"t""n M.U. < T.U.

Ta5)"

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1. ?$"n T.U. Incr"as"6 M.U. d"c)in"s.

. ?$"n T.U. is !a9i!u!6 M.U. is ;"ro

'. ?$"n T.U. is d"c)in"s6 M.U. is n"ati%".

Te La of Diminisin7 Mar7ina% Uti%it!.

Definition: &?$"n a consu!"r consu!"s !or" and !or" units o, co!!odit*

!arina) uti)it* ,ro! it o"s on di!inis$in.

Units o, co!!odit*ic"Bcr"a!

M.U. T.U.

1 / /

4 10' 1

4 0 1

- B 10

Units M.U.

1 /

4

'

4 0

- B

10

T.U.


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Diara! and ta5)" s$on t$at as " consu!" additiona) units at a ood6 M.U.

,ro! t$"! o"s on di!inis$in.

Consmer E0i%i*rim:

A consu!"r is in "8ui)i5riu! $"n $" "ts !a9i!u! satis,action out o, $is

)i!it"d Inco!" and $" $as not t"nd"nc* to s$i,t ,ro! t$is situation ti))

circu!stanc"s unc$an"d.

Consmer E0i%i*rim it Sin7%e Commodit!

?$"n a consu!"r (urc$as"s a sin)" co!!odit*6 $is 5"$a%ior is uid"d 5* t$"

a o, Di!inis$in Marina) Uti)it*. @" i)) tr* to consu!" t$" Co!!odit* u(

to t$" (oint $"r" !arina) uti)it* is ust "8ua) to its (ric".

MU9 F P9

A5o%" diara! and ta5)" s$os

"8ui)i5riu! at (oint E. $"r" MUF

Pric". @"r" Consu!"r consu!"s ,our

units o, oods.

Indifference Cr/e Ana%!sis

Meanin7: B Indi,,"r"nc" Cur%" s$os

t$" di,,"r"nt co!5inations 5"t""n to

co!!oditi"s in $ic$ consu!"rs "t

"8ua) satis,action

Unit

X

M.U.( P(

1 4 1

0 1

' 1/ 1

4 1 1 MU9FP9

- & 1

/ 4 1

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In t$" ta5)" and diara! s$os t$at consu!"r is indi,,"r"nt 5"t""n ,i%"

co!5ination o, oods 9 and *.

MRS& Mar7ina% Rate of s*station:&

T$" rat" o, su5stitution o, on" co!!odit* ,or anot$"r is knon as M.R.S.

MRS* F GY

;

Unit o,

Co!5ination

3ood

3ood

Y

MRS

A 1 1 B

# & 1:4

C ' - 1:'

D 4 ' 1:

E - 1:1

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Assm"tions of IC:&

1. T$" consu!"r is rationa).

. Consu!"r $as !onotonic (r","r"nc"s.

'. Pric" o, oods and Inco!" o, t$" Consu!"r ar" i%"n.

4. T$"r" is no c$an" in t$" tast" and (r","r"nc" o, consu!"r.

Pro"erties of Indifference Cr/e:&

1. An indi,,"r"nc" cur%" a)a*s s)o("s donard ,ro! )",t to ri$t. I, a

consu!"r incr"as"s on" unit o, a (articu)ar co!!odit* ot$"r on" $as to

5" d"cr"as"d.

. Indi,,"r"nc" Cur%" ar" Con%"9 to t$" oriin:B

#"caus" di!inis$in Marina) rat" o, Su5stitution.

'. Indi,,"r"nc" Cur%"s n"%"r int"rs"ct "ac$ ot$"r:B

Eac$ IC $as its on )"%") o, satis,action.

4. @i$"r Indi,,"r"nc" Cur%"s r"(r"s"nt $i$"r )"%") o, satis,action.


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6ood ')

#

P

3ood Y A

P

3ood

#ud"t )in" rotat"s to t$" )",t =ABP> $"n Pric" o, 3ood Y Incr"as".

#ud"t )in" rotat"s to t$" ri$t =#BP>6 $"n Pric" o, 3ood Y D"cr"as"s.

b) ,en can7e in Income of Consmer tan


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Y

X

o

o

d

-

Y

G o o d - X

PK

R

TI C 1

I C 2

I C 3

3ood Y

3ood

Consmer?s E0i%i*rim

A consu!"r i)) 5" in "8ui)i5riu! $"r" $" can !a9i!i;" $is satis,action6

su5"ct to $is 5ud"t constraint.

T$"r" ar" to conditions ,or consu!"r "8ui)i5riu!.

1. #ud"t )in" s$ou)d 5" tan"nt to indi,,"r"nc" Cur%".MRS 9* F P9

P*or

S)o(" o, IC and 5ud"t )in" ar" "8ua) to "ac$ ot$"r.

. Indi,,"r"nc" Cur%" s$ou)d 5" Con%"9 to t$" Point o, oriin at "8ui)i5riu!

Point.

@"r" R is t$" "8ui)i5riu! Point $"r"

5ot$ t$" condition ar" ,u),i))"d.

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8estion for Practice

J.1 D",in" Tota) Uti)it* =TU>

J. D",in" Marina) Uti)it* =MU>

J.' @o is T.U. d"ri%"d ,ro! Marina) Uti)iti"s

J.4 Stat" a o, Di!inis$in Marina) Uti)it*

J.- ?$at is Consu!"rs E8ui)i5riu!

J./ Stat" conditions o, Consu!"rs E8ui)i5riu!

J. D",in" Indi,,"r"nc" Cur%"

J.& ?$at is !"ant 5* !arina) rat" o, su5stitution =MRS>

J.2 ?$at do *ou !"an 5* t$" 5ud"t s"t

J.10 ?$at is 5ud"t )in".

J.11 ?$at do *ou !"an 5* !onotonic (r","r"nc"

J.1 I, a Consu!" $as !onotonic (r","r"nc"6 can )i" is indi,,"r"nc" 5"t""nt$" 5und)" =106&> and =&6/>

Ans. No6 $" (r","r =106&> to =&6/>

J.1' E9()ain Consu!"rs E8ui)i5riu! t$rou$ uti)it* sc$"du)" in cas" o,

sin)" co!!odit*

Tru" or +a)s"

J.14 A Consu!"r is in "8ui)i5riu! $"r" indi,,"r"nc" cur%" "8ua) 5ud"t)in" =+a)s">

J.1- A Consu!"r is in "8ui)i5riu! $"r" $" "arns !a9i!u! (ro,it.

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Demand

Meanin7 of Demand: D"!and o, co!!odit* r","rs to t$" 8uantit* o, a

co!!odit* $ic$ a consu!"r is i))in to 5u* at a i%"n (ric"6 and ti!".

Mar#et Demand:Mark"t D"!and r","rs to t$" su! tota) o, t$" 8uantiti"s

d"!and"d 5* a)) t$" indi%idua) $ous"$o)ds in t$" !ark"t at %arious (ric"s in

i%"n ti!".

Demand 2nction:D"!and +unction is t$" ,unctiona) r")ations$i( 5"t""n

d"!and and ,actors a,,"ctin d"!and.D9 F , =P96 Po6 Y6 T6 E>

2actors affectin7 Demand:& +o))oin ar" t$" ,actors $ic$ a,,"ct t$"

D"!and.

1. Price of Commodit!:?$"n t$" (ric" o, co!!odit* ris"s d"!and o,

co!!odit* i)) d"cr"as" and %ic"B%"rsa.

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. Price of oter re%ated commodit!:Pric" o, ot$"r co!!odit* a,,"ct t$"

d"!and o, co!!odit* in to a*s:

a> S*stitte 6oods:&In t$" cas" o, su5stitut" oods6 t$" d"!and ,or a

co!!odit* ris"s it$ a ris" in t$" Pric" and ,a)) it$ t$" ,a)) in (ric".

E9a!()"B T"a and co,,""

5> Com"%ementar! 6oods:&In cas" o, co!()"!"ntar* oods6 t$" d"!and

,or a co!!odit* ris"s it$ ,a)) in t$" Pric" and d"cr"as"s it$ t$" ris" in

t$" (ric" o, co!()"!"ntar* oods.

E9a!()": Car and P"tro)6 Ink and P"n6 #r"ad and #utt"r.

'. Income of Consmer:&?$"n t$" Inco!" o, Consu!"r ris"s t$" d"!and

o, nor!a) oods incr"as"s and i, t$" inco!" d"cr"as"s t$" d"!and o,

nor!a) ood d"cr"as"s.

In cas" o, In,"rior ood t$" d"!and i)) d"cr"as" it$ ris" in inco!" andincr"as" it$ d"cr"as" in inco!".

4. Taste and Preference:B I, t$" tast" and (r","r"nc" o, consu!"r d"%")o(

,or a co!!odit* t$" d"!and i)) ris".

-. E("ectation: B I, t$" consu!"r "9("cts t$at (ric" in ,utur" i)) ris" t$"

d"!and i)) ris" and %ic"B%"rsa

/. Po"%ation:B Mor" (o(u)ation6 !or" d"!and6 )"ss (o(u)ation )"ss

d"!and.

. C%imate: B T$" d"!and o, co!!odit* c$an"s accordin to t$" c)i!at".

La of Demand: &Ot$"r t$ins ar" "8ua)6 t$" d"!and ,or a ood ris"s it$ a

d"cr"as" in (ric" and d"cr"as"s it$ incr"as" in (ric".

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Y

P r i c e

XO D e m a n d

D

D

Q 1

P 1

Q

P

Q 2

P 2

E9()anation

The table

shows

when price

decreases the demand increases.

Demand curve DD shows more quantity (OQ1) and lower Price (OP1)

Inferior Goods: -These are the goods for which demand rises with decreases

in income of consumer. In other words income effect is negative.

Giffen Goods: -Those inferior goods whose income effect is negative but price

effect is positive.

Change in Quantity demanded: -It is also called movement along a demand

curve. Due to change in its own price, quantity of commodity changes. There

are two type of change in quantity of Demand (a) Extension in Demand

(b) Contraction in Demand.

Change in Demand: -It is also called shift in demand curve. When quantity of

commodity chang due to change in factor other than price. It has two types-a) Increase in Demand b) Decrease in Demand

Change in Quantity Demanded Change in Demand

P9 J9

10 100

2 1-0

& 00

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P r ic e

XO Q D

D

D

( A )E x a n ! i o n o "

D e m a n d

C o n # r a c # i o n o " D e m a n d

1 $ 2 $

2

3 $

XO

r i c e

Q % D %

x

D

D

D 1

D2

D1 I n c r e a ! e i n d d

d e c r e a ! e i n d d %

Diagram

Elasticity of Demand: - The elasticity of demand measures the responsiveness

of the quantity demanded due to change in price of the commodity.

Measurement of elasticity of demand:-

Total Expenditure Method/Total outlay method

(i) If no change in total expenditure as change in price than Ed=1

(ii) If total expenditure and price changes in opposite direction Ed>1

(iii) If total expenditure and price changes in same direction Ed


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Q = Change in Quantity P = Change in price

Ex.

P Q

10 10015 80

Ed= 20X 10 =0.4

5 100

Geometric Method/ Point Elasticity Method

If elasticity of demand is to be measured on the point of demand curve

following formula is to be used

ed = Lowe segment from the point

Upper segment from the point

ed= cb

ca

2actors effectin7 e%asticit! of Demand:&

1. Natur" o, 3oods:B T$" ")asticit* o, d"!and is o, n"c"ssar* oods is )"ss

t$an on" "d1. T$" ")asticit* o, d"!and o, )u9ur* ood is r"at"r t$an

on" "d1. T$" ")asticit* o, d"!and o, co!,ort oods is "8ua)s to on"

"dF1

21


22/100

. A/ai%a*i%it! of S*stittes:&I, t$" su5stitut"s o, oods ar" a%ai)a5)" t$an

")asticit* o, d"!and is $i$ or ")astic d"!and "d1 and i, t$" su5stitut"s

ar" not a%ai)a5)" t$an d"!and is in ")astic "d1

'. Post"onement of Consm"tion:&I, t$" consu!(tion o, oods can not

5" (ost(on"!"nt6 t$an ")asticit* o, d"!and is )"ss t$an on" "d1 )ik"

!"dicin"s. I, t$" consu!(tion o, oods can 5" (ost(on"d t$" d"!and o,

ood is ")astic "d1.

4. Nm*er of Uses:& I, t$" co!!odit* $as s"%"ra) us"s6 t$an its d"!and

i)) 5" ")astic "d1 )ik" !i)k and i, t$" nu!5"r o, us"s o, co!!odit* is

)"ss t$an d"!and o, co!!odit* is in ")astic "d1

-. Time "eriod: &D"!and is "n"ra))* in")astic in t$" s$ort ("riod and

!or" ")astic in )on run.

/. -a*it of consmer:& I, consu!"r is $a5itua) ,or t$" consu!(tion o,

co!!odit*6 o, co!!odit*6 t$an t$" d"!and i)) 5" in")astic "d1

De7rees of e%asticit! of Demand: &T$"r" is t$" di,,"r"nt d"r"" o, ")asticit* o,

d"!and.

1. Perfectly elastic Demand:-?$"n t$" d"!and ,or a co!!odit* ris"s or

,a))s to an* "9t"nt6 it$out an* c$an" in its (ric"6 t$" d"!and is said to

5" ("r,"ct)* ")astic.

EdF Q c$an" in (ric" F 0 D"!and cur%" is (ara))") to O a9is.

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. Perfectly Inelastic Demand: -?$"n t$" d"!and o, a co!!odit* do"s

not c$an" as a r"su)t o, c$an" in (ric"6 it is ca))"d ("r,"ct)* in")astic

d"!and.

"dF0 Q c$an" in d"!and F 0

D"!and cur%" is (ara))") to OY a9is

'. Unitary Elastic Demand:-?$"n t$" ("rc"nta" c$an" in 8uantit* is

"8ua) to ("rc"nta" c$an" in (ric" it is ca))"d ")astic d"!and. EdF1

Q c$an" in 8uantit* F Q c$an" in (ric"

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24/100

P r i c e

Q & a n # i # '

( # e e e r d e m a n d

C & r ) e

D

P r i c e

* + a # # e r D e m a n d

C & r ) e

Q & a n # i # '

D

4. Ine%astic Demand: B ?$"n t$" ("rc"nta" c$an" in 8uantit* is )"ss t$"n

Q c$an" in (ric" 6 it is ca))"d in")astic d"!and.

Q c$an" in 8uantit* Q c$an" in (ric"

-. E%astic Demand: B ?$"n t$" ("rc"nta" c$an" in 8uantit* is r"at"r

t$an ("rc"nta" c$an" in (ric" it is ca))"d ")astic d"!and.

Q C$an" in 8uantit* Q c$an" in (ric"

24


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-OTS

1. Is t$" d"!and ,or t$" ,o))oin ")astic6 !od"rat" ")astic6 $i$)* ")astic

3i%" r"asons.

=i> D"!and ,or ("tro)

=ii>D"!and ,or t"9t 5ooks

=iii> D"!and ,or cars=i%> D"!and ,or !i)k

Ans :B i> D"!and ,or ("tro) is !od"rat")* ")astic 6 5"caus" $"n t$" (ric"

o, t$" ("tro) o"s u( 6 t$" consu!"r i)) r"duc" t$" us" o, it.

ii>D"!and ,or t"9t 5ooks is co!()"t")* in")astic. In cas" o, t"9t 5ooks6

"%"n a su5stantia) c$an" in (ric" )"a%"s t$" d"!and una,,"ct"d.

iii> D"!and ,or cars is ")astic. It is a )u9ur* ood6 $"n t$" (ric" o, t$"

car ris"s6 t$" d"!and ,or t$" car co!"s don.

i%> D"!and ,or !i)k is ")astic6 5"caus" (ric" o, t$" !i)k incr"as"s t$"n

t$" consu!"r (urc$as" )"ss 8uantit* !i)k.

. E9()ain t$" %arious d"r""s o, (ric" ")asticit* o, d"!and it$ t$" $")( o,

diara!s.

Ans:B T$"r" ar" ,i%" d"r""s o, (ric" ")asticit* o, d"!and. T$"* ar"6a> P"r,"ct)* ")astic d"!and =EdF>:B a s)i$t or no c$an" in t$" (ric"

)"ads to in,init" c$an"s in t$" 8uantit* d"!and"d.

5> P"r,"ct)* In")astic d"!and =EdF0> :B D"!and o, a co!!odit* do"s

not c$an" at a)) irr"s("cti%" o, an* c$an" in its (ric".

c> Unitar* ")astic d"!and =EdF1>:B ?$"n t$" ("rc"nta" c$an" in

d"!and =Q> o, a co!!odit* is "8ua) to t$" ("rc"nta" c$an" in

(ric".

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d> 3r"at"r t$an unitar* ")astic d"!and =Ed1>:B ?$"n ("rc"nta" c$an"

in d"!and o, a co!!odit* is !or" t$an t$" ("rc"nta" c$an" in its

(ric".

"> "ss t$an unitar* ")astic d"!and =Ed1> :B ?$"n ("rc"nta" c$an" ind"!and o, a co!!odit* is )"ss t$an t$" ("rc"nta" c$an" in its (ric".

Nu!"rica) ,or (ractic"

'. D"ri%" t$" tota) uti)it* sc$"du)" ,ro! t$" !arina) uti)it*.

Unitsconsu!"d

Marina)uti)it*

1 1

11

' &

4 /

- '

/ 0

4. A consu!"r 5u*s -0 units o, a ood at Rs. 47B ("r unit. ?$"n its (ric"

,a))s 5* - ("rc"nt its d"!and ris"s to 100 units. +ind out t$" (ric"

")asticit* o, d"!and.Ans:B EdF4

-. Pric" ")asticit* o, d"!and ,or $"at is "8ua) to unit* and a $ous"$o)d

d"!ands 40 o, $"at $"n t$" (ric" is Rs.1 ("r k. At $at (ric" i))

t$" $ous"$o)d d"!and '/ k o, $"at

Ans:B T$" (ric" o, $"at ris"s to Rs.1.10 ("r k.

/. T$" 8uantit* d"!and"d o, a co!!odit* at a (ric" o, Rs.10 ("r unit is 40

units. Its (ric" ")asticit* o, d"!and is B. Its (ric" ,a))s 5* Rs.7B ("r unit.

Ca)cu)at" its 8uantit* d"!and"d at t$" n" (ric".

Ans :B -/ units.

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Unit III

Prodction 2nction

Prodction 2nction: & It is d",in"d as t$" ,unctiona) r")ations$i( 5"t""n

in(ut and out(ut ,or a i%"n stat" o, t"c$ni8u".

JF , =+1 +.. +n>

Tota% Prodct:&T$" tota) 8uantit* o, oods (roduc"d 5* a ,ir! durin a i%"n

("riod o, ti!" it$ i%"n in(uts.

A/era7e Prodct:&T$" out(ut ("r unit %aria5)" in(ut.

Mar7ina% Prodct:B T$" c$an" in tota) out(ut 5* usin on" !or" unit o,

%aria5)" ,actor .

MPn F TPn TPnB1

Retrn to a factor: & It is o("rat"d in s$ort run ("riod. I, so!" ,actors ar"

constant and 5* incr"asin t$" 8uantit* o, %aria5)" ,actor r"su)tin out(ut is

a,,"ct"d. T$" ",,"ct on out(ut is ca))"d r"turns to ,actor.

27


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TPP

MPP/TPP

La of /aria*%e "ro"ortion:t$is )a stat" t$at as " incr"as" t$" 8uantit* o,

on)* on" in(ut k""(in ot$"r in(ut constant initia))* MP incr"as"s t$an

d"cr"as"s and u)ti!at")* 5"co!" n"ati%".

and a5our TP MP Sta"1 1 10 10 I sta"

1 '0 0 I sta"

1 ' 4- 1- II sta"

1 4 - II sta"

1 - - 0 II sta"

1 / 4& B4 III sta"

Dira!

Units o !"#i"b$% "&to#

In sta" I TP incr"as"s 5"t""n O to M at an incr"asin rat" and t$"n at a

di!inis$in rat" 5"t""n M < A6 AP incr"as"s and r"ac$"s !a9i!u! at A6 MP

In sta" II6 TP continu"s to incr"as"s at a di!inis$in rat" and r"ac$"s t$"

!a9i!u! at T6 MP continu"s to d"cr"as"s and 5"co!" ;"ro. +ro! t$"

!a9i!u! AP 5"ins to d"cr"as"s =5ut a)a*s r"!ains (ositi%">

28

'

'

O

(

1s

t

3

#)

MPP

2n

)


29/100

In sta" III6 TP 5"ins to ,a))6 MP is n"ati%"6 AP continu"s to d"cr"as" 5ut is

a)a*s (ositi%".

Cases of A""%ication of te La of @aria*%e Pro"ortions.

1. Indi%isi5i)it* o, ,actors.

. Di%ision o, a5our and s("cia)i;ation.

'. Mor" t$an o(ti!u! us" o, t$" ,i9"d ,actors.

4. I!("r,"ct su5stitut"s.

-. O%"r uti)i;ation o, ,i9"d ,actor.

/. Mana"!"nt (ro5)"!.

Re%ationsi" *eteen TP and M" Cr/es:

1. MP cur%" is t$" s)o(" o, TP cur%" at "ac$ (oint.

. ?$"n TP incr"as"s at an incr"asin rat"6 MP incr"as"s.

'. ?$"n TP incr"as"s at a di!inis$in rat"6 MP d"cr"as"s.

4. ?$"n TP is !a9i!u! MP is ;"ro.

-. ?$"n TP d"cr"as"6 MP is n"ati%".Re%ationsi" *eteen AP and MP

1. ?$"n MPAP6 AP incr"as"s

. ?$"n MP F AP6 AP is !a9i!u!

'. ?$"n MPAP6 AP d"cr"as"s

4. MP can 5" ;"ro or n"ati%" 5ut AP is n"%"r ;"ro

-. MP r"ac$"s its !a9i!u! (oint "ar)i"r t$an AP r"ac$"s its on.

8estions

J.1 E9()ain t$" conc"(t o, Production ,unction.

J. ?$at is t$" tota) (roduct o, an in(ut.

J.' ?$at is t$" a%"ra" (roduct o, an in(ut.

J.4 ?$at is !arina) (roduct o, an in(ut.

29


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J.- E9()ain t$" r")ations$i( 5"t""n !arina) (roducts and t$" tota) (roduct

J./ E9()ain t$" di!inis$in !arina) (roduct

J. ?$at is t$" )a o, %aria5)" (ro(ortions. E9()ain it$ diara! and

sc$"du)".

-OTS

6i/in7 reasons= state eter te fo%%oin7 statements are tre or fa%se :

1. ?$"n t$"r" ar" di!inis$in r"turns to a ,actor6 tota) (roduct a)a*s

d"cr"as"s.

Ans :B +a)s"6 as TPP incr"as"s at a d"cr"asin rat" $"n t$"r" is di!inis$in

r"turns to a ,actor.

. TPP incr"as"s on)* $"n MPP incr"as"s.

Ans :B +a)s"6 TPP a)so incr"as"s $"n MPP d"cr"as"s 5ut r"!ains (ositi%".

'. Incr"as" in TPP a)a*s indicat"s t$at t$"r" ar" incr"asin r"turns to a,actor.

Ans :B +a)s" . TPP incr"as"s "%"n $"n t$"r" ar" di!inis$in r"turns to a ,actor.

4. ?$"n t$"r" ar" di!inis$in r"turns to a ,actor !arina) and tota)

(roducts a)a*s ,a)).

Ans: B +a)s"6 on)* MPP ,a))s6 not TPP. In cas" o, di!inis$in r"turns to a ,actor

TPP incr"as" at di!inis$in rat".

-. Ca)cu)at" MP ,or t$" ,o))oin.

aria5)" ,actor

unit

0 1 ' 4 - /

TP unit 0 - 1' ' & & 4

30


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Ans :BMP: 0 - & 10 - 0 B4

Cost conce"t

Cost:& T$" "9("nditur" incurr"d on %arious in(uts is knon as t$" cost o,

(roduction.

T!"es of Cost

1. Mone! Cost:B Tota) !on"* "9("ns"s 5* a ,ir! ,or (roducin a

co!!odit*.

. E("%icit Cost and Im"%icit Cost:B Actua) (a*!"nt !ad" to outsid"rs is

E9()icit Cost.

Cost o, s"), su(()i"d ,actors in i!()icit cost.

'. Rea% Cost:B A)) t$" (ain6 sacri,ic"s6 disco!,orts in%o)%"d in (roducin

,actor s"r%ic"s to (roduc" co!!odit*.

4. O""ortnit! Cost: B It is t$" cost o, n"9t 5"st a)t"rnati%" ,or"on".

5. Sort Rn Cost:&

I. +i9"d Cost: B Cost o, ,i9"d ,actors.

II. aria5)" Cost: B Cost o, %aria5)" ,actors

Diara!

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o ! #

O & # & #

T C T , C

Tota% Cost >TC) F Tota) "9("nditur" incurr"d 5* a ,ir! on t$" ,actors o,

(roduction.

TC F T+C TC

R")ations$i( 5"t""n TC6 T+C6 TC

AC F TC MC F GTC6 MCFTCnB TCnB1

J GJ

Re%ationsi" *eteen AC= MC A@C

Diara!IC./DEPICT/RE

0##m4aecon%5i6i!ace!%com"i+e)ie57C8)!8AC%9i"3$:21;137C8)!8AC%9i"0


33/100

. $"n MC is "8ua) to AC t$an AC is !ini!u! .

'. $"n MC is !or" t$an AC t$an AC t"nds to incr"as"

-OTS

1. ?$* A+C cur%" n"%"r touc$"s H9 a9is t$ou$ )i"s %"r* c)os" to 9 a9is

Ans :B #"caus" T+C can n"%"r 5" ;"ro.

. ?$* AC and A+C a)a*s )i" 5")o AC

Ans:B AC is t$" su!!ation o, AC < A+C so AC a)a*s )i"s a5o%" AC Extension in supply: -?$"n su(()* incr"as"s du" to incr"as" in su(()*.

5> Contraction in supply: - ?$"n su(()* d"cr"as"s du" to d"cr"as" in

su(()*6 is ca))"d contraction in su(()*.

Can7e in s""%!$Sift of s""%! cr/e: &

It occurs du" to c$an" in ot$"r ,actors a,,"ctin su(()* )ik"

T"c$no)o*6 No. o, +ir!s6 "tc.

a> Incr"as" in su(()*: ?$"n !or" 8uantit* is

su(()i"d at sa!" (ric".

5> D"cr"as" in su(()*: ?$"n )"ss 8uantit* is

su(()i"d on t$" sa!" (ric" is ca))"d

D"cr"as" in su(()*.

Price E%asticit! of S""%!: &It !"asur"s t$" d"r"" o, r"s(onsi%"n"ss o, t$"8uantit* su(()i"d o, a co!!odit* to a c$an" in its (ric".

M"asur"!"nt o, Pric" E)asticit* o, Su(()*

1. P"rc"nta" M"t$od

"s F P"rc"nta" C$an" in 8uantit* su(()i"dP"rc"nta" c$an" in Pric"

F GJ P GJ F C$an in 8uantit* su(()i"dGP J GP F C$an in Pric"

. 3"o!"tric M"t$od

"s F A# $"r" A is t$" int"rc"(t o, su(()*O# cur%" it$ Ba9is

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S""%!

1. D",in" su(()*

. ?$at caus"s a donard !o%"!"nt a)on a su(()* cur%" o, a

co!!odit*

'. ?$at is !"ant 5* a c$an" in su(()*

4. ?$at is t$" !"anin o, "9(ansion o, su(()*

-. @o do"s a c$an" in (ric" o, t$" in(ut ",,"ct t$" su(()* cur%" o, a

co!!odit*

/. ?$"n is t$" su(()* o, a co!!odit* ca))"d ")astic

. ist an* t$r"" d"t"r!inants o, su(()* o, a co!!odit*

RE@ENUE CONCEPT

Re/ene :&Mon"* r"c"i(t 5* a ,ir! 5* s"))in a co!!odit*.

T!"es of Re/ene

1. Tota% Re/ene >TR)F Tota) R"%"nu" is tota) !on"* r"c"i(t o, a ,ir! on

account o, t$" tota) sa)".

TR F J P

. Mar7ina% Re/ene >MR)F Marina) R"%"nu" is t$" c$an" in tota)

r"%"nu" as sa)" o, on" !or" unit o, out(ut.

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MR F GTR MRFTRnBTRnB1GJ

'. A/era7e Re/ene >AR)F A%"ra" R"%"nu" is t$" ("r unit r"%"nu"r"c"i%"d ,ro! sa)" o, a co!!odit*.

ARF TR7J

Re%ationsi" *eteen TR= MR in im"erfect com"etition mar#et.

1. ?$"n MR is O TR in !a9i!u!

. ?$"n MR N"ati%" TR ,a))s.

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38/100

-OTS

1. Can MR 5" n"ati%" or ;"ro.

Ans:B Y"s6 MR can 5" ;"ro or n"ati%".

. I, a)) units ar" so)d at sa!" (ric" $o i)) it a,,"ct AR and MR

Ans:B AR and MR i)) 5" "8ua) at )"%")s o, out(ut

'. ?$at is (ric" )in"

Ans:B Pric" )in" is not$in 5ut AR )in" and is $ori;onta) to Ba9is in ("r,"ct

co!("tition.

4. Can TR 5" a $ori;onta) Strai$t )in"

Ans:B Y"s6 $"n MR is ;"ro.

-. ?$at do *ou !"an 5* r"%"nu"

/. E9()ain t$" conc"(t o, r"%"nu" = TR6 AR and MR>

. D",in" AR

Units so$

T.R%

!%n*%

TR

Units so)d

R"%"n

u"

MR

'

'

(

O

+R

38


39/100

&. Pro%" t$at AR F (ric"

2. Pro%" t$at AR is not$in 5ut d"!and cur%"

10.E9()ain t$" r")ations$i(s 5"t""n AR and MR $"n (ric" is constant and

$"n (ric" ,a))s.

11.E9()ain t$" r")ations$i(s 5"t""n TR and MR $"n (ric" is constant.

1.?$at is 5r"akB "%"n (oint E9()ain it$ a diara!.

1'.?$"n t$" situation o, Hs$ut don (oint aris"s ,or a ,ir!

14.?$at $a(("ns to TR $"n a> MR is incr"asin6 5> d"cr"asin 5ut r"!ains

(ositi%" andc> MR is n"ati%"

Ans:B a> TR incr"as"s at an incr"asin rat".

5> TR incr"as"s at a di!inis$in rat".

c> TR d"cr"as"s.

1-.?$* AR is !or" ")astic in !ono(o)istic co!("tition t$an !ono(o)*

Ans:B Mono(o)istic co!("tition !ark"t $as c)os" su5stitut"s. Mono(o)*

!ark"t do"s not $a%" c)os" su5stitut"s.

1/.?$* TR is 4-0

an)" in ("r,"ct co!("tition !ark"tAns:B In ("r,"ct co!("tition !ark"t t$" oods ar" so)d at t$" sa!" (ric"

so ARF MR and t$" TR incr"as"s at a constant rat".

1.Can t$"r" 5" #r"akB "%"n (oint it$ AR F AC

Ans:B Y"s t$"r" can 5" 5r"ak"%"n (oint it$ ARFAC

PRODUCERS E8UILI


40/100

To a((roac$"s

Tota) R"%"nu" and Marina) R"%"nu" and

tota) Cost a((roac$ Marina) Cost a((roac$

+. Tota% Re/ene and Tota% Cost A""roac

E8ui)i5riu! Conditions

Di,,"r"nc" 5"t""n Tota) R"%"nu" =TR> and Tota) Cost =TC> is (ositi%")*

!a9i!u!.

Ot"ts

>Units)

TR TC Profit

0 0 '0 B'0

1 40 -0 B10

0 /0 10

' 20 0 0

4 100 20 10

- 100 10 B0

Diara!

'. Mar7ina% Re/ene and Mar7ina% Cost A""roac

Conditions:B

40


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1. MRFMC

2. At E8ui)i5riu! Point MC cur%" int"rs"ct to MR cur%" ,ro! 5")o

Diara!

IC./DEPICT/RE 0##555%xamidea%inProd&cer-E@&i+i4ri&mima9e$$3%9i"0


42/100


43/100

'. +r""do! o, "ntr* and "9it o, ,ir!s

4. S"))in cost is a(()ica5)"

O%i7o"o%! :B T$is is t$" situation o, !ark"t t$"r" ar" ," s"))"r s"))in

$o!o"n"ous or di,,"r"ntiat"d (roducts. E%"r* s"))"r in,)u"nc"s 5* t$"

5"$a%ior o, ot$"r ,ir!s.

+"atur"s:B

1. +" ,ir!s

. int"rd"("nd"nc"

'. no (ric" co!("tition

4. 3rou( 5"$a%ior

-. und"t"r!in"d d"!and cur%"

S$a("s o, Cur%"s AR6 MR in di,,"r"nt !ark"ts.

IC./DEPICT/RE 0##555%xamidea%inconce#8re)en&eima9e$13%9i"0


44/100

ARFMR

@er! sort anser 0estions

1. D",in" ("r,"ct co!("tition

Ans:B P"r,"ct co!("tition is a !ark"t it$

)ar" nu!5"r o, 5u*"rs and s"))"rs 6 s"))in $o!o"n"ous (roduct at sa!" (ric".

. D",in" !ono(o)*.

Ans: Mono(o)* is a !ark"t situation do!inat"d 5* a sin)" s"))"r $o $as ,u))

contro) o%"r t$" (ric".

'. D",in" !ono(o)istic co!("tition.

Ans:B It r","rs to a !ark"t situation in $ic$ !an* 5u*"rs and s"))"rs s"))in

di,,"r"ntiat"d (roduct and $a%" (artia) contro) o%"r t$" (ric".

4. Und"r $ic$ !ark"t ,or! ,ir! is a (ric" !ak"r

Ans:B P"r,"ct co!("tition

-. ?$at ar" s"))in cost

Ans:B Cost incurr"d 5* a ,ir! ,or t$" (ro!otion o, sa)" is knon as s"))in cost.

/. ?$at is o)io(o)*

Ans:B O)io(o)* is d",in"d as a !ark"t structur" in $ic$ t$"r" ar" ," s"))"rs

o, t$" co!!odit*.

. In $ic$ !ark"t ,or! is t$"r" (roduct di,,"r"ntiation

Ans:B Mono(o)istic co!("tition !ark"t

&. ?$at is (roduct di,,"r"ntiation

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Ans: It !"ans c)os" su5stitut"s o,,"r"d 5* di,,"r"nt (roduc"rs to s$o t$"ir

out(ut di,,"r ,ro! ot$"r out(ut a%ai)a5)" in t$" !ark"t. Di,,"r"ntiation can 5" in

co)or6 si;" (ackin6 5rand na!" "tc to attract 5u*"rs.

2. ?$at do *ou !"an 5* (at"nt ri$ts

Ans:B Pat"nt ri$ts is an "9c)usi%" ri$t or )ic"ns" rant"d to a co!(an* to

(roduc" a (articu)ar out(ut und"r a s("ci,ic t"c$no)o*.

10.?$at is (ric" discri!ination

Ans: B It r","rs to c$arin o, di,,"r"nt (ric"s ,ro! di,,"r"nt consu!"rs ,or

di,,"r"nt units o, t$" sa!" (roduct.

11.?$at do *ou !"an 5* a5nor!a) (ro,its

Ans:B It is a situation ,or t$" ,ir! $"n TR TC.

1.?$* AR is "8ua) to MR und"r ("r,"ct co!("tition

Ans:B AR is "8ua) to MR und"r ("r,"ct co!("tition 5"caus" (ric" is constant.

1'.?$at ar" ad%"rtis"!"nt costs

Ans:B Ad%"rtis"!"nt cost ar" t$" "9("nditur" incurr"d 5* a ,ir! ,or t$"

(ro!otion o, its sa)"s suc$ as (u5)icit* t$rou$ T 6 Radio 6 N"s(a("r 6

Maa;in" "tc.

14.?$at is !"ant 5* nor!a) (ro,it

Ans:B Nor!a) (ro,it is t$" !ini!u! a!ount o, (ro,it $ic$ is r"8uir"d to k""(

an "ntr"(r"n"ur in (roduction in t$" )on run.

1-.?$at is 5r"akB"%"n (ric"

ANs:BIn a ("r,"ct)* co!("titi%" !ark"t6 5r"akB "%"n (ric" is t$" (ric" at $ic$ a

,ir! "arn nor!a) (ro,it =Pric"FAC>. In t$" )on run6 #r"akB "%"n (ric" is t$at

(ric" $"r" PFARFMC

Sort Anser 8estions: >1 $ 3 Mar#s)

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1. E9()ain an* ,our c$aract"ristics o, ("r,"ct co!("tition !ark"t.

Ans:B i> ar" nu!5"r o, 5u*"rs and s"))"rs : T$" nu!5"r o, 5u*"rs and s"))"rs

ar" so )ar" in t$is !ark"t t$at no ,ir! can in,)u"nc" t$" (ric".

ii> @o!o"n"ous (roducts: Products ar" uni,or! in natur". T$" (roducts ar"

("r,"ct su5stitut" o, "ac$ ot$"r. No s"))"r can c$ar" a $i$"r (ric" ,or t$"

(roduct. Ot$"ris" $" i)) )os" $is custo!"rs.

iii> P"r,"ct kno)"d": #u*"rs as ")) as s"))"rs $a%" co!()"t" kno)"d"

a5out t$" (roduct.

i%> +r"" "ntr* and "9it o, ,ir!: Und"r ("r,"ct co!("tition an* ,ir! can "nt"r or

"9it in t$" !ark"t at an* ti!". T$is "nsur"s t$at t$" ,ir!s ar" n"it$"r "arnin

a5nor!a) (ro,its nor incurrin a5nor!a) )oss"s.

. E9()ain 5ri",)* $* a ,ir! und"r ("r,"ct co!("tition is a (ric" tak"r not a

(ric" !ak"r

Ans:B A ,ir! und"r ("r,"ct co!("tition is a (ric" tak"r not a (ric" !ak"r

5"caus" t$" (ric" is d"t"r!in"d 5* t$" !ark"t ,orc"s o, d"!and o, su(()*. T$is

(ric" is knon as "8ui)i5riu! (ric". A)) t$" ,ir!s in t$" industr* $a%" to s"))

t$"ir out(uts at t$is "8ui)i5riu! (ric". T$" r"ason is t$at6 nu!5"r o, ,ir!s und"r

("r,"ct co!("tition is so )ar". So no ,ir! can in,)u"nc" t$" (ric" 5* its su(()*.

A)) ,ir!s (roduc" $o!o"n"ous (roduct.

46

In*st#,

-i#

P#i&%

S

S

E

P P +R/MR

, ,

'


47/100

'. Distinuis$ 5"t""n !ono(o)* and ("r,"ct co!("tition.

Ans:B

Perfect Com"etition Mono"o%!

"r* )ar" nu!5"r o, 5u*"rs and

s"))"rs.

Sin)" s"))"r o, t$" (roduct.

Products ar" $o!o"nous Product $as no c)os" su5stitut"

+ir! is t$" (ric" tak"r and not a

!ak"r

+ir! is (ric" !ak"r not (ric"

tak"r

Pric" is uni,or! in t$" !ark"t i"

(ric" FAC

Du" to (ric" discri!ination (ric"

is not uni,or!.+r"" "ntr* and "9it o, ,ir!s. "r* di,,icu)t "ntr* o, n" ,ir!s.

4. ?$ic$ ,"atur"s o, !ono(o)istic co!("tition ar" !ono(o)istic in natur"

Ans:B i> Product di,,"r"ntiation

ii> Contro) o%"r (ric"

i> Donard s)o(in d"!and cur%"

-. ?$at ar" t$" r"asons $ic$ i%" "!"r"nc" to t$" !ono(o)* !ark"t

i> Pat"nt Ri$ts: Pat"nt ri$ts ar" t$" aut$orit* i%"n 5* t$" o%"rn!"nt

to a (articu)ar ,ir! to (roduc" a (articu)ar (roduct ,or a s("ci,ic ti!"

("riod.

ii> +or!ation o, Cart"): Cart") r","rs to a co))"cti%" d"cision tak"n 5* a

rou( o, ,ir!s to a%oid outsid" co!("tition and s"curin !ono(o)*

ri$t.

47

OO*t*t

O

%"n S*.


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E

D

O D O

D

X

Y

E x c e ! ! & + '

7 a r 6 e # e @ & i + i 4 r i & m

E x c e ! ! D e m a n d

P

P

P

1

2

P

ric

e

iii> 3o%"rn!"nt )ic"nsin: 3o%"rn!"nt (ro%id"s t$" )ic"ns" to a

(articu)ar ,ir! to (roduc" a (articu)ar co!!odit* "9c)usi%")*.

PRICE DETERMINATION UNDER PER2ECT COMPETITION

Price Determination:&

?$"n 8uantit* d"!and"d is "8ua) to t$" 8uantit* su(()i"d o, a (articu)ar

co!!odit*.

Price >Rs) 8antit! Demand 8antit! S""%!

1 10 / E9c"ss

2 D"!and

' & DFS &B Mark"t E8ui)i5riu!

4 2 E9c"ss

- / 10 Su(()*

E0i%i*rim Price:B T$" (ric" at $ic$ t$" 8uantit* d"!and"d o, a co!!odit*

is "8ua) to 8uantit* su(()i"d.

Effect on E0i%i*rim Price en

1. C$an" in d"!and

a) Increase in demand

Cases:&

1. Incr"as" in Inco!" o, a consu!"r o, Nor!a)3oods

. Incr"as" in Pric" o, Su5stitut" oods.

'. D"cr"as" in (ric" o, co!()i!"ntar* oods4. Ris" in "9("ct"d ,utur" (ric".

48

P

(

P1

1

s

E1

E

O 1

Mt. S*

1


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Effects:&

E8ui)i5riu! (ric" and Juantit* o, d"!and and su(()* incr"as".1

*) Decrease in DemandCases:&

1. D"cr"as" in Inco!" o, a consu!"r ,or nor!a) oods.

. D"cr"as" in (ric" o, Su5stitut" oods.

'. Incr"as" in Pric" o, Co!()i!"ntar* oods

4. D"cr"as" in "9("ct"d ,utur" (ric".

Effect:&Pric" and Juantit* 5ot$ d"cr"as"

'. Can7e in S""%!

a) Increase in s""%!

Cases:&

1. No. o, ,ir!s incr"as"

. T"c$no)o* i!(ro%"!"nt

'. D"cr"as" in in(ut (ric"

4. D"cr"as" in indir"ct ta9 and ris" in su5sid*

-. D"cr"as" in "9("ct"d ,utur" (ric".

Effect:&

E8ui)i5riu! (ric" d"cr"as" and "8ui)i5riu!

Juantit* incr"as"s

*) Decrease in s""%!

Cases:&

1. No. o, ,ir!s d"cr"as"

. T"c$no)o* 5ackardn"ss1

'. Incr"as" in in(ut (ric"

49

P#i&%

P

(

P1

1

s

E

E1

O 1

Mt. S*

E1

P

, S

S1

1

Mt . S

E1

O1

P1

E1P

,

S

S1

1

Mt . S

E1

O1

P1

P#i&%


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4. Incr"as" in indir"ct ta9 and ris" in su5sid*

-. Incr"as" in "9("ct"d ,utur" (ric".

Effects:&

E8ui)i5riu! (ric" incr"as"s and E8ui)i5riu! Juantit* d"cr"as"s.

1. ,en *ot demand and s""%! can7es sim%taneos

A> Si!u)tan"ous incr"as" in t$" d"!and and incr"as" in su(()* and d"cr"as"

in su(()*

a> Incr"as" in d"!and is !or" t$an incr"as" in su(()*.

DD and SS cur%"s s$i,t ri$tards to DD1and SS1

Effect:&E8ui)i5riu! (ric" incr"as" and "8ui)i5riu!

8uantit* incr"as"s

5> Incr"as" in d"!and is )"ss t$an incr"as" in su(()*

DD and SS cur%"s s$i,t ri$tard to D1D1and S1S1

Effect:&E8ui)i5riu! (ric" d"cr"as"s and "8ui)i5riu!

8uantit* incr"as"s.

50

S1

P1

P

(

E1

E

'

(

1

S1

S

M M1O

P

P1

EE1

Mt. S*.


51/100

c> Incr"as" in D"!and is "8ua) to incr"as" in su(()*

DD and SS cur%"s s$i,t ri$tard to D1D1and S1S1

E,,"ct:B E8ui)i5riu! (ric" constant and "8ui)i5riu! 8uantit* incr"as"s.


52/100

Effect:&E8ui)i5riu! (ric" r"!ain constant and

E8ui)i5riu! Juantit* d"cr"as"s.

8estions

J.1 ?$at is !"ant 5* E8ui)i5riu! Pric"

J. ?$at is !"ant 5* E8ui)i5riu! Juantit*

J.' ?$"n inco!" o, consu!"rs incr"as" $at ",,"cts on "8. (ric"

J.4 ?$"n (ric" o, ,actor (roduction incr"as"6 ?$at ",,"ct on "8. (ric"

J. ?$"n d"!and and su(()* 5ot$ incr"as" si!u)tan"ous)* $at ",,"ct on

"8. (ric"

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PART B-INTRODUCTORY MACRO ECONOMICS

Unit VI National Income and Aggregates

Stock

Stock *"ntit, o "n%&onoi& !"#i"b$% i& is%"s*#% "t " "#ti&*$"# oint

o ti%.Sto& "s no ti% i%nsion.Sto& is st"ti& &on&%t.

Flow

Flow -$o is t"t *"ntit, o "n%&onoi& !"#i"b$%: i& is%"s*#% *#in; t% %#io oti%.

-$o "s ti% i%nsion $i% %##: %# ", %t&.-$o is " ,n"i& &on&%t.

The variable is measured at a point of

time.

The variable is measured for a period

of time.

Stocks influences flow Flow influences stock

Stock is not represented as per unit

time period

Flow is represented as per unit time

period.Population, Capital stock, Money

supply

National Income, saving rate,

Investment, change in money supply,

etc.

Consumer Goods

Tos% ;oos i& "#% bo*;tb,&ons*%#s "s


54/100

Gets used up by consumption for

deriving satisfaction in the ones or

several times.

Does not gets used up in production

These doesnt increase the production

of economy

These goods increase the productivity

of economy

Final use products used by consumers

for direct use

E.g. car purchased by consumer for

personal use

Final use product used by Producers for

indirect use.

E.g. car purchased by taxi driver for

taxi purpose

Final Goods

Final goods +#% tos% ;oos:

i& "#% *s% %it%# o#


55/100

boundry and ready for use by final

users.

boundry and not ready for use by final

users.

Value addition not required in future. Value addition required in future.

Domestic Territory of a Country

It includes:

(i) Territory lying within the political frontiers, including territorial

waters of the country.

(ii) Ships and aircraft operated by the resident of the country between two

or more countries.

(iii) Fishing vessels, oil and natural gas rigs and floating of platforms

operated by the residents of the country in the international waters or

engaged in extraction in areas in which the country has exclusive

rights of exploitation.

(iv) Embassies, consulates and military establishment of the country

located abroad.

Domestic territory is much bigger than the political frontiers of a

country.

Normal Residents of a Country

A normal Resident of a country is defined as a person who ordinarily resides in

a country and whose centre of interest (Economic interest) lies in that country.

(It also covers institution along with individuals). It includes national and non-

nationals residing in a country. Indians living in England are non-nationals of

that country, because they still hold Indian passports and Indian citizenship.

However, they are the normal residents of England because they have settled

there and their economic interest lies in that country.

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International Organizations like the World Health Organisation, World Bank,

International Monetary Fund and International Labour Organisation are

residents of an international area, but not of the country in which they are

located. The offices of these organizations are also located in India. However,

these are not normal residents of India, but the Indian citizens working in these

offices are the normal residents of India.

Residents households of a country cover all individual living within the

domestic territory of a country except the following:-

(i) Foreign visitors in the country for such purposes as recreation,

holidays, medicals treatment, study tours, conferences, sports- events

etc.

(ii) Crew members of foreign vessels, commercial travelers and seasonal

workers in the country.

(iii) Officials, diplomats and members of the armed forces of a foreign

country.

(iv) Employees of international organization who are not the citizens of

the country in which the offices are located.

(v) Foreigners who are the employees of non- resident enterprises and

who have come to the country of purposes of installing machinery or

equipment purchased from within employees.

(vi) Individuals mentioned in (i), (ii), (iv) and (v) will be treated asforeigners in case they stay for less than one year in the domestic

territory of the given country. It automatically means that if they stay

for one year or more in that country, they will be treated as the normal

residents of that country. Generally, individuals mentioned at (i) and

(ii) above will go back to their respective countries in less than one

year (or sometimes) more. In later case, they will be treated as the

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normal residents of the country where they are employed or are living

A Bangladeshi daily crossing border and working in India and

returning back in evening is a normal resident of Bangladesh.

Depreciation:- ( Capital Consumption allowance, Consumption of Fixed

Capital):- The value of capital goods decreases due to wear and tear in use in

production during an accounting year. It includes normal wear and tear,

foreseen absolescence and accidental losses under use

Gross Investment:-Gross addition to the stock of capital of a firm is called

Gross investment. It means addition to the total stock of capital of a firm when

the value of depreciation is not deducted from it.

Net Investment:-Net addition to the stock of capital of a firm is called Net

investment. It means addition to the total stock of capital of a firm after

deduction of Depreciation which gives more accurate value of available stock .

Circular flow of IncomeCic"la #ow in a two secto econo!$.The National Income of economy is generated as a flow of goods and services

produced, as a flow of Incomes, or as a flow of expenditures on goods and

services which form three phases of the continues flow generated by two

sectors. Mon"* ,)o inc)ud"s on)* ,inancia) transaction i.". (a*!"nts and

r"c"i(ts o, !on"*. T$" circu)ar ,)o o, inco!" r")at"s it$ !on"* ,)o.

R"a) ,)o inc)ud"s ,)o o, oods and ,actors s"r%ic"s. a)u" o, 3oods (roduc"d

is "8ua) to %a)u" o, ,actor inco!" "n"rat"d in a s"ctor "cono!*. T$"

(roduction s"ctor i%"s ,actor (a*!"nt ,or "!()o*in ,actors $ic$ co!"s ,ro!

consu!(tion s"ctor.

dis(osition o, oods Expenditure on

goods and Services

57

P#o*&%#

Cons*tion

S%&to#P#o*&tion -"&to# M"#%t


58/100

-"&to# P",%nt

-"&to# In&o%

Mon"* +)o = S"ctor Econo!*>T$" ,actor inco!" r"c"i%"d 5* consu!(tion S"ctor in s("nt on oods (roduc"d

5* Production s"ctor as "9("nditur" on oods. T$us t$" ,actor inco!" is s("nt

on dis(osition o, oods and circu)ar ,)o o, Inco!" continu"s ,ro! on" s"ctor

to anot$"r.

Sa%ins6 ta9"s Id"nti,*in t$" (roducin "nt"r(ris"s and c)assi,*in t$"! into

industria) s"ctors accordin to t$"ir acti%iti"s.

=ii> Esti!atin n"t %a)u" add"d 5* "ac$ (roducin "nt"r(ris"s as ")) as

"ac$ industria) s"ctors and addin u( t$" n"t %a)u" add"d 5* a))

s"ctors.

a)u" add"d =3ross>=

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>#oss !"$*% "% ?>PM) F a)u" o, Out(ut =3ross> Int"r!"diat"

Consu!(tion

?$"r":

S"$%s @ &"n;% in sto& = !"$*% o o*t*tC"n;% in sto& = &$osin; sto& A o%nin; sto&-o# obt"inin; NNP -& ?N.I) % "!%NNP -& ?N.I) = >PM ?) &ons*tion o F D"(r"ciation sa)"s Incr"as" in stock

3DP F 3A (ri!ar* 3A s"condar* 3A t"rritor*

Income Metod:&

NDP+CF Co!("nsation to "!()o*""s O("ratin sur()us Mi9"d inco!" o,s"), "!()o*"d

?$"r" co!("nsation to "!()o*""s inc)ud"s a"s and sa)ari"s6 socia) s"curit*

contri5ution 5* "!()o*"r6 ot$"r 5"n",its in cas$ and kind )ik" )"a%" tra%")conc"ssion6 Trans(ort a))oanc"6 D"arn"ss a))oanc"6 ratuit*6 "9tra ti!"

5"n",its6 ,r"" r"sid"nc" ,aci)it* "tc.

O.S. =O("ratin sur()us> F= R"nt and ro*a)ti"s> int"r"st (ro,its =$ic$

inc)ud"s coo("ration ta96 undistri5ut"d (ro,its and di%id"nds>

Inco!e !et(od)1. Co!*ensation o+ e!*lo$ees,

, O*eating s"*l"s.

=In&o% #o #o%#t, Ent#%#%n%*#si 1)R%nt Ro,"$t, A2)Int%#%st3)P#o


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iii) i!i%n

.. Mi/ed inco!e o+ sel+-e!*lo$ed.

NP -& = ?1) @ ?2) @ ?3)NNP -& = NP -& ?@) N%t "&to# in&o% #o "b#o">NP M = NP -& @ &ons*tion o )

3 >#oss o%sti& &"it"$ o#"tion ?I;)

Where: ?Gross Domestic fxed Capital ormation+

Change in stock)=

(Ig includes Depreciation, Net Business investment expenditure, Net

Residential Building investment expenditure and Net Public investment

expenditure and change in stock)

0 , Net E/*ot, >X&M)

3DP F C I 3 F =BM>

>PM = ?1) @ ?2) @ ?3) @ ?4)

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NNP -& = >PM &ons*tion o on account (roduction o, ,i9"d

ass"ts 5* o%"rn!"nt6 "nt"r(ris"s and $ous"$o)ds =ii> Production ,or s"),

consu!(tion =iii> I!(ut"d r"nt o, on"rB occu(i"d $ous".

EPENDITURE MET@OD:B=i> E9c)ud" s"cond $and oods "9("nditur".

=ii> "9c)ud" E9("nditur" on o)d and n" s$ar"s and 5onds as t$"* ar" on)*

(a("r c)ai!s=iii>E9c)ud" a)) o%"rn!"nt "9("nditur"s on trans,"r (a*!"nts suc$as un"!()o*!"nt 5"n",its 6o)d a" ("nsions and sc$o)ars$i(s as no (roducti%"

s"r%ic" r"nd"r"d in r"turn.=i%>E9c)ud" "9("nditur" on a)) int"r!"diat" oods

and s"r%ic"s to a%oid dou5)" countin. =%>Inc)ud" on account (roduction o,

,i9"d ass"ts 5* a)) t$" (roducin s"ctors.=%i>Inc)ud" (urc$as" o, n" $ous" 5*

consu!"r $ous"$o)ds.

?ork in (ror"ss at t$" sit" o, construction =%ii> Inc)ud" ca(ita) r"(airs )ik"

a)t"ration o, n" 5ui)din.

INCOME MET-OD:B=Trans,"r (a*!"nts s$ou)d not 5" inc)ud"d =ii> %a)u"

o, (roduction ,or s"), consu!(tion and i!(ut"d r"nt o, on"r occu(i"d $ous"s

=iii> E9c)ud" i))"a) inco!" =i%> E9c)ud" ind,a)) ains )ik" )ott"r*.

=%>cor(oration ta9 is a (art o, (ro,its.

?@IE CACUATIN3 NI6 PRO+ITS #E+ORE DEDUCTION O+

CORPORATION TA @AE TO #E INCUDED ?@IE DOIN3 SO

CORPORATION TA IS NOT INCUDED SEPERATEY. Si!i)ar)*6

Co!("nsation to "!()o*""s inc)ud"s inco!" ta9 to 5" (aid 5* t$" "!()o*""s.

Related aggegates 1

2oss Do!estic *od"ct at !aket *ice

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It is the money value o all fnal goods and services producedduring an accounting year with in the domestic territory o acountry

NATIONA3 INCOME !!" #C is the sum total o actorincome earned $y normal residents o a country during theaccounting year

2oss National *od"ct at !aket *ice

It is " on%, !"$*% o "$$


63/100

Fo!"las

NNP M = >NP M %#%&i"tion

NP M = >PM %#%&i"tion

NP -& = NP M A N%t ini#%&t t"%s ?ini#%&t t" A

s*bsii"#,)

>P -& = NP -& @ %#%&i"tion

NNP -& = >P M %#%&i"tion @ N%t "&to# in&o% #o

"b#o" A N%t ini#%&t t"%s

NNP -& = NP -& @ N%t "&to# in&o% #o "b#o".

Relation 4etween national *od"ct and Do!estic*od"ct,

o%sti& #o*&t &on&%t is b"s% on t% #o*&tion *nits

$o&"t% itin o%sti& ?E&onoi&) t%##ito#,: o%#"t% bot

b, #%si%nts "n non#%si%nts.

N"tion"$ #o*&t &on&%t b"s% on #%si%nt "n in&$*%s

t%i# &ont#ib*tion to #o*&tion bot itin "n o*tsi% t%

%&onoi& t%##ito#,.

National *od"ct = o%sti& #o*&t @ R%si%nts

&ont#ib*tion to #o*&tion o*tsi% t% %&onoi& t%##ito#,

?-"&to# in&o% #o "b#o") Non #%si%nt &ont#ib*tion to

#o*&tion insi% t% %&onoi& t%##ito#, ?-"&to# in&o% to

"b#o")

NATIONA3 INCOME AND 5E3FARE)- >P is ;%n%#"$$, &onsi%#%

"s "n in% o %$"#% b*t t%#% "#% "t $%"st t% o$$oin;

#%"sons , tis ", not b% &o##%&t

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1. ist#ib*tion o >P i >P o " &o*nt#, #isin; %$"#% ",

not #is% i #i& b%&o%s #i&%# "n oo# b%&o%

oo#%#?>P is not *nio#$, ist#ib*t%)

2. Non Mon%t"#, %&"n;%s b"#t%# s,st% is ;%n%#"$$,i&*$t to b% &o*nt% in %!%$oin; &o*nt#i%s i%s*$ts in *n%# %sti"tion o >P.

3. Et%#n"$iti%s o$$*tion *#in; #o*&tion is not in&$*% int% >P "$to*; it %%"s%s t% %$"#% i& #%s*$tsin o!%# %sti"tion o >P.

4. Coosition o ;oos " i"on %n #o*&% is oo#%s o #*%%s "n in%"s%s >P b*t %$"#% o on%

%#son in%"s%s i$% i$ #o*&% o s"% "o*ntT#%%no*s$, in%"s%s %$"#% o "ss%s.

CA3CU3ATION OF NATIONA3 DISPOSAB3E INCOME6 PRI7ATEINCOME6 PERSONA3 INCOME AND PERSONA3 DISPOSAB3EINCOME

NationalDis*osa4leinco!e

Pi8ate Inco!e

in&$*%s "&to# in&o% "s

%$$ "s T#"ns%# in&o%?E"#n% in&o% @Un%"#n% in&o%)

Pesonal Inco!e

It is the incomerom all the sources%&arned Income aswell as transerpayment roma$road) availa$le toresident o a

country or consumptionexpenditure or saving during ayearNNP-C @ N%t Ini#%&tt" @ N%t &*##%ntt#"ns%# #o"b#o" =N%tN"tion"$ isos"b$%

in&o%.?>#oss N"tion"$

#actor income rom netdomestic product accruingto private sector includesincome rom enterprisesowned and controlled $ythe private individual&xcludes:'

( "roperty andentrepreneurial income othe Gov departmentalenterprise *avings o the !on'departmental &nterprise-"&to# In&o% #o NP+&*in; to #i!"t% s%&to#= NP-C ?) in&o% #o#o%#$, %nt#%#%n%*#si

"&*in; to t% ;o!t%"#t%nt"$ Ent%##is%s

"I is the income+ctually received $ythe individuals andhouseholds rom allsources in the orm oactor income andcurrent transers.

P%#son"$ in&o% =P#i!"t% In&o% ?)&o#o#"tion t".?) Co#o#"t% S"!in;sOR Unist#ib*t%#o


65/100

isos"b$% In&o%in&$*%s%#%&i"tion)

?) s"!in;s o Non%"#t%nt"$ %nt%##is%s.Pi8ate Inco!e Incl"desD -"&to# in&o% #o n%to%sti& #o*&t "&*in;

to #i!"t% s%&to#.@ N%t "&to# in&o% #o"b#o"@ Int%#%st on N"tion"$ %bt@ C*##%nt t#"ns%# #o>o!t.@ C*##%nt t#"ns%# #o#%st o t% o#$.

R%&%its o t% ;o!t.+inist#"ti!%%"#t%nt ?%%s "n


66/100

In/estmentF E9("nditur" on (urc$as" o, Int"r!"diat" oods as ")) (roduc"

ood.

In/estment are to t!"es&

=A>Atonomos:B It is ,i9"d not c$an" as c$an" in inco!".

=#>Induc"d In%"st!"nt:B C$an" as c$an" in Inco!".

Ar"at" D"!and can 5" s$on it$ t$" $")( o, ,o))oin sc$"du)" and

diara!.

Income C I CBI

AD

0 - 10 1-

10 10 10 0

0 1- 10 -

'0 0 10 '0

40 - 10 '-

-0 '0 10 40

A77re7ate S""%!:B Tota) Mon"* %a)u" o, a)) ,ina) oods and s"r%ic"s

(roduc"d in an "cono!* in an accountin *"ar.

66


67/100

Ar"at" Su(()* F CS

Income C S

0 - B-

10 10 0

0 1- -

'0 0 10

40 - 1-

-0 '0 0

D"t"r!ination o, Inco!"6 "!()o*!"nt and out(ut

On E (oint Ar"at" d"!and7 Ar"at" su(()*

OJ is t$" )"%") o, inco!"

Some


68/100

APS F 1B APC APC APS F 1

MPC F Ratio 5"t""n c$an" in consu!(tion and c$an" in Inco!"

APC F GC GY

APS F GS GY

MPC MPS F 1

1 MPC F MPS1 MPS F MPC

Mu)ti()i"r

It is t$" ratio 5"t""n c$an" in Inco!" and c$an" in In%"st!"nt.

F GY F 1GI 1 MPC

GY F GI 9

E(cess Demand

E9c"ss d"!and r","rs to situation $"n ar"at" d"!and is in "9c"ss o,

Ar"at" su(()* at ,u)) "!()o*!"nt )"%").

ADAS

It can 5" "9()ain"d it$ ,o))oin diara!B

68


69/100

Deficient Demand

I, AD is )"ss t$an AS at t$" ,u)) "!()o*!"nt )"%").

AD AS at ,u)) "!()o*!"nt.

E,,"ct o, D",ici"nt d"!and

1. +a)) in Inco!" and "!()o*!"nt

. +a)) in "%") o, Out(ut

'. +a)) in 3"n"ra) (ric" )"%")

Measres to Correct E(cess Demand

#* usin ,o))oin !"asur"s

1. +isca) Po)ic*B i> Incr"as" Ta9 and r"duc" su5sid*

ii> R"duc" 3o%t. E9("nditur"

. Mon"tar* Po)ic*B i> Incr"as" in #ank rat"

ii> Incr"as" cas$ r"s"r%" ratio =CRR> and statuar*

)i8uidit* ratio =SR>

iii> O("n Mark"t O("ration =S"))in o, S"curit*>

Measres to Correct Deficient demand

1. +isca) Po)ic* i> R"duc" Ta9"s and incr"as" su5sid*

ii> Incr"as" in 3o%t. "9("nditur"

. Mon"tar* Po)ic* i> R"duction in #ank rat"

69


70/100

ii> R"duction in cas$ r"s"r%" ratio =CRR> and

statuar* )i8uidit* ratio =SR>

iii> Purc$as" o, s"curit*

8estions for Re/ison

J.1 D",in" t$" ,o))oin

1. Ar"at" D"!and

. Ar"at" Su(()*

'. APC

4. Mu)ti()i"r

-. E9c"ss d"!and

/. D",ici"nt d"!and

J. E9()ain $o t$" )"%") o, Inco!" is d"t"r!in"d

J.' E9()ain it$ diara! E9c"ss d"!and and di,,icu)t d"!and

J.4 ?rit" !"asur" to corr"ct "9c"ss d"!and

Meanin7 of in/o%ntar! nem"%o!ment and f%% em"%o!ment.

In%o)untar* un"!()o*!"nt r","rs to a situation in $ic$ ("o()" ar" r"ad* to

ork at (r"%ai)in a" rat"6 5ut do not ,ind ork.

+u)) "!()o*!"nt r","rs to a situation in $ic$ no on" is un"!()o*"d i.".t$"r"

is no in%o)untar* un"!()o*!"nt.

Accordin to "*n"s ,u)) "!()o*!"nt sini,i"s a )"%") o, "!()o*!"nt $"r"

incr"as" in ar"at" d"!and do"s not )"ad to an incr"as" in t$" )"%") o, out(ut

and "!()o*!"nt.

Incr"as" in d"!and 5"*ond ,u)) "!()o*!"nt caus"s (ric"s to o u(.

70


71/100

In%"st!"nt !u)ti()i"rs and its orkin.

In%"st!"nt !u)ti()i"r "9()ains t$" r")ations$i( 5"t""n incr"as" in in%"st!"nt

and t$" r"su)tant incr"as" in inco!".

In%"st!"nt !u)ti()i"r is t$" ratio o, c$an" in inco!" to c$an" in in%"st!"nt.

Mu)ti()i"r =k> FG*7GI.

T$" %a)u" o, !u)ti()i"r d"("nds on t$" %a)u" o, !arina) (ro("nsit* to consu!"

=MPC>.

T$"r" is dir"ct r")ations$i( 5"t""n and MPC.

Mu)ti()i"r a)so d"("nds on t$" !arina) (ro("nsit* to sa%"

T$"r" is in%"rs" r")ations$i( 5"t""n !u)ti()i"r and MPS.

IMPORTANT 2ORMULAE.

ADFCI =to s"ctor "cono!*>.

APCFC7Y.

APSFS7Y.

APCAPSF1

MPCFGC7GY

MPSFGS7GY

MPSMPCF1 AND 1BMPCFMPS

71


72/100

FGY7GC or F17MPS or FI7IBMPC

CF Wc5=Y>

SFBa=1B5>Y

BaF n"ati%" sa%in

=1B5>FMPS

. ADFCI

Consm"tion fnction C c B *>9)

C F Autono!ous consu!(tion

S$os !arina) (ro("nsit* to consu!" du" to unit incr"as" in inco!"

In t$" s$ort ("riod (ric" and rat" o, int"r"st r"!ainin constant i.".6 "9Bant"

In%"st!"nt "9("nditur" is uni,or! 7 sa!" a!ount "%"r* *"ar.

I F I

LET US PRACTICE

?$at is t$" r")ation 5"t""n APC and APS

Ans. APCAPSF1

?$at is t$" r")ation 5"t""n MPC and MPS

Ans. MPSMPCF1.

I, APC is 0. t$"n $o !uc$ i)) 5" APS

Ans. 1B0.F0.'

I, MPC F0.-6 $at i)) 5" MPS

Ans. MPCMPSF1

1B0.-F0.-

Stat" t$" i!(ortant ,actor in,)u"ncin t$" (ro("nsit* to consu!" in an

"cono!*

72


73/100

Ans. T$" )"%") o, inco!" =Y> In,)u"nc"s t$" (ro("nsit* to consu!" =c> o,

an "cono!*.

?$at is !"ant 5* in%"st!"nt

Ans. In%"st!"nt !"ans addition to t$" stock o, ca(ita) ood6 in t$" natur"

o, structur"s6 "8ui(!"nt or in%"ntor*.

?$at is t$" in%"st!"nt d"!and ,unction

Ans. T$" r")ations$i( 5"t""n in%"st!"nt d"!and and t$" rat" o,

int"r"st is ca))"d in%"st!"nt d"!and ,unction.

?$at is "8ui)i5riu! inco!"

Ans. T$" "8ui)i5riu! inco!" is t$" )"%") o, inco!" $"r" ADFAS i.".

ADFAS and ()ann"d sa%in "8ua)s ()ann"d in%"st!"nt.

3i%" t$" ,or!u)a o, in%"st!"nt !u)ti()i"r in t"r!s o, MPC.

Ans. F171BMPC

?$at can 5" t$" !ini!u! %a)u" o, in%"st!"nt !u)ti()i"r

Ans. On".

?$at is t$" !a9i!u! %a)u" o, in%"st!"nt !u)ti()i"r

Ans. In,init*.

3i%" t$" "8uation o, (ro("nsit* to consu!".

Ans. CFa5*.

E9()ain t$" orkin o, a !u)ti()i"r it$ an "9a!()".

Ans. Mu)ti()i"r t"))s us $at i)) 5" t$" ,ina) c$an" in t$" inco!"6 as a

r"su)t o, c$an" in in%"st!"nt. C$an" in in%"st!"nt r"su)ts in t$" c$an" in

inco!". S*!5o)ica))*:

GIXGYXGCXGY

T$" orkin o, a !u)ti()i"r can 5" "9()ain"d it$ t$" $")( o, t$" ,o))oin

ta5)" $ic$ is 5as"d on t$" consu!(tion t$at is6 GIF1000 and MPCF47-.

73


74/100

PROCESS O+ INCOME 3ENERATION.

ROUNDS GI GY GC

1. 1000 1000 47-I000F&00

. B &00 47-&00F/40'. B /40 47-/40F-1

4. B -1 47--1F402./

Z Z Z Z

TOTA -000 4000

As ("r t$" ta5)" t$" initia) incr"as" in t$" in%"st!"nt o, Rs 1000 t$"r" is a tota)

incr"as" in t$" inco!" 5* Rs -000 i%"n MPCF47- . Out o, t$is tota) incr"as" in

t$" inco!" Rs 4000 i)) 5" consu!"d and Rs -000 5" sa%"d.

T$" su! o, tota) incr"as" in inco!" is a)so d"ri%"d as:

G*F1000&00F/40-1.in,init*.

100047-1000=47->1000=47->'1ooo..in,init*

F1000[147- =47->=47->'in,init*\

F1000[171B47-\ F 1000-71FRs. -000 cor"s.

Di,,"r"ntiat" 5"t""n "9 ant" and "9 (ost in%"st!"nt.

Ans. E9 ant" is t$" ()ann"d in%"st!"nt $ic$ t$" ()ann"r int"nds to in%"st at

di,,"r"nt )"%") o, inco!" and "!()o*!"nt in t$" "cono!*.

E9 (ost in%"st!"nt !a* di,,"r ,ro! "9 ant" in%"st!"nt $"n t$" actua) sa)"s

di,,"r ,ro! t$" ()ann"d sa)"s and t$" ,ir!s t$us ,ac" un()ann"d addition or

r"duction o, in%"ntori"s.

.Dra a $*(ot$"tica) (ro("nsit* to consu!" cur%" ,ro! it dra t$" (ro("nsit*

cur%" to sa%" cur%"

Ans. APCFC7Y APSFS7YPro("nsit* to sa%" cur%"

Is dran ,ro! (ro("nsit* to consu!" cur%"

?$"n *Fc APCF1

Ti)) t$at (oint APS is n"ati%" at (ointHs

?$"n *c t$"r" is a (ositi%" sa%in

74


75/100

E9()ain t$" d"t"r!ination o, inco!" and "!()o*!"nt it$ AD and AS. =3i%"

sc$"du)">

ADF CI

ASFCS ASFY =r","rs to countri"s nationa) inco!">

T$" "8ui)i5riu! )"%") o, inco!" is d"t"r!in"d at a (oint $"n ADFAS.

E8ui)i5riu! can 5" ac$i"%"d at ,u)) "!()o*!"nt and "%"n at und"r"!()o*!"nt situation.

It !a* not 5" a)a*s at ,u)) "!()o*!"nt condition in an "cono!*.

Dra a strai$t )in" consu!(tion cur%". +ro! it d"ri%" a sa%in cur%"

"9()ainin t$" (roc"ss. S$o on t$" diara!.

a> T$" )"%") o, inco!" at $ic$ a%"ra" (ro("nsit* to consu!" "8ua) to on".

5> A )"%") o, inco!" at $ic$ a%"ra" (ro("nsit* to sa%" is n"ati%".

consu!(tion sa%in

C

N"ati%" sa%in

75

(=

&@s

(EC

S=0

In&o%+PS=0

S

0

&

C/S

,

&

S

'


76/100

A

o Y # Inco!"7Out(ut

Sa%ins S

Sa%in

O #

N"ati%" sa%ins Inco!"7Out(ut

BA

Ac is t$" consu!(tion cur%" and OA is t$" consu!(tion "9("nditur" at ;"ro

)"%") o, inco!". Inco!" !inus consu!(tion is sa%in.

?$"n inco!" is 06 t$" "cono!*s consu!(tion )"%") is OA. T$"

corr"s(ondin )"%") o, sa%in is B0A.

So a is t$" startin (oint o, sa%in cur%". At O# )"%") o, inco!"consu!(tion is "8ua) to inco!"6 so sa%in ar" ;"ro. so # is anot$"r (oint on

sa%in cur%" .

]oin A and # and "9t"nd t$is )in" to S6 AS is t$" sa%in cur%".

a> T$" )"%") o, inco!" at $ic$ APC is "8ua) to on" is O#.

5> A )"%") o, inco!" at $ic$ APS is n"ati%" OY.

NUMERICALS.

76


77/100

I, in an "cono!* in%"st!"nt incr"as"s 5* Rs 1000 cor"s to Rs 100

cor"s and as a r"su)t tota) inco!" incr"as"s 5* &00 cor"s ca)cu)at" ca(ita)

MPS.

Ans.G IF100B1000F00

GYF&00

GFGY7GIF&00700F4

F17MPSF4

MPSF174F0.-

MPSF0.-

I+ in an "cono!* t$" actua) )"%") o, inco!" is Rs -00cror"s $"r"as t$"

,u)) "!()o*!"nt t$" )"%") o, inco!" is RS &00 cor"s. T$" MPCF0.-

ca)cu)at" t$" incr"as" in in%"st!"nt r"8uir"d to ac$i"%" ,u)) "!()o*!"nt

inco!".

Actua) inco!"FRs-00 cor"s

+u)) "!() Inco!" F Rs &00 cor"s

G * F &00 B-00 F '00 cor"s

MPC F 0.- F - F '

100 4

F 1 1 1 100

BBBBBBBB BBBBBBBBBBBB F BBBBBBBBBB F BBBBBBBBB F 4

01BMPC 1 B 0.- 0.- -

?" kno t$at G * F . G I

'00 F 4 4 I

G I F - cror"s

Ca)cu)ation o, APC and MPC i%"n t$" )"%") o, Inco!" and Consu!(tion

Inco!" consu!(tion APC F c7* MPC F Gc7G*

0 4 B B10 1 1.0 0.&0

0 0 1.00 0.&0

'0 & 0.2' 0.&0

40 '/ 0.20 0.&0

4. Ca)cu)ation o, APS and MPS i%"n t$" )"%") o, Inco!" and consu!(tion

Inco!" consu!(tion sa%in APS MPS

=Rs in cror"s> =Rs in cror"s>

0 4 B4 B B

77


78/100

10 1 B B0.0 0.0

0 0 0 0.00 0.0

'0 & 0.0 0.0

40 '/ 4 0.10 0.0

C)u": APS F s7* MPS F Gs7G* SFY C

-.Su((os" t$" consu!(tion "8ua)s cF 40 0.- *6 In%"st!"nt "8ua)s I F Rs

/0 and YF C I. +ind i> E8ui)i5riu! )"%") o, inco!" ii> T$" )"%") o,

consu!(tion at "8ui)i5riu! iii> )"%") o, sa%in at "8ui)i5riu!

Ans: i> YF C I AS F AD

Su5stituitin t$" %a)u" o, c and I " "tY F 40 0.-* /0 YF C I IF/0

=YB0.-*>F 100 AS FAD CF 40 0.-* >.- Y F 100

YF 100 F 10000

BBBBBBB BBBBBBBBB F 400

0.- -

Y F 400 E8ui)i5riu! )"%") o, Inco!"ii> 3i%"n cF 40 0.-

Y F 400

CF 40 0.-=400> F '40

CF'40

iii> YF C S So SF YBC

SF 400 B'40 F /0

SF /0 cror"s

In a to s"ctor "cono!*6 t$" sa%in and in%"st!"nt ,unctions ar":

SF B10 0.Y I F B' 0.1Y

?$at i)) 5" t$" "8ui)i5riu! )"%") o, inco!"

Ans: E8ui)i5riu! )"%") o, inco!" SF I

B10 F 0.* F B' 0.1*

0.* 0.1* F B' F 10

78


79/100

0.1* F F * F 0

. E9()ain t$" co!(on"nts o, t$" "8uation cF 0 0.20 * and construct a

sc$"du)" ,or consu!(tion $"r" inco!" is Rs 00 6 Rs '00 6 Rs '-0 and Rs

400.

Co!(on"nts o, "8uation cF0 0.20* "9()ain"d in ^ !ark 8u"stion

nu!5"r 1

T$" sc$"du)" ,or consu!(tion is as ,o))os

Y =Inco!"> cF0 0.20*

00 00 cF 0 0.2 00

-0 4- F0 1&0 F 00

'00 20 cF 0 0.2 -0

'-0 ''- F 0 - F 4-

400 '&0 cF 0 0.2 '00 F 20

CF 0 0.2 '-0 ''-

CF 0 0.2 400 F '&0

&.T$" consu!(tion ,unction is CF 0 0.2*. T$" %a)u" o, Inco!" is i%"n

as 1006006 '006 400 and -00. +ind out t$" consu!(tion sc$"du)" and dra

t$" consu!(tion cur%".

T$" consu!(tion sc$"du)"

Y =Inco!"> C F 0 0.2 Y

0 CF0

100 CF0 0.2 =100> F 110

79


80/100

00 CF0 0.2 =00> F 00

'00 CF0 0.2 ='00> F 20

400 CF0 0.2 =400> F '&0

-00 CF0 0.2 =-00> F 40

T$" consu!(tion cur%" is s$on as

. @o is "8ui)i5riu! out(ut o, ,ina) oods d"t"r!in"d und"r s$ort run ,i9"d

(ric"Und"r s$ort run ,i9"d (ric"6 "8ui)i5riu! out(ut and "8ui)i5riu! d"!andat ,i9"d (ric" and constant rat" o, int"r"st can 5" ,ound it$ t$" $")( o,,o))oin ,or!u)as

__YF A BBBBBBBBB 1 B 5Y F a)u" o, "8ui)i5riu! out(ut

__A F Tota) Autono!ous consu!(tion#F MPC

T$us6 %a)u" o, "8ui)i5riu! out(ut =*> d"("nds on %a)u"s o, A =i."6 c I> and 5i." AD F AS __ __

80

470

20

500400300200100

300

200

100

110

380

C=?,)

290

In&o%

Cons*1tion


81/100

YF C I 5*__ __ __ __Y F A 5* =AF C I s$oin tota) autono!ous "9("nditur">

__

Y 5* F A_Y =1B5> F A __YF A BBBBBBBB 1B5

M%ti"%ier

1. In an "cono!* an incr"as" in in%"st!"nt )"ads to incr"as" in nationa)

inco!" $ic$ is t$r"" ti!"s !or" t$an t$" incr"as" in in%"st!"nt

=ca)cu)at" !arina) (ro("nsit* to consu!">

. In an "cono!* t$" MPC is 0.2- in%"st!"nt is incr"as"d 5* Rs. 100

cror"s. Ca)cu)at" t$" tota) incr"as" in inco!" and consu!(tion "9("nditur"

'. E9()ain it$ nu!"rica) "9a!()" $o an incr"as" in in%"st!"nt in an

"cono!* a,,"cts t$" )"%") o, consu!(tion.

4. An incr"as" in in%"st!"nt )"ads to tota) ris" in nationa) inco!" 5* Rs.

-00 cror"s. I, MPC is 0.2 $at is t$" incr"as" in in%"st!"nt Ca)cu)at".

In an "cono!* t$" MPC is 0.& In%"st!"nt is incr"as"d 5* Rs.-00 cror"s.

o Ca)cu)at" t$" tota) incr"as" in inco!" and consu!(tion "9("nditur".

I, in an "cono!* MPC is 0.- and its in%"st!"nt is incr"as"d 5* Rs.-00

cror"s.

o Ca)cu)at" t$" tota) incr"as" in inco!" and consu!(tion "9("nditur"

Co!("t" t$" ta5)"

o Inco!" MPC Sa%in APS

o 0 B B20 B

100 0./ B B

00 0./ B B

'00 0./ B B

&. In an "cono!* SF B-0 0.-Y is t$" sa%in ,unction =$"r" SFsa%in and

YFnationa) inco!"> and in%"st!"nt "9("nditur" is 000. Ca)cu)at"

81


82/100

=i> E8ui)i5riu! )"%") o, nationa) inco!"

=ii> Consu!(tion "9("nditur" at E8ui)i5riu! )"%") o, N.I

2. +ro! t$" ,o))oin in,or!ation a5out an "cono!* ca)cu)at"

o its E8ui)i5riu! )"%") o, nationa) inco!" and

o sa%in at E8ui)i5riu! )"%") o, N.I

o Consu!(tion ,unction F 00 0.2Y

o In%"st!"nt "9("nditur" IF'000.

10.Dis(osa5)" inco!" is Rs.1000 cror"s and consu!(tion "9("nditur" is

Rs.-0 cror"s. +ind out a%"ra" (ro("nsit* to sa%" and a%"ra" r"(r"s"nt to

consu!".

11 In an "cono!* in%"st!"nt "9("nditur" incr"as"d 5* Rs.00 cror"s. T$"

!arina) (ro("nsit* to consu!" is 0.2 ca)cu)at" tota) incr"as" inco!" and

consu!(tion "9("nditur"

1'.In an "cono!* an incr"as" in in%"st!"nt )"ads to incr"as" in nationa)

inco!" $ic$ is t$r"" ti!"s !or" t$an t$" incr"as" in in%"st!"nt ca)cu)at"!arina) (ro("nsit* to consu!".

14.T$" dis(osa5)" inco!" is Rs.-00 cror"s and sa%in is Rs.-00 cror"s ,ind

out a%"ra" (ro("nsit* to consu!"

1-.In an "cono!* MPC is 0.- i, in%"st!"nt "9("nditur" is incr"as"d 5*

Rs.-00 cror"s ca)cu)at" t$" tota) incr"as" in inco!" and consu!(tion

"9("nditur"

1/.Co!()"t" t$" ,o))oin ta5)"

1.As a r"su)t o, incr"as" in%"st!"nt 5* 1- cror"s nationa) inco!"

incr"as"d 5* -00 cror"s ca)cu)at" !u)ti()i"s6 MPC and MPS

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1&.3i%"n consu!(tion ,unction CF100.- Y =$"r" CFconsu!(tion

"9("nditur" and YFnationa) inco!"> and in%"st!"nt "9("nditur" Rs.000

.ca)cu)at"

=i>E8ui)i5riu! )"%") o, nationa) inco!"

=ii> Consu!(tion "9("nditur" at "8ui)i5riu! )"%") o, inco!"

12.In an "cono!* SF B-00.-Y is t$" sa%in ,unction =$"r" SFsa%in and

YFnationa) inco!"> and in%"st!"nt "9("nditur" is 2000 ca)cu)at"

=i> E8ui)i5riu! )"%") o, nationa) inco!"

=ii> Consu!(tion o, "9("nditur" at "8ui)i5riu! )"%") o, nationa) inco!"

0.+ro! t$" ,o))oin in,or!ation a5out an "cono!* ca)cu)at" =i>

E8ui)i5riu! )"%") o, N.I =ii> sa%in at E8ui)i5riu! )"%") o, inco!"

consu!(tion ,unction CF000.2Y =$"r" CFconsu!(tion "9("nditur" and

YFN.I. In%"st!"nt "9("nditur" I F-000

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MONE9

Meanin7 of o, #art"r S*st"!

1. Lac# of Do*%e Coincidence:B It is %"r* di,,icu)t to ,ind out a ("rson

$o ants *our co!!odit* and *ou ant $is co!!odit*.

. Lac# of Common measre of @a%e:B In 5art"r s*st"! t$"r" ar" no

co!!on !"asur" o, a)u" and (ro("r accountins.

'. Lac# of di/isi*i%it!:BMan* oods ar" not di%isi5)"6 I, so!"5od* ant to

"9c$an" $is co ,or a (air o, s$o"s6 $o can $" di%id" $is co.

4. Diffic%t in deferred "a!ments:BT$"r" is no sta5i)it* in t$" (roc"ss o,t$" oods6 Jua)it* o, di,,"r"nt units o, ood a)so do"s not r"!ain t$"

sa!".

Mone!

Meanin7:B Mon"* can 5" d",in"d as a co!!odit* $ic$ is acc"(t"d as a

!"diu! o, "9c$an" and ("r,or! t$" ,unction o, !"asur" o, %a)u" and stora"o, %a)u".

2nctions:&

>A)Primar! 2nction:&

1. Medim of E(can7e:B Mon"* $")(s us6 5u*in and s"))in o, oods. So

!on"* 5"ca!" t$" r"(r"s"ntati%" o, "n"ra) (urc$asin (o"r.

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. Measre of @a%e:& Mon"* $")(6 in !"asurin t$" "9c$an" %a)u" o,

oods and s"r%ic"s. So !on"* s"r%" as a unit o, %a)u" and !on"* !ak"s

(ossi5)" o, k""(in accounts.

> Curr"nt d"(osit account

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=iii> +i9"d d"(osit account

'. Ad/ancin7 of Loans:& oans and ad%anc"s ar" i%"n 5* co!!"rcia)

5ank in t$" ,or! o, =a> Cas$ Cr"dit i!it =5> t"r! )oans =c> D"!and

)oans =d> o%"rdra,t ,aci)it*.

1. Credit Creation:&Cr"dit Cr"ation !"ans t$" Incr"as" in 5ank d"(osit

Co!!"rcia) 5anks "9("nd t$"ir d"(osits 5* i%in )oans and ad%anc"s.

3. A7enc! 2nction:&

>i) Trans,"r o, +unds ,ro! on" ()ac" to anot$"r 5* d"!and dra,t.

>ii) Pa*!"nts o, 5i))s on 5"$a), o, t$"ir custo!"r.

5. 6enera% Uti%it! Ser/ices:&=i> ock"r ,aci)it* =ii> Tra%")"rs C$"8u" =iii>

Sa)" and (urc$as" o, ,or"in "9c$an".

Centra%


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8antitati/e instrments of Credit Contro%

1.


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'. Ca)cu)at" RR6 i, initia) d"(osit o, Rs. 00 cor"s )"ad to cr"ation o, tota)

d"(osits o, Rs. 1/00 cor"s.

Ans: Mon"* !u)ti()i"r F Tota) d"(osits7Initia) d"(osits F 1/00700F&

Mon"* !u)ti()i"r F 17RR F &F17RR.

RR F 1.- or 1.-

6O@ERNMENT Re/ene


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#> Re/ene Recei"ts >RR):& It r","rs to t$os" !on"tar* r"c"i(ts $ic$

n"it$"r cr"at" a )ia5i)it* to t$" o%t. nor )"ad to r"duction in ass"t.

E9a!()":B Ta9"s6 +""s6 ic"ns" and P"r!it6 Esc$"at.

2o%%oin7 are te main com"onents of re/ene recei"ts:&

1. Ta(:&Ta9 is a co!(u)sor* (a*!"nt to o%t. it$out "9("ctation o, dir"ct

5"n",it to t$" ta9 (a*"rs. T$"r" ar" !ain to t*(" o, ta9"s:B=i> Direct Ta(:B I, t$" )ia5i)it* to (a* ta9 =incid"nc"> and its 5urd"n

=i!(act> ,a))s on sa!" ("rson6 it is t"r!"d as Dir"ct ta9.

#urd"n o, dir"ct ta9 cannot 5" s$i,t"d on ot$"r ("rson.

E9a!()":B Inco!" ta96 ?"a)t$ ta96 Cor(orat" ta96 "tc.

=ii> Indirect Ta(:B I, t$" )ia5i)it* to (a* ta9 =incid"nc"> and its 5urd"n

=i!(act> ca5 5" on di,,"r"nt ("o()"6 it is ca))"d indir"ct ta9.

E9a!()":B Sa)"s ta96 E9cis" ta96 custo! dut*. "tc.

. Non& ta( Re/ene:&Sourc"s ot$"r t$an ta9"s

=i> +""s:B Pa*"d to o%t. ,or s"r%ic"s.

=ii> ic"ns" and ("r!it:B Paid to o%t ,or rantin t$" ("r!ission o, doin

c"rtain t$ins o, acti%iti"s.

=iii> +in"s and P"na)ti"s

=i%> Inco!" ,ro! Pu5)ic "nt"r(ris"s

=#> Re/ene E("enditre:B T$os" "9("nditur" $ic$ do not cr"at" an*

ass"ts and do not r"duc" an* )ia5i)it* o, t$" o%t.. T$"s" ar" t$" r"curr"nt

"9("nditur" o, o%t.

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E9a!()"s:B Sa)ari"s6 ("nsion6 int"r"st (a*!"nt6 su5sid* rants to stat"

o%t. "tc.

#. Ca"ita% Ca"ita% E("enditre:B T$" "9("nditur" $ic$ "it$"r cr"at" an* ass"t or

r"duc"s )ia5i)it* o, o%t. is tr"at"d as ca(ita) "9("nditur".

T$"s" ar" nonB r"currin t*(" o, "9("nditur".

E9a!()"s:B E9("nditur" on (urc$asin ass"ts6 )and 5ui)din.

Pa*!"nt o, )oans.

P%an and Non& P%an E("enditre

P%an e("enditre:B It r","rs to t$" "9("nditur" incurr"d on %arious

(ro"cts and d"%")o(!"nt (rora!!"s co%"r"d und"r t$" curr"nt ,i%"

*"ar ()an. E9a!()":B "9(. On rura) d"%")o(!"nt6 irriation.

Non P%an E("enditre:B It r","rs to t$" "9("nditur"s on (ro"cts ot$"r

t$an curr"nt ,i%" *"ar ()an.

E9a!()":B Int"r"st (a*!"nts6 "9("nditur" o, d","nc" s"r%ic"s6 su5sidi"s.

De/e%o"ment E("enditre:B E9("nditur" incurr"d on acti%iti"s $ic$

ar" dir"ct)* r")at"d to "cono!ic and socia) d"%")o(!"nt.

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Non de/e%o"ment E("enditre:B T$" "9("nditur" incurr"d on "ss"ntia)

s"r%ic"s 5* t$" o%t. E9a!()":B E9("nditur" on ad!inistration6 d","nc"

co))"ction o, ta9.

T!"es of durin a +isca) *"ar.

Im"%ication of Re/ene Deficit

i> Incr"as"d r"%"nu" d",icit s$os t$" ar!in to o%t. to r"duc" its da*

to da* "9("nditur".

ii> Incr"as"d r"%"nu" d",icit ris"s t$" )oan )ia5i)it* o, t$" o%t.

2isca% Deficit:B +isca) d",icit is t$" "9c"ss o, tota) "9("nditur" =r"%"nu"

ca(ita)> o%"r tota) r"c"i(ts "9c)udin 5orroins =r"%"nu" r"c"i(ts ca(ita)

r"c"i(ts ot$"r t$an 5orroins> durin a i%"n +isca) *"ar.

Im"%ication$Si7nificance:&

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+isca) d",icit ris"s t$" in,)ation

It incr"as"s t$" d"("nd"nc" on ,or"in countr*

It ",,"ct t$" ,utur" rot$ and d"%")o(!"nt

It indicat" r"at"r 5orroins and )ia5i)it* $ic$ !a* caus" o, a countr*

in a d"5t tra(.

Primar! Deficit:& It is t$" di,,"r"nc" 5"t""n ,isca) d",icit and int"r"st

(a*!"nt.

Pri!ar* d",icit s$os t$" tota) 5orroins )ia5i)it* o, t$" o%"rn!"nt.

J.1 ?$at is #ud"t ?$at ar" its o5"cti%"s.

J. Distinuis$ 5"t""n Ca(ita) R"c"i(ts and R"%"nu" R"c"i(ts

J.' Distinuis$ 5"t""n Ca(ita) E9("nditur" and R"%"nu" E9("nditur"

J.4 C)assi,* t$" ,o))oin 5"t""n ca(ita) "9("nditur" and R"%"nu"

"9("nditur"

i> Su5sid*

ii> 3rants to stat" 3o%t.

iii> Pa*!"nt o, )oan

i%> Construction o, 5ui)din

J.- ?$at do"s !"an o, R"%"nu" D",icit and its i!()ication

J./ ?$at do"s !"an o, ,isca) d",icit and its i!()ication.

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2OREI6N EXC-AN6E

2orei7n E(can7e:&It !"ans a stock o, ,or"in curr"nc*. +or "9a!()"B US

Do))ar6 #ritis$ Pound "tc. ar" ,or"in "9c$an" ,ro! t$" %i" (oint o, India.

2orei7n E(can7e Rate

It is t$" (ric" (aid in do!"stic curr"nc* in ord"r to "t on" unit o, ,or"in

curr"nc*

+or "9a!()" `1 F Rs. 4-

T!"es of 2orei7n E(can7e Rate

+. 2i(ed E(can7e Rate

?$"n "9c$an" rat" is o,,icia))* d"c)ar"d and it is ,i9"d.

'. 2%e(i*%e E(can7e Rate$ 2%oatin7 E(can7e Rate

T$" rat" $ic$ is d"t"r!in"d 5* d"!and and su(()* o, ,or"in "9c$an".

Determination of E(can7e Rate$ E0i%i*rim E(can7e RateT$" "9c$an" rat" o, a countr*s curr"nc* is d"t"r!in"d 5* t$" d"!and and

su(()* o, ,or"in "9c$an".

Sorces of demand for forei7n e(can7e:B

P"o()" d"!and ,or ,or"in "9c$an" ,or t$" ,o))oin (ur(os":B

a> To (urc$as" oods and s"r%ic" ,ro! ot$"r countri"s =I!(orts>

5> To s"nd i,ts and rants to a5road

c> To (urc$as" ,inancia) ass"ts

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d> To s("cu)at" t$" %a)u" o, ,or"in curr"nci"s.

T$"r" is in%"rs" r")ations$i( 5"t""n d"!and o, ,or"in curr"nci"s ,or ,or"in

"9c$an" and ,or"in "9c$an" rat".

Sorces of s""%! for forei7n e(can7e:&

a> E9(orts o, t$" countr* to t$" r"st o, t$" or)d

5> Dir"ct ,or"in in%"st!"nt in $o!" countr*

c> S("cu)ati%" (urc$as" 5* t$" nonB r"sid"nts in t$" do!"stic !ark"t.

d> Dir"ct (urc$as" o, t$" oods and s"r%ic"s 5* t$" nonB r"sid"nts in t$"

do!"stic !ark"t

"> 3i,ts and rants o, t$" nonB r"sid"nts.

T$"s" is dir"ct r")ations$i( 5"t""n Su(()* o, ,or"in "9c$an" and ,or"in

"9c$an" rat".

E0i%i*rim of E(can7e rate

It is d"t"r!in"d at a (oint $"r" d"!and and su(()* o, ,or"in "9c$an"

ar" "8ua).

*

D S `

PE

D `

J 9

D"!and and su(()* o, US`

95

R"t%o

E0&8"n;%


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In t$" diara! D"!and Cur%" =DD> and Su(()* Cur%" =SS> int"rs"ct "ac$ ot$"r

at t$" (oint E. E8ui)i5riu! "9c$an" rat" is OR d"t"r!in"d.


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Trans,"r Pa*!"nt

Crrent Accont:B T$" account r"cords i!(orts and "9(orts o, oods and

s"r%ic" and uni)at"ra) trans,"r.

Ca"ita% Accont:B It r"cords a)) int"rnationa) transactions t$os" in%o)%" a

r"sid"nt o, do!"stic countr* c$anin $is ass"t it$ a ,or"in r"sid"nt or $is

)ia5i)iti"s to a ,or"in r"sid"nt.

Atonomos Items:&

Int"rnationa) "cono!ic transactions t$at tak" ()ac" du" to so!" "cono!ic

!oti%" suc$ as (ro,it !a9i!i;ation. T$"s" it"!s a)so knon as a5o%" t$" )in"

it"!s in t$" #OP.

Accommodatin7 Items:&

Transactions t$at occur 5"caus" o, ot$"r acti%it* in t$" #OP suc$ as o%"rn!"nt

,inancin. T$"s" it"!s a)so knon as 5")o )in" it"!s.

@ER9 S-ORT ANS,ER 8UESTIONS.

1. D",in" ,or"in "9c$an" rat".Ans: +or"in "9c$an" rat" is t$" rat" at $ic$ curr"nc* o, on" countr* can

5" "9c$an"d ,or curr"nc* o, anot$"r countr*.

. ?$at do *ou !"an 5* +or"in E9c$an" Mark"t

Ans: T$" ,or"in "9c$an" !ark"t is t$" !ark"t $"r" int"rnationa)curr"nci"s ar" trad"d ,or on" anot$"r.

'. ?$at is !"ant 5* +i9"d E9c$an" Rat"Ans: +i9"d Rat" o, "9c$an" is a rat" t$at is ,i9"d and d"t"r!in"d 5* t$"

o%"rn!"nt o, a countr* and on)* t$" o%"rn!"nt can c$an" it.

4. ?$at is "8ui)i5riu! rat" o, "9c$an"

Ans: E8ui)i5riu! "9c$an" rat" occurs $"n su(()* o, and d"!and ,or

,or"in "9c$an" ar" "8ua) to "ac$ ot$"r.

-. D",in" ,)"9i5)" "9c$an" rat".

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Ans: +)"9i5)" rat" o, "9c$an" is t$at rat" $ic$ is d"t"r!in"d 5* t$"

d"!and and su(()* o, di,,"r"nt curr"nci"s in t$" ,or"in "9c$an" !ark"t.

/. D",in" S(ot "9c$an

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