Rightward shift due to improvement in technology. Leftward shift due to degradation in technology. Good X Shift in PPC

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Myrtle Hampton
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1 ample Question Paper 11 conomics Class 12th 1. No, I do not agree. ven if China keeps on inventing new and further advanced technologies, then also it will have to face central economic problems, as resources are always scarce in relation to wants. 2. Total product is maximum when marginal product is zero. 3. Payment of rent to landlord is an example of explicit cost. 4. (a) Factor utput Ratio 5. ue to simultaneous change in the technology of both the goods, the transformation or the production possibility curve will shift either leftwards or rightwards as is explained below. (i) The production possibility curve will shift rightwards if there is improvement in the technology of production for both the goods. (ii) The Production Possibility Curve will shift leftward if there is degradation in the technology of production for both the goods. y Good P 2 P P 1 Rightward shift due to improvement in technology Leftward shift due to degradation in technology The reasons behind an economic or central problem or problems related to allocation of resources are as follows : (i) carce Resources (ii) Alternative uses of resources (iii) Wants are unlimited and recurring in nature. P 1 P P 2 Good hift in PPC ue to the above three factors the problem of choice or problem of allocation of resources arise in the economy which is referred to as economic problem. (3) x

2 6. emand of a consumer is affected by his/her tastes and preferences. The consumer s taste and perferences are influenced by advertisement, change in fashion, climate, new inventions etc. ther things being equal, demand for those goods increases for which consumers develop favourable tastes and preferences and vice-versa. o, a housewife prefers microvave ovens over burners or chullahas because it is a latest invention and it helps to reduce her burden. (3) 7. Average, Marginal and Total Product chedule Formulae used Units of Labours TP = AP Units of Labour AP = TP Units of Labour MP = TPn TPn 1 Average Product (AP) Marginal Product (MP) Total Product (TP) Average, Marginal and Total Revenue chedule (3) Formulae used: utput (Units) Price (`) Total Revenue (TR) Marginal Revenue (MR) TR = Price output Price = TR output MR = TRn TRn Four factors affecting elasticity of demand are as follows : (i) Nature of the Commodity Nature of the commodity is an important determinant of the Price lasticity of emand. Necessities like food items and prestige goods have an inelastic demand, while luxuries and comforts have comparatively elastic demand. (ii) Availability of ubstitutes The demand for commodities having close substitutes is very elastic because if there is an increase in the price of the commodity, then people will start using substitute commodities. (iii) Postponement of Consumption The demand for commodities is elastic, whose consumption can be postponed for sometime such as the demand of television, otherwise it is inelastic for commodities whose demand cannot be postponed as in the case of medicines. (iv) ifferent Uses of the Commodity A commodity which has several uses will have an elastic demand. n the other hand, a commodity having only one use will have inelastic demand, e.g. milk, steel, etc have elastic demand because they can be put to several uses. ( 1 4 = 4) 9. The given di a gram shows a sit u a tion of in crease in de mand. The de mand curve shifts to the right from to 1 1 and equi lib rium point shifts from to 1. Con se quently, equi lib rium price and equi lib rium quan tity rises from P to P 1 and Q to Q 1, respectively. (3)

3 Price P 1 P 1 1 xcess demand 1 iagram showing of xcess emand and Chain of ffects The chain effects of increase in demand When there is an increase in demand it creates excess demand (equal to Q 2 ) at initial price P and as a result of which price will rise. With rise in price, demand will start falling (according to Law of emand) and supply will start rising (according to Law of upply). This process will continue till the time we reach new equilibrium level at 1, where there is no excess demand. 10. Price elasticity supply is the degree of responsiveness in quantity supplied due to change in the price of the product. Price elasticity of supply can be measured by using the given formula Percentage change in quantity supplied lasticity of supply ( s ) = Percentage change in price or or Q Q 1 Q 2 Quantity (unit) Q P Q P Q P Q P or Q P P Q, where P and Q = iginal price and original quantity respectively P and Q = Change in price and change in quantity respectively (4) Various degrees of price elasticity of supply are as follows : (i) Perfectly Inelastic upply ( s = 0 ) When supply of a commodity does not change, irrespective of any change in its price, it is called perfectly inelastic supply. In this condition, supply curve will be a straight line parallel to axis. (ii) Perfectly lastic upply ( s = ) upply of a commodity is said to be perfectly elastic when its supply expands or contracts to any extent without any change in the price. In this condition, supply curve will be a straight line parallel to -axis. (iii) Unit lastic upply ( s = 1) If percentage change in supply is equal to percentage change in price, it is called unit elastic supply. In this case, the coefficient of s is equal to one. In this condition, supply curve is a straight line passing through the origin. (iv) Inelastic or Less than Unit lastic upply ( s < 1 ) When percentage change in quantity supplied is less than percentage change in price, it is called inelastic supply. In this condition, the straight line supply curve intersects the -axis in its positive range (or cuts the -axis/quantity axis). (v) lastic or More than Unit lastic upply ( s > 1 ) When percentage change in supply is more than the percentage change in price, it is called more than unit elastic supply. In this condition, the straight line supply curve intersects the -axis in its negative range (or cuts -axis/price axis). (6) 11. With a rise in the price of substitute good (coffee), the demand for the concerned good (tea) increases. As a result the demand curve of the concerned good shifts to the right. Accordingly the equilibrium price would tend to increase and equilibrium quantity also increases.

4 1 xcess demand 1 P 1 Price (`) P 1 Q Q 1 Quantity of con cerned good iagram showing increase in equilibrium price and quantity In the given diagram, initial demand and supply curves intersect at point. With increase in the price of substitute goods, the demand of the concerned good increases and because of this demand curve shifts rightwards to 1 1. Because of this the equilibrium point shifts to 1. Corresponding to this point, the equilibrium price has risen to P 1 and equilibrium quantity has risen to Q 1. (4) 12. Change in in come of the buy ers in flu ences their de mand for dif fer ent goods. The de mand for nor mal goods like full cream milk tends to in crease with in crease in in come and vice-versa. n the other hand, the de mand for in fe rior goods like coarse grain tends to de crease with in crease in in come, and vice-versa. x 2 1 emand curve for normal goods shifts from to 11 when consumer s income increases and shifts to 2 2 when his income decreases Price (`) 1 2 QV Q Q 1 Quantity demand for milk (units) hift in demand curve for normal goods Price (`) 1 2 emand curve for inferior goods shifts to the left from to 1 1 when consumer s income increases and shifts to 22 when his income decreases 1 2 Q 1 Q QV Quantity demand for coarse grain (units) hift in demand curve for inferior goods 13. (a) Both (a) and (b) 14. Two features of public goods are as follows (i) These goods are non-rivalrous in consumption (ii) These goods are non-excludable in consumption = 1

5 1 15. Money multiplier = Legal Reserve Ratio 16. If the reserve ratio is reduced then money supply will increase. 17. Above Full mployment quilibrium It refers to the situation in which actual Aggregate emand (A), i.e. ex-post demand tends to be higher than what is required to maintain full employment. As the economy has already achieved full employment, hence this A cannot be attainable, as a result, it will end up creating excess demand. It leads to inflation in the economy. A = = C + Aggregate emand/ Aggregate upply { F xcess demand A 1(above full employment) = C 1 + I1 A (at full employment) = C + I Under mployment quilibrium Under employment refers to a situation,when all those who are able to work at existing wage rates, are not getting jobs. It refers to that situation in the economy where A = A or = I, but without fuller utilisation of labour force. It leads to deflation in the economy. 18. aving Function of an economy ( ) = y Investment xpenditure in the conomy (I) = ` We know that at equilibrium level of income, avings = Investment 4000 = y = 0. 6 y 4080 = y = ` 6, Aggregate emand/ Aggregate upply R Income and employment Above Full mployment quilibrium } R Income and employment F A = =C+ eflationary gap A (at full employment) = C + I A 1 (at under employment) = C 1 + I 1 Under Full mployment quilibrium Hence, quilibrium level of income = ` 6800, (3)

6 19. The following precautions are to be taken while measuring national income by production method (i) The value of intermediate goods should not be included. (ii) Purchase and sale of second hand goods should be excluded. (iii) Imputed value of self-consumed goods should be included. (iv) wn account production should be included. (v) Value of self-consumed services should not be included in the estimation of National Income. (vi) Commission earned on account of sale and purchase of second hand goods is included. (vii) Imputed rent on the owner occupied house is also taken into the account. (viii) The value added in the government sector is equal to compensation of employees only. (4) The following precautions are to be taken while measuring National Income by income method : (i) Income from illegal activities like smuggling, theft, gambling, etc should not be included. (ii) Commission paid on the sale and purchase of second hand goods are to be included. (iii) Transfer earnings like old age pensions, unemployment allowances, scholarships, pocket expenses, etc should not be included. (iv) Income in terms of windfall gains should not be included. (v) Imputed rent of owner occupied houses is to be treated along with rent as a component of factor incomes. (4) 20. In barter system of exchange there was a lack of common measure of value. In the absence of a common unit, proper valuation was not possible. e.g cloth is measured in metre while milk is measured in litre. Hence, under barter system these commodities were not measurable in a common unit which complicated the process of exchange. But with the evolution of money this problem has been solved. Now each and every commodity can be expressed in terms of money. e.g one metre of cloth costs ` 50 and one litre of milk cost ` 45. (3) It has changed human lives in the following ways : (i) People s standard of living has improved (ii) It has facilitated the exchange process. 21. Government Budget is a statement of the estimates of the government s expected receipts and government s expected expenditure during the financial year or fiscal year which runs from 1st April to 31st March. The following are the objectives of government budget (any three) : (i) Re -dis tri bu tion of In come and Wealth Government through fiscal tools of taxation and transfer payments, brings fair distribution of income. quitable distribution of income and wealth is a way to bring social justice. For this purpose, progressive tax structure is followed in India, in which burden of tax increases with increase in income. It is also known as distribution function. (ii) Re-allocation of Resources The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare. e.g. there should be production of necessity goods as well as comfort and luxury goods. (iii) conomic Growth The growth rate of a country depends on the rate of savings and investment. Therefore, the roles that are assigned to budgetary policy in this regard are to create conditions conducive for increase in savings and investment. (iv) Gen er a tion of m ploy ment Government needs to promote labour intensive technology, public works programmes like construction of roads, dams, canals, bridges, etc to promote employment generation in the economy. everal programmes are initiated through budget to reduce the problem of poverty and unemployment. (v) conomic tability Government tries to establish economic stability by its budgetary policies. conomic stability refers to a situation without fluctuations in price levels and stability of exchange rate in an economy. conomic stability is achieved by protecting the economy from harmful effects of various trade cycles and its phases, i.e. boom, re ces sion, de pres sion and re cov ery.

7 (vi) Management of Public nterprises Public sector enterprises are owned and governed by the government and through budgetary policy, it tries to manage the expenditure and revenue of PUs. ( 3) 22. Gross omestic product at Market Price (GP MP ) = Compensation of mployees + Profits + Interest + Rent + Net Indirect Taxes + Consumption of Fixed Capital = = ` 1950 crores (3) Gross National Product at Market price (GNP MP ) = GNP FC + Net Indirect Taxes Net Factor Income from Abroad = GNP GP Now we know that, Mp = = ` 1950 Crores MP = = 0 NFIA = Factor Income From Abroad Factor Income to Abroad = 30 Factor Income to Abroad Factor Income to Abroad = ` 30 crores (3) Note: Consumption of Fixed Capital = Gross omestic Capital Formation Change in tock Net Fixed Capital Formation. Gross omestic Product at Market Price (GP MP ) = Compensation of mployees + Rent + Interest + Profits + Net Indirect Taxes + Consumption of Fixed Capital = 3000, = ` 6,400 crore (3) Gross National Product at Market Price (GNP MP ) = GNP FC + Net Indirect Taxes Net Factor Income From Abroad =GNP GP Now we known that, MP = 6450, 6400, = ` 50 Crore = 6, = ` 6,450 Crore NFIA = Factor Income from Abroad - Factor Income to Abroad 50 = Factor Income from Abroad 80 MP Factor Income from Abroad = = ` 130 Crore (3) 23. The equi lib rium level of in come or out put is that level at which the planned sav ings and planned in vest ments are equal. It is de rived from Ag gre gate e mand and up ply ap proach. Aggregate emand (A) in a two sector economy is defined as the sum of Consumption xpenditure(c) and Investment xpenditure (I) i.e. A = C + I, whereas Aggregate upply (A) is defined as the sum of Consumption (C) and aving () i.e. A = C +. Mathematically, at equilibrium level of output A = A or, C + I = C + Hence, I = or = I (3)

8 In the graph given, P or P' is the equilibrium level of income. is the equilibrium point where Aggregate emand equals Aggregate upply. quality between A and A implies the equality between and I. When we extend the line P vertically downward, it meets at point ' with and I. It is the equilibrium point of saving and investment approach. P or P' represents the level of income at which the economy is in equilibrium. (3) 24. India s balance of payments is in disequilibrium as payments on account of foreign transactions far exceed the receipts on account of foreign transactions. ome of the causes of disequilibrium are enumerated below : (i) conomic Factors (a) Inflation Changes in price and cost structure of a country s export industires affect the volume of export and the Balance of Payments position. Increase in price due to higher wages and higher prices of raw material makes export costlier and results in deficit in Balance of Payments. (b) xpenditure on developing relations Newly independent countries, in order to develop relations with other countries, have to spend huge amount of money on ambassadors, missions, etc. This has adverse relation on Balance of Payments. (c) Fall in demand When the demand for the domestic goods falls in the foreign market, export reduces and results in adverse Balance of Payments. (d) Import services Underdeveloped countries import capital and other services from developed countries. This results in deficit in BoP. (ii) ocial Factors (a) emonstration effect People of underdeveloped countries imitate the consumption pattern of the people of developed countries leading to an increase in the level of imports. This increase results in a deficit balance in the BoP account. (b) Change in tastes, preferences, fashion and trends An unfavourable change in tastes and preferences of consumers towards domestic goods lead to a deficit in the BoP account. (iii) Political Factors Aggregate emand and Aggregate upply aving/investment C P' P P = xpenditure (A) Income/utput Income/utput A = C + I etermination of quilibrium Level of Income and utput Political instability of a country has an adverse effect on Balance of Payments of a country. Further, partition on unification of a country also affects the Balance of Payments of a country. (5) I

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Downloaded from XII ECONOMICS SURE SHOT SHORT ANSWER QUESTIONS MICROECONOMICS UNIT - INTRODUCTION Q. Distinguish between microeconomics and macroeconomics. 3 Q.2 Discuss the central problems of an economy. Why do they