x L 1 L Good Y Leftward shift in Budget Line

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1 ample Question Paper 14 Economics Class 12th 1. For a densel populated countr like India, labour intensive technique of production should be preferred as it will help to solve the problem of unemploment in the countr. (1) 2. In market period, the suppl of the commodit or the service cannot be increased. (1) 3. (c) Fiit of the factor (1) 4. ne assumption of the law of suppl is that there will be no change in price of factors of production. (1) 5. If the prices of the goods remains unchanged and the consumer s income decreases from ` to ` 8000 per month, then in that case the budget line will shift leftwards as is indicated in the graph given below B Good B 1 L 1 L Good Leftward shift in Budget Line (1) If the prices of the goods remains unchanged and the consumer s income increases from ` 8000 to ` 10000, then in that case the budget line will shift rightward as is indicated in the graph given below B 1 Good B L L 1 Good Rightward shift in Budget Line (1)

2 6. The shape of Production Possibilit Curve depends on Marginal pportunit Cost (MC). Marginal pportunit Cost chedule Wheat (in kg) ( ) Guns (in units) ( ) Marginal pportunit Cost : : : : : 2 5 From the above schedule it is clear that the MC is increasing. Therefore, the shape of PPC will be conve to origin. If the econom decides to produce onl guns then the social value neglected is that of compromising upon the basic needs of the citizens. (1) 7. ubstitute goods are those which can be used one in place of the other, for e.g., tea and coffee. The change in demand of the good due to change in price of substitute good can be studied with reference to the following two cases. (i) When price of substitute good increase In case of substitute goods Increase in the price of one good results in increase in the demand of its substitute good. e.g. tea and coffee are substitute goods. When the price of tea increases then consumers starts consuming coffee in place of tea, as a result, demand of coffee increases at the same price of coffee. (ii) When price of substitute good falls Price (`) of D D 1 Demand curve shifts to the right from DD to D 1 D 1 when price of substitute good rises Initial demand curve D 1 D Q 1 Q Quantit (units) of Good Right ward hift in demand curve in case of substitute goods In case of substitute good, decrease in the price of one good results in decrease in the demand of its substitute good. e.g., when the price of tea decreases then consumers start consuming tea in place of coffee. As a result, demand of coffee decreases at the same price of coffee. D Price (`) of '' D 1 D 1 D L 1 L Quantit (units) good '' Leftward shift in demand curve in case of substitute goods.

3 8. In a monopol market, the relationship between TR, AR and MR is eplained below (i) Relationship between TR and MR From the curves, following relationship is derived between TR and MR : Total Revenue TR is maimum TR (a) TR increases at diminishing rate, if MR is diminishing. (b) TR is maimum and constant, when MR is constant and zero. (c) TR decreases, when MR becomes negative. (ii) Relationship between AR and MR From the above curves, following relationship is derived between AR and MR: (a) When AR is diminishing, AR MR. (b) MR can be negative, but not AR. Average and Marginal Revenue (c) lope of AR is twice of slope of MR. utput (units) In a perfectl competitive market, the relationship between TR, AR and MR is eplained below (i) In perfect competition the price is constant, because of this MR and AR are both equal and constant. Because of this MR and AR curves are identical and parallel to -ais as indicated in graph below AR MR is negative utput MR is zero (units) MR TR, MR and AR curves in Monopol Revenue (`) AR = MR utput (units) AR & MR Curve in Perfect Competition

4 (ii) In perfect competition the TR increases at a constant rate because MR is constant. Because of this the TR curve is a straight line originating from origin as is indicated below TR Revenue (`) 9. Cost chedule utput (units) Total Cost (TC) (`) Average Fied Cost (AFC) (`) Average Cost (AC) (`) Total Variable Cost (TVC) (`) Marginal Cost (MC) (`) Formula Used Fied Cost AFC utput Average Cost TC utput Total Variable Cost TC FC Marginal Cost TC TC 10. The price at which the quantit demanded and supplied are equal is known as equilibrium price. n n 1 (1) In a market, the equilibrium price and quantit are determined b the interaction of the market demand and suppl market curves. (i) Market Demand It refers to the sum total of demand of a commodit b all the buers in the market. (ii) Market uppl utput (units) TR Curve in Pe rfect Compe tition It refers to the sum total of suppl of a commodit b all the firms in the market. This has been eplained with the help of an imaginar schedule and diagram Price ( `) Demand (units) uppl (units) Ecess demand [Equilibrium (D = )] Ecess suppl In the given schedule, the market demand is equal to market suppl when the price is ` 3. Hence, the equilibrium price will be ` Differences between etension of suppl and increase in suppl Basic Etension of uppl Increase in uppl Meaning When the quantit supplied increases with the rise in price, it is called etension of suppl. When suppl of a commodit increases due to favourable changes in factors other than price, it is called increase in suppl Factors Responsible It is due to increase in price of the commodit. It is due to Fall in price of substitute goods. Rise in price of complementar goods. Fall in the price of factors of production. Improvement in technolog. Increase in number of firms in the market. Favourable change in government s polic. (3)

5 Basic Etension of uppl Increase in uppl Effect on uppl Curve Graphical Presentation In this case, there is an upward/rightward movement on the same suppl curve In this case there is a rightward shift in the demand curve 1 Price (`) A B Price (`) Difference between contraction of suppl and decrease in suppl Basis Contraction of uppl Decrease in uppl Meaning When the quantit supplied decreases with the fall in price, it is called contraction of When the suppl of a commodit decreases due to unfavourable changes in factors other than price, it is called decrease in suppl. suppl Factors Responsible It is due to decrease in price of the commodit. It is due to Rise in price of substitute goods. Fall in price of complementar goods. Rise in the price of factors of production. ut dated technolog. Decrease in the number of firms in the market. Unfavourable changes in government polic Effect on uppl Curve Graphical Presentation Quantit (units) Right ward movement from point A to B In this case, there is a downward/leftward movement on the same suppl curve. In this case, there is a leftward shift in the suppl curve 1 Quantit (units) Right ward shift from to Price (`) A B Price (`) (i) Price of the good (P) ` 7 per unit Quantit demanded (Q) 12 units Change in price ( P ) ` 1( 7 6) Ependiture at changed price ` 72 Quantit (units) Left ward movement from B to A Quantit demanded at change price 12 units Change in Quantit demanded ( Q ) 0( 12 12) Q P Now, Price Elasticit of Demand P Q Q Price elasticit of demand is zero, therefore the demand curve will be a vertical straight line parallel to -ais. (3) Quantit (units) Left ward shift from to 1 1

6 (ii) Given, Price Elasticit of Demand ( E d ) ( ) 0 75 Percentage increase in demand 15% We know that, Price Elasticit of Demand Percentage increase in demand Percentage fall in its price 15 ( ) 0 75 Percentage fall in its price Percentage fall in its price % (3) 13. Performance budget is prepared b the government to measure the relationship between funds provided for public service and the outcome of these services. (1) 14. Two eamples of direct ta are (i) Income Ta (ii) Wealth Ta The components of mone suppl are as follows (i) Currenc held b public (ii) Demand deposits of banks (iii) Time deposits of banks (iv) ther deposits of RBI (1) 16. Level of initial deposits Mone created LRR 25 2, 00, ` 50, 000 crores (1) 17. Central Banks uses the following quantitative and qualitative measures to control inflationar trends in an econom (i) Bank rate is increased. (ii) Government securities are sold in the open market. (iii) Cash reserve ratio and statutor liquidit ratio are increased. (iv) Margin requirements are increased. (v) The RBI will persuade the commercial banks to make the credit costlier or decrease the availabilit of credit. (vi) Credit rationing will be encouraged. The above quantitative (i-iv) and qualitative (v-vi) measures will decreases the mone suppl in the econom. As mone suppl decreases, it leads to decrease in liquidit in the econom. Decreased liquidit causes a fall in the level of Aggregate Demand, and hence the problem of inflation is checked. (3) Central Bank uses the following quantitative and qualitative measures to control deflationar trends in an econom. (i) Bank rate is decreased (ii) Government securities are purchased in the open market. (iii) Cash reserve ratio and statutor liquidit ratio are decreased. (iv) Margin requirements are decreased. (v) The RBI will persuade the commercial banks to make the credit cheaper or increase the availabilit of credit. (vi) Credit rationing will be discouraged.

7 The above quantitative (i-iv) and qualitative (v-vi) measures will increase the mone suppl in the econom. As mone suppl increases, it leads to increase in liquidit in the econom. Increased liquidit causes and increase in the level of Aggregate Demand and hence the problem of deflation is checked. (3) 18. Given, Marginal Propensit to consume (MPC) 0 80 We know that, Investment Multiplier ( K ) 1 1 MPC 1 1 K Also, Investment Multiplier Change in income ( ) Change in investment ( I) Change in Income () 5 80 Change in Income ` 400 crores (4) 19. (i) ubsid on the output produced is added to the market price to calculate national income because subsid reduces the factor cost of the output. (ii) Contribution to provident fund b emploees is not included in the national income as it is a part of wages and salaries of emploees. (iii) Pension paid to widows of war victims is not included in national income because it is merel a transfer pament. (iv) Pension paid to retired government officials is included in national income because it is an eample of deferred pament. ( 1 4 4) 20. Evolution of mone has solved the following problems of barter and in the process has led to the epansion of market. (i) Evolution of mone has solved the problem of double coincidence of wants. This problem was a major constraint in the process of echange because ever individual who wanted to echange one commodit for other had to look for another individual who matched his needs. Mone solved this problem because of its feature of common acceptabilit as a medium of echange. (ii) Evolution of mone has also solved the problem of common measure of value. In barter sstem of echange it was ver difficult to epress different commodities, such as milk and cloth, in a single unit. Mone has solved this problem because with the evolution of mone value of each and ever commodit can be epressed in terms of mone. (iii) Under barter sstem it was impossible to store wealth because commodities lost their value over time. But with the evolution of mone this problem has also been solved because mone can be stored without loss in valve over time. (iv) Mone has also solved the problem of deferred paments and because of this credit purchase of goods and services has been made possible. (4) 21. (i) Revenue Deficit Revenue Ependitures Revenue Receipts ` 20 arabs. (ii) Fiscal Deficit Revenue Ependiture Capital Ependiture (Capital Receipts net of Borrowings Revenue Receipts) ( ) ( 95 80) ` 35 arab (iii) Primar Deficit Fiscal Deficit Interest Pament ` 25 arab. (4)

8 22. Consumption Function The functional relationship between the consumption ependiture and the income is known as consumption function. Mathematicall it is epressed as, C f (), which is read as consumption is a function of income. Consumption function in terms of an algebraic epression can be written as C C b Where, C Con sump tion e pen di ture C Autonomous consumption, when income is zero. b Marginal Propensit to Consume In come Let us understand it with the help of a schedule and diagram. Consumption (C) Income ( ) Marginal Propensit to Consume (MPC) C Change in Consumption C) Change in Income ( ) The point B rep re sents the break even point, where the con sump tion e pen di ture equals the in come. To the left of point B, con sump tion is greater than in come and to the right of point B, con sump tion is less than in come. aving Function The functional relationship between the savings and income is known as saving function. Mathematicall, it is epressed as f (), which is read as aving is a function of income. av ing func tion, as an al ge braic e pres sion, can be writ ten as Where, s av ings avings at zero level of income (Dis-savings or borrowings) s Marginal Propensit to ave In come Let us understand it with the help of a schedule and diagram. aving ( ) Income ( ) Consumptions (C) C B (C = ) Income () Consumption and Income Curve s Marginal Propensit to ave (MP) / Change in aving ( ) C C = C + b Change in Income ( )

9 aving ( ) Income ( ) Marginal Propensit to ave (MP) / Change in aving ( ) National Income or Net National Product at aving () E(=0) Income () Change in Income ( ) Factor Cost ( NNP FC ) Private Final Consumption Ependiture Government Final Consumption Ependiture Net Domestic Capital Formation Net Eports Depreciation Net Indirect Taes Net Factor Income paid to Abroad ` 650 crores. 24. For eign e change rate re fers to the rate at which one cur renc can be e changed for the other cur renc in foreign e change mar ket. e.g. if ` 58 is paid, to bu one U dol lar, then `/$ e change rate will be 58 i.e. ` 58 per dollar. (1) Ap pre ci a tion of cur renc When the value of do mes tic cur renc in creases in re la tion to a for eign cur renc due to de mand and sup pl forces in the free mar ket, it is termed as ap pre ci a tion of the do mes tic cur renc. (Un der fle i ble echange rate sstem.) For e.g., the rupee/dollar echange rate appreciates from ` 58 per dollar to ` 54 per dollar De pre ci a tion of cur renc De pre ci a tion of do mes tic cur renc oc curs when the value of do mes tic cur renc de creases in re la tion to the value of for eign cur renc. (Un der fle i ble echange rate sstem.) For e.g., the rupee/dollar echange rate depreciates from ` 58 per dollar to ` 62 per dollar If the government of the countr devaluates the rupee then the economic value affected is Loss in credibilit in the international market. (1) = + s

CBSE Class XII Economics

CBSE Class XII Economics Time: 3 hrs Max. Marks: 80 General Instructions: i. All questions in both sections are compulsor. ii. Marks for questions are indicated against each question. iii. Question Nos.