Q N o MC = TVCn TVC n- MC = 500 000 MOCK PRE-BOARD 07-8 ECONOMICS MARKING SCHEME MC = 500 Demand for desert cooler will increase All the above 4 Demand can be postpone 5 PPC to show economic problem : scarcity or choice Central problems as what, how and for whom to produce 6 We do agree with the given statement The supply curve is the rising portion of the MC curve over and above the minimum of AVC Since no rational producer /seller would like to supply his output to the market if he is unable to remove his per unit variable cost as it would lead to losses between the range of minimum MC and minimum of AVC 7 Black marketing may be termed as a direct consequence of price ceiling, as it implies a situation whereby the commodity under the government s control policy is illegally sold at a higher price than the one fixed by the government It may primarily arise due to the presence of consumers who may be willing to pay higher price for the commodity than to go without it Buffer stock is an important tool in the hands of the government to ensuring price floor/msp If in case the market price is lower than the government feels should be given to the farmers/producer It would purchase the commodity at a higher price from them so as to maintain stock of the commodity with itself This buffer stock is to be released in case of shortage of the commodity in future 8 Price Quantity demanded Total expenditure Resultant 5 0 00 7 6 Price increases and TE also increases As price and TE are in the same direction of increasing, therefore Ed < which means relatively inelastic as proved by expenditure method MAR KS By proportionate method: Q / P * P / Q = Ed 4/ * 5/0 = / = 05 Ed <, relatively inelastic 9 Given the price of two goods and income of the consumer which he is going to spend entirely, the following condition will be met to be in equilibrium: a MRSxy = Px / Py b MRS continuously falls as more and more good is consumed Now suppose MRSxy>Px /Py It means the consumer is willing to pay more for X than the price prevailing in the market As a result the consumer buys more of X this leads to fall in the MRS It continues to fall till it becomes equal to the ratio of price and equilibrium is established Alternatively when MRSxy<Px / Py It means the consumer is willing to pay lower than the price prevailing market price for X and in its place consume more Y this leads to rise in =4 ½ ½
0 MRS MRS continues to rise till it becomes equal to Px / Py Px =, Py=, Mux = 4 Utils andmuy = 4 utils Condition od equilibrium = Mux / Px = MUy = Py Hence, 4/ = and 4/ =4, as <4 Therefore, Mux /Px<MUy / Py Since per reupee of Mux is lower in case of X, the consumer wll transfer expenditure from X to Y buying less of X and more of Y Buying less of Mux while buying more of Y lowers MUy as the law of diminishing MU will prevail Thus, Mux rises and MUy falls till the equilibrium condition is established MOC of a given commodity along a PPC is defined as the amount of sacrifice of a commodity so as to gain one additional unit of the other commodity MOC can also be termed as MRT ie the ratio of number of units of a good sacrifice to produce an additional unit of other good SCHEDULE Price rigidity does take into consideration the non-price war of the oligopoly A producer of oligopoly fixes the prices according to the prices fixed by its rival firms This is so, if the producer increases the price Non-price competition in an oligopoly firm distinguishes its product by offering quality of services, customer focus, coupons, gifts etc other than prices Firms are engaged in non-price competition inspite of the additional costs involved, because it is more profitable than selling for a lower orice and avoid the risk of price war (a) difference between AVC and MC: Sr No AVC MC Per unit cost of variable factors Extra unit of cost incurred with an additional change in output AVC = TVC /Q MC = TC / Q or TCn TCn- AVC reaches its minimum point later to that of MC as change affects slowly MC reaches its minimum point much earlier than AVC as it changes faster (i) Complete the following table: Output TVC AVC MC 0-0 0-6 8-6 -54-8 8 4 80 0-8 5-0 -6 (i) we know that the equilibrium price and quantity are achieved at: Qd = Qs 000-p = 700 p -p-p = 700-000 -p = -00 Therefore, eq price = 00 Equilibrium quantity = 000 p = 000 00 = 900 units =4 =4 =4 =6 (ii) If equilibrium is at Qd = Qs, then will a change in Qs eq changes 000 p = 400 -p -p -p = 400 000 -p = -600 p = 00 Equilibrium quantity = 000 00 = 800 units =6
4 5 As equilibrium price increases from 00 to 00; Quantity demanded decreases from 900 to 800 units Market demand is defined as the quantity of good that all the consumers taken together, of that good are willing to buy at a given price during a period of time It is the summation of demands of the entire consumer taken together for a good at a particular price Factors affecting market demand are: a Change in population b Distribution of income among people c Composition of the age group in an economy like demographic dividend in India d Change in fashion and trends With explanation PM s visit to different countries and appealing to invest in India will definitely enhance the resources of our country Appeal to foreign investors will lead to the large scale inflow of capital This will result in the availability of resources This will result in the shifting of the PPC to the right Explaining the meaning of rightward shift of PPC 4=6 6 7 8 9 0 Every economy tries to increase its resources so that more can be produced PPC is based on the assumption that resources are fixed, so one good have to be sacrificed for the =6 other, but if the PPC shifts then more of both the goods can be produced This will happen when resources increases by: a Availability of resources through investment b New technology increase c Through technological enhancement new employment will be availiable Section B Introductory Macroeconomics (iii) real flow (iii) borrowing by a govtrepresents a situation of fiscal deficit (iii) both (i) and (ii) Role of Central Bank in : (i) Fixed Exchange (ii) Floating Exchange (iii) Managed Exchange When I = 00 ; C= 80 + 04 Y and Y = 400 Then C = 80 + 04 *400 C = 80 +60 C = 40 Y = C + I 400 40 + 00 Therefore, not in equilibrium I = 60; MPC = 08; Y = 400 and c = 0 Now as C = c + by C = 0 + 08 *400 C = 50 As Y = C + I 400 = 50 + 60 400 40 Therefore, not in equilibrium
4 5 6 Saving does not stimulate as much as investment does When in an economy S > I, it means buyers are planning to buy less what sellers are planning to produce Thus, inventories pile up As a result the producers cut back on production and lay off workers The downward trend continues till S = I, thus bringing the economy back to equilibrium GDPmp = 4,000; NI =,500; Net factor income to ROW = 400; and NIT = 450 Converting GDP mp to NDP mp then Gross Net = CFC Or NNP mp to GNP mp Converting NNP fc into NDP mp Therefore, NNP fc - NFIFA + NIT = NDP mp,500 + 400 + 450 = 50 Now, GDP mp NDP mp = CFC 4000 50 = 650 CFC = 650 CRES Difference between depreciation and devaluation: Devaluation Depreciation Reducing the value of home currency deliberately by the government Reduction in the value of home currency which takes place automatically by the force of demand and supply Devaluation takes place with Depreciation takes place only with the regards to all global currency currency in transaction with Exports in case of devaluation / depreciation increases the goods and services from other countries since it would increase the global competiveness of the goods Welfare economists does not consider GDP as a proper indicator for growth as: a Non- monetary exchanges are not included like work done by housewife b Externalities are not taken into account in GDP like construction of a flyover c Distribution of GDP unequally d All goods do not contribute equally like arms and animations Fiscal deficit is not necessarily inflationary But they can be when government increases its expenditure / spending or cuts off taxes, the AD in the economy increases Firms may not be able to produce enough to meet the sudden demand at an on-going price They may instead increase the price to accommodate demand This may lead to inflation On the other hand, if resources are underutilized and output is below full employment then with the increase in government expenditure; more factor resources will be employed to correspond to the excess demand In this situation, a high fiscal deficit is accompanied by high demand, greater output level and less inflationary situation Calculating (a) National income and (b) Gross National Disposable Income Calculating NI by expenditure method: NNP fc = Private FC Exp + Govt FC Exp + Net D FIXED CF + Change in stock Net Imports +NFIFA NIT = 00 + 50 +40-0 +0-0 -40 = 50 IN CRES GNDY = NI NIT + Net CT from ROW + CFC = 50 40 +5 +0 = 45 IN CRES Private Income = PDI + Direct Personal Tax + Saving of private corporate sector + Cop Tax = = = 4 =4 4 =6
7 = 50 +0 +5 +5 = 400 IN crores NI = Private Income + Govt Income TP s Govt Income = Income from property and entrepreneurship accruing to govt ad Dept + savings of Non- Dept enterprises = 50 +5 = 75 Transfer Payment = Current Transfer to ROW + Current Transfer from Govt = -0 +0 = 0 Therefore, NI = 400 + 75-0 = 485 In crores (a) Definition: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds Repo rate is used by monetary authorities to control inflation Significance of Repo-rate is that if RBI increases its repo rate then banks will have to return more money to RBI because of high Repo-rate This ll lead commercial banks to cease lending money from RBI and it ll terminate excess money to reach the market, so this way RBI can control inflation by Repo-rate (b) A Margin Requirement is the percentage of marginable securities that an investor must pay for with his/her own cash It can be further broken down into Initial Margin Requirement and MaintenanceMargin Requirement The RBI has power to vary the margin requirements depending upon the business conditions prevailing in the countryby using this method, during the period of deflation it lowers the margin to expand the credit This method also enables the commercial banks to direct their funds to essential activities rather than speculative activities =6 6 Excise duty on cigarettes is indirect taxes: taxes which are imposed on goods and services and have incidence of tax Income tax is direct taxes: taxes which are imposed on income and property of an individual and have incidence of tax The objective of the government is not just to earn revenue but a Reduce the use of harmful goods causing injurious to health b Equal distribution of income by levying more taxes on rich and giving them to the poor s as subsidies By imposing higher level of taxes the AD can be pulled downward; reducing the consumption in the economy; which may further lead to reduction in investment as well A central bank is the primary source of money supply in an economy through circulation of currency However, for this purpose, the central bank needs to depend upon the reserves of commercial banks These reserves of commercial banks are the secondary source of money supply in an economy The most important function of a commercial bank is the creation of credit = 6 Therefore, money supplied by commercial banks is called credit money Commercial banks create credit by advancing loans and purchasing securities They lend money to individuals and businesses out of deposits accepted from the public However, commercial banks
cannot use the entire amount of public deposits for lending purposes They are required to keep a certain amount as reserve with the central bank for serving the cash requirements of depositors After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits Let us learn the process of credit creation by commercial banks with the help of an example Suppose you deposit Rs 0,000 in a bank A, which is the primary deposit of the bank The cash reserve requirement of the central bank is 0% In such a case, bank A would keep Rs 000 as reserve with the central bank and would use remaining Rs 9000 for lending purposes The bank lends Rs 9000 to Mr X by opening an account in his name, known as demand deposit account However, this is not actually paid out to Mr X The bank has issued a check-book to Mr X to withdraw money Now, Mr X writes a check of Rs 9000 in favor of Mr Y to settle his earlier debts The check is now deposited by Mr Y in bank B Suppose the cash reserve requirement of the central bank for bank B is 5% Thus, Rs 450 (5% of 9000) will be kept as reserve and the remaining balance, which is Rs 8550, would be used for lending purposes by bank B Thus, this process of deposits and credit creation continues till the reserves with commercial banks reduce to zero This process is shown in the Table: =6 From Table it can be seen that deposit of Rs 0,000 leads to a creation of total deposit of Rs 50,000 without the involvement of cash