Economics PDF

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Sri Sankara Coaching Centre
Important Abbreviations
AMPC
Automatic Mail Processing Centres
APEC
Asia Pacific Economic Co-operation
ASEAN
Association for South East Asian Nations (made on 8-8-1968)
ASEM
Asia Europe meetings
BALCO
Bharat Aluminium Company Limited
BOP
Balance of Payment
BPO
Business Process Outsourcing
BSNL
Bharat Sanchar Nigam Limited
CDS
Current Daily Status
CENVAT
Central Value Added Tax
CMC
CMC Limited
CRR
Cash Reserve Ratio
CSO
Central Statistical Organisation
CWS
Current Weekly Status
DFEC
Duty Free Export Credit
EAS
Employment Assurance Scheme
EGS + AIE
Education Guarantee Scheme and Alternative and Innovative Education
EMR
Exclusive Marketing Rights
EOU
Export Oriented Units
EPCG
Export Promotion Capital Goods
EPZ
Export Processing Zones
EXIM
Export Import Bank of India
FDI
Foreign Direct Investment
FEMA 2000
Foreign Exchange Management Act
FERA 1973
Foreign Exchange Regulation Act, 1973
FIEO
Federation of Indian Export organisations
FRA
Forward Rate Agreement
FRBM Act
Fiscal Responsibility and Budget Management Act, 2003
GATT
General Agreement on Trade and Tariff (made on 1-1-1948)
GDF
Global Development Finance
GDR
Global Depositary Receipt
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GRT
Gross Registered Tonnage
HCI
Hotel Corporation of India Limited.
HDI
Human Development Index
HTL
HTL Ltd.
HYVP
High Yielding Varieties Programmes
HZL
Hindustan Zinc Limited
IAY
Indira Awas Yojana
IBP
IBP Company
ICOR
Incremental Capital Output Ratios
ICSID
The International Centre for Settlement of Investment Disputes
IDA
The International Development Association
IFC
The International Finance Corporation
IIM
Indian Institute of Management
1IT
Indian Institute of Technology
IMF
International Monetary Fund
IMR
Infant Mortality Rate
IPCC
Indian Petrochemical Corporation
IRDP
Integrated Rural Development Programme
ISM
Indian System of Medicine
ITDC
India Tourism Development Corporation
JCL
Jessop and Company Limited
JGSY
Jawahar Gram Sammridhi Yojana
KGBV
Kasturba Gandhi Balika Vidyalaya
LFPR
Labour-force participation rate
LJMC
Lagan Jute Machinery Company Limited
MFIL
Modern Food Industries Limited
MIGA
The Multilateral Investment Guarantee Agency
MMR
Maternal Mortality Rate
MODVAT
Modified Value Added Tax
MRTP Act
Monopolies & Restrictive Trade Practices Act
MTA
Multilateral Trade Agreements
MTA
Mid-Term Appraisal
MTNL
Mahanagar Telephone Nigam Limited

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MUL
Maruti Udyog Limited
MWS
Million Wells Scheme
NABARD
National Bank for Agriculture and Rural Development
NAFTA
North American Free Trade Agreement (made on 12-8-1992)
NFFWP
National Food for Work Programme
NHDP
National Highways Development Projects
NHPC
National Hydroelectric Power Corporation
NIXI
National Internet Exchange of India
NLM
National Literacy Mission (started in 1998)
NPA
Non-Performing Assets
NPCIL
Nuclear Power Corporation of India Limited
NPE
National Policy on Education
NPEGEL
National Programme for Education of Girls at Elementary Level
NPP
National Population Policy
NRY
Nehru Rozgar Yojana
NSSO
National Sample Survey Organisation
NTPC
National Thermal Power Corporation
OPEC
Organisation of Petroleum Exporting Countries
PCO
Public Call Offices
PDS
Public Distribution System
PLR
Prime Lending Rate
PMGSY
Pradhan Mantri Gram Sadak Yojana
PMIUPEP
Prime Minister's Integrated Urban Poverty Eradication Programme
POL
Petroleum, Oil and Lubricants
PPL
Paradeep Phosphates Limited
PPP
Public Private Partnership
PSK
Prarambhik Shiksha Kosh
PSU
Public Sector Undertaking
QR
Quantitative Restrictions
RRB
Regional Rural Banks
SEB
State Electricity Boards
SEZ
Special Economic Zones
SGRY
Sampoorna Grameen Rojgar Yojana

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SGSY
Swarana Jayanti Gram Swarozgar Yojana
SJSRY
The Swarna Jayanti Shahari Rozgar Yojana
SLR
Statutory Liquidity Ratio
SME
Small & Medium Enterprises
SSA
Sarva Shiksha Abhiyan
T&D
Transmission and Distribution
TLC
Total Literacy Campaign
TRAI
Telecom Regulatory Authority of India
TRC
Tax Reforms Committee
TRIP
Trade Related Intellectual Property Rights
TRP
Tax Return Preparers
UBSP
Urban Basic Services Programmes
UNDP
United Nations Development Programme
UPS
Usual Status
VAMBAY
Valmiki Ambedkar Awas Yojana
VAT
Value Added Tax
VPT
Village Public Telephone
VSAT
Very Small Aperture Terminals
VSNL
Videsh Sanchar Nigam Limited
WFPR
Work Force Participation Rate
WTO
World Trade Organisation
Soviet Union, now called Commonwealth of Independent States.
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DIVISION I
MICRO ECONOMICS
CHAPTER 1
NATURE AND SCOPE OF ECONOMICS

MEANING & NATURE OF ECONOMICS
Q: Define Economics. Discuss the scope of Economics.
1. SCIENCE WEALTH (Classical Approach)
"Economics is an inquiry into the nature and causes of the wealth of the nations"
Adam Smith
"Economics is the science which deals with wealth"
J. B. Say
Features:
1.
Science (not Art)
2.
Object of study of Economics: Wealth Creation,

Money Making, etc.
Criticism:
1.
2.
Money Making Science: As the science of wealth,

economics taught the selfishness and love for money.
Therefore, it is not a 'Gospel of Mammon'.
Restricted the Scope: Economics is not only the
science of wealth, but also the study of human behaviour.
Therefore, it is the science 'the science of Bread
& Butter.'
Types of Definition of Eco.

1. Science of Wealth.
2. Science of Material WellBeing
3. Science of Choice Making
4. Science of Dynamic Growth
and Development
2. SCIENCE OF WELL-BEING
"Economics is a study of mankind in the ordinary business of life. It examines that part of individual
and social action, which is most closely connected with the attainment and with the use of
the material requisites of well-being. Thus it is on the one side a study of wealth and on the
other and more important side, a part of the study of the man."
Prof. Marshall
Features;
Economics is the 'study of wealth' + 'study of mankind'. But, he primarily emphasized on study
of mankind.
Thus, he agreed with the classical economists that economics is concerned with wealth, as
wealth is an essential element of well-being. But, according to Marshall, wealth is sought for
the welfare of human beings.
Criticism:
1.
Non-Material things not Considered: For example, the services of teachers, lawyers,
doctors, etc. which are highly essential to promote human welfare.
2.
Non-Welfare Economic Activities: There are several economic activities, which hardly
promote welfare. For example, the production of guns, drugs, etc. does not promote to
welfare. But it is certainly an economic activity.
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"The Range of our inquiry becomes restricted to that part of social welfare that can be
brought directly or indirectly into relation with the measuring rod of money."
A.C. Pigou
3. SCIENCE OF CHOICE-MAKING
"Economics is the science, which studies human behaviour as a relationship between ends and
scarce means which have alternative uses."
Prof. Robbins
Features:
Limited Means: The means needed to satisfy unlimited wants are limited. The scarcity of means
is responsible for most of the economic problem.
For example, it is owing to the scarcity of means that an economy is confronted with a central
problem... what to produce?
Criticism:
(a)
Scarcity of Means: Robbins definition highlights the 'scarcity of means' as the root of
economic problem. The fact is disproved by the great depression of 1930, when abundance
of goods was responsible for most of the economic problems.
(b)
Allocative Role: The critics argue that economics not merely plays an allocative role,
but also suggests the ways and means of creation of new resources.
To conclude, despite certain flaws, Robbins definition is certainly more comprehensive in spelling
out the meaning and scope of economics.
4. A SCIENCE OF DYNAMIC GROWTH & DEVELOPMENT
"Economics is the study of how men and society choose, with or without the use of money,
to employ scarce productive resources which could have alternative uses, to produce various
commodities over time and distribute them for consumption now and in the future amongst various
people and groups of society".
Paul A. Samuelson
Q: Describe the Nature of Economics. Is it a Science or Art?
Economics as a Science
What is Science?
Why Economics is a Science?

Economics is also a science, because -
It refers to the systematic body of knowledge,

which (i)
establishes cause and effect relationship

between two or more variables,
(ii)
is based on such tested and well

experimented principles and theories,
that are universally applicable,
(i)
Like science, its knowledge is sytematized.
(ii)
Like science, it establishes the cause and

effect relationship between two economic
phenomena.
(iii) Like science, its study depends on

estimations.
(iii) can be learnt and taught.
(iv) Its laws have the ability to predict events

with reasonable degree of exactness.
Examples: Physics, Chemistry,

Mathematics, etc.
It is to be noted that economics cannot predict

as accurately as the physical science i.e. physics
and chemistry can. Because, economics deals
with human behaviour, which is highly uncertain.
Further, controlled experiment is not possible
on human behaviour.
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Economics as an Art
Why Economics is an Art?
What is Art?
Art refers to the systematic body of
knowledge, which enables us to know how
to do a thing. Thus Art involves the practical
application of personal skills and knowledge
to achieve the desired result. The main
elements of art are (i)
Personal Skill
(ii)
Practical Know-how,
(iii)
Result-oriented
(iv)
Creativity
Economics is also an art, because (i) Personal Skill: Like other art, economics
develops the skills of solving economic problems
in people. For example, the preparation of the
budget and the formulation of budgetary policies
belong to the domain of economics as an art
(ii) Practical Know-how: Like other artists,
economists also apply their knowledge and skill
to solve basic economic problems. Moreover, an
economist has to make various graphs and
diagrams, such as demand curve, supply curve,
etc, which are nothing, but a part of art.
(iii) No doubt, economics is Goal-oriented and has
a creative approach.
Positive Science v. Normative Science

Positive Science
(Neutrality between ends)
1.
Normative Science
(Welfare Economics)
Meaning:
It refers to the science that presents the
whole situation, but does not pass value
judgment.
It states- 'what is?' not 'what is to be?'
Positive Science + Suggestions.

There is a very strong opinion in favour of its
fruit-giving aspect. Economics should be both
light-giving and fruit-giving.
2.
Based upon: Cause and Effect Analysis
Ethics
3.
Suggestions:
It is not the job of economists to suggest

_what to do? A person can spend his money
either on liquor or on drugs or on milk or on
cinema. It is entirely his business, how to use
his money. An economist should not suggest
him.
Are given
4.
Marshall, Pigou, Hicks, etc.
Advocated by: Prof. Robbins, Adam

Smith, etc.
TYPES OF ECONOMICS & METHODS OF STUDY

Q: Differentiate between Micro and Macro Economics.
MICRO ECONOMICS V/S. MACRO ECONOMICS
Head of Diff.
1.
Meaning :
Micro
Macro
Micro stands for millionth part of the

whole. Therefore, micro economics
is that part of economics that deals
with the behaviour of individuals, i.e.
consumers, producers, suppliers of
resources.
On the other hand, macro economics

analyses the overall conditions of the
economy such as total production,
total consumption, total saving, total
investment, etc. In short, it is concerned
with economic behaviour at the macro
level.

Head of Diff.
2.
Scope of :
Study
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Micro
Macro
It includes-
It includes-
(a) Theory of consumer behaviour
(a) Income and employment theory
(b) Theory of Production
(b) Trade cycle
(c) Theory of Product pricing and

firm's equilibrium in the product
market
(c) The financial system of an

economy
(d) Theory of factor pricing and

firm's equilibrium in the factor
market
(d) The financial system of an

economy
(e) The fiscal system of an economy
(f) The foreign trade and payment
system of an economy
3.
Type of
Analysis
A partial equilibrium analysis, as it

does not take into consideration the
disturbance in equilibrium price and
quantity in one market, which could
lead to a disturbance in the equilibrium
prices and quantities in all other
markets.
A general equilibrium analysis, as it

takes the above situation into
consideration.
4.
Price
The price determined under micro

economics is called 'relative prices'.
The price determined under macro

economics is called 'absolute prices'.
Conclusion: In fact, it is very difficult to distinguish between micro economics and macro economics.
What is macro from the national angle is micro from the world angle. Similarly, what is micro from
national angle becomes macro from a regional angle. Unless, we define what is the whole, we cannot
say about a phenomenon whether it is micro or macro.
Q: What are the main methods of study? Differentiate between them.
METHODS OF STUDY
Head of Diff.
Deductive Method
Inductive Method
(Abstract, Analytical, Priori Method)
1.
Meaning :
2. Example
Under this method, conclusions are

made on the basic of fundamental
assumptions/accepted axioms/truths
established and handed down from
generation to generation.
Under this method, no market survey
is made and no data is collected.
Only on the basis of past experience
are the conclusions made.
Just opposite.
Generally, when the price of a

commodity rises it is said that the
demand for that commodity will fall.
But the actual situation may differ,
if the other factors of demand such
as income of consumer, prices of
the related goods, tastes and
preferences of the consumer, etc.
do not remain constant.
If the price of a commodity rises, then

under this method, at first, the market
survey will be made to find out the
situation of the other factors of demand
and to see whether the other factors
of demand have changed or not with
the change in price. After analysing all
the facts, the final conclusion will be
made i.e. whether demand will rise or
fall.
Under this method, conclusions are

drawn after analysing every aspect
relevant to the inquiry.
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Head of Diff.
Deductive Method
Inductive Method
(Abstract, Analytical, Priori Method)
3. Steps
This method involves the following

steps :
1. Identify the problem
2. Define in technical terms
after making appropriate
assumptions
3. Deducing hypothesis
4. Testing of hypothesis deduced.
This method involves the following steps:

1. Identify the problem
2. Collection, classification and
analysis of data through statistical
analysis
3. Finding reasons for the relationship established through
statistical analysis and to set rules
for the verification of the principles.
Conclusion: It is to be noted that the two methods are not opposed to each other and are
used side by side in any scientific enquiry. In any scientific enquiry, at first some hypothesis is made
on the basis of deductive method and then this hypothesis is verified through inductive method.
DIFFERENT ECONOMIC SYSTEMS
Q: What are the different types of economic systems? Explain.
1. CAPITALIST/FREE ECONOMY
A capitalist economy refers to the economic system in which all the factors of production such
as land, labour, capital, materials, etc. are privately owned. In the capitalist economy, prices of commodities
are determined by a free play of demand and supply. The government has no control over it. The following
are the main characteristics of this system:
1.
Private Ownership of Factors of Production.
2.
Solution of the central problem of production: In the capitalist economy, the problems related
to production are not solved by a 'Central Planning Authority', but by the price mechanism. The
following are the central problems related to production(a)
What to produce?
(b)
When to produce?
(c)
How much to produce?
(d)
For whom to produce?
(e)
How to produce?
(f)
Where to produce?
Central Economic Problem

Types
Causes
(a) What to produce?
Unlimited Wants
(b) How to produce?
Limited resources
(c) For whom to produce?
Alternative uses of resources
(d) What provisions are to be made

for economic growth? (i.e. savings)
3.
Role of Money and Market : In the capital economy, money and market have a very important
role to play. The price and output of a commodity is determined by the market forces by the
free interplay of demand and supply.
4.
Freedom on Consumption (i.e. consumer sovereignty) : In the capitalist economy, the consumer
is called king; because every consumer is free to consume whatever he likes. There is no restriction
on consumption by the government. His consumption is automatically restricted by his limited
income. There are some restrictions by the government on consumption of harmful goods, such
as drugs, liquor etc. is necessary.
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5.
Freedom of Production : In a capitalist economy, the entrepreneurs enjoy complete freedom

to choose any goods for production. Therefore, the entrepreneurs give priority to the goods demanded
by the rich consumer and sometimes, they even neglect the needs of the common society.
Therefore, some restrictions on this attitude are necessary by the government for the welfare
of the community.
6.
Profit Motive : In a capitalist economy, the entrepreneurs are guided by profit motive. No doubt,
profit motive promotes efficiency, hard work, research and development. But it is beneficial as
long as there is competition in the market. In the absence of competition, i.e. in case of monopoly,
this profit motive will induce the entrepreneur to exploit the common person.
SOCIALIST ECONOMY/CONTROLLED ECONOMY
In the controlled economy, the factors of production are not privately owned, but they are collectively
owned by the whole community represented by the state. The main characteristics of this economy
are as follows1.
Collective Ownership of Means of Production by the whole community represented

by state.
2.
Solution of the central problems of production by 'Central Planning Authority'.
3.
Restriction on Consumption: In this economy, although freedom from hunger is guaranteed,

choice of the consumer is restricted by the planned production.
4.
Restriction on Production: The goods to be produced are determined by the central planning
authority on the basis of certain social goals before the nation.
5.
Social Welfare: Some examples of social goals are as follows:(i)
An equitable distribution of national income,
(ii)
Increasing the pace of economic development,
(iii)
Full employment,
(iv)
Reduction of poverty,
(v)
Balanced regional growth, etc.

MIXED ECONOMY
1.
Co-existence of Private and Public Sector: Co-existence of private and public sector
is the biggest characteristic of this economy. In fact, there are three sectors in this economy:
(a)
Private Sector: Capitalist economy- guided by profit motive.
(b)
Public Sector: Controlled economy - guided by the welfare of the people.
(c)
Combined Sector
2.
Planned Economic System: The mixed economic system is a planned economic system.
The central planning authority prepares planning and lays down certain goals for the development
of the whole economy. The public sector runs to achieve the goals. Moreover, the government
creates an atmosphere where the private sector also has to achieve the pre-determined
goals.
3.
Dual Pricing System:
In the private sector, the market forces fix the prices.
In the public sector, the central planning authority determines the prices.
in the combined sector, the government has the authority to fix the prices of essential
goods, such as petrol, kerosene, coal, electricity, etc. The price so fixed is called
administered price.
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PRODUCTION POSSIBILITY CURVE (PPC)
Q: What do you mean by Production Possibility Curve?
Meaning :
This curve shows the different possibilities of two

commodities that the economy can produce, when the resources
are fully employed.
Assumptions in Drawing PPC;

1. The amount of productive resources of the economy
are fixed.
2. The resources are fully utilised (i.e. they are not
unemployed or underemployed)
3. Technology does not change.
Various Production Possibilities
Production
Possibilities
Commodity X
Opportunity Cost$
Commodity Y
20
--
19
17
14
10
10
y
x
($ Opportunity cost is assumed to be increasing. It may be constant or decreasing)

Presentation of Central Problems by PPC
Allocation of Resources
All points on PPC show that

goods and services are produced
at least cost and no resources
are wasted, i.e. economy is
productively efficient.
Resource Utilisation
Movement from B to D also known

as greater productive efficiency)
may be due to Decrease in unemployment
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Economic Growth
Such change may be due toTechnological progress

Development of new and
better ways of doing
things.
Greater capital formation
Population growth
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Questions
1.
According to Robbins, neutrality between

ends is(A) Not feasible
(B) Not desirable
(C) Both (A) and (B)
(D) Either (A) or (B)
8.
Capital-intensive techniques would get chosen

in a (A) Labour-surplus economy
(B) Capital-surplus economy
(C) Developed economy
(D) Developing economy
2.
Robbins defined Economics as (A) Science of wealth

(B) Science of material well-being
(C) Science of choice making
(D) Science of dynamic growth and
development
9.
Labour-intensive techniques would get chosen

in a (A) Labour -surplus economy
(B) Capital-surplus economy
(C) Developed economy
(D) Developing economy
3.
Economics is different from other social

sciences because it is primarily concerned
with the study of ; it is similar to other social
sciences as they are all concerned with the
study of (A) limited resources, market behaviour
(B) scarcity, human behaviour
(C) social behaviour, limited resources
(D) Biological behaviour, scarcity
10.
Which of the following is related to micro

economics?
(A) Inflation in the economy
(B) Problem of unemployment
(C) National income
(D) Income from the railways
11.
Competitive market structure and inequality

of wealth are the main features of (A) Mixed economy
(B) Socialistic economy
(C) Capitalistic economy
(D) None of the above
12.
Indicate the suitable match (A) Economics is the science of wealth

- A dam Smith
(B) Economics is the science of material
well- being. - Samuelson
(C) Economics is the science of choicemaking. - Marshall
(D) Economics is the science of growth
and development. - Rabbins
13.
State, whether economics is (A) A positive science only.

(B) Neither a positive nor normative science.
(C) A science, but not art.
(D) A science or an art depending on who
uses economics and for what propose.
14.
Who expressed the view that "Economics

is neutral between end" ?
(A) Robbins
(B) Marshall
4.
Our
(A)
(B)
(C)
(D)
economy is characterised by Unlimited wants and needs

Unlimited material resources
No energy resources
Abundant productive labour
5.
The
(A)
(B)
(C)
(D)
Central economic problem is What to produce?

How to produce?
For whom to produce?
All of above
6.
Under a mixed economy (A) A dual system of pricing exists

(B) State regulates prices of essential goods
(D) Neither (A) nor (B)
7.
If the marginal (additional) opportunity cost

is a constant, then the PPC would be (A) Convex
(B) Straight line
(C) Backward bending
(D) Concave
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(C) Pigou
20. Find the correct match -
(D) Adam Smith

15.
(A) An Enquiry into the Nature and Causes

of the Wealth of Nations. - A.C. Pigou
(B) Science, which deals with wealth. Alfred Marshall
(C) Economics is the science, which studies
human behavior as a relationship
between ends and scarce means, which
have alternative uses. - Robbins
(D) The range of our enquiry becomes
restricted to that part of social welfare
that can be brought directly or indirectly
into relation with the measuring rod of
money. - Adam Smith
Which of the following is the best general

definition of the study of Economics?
(A) Inflation and unemployment in a growing
economy
(B) Business decision making under foreign
competition
(C) Individual and social choice in the face
of scarcity
(D) The best way to invest in the stock
market
16.
Which of the following embody a more widely

accepted definition of economics ?
21.
The law of scarcity (A) does not apply to rich/developed

countries
(B) applies only to the less developed
countries
(C) implies that consumer's wants will be
satisfied in a socialistic system
(D) implies that consumer' wants will never
be completely satisfied
22.
What implication(s) does resource scarcity

have for the satisfaction of wants?
(A) Not all wants can be satisfied.
(B) We will never be faced with the need
to make choices.
(C) We must develop ways to decrease
our individual wants.
(D) The discovery of new natural resources
is necessary to increase our ability to
satisfy wants.
23.
Rational decision-making requires that (A) One's choice be arrived at logically and
without error
(B) One's choice be consistent with one's
goals
(C) One's choice never varies
(D) One makes choices that do not involve
trade-offs
24.
In a mixed economy (A) all economic decisions are taken by

the central authority.
(B) all economic decisions are taken by
private entrepreneurs.
(C) economic decisions are partly taken
by the state and partly by the private
entrepreneurs.
(D) none of the above
(A) "An Inquiry into the Nature and Causes

of the Wealth of Nations."
(B) "The part of social welfare which can
be brought directly or indirectly into
relationship with the measuring rod of
money."
(C) "A study of mankind in the ordinary
business of life material requisites of
well-being."
(D) "A science, which studies human
behaviour as a relationship between
ends , which have alternative uses."
17.
State which of the following refer to the macro

economic approaches from a national angle(A) Per capita income of the country
(B) Capital-output ratio in steel industry
(C) Income from the railways
(D) Both (A) and (B)
18.
State which of the following refer to the micro

economic approaches from a national angle(A) Per capita income of the country
(B) Capital-output ratio in steel industry
(C) Income from the railways
(D) Both (A) and (B)
19.
State which of the following refer to micro

economic approaches from a national angle(A) Unemployment among the educated
people
(B) Inflation in the economy
(C) Lockout in Indian Airlines
(D) Distribution of coal in the country
13

25.
26.
27.
28.
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The central problem in economics is that

of (A) comparing the success of command
versus market economies
(B) guaranteeing that production occurs
in the most efficient manner
(C) guaranteeing a minimum level of income
for every citizen
(D) allocating scarce resources in such
a manner that a society's unlimited needs
or wants are satisfied as well as possible
30.
Under a controlled economy (A) state plays a major role

(B) central authority decides how much will
be produced
(C) both (A) & (B)
(D) neither (A) nor (B)
31. Under a capitalist economy(A) Government plays a major role

(B) Government plays no role
(C) Government plays a minor role
(D) None of these
Which of the following illustrates a decrease

in unemployment using the PPC?
(A) A movement down along the PPC
(B) A rightward shift of the PPC
(C) A movement from a point on the PPC
to a point inside the PPC
(D) A movement from a point inside the
PPC to a point on the PPC
32. PPC
(A)
(B)
(C)
denotes level of output

maximum output
maximum output possible with several
combination of inputs
(D) none of these
33. A capitalist economy uses_____as the principal

means of allocating resources (A) Demand
(B) Supply
(C) Efficiency
(D) Price
Which of the following can be regarded as

the laws of economics?
(A) There is a direct proportionate change
in the price level with a change in the
supply of money.
(B) Prices are determined by total demand
and total supply in the market.
(C) After a point, the marginal increase in
output shows a falling tendency with
every increase in one or more of the
factors of production.
(D) All of above
34. In free market economy, when consumers

increase their purchase of a good and the
level of _____exceeds_____, then price tends
to rise (A) demand, supply
(B) supply, demand
(C) prices, demand
(D) profits, supply.
Which of the following can be regarded as

the laws of economics?
(A) Marginal propensity to consume shows
a fall with an increase in income.
(B) Price of other products show a
sympathetic rise with a rise in the prices
of food grains.
(C) Taxes have no relation with the benefit
which a person derives from the
government.
(D) Economy cannot prosper without hard
work and sincerity of the people.
29. Under a free economy, prices are (A) regulated

(B) determined through free interplay of
demand & supply
(C) partly regulated
(D) none of these
14
35.
Right to private property is found in (A) Socialism

(B) Capitalism
(C) Mixed economy
(D) None of these
36.
Which of the following does not suggest a

macro approach for India?
(A) Determining the GNP of India
(B) Finding the causes of failure of X and
Co.
(C) Identifying the causes of inflation in
India
(D) Analysing the causes of failure of industry
in providing large-scale employment
CPT
37.
Economic goods are considered scarce

resources because they (A) Cannot be increased in quantity
(B) Do not exist in adequate quantity to
satisfy social requirements
(C) Are of primary importance in satisfying
social requirements
(D) Are limited to man-made goods
38.
From the national point of view which of the

following indicates micro approach?
(A) Per capita income of India
(B) Underemployment in agriculture sector
(C) Lock-out in TELCO
(D) Total savings in India
39.
40.
41.
When specifying economic models,

economists often make assumptions about
the real world. The purpose of assumptions
in economic theory is to (A) make the model more realistic
(B) simplify the model and provide a primary
focus for theory
(C) ensure that the model only covers specific
conditions
(D) guarantee the accuracy of theory
Which of the following is incorrect?
(A) The central problem in economics is
that of allocating scarce resources in
such a manner that society's unlimited
needs are satisfied as well as possible.
(B) In a mixed economy, the government
and the private sector interact in solving
the basic economic questions.
(C) Micro economics best describes the
study of the behaviour of individual
agents.
(D) An important theme in economics is
that market systems are better than
command (socialistic) economies.
An example of 'positive' economic analysis
would be (A) An analysis of the relationship between
the price of food and the quantity
purchased
(B) Determining how much income each
person should be guaranteed
(C) Determining the fair price for food
(D) Deciding how to distribute the output
of the economy
15
42.
Identify the correct statement (A) In the deductive method logic proceeds
from the particular to the general.
(B) Micro and Macro -Economics are
interdependent.
(C) In a capitalist economy, the economic
problems are solved by the Planning
Commission.
(D) Higher the prices, lower is the quantity
demanded of a product is a normative
statement.
43.
A study of how increases in the corporate

income tax rate will affect the national
unemployment rate is an example of (A) Macro economics
(B) Descriptive economics
(C) Micro economics
(D) Normative economics
44.
Which of the following statements is correct?

(A) In a two-goods economy, the production
possibilities frontier reflects the maximum
amount of one good that can be produced
when a given amount of the other good
is produced,
(B) Micro economics is the study of the
behaviour of the economy as a whole.
(C) Positive economics focuses on welfare
of the people of a society.
(D) None of the above.
45.
Which of the following is likely to cause

an inward shift in a country's PPC?
(A) Earthquake destroying resources of the
country
(B) Scientists destroying new machines
(C) Workers getting jobs in the new metro
project
(D) The country finds new reserves of crude
oil
46.
In an economy, people have the freedom

to buy or not to buy the goods offered in
the market place and this freedom to choose
what they buy dictates what producers will
ultimately produce. The key term defining
this condition is (A) Economic power of choice
(B) Consumer sovereignty
(C) Positive economy
(D) Producer sovereignty
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51. In Q. 50 above, the opportunity cost of increasing
one unit of Good B from 10 units to 18 units
is (A) 3 units of A
(B) 1 unit of A
(C) 0.125 units of A
(E) 0.5 units of A
47. Consider the following table:

Production A B C D E F G H
possibilities
Guns
0 10 20 30 40 50 60 70
Bread
105 100 90 75 55 30 0 45
The opportunity cost of increasing gun's
production from 20 to 30 units is equal to(A) 10 units of bread
52.
In Q. 50 above, as one moves successively

from point A to point B, C, D, E and F, the
opportunity cost of Good A (A) increases as more of goods A is
produced
(B) decreases as more of goods A is
produced
(C) remains constant
(D) is always equal to one unit of B
53.
What is the "Fundamental Premise Basis

of Economics"?
(A) Natural recourses will always be scarce.
(B) Individuals are capable of establishing
goals and acting in a manner consistent
with achievement of those goals.
(C) Individuals choose the alternative in
which they believe the net gains would
be the greatest.
(D) No matter what the circumstances,
individual choice always involves a trade
off.
54.
Which of the following is a normative

statement?
(A) Planned economies allocate resources
via government departments.
(B) Most transitional economies have
experienced problems of falling output
and rising prices over the past decade.
(C) There is a greater degree of consumer
sovereignty in market economies than
planned economies.
(D) Reducing inequality should be a major
priority for mixed economies.
55.
Which of the following statements would

you consider to be a normative one?
(A) Faster economic growth should result
if an economy has a higher level of
investment.
(B) Changing the level of interest rates is
a better way of managing the economy
than using taxation and government
expenditure.
(B) 15 units of bread

(C) 25 units of bread
(D) 24 units of bread
48.
In Q. 47 above, one moves successively

from point A to points B, C, D, E and F,
the opportunity cost of guns (A) Increases as more of guns are produced
(B) Decreases as more of guns are
produced
(C) Remains constant as more of guns are
produced
(D) Nothing can be said
49.
In Q. 47 above, Point D is efficient while,

point H (30 guns and 45 loaves of bread)
is inefficient. Why?
(A) Point D is outside the PPC while point
H is on the PPC.
(B) Point D is inside the PPC while point
H is on the PPC.
(C) Point D is on the PPC while point H
is inside the PPC.
(D) Nothing can be said.
50.
Consider the following table:

Production
Goods - A
Goods - B
30
28
24 18
10
possibilities
The opportunity cost of increasing GoodA's production from 2 to 4 units is equal

to (A) 10 units of B
(B) 14 units of B
(C) 24 units of B
(D) 2 units of B
16
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(C) Higher level of unemployment will lead
to higher levels of inflation.
(D) The average level of growth in the
economy was faster in the 1990s than
the 1980s.
56.
57.
58.
59.
(C) Factor Pricing

(D) National Saving and Investment

(A) Unlike normative economics, positive
economics is based on objective analysis
of economic issues.
(B) The opportunity cost of a good is the
quantity of other goods sacrificed to
get another unit of that good.
(C) Micro economics emphasizes
interactions in the economy as a whole.
Economics is the study of(A) how society manages its unlimited
resources
(B) how to reduce our wants until we are
satisfied
(C) how society manages its scarce
resources
(D) how to fully satisfy our unlimited wants
61.
Which of the following falls under Micro

Economics?
(A) National Income
(B) General Price level
63.
Which point on the PPC shows a "productively

efficient" level of output?
(A) A
(B) B
(C) C
(D) All of above
64.
In Q. 63 above, which of the following clearly

represents a movement towards greater
productive efficiency?
(B) A movement from point C to point D
(C) A movement from point F to point C
(D) A movement from
point E to point B
65.
Consider the following

diagram:
The opportunity cost of
increasing
wine
production from D to E is -
The meaning of the word 'Economic' is most

closely connected with the word (A) Extravagant
(B) Scarce
(C) Unlimited
(D) Restricted
(A) Employment and economic growth are
studied in micro economics.
(B) Micro economics deals with balance
of trade
(C) Economic condition of a section of the
people is studied in micro economics
(D) External value of money is dealt with
in micro economics
Which of the following steps relates only

to deductive method in economics?
(A) Testing of hypothesis
(B) Collection of data
(C) Classification of data
(D) Perception of the problem
(A) A movement from point A to point B

(A) Robbins has made economics as a form
of welfare economics
(B) The law of demand is always true
(C) All capital is wealth but all wealth is
not capital
60.
62.
(A) 0 litre of grape juice.

(B) 5 litres of grape juice.
(C) 1 litre of wine.
(D) 0.2 litre of wine.
66.
17
In Q. 65 above, assuming that the PPC does

not shift, which of the following is true?
(A) Point A is desirable but is inefficient.
(B) Point D represents a more efficient
allocation of resources than points A
and F.
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(C) Point H is desirable but is not attainable.

(D) If wine production equals 7 litres, the
maximum amount of grape juice that
can be produced simultaneously is 28
litres.
67.
68.
(C) Q
(D) Both R and S
71.
In Q. 65 above, the PPC in the diagram

reflects (A) Increasing opportunity cost of more wine
production and constant opportunity
cost of more grape juice production.
(B) Increasing opportunity cost of more wine
production and decreasing opportunity
cost of more grape juice production.
(C) Decreasing opportunity cost of more
wine production and decreasing cost
of more grape juice production.
(D) Increasing opportunity cost of more wine
production and increasing cost of more
grape juice production.
If the economy is operating at point C, the

opportunity cost of producing an additional
15 units of bacon is (A) 40 units of eggs
(B) 10 units of eggs
(C) 20 units of eggs
(D) 30 units of eggs
Consider the following figure:
Which point in the above figure shows that

the two commodities cannot be produced
with given technology?
(A) P
(B) S
(C) Q
69.
In Q. 68 above, which point in the above

figure shows that the resources are not being
utilised fully?
(A) P
(B) Q
(C) S
(D) R
70.
In Q. 68 above, which point or points in the

above figure show that outputs are being
produced at least cost combination of
resources?
(A) P
(B) Both P and Q
Consider the following figure:
18
72.
In Q. 71 above, if the economy was operating

at E (A) the opportunity cost of 20 additional
units of eggs is 10 units of bacon
(B) the opportunity cost of 20 additional
(C) the opportunity cost of 20 additional
(D) 20 additional units of eggs can be
produced with no impact on bacon
production
73.
In Q. 71 above, if the economy moves from

point A to point D, then (A) the opportunity cost of eggs in terms
of bacon falls
(B) the opportunity cost of eggs in terms
of bacon rises
(C) the opportunity cost of eggs in terms
of bacon is constant
(D) the economy becomes less efficient
74.
In Q. 71 above, Point F represents (A) None of these answers

(B) a combination of production that can
be reached, if we reduce the production
of eggs by 20 units.
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79.
(C) a combination of production that can

be reached, if there is a sufficient advance
in technology.
(D) a combination of production that is
inefficient, because there are
unemployed resources.
75.
76.
In Q. 76 above, what is the opportunity cost

of moving from point A to point B?
(A) 100 units of capital goods
(B) 8 units of consumer goods
(C) 90 units of capital goods
(D) 10 units of capital goods
In Q. 71 above, which of the following

represents a movement towards better
utilisation of existing resources?
(B) A movement from point E to point B
(C) A movement from point C to point B
(D) A movement from point F to point B
80.
In Q. 76 above, unemployment or under

employment of one or more resources is
illustrated by the production at point (A) A
(B) C
(C) F
(D) E
Which of the following represents the concept

of trade-offs?
81.
Which of the following combinations of goods

could not be produced with the resources
the economy currently has?
(A) a
(B) b
(C) c
Fig : PPC
(D) d
82.
(B) A movement from point F to point C

(C) Point E
(A) unique
(D) Point F
77.
(B) socially responsible
In Q. 76 above, moving from point A to point

D, what happens to the opportunity cost
of producing each additional unit of consumer
goods?
(C) neutral
(D) inspiring
83.
(B) decreases
The branch of economic theory that deals

with the problem of allocation of resources
is -
(C) remains constant
(A) micro economics
(D) increases up to point B, then falls

thereafter
(B) macro economics
In Q. 76 above, which of the following would

not move the PPC for this economy closer
to point E?
(A) increases
78.
Economics as a positive science should

be______between ends.
(C) econometrics
84.
(A) A decrease in the amount of unemployed

labour resources
An economy achieves "productive efficiency"

when (A) Resources are employed in their most
highly valued uses.
(B) A shift in preference towards greater

capital formation
(B) The best resources are employed
(C) An improvement in the overall level of

technology
(C) The total number of goods produced

is greatest
(D) An increase in the population growth

rate
(D) Goods and services are produced at

least cost and no resources are wasted
19

85.
Which of the following is a reason for the

curvature or bowed out shape of the PPC?
(A) Falling unemployment as we move along
the curve
(B) The economy having to produce less
of one goods in order to produce more
of another goods
(C) Opportunity costs increase as more
of a good is produced.
87.
Which of the following is a reason for the

negative slops of the PPC?
(A) The inverse relationship between the
use of technology and the use of natural
resources
(B) Scarcity, at any point of time we have
limited amounts of productive recourses
(C) Recourses specialisation
(D) Increasing opportunity costs
89.
90.
(C) The discovery of new oil deposits in

India
(D) An increase in the number of people
taking management training courses
Which of the following would be considered

a disadvantage of allocating resources using
a market system?
(A) Income will tend to be unevenly
distributed.
(B) Significant unemployment may occur.
(C) It cannot prevent the wastage of scarce
economic resources.
(D) Profit will tend to be low.
86.
88.
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If the PPC is linear, which of the following

is true?
(A) As the production of goods increases,
the opportunity cost of the goods rises.
(B) As the production of goods increases,
the opportunity cost of that good falls.
(C) Opportunity costs are constant.
(D) The economy is not at full employment
when operating on the PPC.
Periods of less than full employment
correspond to (A) points outside the PPC
(B) points inside the PPC
(C) points on the PPC
(D) either point inside or outside the PPC
Which of the following would not result in
a rightward shift of the PPC?
(A) An increase in investment in capital
stock
(B) A reduction in the labour unemployment
rate
20
91.
During election campaigns, candidates often

promise both more "guns" and more "butter",
if they are elected. Assuming unemployment
is not a problem, what possible assumption
are they making but not revealing to their
audience?
(A) There will be a sufficient increase in
the supply of natural recourses used
to produce "guns" and "butter".
(B) There will be an improvement in the
technology of both "guns" and "butter"
production.
(C) There will be an increase in the labour
force.
(D) All of the above
92.
A PPC is (A) convex to origin

(B) concave to origin
93.
What is one of the future consequences of

an increase in the current level of consumption
in India?
(A) Slower economic growth in the future
(B) Greater economic growth in the future
(C) No change in our economic growth rate
(D) Greater capital accumulation in the future
94.
Which of the following is not a micro economic

subject-matter?
(A) The price of mangoes
(B) The cost of producing a fire truck for
the fire department of Delhi, India
(C) The quantity of mangoes produced for
the mango market
(D) The national economy's annual rates
of growth
95.
Which of the following is not one of the four

central questions that the study of economics
is supposed to answer?
(A) Who produces what?
(B) When are goods produced?
(C) Who consumes what?
(D) How are goods produced?
CPT
96.

its available resources and technology
efficiently are depicted by (A) demand curve
(B) production curve
(C) supply curve
(D) production possibilities curve
Mr. A :
My corn harvest this year is poor.
Mr. B :
Don't worry. Price increase will

compensate for the fall in quantity
supplied
Mr. C :
Climate affects crop yields. Some

years are bad, others are good.
Mr. D :
The government ought to

guarantee that our income will
not fall. In this conversation, the
normative statement is made by-
(D) Mr. D
101. Which of the following statements is

normative?
(A) Large government deficits cause an
economy to grow more slowly.
(B) People work harder if the wage is higher.
(C) The unemployment rate should be lower.
(D) Printing too much money causes
inflation.
In 1940, Hitler's air force bombed Rotterdam,

a beautiful city in Holland. 25,000 homes,
1200 factories, 69 schools and 13 hospitals
were destroyed. Nearly 75,000 people became
homeless and 1000 people died. 35% of
the port was gutted by the German army.
The above destruction would mean -
102. Which of the following involves a trade-off?

(A) Taking a nap
(B) All of these answers involve trade-offs
(C) Watching a football game on Saturday
afternoon
(D) Going to university
(A) A complete wipe off of PPC of Rotterdam

(B) An outward shift of the PPC of Rotterdam
103. Trade-offs are required because wants are

unlimited and resources are (A) economical
(B) unlimited
(C) efficient
(D) scarce
(A) Mr. A
(B) Mr. B
(C) Mr. C
97.
(C) An inward shift of the PPC of Rotterdam

(D) A downward movement on the same
PPC of Rotterdam
98.
In Q. 97 above, immediately after the war,

Rotterdam rebuilt its port with the help of
the most up-to-date cranes, docks and cargo
handling technology. By the end of the
reconstruction, ships were loading and
unloading faster and at lower cost than
anywhere in the world. It became more efficient
than it was before the destruction. This means(A) Rotterdam has come back to its original
PPC.
(B) Rotterdam has shifted to a higher PPC.
104. Which of the following can be regarded as

law of economics?
(A) Ceteris Paribus, if the price of a
commodity rises the quantity demanded
of it will fall.
(B) Higher the income, greater is the
expenditure.
(C) Taxes have no relation to the benefits
which a person derives from the state.
(C) Rotterdam has shifted to a lower PPC.

(D) Nothing can be said.
99.
105. Which of the following is correct?

(A) Normative economics is not concerned
with value judgment.
(B) A market is a process that reconciles
consumer decision, production decisions
and labour decisions.
(C) A mixed economy has a certain level
of government intervention in the
economy along with private sector
ownership of the economy.
(D) Both (B) and (C).
Which of the following is an economic activity?

(A) Medical facilities rendered by a
charitable dispensary
(B) Teaching one own's child at home
(C) A housewife doing household duties
(D) Listening to music on the radio
100. The various combinations of goods that can

be produced in an economy, when it uses
21
CPT
106. Which of the following is correct?

(A) The production possibilities frontier
shows the maximum combination of
outputs that the economy can produce
using all the recourse available.
(B) Increasing opportunity cost implies a
production possibility frontier concave
to the origin.
(C) Free markets are the markets in which
the governments do not intervene.
(D) All of the above are correct.
107. State which of the following represents macro

from the national point of view (A) Turnover ratio of Reliance Ltd.
(B) Capital-output ratio of Indian Industries
(C) Debt equity ratio of TELCO
(D) All the above
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
B
.
22
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CHAPTER 2
THE THEORY OF DEMAND

MEANING OF DEMAND
The word demand refers to the quantity of a commodity or service that the consumers are
willing to purchase, and
able to purchase
at various prices during a period.

"Demand is an effective desire."
Prof. Pension
The word effective desire includes the following five elements:

1.
Desire
2.
Means to Purchase. For example, if a poor person desires a car, his desire cannot be
called demand.
3.
Willingness to use those 'Means' to fulfil the Desire. For example, if a rich miser desirers
a car, then his desire will not be called demand, although there is a desire and means
to purchase. This is because; there is absence of a third element of demand, i.e. willingness
to use those means to fulfil the desire.
4.
Price: Demand in economics is always at a price. For example, you will be willing to
purchase a pen for Rs. 10/-, but you may not buy that pen if the price is Rs. 100/-
5.
Time Period: Demand is always expressed with reference to a particular time period.
For example, cars per day, 1000 cars per week etc.
DETERMINANTS OF DEMAND
1. Price of the Commodity: Price is the most important factor of demand. Ceteris paribus
(i.e. other thing remains constant), when the price of a commodity rises, the demand of the commodity
falls and vice-versa. This is also known as the law of demand.
Symbolically,
Price
P
P
Demand
D
Demand Determinants
1.
2.
3.
4.
5.
6.
Graphically,
23
Price of Commodity
Price of related goods
Income of household
Taste & preferences of consumers
Composition of population
Other Factors:
(a) Size of population
(b) Education of people
(c) Weather situation of the region
(d) Distribution of income
(e) Advertisement
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In the diagram 2:1, we see that when price increases from P to P1, the demand for the commodity
decreases from Q to Q1, and when price decreases from P to P2, the demand increases from Q
to Q2.
2. Price of the Related Goods: There are two types of related goods:(a)
Complementary goods.
(b)
Substitutes or competing goods.
(a)
Complementary Goods : Complementary goods are those goods which are used simultaneously.
For example, pen and ink, tea and sugar, etc.
Goods (Pen)
P
D
P
(b)
Complementary Goods (Ink)
P no change
P no change
Substitutes or Competing Goods : Substitutes are those goods which can be used in
place of one-other. For example: tea and coffee, pepsi and coca-cola, etc.
Goods (Tea)
Complementary Goods (Coffee)
P - no change
P - no change
3.
Income Level of the Household : To analyse the impact of income on the demand, the
goods can be divided into two categories:
(a)
Inferior goods
(b)
Superior goods
Inferior goods: Inferior goods are those that are consumed by poor household. For example,
very low quality wheat, etc.
Income
Demand for inferior goods
24
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Superior Goods: Superior goods are those goods that are consumed by a rich household. For
example, the wheat of very high quality, etc. Symbolically,
Income Inferior goods
Demand for
Graphically,
4. Taste and Preference of Consumer : The goods, which are preferred by consumers or
which are in fashion, will cover a good share of market in comparison to the goods, which are out
of fashion. For example, the demand for colour T.V. is higher than that of black & white T.V.
Here, demonstration effect plays an important role. A person's demand for colour TV may be
affected by his seeing is in a friend's house.
5. Composition of Population : For instance, if there are more old age persons in the population
then the demand for sticks, spectacles etc. will be higher, if there are more children in the population,
then the demand for sweets, toys, toffees etc. will be high.
6. Other Factors of Demand : Besides the above, the following factors also affect the demand
of a commodity(a)
Size of population,
(b)
Education of people,
(c)
Weather situation of the region,
(d)
Distribution of income,
(e)
Advertisement etc.
LAW OF DEMAND
-
Meaning:
1.
Refer to the Price Factor of Demand on P.No: 18
2.
Ceteris Paribus
Demand Schedule:
The above concept of the law of demand can also be explained through demand schedule and
demand curve:
Price (Rs.)
10
8
6
4
2
Quantity Demand (units)

10
15
20
25
35
25
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The above schedule shows that when the price of the commodity was Rs. 10, the demand
for the commodity was 10 units. As the price falls upto Rs. 8, the demand rises up to 15 unites.Similarly
when the price reaches Rs. 6, the demand rises to 20 units. Thus, the above schedule shows an
inverse relationship between price and demand of the commodity.
- Demand Curve:
Demand curve shows the demand of a commodity/service at various prices during a period. It
can easily be derived by plotting the demand schedule on a graph. The demand curve of the above
schedule is as follows:
In Fig 2.6, the demand curve is
negatively sloped, showing that as
the price of the commodity
increases, the demand for it falls
and vice-versa.
1.
Exceptions to the Law of Demand:

When Does The Law of
Demand Not Operate?
Giffen's Paradox: In the case of Giffen goods, when the

price of a commodity falls, the demand for Giffen goods
also falls and vice-versa.
1. Giffen's paradox
2. Thinking of people
Sir Robert Giffen, an economist, was surprised to find

out that as the price of bread increased, the British
workers purchased more bread and not less of it. This
was something against the law of demand. Why did
this happen?
The reason given for this is that when the price of
bread went up, it caused such a large decline in the
purchasing power of the poor people that they were
forced to cut down their consumption of meat and
other more expensive foods.
3. Fashionable product
4. Brand preference
5. Future expectation about
price
6. Impulsive purchase.
7. Non-operation of Ceteris
paribus
Since bread (even after the price rise) was still the cheapest food article, people consumed
more of it and not less when its price went up. Such goods which exhibit 'direct pricedemand relationship' are called Giffen goods. Generally, these goods are considered inferior
by consumers and occupy a substantial place in the consumer's budget. Examples of
such goods are coarse grains like bajra, low quality rice and wheat etc.
2.
Thinking of People (Conspicuous Goods): It is a human thinking that higher the price, higher
the quality, i.e. generally people measure the quality of commodity through its price. Therefore,
they try to purchase those commodities whose prices are higher. Thus, here the law of demand
fails.
3.
Fashionable Product
4.
Brand Preference. For example: if a consumer prefers the clothes of 'Raymond' brand, then
he will like to wear the clothes of only Raymond brand, even if its price is very high.
5.
Future Expectation about Price : If the consumers expect that the price of a commodity will
rise in the future due to drought, etc., then they will purchase the commodity in larger quantities
in the present.
26
CPT
6.
Impulsive Purchase : Sometimes, the consumer purchases a commodity without any cool calculation
about its price and utilities. In such cases, the law of demand may fail.
7.
The inoperation of 'Ceteris Paribus' : If other factors also change with price, then the law
of demand will fail.
- Market Demand Schedule and Market Demand Curve:

Market demand schedule is the schedule that shows the total demand for a commodity or service
by all the consumers of a market at various prices.
Suppose, if P, Q, R and S are the consumers of a commodity, then the market demand schedule
with imaginary figure will be as follows:
Market Demand Schedule
Price (Rs.)
Demand
P
Q
R
S
Total
5
2
3
4
1
10
4
3
4
5
2
14
3
4
5
6
3
18
2
5
6
7
4
22
1
6
7
8
5
26
When we plot the above Market demand schedule on a graph, we get the market demand curve,
which is as follows:
Fig.2.7. Market Demand Curve

Why Does Individual Demand Curve or Market Demand Curve Slope Downward?
1.
Inverse relationship b/w price and quantity demanded.
2.
The Law of Diminishing Marginal Utility : According to the law of diminishing marginal
utility, as a consumer uses more and more units of a commodity, the marginal utility of
that commodity goes on decreasing. A consumer will try to extend his consumption to
the point where the marginal utility of the commodity is equal to the price of the commodity.
So it is only at a low price at that a consumer would like to purchase more quantities
of a commodity.
3.
Substitution Effect : When the price of a commodity falls, it becomes relatively cheaper
than its substitutes. For example: Tea and coffee are substitutes, if the price of coffee
falls, it will become relatively cheaper than tea. So some people, who were purchasing
tea before may now purchase coffee. This will increase the demand for coffee.
4.
Income Effect : When the price of a commodity falls, the purchasing power of the consumer
increases and vice-versa. For example, a consumer is consuming one Kg. Apple, when
its price is Rs. 10 per Kg. Now suppose, the price of Apple falls to Rs 5 per Kg. This
fall in price will increase the purchasing power of the consumer, because now he can
purchase two Kgs. of apple with the same money, i.e. Rs. 10. This will induce the consumer
to consume more apples and thus the demand for apples may increase.
27

5.
CPT
Change in the Number of Consumer : When the price of a commodity falls, it comes
within the purchasing power of some households, who could not afford to purchase it earlier.
Thus, a fall in price increases the number of consumers and a rise in price decreases
the number of consumers.
EXPANSION & CONTRACTION IN DEMAND
When the demand increases due to a fall in its

price, it is called expansion in demand, but
when the demand decreases due to the rise in
its price, it is called contraction in demand.
Thus, expansion or contraction takes place only

due to the change in price, not due to the change
in other factors of demand, i.e. other factors
of demand should remain constant.
The expansion or contraction in demand is also

known as movement along the demand curve/
Change in the quantity demanded.
INCREASE & DECREASE IN DEMAND
When the demand for a commodity rises or falls due to change in any other factor, except
price, then it is called 'Increase in Demand' and 'Decrease in Demand' respectively.
Such increase or decrease in demand is also known as Shift in demand curve/Change

in demand.
The other factors can affect the demand in the following ways:1.
Change in Income: To analyse the impact of change in income of the household on the
demand of goods, the goods can be divided into two categories:
(a)
Superior Goods.
(b)
Inferior Goods.
Superior Goods: In this case, Ceteris paribus, when the income of a consumer increases,
the demand for superior goods also increases. Thus whole of the demand curve shifts
rightward. In the inverse case, the demand for superior goods decreases and the demand
curve shifts leftward, Graphically,
Fig. 2.9 shows that the original demand
curve for the superior goods is DD showing that
demand for the goods is Q at the price P. Now
suppose the income of the consumer rises, as
a result of which the whole of the demand curve
shifts the rightward and becomes D2D2. At this
demand curve, the demand for the commodity
is Q2 at the same price (i.e. P). In the same
way, when the income of the consumer falls, the
whole of the demand curve shifts leftward and
becomes D|D|. At this curve, the demand is Q1
at the same price i.e. P.
Inferior Goods: In this case of inferior goods, the demand for inferior goods, Ceteris paribus,
increases with a fall in income and the whole of demand curve shifts rightward, but the
demand for inferior goods decreases with a rise in income, therefore, the demand curve
shifts to the leftward.
28
CPT

2.
Change in Price of Related Goods :

(a)
Substitutes : In the case of substitus, Ceteris paribus, when the price of substitutes
falls, the demand for a commodity also decreases and therefore the demand curve
shifts leftward. In the inverse case, the demand for the commodity increases and
the demand curve shifts rightward.
(b)
Complementary Goods : In this case, when the price of complementary goods

rises, the demand for the commodity falls and the demand curve shifts leftward.
In the inverse case, i.e. when the price of complementary goods falls, the demand
for a commodity rises and therefore the demand curve shifts rightward.
3.
Change in Tastes and Preferences: Changes in taste and preferences of the consumers
for a commodity may increase or decrease the demand for that commodity at the same
price. Thus, the demand curve will shift rightward or leftward.
4.
Change in Income Distribution : If there is a change in income distribution of people

in such a way that some are gainers and some are losers, then the demand for the goods
that are preferred by gainers will rise and the demand curve of that goods will shift to
rightward, but the demand for the goods that are preferred by losers will decrease and
the demand curve of those commodities will shift to leftward.
5.
Change in Size of Population : If the population of the city or country decreases, then
the demand for a commodity will fall and the whole of the demand curve will shift leftward.
In the inverse case, the demand curve will shift rightward.
ELASTICITY OF DEMAND (e)
Elasticity of demand refers to the responsiveness of the quantity demanded of a commodity

to the change in one of the variables on which the demand depends, i.e. price of the commodity,
price of related goods, income level etc.
Elasticity : e =
% C h a n g e in t h e Q u a n tity d e m a n d e d
of Demand :
%
C hTypes
a n g e of
in Elasticity
P r ic e
Since demand depends on the price of a commodity, the price of related goods, income of the
household etc, there are many kinds of elasticity such as:1. Price Elasticity Methods :
(a) Point method; (b) Arc method; (c) Total outlay method.
Types :
Five
2. Income Elasticity
3. Cross Elasticity
1. Price Elasticity
The price elasticity of demand refers to the responsiveness of the quantity demanded of a commodity
to the change in price of that commodity. In other words, the price elasticity of demand is the percentage
change in quantity demanded of a commodity divided by the percentage change in its price. Symbolically,
Elasticity ep =
% change in the quantity demanded

% change in price
q2 - q1
x 100
q1
=
p2 - p1
x 100
p1
29
CPT
q
x100
q1
= p
x100
p1
Where,
pI =
Price before change in price
p 2 = Price after change in price

q1 = Quantity demanded before change in price
p1 q2 q1
= q xp p
1
2
1
q 2 = Quantity demanded after change in price

A =
Very small change
=
Points to be noted :
1.
Price elasticity will be negative in case of normal goods, as there is negative relationship
between demand of normal goods and its price. While price elasticity will be positive in
the case of Giffen goods due to the positive relationship between the demand for Giffen
goods and its price.
2.
But for drawing conclusion, we do not consider every sign, we only consider the value.
Thus, if 10% change in price leads to 20% change in quantity demanded of goods-X and
30% change in quantity demanded of goods-Y, then we get the elasticity of X and Y as
20 and 30 respectively, showing that demand for Y is more elastic to price than X. If
we had considered minus signs, we would have concluded that X is more elastic than
Y, which is not correct.
Measurement of Price Elasticity: There are three methods:-
1. Point Method/Point Elasticity : Under this method, the elasticity of demand is calculated
by keeping only one point as base. The formula is:
ep
Formula-1
Formula - 2
Examples:
1.
Suppose the demand for a commodity is 100 units at a price of Rs. 10/-. But, at the
price Rs. 15/-, the demand is 80 units, thenPoint Elasticity : ep =
2.
If the demand function is:
q = 2000-20p 2, then
dq
= -40p
dp
The quantity demanded (q) at price Rs. 5 will be 1500 units. So, e = -40x5x
Point Elasticity on a Linear Demand Curve: Point elasticity
can also be calculated on a straight-line demand curve with the help
of the following formula:
Point Elasticity : ep =
30
=-0.66
CPT
On the basis of the above formula, point elasticity at different points of a straight-line demand
curve will be as follows:
Point Elasticity on a Non-Linear Demand Curve: Consider the Fig. 2.12. In this figure, DD
is a non-leaner demand curve. If we are to calculate point-elasticity at point B, then we will draw a
line AC tangent to the point B. Now the elasticity can easily be calculated with the help of the following
formula:
Elasticity :
e =
AB < BC,
<1
Q
NP
<Segment
MN
Lower
BCe
NP
e=
Upper
AB MNSegment
e > 1
In the same way, the elasticity at the point N :
,
2. Arc Method: If we want to find the elasticity between the two points of a demand curve,
then the problem arises at to what price and quantity should be kept as a base. In such a situation,
the average of the two prices and quantities is used. Symbolically,
q2 - q1
q2 + q1
(
)
q2 - q1 p2 + p1
2
=
x
p2
p1
p2
- p1 q2 + q1
Arc Elasticity :e =
p2 + p1
(
)
2
Point to be noted:
When we want to measure price elasticity at a point on the demand curve or for a very small
change in the price and quantity of a commodity, we use the 'Point Elasticity Method'. However, for
measuring price elasticity over an arc of the demand curve, we use the 'Arc Elasticity Method'.
31
CPT
3. Total Outlay Method: Under this method, with the help of total outlay, we try to find whether
the elasticity is equal to one or less than one or greater than one. It is to be noted that this method
gives only a rough estimate about price elasticity. We cannot find the exact co-efficient of elasticity
with the help of this method. There are three rules in this method: (i) If the total outlay does not change with a change in price,
the elasticity will be equal to one (e = 1). For instance:
Price (Rs.)
Quantity Demanded
Outlay (Rs.)
10
100 Units
1000
200 Units
1000
In the above example, the elasticity will be equal to one, because the
total outlay does not change due to change in price. (see Fig)
(ii) If the total outlay decreases with a rise in price and increases
with a fall in price, then the elasticity will be greater than one
(e > 1). For instance:
Price (Rs.)
Quantity Demanded
Outlay (Rs.)
10
100 Units
1000
240 Units
1200
In the above instance, the elasticity is greater than one, because, as

the price falls from Rs. 10 to Rs. 5, the total outlay increases from
Rs. 1000 to Rs. 1200. (See Fig)
(iii) If the total outlay increases with a rise in price and decreases
with a fall in price, then elasticity will be less than one (e < 1).
For instance:
Price (Rs.)
Quantity Demanded
Outlay (Rs.)
10
100 Units
1000
120 Units
600
In this case, the elasticity will be less than one, because when the
price falls from Rs. 10 to Rs. 5, the total outlay also falls from Rs.
1000 to Rs. 600. (See Fig:)
Types/Degrees of Price Elasticity of Demand
Numerical
Value
Description
1. Perfectly Inelastic
e = 0
There is no impact of change in price on the demand

of a commodity (See Fig: 2.16)
2. Inelastic
0 < e < 1
% change in quantity demanded < % change in price

(See Fig: 2.17)
3. Unitary Elastic
e = 1
% change in quantity demanded = % change in price

(See Fig: 2.18)
4. Elastic
> e > 1
% change in quantity demanded > % change in price

(see Fig: 2.19)
5. Perfectly Elastic
e =
Due to very small change in price, which tends to zero,

the quantity demanded changes substantially (see Fig:
2.20)
32
CPT
Fig : 2.18
Fig : 2.16
Fig : 2.17
Fig : 2.19
Fig : 2.20
Determinants of Price Elasticity

1. Availability of Substitutes: The more the substitutes, the more the elasticity. For example,
Limca, a cold drink, has many substitutes such as Pepsi, Thumps Up etc. If the price of Limca rises,
people will begin to purchase Pepsi or any other cold drink. Thus, the demand for Limca will be elastic.
2. Position of a Commodity in Consumer's Budget: The demand for commodities, which covers
a very big slice of a consumer's budget, is generally elastic, but in the inverse case, the demand
will be inelastic. For example, the demand for matches, button etc, is inelastic while the demand
for cloths is elastic.
3. Nature of Commodity: Normally, the demand for luxurious goods is elastic, but of necessities
is inelastic. For example, the demand for salt is inelastic.
4. Number of Uses of Commodity: If a commodity can be used in many ways, then its demand
will be elastic and vice-versa. For example, the demand for milk is elastic because it can be used
in many ways. If its price rises, it will be used only for feeding the sick and children and if its price
falls, it can be used in many ways such as in sweets, curd, feeding etc.
5. Consumer Habit: If a consumer is habitual of a commodity, then its demand will be inelastic.
6. Price Range: The demand for goods, whose prices are either very high or very low, is inelastic.
However, the demand for goods, whose prices are in the middle range, is elastic.
7. Time Period: The elasticity of demand also depends on the time period, which the consumers
take to adjust their habits. For example, consumers may be used to consume coffee in comparison
to tea. If the price of coffee rises, they may continue to use the same amount of coffee in the short
run. But in the longer period, they might develop their taste of tea and therefore, the demand for coffee
might fall in the long run.
8. If postponement of consumption is not possible, the demand will be inelastic.
33
CPT
2. Income Elasticity
Meaning:
Income Elasticity ei
=
Where,
= Change in quantity
I = Change in income of consumer;
I = Income before change in income; q = Quantity before change in income
Types/Degrees of Income Elasticity of Demand
Numerical
Value
Description
ei = 0
There is no impact of change in income on the demand

of a commodity (See Fig: 2. 16)
2. Inelastic
0 < ei < 1
% change in quantity demanded < % change in income

(See Fig: 2. 17)
3. Unitary Elastic
ei = 1
% change in quantity demanded = % change in income

(See Fig: 2.18)
< ei < 1
4. Elastic
% change in quantity demanded > % change in income

(See Fig: 2.19)
ei =
Due to very small change in income, which tends to zero,

the quantity demanded change substantially (See Fig: 2.20)
It is to be noted that:
In case of inferior goods
ei < 0
In case of necessary goods
0 < e < 1
In case of luxury (superior) goods
ei > l
(1)
If the proportion of income spent on a goods remains the same as income rises, then
income elasticity is one
(2)
If proportion of income spent on a good rises as income rises, then income elasticity
is greater than one.
(3)
If proportion of income spent on a good decreases as income rises, then income elasticity
is less than one
3. Cross Elasticity
Cross elasticity refers to the responsiveness of the quantity demanded of a commodity to the
change in the price of other goods, i.e. substitute or complementary goods. Symbolically,
Income Elasticity e c
qx
py
= py x qx
34
CPT

where,
qx
= Quantity demanded of commodity-X
qx = Change in the quantity demanded of commodity-X

py
= Price of commodity-Y
py = Change in the price of commodity-Y

It is to be noted that:(1)
If two goods are perfect substitutes for each other, then ec = ?.
(2)
If the two goods are unrelated, then ec = 0
(3)
In case of substitutes, cross elasticity will be positive due to the positive relationship
between the price of a commodity and the demand for its substitutes.
(4)
In case of complementary goods, cross elasticity will be negative due to the negative
relationship between the price of commodity and the demand for its complementary goods.
Questions
1.
2.
5.
Demand means (A) Desire
(A) Price of goods and related commodities
(B) Purchasing ability
(B) Size of population
(C) Desire with purchasing ability
(C) Income, tastes and other factors
(D) None of these
(D) All are true

6.
The law of demand states (A) Positive relation between P & Q

(B) Negative relation between P & Q
(B) Pepsi's advertising is not as effective

as in the past.
(D) None of these
(C) The price of Pepsi has increased.
The Law Of Demand considers constancy

of-
(D) Pepsi consumers had an increase in

income.
(A) Tastes and preferences

(B) Income of consumer
4.
The quantity demanded of Pepsi has

decreased. The best explanation for this is
that (A) The price of Coca Cola has increased.
(C) Spurious relation between P & Q
3.
Demand depends on -
(C) Price of related goods
7.
Which of the following will not cause a shift

in the demand curve for compact discs?
(D) All are true
(A) A change in income
At which of the points given below will the

price elasticity of demand be equal to one?
(B) A change in wealth

(C) A change in the price of pre-recorded
cassettes
(A) Where average revenue equals zero
(D) A change in the price of compact discs
(B) Where marginal revenue equals 0

8.
(C) At the mid-point of the demand curve

between its intersection with the x and
y- axes
Given the following four possibilities, which

one results in an increase in total consumer
expenditure?
(A) demand is unitary elastic and price falls.
(D) Where marginal cost equals marginal

revenue
(B) demand is elastic and price rises.

35
CPT
(C) Nothing definite can be said
(D) Convex
(C) demand is inelastic and price falls.

(D) demand is inelastic and prices rise.
9.
Q =
(A)
(B)
(C)
(D)
5 - 7P; This demand function is Direct demand function

Inverse demand function
Both are true
None of these
10.
P =
(A)
(B)
(C)
(D)
12 - 8Q; This demand function is Direct demand function

Inverse demand function
Both are true
None of these
11.
12.
13.
14.
15.
16.
If good x is a substitute of good y , then(A) y is also the substitute of x

(B) y may not be substitute of x
(C) both are substitutes of each other
(D) none of these
The formula of price elasticity can be written
as(A) (1/slope of demand curve) xp/q
(B) (1/slope of demand curve) x q/p
(C) (1/slope of demand curve) x ?p/?q
(D) None of these
If price elasticity is zero, the slope of the
demand curve is (A) Zero
(B) One
(C) More than one
(D) Infinite
If price elasticity is zero, the demand curve
will be(A) Horizontal
(B) Downward sloping
(C) Vertical
(D) None of these
Demand curve is p = ( a - bq )2, where a,
b >0. The demand curve is (A) Linear
(B) Concave
(C) Nothing definite can be said
(D) Convex
The demand curve is p = a - bq, where a,
b >0. The demand curve is (A) Linear
(B) Concave
36
17.
The price elasticity is infinity, the slope of

demand curve is (A) zero
(B) one
(C) infinite
(D) more than zero
Hint: Stop of DD =
18.
The price elasticity is infinite, demand curve

is (A) Downward sloping
(B) Vertical
(C) Horizontal
(D) None of these
19.
The quantity demanded does not respond

to price change and so the elasticity value
is (A) one
(B) infinite
(C) zero
(D) none of these
20.
If percentage change in quantity demanded

is greater than percentage change in price,
we have(A) one
(B) infinite
(C) zero
(D) greater than one
21.
If elasticity value is greater than one, it is(A) inelastic

(B) elastic
(C) unitary elastic
(D) none of these
22.

is less than percentage change in price,
we have elasticity value as (A) one
(B) zero
(C) less than one
(D) infinite
23.
If elasticity value is less than one, it is (A) inelastic

(B) elastic
(C) unitary elastic
(D) none of these
CPT
24.

is equal to percentage change in price, the
price elasticity is (A) one
(B) less than zero
(C) zero
(D) less than one
25.
With price at Rs. 9, only 7 oranges are

purchased. But as price falls to Rs. 8, 8
oranges were purchased, then the price
elasticity value is(A) One
(B) greater than one
(C) less than one
(D) zero
26.
27.
28.
29.
30.
With price at Rs. 10, only 8 pens were

purchased. But as the price falls to Rs.5,
16 pens were purchased, then the price
elasticity value is
(A) one
(B) less than one
(C) greater than one
(D) zero
Demand is affected by (A) Ratchet effect
(B) Demonstration effect
(D) None of these
Market demand curve is derived by considering(A) Independence of consumers' preferences
(B) Consumers are selfish
(D) None of these
Demand curve is upward rising, (A) if a good is Giffen
(B) if a good takes up a small part of a
consumers' budget
(C) both (A) and (B)
In the case of inferior goods, the income
elasticity of demand is
(A) Positive
(B) Zero
(C) Negative
(D) Infinite.
37
31.
Increase or decrease in quantity demanded

is based on(A) Shift of the demand curve
(B) Movement along the same demand curve
(D) None of these
32.
Increase or decrease in quantity demanded

is based on (A) Changes in income
(B) Only price change
(C) Changes in tastes
(D) None of these
33.
The
(A)
(B)
(C)
(D)
34.
Shift in demand means (A) A leftward or rightward shift of the demand

curve
(B) The movement along the demand curve
(D) None of these
35.
Shift of demand may be due to (A) Change in income, tastes

(B) Change in price
(D) None of these
36.
Shift of demand may be due to (A) Change in population

(B) Change in income distribution
(D) None of these
37.
If the price of complementary goods rises(A) Demand curve shifts to left

(B) Demand curve shifts to right
(D) None of these
38.
If the price of substitute good rises (A) demand curve shifts to left
(B) demand curve shifts to right
(D) None of these
demand function of any good is single valued

multi-valued
may be both (A) and (B)
none of these

39.
40.
41.
42.
CPT
Change in demand means (A) change in quantity demanded

(B) change in price
(C) shift of demand curve
(D) none of these
(C) perfectly inelastic

(D) none of these
Demand curve is downward sloping due to(A) Income effect

(B) Substitution effect
(C) Law of diminishing marginal utility
(D) All are true
Price elasticity of demand is (A) The response between price and quantity
(B) The response between income &
quantity
(C) The response between price & income
(D) None of these
With P at Rs. 7, only 7 pencils were purchased.

But as P falls to Rs. 6, 8 pencils were
purchased. The price elasticity value is (A) one
(B) less than one
(D) zero
43.
If a fall in price leads to an increase in total

revenue, we have elasticity of demand as(A) greater than one
(B) less than one
(C) zero
(D) infinite
44.
If the good is a luxury item, the demand

will be (A) relatively inelastic
(B) relatively elastic
(C) cannot be determined
(D) none of these
45.
If the good has few substitutes, it will be(A) relatively inelastic

(C) perfectly elastic
(D) none of these
46.
If the good has many uses, it will be (A) relatively elastic

(B) relatively inelastic
38
47.
If the demand for the good is made by a

consumer with high income, it will be (A) relatively inelastic
(C) unit elastic
(D) none of these
48.
If the good is durable, the demand will be(A) relatively inelastic

(C) nothing definite can be deduced
(D) none of these
49.
If the good takes up an insignificant share

of consumers' budget, it will be (A) relatively inelastic
(C) nothing definite can be deduced
(D) none of these
50.
If postponing the consumption of the good

is possible, the demand will be (A) relatively elastic
(C) perfectly inelastic
(D) none of these
51.
In the short run, if the price elasticity demand

is (A) relatively elastic
(B) perfectly elastic
(C) relatively inelastic
(D) perfectly inelastic
52.
If the price level is high, the good will be(A) relatively elastic
(B) unit elastic
(C) relatively inelastic
(D) none of these
53.
Income elasticity is a relation between (A) Price & Quantity

(B) Income & Quantity
(C) Price & Income
(D) None of these
54.
For a normal good, income elasticity lies

between (A) zero & infinity
(B) one & infinity
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(C) zero & one
(D) none of these
55.
For
(A)
(B)
(C)
(D)
a luxury good, income elasticity is greater than zero

less than zero
greater than one
less than one
56.
For
(A)
(B)
(C)
(D)
an inferior good, income elasticity isless than one

less than zero
greater than zero
greater than one
57.
If proportion of income spent on a good rises

as income rises, then income elasticity is
(A) greater than one
(B) greater than zero
(C) less than one
(D) less than zero
58.
If the proportion of income spent on a good

remains the same as income rises, then
income elasticity is (A) equal to one
(B) greater than zero
(C) less than one
(D) less than zero
59.
If the proportion of income spent on a good

decreases as income rises, then income
elasticity is (A) greater than one
(B) less than one
(D) less than zero
60.
61.
As income rises by 10%, the demand for

a good rises by 5% and so the good is (A) normal good
(B) luxury good
(C) inferior good
(D) nothing definite can be said
As income rises by 10%, the demand for
buttons does not rise at all. So buttons have
income elasticity of (A) One
(B) zero
(C) infinite
(D) none of these
39
62.
If there are only two goods in the world,

we will have (A) both normal or one normal, one inferior
(B) both inferior
(C) only (A), but not (B)
(D) both (A) and (B)
63.
Which of the following would cause a change

in the quantity demanded of cars produced
in India?
(A) a decrease in the average income of
car buyers.
(B) an increase in the number of people
over the legal driving age.
(C) concerns that the price of cars will
increase next year.
(D) a decrease in the price of cars produced
by Indian car companies.
64.
If we have two parallel and downward sloping

demand curves, then at the same price, the
elasticity of demand will be (A) same
(B) higher for the demand curve closer to
the origin
(C) higher for the demand curve away from
the origin
(D) none of these
65.
If cross elasticity is zero, goods are (A) substitutes

(B) unrelated
(C) complements
(D) none of these
66.
If cross elasticity is positive, the two goods

are (A) Complements
(B) substitutes
(C) unrelated
(D) none of these
67.
If cross elasticity is negative, the two goods

(A) complements
(B) substitutes
(C) unrelated
(D) none of these
68.
Expansion and contraction in demand are

caused by(A) Change in price of a commodity
(B) Change in income
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(C) Change in prices of related goods

(D) Change in population
69.
70.
71.
72.
73.
74.
75.
individual's demand curve for a commodity.

Which one is it?
(A) the preference of the individual
Which of the following factors generally keeps

the price elasticity of demand for a good
low?
(A) Availability of substitutes
(B) High proportion of income spent on it
(C) Its low price
(D) Large number of possible uses of a
commodity
(B) his monetary income

(C) the price of the good under consideration
(D) the prices of other goods
76.
Which of the following pairs of goods is an

example of substitutes?
(A) Tea and sugar
(B) Tea and coffee
(C) Pen and ink
Other things remaining constant, the law

of demand states (A) Demand for a commodity is inversely
related to its price
(B) As demand rises, price rises
(C) The demand for a commodity depends
on its price, level of income and price
of related goods
(D) Price is not related to demand
(D) Shirt and trousers

77.
In the case of a straight line demand curve

meeting the two axes, the price-elasticity
of demand at the mid-point of the line would
be (A)
(B)
(C)
(D)
Demand for a commodity refers to (A) Desire for the commodity

(B) Need for the commodity
(C) Quantity demanded of that commodity
(D) Quantity of the commodity demanded
at a certain price during any particular
period of time.
78.
If income elasticity for the household for

good A is 2, then it is a (A) necessity item
(B) inferior goods
(C) luxurious item
(D) comfortable item
0
1
1.5
2
The law of demand, assuming other things

to remain constant, established the
relationship between (A) Income of the consumer and the quantity
of a good demanded by him
(B) Price of a good and the quantity
demanded
(C) Price of a good and the demand for
its substitute
(D) Quantity demanded of a good and the
relatives prices of its complementary
goods
When the price of a substitute of good X

falls, the demand for X (A) Rises
(B) Falls
(C) Remains unchanged
(D) Any of the above.
79.
Identify the coefficient of price-elasticity of

demand when the percentage increase in
the quantity of a good demanded is smaller
than the percentage fall in its price (A) Equal to one
(B) Greater than one
(C) Smaller than one
(D) Zero
Contraction of demand is the result of (A) decrease in the number of consumers

(B) increase in the price of the good
concerned
(C) increase in the prices of other goods
(D) decrease in the income of purchasers.
80.
All but one of the following are assumed

to remain the same while drawing an
40
In a free market economy, when consumers

increase their purchase of a good and the
level of _____exceeds____then prices tend
to rise (A) demand, supply
(B) supply, demand
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(C) Cross elasticity between X and Y is
one.
(D) Cross elasticity between X and Y is
negative.
(C) prices, demand

(D) profits, supply
81.
If the demand for a good is inelastic, an

increase in its price will cause the total
expenditure of the consumers of the good
to -
87.
More may be demanded at a higher price

in the case of (A) Giffen goods
(B) Normal goods
(C) Luxury goods
(D) All are true
88.
___pair of commodities is an example of

substitutes (A) Coffee and milk
(B) Diamond and cow
(C) Pen and ink
(D) Mustard oil and coconut oil
89.
If the price of good A increases relative to

the price of substitutes B and C, the demand
for (A) B will increase
(B) C will increase
(C) B and C will increase
(D) B and C will decrease
90.
If the railways are making losses on passenger

traffic, they should lower their fares. The
suggested remedy would only work, if the
demand for rail travel had a price elasticity
of (A) Zero
(B) Greater than zero but less than one
(C) One
(D) Greater than one
91.
Which of the following influence most the

price level in the very short-run period?
(A) demand
(B) supply
(C) cost
(D) production
92.
Demand for a good will tend to be more

elastic, if (A) It represents a small part of the
consumer's income
(B) The good has many substitutes available
(C) It is a necessity (as opposed to luxury)
(D) There is little time for the consumer
to adjust to the price change
(A) Remain the same

(B) Increase
(C) Decrease
(D) Any of the these
82.
Regardless of changes in its price, if the

quantity demanded of a good remains
unchanged, then demand curve for the good
will be (A) Horizontal
(B) Vertical
(C) Positively sloped
(D) Negatively sloped
83.
If a point on a demand curve of any commodity

lies on X-axis then the price elasticity of
demand of that commodity at that point will
be (A) Infinite
(B) More than zero
(C) Less than zero
(D) zero
84.
If the price of Pepsi decreases relative to

the price of Coke and 7-Up, the demand
for (A) Coke will rise
(B) 7-Up will decrease
(C) Coke and 7-Up will increase
(D) Coke and 7-Up will decrease
85.
Which one of the following is not the method

of forecasting demand?
(A) Expert opinion method
(B) Total outlay method
(C) Controlled experiment method
(D) Collective opinion method
86.
If goods X and Y are substitutes, then (A) Cross elasticity between X and Y is
zero.
(B) Cross elasticity between X and Y is
positive.
41

93.
94.
95.
96.
97.
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(C) It is perfectly inelastic.
(D) It is inelastic.
If point-C divides the demand curve in two

equal parts, then elasticity at points-C equals(A) Zero
(B) Five
(C) Two
(D) One
98.
In Q. 94 above, suppose the income of the

residents of Ecoville increases by 50% and
the quantity of fresh milk demanded increases
by 30%. What is the income elasticity of
demand for fresh milk?
(A) 0.5
(B) 0.6
(C) 1.25
(D) 1.50
99.
In Q. 94 above, if as a result of a change

in price, the quantity supplied of a good
remains unchanged, we conclude that (A) elasticity of supply is perfectly inelastic
(B) elasticity of supply is relatively more
elastic
(C) elasticity of supply is inelastic
(D) elasticity of supply is relatively lesselastic
A milk seller sells fresh milk @ Rs. 20 per

litre. At this price, 400 litres of milk were
sold per month. After some time, the price
was raised to Rs 30 per litre. Following the
price rise:
Only 200 litres of milk was sold every

month.
The number of boxes of cereal

customers bought went down from
280 to 240 p.m.
The number of packets of powdered

milk
customers bought went up from 90

to 220 op.m.
The price elasticity of demand, when fresh

milk's price increases from Rs. 20 per litre
to Rs 30 per litre is equal to (A) 2.5
(B) 1.0
(C) 1.66
(D) 2 .66
100. In Q. 94 above, we can say that fresh milk

in economics sense is a/an -
In Q. 94 above, the cross elasticity of monthly

demand for cereal, when the price of fresh
milk increases from Rs. 20 to Rs. 30 is
equal to (A) -0.38
(B) +0.25
(C) -0.19
(D) +0.38
101. Suppose the demand for meals at a mediumpriced restaurant is elastic. If the management
of the restaurant is considering raising prices,
it can expect a relatively -
(A) luxury good

(B) inferior good
(C) normal good
(D) nothing can be said.
(A) large fall in quantity demanded

(B) large fall in demand
(C) small fall in quantity demanded
(D) small fall in demand
In Q. 94 above, the cross elasticity of monthly

demand for powdered milk, when the price
of fresh milk increases from Rs 20 to Rs
30 per litre is equal to (A) + 1.05
(B) -1.05
(C) -2.09
(D) + 2.09
102. The law of demand refers to (A) price-supply relationship

(B) price- cost relationship
(C) price-demand relationship
(D) price-income relationship
103. An increase in demand can result from (A) a decline in market price.
In Q. 94 above, what can be said about the

price elasticity of demand for fresh milk?
(A) It is perfectly elastic.
(B) It is elastic.
(B) an increase in income

(C) a reduction in the price of substitutes
(D) an increase in the price of complements
42
CPT

110. A drought in India leads to unusually low
level of wheat production. This would lead
to a rise in the price of wheat and fall in
the quantity of wheat demanded due to (A) excess demand at the original price
(B) excess supply at the original price
(C) the supply curve shifting to the right
(D) the demand curve shifting to the left
104. A movement along the demand curve for soft

drinks is best described as (A) An increase in demand
(B) A decrease in demand
(C) A change in quantity demanded
(D) A change in demand
105. If a good is a luxury, its income elasticity
of demand is (A) Positive and less then 1
(B) Negative but greater than -1
(C) Positive and greater than 1
(D) Zero
111. The
(A)
(B)
(C)
law of demand is a quantitative statement

A qualitative statement
Both a quantitative and a qualitative
statement
(D) Neither a quantitative nor a qualitative
statement
106. A necessity is defined as a good having (A) a positive income elasticity of demand
(B) a negative income elasticity of demand
(C) an income elasticity of demand less
than 1
(D) an own price elasticity of demand less
than 1
112. All of the following are determinants of demand

except (A) Tastes and preferences
(B) Quantity supplied
(C) Income
(D) Price of related goods
107. Which of the following is incorrect?

(A) The cross elasticity of demand for two
substitutes is positive.
(B) The income elasticity of demand is the
percentage change in quantity
demanded of a good due to a change
in the price of a substitute.
(C) The cross elasticity of demand for two
complements is negative.
(D) The price elasticity of demand is always
negative, except for Giffen goods.
113. If the elasticity of demand for a commodity

is perfectly inelastic, then which of the following
is incorrect?
(A) The commodity must be essential to
those who purchase it.
(B) The commodity must have many
substitutes.
(C) The commodity will be purchased
regardless of increase in its price.
(D) The elasticity of demand for this
commodity must equal zero.
108. The demand for a factor of production is

said to be a derived demand because (A) it is a function of the profitability of
an enterprise.
(B) it depends on the supply of
complementary factors.
(C) it stems from the demand for the final
product.
(D) it arises out of means being scarce
in relation to wants.
114. If a good has price elasticity greater than

one then (A) Demand is unit elastic and a change
in price does not affect sellers' revenue.
(B) Demand is elastic and a change in price
causes sellers' revenue to change in
the opposite direction.
(C) Demand is inelastic and a change in
price causes sellers' revenue to change
in the same direction.
(D) None of the above is correct.
109. Positive income elasticity implies that as

income rises, the demand for commodity(A) rises
(B) falls
(C) remains unchanged
(D) becomes zero
115. If an increase in the price of Blue Jeans

leads to an increase in the demand for Tennis
Shoes, then Blue Jeans and Tennis Shoes
are (A) complements
(B) inferior goods
43
CPT
122. A decrease in price will result in increases
in total revenue, if-
(C) normal goods

(D) substitutes
(A) The percentage change in quantity

demanded is less than the percentage
change in price.
116. If consumers always spend 15% of their

income on food, then the income elasticity
of demand for food is (A) 1.50
(B) 1.15
(C) 1.00
(D) 0.15
(B) The percentage change in quantity

demanded is greater than the percentage
change in price.
(C) Demand is inelastic.
(D) The consumer is operating along a linear
demand curve at a point at which the
price is very low and the quantity
demanded is very high.
117. If an increase in consumer incomes leads

to a decrease in the demand for camping
equipment, then camping equipment is (A) A normal good
(B) None of these answers
(C) An inferior good
(D) A substitute good
123. An increase in price will result in an increase

in total revenue, if(A) The percentage change in quantity
demanded is less than the percentage
change in price.
118. What is the price elasticity of demand when,

price changes from Rs. 10 to Rs. 12 and
correspondingly demand changes from 6 units
to 4 units?
(A) 0.833
(B) 1.6
(C) 2.2
(D) 1.833
(B) The percentage change in quantity

demanded is greater than the percentage
change in price.
(C) Demand is elastic.
(D) The consumer is operating along a linear
curve at a point at which the price is
very high and the quantity demanded
is very low.
119. What is the new quantity demanded when

price elasticity is 1 and price changes from
Rs. 15 to Rs. 10 and the original quantity
demanded was 10 units?
(A) 15 units
(B) 20 units
(C) 8 units
(D) 12 units
124. When as a result of decrease in the price

of good, the total expenditure made on it
decreases we say that price elasticity of
demand is (A) less than unity
(B) unity
(C) zero
(D) greater than unity
120. What is.the original price of a commodity

when price elasticity is 0.71 and demand
changes from 20 units to 15 units and the
new price is Rs. 10?
(A) Rs. 15
(B) Rs. 18
(C) Rs. 20
(D) Rs. 8
125. The point elasticity at the mid-point on the

demand curve is (A) one
(B) zero
(C) less than one
(D) less than zero
126. The income of a household rises by 20 percent,
the demand for computer rises by 25%, this
means computer (in Economics) is a / an-
121. In the case of a Giffen good, the demand

curve will be (A) horizontal
(B) downward-sloping to the right
(C) backward falling to the left
(D) upward-sloping to the right
(A) inferior good

(B) luxury good
(C) necessity
(D) can't say
44
CPT
127. The
(A)
(B)
(C)
(D)
exceptions to the law of demand areVeblen goods (i.e. conspicuous goods)

Giffen goods
both
none
The demand for Y increases from 25

units to 50 units.
The demand for commodity Z
decreases from 75 units to 50 units.
The price elasticity of demand, when the
price of X decreases from Rs. 20 per piece
to Rs. 10 per piece will be equal to -
128. If the price of 'X' rises by 10% and the quantity

demanded falls by 10%, 'X' has (A) Inelastic demand
(B) Unit elastic demand
(C) Zero elastic demand
(D) Elastic demand
(A) 0.6
(B) 1.6
(C) 0.5
(D) 1.5
129. Demand for final consumption arises in (A) household sector only
(B) government sector only
(C) both household and government sectors
(D) neither household for government
sectors
133. In Q. 132 above, the cross elasticity of demand

for commodity Y when the price of X decreases
from Rs. 20 per piece to Rs. 10 per piece
will be equal to (A) -1.5
(B) +1.5
130. When the quantity demanded changes by

a larger percentage than does price, elasticity
is termed as (A) inelastic
(B) perfectly elastic
(C) elastic
(D) perfectly inelastic
(C) +l
(D) -l
134. In Q. 132 above, the cross elasticity of
commodity Z when the price of X decreases
from Rs. 20 per piece to Rs. 10 per piece
will be equal to (A) +1.66
131. The price elasticity of demand for burger

is (A) The change in the quantity demanded
of burger, when burger price increases
by 30 paise per rupee.
(B) The percentage increase in the quantity
demand of burger, when the price of
burger falls by 1% per rupee.
(C) The increase in the demand for burger,
when the price of burger falls by 10%
per rupee.
(D) The decrease in the quantity demand
of burger, when the price of burger falls
by 1% per rupee.
(B) + 0.6
(C) -1.66
(D) -0.6
135. In Q. 132 above, what can be said about
the price elasticity of demand for commodity
X?
(A) Demand is unit elastic
(B) Demand is highly elastic
(C) Demand is inelastic
(D) Demand is perfectly elastic
136. In Q. 132 above, suppose the income of
the consumers increases by 50% and the
demand for commodity X increases by 20%,
what will be the income elasticity of demand
for commodity X?
132. X, Y and Z are three commodities, where

X and Y are complementary; whereas X and
Z are substitutes.
A shopkeeper sells commodity X at Rs. 20
per piece. At this price, he is able to sell
100 pieces of X per month. After some time,
he decreases the price of X to Rs. 10 per
piece. Due to the price decrease:
He is able to sell 150 pieces of X
per month.
(A) 0.04
(B) 0.4
(C) 4.00
(D) -4.00
45
CPT
(C) 2.0
137. In Q. 132 above, we can say that commodity

X in the economic sense is a/an -
(D) 3.0
(A) Inferior foods
143. The demand for a good will tend to be more

elastic, if -
(B) Giffin Goods

(C) Normal Goods
(A) The good has many substitutes.
(D) Luxury Goods.
(B) The good is a luxury (as opposed to

a necessity).
138. In case of Giffen goods, the demand curve

will slope-
(C) The good is a small part of the consumer

to adjust to the change in prices.
(A) upward
(D) There is a great deal of time for the

consumer to adjust to the change in
prices.
(B) downward
(C) horizontal
(D) vertical
144. Cross elasticity of demand between tea and

coffee is -
139. The price of hot dogs increases by 22%

and thequantity of hot dogs demanded falls
by 25%. This indicates that demand for hot
dogs is -
(A) positive
(B) negative
(A) Elastic
(C) zero
(B) Inelastic
(D) infinity
(C) Unitarily elastic
145. Suppose a department store has a sale on

its silverware. If the cost of plate-setting
is reduced from Rs. 300 to Rs. 200 and the
quantity demanded increases from 3,000
plate-setting to 5,000 plate-setting, what
is the price elasticity of demand for silverware?
(D) Perfectly elastic

140. If the quantity demand of beef increases
by 5%, when the price of chicken increases
by 20%, the cross-price elasticity of demand
between beef and chicken is -
(A) 0.8
(A) - 0.25
(B) 1.0
(B) + 0.25
(C) 1.25
(C) -4
(D) 1.50
(D) +4
146. If the income elasticity is greater than one

the commodity is -
141. A discount store has a special offer on CDs.

It reduces their price from Rs. 150 to Rs.
100. Suppose the store manager observes
that the quantity demanded increases from
700 CDs to 1,300 CDs, what is the price
elasticity of demand for CDs?
(A) necessity
(B) luxury
(C) inferior goods
(D) none of these
(A) 0.8
147. If electricity demand is inelastic, and electric

rates increase, which of the following is likely
to occur?
(B) 1.0
(C) 1.25
(D) 1.50
(A) Quantity demand will fall by a relatively

large amount.
142. If the local pizzeria raises the price of a

medium pizza from Rs.60 to Rs. 100 and
the quantity demanded falls from 700 pizzas
a night to 100 pizzas a night, the price
elasticity of demand for pizzas is -
(B) Quantity demanded will fall by a relatively

small amount.
(C) Quantity demanded will rise in the short
run, but fall in the long run.
(A) 0.67
(D) Quantity demanded will fall in the short

run, but rise in the long run.
(B) 1.5
46
CPT
148. Demand curve in most cases slopes (A) downward towards right
(B) vertical and parallel to Y-axis
(C) upward towards left
(D) horizontal and parallel to X-axis
154. What is cross elasticity of demand, when

the price of petrol rises by 10% and demand
for car falls by 5% (A) -0.5
(B) -0.2
(C) 0.5
(D) 0.2
149. The concept of elasticity of demand was

developed by (A) Alfred Marshall
(B) Edwin Camon
(C) Paul Samuelson
(D) Frederic Benham
155. The price elasticity of demand is defined

as the responsiveness of(A) Price to a change in quantity demanded
(B) Quantity demanded to a change in price
(C) Price to a change in income
(D) Quantity demanded to a change in
income
150. Price elasticity of demand is defined as (A)
156. Suppose the price of moving seen at a theater

rises from Rs. 120 per person to Rs. 200
per person. The theater manager observes
that the rise in price causes attendance at
a given movie to fall 300 person to 200 person.
What is the price elasticity of demand for
movies?
(A) 0.5
(B) 0.8
(C) 1.0
(D) 1.2
(B) Proportionate change in Qty. demanded

Change in Price
(C)
Change in Quantity demanded

Proportionate change in Price
(D)
151. What is the income elasticity of demand,
Proportionate
Change in Quantity
change in
demanded
Quantity
demanded
when
income
changed by 20% and demand
changes
by 40% ?
Proportionate
Change in Price
change
in Price
(A)
(B)
(C)
(D)
157. Which of the following statements is correct?

(A) Inferior goods have negative income
elasticity of demand.
(B) Shorter the time period, greater is the
possibility of increasing the supply of
a product in response to demand.
(C) In a free economy, the State decides
what, how and for whom to produce.
(D) Ceteris Paribus, if there is a fall in the
supply of a product, the price will remain
constant.
1/2
2
- 0.33
none of these
152. For goods increase in income leads to

decrease in demand (A) abnormal
(B) normal
(C) inferior
(D) superior
158. For
the
(A)
(B)
(C)
(D)
153. More is demanded at a higher price (A) if the good is Giffen.

(B) if the good is normal.
(C) if the good has close substitutes.
(D) none of the above.
47
goods, if TR is always constant, then

elasticity of demand is one
zero
infinite
none of these
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82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
151.
152.
153.
154.
155.
156.
157.
158.
48
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CHAPTER 3
THE THEORY OF CONSUMERS BEHAVIOUR

WHAT IS UTILIITY
Utility: When a consumer consumes a commodity, he gets some satisfaction. This satisfaction
is known as utility in economics. Utility is subjective and varies from person to person.
Thus, utility is want satisfying power of a commodity. For example, Bread has the power to
satisfy hunger; Books fulfill our desire for knowledge, a TV satisfies our desire for entertainment.
It is found not only in harmless goods, but also in harmful goods. For example, there is utility
in liquor, as it satisfies the wants of drunkards.
Marginal Utility: Marginal utility is an additional utility derived from the consumption of an additional
unit of a commodity. Symbolically,
Marginal Utility: MUn = TUn - TU n-1
Total Utility: Total utility is simply the sum of separate utilities derived from the consumption
of different units. Symbolically,
Total Utility: TU =
MU
Measurement of Utility: There are two approaches regarding the measurement utility:
1.
Cardinal Approach
By Alfred Marshall
2.
Ordinal Approach
By Hicks & Allen

CARDINAL UTILITY APPROACH
-Assumptions of this Approach:

1.
Utility is cardinally measurable: That means that utility can be presented numerically.
Thus, as per this approach, money is the measuring rod of utility. The amount of money,
which a person is ready to pay rather than go without it, is the utility that he derives
from the consumption of that commodity.
MUx
px
2.
The marginal utility of money must remain constant throughout the consumption.
The marginal utility of money is calculated as follows:
Marginal Utility of Money: MUm =
where, MUx is the marginal utility of X and Px is the price of X.
However, this assumption is not realistic.
3.
Hypothesis of independent utilities: According to Marshall, the total utility derived from
the consumption of the whole collection of goods is simply the sum of separate utilities
of goods, this assumption is also unrealistic.
4.
Rational: Every consumer is rational. He seeks to maximise his satisfaction by maximisation

of total utility.
LAW OF DIMINISHING MARGINAL UTILITY
It was formulated by H. H. Gossen. It is also known as 'Gossen's First Law''. This law was
later on developed by Prof. Marshall. According to this law, as a consumer consumes more and more
units of a commodity, the marginal utility of that commodity goes on decreasing.
For example, if a consumer consumes three breads, then according to this law, the utility derived
from second bread would be less than that of the first and the utility derived from the third will be
less than that of the second.
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This law can also be illustrated by the following table:

Marginal & Total Utility Schedule
Consumption of
Bread
1
2
3
4
5
6
7
Graphical Presentation:
Marginal utility
Total utility
10
8
6
3
1
0
-5
10
18
24
27
28
28
23
MU is the slope of TU
Limitation of the Law of Diminishing Marginal Utility :

1.
All the units consumed by the consumer should be identical in all respects. Otherwise,
this law may not operate. For example, if the quality of the second mango is superior
to the first, the consumer may derive more utility from the second mango.
2.
The commodity should be consumed in standard unit. Otherwise, this law will not apply.
For example, if water is given to a very thirsty man by a spoon, then second spoonful
water may give more utility than the first.
3.
Taste, preference and income of consumer should not change. If they change, this
law may not hold good.
4.
There should be no change in the price of the goods.
5.
There should be no time gap between the consumption of units, i.e. the consumption
should be made successively. For example, if Mr. A consumes two breads first in the
morning and the second in the evening, then the second bread may give more utility than
the first.
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6.
This law may not apply to goods like - Gold, Cash, etc. where a greater quantity may
increase the lust for it.
7.
The presence or absence of complementary or substitute goods may affect the utility.
For example, the utility derived from the consumption of tea may be seriously affected
by the absence of sugar.
+
Four Basic Assumptions of this Approach (Refer to P. No: 43)
CONSUMER'S SURPLUS/CONSUMER'S EQUILIBRIUM
What is Consumer's Surplus?

Consumers Surplus = (what a consumer is ready to pay) - (what he actually pays)
Consumers Surplus = (Marginal Utility) - (Market Price)
When Consumer will be in Equilibrium?

A consumer will be in equilibrium, when the Consumer's surplus = 0.
OR
A consumer will be in equilibrium, when MU = MP.

No. of units
Marginal utility
Market price
Consumer 's surplus
40
30
10
36
30
33
30
31
30
30
30
28
30
-2
25
30
-5
Fig: 3.2 shows that when the consumer consumes

Q1 quantity, he has to pay Rs. OP as market price,
but he derives the marginal utility equal to AQ?. Thus,
his gain is AC. The shaded area 'YPEA' show? the
total consumer's surplus. The marginal utility curve and
the market price curve meet at the point E. Therefore,
the consumer will be in equilibrium if he consumes
Q quantity of commodity.
Note: Consumer Surplus is highest in case of Necessities.
INDIFFERENCE CURVE APPROACH

( by Hicks & Allen )
Assumptions of this Approach;
1.
Rational
2.
Utility is ordinal: According to this approach, utility is not cardinally measurable, but
it is ordinal, i.e. a consumer can rank the different combination of two goods according
to his satisfaction.
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The combination, which gives highest satisfaction, will be given the highest rank and
the combination, which gives lowest satisfaction, will be given the lowest rank.
3.
Weak-ordering: Every consumer is in a position to select one of the following options:

(i)
He prefers combination A to B
(ii)
He prefers combination B to A
(iii)
He is indifferent to both combinations, i.e. both give the same level of satisfaction
4.
Consistency: If a consumer prefers the combination A to B, then he will never select the
combination B to A if both combinations are made available to him.
5.
Transitivity: If a consumer prefers the combination A to B and the combination B to C

then he will also prefer the combination A to C.
What is indifference curve?
An indifference curve is the curve, which shows all the combinations of two goods, which give
the same level of satisfaction to the consumer. Since all the combinations, give the same level of
satisfaction, the consumer is indifferent to them and so it is called indifference curve.
For example, suppose there are two goods, say X and Y and he consumes 20 units of Y and
one unit of X. Now, the consumer is asked what quantity of Y he is ready to sacrifice for an additional
unit of X in order to maintain the same level of satisfaction. Let us assume that he is ready to sacrifice
8 units of Y for an additional unit of good X, thus we have two combinations (1, 20) and (2, 12). In
this way, we can get a number of combinations as below:
Combination
A
B
C
D
Commodity X
1
2
3
4
Commodity Y
20
12
8
6
Diminishing Marginal
Rate of Substitutes
8 : 1
4 : 1
2 : 1
When we draw the above table on the graph, we derive a curve, known as Indifference Curve:-
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Properties of Indifference Curve:

1.
Indifference curve always has a negative slop. This is because, as a consumer increases
one unit of a commodity, it becomes necessary to reduce the consumption of the other
commodity to maintain the same level of satisfaction.
An indifference curve can never get the following shapes: (because the level of satisfaction
is not the same)
2.
Diminishing "Marginal Rates of Substitutes": This is because the consumer seeks to

sacrifice lesser and lesser quantity of Y for every increment in the quantity of X.
3.
An Indifference Curve is always convex to the origin: An indifference curve is always

convex to the origin due to the diminishing marginal utility. It cannot adopt the shapes
as shown in Fig: 4.7 and 4.8.
4.
Two Indifference Curves can never intersect: (Fig:

3.9)
But, it does not mean that the ICs are always parallel
to each other.
5.
A higher indifference curve will give a higher level

of satisfaction than the lower one.
INDIFFERENCE MAP
The map having two or more indifference curves

is called 'indifference Map'.
In the indifference map, two ICs can never intersect

each other.
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BUDGET LINE/PRICE LINE
A budget line is the line that shows all the combinations of two goods, which lie under and
on and beyond the purchasing power of the consumer.
To draw up a budget line, one should consider two things:
1.
Income of the consumer
2.
Price of both goods (say X and Y)
Let us assume the income of a consumer at Rs. 100/-. The price
of good-X at Rs. 20/- and of good-Y at Rs. 10/-. Now the consumer
has three options:1.
He can spend all the income on good-X
2.
He can spend all the income on good-Y,
3.
He can spend some money on good-X and the remaining
on good-Y
Now, if the consumer spends all his income on good-X, then he can get five units of good-X,
which is denoted by OB, but if he spends all his income on good-Y, then he can get 10 units of goodY, denoted by OA.
The line joining points A and B is called budget line and showing all the combinations of goodX and Y lying under and on and beyond the purchasing power of the consumer. For example:
If he selects any combination lying under the budget line (say P), then his whole income
will not be spent i.e. this combination lies under the purchasing power.
If he selects any combination lying on the budget line (say Q), then his whole income
will be spent, i.e. this combination lies on his purchasing power.
If he selects any combination lying over the budget line (say R), then he cannot afford
this combination i.e. this combination is beyond his purchasing power.
CONSUMER'S EQUILIBRIUM
A consumer is said to be in equilibrium, when he is getting maximum satisfaction and there

is no need to rearrange income distribution between the two goods (say x and y).
-The assumptions are as follows:
1.
The consumer has given an indifference map showing his scale of preference for the various
combinations of the two goods.
2.
The income of the consumer is fixed and he has to spend all the income.
3.
The prices of goods (i.e. X and Y) are fixed and unchanged.

+
Five basic assumptions of this approach (Refer to page 46)
- The Equilibrium point:

"The consumer will be in equilibrium if he selects the combination that lies on the indifference
curve, which is tangent to the budget line."
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In order to determine the consumer's equilibrium, consider the diagram: 3.12.
Fig: 3.12 Consumer's Equilibrium

At the tangency point C, budget line is tangent to IC3; therefore the slope of both must be equal.
The slope of the budget line is given by =
The slope of the IC 3 is given by
= MRSxy
=
[The same condition was proved by Prof. Marshall for 'consumer's equilibrium by his 'cardinal
MUx
MUx
Px Px MUy
==
approach']
PxPy
Py
MUy
Py
To conclude
The consumer will be in equilibrium
If he selects the combination that lies on the indifference curve which is tangent
to the budget line,
Or
If the marginal rate of substitution is equal to the price ratio between the two goods.
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Questions
1.
If both the commodities are bad, the IC will

be (A) convex to origin and downward sloping
(B) concave to origin and downward sloping
(C) convex to origin and upward sloping
(D) concave to origin and upward sloping
2.
If goods-X and Y are perfect substitutes, the

ICs are(A) horizontal
(B) vertical
(C) linear & upward rising
(D) linear & downward sloping
3.
A higher IC implies (A) same utility

(B) lesser level of utility
(C) higher level of utility
(D) none of these
4.
The maximum amount of Good-X the consumer

can buy (by using the budget line) where M
is his money income is given by (A) M / Px
(B) M / Py
(C) Px/M
(D) Py/M
5.
6.
7.
8.
If Good-x and y are the two commodities,

the consumer's equilibrium is established,
where (A) MUx / MUy =Px / Py
(B) MUx/MUy = x/y
(C) MRS = x / y
(D) Px/Py = x/y
9.
The sufficient condition regarding IC curves

are (A) IC s are concave to origin
(B) IC s are downward sloping
(C) IC s are convex to origin
(D) None of these
10. Utility may be defined as (A) level of satisfaction

(B) want satisfying power
(C) both (A) & (B)
(D) none of these
11. Cardinal theory of utility was proposed by(A) Hicks
(B) Allen
(C) Marshall
(D) Samuelson
If all prices and money income are doubled,

the consumer is (A) Better off
(B) Worse off
(C) Neither better off nor worse off
(D) None of these
If money income of the consumer increases,
other things being constant, the budget line
will(A) Shift rightwards
(B) Shift leftwards
(C) Shift rightwards in a parallel way
(D) Shift leftwards in a parallel way
12. The
(A)
(B)
(C)
(D)
Utility Theory considers constancy of MU of money

MU of money is variable
MU is constant for a particular good
none of these
13. The
(A)
(B)
(C)
(D)
ratio of MU of two goods is MRS

MRT
cannot be said
none of these
14. The law of equi-marginal utility considers the

price of money as (A) zero
(B) less than one
(C) more than one
(D) one
Who is the main exponent of Marginal utility

analysis?
(A) Paul Samuelson
(B) Hicks
(C) Keynes
(D) Marshall
15. The 'Diamond Water' controversy is explained

by(A) Total Utility
(B) Marginal Utility
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CPT
(C) Price Offered

(D) Quantity Supplied
(C) Robbins
(D) A.C. Pigou
16. Consumer surplus means (A) the area inside the budget line
(B) the area between the average revenue
and marginal revenue curves
(C) the difference between the maximum
amount a person is willing to pay for
a good and its market price
22. Constancy of MU of money in Marshallian

analysis means (A) zero income effect
(B) may be negative
(C) Both (A) & (B)
(D) none of these
23. Suppose you just purchased a television set
and realised you ended up with a consumer's
surplus. You tell your friends about it and
explain that the consumer's surplus arose
because (A) the price you were willing to pay was
less than the market price.
(B) the price you were willing to pay was
equal to the market price.
17. Diminishing MU does not imply (A) diminishing MRS

(B) increasing MRS
(C) cannot be said about MRS
(D) none of these
18. If a buyer's willingness to pay for a new car
is Rs. 2,00,000 and she is able to actually
buy it for Rs. 1,80,000 her consumer surplus
is (A) Rs. 18,000.
(B) Rs. 20,000.
(C) Rs. 2,000.
(D) Rs. 0.
(C) the price you were willing to pay was

more than the market price.
(D) you were willing to pay the market price,
but the equilibrium price was lower.
24. V and G each buy a ticket to a newly released
movie. V is ready to pay Rs. 180 and G Rs.
200 for a ticket. The actual ticket price is
Rs. 100. This means (A) The total opportunity cost of the ticket
is Rs.380.
(B) The total consumer surplus is Rs. 180.
19. Demand curve can be derived from (A) MU curve

(B) TU curve
(C) Both
(D) None
(C) The total producer surplus is Rs. 380.

(D) The combined producer and consumer
surplus is Rs. 560.
20. Suppose there are three identical vases

available to be purchased. Buyer 1 is willing
to pay Rs. 30 for one, buyer 2 is willing to
pay Rs. 25 for one, and buyer 3 is willing
to pay Rs. 20 for one. If the price is Rs. 25,
how many vases will be sold and what is
the value of consumer surplus in this market?
(A) Three vases will be sold and consumer
surplus is Rs. 80.
(B) One vase will be sold and the consumer
surplus is Rs. 5.
(C) One vase will be sold and consumer surplus
is Rs. 30.
(D) Two vases will be sold and consumer
surplus is Rs. 5.
25.
IC analysis considers that (A) consumer is rational and can rank a

combination of goods based on his
preference.
(B) consumer is rational but cannot rank
a combination of goods.
(C) consumer is irrational and can rank a
combination of goods based on his
preference.
(D) none of these
26. The slope of IC is given by (A) -MUx/MUy
21. Marginal utility approach to demand was given

by -
(B) MRS
(A) J.R. Hicks
(C) Both (A) & (B)
(B) Alfred Marshall
(D) None of these

57
CPT
27. The difference between the price a consumer

is willing to pay and the price he actually
pays is called -
(D) none of these

33. When marginal utility is negative, then total
utility -
(A) excess price

(B) excess demand
(A) Becomes zero
(C) consumer surplus
(B) Becomes negative
(D) exploitation
(C) Increases
28. IC cannot -
(D) Decreases
(A) intersect
34. A consumer attains equilibrium at a point on

the indifference curve, where Px
(A) MRSxy =
Py
(B) MRSxy >
(B) be parallel to one another

(C) touch the axis
(D) none of these
(C) MRSxy <
29. Economic analysis expects the consumer

to behave in a manner which is -
(D) MRSxy = Px.Py
(A) Rational
35. A consumer's equilibrium is attained at a point,

where the budget line is -
(B) Irrational
(C) Emotional
(A) Above an indifference curve
(D) Indifferent.
(B) Below an indifference curve

(C) Tangent to an indifference curve
30. The law of diminishing marginal utility implies

that -
(D) Cuts an indifference curve.
(A) for each extra unit of X consumed, holding

constant consumption of other goods,
the total utility increases.
36. In economics, what a consumer is ready to

pay minus what he actually pays, is termed
as -
(B) total utility remains unchanged regardless

of how many units of X are consumed.
(A) Consumer's equilibrium
(C) marginal utility will increase at a constant

rate as more units of X are consumed.
(C) Consumer's expenditure
(B) Consumer's surplus

(D) each extra unit of X consumed, holding

constant consumption of other goods,
adds successively less to total utility.
37. Cardinal measure of utility is required in (A) Marginal Utility theory

(B) Indifference curve
31. After reaching the saturation point, the

consumption of additional units of the
commodity cause -
(C) Revealed preference

(D) None
(A) Total utility to fall and marginal utility

to increase.
38. Consumer surplus is highest in the case of(A) Necessities
(B) Total utility and marginal utility both to

increase.
(B) Luxuries
(C) Total utility to fall and marginal utility

to become negative.
(D) Conventional necessities
(C) Comforts
39. Which of the following statements is incorrect?
(D) Total utility to become negative and

marginal utility to fall.
(A) An indifference curve must be downwardsloping to the right,
32. IC analysis is based on -
(B) Convexity of a curve implies that the slope

of the curve diminishes as one moves
from left to right.
(A) ordinal concept of utility

(B) cardinal concept of utility
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CPT

44. In Q. 43 above, what is the marginal utility,
when consumption increases from 8 units
to 9 units?
(A) 3000
(B) 200
(C) 2000
(D) 1500
(C) The elasticity of substitution between

two goods to a consumer is zero.
(D) The total effect of a change in the price
of a good on its quantity demanded is
called the price effect.
40. Marginal utility of a commodity depends on
its quantity and is (A) inversely proportional to its quantity
(B) not proportional to its quantity
(C) independent of its quantity
45. An indifference curve slopes down towards

right since more of one commodity and less
of another results in (A) Same satisfaction
(B) Greater satisfaction
(C) Maximum satisfaction
(D) Decreasing expenditure
41. By consumer surplus economists mean (A) The area inside the budget line.
(B) The area between the average revenue
and marginal revenue curves.
(C) The difference between the maximum
amount a person is willing to pay for
a good and its market price.
46. Which one of the following assumptions is

not necessary for the cardinal utility theory?
(A) Rationality of the consumer
(B) Constant marginal utility of money
(C) Perfectly competitive market
(D) Additivity of utility
42. Indifference curve is downward slopping (A) always

(B) sometimes
(C) never
(D) none of these
47. Total utility is maximum when (A) marginal utility is zero

(B) marginal utility is at its highest point
(C) marginal utility is equal to average utility
(D) average utility is maximum
43. Consider the following table Number of

products
Total
utility
1800
3400
4800
6000
7000
7800
8400
8800
9000
Marginal
utility
48. Which among the following is the drawback

of consumer surplus (as explained in marginal
utility analysis)?
(A) it is highly hypothetical and imaginary
(B) it ignores the interdependence between
the goods
(C) it cannot be measured in terms of money
because marginal utility of money changes
(D) all of the above
49. The
(A)
(B)
(C)
(D)
What is the marginal utility when consumption

increases from 4 units to 5 units?
(A) 3000
(B) 1200
(C) 1000
(D) 1500
law of consumer surplus is based onindifferent curve analysis

revealed preference theory
law of substitution
the law of diminishing marginal utility
50. Which of the following is a property of an

indifference curve?
(A) It is convex to the origin.
(B) The marginal rate of substitution is
constant as you move along an indifference
curve.
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CPT
(C) Marginal utility is constant as you move

along an indifference curve.
57. MU is (A) sum of utility derived from different units

of a good
(B) total utility/no. of units consumed
(C) slope of TU
(D) none of these
(D) Total utility is greatest where the 45degree line cuts the indifference curve.
51. The second glass of lemonade gives lesser
satisfaction to a thirsty boy; this is a clear
case of-
58. MU
(A)
(B)
(C)
(D)
(A) Law of demand

(B) Law of diminishing returns
(C) Law of diminishing marginal utility
(D) Law of supply
can be zero
positive and negative
only (A) or (B)
both (A) and (B)
59. Under income effect, consumer (A) moves along the original indifference curve
(B) moves to higher or lower indifference curve
(C) always purchases higher quantities of
both the commodities
(D) none of the above.
52. Under marginal utility analysis, utility is

assumed to be a (A) cardinal concept
(B) ordinal concept
(C) indeterminate concept
60. While analysing Marshall's measure of

consumer surplus one assumes (A) Imperfect competition
(B) Perfect competition
(C) Monopoly
(D) Monopsony
53. The indifference curve approach does not

assume (A) Rationality on the part of consumers
(B) Ordinal measurement of satisfaction
(C) Consistent consumption pattern behaviour
of consumers
61. When economists speak of the utility of a

certain good, they are referring to (A) The demand for the good
(B) The usefulness of the good in consumption
(C) The satisfaction gained from consuming
the good
(D) The rate at which consumers are willing
to exchange one good for another
(D) Cardinal measurement of utility

54. Utility may be defined as (A) the power of a commodity to satisfy wants
(B) the usefulness of a commodity
(C) the desire for a commodity
55. A Consumer stops purchasing additional units
of a commodity, when -
62. Which one is not an assumption of the theory

of demand based on analysis of indifference
curves?
(A) Given scale of preferences as between
different combinations of two goods
(B) Diminishing marginal rate of substitution
(C) Constant marginal utility of money
(D) Consumers would always prefer more
of a particular good to less of it, other
things remaining the same
(A) marginal utility starts declining.

(B) marginal utility becomes zero.
(C) marginal utility of a commodity is equal
to the marginal utility of money.
(D) total utility is increasing.
56. The indifference curve approach assumes (A) consumer has full knowledge of all relevant
information
63. When indifference curve is L-shaped, then

two goods will be (A) perfect substitute goods
(B) substitute goods
(C) perfect complementary goods
(D) complementary goods
(B) all commodities are homogenous and

divisible
(C) prices of commodities remain the same
throughout the analysis
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Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
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58.
59.
60.
61.
62.
63.
C
.
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CHAPTER 4
THE THEORY OF SUPPLY

MEANING OF SUPPLY
The word supply refers to the quantity of a service or a commodity that the suppliers are
willing to offer for sale
able to offer for sale
at a certain price during a particular period.

DETERMINANTS OF SUPPLY
1.
Price of Goods : Ceteris paribus, if the price rises, then

its supply will also rise and vice - versa. It is also known
as the law of supply.
Symbolically,
Price
2.
Supply
Price of related goods: There are two types of related

goods:
(a)
Complementary goods
(b)
Substitutes or competing goods
1.
2.
3.
4.
5.
6.
7.
8.
9.
Determinants of Supply
Price of Goods
Price of Related Commodity
Cost of factors of production
State of Technology
Time Element
Taxation Policies and Subsidies
Means of Transportation
Objectives of firm
Future expectation about price
Complementary goods: In this case, ceteris paribus, when the price of a good rises, then
the supply of its complementary good also rises and vice-versa.
Symbolically,
Commodity (Pen)
P
S
P
Substitute of Commodity (Ink)

P no change
S
P no change
Substitutes or competing goods: In this case, ceteris paribus, when the price of a good rises,
the supply of its substitutes will fall and vice-versa.
Symbolically,
Commodity (Tea)
S
P
P
3.
Substitute of Commodity (Coffee)

P no change
S
P no change
Cost of factors of production: If the cost of any factor of production rises, then its supply
will fall and vice-versa.
In this case, the supply of the commodity will increase only when the market price of the commodity
rises.
62
CPT
4.
5.
6.
7.
8.
9.

State of Technology: Ceteris paribus, if a new technology of production is developed, which
makes it possible to produce the same level of production at lower cost, then the supply of
the commodity will rise.
Time Element: Refer to market.
Taxation and Subsidies: Ceteris paribus, if the government increases the rate of taxes on
a product under its taxation policies, then its supply will fall and vice-versa. However, ceteris
paribus, an increment in the subsidies on a product will increase the supply of that product.
Means of Transportation: Means of transportation also affects the supply of a commodity. If
there is proper means of transportation, then the supply will be high and in the inverse case,
it will be lower.
Objectives of Firm.
Future expectation about price.
LAW OF SUPPLY
Meaning:
1.
Refer to the Price Factor of Supply on P.No:55.
2.
Ceteris Paribus
Supply Schedule and Supply Curve:
Supply Schedule
Price (in Rs.)
1
2
3
4
5
Supply (in units)

2
10
14
16
18
% change in the quantity supplied

% change in the price of commodity
SS = Supply Curve
In the diagram 4.1, we see that
the supply curve is positively
sloped, which shows that the
supply of the commodity rises
with the rise in price and falls
with a fall in price.
ELASTICITY OF SUPPLY
Elasticity of supply refers to the responsiveness of quantity supplied to the change in price of the
commodity.
Elasticity of Supply
: es =
63
CPT
Q2 - Q1
P1
P1
Q
= P - P x Q = P x Q
2
1
1
1
Where,
P1 = Original price
P2 = Price after change
Q1 = Quantity supplied before change in price
Q2 = Quantity supplied after change in price
Measurement of Elasticity of Supply
There are two methods:1.
Point Method/Point Elasticity: Under this method, the elasticity of supply is calculated by
keeping only one point as base. The formula is:
ep
p1 q2 - q1
x
q1 p2 - p1
Formula -1
p1 dq
x
q1 dp
Formula - 2
For example, if the supply function is q = 120p +100, the point elasticity at price Rs.20 will
be found as follows:
dq
d(120 p + 100)
=
= 120
dq
dp
ep =
dq p
x
dp
q
On putting corresponding values: 2.
Arc Method :
q2
q2
p2
Arc Elasticity : e =
p
2
- q1
+ q1
2
- p1
+ p1
2
x 100
=
x 100
q2 - q1
p + p1
x 2
p2 - p1
q2 + q1
Where,
p 1 and q1, are original price and quantity supplied,
p 2 and q 2 are new ones.
For example, If the supply function is qs = 120p +100, the arc elasticity between Rs. 10 and
Rs.20 will be calculated as follows:
64
CPT

Arc Elasticity : e =
If price (p 1) = Rs. 10, then Supply (q 1) = (120 x 10) +100 = 1300
If price (p 2) = Rs. 20, then Supply (q 2) = (120 x 20) +100 = 2500
On putting the corresponding values in the formula:
e =
2500 - 1300
10 + 20
x
= 0.947 (approx.)
20 -10
2500 + 1300
Types/Degrees of Elasticity of Supply

Numerical
Value
Description
e = 0
There is no impact of change in price on the supply of a

commodity (See Fig: 4.2)
2. Inelastic
(Relatively Less
Elastic)
0 < e < 1
% change in quantity supplied < % change in price (See

Fig: 4.3)
3. Unitary Elastic
e = 1
% change in quantity supplied = % change in price (See

Fig: 4.4)
4. Elastic
(Relatively greater
Elastic)
> e > 1
% change in quantity supplied > % change in price (See

Fig: 4.5)
e =
Due to very small change in price, which tends to zero,

the quantity supplied changes substantially (See Fig: 4.6)
q - q
p + p1
2
1
x 2
p2 - p1
q2 + q1
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CPT
Shift in Supply Curve Vs. Movement along a Supply Curve
Movement along a supply curve indicates a change in the supply of a commodity due to change
in its price, whereas shift in supply curve indicates a change in supply of a commodity due to change
in any other factor of supply except price.
The main distinctions are as follows:
Movement on Supply Curve
Shift in Supply Curve
1.
In this case, change in supply occurred due

to only change in price
1.
In this case, all the factors of supply except

price remain constant.
2.
In this case, change in supply occurred due

to any factor except price.
2.
In this case, price is the only factor that

cannot vary.
3.
In this case, rise in supply is called 'Expansion

in supply 'and fall in supply is called
'Contraction in supply'.
3.
In this case, rise in supply is called 'increase

in supply' and fall in supply is called 'Decrease
in supply'.
4.
In this case, rise or fall in supply as termed

as 'Change in quantity supplied'.
4.
In this case, the rise or fall in supply is termed

as 'Change in supply'.
5.
In this case, the shape of supply curve is

as follows:-
5.
In this case, the shape of supply curve is

as follows:-
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CPT

Questions
1.
2.
3.
4.
5.
6.
7.
The
(A)
(B)
(C)
(D)
supply curve is usually upward rising

downward sloping
nothing definite can be said
none of these
The
(A)
(B)
(C)
(D)
supply curve depends on price of good, technology, govt. policy

price of factors of production
both (A) & (B)
neither (A) or (B)
8.
For perfectly inelastic supply curve, elasticity

value is (A) one
(B) zero
(C) infinite
(D) none of these
9. If supply curve is perfectly elastic, it is (A) horizontal

(B) vertical
(C) upward rising
If supply is perfectly inelastic, the supply curve

is (A) vertical
(B) horizontal
(C) upward sloping
(D) none of these
(D) none of these

10. If the elasticity of Supply is zero then supply
curve will be (A) Horizontal
(B) Downward sloping
(C) Upward sloping to the right
All of the following are determinants of supply

except (A) Price
(B) Income levels
(C) Objectives of the firm
(D) Level of technology
(D) Vertical
11. If as a result of a change in price, the quantity
supplied of a good remains unchanged, we
say elasticity of supply is (A) Zero
The ability to supply goods is primarily based

on(A) Buyer's incomes
(B) Satisfaction of buyers' wants and needs
(C) The cost of production
(D) Unlimited wants and needs
(B) Between zero and one

(C) Infinite
(D) Between one and Infinity
12. For a perfectly elastic supply curve, the elasticity
value is (A) zero
Suppose the price of mozzarella cheese

declines due to a major breakthrough in the
dairy industry; there would be (A) A decrease in the quantity of pizzas
supplied
(B) An increase in the quantity of pizzas
supplied
(C) No change in the supply of pizzas
(D) An increase in the supply of pizzas
(B) infinite
(C) one
(D) none of these
13. If percentage change in quantity supplied is
equal to percentage change in price, the
elasticity of supply is (A) zero
(B) two
If supply curve is relatively elastic, it means

that elasticity value is (A) less than one
(B) zero
(C) infinite
(D) none of these
14. The factors affecting elasticity of supply are-
(C) more than zero
(A) nature of good, technology

(B) time factor, future expectations
(D) more than one

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CPT
(C) both (A) & (B)

(D) neither (A) or (B)
15. The
(A)
(B)
(C)
(D)
(C) Equal to one

(D) Greater than zero but less than one.
supply of a good refers to Actual production of a good

Total stock of the good.
Stock available for sale
Amount of the good offered for sale at
a particular price per unit of time
22. Contraction of supply is the result of (A) Decrease in the number of producers
(B) Decrease in the price of the good
concerned
(C) Increase in the prices of other goods
(D) Decrease in the outlay of sellers
16. A vertical supply curve parallel to Y axis implies

that the elasticity of supply is (A) Zero
(B) Infinity
(C) Equal to one
(D) Greater than zero, but less than infinity
23. S1 and D1 are the original demand and supply

curves. D2, D3, S2 and S3 are possible new
demand and supply curves. The initial
equilibrium point is 1.
17. If a fisherman must sell all of his daily catch

before it spoils for whatever price he is offered,
once the fish are caught the fisherman's price
elasticity of supply for fresh fish is (A) zero
(B) infinite
(C) one
(D) unable to be determined from this
information
Assume X is a normal good. Keeping everything

else constant, assume that income rises and
the price of a factor of production also increases.
What point is most likely to be the new
equilibrium price and quantity?
(A) Point 9
(B) Point 5
(C) Point 3
(D) Point 2
18. If the price of apples rises from Rs. 30 per

kg to Rs. 40 per kg and the supply increases
from 240 kg to Rs. 300 kg. the Elasticity
of supply is (A) 0.77
(B) 0.67
(C) (-) 0.67
(D) (-) 0.77
19. An increase in the supply of a good is caused
by(A) Improvements in its technology
(B) Fall in the prices of other goods
(C) Fall in the prices of factors of production
24. In Q. 23 above, suppose we are analysing

the market for good-Z. The price of a complement
good, good-Y, declines. At the same time,
there is a technological advance in the
production of good-Z.
What point is most likely to be the new
(A) Point 4
(B) Point 5
(C) Point 7
(D) Point 8
20. Elasticity of supply refers to the degree of

responsiveness of supply of a good to changes
in its (A) Demand
(B) Price
(C) Cost of production
(D) State of technology
25. In Q. 23 above, suppose heavy rains during

2007 and 2008 caused havoc with the rice
crop. What point is most likely to be the new
(A) Point 6
(B) Point 3
21. A horizontal supply curve parallel to the quantity

axis implies that the elasticity of supply is(A) Zero
(B) Infinity
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CPT
(C) Point 7
(D) Point 8
30. In Q. 27 above, a government research agency

has published outcome of studies which say
that the consumption of good X could cause
cancer. In addition, assume that a powerful
lobby has persuaded the government to give
subsidy to the manufacturers of good X. What
point is most likely to be the new equilibrium
price and quantity?
(A) Point 6
(B) Point 5
(C) Point 3
(D) Point 9
26. In Q. 23 above, assume that consumers expect

the prices on new cars to significantly increase
next year. What point is most likely to be
the new equilibrium price and quantity?
(A) Point 6
(B) Point 5
(C) Point 3
(D) Point 8
27. S1 and D1 are the original demand and supply
curves. D2, D3, S2 and S3 are possible new
demand and supply curves. The initial
equilibrium point is 1.
31. SI and Dl are the original demand and supply

curves. D2, D3, S2 and S3 are the possible
new demand and supply curves. Initial
Equilibrium point is 1.
Suppose the wage rate of coffee worker

increases and the price of tea decreases.
(Coffee and Tea are substitutes). What point
is most likely to be the new equilibrium price
and quantity of coffee?
(A) Point 6
(B) Point 4
(C) Point 3
(D) Point 2
If the diagram represents the market for Pepsi,

the initial equilibrium is at the intersection
of SI and Dl. The new equilibrium if there is
an increase in the price of Coca Cola will
be (A) Point 3
(B) Point 5
(C) Point 4
(D) Point 2
28. In Q. 27 above, assume that consumer income

has increased. Given that Y is an inferior good,
which point in the figure is most likely to
be the new equilibrium price and quantity?
(A) Point 4
(B) Point 6
(C) Point 5
(D) Point 8
32. In Q. 31 above, the new equilibrium, if there

is rapid economic growth but cost of labour
producing Pepsi also rises (A) Point 3
(B) Point 9
(C) Point 2
(D) Point 6
29. In Q. 27 above, assume that the government

has just removed the 10% excise duty on
good X. What point in Figure 1 is most likely
to be the new equilibrium price and quantity?
(A) Point 6
(B) Point 4
(C) Point 7
(D) Point 8
33. In Q. 31 above, the new equilibrium, if there

is a health scare about the effect cold drinks
may have is (A) Point 2
(B) Point 9
(C) Point 3
(D) Point 6
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CPT
34. In Q. 31 above, assuming that there is a new

technology for producing Pepsi, the new
equilibrium (A) Point 8
(B) Point 7
(C) Point 3
(D) Point 6
38. In Q. 36 above, find the value of z (A) 14

(B) 1
(C) 0.07
(D) 5
39. Which of the following affects the elasticity
of supply?
35. In Q. 31 above, assuming that there is an

increase in the productivity and at the same
time the price of Miranda falls. The new
equilibrium will be (A) Point 2
(B) Point 9
(C) Point 3
(D) Point 6
(A) Technique of production

(B) Time period
(C) Nature of the commodity
40. Which of the following is not a determinant
of supply?
36. Consider the following data%

change
in price
Demand for salt

Demand for
bananas
Supply of chicken
20
15
z
% change
in quantity
demanded/
quantity
supplied
-1
y
14
(A) Price of the commodity
Elasticity
(B) Price of related commodities

(C) Elasticity of supply
(D) State of technology
X
3
41. What is the elasticity of supply, when price

changes from Rs. 15 to Rs. 12 and supply
changes from 6 units to 5 units?
(A) 0.77
Find the value of x(A) -20

(B) -0.05
(C) -l
(D) Cannot be determined
(B) 0.87
(C) 0.81
(D) 0.58
42. Increase or decrease in supply means (A) shift in supply curve
37. In Q. 36 above, find the value of y (A) -5

(B) 15
(C) 45
(D) -3
(B) movement along the same supply curve

(D) Neither (A) or (B)
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
A
.
70
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CHAPTER 5
PRODUCTION ANALYSIS
PRODUCTION & ITS FACTORS
Q: Explain the meaning of the term production in Economics?
Meaning;
In economics, production refers to all those human activities that are done to satisfy human
wants with a main view to earning money. The essentials of production are
Creation of Utility
Money Motive
Therefore, the services of doctors, lawyers, etc, are also considered as production in economics.
Methods for Creating Utility:

1.
Form Utility: This utility is created through the conversion of the form of a commodity.
For example, the conversion of wood into chair is creation of form utility' in the wood.
2.
Place Utility: This utility is created through a change in place of a commodity. For example,
transfer of 'Chamble send' from a desert to different cities is the creation of place utility'.
3.
Time Utility: This utility is created through a change in time. For example, the storing
of woollen clothes till the winter season is the creation of time utility' in the woollen cloths.
4.
Personal Utility: It includes the personal skills and exertion of a human that are used
in creating form utility, time utility and place utility. For example, the services of sales
representatives, transport conversion, shopkeeper and workers.
5.
Possession Utility: This utility is created by changing the possession or ownership of

a property. For example, a book on physics may be of no use for a commerce student,
but when is given to a physics student, its utility may increase.
6.
Knowing utility: Many commodities become more useful only when we know about their
use and operations. This knowledge can be provided through books, talks, advertisements,
etc. Hence, the creation of knowledge utility is also included in production.
Q: What are the main 'Factors of Production'? Explain in detail.

FACTORS OF PRODUCTION (as per Prof. Marshall)
1.
Land,
2.
Labour,
3.
Capital,
4.
Entrepreneur,
1. LAND
Land include all the free gifts of nature to human, such as air, water soil, etc.
Characteristics of Land:
1.
Free gift of Nature
2.
An Inactive Factor: It cannot produce anything by itself. So, human efforts are necessary
to make it active.
71

3.
4.
5.
6.
CPT
Limited: Land is strictly limited. Nobody can add or less even an inch to it.
No supply price
Elasticity of Supply: From the point of view of the whole economy, its supply is inelastic,
but from the point of view of an individual, its supply is elastic.
Imperishable: It is an imperishable factor of production. One can neither create land nor
can destroy it. Immobile
2. Labour
Labour refers to all those physical or mental work, which is done to earn money. For example,
if a man sings in a party for money, his exertion will be called labour, but if the same man sings
not for money, but for entertainment, his exertion will not be called labour in economics.
Characteristics of Labour:
1.
Active factor
2.
Perishable: Labour is perishable in the sense that it cannot be stored. If a worker does
not work on a particular day, his labour for that day goes waste.
3.
Labour and Labourer are inseparable.
4.
Labour power (i.e. skills) differs from labourer to labourer.
5.
Labourer sells his services, not his skills
6.
Weak Bargaining power: because - (i) labour is perishable; (ii) the financial position
of a worker is weaker than of the employers.
7.
A Labourer has to make a choice between

working hours and hours of leisure: A labourer
has to make a choice between working hours and
hours of leisure.
As the wage rate increases, the supply of labour
also increases. But after a point, an increase in
wage rate decreases the supply of the labour.
In diagram 5.1, OPQ is a 'labour supply curve',
which is backward bending. The curve is positively
sloped till point-P. But after this point, the curve
is negatively sloped. Thus, after point-P, the supply
of labour decreases with an increase in wage rate.
3. CAPITAL
The word 'CAPITAL' refers to that part of wealth that is used in the further production of
wealth.
Wealth means all the goods that are made by man, but are not used in production, but
when these goods are used in production, they are called capital.
For example, if machinery is lying idle in a factory, then the machinery will be treated
as wealth, but if the same machinery is being used in the production process, then it
will be treated as capital.
Characteristics of Capital:
1.
An inactive factor of production
All capital is wealth
2.
Human made factor of production
3.
High mobility
4.
Supply of capital can be increased or decreased
5.
Capital has value: Because, capital is not a free gift of God, but it is man made.
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CPT

4. ENTREPRENEUR
Entrepreneur is the most important factor of production in the present time. Without entrepreneur,
production is not possible. Entrepreneur refers to the person or the group of persons, who collect other factors of productions (i.e. land, labour, capital etc.) in the right proportion,
establish co-ordination between them,
initiate the production process,
bear the risk, and
make innovations from time to time.
Q: What do you mean by 'Mobility of Labour'?
MOBILITY OF LABOUR
Mobility of labour refers to the willingness of labourers to move from one place to another place
or from one job to another job. There are two types of mobility of labour1.
Territorial Mobility: In this case, a labourer moves from one firm to another firm in search
of better job. The curve of territorial mobility is always vertical.
2.
Occupation Mobility: In this case, a worker moves from one post to another post in the
same industry or from one industry to another on the same post. The curve of occupational
mobility may be vertical or horizontal.
Q: What do you mean by 'Capital Formation'? What are its different stages?
CAPITAL FORMATION
Capital formation refers to an increment in the stock of real goods. In other words, one can
define capital formation as an increase in the production of capital goods, such as buildings, machinery,
roads, and parks etc, which are used in the further production of capital. Capital formation is necessary
not only for replacement of capital goods, but also for creating additional productive capacity.
Stages of Capital Formation:

1.
Savings: It is to be noted that saving depends upon the

income of people. If the income of people is high, they
can also save high.
Further, only high income is not sufficient for saving. What
is sufficient is willingness to save. Therefore, there must
be willingness to save as well as the ability to save.
2.
Mobilisation of Saving: The savings of the people alone

cannot become capital goods. There must be mobilisation
of the scattered savings of the people. Banks, post-offices,
insurance companies and other financial institutions should
operate such good schemes as would attract the savings
of the people. The government can also help in the work.
3.
Investment: Investment is the third and final stage of capital

formation. The process of capital formation comes to an
end when banks and other financial institutions give the
mobilised saving of the public to the entrepreneurs for production
process, i.e. when the saving turns into capital goods.
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CPT
Q: Explain the Production Function given by Cobb-Douglas?

COBB-DOUGLAS PRODUCTION FUNCTION
Cobb-Douglas production function establishes a functional relationship between Output, Capital
and Labour. The function is given below:
Q = K.La.C 1-a
Where, Q = Output; L = Labour; C = Capital; K and a are constant; and a < 1.
Cobb-Douglas production function shows constant returns to scale and depicts that about 75%
increment in the production is due to labour and 25% due to capital.
CONCEPT OF TOTAL PRODUCT, AVERAGE PRODUCT, MARGINAL PRODUCT
Q: Explain the meaning of (i)
Total Product;
(ii)
Average Product;
(iii)
Marginal Product
Table 1
Quantity of Labour (n)
Total Product (TP)
1
2
3
4
5
6
7
100
250
450
600
700
700
650
Average Product
Marginal Product
(AP = TP/n)
100.0
125.0
150.0
150.0
140.0
116.6
92.8
(MP = TPn - TPn-1)

100
150
200
150
100
0
-50
Total Product (TP): Total product is the total output resulting from the efforts of all the factors
of production, when they are combined together at any time.
Average Product (AP) :

=
Marginal Product (MP): Marginal product is an additional product derived from an additional
unit of a variable input.
MP = TPn-TPn-1
VARIOUS LAWS REGARDING PRODUCTION
Q: Explain the law of variable proportion'. Or Explain 'the law of Returns to Factor'.
THE LAW OF VARIABLE PROPORTION
OR
THE LAW OF RETURNS TO FACTOR
Assumptions of this Law;

1.
Short Run: This law holds good in the short run. In the short run, fixed factors of production
remain constant, but variable factors of production can vary.
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CPT

2.
3.
4.
No Fix Proportion: When inputs are used in a fix proportion, this law does not operate.
Because in such a situation, an increase in input will not lead to a change in the average
output.
No Change in Technology
Not to Consider Financial Aspect
What this Law says?
According to the law of variable, proportion as a producer goes on increasing the quantity of
a variable input, which is combined with other fixed factors, then in the beginning, the marginal productivity
of that input increases but after a point, it falls and becomes less and less.
The above law can be divided into three stages:
Stage-1 The Law of Increasing Returns:
During this stage, as the firm increases more and

more units of an input, the total product increases
at the increasing rate up to the point Q. But beyond
Q, the total product increases at the diminishing rate.
The marginal product curve rises speedily in the

beginning up to the point Q and then starts falling.
Moreover, the marginal product curve remains over
the average product curve.
This stage is known as the stage of increasing returns

to factor because the total product curve and the
average product curve continue to increase throughout
this stage.
This stage comes to an end, when marginal cost becomes equal to the average cost or in
other words, when the marginal cost curve cuts the average product curve.
Why it is so? This law operates due to the underutilisation of fixed factors in the beginning.
There are two reasons why this law holds good:
1.
Indivisibility of Fixed Factor: Indivisibility of a factor means that due to technological

requirements, a minimum amount of that factor must be employed whatever the level of
output.
2.
Specialisation: When we go on increasing the quantity of a variable input, the specializations

of inputs, i.e. workers and managers become possible, which results in higher productivity.
Stage-2 The law of Diminishing Returns:
During this stage, as the firm increases the more and more units of an input, the total
product increases at a diminishing rate, until it reaches its maximum point C.
Both the marginal product and the average product curve are diminishing though they remain
positive. That is why this stage is called 'the stage of diminishing returns to factor'.
This stage ends when the marginal product is zero or, in other words, we can say, when
the total product is maximum.
Why it is so? This law operates due to the overutilisation of fixed factor. There are two reasons
why this law holds good:
1.
Indivisibility of fixed factor
2.
Over-specialisation
Stage-3 The Law of Negative Return:
In this stage, the total product, marginal product and average product are all falling. This is
the worst stage of production.
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Why it is so? This law operates due to the abundance of variable inputs in relation to fixed
factor. When the quantity of input becomes too much that they comes into each other's way, then
the total product falls instead of rising. In the above example, if a lot of men, say 10 or more, are
put on the machine, the total product definitely falls instead of rising.
Which Stage of Operation is Best?
A rational producer would not like to produce in stage-3, where the marginal product of the variable
factor is negative. Even if the variable factor is free of cost, the rational producer will stop before the
beginning of the third stage. The rational producer will also not produce in stage-1 due to the underutilisation of fixed factor.
Thus, a rational producer will always try to produce in stage-2, where both the marginal product
and the average product of the variable factors are diminishing. At which particular point in this stage,
the producer will decide to produce; it will depend upon the prices of factors and the demand of the
product.
Q: Explain the Law of Returns to Scale.
THE LAW OF RETURNS TO SCALE
The law of returns to scale holds good in the long run, when all the factors of production can
be varied. Returns to scale may be increasing, constant or decreasing.
Increasing Returns to Scale:
A firm enjoys increasing returns to scale, when the output increases in greater proportion than
the increase in inputs.
The increasing return to scale becomes operative in the initial stage of production because in
this stage, the firm enjoys some economies of scale, which outstrip the diseconomies of scale.
Constant Returns to Scale;
A firm obtains constant returns to scale when output increases in the same proportion in which
the scale of operation is increased. The Cobb-Douglas production function also exhibits constant returns
to scale.
The constant returns to scale operate when the economies of scale are counterbalanced by
the diseconomies of scale.
Decreasing Returns to scale:
A firm has to face decreasing returns to scale, when the output increases in a smaller proportion
than the increase in the inputs.
When a firm goes on expanding the scale of

operation, then finally diminishing return to scale sets
in due to increasing difficulty of management, coordination
and control. The diminishing returns to scale emerges
when diseconomies of scale are more than the economies
of scale.
Consider the Fig: 5.3. The X-axis measures units
of labour and capital. The Y-axis measures physical output.
The Curve OP shows 'increasing returns to scale', the
curve OQ shows 'constant returns to scale' and the curve
OR shows 'decreasing returns to scale'.
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CPT

PRODUCTION OPTIMISATION/PRODUCER'S EQUILIBRIUM
Q: What do you mean by Production optimisation or Producer's equilibrium? How is it determined?

Explain in detail.
Meaning;
A producer is said to be in equilibrium, when he is producing a given level of output at the minimum
possible cost and there is no need to rearrange the money distribution between two inputs, (say x
and y). Thus, a combination of factors of production that enables the producer to produce a given
level of output at the minimum cost is called 'optimum input/factor combination'. The optimum input
combination is found out with the help of iso-quants and iso-cost curves.
Iso-Quants (IQ)/equal product curve/Producer's indifference curve;
It represents all the combinations of two inputs, say x and y that yield the same level
of output.
The properties of iso-quant curve are similar to the consumer's indifference curve.
Table
Combinations
A
B
C
D
Input-x
1
2
3
4
Input-y
20
12
8
6
Marginal Rate of
Technical Substitution
8:1
4:1
2:1
In the above table, we see that there are four combinations of inputs, viz A, B, C and D. These
combinations represent the same level of output. Let it be 100 units. When we plot these combinations
on the graph, we get the following iso-quant curve:y
x
Iso-Cost Curve;
The Iso-cost curve is also known as equal cost line. The curve represents all the combinations
of two inputs that a producer can buy with a given outlay at the given price of two inputs.
To draw up an iso-cost curve, one should consider two things:
1.
The fund of the producer.
2.
Price of both inputs (say x and y).
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Suppose, a producer has to spend Rs. 100/- on input x and y, whose prices are Rs. 107- and
Rs. 5 respectively, then the producer has three options:1.
He can spend all the money on input-x,
2.
He can spend all the money on input-y,
3.
He can spend some money on input-x and the remaining on input-y.
Now, if the producer spends all his income on input-x, then he can get 10 units of input-x, which
is denoted by OB, but if spends all his income on input-y, then he can get 20 units of input-y, denoted
by OA The line joining the points A and B is called iso-cost line. Thus, many iso-cost curves can
be derived for the different level of funds of the producer.
Selection of Least Cost Combination; Consider the diagram 5.6.
Suppose, the firm is to produce 100 units, which is represented by the iso-quant curve
(IQ). 100 units can be produced by any combination lying on the IQ curve, such as P,
Q, R, S, T, etc.
Since the producer is to produce 100 units at the minimum cost, he will not choose the
combination P, Q, S or T, because these combinations lie on higher iso-cost curves.
Therefore, the producer will choose the combination R to produce 100 units at the minimum
cost.
Thus,
"The producer will be in equilibrium if he selects the combination that lies on the
IQ curve, which is tangent to Iso-cost Curve."
Further, at tangency point R, Iso-cost curve is tangent to IQ; therefore the slope of both must
be equal.
Where,
The slope of Iso - cost Curve is given by =

The slope of the IQ is given by
MPx
= Marginal productivity of input x
= MRTSxy
MPy
= Marginal productivity of input y
MRTSxy = Marginal Rate of Technical

Substitution
MPx
MPy
=
Px
Py
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CPT
To conclude
The producer will be in equilibrium
If he selects the combination that lies on the IQ curve, which is tangent to Iso-cost Curve,
Or
If the marginal rate of Technical Substitution is equal to the price ratio between the two
Inputs.
Q: What are the various Economies and Diseconomies of Scale?
ECONOMIES & DISECONOMIES OF SCALE
When a firm expands its scale of operation, the returns to scale increase in the initial stages
and after remaining constant for a while, it decreases. This is because, in the initial stage the firm
enjoys a number of internal and external economies of scale. But after a point, these economies turn
into diseconomies as a result of which the returns to scale starts declining and the cost of production
starts rising.
The various economies and diseconomies can be divided into two types:
1.
Internal economies and diseconomies.
2.
External economies and diseconomies.
Internal Economies and Diseconomies:

Internal economies and diseconomies are those, which are special to each firm. These are called
internal because they accrue to a firm due to its own features. The following are some internal economies
and diseconomies:1.
(a)
(b)
Technical Economies
The large firm will be able to install and
operate more up-to-date and expensive
machinery. This will help the large firm
to produce products of higher quality at
lower cost.
Greater degree of division of labour
Technical Diseconomies
Higher R & M cost of machinery
2.
Managerial Diseconomies
Managerial Economies
(a)
(b)
Reduction in managerial cost.

Division of labour can also be applied
to the management, i.e. the firm can
appoint different managers for different
activities and can get the benefit of their
service.
However, beyond an optimum point, the

managerial diseconomies set in. It becomes
very difficult for top management to exercise
control and co-ordination among various
departments.
3.
(a)
(b)
(c)
(d)
Marketing Economies
Large firm enjoys the benefit of bulk buying.
It enjoys prompt deliveries, careful
attention and special facilities from its
suppliers.
It can also get concessions from transport
agencies.
It can secure advantages in advertisement,
e.g. the advertisement expenses will be
the same whether the production level
is small or large.
79
Marketing Diseconomies
These economies become diseconomies after
an optimum scale, Like (a)
Over dependency upon a particular supplier
(b)
Higher advertisement and marketing

overheads
CPT
4.
Financial Economies
Financial Diseconomies
(a)
A large firm can offer better security and

therefore, is in a position to secure
better and cheaper credit facilities.
(b)
Easy access to the capital market.
Beyond the optimum level, the cost of financial

capital rises.
5.
Risk bearing Economies
Risk bearing Diseconomies
A large firm is in a better position to bear the

ups and downs by launching multi-product in
the market. The loss in the sale of a product
can be covered by the profit of other products.
But it may be possible that the firm has faced

loss in every product. Thus the risk-bearing
economy will become the risk-bearing
diseconomy after an optimum level.
External Economies and Diseconomies:
These economies and diseconomies accrue to firms, not due to their internal situation, but due
to outside situation, i.e. expansion of the industry. The following are some of the external 'economies',
which the firms may enjoy:1.
Technological Economies: When the whole industry expands, the demand for the technology
used in that industry rises. This leads to the development of that technology and may
also lead to the development of new technology. This technical development reduces the
cost of production.
2.
Availability of Cheaper Raw Material and Capital Equipment: When an industry expands,
the demand for the material and capital equipment required by it also rises. Therefore,
the suppliers of the material and capital equipment try to provide the same at lower cost,
which reduces the cost of production.
3.
Labour Economies: When an industry expands in a particular area, the labour of that
area becomes accustomed to do the various production processed of that industry. As
a result the firms of that industry have not to go anywhere in search of skilled labourer.
No doubt, skilled labourers reduce the wastage of material and therefore the cost of production.
4.
Economies of by-products: The expansion of an industry would enable the firms to reduce
their costs of production by making better use of wastage material. The waste material
of one firm may be useable as raw materials in the other firms. Thus, wastage is converted
into by-products. The selling firms can reduce their cost of production by realising something
for their wastes.
5.
Better Transportation and Marketing Facilities: The expansion of an industry may result
in the development of transportation and marketing facilities. This is because, when a firm
expands in a particular area, the network of infrastructure facilities, such as transportation,
banking, roads, insurance, finance, etc. is developed in that area. The development of
these facilities will definitely reduce the cost of a product.
However, beyond an optimum level, these external economics become external diseconomies
some of the external diseconomies are as under:
1.
Pollution
2.
High Factor Prices: This may be due to cut-throat competition among the firms for the
factors of production.
3.
Injure on Infrastructure
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Questions
1.
2.
3.
4.
5.
6.
7.
8.
(C) 3 stages
Production is defined as (A) change of inputs to output

(B) creation or addition of utility
(C) both (A) & (B)
The
(A)
(B)
(C)
(D)
(D) 5 stages
9.
(A) the 1st stage

(B) the 2nd stage
labour supply curve is upward rising

downward sloping
backward bending
none of these
(C) the 3rd stage

(D) none of these
10. IQ s may be defined as (A) Indifference curves
In the short run (A) labour is fixed

(B) capital is fixed
(C) both labour & capital is fixed
(D) none of the labour & capital is fixed
(B) Production indifference curves

(C) Both (A) & (B)
11. In the Cobb Douglas production function We
generally have -
The slope of the total product curve is given

as (A) average product
(B) marginal product
(C) average and marginal product
(D) none of these
The
(A)
(B)
(C)
(D)
law of variable proportions considers L as variable

Both K & L as variable
K as variable
none of these
The
(A)
(B)
(C)
(D)
law of variable proportions considers technology as fixed

technology as variable
no such assumption is needed
none of these
Under the law of variable proportions, the stage

of operation is in -
(A) a + b < 1
(B) a + b = 1
(C) a + b > 1
(D) all are possible
12. For IRS, we have (A) a + b < 1
(B) a + b = - 1
(C) a + b > 1
(D) a + b = 1
13. For CRS, we have (A) a + b < 1
(B) a +b > 1
(C) a + b = -l
(D) a + b = 1
14. For DRS, we have -
When marginal product is zero, then total

product is (A) Maximum
(B) Increasing
(C) Decreasing
(D) Negative
(A) a + b < 1
(B) a + b > 1
(C) a + b = 1
(D) a + b = -l
15. The slope of iso-quant (IQ) is -
The law of variable proportions sub-divides

the law into -
(A) Positive
(A) 9 stages
(C) Negative
(B) 4 stages
(D) None of these
(B) Zero
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CPT
(C) MPL / MPK = k/L
(D) MPL / MPK = - k/L
16. Let the production function q = f (K,L) be

homogeneous of degree n. If n > 1, it means(A) IRS
(B) CRS
(C) DRS
(D) none of these
23. Producers equilibrium demands that the

necessary condition is that IQ s must be(A) concave to origin
(B) linear
(C) convex to origin
(D) none of these

homogeneous of degree n. If n = 1, it means(A) IRS
(B) CRS
(C) DRS
(D) none of these
24. If the production function is homogeneous

of degree n, then the expansion path is (A) linear and passes through origin
(B) non-linear and passes through origin
(C) linear and does not pass through origin
(D) non-linear and does not pass through
origin

homogeneous of degree n. If n < 1 (A) IRS
(B) CRS
(C) DRS
(D) none of these
25. In the production of wheat, all of the following

are variable factors that are used by the farmer
except (A) The seed and fertilizer used when the
crop is planted.
(B) The field that has been cleared of trees
and in which the crop is planed.
(C) The tractor used by the farmer in planting
and cultivating not only wheat but also
corr. and barley.
(D) The number of hours that the farmer
spends in cultivating the wheat fields.
19. For a Cobb Douglas production function, the

IQ's so derived will be (A) concave
(B) linear
(C) convex
(D) none of these
20. If w, r are the prices of one unit of Labour
(L), Capital (K) respectively, then the slope
of iso-cost line will be (A) w/r
(B) - K/L
(C) MPL/MPK
(D) K/L
26. The short run as economists use the phrase,

is characterised by (A) at least one fixed factor of production
and firms neither leaving nor entering
the industry.
(B) a period where the law of diminishing
returns does not hold.
(C) no variable inputs - that is all of the factors
of production are fixed.
(D) all inputs being variable.

(L), Capital (K) respectively and If the producer
goes for output maximisation subject to cost,
his equilibrium condition is (A) MPL / MPK = w/r
(B) MPL / MPK = -w/r
(C) MPL / MPK = k/L
(D) MPL/MPK= -k/L
27. Diminishing returns to scale implies diminishing

returns to a single factor is (A) True, but converse not true
(B) True, but converse also true
(C) False, but converse is true
(D) False, and converse also false

(L), Capital (K) respectively and If the producer
goes for the cost minimisation subject to output,
equilibrium is (A) MPL/MPK = w/r
(B) MPL / MPK = -w/r
28. If production function is homogeneous of degree

one then the two factors must be complements
of each other (A) marginal productivities are constant
(B) marginal productivities are increasing
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CPT
(C) marginal productivities are zero

(D) marginal productivities are diminishing
(C) Boating in a lake for recreation

(D) Painting a picture for pleasure
29. Which of the following is a correct statement?

(A) Supply curve of labour is an upward sloping
curve.
(B) Internal economies accrue to the firm
due to its own efforts, while external
economies accrue to the firm from outside.
(C) Saving cannot be affected by the state.
(D) Accumulation of capital depends solely
on income.
35. The average product of labour is maximised,

when marginal product of labour (A) Equals the average product of labour
(B) Equals zero
(C) Is maximised
36. The law of variable proportions is drawn under
all of the assumptions mentioned below except
the assumption that (A) The technology is changing.
(B) There must be some input, whose quantity
is kept fixed.
(C) We consider only physical input and not
economic profitability in monetary terms.
(D) The technology is given and stable.
30. Which of the following statement is true?

(A) Accumulation of capital depends solely
on income.
(B) Saving can also be affected by the state.
(C) External economies go with size and
internal economies with location.
(D) The supply curve of labour is an upward
sloping curve.
37. An
(A)
(B)
(C)
(D)
31. The scheme of dividing a given work among

labourers in such a way that each labourer
is supposed to do one activity is known as(A) Division of labour
(B) Efficiency of labour
(C) Mobility of labour
iso-quant slopes Downward to the left

Downward to the right
Upward to the left
Upward to the right
38. Which of the following is considered production

in economics (A) Tilling of soil
(B) Singing a song before friends
(C) Preventing a child from falling into a
manhole on the road
(D) Painting a picture for pleasure
32. Diminishing returns occur (A) When units of a variable input are added
to a fixed input and total product falls
(B) When units of a variable inputs are added
to a fixed input and the marginal product
falls
(C) When the size of the plant is increased
in the long run.
(D) When the quantity of the fixed input is
increased and returns to the variable input
falls
39. Identify the correct statement (A) The average product is at its maximum,
when marginal product is equal to average
product.
(B) The law of increasing returns to scale
relates to the effect of changes in factor
proportions.
(C) Economies of scale arise only because
of indivisibilities of factors of production.
(D) Internal economies of scale can accrue
only to the exporting sector.
33. If decreasing returns to scale are present,

then if all inputs are increased by 10%, then(A) Output will also decrease by 10%.
(B) Output will increase by 10%.
(C) Output will increase by less than 10%.
(D) Output will increase by more than 10%.
40. Which of the following is not a characteristic

of land?
(A) Its supply for the economy is limited.
(B) It is immobile.
(C) Its usefulness depends on human efforts.
(D) It is produced by our forefathers.
34. Which of the following is considered production

in economics?
(A) Saving a child from drowning in a river
(B) Doctor examining a patient for a fee
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CPT
48. The marginal, average and total product curves,
encountered by the firm producing in the short
run exhibit all of the following relationship
except (A) When total product is rising, average
and marginal product may be either rising
or falling
(B) When marginal product is negative, total
product and average product are falling.
(C) When average product is at a maximum,
marginal product equals average product,
and total product is rising.
(D) When marginal product is at a maximum
average product equals marginal product,
and total product is rising.
41. The marginal product of a variable input is

best described as (A) total production divided by the number
of units of variable input
(B) the additional output resulting from a
one unit increase in variable input
(C) the additional output resulting from a
one unit increase in both variable and
fixed inputs
(D) the ratio of the amount of the variable
input that is being used to the amount
of the fixed input that is being used
42. Which of the following is closest to the concept
of economic production?
(A) Sale of goods and services for profit
49. If one unit of labour and one unit of capital

give 200 units of output, two units of labour
and two units of capital give 400 units of output
and five units of labour and five units of capital
give 1,000 units of output then this is a case
of(A) Constant returns to scale
(B) Increasing returns to scale
(C) Decreasing returns to scale
(D) None of these
(B) Manufacture of goods

(C) Addition to the stock of goods and services
for future use
(D) Addition to the value of commodities with
profit motive.
43. Average production from labour (i.e. APL )is
defined as (A) q/L
(B) q/K
(C)
q/K+L
(D)
q/K-L
50. Which of the following is the best definition

of the "production function"?
(A) The relationship between market price
and quantity supplied.
(B) The relationship between the firm's total
revenue and the cost of production.
(C) The relationship between the quantities
of inputs needed to produce a given level
of output.
(D) The relationship between the quantity
of inputs and the firm's marginal cost
of production.
44. When AP is maximum (A)

(C)
AP > MP
AP = MP
(B)
(D)
AP < MP
none of these
45. The law of diminishing marginal returns

indicates that marginal returns (A) always diminish.
(B) sometimes diminish.
(C) eventually diminish.
(D) always diminish before increasing.
46. In describing a given production technology,
the short run is best described as lasting(A) up to six months from now
51. The "law of diminishing returns" applies to(A)

(B)
(C)
(D)
(B) up to five years from now

(C) as long as all inputs are fixed
(D) as long as at least one input is fixed
The short run, but not the long run

The long run, but not the short run
Both the short run and the long run
Neither the short run nor the long run
52. At the point of inflexion, the marginal product

is(A) Increasing
(B) Decreasing
(C) Maximum
(D) Negative
47. Larger production of_____ goods would lead

to higher production in future (A) Consumer goods
(B) Capital goods
(C) Agricultural goods
(D) Public goods
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CPT

60. A firm's production function (A) shows how much output and the level
of input required for the firm to maximise
profits.
(B) establishes the minimum level of output
that can be produced using the available
resources.
(C) shows the maximum output that can be
produced with a given amount of inputs
with available technology.
(D) shows labour force which is employed

Labor
Input
0
2
4
6
8
10
12
Output
Average
Product
Marginal
Product
0
25
90
120
140
14
10
61. The law of diminishing returns:

(A) states that beyond some level of a variable
input, the average product of that variable
input begins to increase steadily.
(B) assumes that there is technological
improvement over time.
(C) states that beyond some level of a variable
input, the marginal product of that variable
begins to decrease steadily.
(D) informs a firm whether or not to use a
factor input.
At a labour input of two, the output is (A) 25

(B) 30
(C) 50
(D) 75
54. In Q. 53 above, at a labour input of 4, the
output per worker is (A) 20
(B) 22.5
(C) 45
(D) 90
55. In Q. 53 above, at a labour input of 6, the
marginal product of labour is (A) 120
(B) 20
(C) 15
(D) 10
62. The following data is an example of Number of workers Output

0
0
1
23
2
40
3
50
(A) increasing marginal product of labour
(B) diminishing marginal product of labour
(C) increasing returns to scale
(D) diminishing returns to scale
56. In Q. 53 above, the output per worker is

maximised at a labour input of (A) 2
(B) 4
(C) 6
(D) 8
57. In Q. 53 above, the firm's output is at a short
run maximum at a labour input of (A) 6
(B) 10
(C) 12
(D) 2
63. Lesser production of_____would lead to lesser

production in future (A) Public goods
(B) Consumer goods
(C) Capital goods
(D) Agricultural goods
58. The production function is a relationship between

a given combination of input, and (A) Another combination that yields the same
output
(B) The highest resulting output
(C) The increase in output generated by those
inputs
(D) All levels of output that can be generated
by these inputs

Hrs. of
Total
Marginal
Labour
output
output
59. If the marginal product of labour is below the

average product of labour, it must be true
that (A) The marginal product of labour is negative.
(B) The marginal product of labour is zero.
(C) The average product of labour is falling.
(D) The average product of labour is negative.
350
350
230
670
What is the total output, when two hours of

labour are employed (A) 500
(B) 580
(C) 600
(D) 680
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CPT
65. In Q. 64 above, what is the marginal product

if the third hour of labour is employed?
(A) 90
(B) 110
(C) 100
(D) 120
70. The producer is in equilibrium at a point where

the cost line is (A) above the isoquant
(B) below the isoquant
(C) cutting the isoquant
66. Consider the following tableHrs. of

Total
Marginal
Labour
Output
Product
0
1
100
100
2
80
3
240
(D) tangent to isoquant

71. Which of the following statement is true?
(A) The services of a doctor are considered
production.
(B) Men can create matter.
(C) The services of a housewife are considered
production.
What is the total output, when two hours of

labour are employed?
(A) 80
(B) 100
(C) 180
(D) 200
(D) When a man creates a table, he creates

matter.
72. An iso-elastic demand curve can never be-
67. In Q. 66 above, what is the marginal product

of the third hour of labour?
(A) 60
(B) 80
(C) 100
(D) 240
(A) linear
(B) non-linear
(C) nothing definite can be said
(D) none of these
68. In Q. 66 above, what is the average product

of the first three hours of labour?
(A) 60
(B) 80
(C) 100
(D) 240
73. Which of the following is a function of an

entrepreneur?
(A) Initiating a business enterprise.
(B) Risk bearing.
69. Capital is a_____of wealth (A)
Natural gift
(B)
Stagnation
(C) Innovating.
(C)
Superset
(D)
Subset
(D) All of the above.
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
D
.
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CPT

CHAPTER 6
COST ANALYSIS
COST CONCEPTS & COST DETERMINANTS

Q: What do you mean by the concept of cost? or explain the various types of costs?
CONCEPT OF COST
The concept of cost can be analysed as follows:
1.
Accounting cost:
(i)
Accounting cost is also known as Explicit Cost/Money Cost.
(ii)
What to Include: It includes all such expenditure, which are incurred in purchasing or hiring
the factors of production. For example, wages to workers employed, payment for fuel and
power used, rent on the building, prices of raw material and interest on the money borrowed
for doing business.
(iii)
What not to Include: It does not include the cost of factors owned by the entrepreneur
himself and employed in his own business, i.e. interest on the entrepreneur's capital and
his salary, etc, because no money payment is made for such factors. Such cost is known
as Implicit Cost.
2.
Economic Cost:
= Explicit Cost + Implicit Cost
3.
Outlay Cost and Opportunity Cost:

(i)
Outlay cost means the actual outlay or expenditure incurred by a firm on the production
of a commodity, such as, expenditure on wages and salaries paid to labour, expenditure
on machinery and equipment, on materials, power, lights, fuel, transportation, on rents
and insurance and payments to government by the way of taxes.
(ii)
Opportunity cost is the alternative earning that might have been earned, if the productive
capacity or services had been put to some other alternative. In simple words, it is the
advantage which has been foregone due to not using the facility in the manner originality
planned. For example, if an owned building is proposed to be used for an accounting project,
the likely rent of the building is the opportunity cost, which should be taken into consideration
while evaluating the profitability of the project.
Recording: Moreover, outlay costs involve financial expenditure, so it is recorded in the books
of account. But opportunity costs relate to sacrifice and not recorded in the books of account
general.
4.
Direct/Traceable Cost and Indirect/Non-traceable Cost:

(i)
Direct costs are those which may be conveniently identified with a particular product. For
example, materials used and labour employed in manufacturing an article is direct cost.
(ii)
Indirect costs are those that are incurred for the benefit of a number of products and cannot
be identified with a particular product. Example of indirect cost includes rent of building,
management salaries, machinery depreciation, etc.
87

5.
CPT
Fixed Cost and Variable Cost:

(i)
In the short run, there are some factors,

which are necessarily fixed, and some
are freely variable. The fixed factors are
building, business premises, the machinery,
etc. and cost of these factors is known
as fixed cost.
Fixed cost dose not change with output
up to a certain level of capacity.
(ii)
6.
1.
2.
3.
4.
5.
6.
Concept of Costs
Accounting Cost
Economic Cost
Outlay Cost and Opportunity Cost
Direct/Traceable Cost and Indirect/Nontraceable Cost
Fixed Cost and Variable Cost
Shutdown Costs and Abandonment Cost
The variable factors are raw materials, power and fuel, etc. the cost corresponding to these
factors is called variable costs. Variable cost changes according to the volume of production.
If the output is zero, the total variable cost will also be zero. If the output increases, the
total variable cost will also increase. (See Fig: 6.1)
Shutdown Costs and Abandonment Cost:
(i)
Shutdown costs are those which are incurred in the event of temporary cessation of business
activities and which could be saved, if the operations were allowed to continue. Besides
fixed costs, shutdown costs cover the additional expenses, such as salary of watchman
in looking after the property.
(ii)
Abandonment costs are the cost of retiring a fixed asset from use. For example, old machinery
may be useless due to the development of new technology. Thus, abandonment cost involves
permanent cessation of activity and gives rise to the problem of disposal of assets.
SHORT-RUN COST & LONG RUN COST
Q: Explain the behaviuor of various short run costs.

SHORT RUN TOTAL COST!
Total Fixed Cost
Total VariablerCost
Total Cost: TC =TFC +TVC

Consider the Fig. 6.1. It shows that TFC
is parallel to X-axis, signifying that total fixed
cost is a fixed amount, even if the output
is zero. TVC starts from origin and positively
sloped. This starts from origin, because TVC
will be zero if output is zero. This is positively
sloped, which shows that an increase in
output leads to an increase in the total variable
cost and vice-versa. The total cost curve
TC is derived by adding vertically TFC curve
and TVC curve.
SHORT-RUN AVERAGE COSTS
Average Fixed Cost (AFC): It refers to fixed cost per unit of output. Symbolically,
AFC =
TFC
q
The AFC curve falls speedily in the beginning and then tends to approaching x-axis, but will
never touch x-axis, because it can never be zero. Graphically, the AFC curve will be a rectangular
hyperbole.
88
CPT
Average Variable Cost (AVC): It refers to variable cost per unit of output. Symbolically,
AVC =
The fig: 6.2 shows that the average variable cost curve is U-shaped due to the operation
of the law of the returns to factor.
Average Total Cost (ATC): Average total cost

refers to the cost (both fixed and variable) per
unit of output. Symbolically,:
ATC = AFC+AVC
Thus, the average total cost is the sum of average
fixed cost and average variable cost. It implies
that the behaviour of ATC curve depends upon the
behaviour of both AFC curve and AVC curve. It
can be observed from Fig: 6.2 that in the beginning
both AFC and AVC curves fall, as a result of which
ATC falls speedily. After the Ql level of output,
the average variable cost curve starts rising, but
the rate of rising of AVC curve is low than the
rate of falling of AFC curve, therefore the ATC curve is still falling. After OQ2 level of output,
the ATC curve starts rising because from this stage, the rate of rising of AVC curve is
more than the rate of falling of AFC curve.
Thus, we see that the ATC curve is a U-shaped curve.
TVC
TC TC = TFC + TVC
ATC =
q
q
qq
Marginal Cost Curve (MC): Marginal cost is the cost of the additional unit of output.
Symbolically,
Formula-1:
MC =
Formula-2:
MC = TCn - TCn-1
From Fig: 6.2, it may be observed that in the beginning the MC curve declines due to
increasing returns to factor and then it rises due to diminishing returns to factor. Hence,
the MC curve will be U-shaped.
Table: (Cost Behaviour in the short run)
Output
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
Average
Variable
Cost
TFC
TVC
TC
AVC
0
4
10
15
20
23
25
5000
5000
5000
5000
5000
5000
5000
0
20
40
60
80
100
120
5000
5020
5040
5060
5080
5100
5120
5.00
4.00
4.00
4.00
4.35
4.80
89
Average
Fixed
Cost
AFC
1250.00
500.00
333.33
250.00
217.39
200.00
Average
Total Cost
Marginal
Cost
ATC
MC
1255.00
504.00
337.33
254.00
221.74
204.80
5.00
3.00
4.00
4.00
6.67
10.00
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Q: Explain the behaviour of Long Range Average Cost Curves in detail.

LONG RUN AVERAGE COST CURVES
What is Long Run? In the long run, all the
factors are variable. There is no fixed cost.
Short Run Average Cost Curves/Plant Curves:
In order to understand- how the long run average
cost curve (LAC) is derived, consider the short run average
cost curves (also known as plant curves) shown in the
Fig. 6.3-
In this figure, it is assumed that technologically,

there are only three sizes of plants in the
short run-small (SAC1), medium (SAC2)
and large (SAC3). In the short run, the firm
can operate on any short run average cost
curve given the size of the plant.
From the figure, it is clear that - (Rule of Cost Minimisation)

1.
Up to OQ level of output- The firm will select the SAC1.
2.
For Output more thats OQ, but less than OS- the firm will select SAC2.
3.
For output beyond the OS,- the firm will operate on SAC3.
Long Run Average Cost Curves/Plant Curves:

How to derive LAC? Now suppose, there are an infinite number of plants, as a result of
which there are an infinite number of short run average cost curves. The long run average
cost (LAC), therefore, will be a smooth curve, enveloping all these short run average cost
curves, as shown in Fig. 6.1. The LAC curve is tangent to every short run average cost curve.
How to Determine Optimum Capacity? In the long run, OQ is the optimum output. This
is because OQ is being produced at the minimum point of LAC and corresponding SAC6.
Why has the LAC curve always a D-shape:

90
Due to return to scale.
CPT

Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
Opportunity cost is (A) Direct cost

(B) Total cost
(C) Accounting cost
(D) Cost of foregone opportunity
TVC is (A) U-shaped

(C) convex
(B) concave
(D) concavo - convex
10.
MC is generally (A) U-shaped

(B) concave
(C) convex
The various concepts of returns to scale

may be used to explain (A) IC
(B) IQ
(C) Average fixed cost
(D) Average cost curve
11.
In the short run, TC is (A) U-shaped

(B) concave
(C) convex
12.
In the short run, there are (A) fixed & variable costs
(B) only fixed costs
(C) only variable costs
(D) none of these
In the long run, there are no (A) fixed costs

(B) variable costs
(D) none of these
13.
The shape of TC in the long run is (A) U-shaped

(B) concave
(C) convex
(D) concavo-convex
14.
If there is no production in the long run, TC

will be(A) positive
(B) zero
(C) either positive or zero
(D) none of these
15.
For
(A)
(B)
(C)
(D)
16.
If the cost function is c = kq (k is a constant),

then (A) MC > AC
(B) MC < AC
(C) MC = AC
(D) none of these
17.
The
(A)
(B)
(C)
(D)
18.
The downward portion of LAC is subject to(A) IRS

(B) CRS
(C) DRS
(D) none of these
If there is no production in the short run,

TC will be (A) zero
(B) positive
(D) none of these
In the short run, TC starts from (A) origin
(B) a positive vertical intercept
(C) a positive horizontal intercept
(D) none of these
AFC curve is (A) convex & downward sloping
(B) concave & downward sloping
(C) convex & upward rising
(D) concave & upward rising
The AFC curve (A) touches the horizontal axis
(B) touches the vertical axis
(C) touches both horizontal and vertical axis
(D) does not touch either axis
AVC is equal to MC, if (A) AVC is maximum
(B) AVC is minimum
(D) none of these
91
a cubic cost function MC reaches minimum before AVC

AVC reaches minimum before MC
MC<=AVC at all points
MC > AVC at ail points
LAC is an envelope of long run total cost

short run total cost
short run average cost
none of these

19.
The upward portion of LAC is subject to(A) IRS

(B) CRS
(C) DRS
(D) none of these
20.
The sum of direct material, direct wages

& direct expenses is (A) total cost
(B) average cost
(C) production cost
(D) prime cost
21.
(C) AVC & AC meet after sometime

(D) AVC & AC come closer & closer to
each other, but do not meet
The sum of indirect material, indirect wages,

indirect expenses is (A) Total cost
(B) Production overhead
(C) Average cost
(D) Marginal cost
22.
The sum of prime cost & production overhead

is(A) Total cost
(B) Production cost
(C) Average cost
(D) Marginal cost
23.
Suppose output increases in the short run.

The total cost will (A) Increase due to an increase in fixed
costs only.
(B) Increase due to an increase in variable
costs only.
(C) Increase due to an increase in both
fixed and variable costs.
(D) Decrease, if the firm is in the region
of diminishing returns.
24.
CPT
26.
The vertical difference between TVC and TC

is equal to (A) MC
(B) AVC
(C) TFC
(D) None of these
27.
The long run total cost curve is given by

q3 - 2q2 - 7q. Optimum output is (A) q = 1
(B) q = 2
(C) q = 3
(D) q = 4
28.
The AFC curve is given by 10/q. If output

produced is five units, the slope of AFC is(A) 2/5
(B) -2/5
(C) 5/2
(D) -5/2
29.
Indicate which of the following is a variable

cost?
(A) Cost of raw materials
(B) Cost of equipment
(C) Interest payment on capital employed
(D) Payment of rent on buildings
30.
Which of the following cost curves is never

'U' shaped?
(A) Average cost curve
(B) Marginal cost curve
(C) Average variable cost curve
(D) Average fixed cost curve
31.
The negatively-sloped (i.e. falling) part of

the long-run average total cost is due to
which of the following?
(A) Diseconomies of scale
(B) Diminishing returns
(C) The difficulties encountered in
coordinating the many activities of a
large firm
(D) The increase in productivity that results
from specialisation
32.
A firm's average total cost is Rs. 300 at

five units of output and Rs. 320 at six units
of output. The marginal cost of producing
the 6th unit is (A) Rs. 20
(B) Rs. 120
(C) Rs. 320
(D) Rs. 420
33.
The cost of one thing in terms of the alternative

foregone is known as (A) Production cost
(B) Physical cost
Which of the following statements concerning

the long-run average cost curve is false?
(A) It represents the least-cost input
combination for producing each level
of output.
(B) It is derived from a series of short-run
average cost curve.
(C) The short-run cost curve at the minimum
point of the long-run average cost curve
represents the least-cost plant size for
all levels of output.
(D) As output increases, the amount of
capital employed by the firm increases
along the curve.
25.
As output arises (A) AVC & AC move away from each other
(B) AVC & AC come closer & closer to
each other
92
CPT

(C) Opportunity cost
(D) Real cost
34.
Which cost increases continuously with the

increase in production?
(A) Average cost
(B) Marginal cost
(C) Fixed cost
(D) Variable cost
35.
In the short run, when the output of a firm

increases, its average fixed cost (A) Increases
(B) Decreases
(C) Remains constant
(D) First declines and then rises
36.
Which one of the following is also known

as planning curve?
(A) Long-run average cost curve
(B) Short-run average cost curve
(D) Average total cost curve
37.
Which of the following is true of the relationship

between the marginal cost function and the
average cost functions?
(A) If MC is greater than ATC, then ATC
is falling.
(B) The ATC curve intersects the MC curve
at minimum MC.
(C) The MC curve intersects the ATC curves
at minimum ATC.
(D) If MC is less than ATC, then ATC is
increasing.
38.
Which of the following is not determinant

of the firm's cost function?
(A) The production function
(B) The price of labour
(C) Taxes
(D) The price of the firm's output
39.
Which of the following statements is correct

concerning the relationships among the firm's
functions?
(A) TC = TFC - TVC
(B) TVC = TFC - TC
(C) TFC = TC - TVC
(D) TC = TVC - TFC
40.

(D) Average total cost curve
Which one of the following is also known

as plant curve?
(A) Long run average cost curve
(B) Short-run average cost curve
93
41.
With which of the following is the concept

of marginal cost closely related?
(A) Variable cost
(B) Fixed cost
(C) Opportunity cost
(D) Economic cost
42.
Ani quit her job at a private company, where

she earned Rs. 2,90,000 a year. She withdrew
Rs 4,00,000 in a savings account that earned
10% interest annually to buy a second hand
mini bus to commute passengers between
Agra and Delhi. There are 1,000 passengers,
who will pay Rs 4,000 a year each for the
commuter services; Rs 2,800 from each
passenger goes for petrol, maintenance,
depreciation etc. What is Ani's total revenue
from her commuter service?
(A) Rs. 40,00,000
(B) Rs. 2,90,000
(C) Rs. 28, 00,000 (D) Rs. 31,30,000
43.
In Q. 42 above, calculate Ani's accounting

costs?
(A) Rs. 12, 00,000 (B) Rs. 40, 00,000
(C) Rs. 28,00,000
(D) Rs. 8, 70,000
44.
In Q. 42 above, calculate Ani's economic

cost?
(A) Rs. 3, 30,000
(B) Rs. 40, 000
(C) Rs. 28, 00,000 (D) Rs. 31, 30,000
45.
In Q, 42 above, we can say that Ani (A) earned economic profits but suffered
accounting loss.
(B) earned economic profits and accounting
profits.
(C) suffered economic loss and accounting
loss.
(D) earned accounting profits but suffered
economic loss.
46.
In Q. 42 above, calculate Ani's accounting

profit/loss?
(A) Rs. 40,00,000
(B) Rs. 12,00,000
(C) Rs. 8,70,000
(D) Rs. 2,90,000
47.
In Q. 42 above, calculate Ani's economic

profit / loss?
(A) Rs. 12,00,000
(B) Rs. 30,000
(C) Rs. 31,30,000
(D) Rs. 8,70,000

48.
49.
50.
51.
52.
53.
CPT
Which of the following statements is Incorrect?
The above data is an example of:
(A) When the average cost is rising, the

marginal cost must also be rising.
(B) When the average cost is rising, the
marginal cost must be falling.
(C) When the average cost is rising, the
marginal cost is above the average cost
(D) When the average cost is rising, the
average fixed cost must be falling.
(A) decreasing returns to scale

(B) constant returns to scale
(D) positive fixed costs
54.
Consider the following data:

Output
Total Costs
0
1
2
3
4
5
The opportunity cost of an action (A) is Rs 40

(B) measures the undesirable aspects of
that action
(C) is the average amount of unhappiness
experienced by everyone involved
(D) is the value of the best alternative
0
15
30
45
60
75
The above data is an example of(A) constant returns to scale
A firm producing seven unit to output has

an average total cost of Rs. 150 and has
to pay Rs. 350 to its fixed factors of production
whether it produces or not. How much of
the average total cost is made up of variable
costs?
(A) Rs. 200
(B) Rs. 50
(C) Rs. 300
(D) Rs. 100
(B) decreasing returns to scale

(D) globalisation
55.
A firm has a variable cost of Rs. 1,000 at

five units of output. If fixed costs are Rs.
400, what will be the average total cost at
units of output?
(A) Rs. 280
(B) Rs. 60
(C) Rs. 120
(D) Rs. 1,400
With the same amount of resources, a farmer

can feed the following combinations of goats
and horses Goats
Horses
Option I
168
44
Option II
150
50
What is the opportunity cost to the farmer

of feeding one horse?
Which of the following is most likely to be

a variable cost for a firm?
(A) The interest payments on loans.
(B) The franchiser's fee that a restaurant
must pay to the national restaurant chain.
(C) The monthly rent on office space that
is leased for a year.
(D) The payroll taxes that are paid on
employees' wages.
56.
(A) 1 goat
(B) 3 horses
(C) 3 goats
(D) 18 goats
With the same amount of resources, a farmer

can feed the following combinations of sheep
and cows Sheep
Cows
Option I
84
22
Option II
75
25
The following data is an example of :

Output
0
1
2
3
4
5
57.
Total Costs
0
15
35
60
92
140
In Q. 56 above, what is the opportunity cost

to the farmer of feeding one sheep?
(A) 9 sheep
(B) 3 cows
(C) 1/3 sheep
(D) 1/3 cow
94
CPT
58.

The following
Output
0
1
2
3
4
5
The
(A)
(B)
(C)
(D)
59.
63.
data is an example of Total Costs

0
15
28
38
46
54
64.
65.
above data is an example ofdecreasing returns to scale

constant returns to scale
increasing returns to scale
positive fixed costs
In Q. 61 above, the accounting profit is (A) Rs. 30,000
(B) Rs. 50,000
(C) Rs. 80,000
(D) Rs 75,000
In Q. 61 above, the economic profit is (A) Rs. 75,000
(B) Rs. 35,000
(C) Rs. 80,000
(D) Rs. 30,000
Which of the following is part of the opportunity

cost of going on holiday?
(A) the money you spent on a theatre show
(B) the money you could have made if you
had stayed at home and worked
(C) the money you spent on airline tickets
(D) the money you spent on food
Suppose you find Rs. 100. If you choose

to use Rs. 100 to go to a football match,
your opportunity cost of going to the game
is (A) nothing, because you found the money.
(B) Rs. 100 (because you could have used
Rs. 100 to buy other things) plus the
value of your time spent at the game.
(C) Rs. 100 (because you could have used
Rs. 100 to buy other things) plus the
value of your time spent at the game,
plus the cost of the dinner you purchased
at the game.
(D) Rs. 100 (because you could have used
Rs. 100 to buy other things).
66.
In describing a given production technology,

the short run is best described as lasting(A) Up to six months from now
(B) Up to five years from now
(C) As long as all input are fixed
(D) As long as at least one input is fixed
67.
If there are implicit cost of production (A) economic profit will be equal to
accounting profit.
(B) economic profit will be less than
accounting profit.
(C) economic profits will be zero.
60. A firm's average fixed cost is Rs. 20 at six

units of output. What will it be at four units
of output?
(A) Rs. 60
(B) Rs. 30
(C) Rs. 40
(D) Rs. 20
61.
(D) economic profit will be more than

accounting profit.
68.
Output
X owns a small pottery factory. He can make

1,000 pieces of pottery p.a. and sell them
for Rs. 100 each. It costs X Rs. 20,000 for
the raw materials to produce the 1,000 pieces
of pottery. He has invested Rs 1,00,000 in
his factory and equipment: Rs. 50,000 from
his savings and Rs. 50,000 borrowed at 10%.
(Assume that he could have loaned his money
out at 10%, too). X can work at a competing
pottery factory for Rs. 40,000 per year.
TC(Rs.) 240 330 410 480 540 610 690

The average fixed cost of two units of output
is -
69.
The accounting cost is (A) Rs. 25,000

(B) Rs. 50,000
(C) Rs. 80,000
(D) Rs 75,000
62.
Consider the following table-
70.
In Q. 61 above, the economic cost is (A) Rs. 75,000

(B) Rs. 70,000
(C) Rs 80,000
(D) Rs 30,000
95
(A) Rs. 80
(B) Rs. 85
(C) Rs. 120
(D) Rs. 205
In Q. 68 above, the marginal cost of the

sixth unit of output is (A) Rs. 133
(B) Rs. 75
(C) Rs. 80
(D) Rs. 450
In Q. 68 above, diminishing marginal returns

start to occur between units (A) 2 and 3
(B) 3 and 4
(C) 4 and 5
(D) 5 and 6

71.
72.
73.
CPT
(B) The income that could have been earned
in alternative uses by the resources
owned by the firm.
(C) The payment of wages by the firm.
(D) The normal profit earned by the firm.
What is the average total cost of producing

20 units, if the fixed cost is Rs. 5,000 and
the variable cost is Rs. 2 per unit?
(A) 250
(B) 260
(C) 258
(D) 252
For producing 100 units the Total variable

cost is Rs. 500 & the total fixed cost is
Rs. 1,000. Compute the average Cost (A) 10
(B) 15
(C) 5
(D) 20
79.
Suppose the total cost of production of

commodity X is Rs. 1,25,000. Out of this
cost the implicit cost is Rs. 35,000 and
the normal profit is Rs. 25,000. what will
be explicit cost of commodity X?
(A) 90,000
(B) 65,000
(C) 60,000
(D) 1,00,000
80.
Marginal cost is defined as (A) the change in output due to a one unit
change in output
(B) total cost divided by output
(C) the change in total cost due to one
unit change in output
(D) total revenue divided by the quantity
of input
81.
Mac's burgers is a small restaurant and a

price taker. The table below provides the
data of Mac's output and costs in rupees-
Consider the following cost components:

Direct material
Rs. 2,500
Indirect material
Rs. 1,500
Indirect labour
Rs. 2,000
Direct labour
Rs. 1,400
Management expense
Rs. 3,000
Promotional expense
Rs. 2,700
Indirect expense
Rs. 1,500
Direct expense
Rs. 1,000
From the above data, compute the prime

cost -
74.
75.
76.
77.
78.
(A) 6300
(B) 2900
(C) 4900
(D) 5300
Qty.
0
10
20
30
40
50
60
In Q. 73 above, compute Production cost(A) 7600
(B) 6900
(C) 9900
(D) 8700
In Q. 73 above, compute the cost of goods

sold (A) 9900
(B) 11500
(C) 12600
(D) 12900
(B) 15,600
(C) 12,900
(D) 14,800
If a seller realises Rs. 10,000 after selling

100 units and Rs. 14,000 after selling 120
units what is the marginal revenue here?
(A) Rs. 4,000
(B) Rs. 450
(C) Rs. 200
(D) Rs. 100
ATC MC
If burgers sell for Rs. 14 each, what is Mac's

profit maximising level of output (A) 10 burgers
(B) 40 burgers
(C) 50 burgers
(D) 60 burgers
In Q. 73 above, compute the cost of sales(A) 15,500
TC
FC TVC AVC
100
210
300
400
540
790
1060
Which of the following is the example of

an "explicit cost"?
(A) The wages a proprietor could have made
by working as an employee of a large
firm.
96
82.
In Q. 81 above, what is the total variable

cost, when 60 burgers are produced?
(A) Rs. 690
(B) Rs. 960
(C) Rs. 110
(D) Rs. 440
83.
In Q. 81 above, what is the average fixed

cost when 20 burgers are produced?
(A) Rs. 5
(B) Rs. 3.33
(C) Rs. 10
(D) Rs. 2.5
84.
In Q. 81 above, between 10 and 20 burgers,

what is the marginal cost (per burger)?
(A) Rs. 11
(B) Rs. 13
(C) Rs. 14
(D) Rs. 9
CPT
85.
86.
87.
88.
89.

Which of the following is an example of an
"implicit cost"?
(A) Interest that could have been earned
on retained earning used by the firm
to finance expansion.
(B) The payment of rent by the firm for the
building in which it is housed.
(C) The interest payment made by the firm
for borrowal from a bank.
(D) The payment of wages by the firm.
The average fixed cost (A) remains the same whatever the level
of output
(B) increases as output increases
(C) diminishes as output increases
Average variable cost curve (A) slopes downwards at first and then
upwards
(B) slopes upwards, then remains constant
and falls
(C) slopes downwards
If a firm produces zero output in the short
period (A) its total cost will be zero
(B) its variable cost will be positive
(C) its fixed cost will be positive
(D) its average cost will be zero
The average total cost of producing 50 units
is Rs. 250 and total fixed cost is Rs. 1,000.
What is the average fixed cost of producing
100 units?
(A) Rs. 10
(B) Rs. 30
(C) Rs. 20
(D) Rs. 5
90.
The MC curve cuts the AVC and ATC curves(A) at different points
(B) at the falling parts of each curve
(C) at their respective minimise
(D) all the rising parts of each curve
91.
Which of the following statements is true?

(A) ATC=AFC - AVC
(B) AVC=AFC + ATC
(C) AFC=ATC + AVC
(D) AFC=ATC - AVC
92.
What is the total cost of producing 20 units,

if the fixed cost is Rs. 5,000 and the variable
cost is Rs.2 per unit ?
(A) 5400
(B) 5040
(C) 4960
(D) 5020
93.
If AC is minimum (A) MC > AC

(B) MC < AC
(C) MC = AC
(D) none of these
94.
Explicit cost means (A) Cost paid in cash to outsider

(B) Self-employed resources
95.
Average cost includes (A) Fixed cost

(B) Variable cost
(D) none of these
96.
What is the other name for long run average

cost curve?
(A) profit curve
(B) planning curve
(C) demand curve
(D) indifference curve
97.
The marginal cost curve intersects the average

cost curve when the average cost is (A) Maximum
(B) Minimum
(C) Rising
(D) Falling
98.
Suppose that a sole proprietorship is earning

a total revenue of Rs. 2,00,000 and is incurring
explicit costs of Rs. 1,50,000. If the owner
could work for another company for Rs. 60,000
a year, we would conclude that (A) the firm is incurring an economic loss.
(B) implicit costs are Rs. 50,000.
(C) the total economic costs are Rs.
2,00,000.
(D) the individual is earning an economic
profit of Rs. 50,000.
99.
Diminishing marginal returns implies (A) Decreasing average variable costs

(B) Decreasing marginal costs
(C) Increasing marginal costs
(D) Decreasing average fixed costs
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CPT
100. Increasing returns imply -
103. If a firm's average variable cost curve is rising,

its marginal cost curve must be -
(A) constant average cost

(B) diminishing cost per unit of output
(A) constant
(C) optimum use of capital and labour
(B) above the total cost curve
(D) external economies
(C) above the average variable cost curve

101. is an implicit cost of production -
104. Which of the following statement is false?

(A) Economic costs include the opportunity
costs of the resources owned by the
firm
(B) Accounting costs include only explicit
costs.
(C) Economic profit will always be less than
accounting profit if resources owned
and used by the firm have any opportunity
costs.
(D) Accounting profit is equal to total revenue
less implicit costs.
(A) Wages of the labour

(B) Electricity charges
(C) Interest on owned capital
(D) Payment for the raw material
102. Which of the following best describes the
shape of the total variable cost curve?
(A) Initially increasing at an increasing rate,
then increasing at a decreasing rate.
(B) Initially increasing at a decreasing rate,
then increasing at an increasing rate.
(C) Initially decreasing at an increasing rate,
then decreasing at a decreasing rate.
(D) Increasing at a constant rate.
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
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CPT

CHAPTER 7
THE THEORY OF MARKET

Q: Define Market? What factors determine the extent of market?
MEANING OF MARKET
In common parlance, market is generally

understood to mean a particular place, where
goods are sold and purchased.
But in economics, there is no need for any particular
place to form a market. The elements of a market
are: -
Factors affecting extent of Market

1.
Nature of Commodity
Perishable
Non-Perishable
2.
Extent of Demand
3.
Size of Production
4.
Means of Communication
and Transport
Knowledge about market conditions,
5.
Peace and security
One price for a product or service at a

given time.
6.
Currency and credit system
(i)
Buyers and sellers,
(ii)
A product or service,
(iii)
Bargaining for a price,
(iv)
(v)
VALUE V/S. PRICE

Q: What is the difference between Value and Price?
Value:
Value means the quantity of other things for which a commodity is exchanged.
It is the economic worth of a commodity expressed in relation to another commodity.
It is the general power of a thing to obtain other things or its purchasing power.
Price: When the value of a commodity is expressed in terms of money, then it is called price.
For Example,
(i)
If the price of wheat is Rs. 8/- kg., then it can be said that the value of Rs. 8/- is one
kg. wheat.
(ii)
If the price of wheat is Rs. 8/- kg. and that of rice is Rs. 24/- kg., then the value of rice
is three times the value of Wheat.
Factors affecting Price: The price of a thing depends on three elements 1.
Utility
2.
Scarcity: Water, air, sunlight, etc. have immense utility, but even then they have no price;
because, they are not scarce.
3.
Transferability: If a thing is not transferable, then its price will be nil. For example, the
degree of CA is not transferable from one person to another, so its market price will be
nil.
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REVENUE ANALYSIS & BEHAVIOURAL PRINCIPLES

Q: Explain the meaning of Total Revenue, Average Revenue and Marginal Revenue.
Total Revenue (TR):

The whole income received by a seller from selling a given quantity of a product is called total
revenue.
Symbolically,
TR = P x Q
Where. P = Price per unit; Q = Quantity of a commodity sold.
Average Revenue (AR):

Average revenue is revenue earned per unit of output.
Average Revenue (AR) =
Marginal Revenue (MR):

Marginal revenue is the revenue earned by selling an additional unit of a product.
Symbolically,
If only one unit is sold additionally,
MRn = TRn - TRn-1 ,
If more than one unit is sold,
MR =
TR
Q
Q: What are 'Behavioural Principles'? Explain.

Principle- 1: A firm should not produce at all, if
Total Revenue < Total Variable Cost.
For example,
The VC is Rs. 10/- per unit and FC Rs. 10,000/-. The demand of the product is 1,000 units.
The selling price is Rs. 12/- per unit. Decide, whether the firm should continue production or shut
down.
If the firm shuts down the production, the total loss will be equivalent to FC, i.e. Rs.10,000/However, if the firm continues production, the total loss = (12 x 1.000) - [(10 x 1,000) + 10,000]
= Rs. 8,000
So, the loss will be minimum, if the firm continues production.
Principle-2: If will be profitable for the firm to increase output, if MR > MC, until (a)
MR = MC
(b)
MC cuts MR from below.
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CPT

DETERMINATION OF PRICES
Q: What is an equilibrium price? How is it determined in a free market economy/perfect competition?

EQUILIBRIUM PRICE
The equilibrium price is the price, at which Total supply = Total demand.
In a graph, the equilibrium price is determined at the intersection point of 'Demand Curve'
and 'Supply Curve'.
In Fig. 7.1, Price P is the equilibrium price,
because at this price, the total demand of the
product will be equal to the supply of the product.
Suppose, instead of P, P1 is set as price.
At P1, the total demand will be Q0, while the
total supply will be Ql, i.e. the demand is less
than the supply. Since there is perfect competition
in the market, so competition among suppliers
will force the price to go down. This position will
continue until the price P is arrived.
Q: Show the effect on equilibrium price in the change of demand and supply.
CHANGES IN DEMAND & SUPPLY
The other factors (like income level of consumer, tests and preferences, prices of substitutes,
etc. may cause a change in demand and supply. These changes in demand and supply can be classified
as under:
(i)
(i)
An increase (shift to the right) in demand:
(ii)
A decrease (shift to the left) in demand:
(iii)
An increase (shift to the right) in supply:
(iv)
A decrease (shift to the left) in supply:
(v)
Simultaneous change in the demand and supply
An increase in Demand;
In Fig. 7.2, the original demand curve is DD and the supply curve is SS. Both the curves
intersect at point-E, so the equilibrium price is OP.
Now suppose the income of the consumer increases. As a result of which, the demand
curve will shift to right and becomes D 1D 1 The supply curve will remain the same.
Now at OP price, the demand increases to OQ2 while supply remains the same i.e. OQ.
Since supply is short, the competition among suppliers will force the price to go up. A
new equilibrium between the demand and supply will be reached at E1. At this equilibrium
point, OP1 is price and OQ1 is the quantity.
Conclusion: Thus, we see that as a result of an increase in demand, there is an increase

in equilibrium price, as a result of which the quantity sold and purchased also increases.
(ii) Decrease in Demand:
Conclusion: Thus, with a decrease in demand, there is a decrease in the equilibrium price
and quantity demanded and supplied (Fig. 7.3).
101
CPT
(iii) Increase in Supply;
Conclusion: Thus, as a result of an increase in supply, the equilibrium price will go down
and the quantity demanded will go up (Fig. 7.4).
(iv) Decrease in Supply:
Conclusion: If, there is a decrease in supply, the equilibrium price will go up, but the amount
sold and purchased will go down (Fig. 7.5).
(v) Simultaneous Change in Demand and Supply;

There may be cases in which both supply and demand change at the same time. Consider the
following diagrams:
102
CPT
Fig. 7.6 shows that the increase in demand is equal to increase in supply. The new demand
curve D 1D1 and S 1S1 meet at E?. The new equilibrium price is equal to the old equilibrium
price (OP).
Fig. 7.7 shows that the increase in demand is more than the increase in supply. Hence,
the new equilibrium price OP1 is higher than the old equilibrium price OP.
Fig. 7.8 shows that supply increases in a greater proportion than demand. The new equilibrium
price will be less than the original equilibrium price.
Q: Explain the difference between Market Price and Normal Price
Market Price: Market price is the price of a commodity, which prevails during a very short
period.
Normal Price: Normal price is the price of a commodity, which prevails in the long period.
Questions
1.
Market refers to -
4.
Market price prevails in which of the following

market situations?
(A) Very short period
(B) Short period
(C) Long period
(D) Very long period
5.
The real determinant of the size of a market

in a country is the (A) income of its population
(B) geographical area
(C) size of its population
(D) income of the government
6.
In the very short run (A) demand only can change

(B) supply only can change
(C) both demand & supply can change
(D) none of these
(A) A particular place

(B) Not a particular place
(C) Govt. plays a major role
(D) None of these
2.
A firm will shut down in the short run, if (A) it is suffering a loss.
(B) fixed costs exceed revenues.
(C) variable costs exceed revenues.
(D) total costs exceed revenues.
3.
Value of a good means (A) Its economic worth

(B) Its power to obtain other goods
(C) Both (A) & (B)
103

7.
In the long run (A) only demand can change

(B) only supply can change
(C) both demand & supply can change
(D) none of these
8.
Equilibrium price may be determined through(A) only demand

(B) only supply
(C) both demand & supply
(D) none of these
9.
An increase in demand with no change in

supply leads to (A) P rises, Q falls
(B) P falls, Q rises
(C) both P & Q fall
(D) both P & Q rise
CPT
15. Suppose consumer tastes shift towards the
consumption of apples. Which of the following
statements is an accurate description of the
impact of this event on the market for apples?
(A) There is an increase in the quantity
demanded of apples and in the supply
for apples.
(B) There is an increase in the demand and
supply of apples.
(C) There is an increase in the demand for
apples and a decrease in the supply
of apples.
(D) There is an increase in the demand for
apples and an increase in the quantity
supplied
16. An increase in demand and an increase in
supply will (A) affect equilibrium quantity in an
indeterminate way and price will decrease.
(B) affect price in an indeterminate way and
quantity will decrease.
(C) affect price in an indeterminate way and
quantity will increase.
(D) affect equilibrium quantity in an
indeterminate way and price will increase.
10. An increase in supply with unchanged demand

leads to (A) p rises, q falls
(B) both p & q fall
(C) both p & q rise
(D) p falls, q rises
17. What combinations of changes would most

likely decrease the equilibrium quantity?
(A) When supply increases and demand
decreases.
(B) When demand increases and supply
decreases
(C) When supply increases and demand
increases.
(D) When demand decreases and supply
decreases.
11. An increase in both demand and supply leads

to (A) q rises, but p remains same or rises
(B) q rises, but p falls
(C) Neither (A) nor (B) holds
(D) Both (A) and (B) are possible
12. The
(A)
(B)
(C)
(D)
sum of all MR values gives us MR

TR
Both (A) & (B)
Neither (A) nor (B)
18. Which of the following situation does not lead

to an increase in equilibrium price?
(A) An increase in demand, without a change
in supply.
(B) A decrease in supply accompanied by
an increase in demand.
(C) A decrease in supply without a change
in demand.
(D) An increase in supply accompanied by
a decrease in demand.
13. If price is fixed, the TR curve is (A) linear but does not pass through origin
(B) non-linear but passes through origin
(C) linear & passes through origin
(D) non-linear but does not pass through
origin
14. MR of the nth unit is given by (A) TRn - TRn-1
(B) TRn + TRn-1
19. If price is forced to stay below equilibrium

price (A) excess supply exists
(B) excess demand exists
(C) TRn / TRn-1

(D) TRn+l / TRn
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CPT
(C) either (A) or (B)

(C) Quantity will increase; price cannot be

determined.
(D) Quantity will decrease; price cannot be
determined.
20. If price is pegged below equilibrium price (A) excess supply exists
(B) excess demand exists
25. With a given supply curve, a decrease in

demand causes (A) An overall decrease in price, but an
increase in equilibrium quantity
(B) An overall increase in price, but a
decrease in equilibrium quantity
(C) An overall decrease in price and a
decrease in equilibrium quantity
(D) No change in overall price but a reduction
in equilibrium quantity
21. Assume that consumers' incomes and the

number of sellers in the market for good A
both decrease. Based upon this information
we can conclude, with certainty, that
equilibrium(A) price will increase
(B) price will decrease
(C) quantity will increase
(D) quantity will decrease
26. Suppose that the supply of cameras increases

due to an increase in foreign imports. Which
of the following will most likely occur?
(A) The equilibrium price of cameras will
increase.
(B) The equilibrium quantity of cameras will
decrease.
(C) The equilibrium price of camera film
decrease.
(D) The equilibrium quantity of camera films
will increase.
22. When a market is in equilibrium (A) no shortages exist.

(B) quantity demanded equals quantity
supplied.
(C) a price is established that clears the
market.
(D) all of the above are correct.
23. In the table below, what will be equilibrium
market price?
Price Demand (tonnes
(Rs.)
per annum)
1
1000
2
900
3
800
4
700
5
600
6
500
7
400
8
300
(A) Rs.2
(B)
(C) Rs.4
(D)
27. Assume that in the market for good-Z, there

is a simultaneous increase in demand and
the quantity supplied. The result will be (A) an increase in equilibrium price and
quantity.
(B) A decrease in equilibrium price and quantity
(C) An increase in equilibrium quantity and
uncertain effect on equilibrium price
(D) A decrease in equilibrium price and
increase in equilibrium quantity
Supply (tonnes
per annum)
400
500
600
700
800
900
1000
1100
Rs.3
Rs.5
28. Marginal Revenue is equal to (A) the change in price divided by the change
in output
(B) the change in quantity divided by the
change in price
(C) the change in P x Q due to a one unit
change in output
(D) Price, but only if the firm is a price
searcher.
24. Suppose the technology for producing personal

computers improves and, at the same time,
individuals discover new uses for personal
computers so that there is greater utilization
of personal computers. Which of the following
will happen to equilibrium price and equilibrium
quantity?
(A) Price will increase; quantity cannot be
determined.
(B) Price will decrease; quantity cannot be
determined.
29. TR is given by (A) p/q

(B) q/p
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CPT
fixed costs are Rs 100. His other costs are
given below -
(C) pq
(D) none of these
Output
0
1
2
3
4
5
6
30. A competitive firm sells his product at market

price of Rs. 51 per unit. The fixed cost is
Rs. 300 and variable cost for different level
of production are as under Qty. TVC
0
10
470
20
980
30
1850
40
3400
50
5950
FC TC
AVC
ATC MC
VC
0
5
11
18
26
36
50
FC
TC
MC
What is total cost, when 4 units are produced?

(A) Rs. 126
(B)
Rs 100
(C) Rs. 26
(D)
Rs. 8
35. In Q. 34 above, when production increases
from 5 to 6 units, his marginal cost becomes?
(A) Rs. 8
(B)
Rs. 14
(C) Rs. 10
(D)
Rs. 6
When production is 30 units, the average

variable cost is -
36. In Q. 34 above, the average fixed cost of

producing 4 units is (A) Rs. 1.50
(B)
Rs. 2.25
(C) Rs. 25
(D)
Rs. 3.00
(A) 70.6
(B) 60.6
(C) 61.6
37. In Q. 34 above, the average total cost of

producing 6 units is (A) Rs. 2.50
(B)
Rs. 3.00
(C) Rs. 25
(D)
Rs. 30
(D) 71.6
31. In Q. 30 above, when production is 50 units,
marginal cost is (A) 265
38. In Q. 34 above, when will Mr. X maximize

profits?
(A) When 4 units are produced
(B) When 5 units are produced
(C) When the company shuts down
(D) When 3 units are produced
(B) 255
(C) 245
(D) 275
32. In Q. 30 above, to maximize profit, the firm
should produce -
39. A competitive firm sells its product at a price

of Rs. 100 per unit. Its fixed cost is Rs. 300
and its variable costs for different levels of
production are as under -
(A) 30 units
(B) 10 units
Qty.
0
5
10
15
20
25
30
35
40
45
50
(C) 20 units
(D) 40 units
33. In Q. 30 above, if the market price drops from
Rs. 51 to Rs. 47, the firm should (A) Close down
(B) produce 10 units
(C) Produce 30 units
(D) Produce 20 units
34. Mr. X operates in a perfectly competitive market.
He sells his product at Rs. 8 per unit. His
106
TVC
0
270
490
720
1000
1370
1870
2540
3420
4550
5970
FC
TC
AVC
ATC
MC
CPT
When production is 35 units, the average

variable cost is (A) Rs. 7.25
(B) Rs. 72.25
(C) Rs. 72.57
(D) Rs. 85.50
(C) Rs. 500

(D) cannot be determined
44. In Q. 43 above, what is the average total cost,
when 5 units are produced?
(A) Rs. 218
(B) Rs. 1090
40. In Q. 39 above, marginal cost per unit that

corresponds to 25 units of production is (A) Rs. 3.50
(B) Rs. 74
(C) Rs. 450
(D) Rs. 370
(C) Rs. 730

(D) Rs. 210
45. In Q. 43 above, what is the marginal revenue
(per unit), when production increases from
7 units to 8 units?
(A) 160
41. In Q. 39 above, To maximize profit, the firm

should produce (A) 30
(B) 35
(C) 45
(D) 50
(B) 140
(C) 120
(D) 100
46. In Q. 43 above, what is the marginal cost,
when production increases from 3 to 4 units?
42. In Q. 39 above, If the market price drops from

Rs. 100 to Rs. 74, the firm short run response
should be (A) continue to produce the same number
of units as before the drop in price
(C) produce 20 units
(D) produce 25 units
(A) 140
(B) 80
(C) 60
(D) 240
47. In Q. 43 above, to maximise its profit or minimise
its loss, what level of production should one
choose?

Output Price
Q
per
unit
P
0
250
1
240
2
230
3
220
4
210
5
200
6
190
7
180
8
170
9
160
TC
ATC MC
(A) 7 units
TR MR
(B) 6 units
(C) 4 units
(D) 8 units
500
730
870
950
1010
1090
1230
1470
1850
2410
48. In Q. 43 above, at the profit maximising level,

what price should be charged?
(A) Rs. 190
(B) Rs. 200
(C) Rs. 210
(D) Rs. 220
49. In Q. 43 above, calculate the maximum profit
or the minimum loss (A) Loss of Rs. 100
What is the fixed cost?
(B) Loss of Rs 60
(A) Rs. 250

(B) Rs. 730
(C) Profit of Rs. 90

(D) Loss of Rs. 90
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CPT
50. The following table shows the average cost

of a perfectly competitive firm Qty.
0
1
2
3
4
5
6
7
8
9
10
11
12
13
AFC
ATC
MC
80.00
40.00
26.66
20.00
16.00
13.33
11.42
10.00
8.88
8.00
7.27
6.66
6.15
100.00
58.00
44.00
36.25
31.40
28.33
26.29
26.13
26.56
27.30
28.45
30.00
31.92
20
17
15
13
12
13
14
25
30
34
40
47
55
54. A firm encounters its "shutdown point" when(A) Average total cost equals price at the
profit-maximising level of output.
(B) Average variable cost equals price at
the profit-maximising level of output.
(C) Average fixed cost equals price at the
profit-maximising level of output.
(D) Marginal cost equals price at the profitmaximising level of output.
55. If marginal revenue exceeds marginal cost,
a monopolist should (A) increase output
(B) decrease output
(C) keep output the same because profits
are maximised when marginal revenue
exceeds marginal cost
(D) raise the price
56. In the long run any firm will eventually leave
the industry, if (A) price does not at least cover the average
- total cost.
(B) price does not equal marginal cost.
(C) economies of scale are being reaped.
(D) price is greater than long run average
cost.
If the price of the good is Rs 13, the firm

will be produce (A) 4 units at a loss of Rs. 93
(B) 6 units at a loss Rs. 92
(C) zero units at a loss of Rs. 80
(D) 8 units at a profit of Rs. 9
57. "I am making a loss, but with the rent I have

to pay, I can't afford to shut down at this
point of time."
51. In Q. SO above, if the market price is Rs

31, the firm will produce (A) 9 units at an economic profit of Rs. 40
(B) 10 units at an economic profit of Rs.
67
(C) 9 units at an economic profit of Rs. 81
(D) 0 units of output and lose its fixed cost
If this entrepreneur is attempting to maximise

profits or minimise losses, his behaviour in
the short run is (A) rational, if the firm is covering its variable
cost
(B) rational, if the firm is covering its fixed
costs
(C) irrational, since plant closing is necessary
to eliminate losses
(D) irrational, since fixed costs are eliminated
if a firm shuts down
52. In Q. 50 above, if the price is Rs 26, the

perfectly competitive firm will (A) shut down in the short run
(B) produce 8 units at an economic loss
of Rs. 9
(C) produce 9 units at an economic loss
of Rs. 5
(D) produce 8 units at an economic loss
of Rs. 1.04

(A) If marginal revenue exceeds marginal
cost the firm should increase output.
(B) If marginal cost exceeds marginal revenue
the firm should decrease output.
(C) Economic profits are maximised when
total costs are equal to total revenue.
(D) Profits are maximised when marginal
revenue equals marginal cost.
53. In Q. 50 above, if the price is Rs. 34, the

perfectly competitive firm will (A) shut down
(C) produce 11 units
(D) produce 13 units
108
CPT

Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
C
.
109
CPT
CHAPTER 8
PRICE AND OUTPUT DETERMINATION

Q: What are the different types of Markets?
There are 4 types of markets:
1.
Perfect Competition,
2.
Monopoly
3.
Imperfect Competition
(a)
Monopolistic competition,
(b)
Oligopoly
PERFECT COMPETITION
Q: What do you mean by Perfect competition? Explain its characteristics.

Meaning: Perfect competition refers to the market, when there are many buyers and sellers in
the market. Sellers are selling homogeneous product. No individual buyer or seller can influence the
price of product.
Characteristics:
(1)
Large number of buyers and sellers in the market. Their number is so large that no
individual buyer or seller can influence the price of the product. No firm in the market
is the price maker, but they are the price taker.
(2)
Homogeneous Product: Homogenous means that the product must be same in physical
characteristics, colour, size, components, etc.
(3)
Free Entry or Exit
(4)
Perfect Knowledge
(5)
Perfect Mobility Of Resources
(6)
Uniform Price
Q: How the problem of price and output determination is solved under perfect competition
in short run?
SHORT RUN EQUILIBRIUM OF INDUSTRY
'
Meaning of Industry: In economics, industry consists of large number of firm, producing

the homogeneous product. For example, when we say
Shoe Industry of India', then we are dealing with all the
firms of India, producing the shoe.
Equilibrium Point: An industry will be in equilibrium,
whenThe total Supply of the industry = The total demand of
the industry
Consider the following diagram:
In the Fig: 8.1, DD is industry demand curve and SS
is the industry supply curve. Both the curves intersect
at point-E. At this point, both demand and supply are
equal. So, this is the equilibrium point for the industry.
OP is the equilibrium price and OQ is the equilibrium
quantity.
110
Fig : 8.1 Determination of Equilibrium

Price of Industry
CPT

SHORT RUN EQUILIBRIUM OF FIRM
The firm will be in equilibrium, when it is maximising its profit.
Firm's Demand Curve: Industry price OP is fixed through the interaction of total demand
and total supply of the industry. An individual firm cannot alter this price under perfect
competition. So, there is only one price (i.e. OP) at which the consumer will be ready
to purchase, whatever the quantity may be.
So, PD will become the demand curve of the individual firm.
Fig: 8. 2 The firm's demand curve under Perfect Competition
Average Revenue (AR) and Marginal Revenue (MR) of Firm: The line PD will also
indicate the AR curve and MR curve.
Table: Average Revenue and Marginal Revenue
Price (Rs.)
TR
Q
Quantity Sold
Total Revenue
Average Revenue
D = C/B
Marginal Revenue
C =A x B
MR =
15
10
30
16
48
22
66
30
90
To conclude, in a perfectly competitive market, the firm's AR = MR = Price.
Condition for equilibrium of a firm:

(i) MR = MC
(ii) The MC curve should cut MR curve from below
Fig: 8. 3 Equilibrium of Firm under Perfect Competition

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CPT
In Fig. 8.3, MR is equal to MC at two places- F and E. But the MC curve is cutting the MR
curve from below at point-E. So, OQ2 is the equilibrium level of output.
Supply Curve of the Firm in a Competitive Market: Consider Fig. 8.4.
Fig. 8.4 Supply Curve of Firm

Suppose the market price of a product is P1 corresponding to it- we have D1 as demand curve
of the firm. At price P1, the firm supplies Q1, because the firm will be in equilibrium at this point.
Similarly, if the market price is P2, the corresponding demand curve is D2. At P2, the quantity supplied
is Q2. Similarly, at price P3 and P4, the supply will be Q3 and Q4 respectively. Therefore, the firm's
marginal cost curve also depicts firm's supply curve.
Further, for prices below AVC, the firm will supply zero units, because here the firm is unable
to meet even its variable cost.
To conclude,
In perfect competition, the firm's marginal cost curve above AVC will be the firm's
supply curve.
Q: Explain the various profit or loss position of a competitive firm
1.
Super Normal Profit:
AR > ATC. Consider Fig: 8.5
2.
Normal Profit:
AR = ATC. Consider Fig: 8.6.

A normal % of profits is already included in the cost of production.
3.
Loss :
AR < ATC. Consider Fig: 8.7.
Fig: 8.5 Super-Normal Profit

of a Competitive Firm
Fig: 8.6 Normal Profit of a

Competitive Firm
112
Fig. 8.7 Loss of a

Competitive Firm
CPT
Q: How price and out determination is determined under perfect competition in the Long run?
LONG RUN EQUILIBRIUM
In the long run, the firms will be earning just normal profits, which are included in the AC. If
they make supernormal profits, new firms will be attracted to the industry; this will lead to a fall in
price (a downward shift in the individual demand curve) and an upward shift of the cost curves due
to increase a the prices of factors as the industry expands. Similarly, if the firms make losses in
the short run, some of them will leave the industry in the long run. This will raise the price, but costs
may fall. Consider Fig. 8.8.
This figure shows that DD and SS are the original demand and supply curves of the industry
respectively. The equilibrium price is OP. At this price, the firm is making super-normal
profits working with the plant whose cost is denoted by SAC1.
Seeing the excess profit, new firms will enter the industry. As the quantity supplied in
the market increases, the supply curve in the market will shift to the right and will become
S1S1. Now the equilibrium price will become OP|.
The point El shows the industry and in firm's equilibrium in the long run.
To conclude:
(i)
The firm just earns normal profits.
(ii)
There is no further entry or exit from the market, the industry is said to have attained
long-run equilibrium.
(iii)
The condition for the long-run equilibrium of the firm is LMC = LAC = P
(iv)
The firm adjusts its plant size as to produce that level of output at which the LAC is the
minimum possible in the long run in such a way that SMC = LMC = SAC = LAC = P = MR
Fig: 8. 8 Long - Run equilibrium of the Firm

In perfect competition, in the long run, a firm will work at the lowest point of LAC, so
there is no waste of capacity or no excess capacity left with the firm.
MONOPOLY
Q: What do you mean by "Monopoly Market"? What are its main characteristics?
Meaning;
Monopoly is the market, where there is only a single seller of a product, which has no close
substitutes. It is an extreme form of imperfect competition.
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CPT
Pure monopoly is rarely found in practice. In our country, water, electricity, railway, etc. are
monopoly forms of market.
Characteristics:
1.
Single Seller: So, there is no distinction between the firm and the industry in a monopolistic
market. That is why- the seller is price maker in the case of monopoly.
2.
No Close-substitutes
Since there are no close substitutes, the cross elasticity of demand for the monopolist's
product is zero or very small. The price elasticity of demand for a monopolist's product
is also less than one. As a result, the monopolist faces a downward sloping demand curve.
3.
Restriction to Entry
Q: Explain the behaviour of Marginal Revenue, Average Revenue, Total Revenue and Elasticity
of Demand in the case of a Monopoly Market. Also explain the relationship between them.
1.
AR curve will be downward sloping (negatively sloped). This shows that the monopolist
is required to reduce the price to sell more.
2.
Since there is only one seller of the product, so his demand curve is identical to the market
demand curve for the product.
3.
MR curve will also be negatively sloped. MR curve lies halfway between the AR curve and
the Y-axis.
4.
AR cannot be zero, but MR can be zero or even negative.
Behaviour of Various Curves:
Tabular Presentation:
( Assuming TR = 10Q - Q2)
Quantity
Sold
Total
Revenue
TR =10Q-Q2
Average
Revenue
Marginal
Revenue1
AR =TR / Q MR =
16
21
24
25
24
-1
21
-3
16
-5
-7
Fig : 8.10 A monopolistics demand

Curve and Marginal Revenue Curve
The Marginal Revenue can alternatively be calculated by deviation method, i.e.

In this case, MR shall be 10, 8, 6, 4, 2, 0. -2, -4, -6, -8, respectively. Thus, the both formula gives the
different result. Here MR is computed as the rate of total revenue for infinitestimal change in Q.
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CPT
Relationship between MR, AR and Elasticity of

Demand:
MR = AR x
(1)
e 1
e
If e = l, then= 0
(i)
MR = AR x
(ii)
Consider Fig. 8.11. C is the middle

point of AR. The elasticity on the
straight line curve is calculated by
the formula At this point, elasticity will be equal
to one. Corresponding to point C,
MR will be zero at Q. Since MR is
zero, so TR will be maximum at Q.
(2)
(3)
If e > l,
(i)
MR will be positive
(ii)
Total revenue will be increasing.
If e < l,
(i)
MR = negative
(ii)
Total revenue will be decreasing.
Thus, it will not be profitable for the monopolist to produce beyond the middle point on the demand
Lower
1
1 Segmentcurve.
Upper
1 Segment
Q: How the equilibrium of a monopoly firm is determined in the short run?

SHORT RUN EQUILIBRIUM OF MONOPOLY
Firms in a perfectly competitive market price-takers so that they are only concerned about determination
of output. But this is not case with a monopolist. A monopolist has to determine not only output but
also the price of his product.
Conditions for the equilibrium:

The following two conditions must be satisfied:
(i)
MC = MR,
(ii)
MC curve must cut MR curve from below
In Fig. 8.12, both the conditions for the equilibrium are satisfied
at point E. At this point, MC is equal to MR and MC curve cuts
AR curve from below. So, the equilibrium quantity is OQ and the
equilibrium price is OP.
Fig. 8.12 Equilibrium position of

monopolist (Short - run)
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CPT
1.
Super Normal Profit:
AR > ATC. Consider Fig: 8.13
2.
Normal Profit:
AR = ATC. Consider Fig: 8.14

A normal % of profits is already included in the cost of production.
3.
Loss:
AR < ATC. Consider Fig: 8.15
Fig: 8.13 Super Normal Profit

of a Monopoly firm
Fig: 8.14 Normal Profit

of a Monopoly firm
Fig: 8.15 Loss of a Monopoly

firm
Q: How the equilibrium monopoly firm is determined in the Long run?

LONG RUN EQUILIBRIUM OF INDUSTRY
Long-run is a period long enough to allow the monopolist

to adjust his plant size in such a way that it maximizes
his profit.
In the absence of competition, the monopolist need

not produce at the optimal level.
In other words, he need not reach the minimum of

LAC curve, he can stop at any point where his profits
are maximum.
However, one thing is certain -The monopolist will not

continue if he makes losses in the long run. He will
continue to make super-normal profits even in the long
run as the entry of outside firms is restricted.
The Fig. 8.16 shows the long run equilibrium of the

monopolist.
Fig: 8.16 Long Run Equilibrium
of Monopoly firm
Q: What is price discrimination?

PRICE DISCRIMINATION
Meaning;
In price discrimination, the seller charges different prices for the same goods from different buyers.
For examples,
(i)
A doctor may charge higher fees from a rich customer, but lower fees from a poor customer.
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CPT

(ii)
A college may charge higher tuition fees from evening class students, but lower fees from
morning class students.
(iii)
CA institute charges lower fees for its magazine from CA students, but higher fees from
other students.
Conditions for Price Discrimination;

Price discrimination is possible only if the following conditions are satisfied(i)
Monopoly power
(ii)
Market segmentation: The seller should be able to divide his market into two or more
sub-markets.
(iii)
The price-elasticity of the product should be different in different markets. The monopolist
fixes up a high price for those buyers, for whom ep is inelastic, i.e. ep < 1.
Similarly, he fixes lower price for those buyers for whom ep is elastic, i.e. ep > 1.
(iv)
No reselling: It should not be possible for the buyers of low priced market to resell the
product to the buyers of high-priced market.
Price and Output Determination under Price Discrimination:
Suppose the monopolistist sub-divides his whole market into two parts- market A and market
B. Both markets have different price elasticities. Demand is more elastic in market B than
in market A.
Fig. 8.17 shows DA and DB as the average revenue curves for the respective markets.
MRA and MRB are the corresponding marginal revenue curves. Since all his output is
under one organisation, there is only one marginal cost curve. AMR is the total marginal
revenue curve. It is a lateral summation of the two curves- MRA and MRB.
Fig. 8.17 Price-Output Determination in Price Discrimination
Conditions for equilibrium:(i) MC=AMR;
(ii) MC = MRA = MRB
In Fig. 9.17, MC and AMR intersect at point E and OM is the total output of the monopolist.
The corresponding equilibrium point of market-A and market-B shall be E1 and E2. At point E1 in Market
A, the equilibrium price OP1 and equilibrium output is OM1. Similarly at E 2 in Market B, the equilibrium
price is OP2 and the equilibrium output is OM 2.
Thus, we see that a monopolist can charge different prices from different classes of customers
for the same goods and may remain in an equilibrium position.
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Example:
Suppose, the single monopoly price is Rs. 60/-. The elasticity of demand of market A
and B is respectively two and four. Then,
The MR in Market A
Similarly, MR of market B = 45
We see that the MR of market B is higher; because, the elasticity of demand of market
B is also higher.
Since the MR of market B is higher, so it would be profitable for the monopolist to transfer
some quantity of products from market A to market B. This will increase his gain by Rs.
15/- (=45-30) per unit.
MONOPOLISTIC COMPETITION
Q: What do you mean by "Monopolistic Competition? What are its main characteristics?
Meaning:
Monopolistic competition is that form of the market in which there are many sellers of a particular
product, but each seller sells somewhat differentiated product.
Let us take an example of Soap Market', where Lux is exhibited to be a beauty soap, Liril is
more related with freshness, while Detol is exhibited as an antiseptic soap.
Characteristics:
1.
Large number of sellers
2.
Product differentiation: In a monopolistic competitive market, the products of different

sellers are differentiated on the basis of brands. These brands are generally so much advertised
that a type of brand loyalty is developed.
Product differentiation gives rise to an element of monopoly to the producer over the competing
product. As such, the producer of an individual brand can raise the price of his product
knowing that he will not lose all the customers to other brands, because of the absence
of perfect substitutability. Since, however, all the brands are close substitutes of one another,
the seller will lose some of his customers to his competitors. Thus this market is a blend
of monopoly and perfect competition.
3.
Thus this market contains features of both the markets - monopoly and perfect competition.
4.
Freedom of Entry or Exit
5.
Non-Price Competition: In this market, sellers try to compete on a basis other than
price. Such other base may be aggressive advertising, product development, better distribution
arrangements, efficient after-sales service, and so on.
In fact, this type of market is more common than pure competition or pure monopoly.
Q: How short rum equilibrium of a firm is determined in monopolistic competition?
SHORT RUN EQUILIBRIUM OF FIRM
In a monopolistic competition, since the product is differentiated between firms, each firm does
not face a perfectly elastic demand for its products. Each firm is a price maker.
Conditions for the Equilibrium:

The following two conditions must be satisfied:
(i)
MC = MR,
(ii)
MC curve must cut MR curve from below

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CPT
Consider Fig. 8.18. In this figure, the equilibrium quantity is OQ

and the equilibrium price is OP.
1.
Super Normal Profit: AR > ATC. Consider Fig: 8.13
2.
Normal Profit:
AR = ATC. Consider Fig: 8.14
A normal % of profits is already

included in the cost of production.
3.
Loss:
AR < ATC. Consider Fig: 8.15

Fig. 8.18 Equilibrium position of
firm in monopolist Competition
(Short run)
Q: How Long Run equilibrium of a firm is determined in case of monopolistic competition?

LONG RUN EQUILIBRIUM OF FIRM
In the long run, the firms will be earning just normal profits. If they make supernormal
profits, new firms will be attracted to the industry; this will lead to a fall in price and vice
versa.
Consider Fig. 8.14.

OLIGOPOLY
Q: What do you mean by "Oligopoly Market"? What are its main characteristics?
Meaning:
Oligopoly is an important form of imperfect competition. Many of the industries in India are based
on oligopoly. Oligopoly is often described as 'competition among the few'. In other words, when there
are few (two to ten) sellers in a market, selling homogeneous or differentiated products, oligopoly is
said to exist.
Cold drinks industry and automobile industry are examples of oligopoly.
Characteristics:
1.
Few sellers in the market.
2.
Interdependence of firms in decision-making: This is because, when the number of

competitors is few, any change in price, output, product etc. by a firm will have a direct
effect on the fortunes of other industries.
3.
Importance of Advertising and Selling Costs: A direct effect of interdependence is that

the various firms have to employ various aggressive and defensive marketing weapons to
gain a greater share in the market or to maintain their share. For this, firms have to incur
a heavy amount on advertising and other measures of sales promotion.
4.
Group Behaviour: The theory of oligopoly is a theory of group behaviour, not of individual
behaviour. There is no generally accepted theory of group behaviour. However, one thing
is certain- each oligopolist closely watches the business behaviour of the other oligopolists
in the industry.
5.
Restricted Entry
6.
High Profits
7.
No Definite Demand Curve.
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CPT
Q: How is the price and output decision is undertaken in an Oligopoly Market? or

What is Kinked Demand Curve?
PRICE-OUTPUT DETERMINATION IN OLIGOPOLY
No Definite Demand Curve:
When an oligopolist does not know his demand curve, the
price and output cannot be ascertained by economic analysis. However,
there is a kinked demand curve approach in this regard.
Kinked demand curve Approach (by sweezy): Generally
in oligopolistic industries, prices remain inflexible (i.e. rigid) for
a long time.
According to this approach, the demand curve of an oligopolistic
firm has a 'kink' at the level of the prevailing price. The kink is
formed at the prevailing price level because the segment of the
demand curve above the prevailing price level is highly elastic and
the segment of the demand curve below the prevailing price level
is inelastic. Consider the diagram 9.23.
Fig: 8.19 Kinked Demand Curve
In the diagram 8.19, dD is the demand curve of the oligopoly firm. The price is OP and the
firm produces and sells output OQ. At the price OP, the curve has been divided into two segments
- dP and PD. The upper segment of the demand curve, i.e. dP, is relatively elastic and the lower segment
PD is relatively inelastic.
VARIANTS OF MARKETS (at a glance)
Features
Perfect
Competition
1. Number of Firms : Very Large
Monopoly
Monopolistic
Competition
Oligopoly
One
Large
Few
(2 to 10)
2. Nature of
Product
: Homogeneous
Unique without
any close
substitutes
Differentiated
Homogeneous
or differentiated
product
3. Nature of Entry
: Free
Closed
Free
Restricted
4. Hold on Price
: No hold, so
Price Taker
Complete, so
Price Maker
Some, so Price
Maker
Some, so Price
Maker
5. Price Elasticity
of Demand
: Infinite
Small
Large
Small
6. Selling Cost
(Advertisement)
: Does not
exist
Does not exist
Exists
Exists
7. Nature of
Demand Curve
: Straight
Negatively Sloped
Negatively Sloped
Kinked
8. Nature of Profit : Normal

in the Long Run
Super Normal
Normal
9. Excess capacity : Never
May be or may
not be
Always
120
Nothing can be
said
CPT

Questions
Perfect Competition
1.
In the long run, the optimum output is derived

from the relationship -
(C) average total cost

(D) average revenue
(A) LAC > LMC

7.
(B) LAC < LMC
(A) The shape of the average cost and

marginal cost curves is 'U' shaped.
(C) LAC = LMC

(D) none of these
2.
(B) The AR and MR curves of a firm under

perfect competition are parallel to 'X'
axis.
AR always is (A) price
(C) At the equilibrium of a firm, AR = MR

= 0
(B) demand curve

(C) both (A) & (B)
(D) The necessary condition for equilibrium

of a firm is AR =AVC.

3.
The scarcity problem suggests that

competition is -
8.
(A) greater among suppliers than demanders
(B) Demand Curve

(C) Indifference Curve
(C) less among suppliers than demanders
(D) Iso-product curve
(D) not achieved by suppliers or demanders

9.
Under which of the following forms of market

structure does a firm have no control over
the price of its product?
(A) Monopolistic competition
(B) Average Revenue curve
(C) Average Cost Curve
(C) Monopoly
(D) Indifference Curve

10.
Profit-maximising firms want to maximise

the difference between -
Which of the following is not an essential

condition of pure competition?
(A) Large number of buyers and sellers
(A) Total revenue and marginal cost
(B) Homogeneous product
(B) Total revenue and total cost
(C) Freedom of entry
(C) Marginal revenue and marginal cost
(D) Absence of transport cost
(D) Marginal revenue and average cost

6.
Which is the other name that is given to

the demand curve?
(A) Profit curve
(D) Oligopoly
5.
Which is the other name given to 'Average

Revenue Curve'?
(A) Profit curve
(B) always the same among suppliers than

demanders
4.
Which of the following is correct?
11.
In the long-run, some firms will exit the market

if the price of the good offered for sale is
less than -
What is the shape of the demand curve of

a firm under perfect competition?
(A) Horizontal
(B) Vertical
(A) marginal revenue
(C) Positively sloped
(B) marginal cost
(D) Negatively sloped
121

12.
CPT
Price-taking firms, i.e., firms that operate

in a perfectly competitive market, are said
to be "small" relative to the market. Which
of the following best describes this
smallness?
18.
While analysing Marshall's measure of

consumer's surplus one assumes (A) Imperfect competition
(C) Monopoly
(D) Monopsony
19.
In the short run, if a perfectly competitive

firm finds itself operating at a loss, it will(A) reduce the size of its plant to lower
fixed costs
(B) raise the price of its product
(C) shut down
(D) continue to operate as long as it covers
its variable cost
20.
The degree of control over price under perfect

competition is (A) none
(B) some
(C) considerable
(D) none of these
21.
Existence of a large number of buyers and

sellers means (A) oligopoly
(B) perfect competition
(C) monopoly
(D) none of these
22.
The products sold in a competitive market

are (A) perfect substitutes of one another
(B) near substitutes of one another
(C) are not substitutes of one another
(D) none of these
23.
The short run equilibrium condition of a

competitive firm is (A) P = MC; & MC is upward rising at
equilibrium
(B) P = MC
(C) MC is upward rising at equilibrium
(D) none of these
24.
If profits are greater than zero, it means (A) abnormal profits

(B) super normal profits
(C) both (A) & (B)
(D) either (A) or (B)
(A) The individual firm must have fewer than

10 employees.
(B) The individual firm faces a downwardsloping demand curve.
(C) The individual firm has assets of less
than Rs.20 lakh.
(D) The individual firm is unable to affect
the market price through its output
decisions.
13.
Under_____market condition, firms make

normal profits in the long run (A) Perfect Competition
(B) Monopoly
(C) Oligopoly
14.
The number of sellers under perfect competition

is (A) many
(B) few
(C) one
(D) none of these
15.
Product differentiation under perfect

(B) slight
(C) not substantial
(D) extreme
16.
Price elasticity of demand for a firm under

perfect competition is (A) infinite
(B) small
(C) large
(D) none of these
17.
Excess capacity is not found under (A) Monopoly

(B) Monopolistic competition
(C) Perfect competition
(D) Oligopoly
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CPT
25.
26.
27.

For
(A)
(B)
(C)
(D)
a competitive firm, we have P = MR = 0

P is fixed 0
MR = AR
All of the above
For
(A)
(B)
(C)
(D)
a competitive firm, we have P > MR

P < MR
MR = AR
All are true
For
is (A)
(B)
(C)
(D)
a competitive firm, its demand curve
33.
For a competitive firm, the supply curve is

given by (A) MC curve
(B) rising portion of MC curve
(C) rising portion of MC curve that lies above
minimum AVC
(D) none of these
34.
Under a competitive framework, an industry

supply curve is given by (A) that MC curve of each firm
(B) horizontal addition of MC curve of all
firms
perfectly inelastic
relatively inelastic
perfectly elastic
relatively elastic
(D) none of these

35.
A competitive firm in the short run incurs

losses. The firm continues production, if (A) P > min AVC
28.
29.
30.
31.
32.
Even if it makes loss in the short run, a

competitive firm will operate, if it (A) covers TVC
(B) covers TFC
(D) none of these
(B) P = min AVC

(C) P >= min AVC
(D) P >= AVC
36.
The long run equilibrium in a competitive

market is (A) P > min LAC
Normal profits mean (A) super normal profits are positive

(B) super normal profits are zero
(C) super normal profits are negative
(D) none of these
(B) P < min LAC

(C) P = min LAC
(D) none of these
37.
Competitive firms in the long run earn (A) Super normal profit
(B) Normal profit
(C) Loses
(D) None of these
When____, we know that the firms are earning

just normal profits (A) AC = AR
(B) MC = MR
(C) MC = AC
(D) AR = MR
38.
If competitive firms are earning supernormal

profits in the short run then in the long run(A) some firms will leave the industry
(B) some firms will join the industry
(D) none of these
Firm and industry equilibrium will be the

same for a (A) competitive firm
(B) oligopoly firm
(C) monopoly firm
(D) none of these
39.
If profits are greater than zero, it means (A) P < AC

(B) P > AC
(C) P = AC
(D) No relation between P and AC exists
Price discrimination is possible for a (A) competitive firm

(B) monopoly firm
(C) oligopolistic firm
(D) none of these
123

40.
CPT
(C) shutdown, since it will lose nothing in
that case.
(D) shutdown, since it cannot even cover
its variable costs if it stays in business.
Excess capacity in the long run is never

found under (A) Monopoly
45.
Should firm in a perfectly competitive industry

advertise? NO: It makes no sense because
if (A) they have no control over price and can
sell as much as they want at the
prevailing price any way.
(B) know that if at all they advertise, they
cancel each other out, so that no one
can gain from advertising.
(C) produce agricultural goods, and these
goods are not suitable for advertising.
(D) each has a horizontal demand curve,
so that advertising will only distort
demand by creating a perfectly
competitive downward sloping curve.
46.
For
(A)
(B)
(C)
(D)
47.
Which of the following is not a characteristic

of a perfectly competitive market?
(A) A large number of firms in the industry
(B) Outputs of the firms are perfect
substitutes for one another.
(C) Firms face downward-sloping demand
curves.
(D) Resources are very mobile.
48.
A competitive firm maximises profit at the

output level, where (A) price equals marginal cost.
(B) the slope of the firm's profit function
is equal to zero.
(C) marginal revenue equals marginal cost.
(D) all of the above.
49.
An individual firm in a perfectly competitive

market faces a demand curve, which is (A) downward sloping
(C) perfectly elastic
(D) upward sloping
(D) Oligopoly
41.
A purely competitive firm's supply schedule

in the short run is determined by (A) its average revenue
(B) its marginal revenue
(C) its marginal utility for money curve
(D) its marginal cost curve
42.
The firm in a perfectly competitive market

is a price taker. This designation as a price
taker is based on the assumption that (A) The firm has some, but not completes,
control over its product price.
(B) There are so many buyers and sellers
in the market that any individual firm
cannot affect the market.
(C) Each firm produces a homogeneous
product.
(D) There is easy entry into or exit from
the market place.
43.
Suppose that, at the profit-maximising level

of output, a firm finds that the market price
is less than the average total cost, but greater
than the average variable cost. Which of
the following statements is correct?
(A) The firm should shutdown in order to
minimise its losses.
(B) The firm should raise its price enough
to cover its losses.
(C) The firm should move its resources to
another industry.
(D) The firm should continue to operate
in the short run in order to minimise
its losses
44.
When price is less than average variable

cost at the profit-maximising level of output,
a firm should (A) produce where marginal revenue equals
marginal cost, if it is operating in the
short run.
(B) produce, where marginal revenue equals
marginal cost if it is operating in the
long run.
124
the price-taking firm Marginal revenue is less than price.

Marginal revenue is equal to price.
Marginal revenue is greater than price.
The relationship between marginal
revenue and price is indeterminate.
CPT
50.
51.
52.
53.

Which of the following is not a condition
of perfect competition?
(A) A large number of firms
(B) Perfect mobility of factors
(C) Informative advertising to ensure that
consumers have good information
(D) Freedom of entry and exit into and out
of the market
If a competitive firm doubles its output, its
total revenue (A) doubles
(B) more than doubles
(C) less than doubles
(D) cannot be determined because the price
of the good may rise or fall
Under which market structure, the average
revenue of a firm is equal to its marginal
revenue
(A) Oligopoly
(B) Monopoly
(D) Monopolistic competition
Agricultural goods markets
characteristics close to (A) Perfect competition
(B) Oligopoly
(C) Monopoly
(D) Monopolistic competition
57.
Under perfect competition, a firm will be in

equilibrium, when (A) MC = MR
(B) MC cuts the MR from below
(C) MC is rising when it cuts MR
58.
A perfectly competitive firm producer has

control over (A) price
(B) production as well as price
(C) control over production, price and
consumers
59.
The conditions of long-period equilibrium for

the firm operating under perfect competition
are-
depict
54.
Full capacity is utilised only when there is(A) Monopoly

(C) Price discrimination
(D) Oligopoly
55.
In a perfect competitive market (A) a firm is the price-giver and industry

the price taker
(B) firm is the price taker and industry the
price giver
(C) both are price takers
56.
(C) many sellers and few buyers

(D) only one price for identical goods at
any one time
(1)
MC = MR
(2)
AR = MR
(3)
AC = AR
(4)
AC = MC
(A)
(B)
(C)
(D)
One of the essential conditions of perfect

competition is (A) product differentiation
(B) multiplicity of prices for identical product
at any one time.
125
(1) only
(1) and (2) only
(1),(2)and(3)only
(1), (2), (3) and (4)
60.
When______, we know that firms must be

producing at the minimum point of the average
cost curve and so there will be productive
efficiency (A) AC = AR
(B) MC = AC
(C) MC = MR
(D) AR = MR
61.
When _____, there will be allocative efficiency

meaning thereby that the cost of the last
unit is exactly equal to the price consumers
are willing to pay for it and that right goods
are being sold to the right people at the
right price (A) MC = MR
(B) MC = AC
(C) MC =AR
(D) AR = MR

62.
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Which of the following is not the characteristic

of a price-taker?
(A) TR = P x Q
(B) AR = Price
(C) Negatively sloped demand curve
(D) Marginal Revenue = Price
(C) MR = MC1 = MC2

(D) MR1 = MR2 =MC
70.
(A) MR = MC
(B) MR1 + MR2 = MC
(C) MR = MC1 = MC2
Monopoly
63.
64.
65.
66.
67.
68.
69.
(D) MR1 = MR2 =MC 1
Under price discrimination, market with a

higher price (A) has higher price elasticity of demand
(B) has lower price elasticity of demand
(C) has price elasticity of demand as infinite
(D) none of these
In a
(A)
(B)
(C)
(D)
monopoly, if MR is positive TR is falling

TR is rising
TR is constant
none of these
In a
(A)
(B)
(C)
(D)
monopoly, if MR is negative TR is falling

TR is rising
TR is constant
none of these
71.
If the monopolist goes for price discrimination

in two markets, the price elasticity of demand
in these markets must be (A) Different
(B) Same
(C) Price elasticity does not influence price
discrimination
(D) None of these
72.
For a monopolist, if MR = 0, it means he

is operating (A) above the midpoint of his demand curve
(B) below the midpoint of his demand curve
(C) at the midpoint of his demand curve
(D) none of these
73.
Marginal revenue will be negative, if elasticity

of demand is (A) Less than one
(B) More than one
(C) Equal to one
(D) Equal to zero
In a
(A)
(B)
(C)
(D)
The equilibrium condition of a multi-plant

monopolist operating in two markets is -
In the long run, monopoly output is (A) equal to competitive output

(B) half of competitive output
(C) one-third of competitive output
(D) none of these
74.
Monopoly price is (A) lower than competitive price

(B) higher than competitive price
monopoly, if MR is zero TR is falling

TR is rising
TR is maximum
None of these
(C) same as competitive price

(D) none of these
75.
All of the following are characteristics of

monopoly except (A) There is a single firm.
(B) The firm is a price takes.
(C) The firm produces a unique product.
(D) The existence of some advertising.
The imposition of ad-valorem tax on monopoly

leads to (A) p rises, q rises
(B) p rises, q falls
(C) p falls, q rises
(D) p falls, q falls
76.
If the monopolist goes for price discrimination

across two markets, the condition is (A) MR1 = MR2
(B) MR1 + MR2 = MC
If profits taxes are imposed on a monopoly

firm, then the equilibrium condition MR =
MC:
(A) holds true
(B) does not hold true
126
CPT

(D) infinite

(D) none of these
77.
The number of sellers under monopoly is-
84.
In a
(A)
(B)
(C)
85.
The
(A)
(B)
(C)
(D)
86.
For a monopolist, the necessary condition

for equilibrium is (A) P = MC
(B) P = MR = AR
(C) MR = MC
(D) None of these
87.
For a monopolist, the sufficient condition

for equilibrium is (A) slope of MR < slope of MC
(B) slope of MR > slope of MC
(C) slope of MR = slope of MC
(D) MC is upward rising at equilibrium
88.
If the demand curve of a monopolist is linear

and downward sloping, the MR curve is (A) Linear, but horizontal
(B) linear and upward rising
(C) linear & downward sloping
(D) linear and vertical
89.
Given the slope of AR for a monopolist, the

slope of MR will be (A) same as that of AR
(B) half that of AR
(C) double that of AR
(D) none of these
90.
If the demand curve is concave/convex, the

MR curve is (A) convex/concave
(B) concave/convex
(C) linear
(D) none of these
(A) many
(B) few
(C) one
(D) none of these
78.
Product differentiation under monopoly is(A) none

(B) slight
(C) not substantial
(D) extreme
79.
A natural monopoly results from (A) the ownership of patent rights

(B) a combination of market demand and
high fixed costs, such that only one
firm can operate profitably
(C) acquisition of other firms by a firm through
the natural process of competition
(D) exclusive access to natural resources
80.
The AR curve and the industry demand curve

are same (A) In the case of monopoly
(B) In the case of oligopoly
monopoly market, we have one seller, many buyers

one seller, one buyer
one seller, no restriction on number
of buyers
(D) none of these
product sold by a monopolist has near substitutes
has no close substitutes
are differentiated
none of these
(C) In the case of perfect competition

81.
Price elasticity of demand for a firm under

monopoly is (A) infinite
(B) small
(C) large
(D) none of these
82.
The degree of control over price under Monopoly

is (A) none
(B) some
(C) considerable
(D) none of these
83.
If AR - MR is zero, the value of elasticity

of demand is (A) zero
(B) one
127

91.
CPT
A monopolist can -
98.
If AC = MC; if the MC curve is horizontal,

equilibrium may not be achieved in (A) monopoly market
(B) competitive market
(D) both (A) & (B)
99.
In the long run, a monopolist earns (A) normal profits

(B) supernormal profits
(D) none of these
(A) only control P

(B) only control Q
(C) control both P & Q
(D) control either p or q , but not both
92.
If a monopolist varies p, instead of q to

maximise profit, the equilibrium condition
is (A) P = MC
(B) MR = MC
(C) P > MC
100. In the long run, the monopolist operates

at(A) the minimum point of LAC curve
(B) beyond the minimum point of LAC curve
(C) before the minimum point of LAC curve
(D) Any of the options is possible
(D) MR > MC
93.
For a monopolist (A) P < MR

(B) P > MR
(C) P = MR
(D) None of these
94.
101. A monopolist has (A) no supply curve

(B) a supply curve
(C) has a supply curve, difficult to determine
(D) none of these
A monopolist will never operate on the (A) elastic portion of the demand curve
(B) inelastic portion of the demand curve
(D) demand curve where elasticity is unity
95.
102. A monopoly firm leads to (A) a gain in social welfare

(B) a loss in social welfare
(D) none of these
Which of the following statements is incorrect?

(A) Even a monopolist can earn losses.
(B) Firms in a perfectly competitive market
are price takers.
103. A monopolist earns supernormal profits in

the long run as (A) product sold has no substitutes
(B) he is the only seller
(C) there are entry restrictions
(D) none of these
(C) It is always beneficial for a firm in a

perfectly competitive market to
discriminate prices.
(D) Kinked demand curve is related to an
oligopolistic market.
96.
The MR cuts the horizontal line between

y-axis & demand curve into -
104. For a monopoly firm the statements that

hold true is (A) there are no entry restrictions
(B) exist possible, entry restricted
(C) exit of monopoly firm
(D) none of these
(A) two unequal parts

(B) two equal parts
(C) may be equal or unequal parts
(D) none of these
97.
In the short run, the monopolist can earn105. For a monopolist (A) there is a unique relation between
P & Q
(B) there is a no unique relation between
P & Q
(A) supernormal profits

(B) normal profits
(C) losses
128
CPT

112. In which form of the market structure is the
degree of control over the price of its product
by a firm very large?
(A) Monopoly
(B) Imperfect competition
(C) Oligopoly
(D) Perfect competition
(C) sometimes relation between P & Q

(D) none of these
106. For
(A)
(B)
(C)
(D)
a monopolist there are no losses in the short run

there may be losses in the short run
there is no demand curve
none of these
113. Price discrimination will be profitable only

if the elasticity of demand in different markets
in which the total market has been divided
is (A) Uniform
(B) Different
(C) Less
(D) Zero
107. A monopolist can go for price discrimination

across (A) two buyers
(B) three buyers
(C) four buyers
(D) several buyers
108. 'Excess capacity exists for a monopoly firm.'
This statement is (A) true
(B) sometimes true
(C) true under special conditions
(D) false
114. Monopolies are allocatively inefficient,

because(A) they restrict the output to keep the price
higher than under perfect competition
(B) they charge a price higher than the
marginal cost
(C) both (A) and (B) are correct
(D) both (A) and (B) are incorrect
109. Suppose that the demand curve for the XYZ

Co. slopes downward and to the right. We
can conclude that (A) The firm operates in a perfectly
competitive market.
(B) The firm can sell all that it wants to
at the established market price.
(C) The XYZ Co. is not a price taker in
the market, because it must lower price
to sell additional units of output.
(D) The XYZ Co. will not be able to maximise
profits, because price and revenue are
subject to change.
115. Which is the first order condition for the

profit of a firm to be maximum?
(A) AC - MR
(B) MC = MR
(C) MR = AR
(D) AC = AR
116. In the case of monopoly (A) MR curve cannot be defined
(B) AR curve cannot be defined
(C) the short run supply curve cannot be
defined
110. Discriminating monopoly implies that the

monopolist charges different prices for his
commodity (A) From different groups of consumers
(B) For different uses
(C) At different places
(D) Any of the above
117. Price discrimination is not possible in the

case of (A) perfect competition
(B) monopoly
(C) monopolistic competition
(D) Nothing can be said
111. A monopolist is able to maximise his profits,

when (A) His output is maximum
(B) He charges a high price
(C) His average cost is minimum
(D) His marginal cost is equal to marginal
revenue.
118. Suppose a firm is producing a level of output

such that MR>MC. What should the firm
do to maximise its profits?
(A) The firm should do nothing.
(B) The firm should hire less labour
129
CPT
(C) The firm should increase price

(D) The firm should increase output
(C) one
(D) none of these
119. The demand curve facing an industrial firm

under monopoly is a/an (A) horizontal straight-line
(B) indeterminate
(C) downward sloping
(D) upward sloping
126. Product differentiation under monopolistic

(B) slight
(C) not substantial
(D) extreme
120. The degree of monopoly power is measured

in terms of difference between (A) Marginal cost and the price
(B) Average cost and average revenue
(C) Marginal cost and average cost
(D) Marginal revenue and average cost
127. Price elasticity of demand for a firm under

monopolistic competition is (A) infinite
(B) small
(C) large
(D) none of these
121. A monopoly producer usually earns ____

even in the long run (A) super normal profits
(B) only normal profits
(C) losses
128. The degree of control over price under

monopolistic competition is (A) none
(B) some
(C) considerable
(D) none of these
122. Discriminating monopoly is possible if two

markets have (A) rising cost curves
(B) rising and declining cost curves
(C) different elasticities of demand
(D) equal elasticities of demand
129. The structure of the toothpaste industry in

India is best described as (A) Perfectly competitive
(B) Monopolistic
(C) Monopolistically competitive
(D) Oligopolistic
123. In the long run equilibrium the pure monopolist

can make pure profits because of (A) blocked entry
(B) the high price he charges
(C) the low LAC costs
(D) advertising
130. Under monopolistic competition, each firm

sells (A) homogeneous product
(B) near substitutes
(C) differentiated good
(D) perfect substitute goods
124. Which of the following statements is not

true about a discriminating monopolist?
(A) He operates in more than one market
(B) He makes more profit because he
discriminates
(C) He maximises his profits in each market
(D) He charges different prices in each
market
131. Each firm under monopilistic competition

has (A) the same amount of demand
(B) differentiated product
(C) identical product
132. Which of the following statements about price
and marginal cost in competitive and
monopolised markets is true?
(A) In competitive markets, price equals
marginal cost; in monopolised markets,
price exceeds marginal cost.
Monopolistic Competition
125. The number of sellers under monopolistic
competition is (A) many
(B) few
130
CPT

(B) In competitive markets, price
equals marginal cost; in monopolised
markets, price equals marginal cost.
(C) In competitive markets, price exceeds
price exceeds marginal cost.
(D) In competitive markets, price exceeds
price equals marginal cost.
(C) In monopolistic competition, entry into

the industry is blocked.
(D) In monopolistic competition, there are
relatively few barriers to entry.
139. The long-run equilibrium outcomes in
monopolistic competition and perfect
competition are similar, because in both
market structures (A) Efficient output level will be produced
in the long run.
(B) Firms will be producing at minimum
average cost.
(C) Firms will only earn a normal profit.
(D) Firms realise all economies of scale.
133. A large number of firms under monopolistic

competition is called (A) industry
(B) group
(C) collection of firms
(D) none of these
140. Which of the following is not a characteristic

of monopolistic competition?
(A) Ease of entry into the industry
(B) Product differentiation
(C) A relatively large number of sellers
(D) Homogenous product
134. The equilibrium in the short run for monopolistic

competition must be w.r.t. (A) market demand curve
(B) market supply curve
(C) individual firms demand curve
(D) individual firms supply curve
141. A firm under monopolistic competition

advertises (A) to compete successfully with the rival
firms
(B) to lower cost of production
(C) to increase sales and profit
(D) because it cannot raise price
135. The short run equilibrium condition under

monopolistic competition is (A) P = MC
(B) P = MR = AR
(C) MR = MC
(D) none of these
142. In the short run, a firm in monopolistic

competition(A) always earns profits
(B) incurs losses
(C) earns normal profit only
(D) may earn normal profit, super normal
profit or incur losses
136. Under monopolistic competition, in the long

run, firms (A) have no freedom of exit & entry
(B) have freedom of exit & entry
(C) exit & entry depends on specific cases
(D) question of exit and entry does not arise
137. Firms under monopolistic competition have(A) no excess capacity
(B) concept of excess capacity does not
arise
(C) have excess capacity
(D) none of these
143. In the long-run, all firms in monopolistic

competition (A) earn-super normal profits
(B) earn normal profits
(C) incur losses
(D) may earn super normal profit, normal
profit or in incur losses
138. Monopolistic competition differs from perfect

competition primarily, because (A) In monopolistic, competition firms can
differentiate their products.
(B) In perfect competition, firms can
differentiate their products.
144. A market structure in which many firms sell

products that are similar but not identical
is known as (A) monopolistic competition
(B) monopoly
131
CPT
(C) perfect competition

(D) oligopoly
151. The number of sellers under oligopoly is (A) many

(B) few
145. Under which market condition, though the

firms earn normal profits in the long run,
there is always excess capacity with them(A) Perfect competition
(B) Monopoly
(C) Oligopoly
(D) Monoplistic competition
(C) one
(D) none of these
152. Product differentiation under Oligopoly is (A) none
(B) slight
(C) not substantial
(D) extreme
146. By imperfect monopoly, we mean (A) It is possible to substitute the

monopolised product with another
monopolised product
(B) Entry of new firms is possible to produce
the same product
(C) The amount of output produced is very
small
153. Price elasticity of demand for a firm under

Oligopoly is (A) infinite
(B) small
(C) large
(D) none of these
154. Which one of the following is the best example
of agreement between oligopolists?
147. In monopolistic competition, a firm is in longrun equilibrium (A) at the minimum point of LAC curve.
(B) in the rising segment of the LAC curve
(C) when price is equal to marginal cost
(D) in the falling segment of the LAC curve
(A) GATT
(B) OPEC
(C) WTO
(D) UNIDO
155. The degree of control over price under oligopoly
is -
148. The equilibrium in the short run for monopolistic

competition is reached, where (A) MC = MR
(B) MR > MC
(C) MR < MC
(D) MC = AC
(A) none
(B) some
(C) considerable
(D) none of these
156. The kinked demand curve model of oligopoly
assumes that (A) response to a price increase is less
than the response to a price decrease.
(B) response to a price increase is more
than the response to a price decrease.
149. When AR = Rs. 10, AC = Rs.7, the firm

makes (A) normal profits
(B) abnormal profits
(C) gross profits
(D) net profits
(C) elasticity of demand is constant

regardless of whether price increases
or decreases.
(D) elasticity of demand is perfectly elastic
if price increases and perfectly inelastic,
if price decreases.
Oligopoly
150. Oligopolistic industries are characterised
by (A) A few dominant firms and substantial
barriers to entry
(B) A few large firms and no entry barriers
(C) A large number of small firms and no
entry barriers
(D) One dominant firm and low entry barriers
157. The structure of the cold drink industry in

India is best described as (A) perfectly competitive
(B) monopolistic
132
CPT

(C) monopolistically competitive
(D) oligopolistic
(B) generally unmatched

(C) always by 10%
(D) none of these
158. Under oligopolist firms, there is (A) no interdependence in decision making

(B) interdependence under special cases
(C) interdependence in decision-making
(D) none of these
159. Any
(A)
(B)
(C)
(D)
166. If oligopoly firms decide to choose & follow

a leader, then the leader will be (A) a dominant firm
(B) low cost firm
(C) can be either (A) or (B)
action taken by an oligopolistic firmwill be noticed by other firms

will be ignored by other firms
will generate retaliation from other firms
none of these
(D) none of these

167. The kinked demand curve was introduced
by (A) Samuelson
(B) Hicks
160. Oligopolistic firms might (A) spend on advertisement

(B) may spend on sales promotion
(D) both (A) and (B)
(C) Sweezy
(D) Dalton
168. The upper segment of the kink is (A) perfectly elastic
(B) perfectly inelastic
161. Theory of oligopoly deals with (A) mass behaviour

(B) individual behaviour
(C) Both (A) & (B)
(D) group behaviour
(C) relatively elastic

(D) relatively inelastic
169. The lower segment of the kink is (A) perfectly elastic
(B) perfectly inelastic
162. Under oligopoly market, equilibrium (A) can be determined

(B) is indeterminate
(C) is indeterminate but may be resolved
through several assumptions
(D) none of these
(C) relatively elastic

(D) relatively inelastic
170. The kinked demand hypothesis is designed
to explain in the context of oligopoly (A) Price and output determination
163. The kinked demand curve is observed in (A) duopoly market

(B) monopoly market
(C) competitive market
(D) oligopoly market
(B) Price rigidity

(C) Price leadership
(D) Collusion among rivals.
171. For a kinked demand curve (A) MR is continuous
164. Under an oligopolistic market, a rise in price

is (A) always matched
(B) generally unmatched
(C) cannot definite be said
(D) none of these
(B) MR is discontinuous
(C) MR has a kink
(D) MR does not exist
172. The kinked demand curve explains (A) behaviour of sellers
(B) behaviour of buyers
165. Under an oligopolistic market, a rise in price

is(A) always matched
(C) output production

(D) inflexibility of prices for a long time
133
CPT
(D) none of these
173. When an oligopolist's price becomes the

price, which others in the industry will accept,
it is likely that the industry is characterised
by (A) cartel behaviour
(B) a set of linked demand curves
180. Consider the following figure-
(C) mutual interdependence

(D) price leadership
174. Advertising is the most important tool of
sales promotion in (A) Perfectly competitive market
(B) Oligopoly
(C) Monopoly
The above figure represents which market175. Differentiated oligopoly is one where there
are -
(A) Perfectly competitive firm

(B) Perfectly competitive industry
(A) many sellers producing homogeneous

product
(C) Monopolist
(B) few sellers producing homogeneous

product
181. In Q. 180 above, the firm's marginal revenue

curve is curve -
(C) many sellers producing differentiated

product
(A) E
(D) few sellers producing differentiated

product
(B) A
(C) F
176. Price leadership is a form of (A) monopolistic competition
(D) B
182. In Q. 180 above, curve E is the firm's -
(B) monopoly
(C) non-collusive Oligopoly
(A) Marginal cost curve

(B) Average cost curve
(D) perfect competition
(C) Demand curve.
177. The upper portion of the kinked demand curve

is relatively (A) more inelastic
(D) Marginal revenue curve

183. In Q. 180 above, the firm's most efficient
output is -
(B) more elastic

(C) less elastic
(D) inelastic
(A) K
(B) L
(C) M
178. In both the Chamberlin and kinked demand

curve models, the oligopolists (A) recognize their interdependence
(B) do not collude
(D) N
184. In Q. 180 above, the firm's most profitable
output is -
(C) tend to keep prices constant

(A) K
(B) L
179. Cartel is formed - o

(A) for a price war
(C) M
(D) N
(B) to avoid a price war
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CPT

Practical Questions
192. A competitive firm faces a demand curve

q = 200 - l00p. If the firm wants to maximise
total revenue, then output is (A) 50
(B) 100
(C) 150
(D) 200
185. Given the relation MR = P(l - 1/e), if MR

is zero, then (A) price is zero
(B) price may not be zero
(D) none of these
193. For a competitive firm, Price per unit (P)

= 6 and TC = 1 + q2, then the amount of
profits it will earn will be (A) 7
(B) 8
(C) 9
(D) 10
186. Given the relation MR = P(l - 1/e), if e>l,

then (A) MR > 0
(B) MR < 0
(C) MR = 0
(D) none of these
187. Given the relation MR = P( 1 - 1 /e), if e=
1, then (A) MR > 0
(B) MR < 0
(C) MR = 0
(D) none of these
194. For a monopoly firm P = 6 and TC = 1 +

q2. The amount of profits it will earn will
be (A) 7
(B) 8
(C) 9
(D) 10
188. Given the relation MR = P( 1 - 1 /e), if e

< 1, then(A) MR < 0
(B) MR > 0
(C) MR = 0
(D) none of these
195. If the demand curve of the monopolist is

P = a - bq, then (A) MR = a - bq
(B) MR = 2a-bq
(C) MR = 2a - 2bq
(D) MR = a - 2bq
189. If the demand curve is given by p = 8 -3q,

then in an imperfect market, we have (A) MR = 16 - 3q
(B) MR = 16 - 6q
(C) MR = 8 - 6q
(D) MR = 8 + 6q
196. For a monopolist, TC = 100 + 20q2 and the

demand curve is P = 400 - 20q , then the
profit of the monopolist is (A) 600
(B) 700
(C) 800
(D) 900
190. Given measure (P - MR) / P, for a monopolist

this will equal (A) 1/ e - l
(B) e - 1
(C) e
(D) 1/e
197. If the demand curve is p = a - bq, then with

zero cost, output for the competitive firm
is (A) a/2b
(B) a/b
(C) a/3b
(D) none of these
191. A monopoly firm faces a demand curve q

= 200 - l00p. If the firm wants to maximise
total revenue, then output is (A) 50
(B) 100
(C) 150
(D) 200
198. If the demand curve is p = a - bq, then with

zero cost, the output of a monopoly firm
is (A) a/2b
(B) a/b
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CPT
(C) a/3b
202. The demand curve for a firm operating in

a monopolistic market is P = 220 - 8Q. the
Marginal cost is Rs. 20. Find the output
maximising profit -
(D) none of these

199. Assume that when the price is Rs. 20, the
quantity demanded is 9 units, and when
price is Rs. 19, quantity demanded is 10
units. Based on this information, what is
the marginal revenue resulting from an
increase in output from 9 units to 10 units?
(A) 9.75
(B) 11.5
(C) 10.25
(D) 12.5
(A) Rs. 20
203. The elasticity of demand is (8 - q)/q and

at the current price level, the quantity
demanded is 6 units. If TR is to be increased,
the price should be -
(B) Rs. 19
(C) Rs. 10
(D) Re. 1
(A) kept unchanged
200. Assume that when the price is Rs. 20, the

quantity demanded is 15 units, and when
the price is Rs. 18, the quantity demanded
is 16 units. Based on this information, what
is the marginal revenue resulting from an
increase in output from 15 units to 16 units?
(B) decreased
(C) cannot be said
(D) increased
204. If AR + MR equals zero, the elasticity of
demand is -
(A) Rs. 18
(A) 1/2
(B) Rs. 16
(B) 1
(C) Rs. 12
(C) -1/2
(D) Rs. 28
(b)
201. If firms in the toothpaste industry have the

following market shares, which market
structure would best describe the industry?
Market share
205. The average profit is the difference between(A) AC and TC

(B) AC and VC
(% of market)
Toothpaste
18.7
Dentipaste
14.3
Shinibright
11.6
(C) AC and AR
(D) AC and TR
I can't believe it's not toothpaste 9.4

Brighter than white
8.8
Pastystuff
7.4
Others
29.8
-1
(A) Perfect competition

(C) Oligopoly
(D) Monopoly
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CPT

Answers-sheet
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C
.
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CPT
DIVISION II
MACRO ECONOMICS
CHAPTER 9
PROFILE OF INDIAN ECONOMY

1. NATURE OF INDIAN ECONOMY
Q: Explain the features of an underdeveloped country. Also explain the position of India in
this regard.
FEATURES OF AN UNDERDEVELOPED COUNTRY
(1)
Agriculture is the main occupation of the people. Nearly 60 to 80% of the population
is engaged in agriculture.
(2)
(3)
(4)
(5)
Poverty is the main problem. The ability to save of people is very low. Due to the low
rate of saving, the rate of capital formation and investment is very low!"
In India, poverty is very high. Every third poor person in the world is an Indian. That
means one third of the world's poor live in India.
In India, Nearly 22% of the population is below poverty line. (2004-05)
Population grows at a high rate (about 2% pa) and the burden of dependent population
is also high.
Indian population growth rate is more than 2%.
India is facing the problem of population explosion.
The dependency rate, i.e. percentage of people in the non-working age group (below
15 and above 64 years of age) is 37% in India.
The Living Standard of people is generally low and the productivity of labour is also
considerably low.
In India, the living standard is quite low, because of low level of per capita income.
India's per capita income was $ 950 in 2007.
Similarly, gross domestic capital formation in India was 39.1% in 2007-08.
The production techniques are backward. Investment in research and development is

quite low.
(6)
In India. At present, nearly 52% population is dependent on agriculture.
In India, Techniques of production, especially in the agriculture sector are still backward.
The incidence of unemployment is quite high.

The incidence of unemployment in India is quite high. The Tenth Plan had a target to create
50 million employment opportunities. About 47 million persons were employed during
2000 - 05
Not only this, unemployment rate in India has increased.
Open unemployment and disguised unemployment are very high in India
(7)
The level of human well-being activities, like health and education, etc., is generally low.
In India, the level of human well-being is also quite low. For measuring human wellbeing, the Human Development Index (HDI) is used. This index is constructed by
the United Nations Development Programme (UNDP).
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CPT
(8)
According to the latest UNDP report, 2008, India's relative global ranking on this
index has remained at a low of 132 among 179 countries. Its HDI was 0.577 in 2004
which improved marginally to 0.609 in 2006.
The HDI is a composite of three basic indicators of human development 1.

Longevity
: If is measured in terms of life expectancy at birth.
2.
Knowledge
: It is measured in terms of education.
3.
Standard of living
: It is measured in terms of real GDP per capita.
The HDI is a simple average of the above indices.
Income inequalities are widespread.
In India, the distribution of income and wealth is not equitable. In order to measure
the inequality of income and wealth, generally the Gini index is used.
If, Gini index = 0, then perfect equality If, Gini index = 1, then perfect inequality
(9)
(10)
As per World Development Report-2006, the Gini index for India in 2004 was 0.368.
The corresponding figure was 0.297 in 1994. So over this period, the inequalities
of income and wealth have increased.
Volume of Foreign Trade is low.
Their social life is traditional; people are generally orthodox.
Q: Explain the reasons- Why India is a Developing Country?

1. Rise in National income: India's national income i.e. Net National Product (NNP) at factor
cost was Rs. 2,04,924 crore in 1950-51, which rose to Rs. 27,64,795 crore (at constant prices) in
2007-08. Thus, over this period, the NNP has increased by more than 12 times.
2. Rise in Per Capita Income: The per capita income in India was Rs. 5,708 in 1950-51 (at
constant prices). It rose Rs. 24,295 in 2008-09. Thus, over this period, the per capita income has
increased by more than 3 times.
3. Improvements in social overhead capital: Social overhead capital includes transport facilities,
irrigation facilities, energy, education system, health and medical facilities. The main improvements
are as under:
Railways: The railways' route length has increased by nearly 10,000 km. Indian railways
has been the world's Third largest rail network under a single management. Metro Rail
system is working in two Metro cities1.
Kolkata
2.
Delhi
Engines: Diesel and electrical locomotives have replaced steam engines.
Roadways: The Indian road network has become one of the largest networks in the world,
aggregating 3.34 million kilometres.
Electricity: In 2008-09, the installed electricity generating capacity was 1,49,390 MW.
Irrigation facilities have increased. The land under irrigation was 87.2 million-hectares in
2006-07.
Education: During the planning period, the number of educational institutions has more
than doubled and the number of teachers has increased by around 4 times. The literacy
rate is 67.6% in 2005-06.
Health: The number of doctors has increased by more than 9 times, increasing from 61,800
in 1950- 51 to 7,00,000 in 2008. The bed-population ratio is now 1.03 per 1,000 population.
4. Development in banking and financial sector. (For details, refer to chap.-Monetary policy
& banking system).
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CPT
2. DIFFERENT SECTORS OF INDIA

AGRICULTURE
GENERAL KNOWLEDGE
The growth of agricultural production is not satisfactory.
The population is growing at a rate of around 2% p.a., but food grain production has increased
at an annual rate of 2.42%. This rate is just sufficient to maintain the existing standard
of consumption of the people.
The average growth rate of agricultural production for the last six years (starting from 200102) was 3% pa.
XIth plan
Target Growth rate of Agriculture : 4% (less than 2% achieved in Xth plan)
This target requires increased investment in irrigation, water shed development in rainfed
areas, rail road connectivity and rural electrification.
This target also requires improving technology, enhancing productivity of farm

houses, improving marketing, evolving viable packages for individual agro climatic zones
and removing distortions in farm subsidies, etc.
Also, second green revolution is required to achieve this target.
Certain crops (like wheat) are growing at a higher rate than other crops (like maize , jawar,
etc.).
Low yield per unit area from almost all crops has become a regular feature of Indian agriculture.
For example(a)
India's wheat production is 12% of global production. But, the average yield was less than
l/3rd of highest yield level estimated for the UK in 2004-05.
(b)
India's rice production is 21.8% of global rice production. But the estimated yield per hectare
in 2004-05 was l/3rd that of Egypt.
There are regional imbalances. The growth has remained confined to certain areas, like Punjab,
Haryana and Western UP.
About 60% net sown area is rain fed and there are no appropriate dry-farming techniques.
Only 40% of the gross cropped area has irrigation facilities.
Agricultural Finance: There are three main institutions for agricultural finance:
(a)
Regional Rural Banks (set up in 1975)
(b)
NABARD (set up in 1982)
(c)
Cooperative credit societies
Recent Credit Schemes for Farmers:

(1)
Farm Credit Package 2004
(2)
Kisan Credit card scheme (more than 800 lakh credit cards have been issued)
(3)
Agricultural Debt Waiver and Debt Relief Scheme 2008 (in this scheme, overdue loans
worth Rs. 50,000 crore were waived and for loans worth Rs. 10,000 crore, one time settlement
relief was provided).
(d)
Rehabilitation package for distressed farmers
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CPT
About 10-15% of agriculture produce is eaten by rats. Government agencies like Food Corporation
of India provide storage facilities but these are inadequate.
Lack of Grading and Standardisation: In India, there is no proper agency to classify the agricultural
products in different grades according to their quality and fix prices accordingly. The inferior
quality gets mixed up with the superior one and the producers of superior quality products do
not get a fair price for their products.
Q:
Examine the Importance of Agriculture in the Indian economy.

ROLE OF AGRICULTURE IN INDIA
Q:
1.
Major Source of Employment: It provides employment to about 52% of the total population
2.
A Big Source of national Income: Also this sector contributed 17% of GDP.
3.
Development of Industries: Agriculture has a big role in the development of industries,

specially agro-based Industries such as textiles, sugar, tea, etc. There are many other
industries, which depend on agriculture for their inputs. The demand of industrial products
depends upon the income of farmers, which in turn depends upon agricultural production.
4.
Dependence on Foreign Trade: The country's foreign trade, specially export of commodities
like jute, tea, coffee, tobacco, etc, depends a great deal on the supplies of agricultural
sector. So, the balance of trade is significantly affected by the performance of this sector.
5.
Affect Cost of Living: In India, agriculture is generally based on rains. In case of drought,
the availability of food grains is directly affected and so this leads to higher cost of living.
6.
Dependence on trade & Commerce: On account of agricultural predominance, the income

of a majority of people depends upon agriculture. A considerable part of trade and commerce
depending on agriculture.
7.
Low Capital-Output Ratio: Agriculture has a low capital output ratio. In other words, it
requires lesser capital per unit of output produced compared to industry. Therefore, a capital
poor economy like India has to rely on development of agriculture.
8.
Stops problem of migration: Due to rising problem of unemployment, rural population tends
to migrate to urban areas. Agriculture tends to curb such migration.
9.
Predominance of agriculture in India: India is basically an agriculture based country.
Explain measures adopted by government to improve agricultural productivity.

GREEN REVOLUTION (Launched in 1966)
Increased Production: In the Green Revolution, the government introduced the High-Yielding
Variety Programme (HYVP). The main object of this scheme was to generate high-yielding varieties
of seeds, proper irrigation facilities, extensive use of fertilizers, pesticides and insecticides.
HYVP was restricted to five crops - wheat, rice, bajra, jawar and maize.
Production of wheat increased by more than 6 times from 11 million tonnes (annual average)
in the third plan to 78.5 million tonnes in 2007-08. The productivity of wheat during the same period
has increased from 827 kg. per hectare in 1965-67 to 2806 kg. per hectare in 2008-09. On account
of this, it is often said that the green revolution is largely wheat revolution.
Total food grains production increased from 81 million tonnes in Third Plan (before HYVP) to
230 million tonnes in 2008-09.
LAND REFORMS
Land reform is one of the technique, adopted by the government for improving agricultural productivity.
It was adopted by the government to eliminate intermediaries, who never work on land, but take away
overall profit from cultivators. Measures of land reforms are as under:
141

1.
2.
CPT
Abolition of Intermediaries:
Earlier, there were three types of land revenue systems prevailing in the country:
Zamindari System + Ryotwari System + Mahalwari System
In all these systems, the land was cultivated by tenants and they paid rent for the use
of land. Only the system of collecting rent or land revenue was different in these land
tenure systems.
Under these systems, the tenant was exploited by the landowners.

More than 25% of the produce was taken away by these intermediaries in the form of
rent.
So, the government took the step of abolition of intermediaries. About 173 Million acres
of land had been acquired from the zamindars and distributed among the landless farmers.
Ceiling on Land Holdings:
Ceiling on land holdings refers to the fixation of the maximum size holdings that an individual
cultivator or household may own.
Accordingly, a family could hold 18 acres of wet land or 54 acres of unirrigated land.
3.
Tenancy Reforms:
(a) Regulation of Rent: In the pre-independence period, the rent charged by zamindars from
the tenants was very high. Laws have been made after Independence to regulate this rent. Different
states have fixed different levels of rent, which ranged between 25% and 75% of the produce.
(b) Security of Tenure: Security of tenure had three aims (a)
Ejectments do not take place, except in accordance with the provisions of the law
(b)
Land may be resumed by an owner only for 'personal cultivation'
(c)
In the event of resumption, the tenant is assured of a prescribed minimum area.
(c) Ownership Rights of Tenants: Legislations have been passed for conferring ownership rights
to tenants on the land they cultivate.
However, while some states did not adopt legislations for conferment of ownership right, in some
others the laws failed to meet the object. Overall, the progress has not been very satisfactory. It has
been estimated that approximately 12.42 million tenants have acquired ownership rights over 6.32 million
hectares of land.
4.
National Policy for farmers 2007 adopted by Government. Main Targets are - Assets reforms,
Water use efficiency, good quality seeds, disease free planting material etc.
INDUSTRY
GENERAL INFORMATION
Indian economy is a labour surplus economy.
Employment: Industries engage only 18% of the labour force of India.
Share in the GDP by industrial sector has improved from 12% in 1950-51 to 25.8% in
2007-08.
Contribution to exports by industries is around 2/3rd of the exports earnings of India.
Raising incomes of the people: Higher industrial output results in higher income per
head. In fact, in the industrially developed countries, the GNP per capita is very high as
compared to the GNP per capita in industrially developing countries. For example, in the
USA the GNP per capita was $ 46,000 and in India it was just $ 950 in 2007.
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CPT
The average growth rate of industrial production has been @ 6.2% p.a. over the plan period.
Target average growth rate of industrial production during the 10 Plan - 10% p.a. (but
achieved 8.7%)
Target average growth rate of industrial production during the 11th Plan was 11% p.a.
The 11th Plan aims at 8.5% growth in GDP
In March 2008, the number of public sector industrial units increased to 242 with cumulative
investment of about 4,55,000 crore.
Between 1965-80, there was a deceleration and retrogression in the industrial growth due
to the following reasons:
(a)
Unsatisfactory performance of agriculture.
(b)
Slackening of real investment especially in the public sector.
(c)
Slowdown in import substitution.
(d)
Regulation and control over private sector in the form of industrial licensing, MRTP
Act, high taxation, price and distribution controls, foreign exchange control, etc.
(e)
Narrow market for industrial goods, especially in the rural areas.
Types of Indian Industries -
On the basis of the size of industries
Micro, small
and medium
enterprises*
On the basis of end-use of output
Large
enterprises
Basic Goods industries (like minerals,

fertilizers, cement, iron and steel, non-ferrous
basic metals, electricity, etc.)
Capital Goods Industries (like machinery,

machine tools, rail-road equipments, etc.)
Intermediate Goods (like chemicals,

rubber, plastic, coal and petroleum products)
Consumer Goods consumer durables

and non-durables (like man-made fibres,
beverages, watches, cosmetics, perfumes
etc.)
largely from the basis of the country's

index of industrial production, include
following industries:
(a) Mining and quarrying
(b) Manufacturing
(c) Electricity, gas and water
Manufacturing enterprises
Micro units
(Investment
up to
Rs. 25 Lakh)
Small units
(Investment
between
Rs. 25 lakh and
Rs. 5 crore)
Service enterprises
Medium units
(Investment
between
Rs. 5 crore and
Rs. 10 crore)
143
Micro units
(Investment up
to Rs. 10 lakh)
Small units
(Investment
between
Rs. 10 lakh and
Rs. 2 crore)
Medium units
(Investment
between
Rs. 2 crore
and Rs. 5
crore)
CPT
Classification by Micro, Small and Medium Enterprises Development Act, 2006
Small Scale Industries :

Growth rate of SSI is @ 10% pa in terms of production. It is far faster than that of
large scale sector, since 1973.
The production in SSI increased from Rs. 13,600 crore in 1973-74 to more than 5,85,000
crore, in 2006-07.
SSI contributes about 39% of the gross value of output in the manufacturing sector.
The number of registered and unregistered SSI which stood at 16,000 units in 1950
increased to 128.4 lakh in 2006-07.
SSI employed nearly 312 lakh persons in 2006-07, This represents about 60% of the
total industrial employment. Employment in SSI is next only to that of agricultural sector.
SSI contributes over 40% of the manufacturing exports and 33% of the total exports.
Q: What are the main problems of industrial development of India?

PROBLEMS OF INDUSTRIAL DEVELOPMENT IN INDIA
The main problems of industrial development are as under:
1.
Big Gap between Plan Production and Actual Production: There are serious gaps
between planned production and actual production in physical terms. In each plan period,
the average industrial growth rate achieved has been around 6.2% relative to the target
of about 8%.
2.
Underutilisations of Capacity: A large number of industries experience underutilisation

of production capacity. The average underutilisation is 40% to 50%. It is estimated that
if this unutilised capacity is utilised in a planned manner, then the industrial output can
be easily increased by 30% to 40% without any further investment.
The factors responsible for underutilisation of capacity are- Demand shortfalls, Over-optimistic
demand projection, supply bottlenecks, labour problems, deliberate underutilisation to create
shortages and so on.
3.
Increasing Capital-Output Ratio: Another very disturbing

feature of industrial development of India is the ever-rising
capital output ratios. It was 2.95 during the first plan,
but increased to 3.9 during the 7th plan and further to
4 during 8th, 9th and 10th Plan.
This increasing trend of capital output ratio is due to
increasing capital cost of new industrial units, the highly
capital-intensive nature of basic and heavy units,
underutilisation of capacity, un-remunerative administered
prices in respect of basic goods and services and so
on.
4.
High Cost Economy: The cost and price of goods/ services

in India are generally much higher than international costs
and prices. The consuming public is obliged to bear high
burden.
The high cost economy is attributed to import substitution,
government protection of indigenous industries, monopolistic
tendencies in several industrial areas, high wage rate,
increasing capital intensity in industrial units, low productivity
of labour, uneconomic size of industrial units, lack of
cost consciousness among industrial magnates and
managers and so on.
144
Problems of Industrial
Development
1. Big Gap b/w plan production
and actual production
2. Underutilisations of capacity
3. Increasing capital-output ratio
4. High cost economy
5. Inadequate employment
generation
6. Poor performance of public
sector
7. Concentration of economic
power
8. Sectoral imbalances
9. Industrial sickness
10. Absence of world-class
infrastructure
CPT

5.
Inadequate employment generation: One of the most serious deficiencies of industrial

development is its inadequate employment generation in relation to investment made. Though
employment generation is one of the major objectives of the five year plans, industrialisation
has proved itself to be incapable of generation of substantial direct employment.
6.
Poor performance of Public Sector: The performance of public sector has raised many
eyebrows. Though profit may not always be the appropriate criterion for evaluation the
performance of public sector, accumulation of large losses in public sector units is a serious
matter and needs some immediate corrective actions. The accumulated losses of central
public sector units was more than Rs. 42,000 crore in 2005-06.
A loss making undertaking gets weak in course of time. It loses survival capability. A large
number of public sector units was 'loss leaders'.
7.
Concentration of Economic Power: Although the reduction of concentration of economic

power is one of the main objectives of the governments' five year plans, but even then
large business houses have considerably increased their assets and sales during the plan
period. For example, the assets of TATA increased from Rs. 375 crore in 1963-64 to Rs.
8531 crore in 1991.
8.
Sectoral Imbalances: Sectoral imbalance is also another problem of industrial development.

There should be proper tuning of all sectors so that they develop each other. In our country,
industries are suffering from inadequate support from agriculture and infrastructure.
9.
Industrial sickness: Industrial sickness has become a serious problem affecting small
medium and large units. In March 2007, there were 1.18 lakh sick units of which 96%
were small units. Industrial sickness has been spreading over the years. The causes of
sickness are identified as financial mismanagement, demand recession, labour unrest,
working capital shortage, cost escalations, shortage, and cost escalations, uneconomic
size, outdated machinery and equipment and so on.
10.
Absence of world class infrastructure.

SERVICE SECTOR (I.E. TERTIARY SECTOR)
Growth Rate of Service Sector: This sector provides services to other business enterprises
and to final consumers. This sector is growing very fast.
9% p.a. in the 10th Plan (11th Plan aims at 9.4% p.a. growth in the service sector).
IT services (such as BPO) have been growing @ 60-70% pa.
India has the second largest scientific and technical manpower in the world.
Share in GDP: Over the plan period, the share of this sector has increased from l/3rd of GDP
in 1950-51 to more than half in 2007-08. In 2007-08, its share in the GDP was more than 57%
(more than half of GDP).
The share of various service sectors are as under:
Share of trade, hotels, transport and communication
Share of financial services
Share of other services
: 9% in 2008-09
: 7.8% in 2008-09
: 13% in 2008-09.
(such as community, social and personal services)
Employment: This sector occupied about 17.3% of working population in 1951. In 2001, around
22.5% of working population was dependent on the service sector for occupation.
This sector provides support to other sectors.
Contribution in Exports:
Services accounted for more than 45% of total exports of India (2007-08).
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In 2006, India's share in world's total commercial services export was 2.7%. Indian service
exports grew by 29% in 2000-06. In the list of exporters of services (2008), India is ranked
9th.
Software and other services such as business, technical and professional services have emerged
as the major categories in India's export of services.
3. NATIONAL INCOME
Q: Define National Income? Examine the various concepts related to National Income?
Meaning of National Income:
The money value of all the final goods and services produced by a country during a period of
one year is termed as "National Income.
Since different goods are measured in different units. It is not possible to add them together.
Therefore their value is converted in a common measure, i.e. money.
Characteristics of National Income;
1.
National Income reflects the value of final goods and services only. Intermediate goods
are excluded to avoid the problem of double-counting.
2.
National Income is expressed in monetary terms.
3.
National Income is generally expressed over one year.
4.
Finally, National Income is not the sum of personal incomes. Personal incomes include
transfer incomes. All transfer incomes are excluded from national income, because they
represent a redistribution of goods and services already produced and not any addition
in goods and services.
Basic Concepts in National Income;

1.
2.
Gross Domestic Product (GDP): The money value of all the final goods and services
produced with in the domestic territory of a country during the accounting year is termed
as Gross Domestic Product. Here, the word domestic territory includes the following:
(a)
Territory lying within the political frontiers, including territorial waters of the country.
(b)
Ships and aircraft operated by the residents of India between two or more countries.
(c)
Fishing vessels, oil and natural gas rigs, floating platforms operated by the residents
of India in the international waters.
(d)
Embassies, consulates and military establishments of the country located abroad.
GDP at Constant Prices and at Current Prices:

When the GDP is calculated on the basis of the prices prevailing in the market, it is called
'GDP at current prices'. On the other hand, when the GDP is calculated on the basis
of some fixed prices keeping as base, then it is called 'GDP at constant prices' or real
GDP.
For example, the GDP at the current price in 2007-08 was Rs. 43,20,892 crores, but when
GDP was valued on the basis of the prices prevailing in the 1999-00, it was Rs. 31,29,717
crores.
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3.
GDP at Factor Cost and GDP at Market Price: It is simply the sum of the Net value
added by the different producing units and the consumption of fixed capital, i.e. depreciation.
In short,
GDP FC = Net value added by the different producing units + Depreciation
'GDP at market price' also includes indirect taxes and excludes the subsidies given by
the government. Therefore, if we add indirect taxes and subtract the subsidies from the
GDP at the factor cost, we will get 'GDP at the market price'. In short,
GDPMP = GDPFC + Indirect Taxes - Subsidies
GDPFC = GDPMP - Indirect Taxes + Subsidies
4.
Net Domestic Product (NDP): When the consumption of fixed capital, i.e. depreciation,
is deducted from the gross domestic product, we get net domestic product. SymbolicallyNDP = GDP - Depreciation
5.
Gross National Product (GNP): As discussed earlier, GDP is the money value of all the
final goods and services produced within the domestic territory, but it does not include
net factor income from abroad.
Now the question arises, "what is net factor income from abroad?" Some Indian residents
go abroad to work and earn factor income. Similarly, some people come to India from
abroad and earn factor income for the services rendered by them. Net factor income is
the difference between both the incomes, i.e. between the income received form abroad
for rendering factor services and the income paid for the factor services rendered by the
non-residents.
Gross National Product is the sum of gross domestic product and net factor income from
abroad (NFIA). In brief,
GNP = GDP + NFIA

6.
Net National Product (NNP): When depreciation is deducted from the Gross National
Product, we get Net National Product. Symbolically,
NNP = GNP - Depreciation
NNP = GDP + NFIA - Depreciation
NNP = NDP +NFIA
7.
NNP at Factor Cost or National Income: It is the net value added at factor cost during
an accounting year, in the terms of income earned by the factors of production. NNP at
factor cost or national income is defined as the sum of domestic factor incomes and net
factor income from abroad. If NNP figure is available at market prices, we will subtract
indirect taxes and add subsidies to the figure to get NNP at factor cost. In brief,
NNPFC (National Income) = FID + NFIA
Where, FID = Factor income earned in the domestic territory of a country, NFIA = Net
factor income from abroad.
147

8.
CPT
Personal Income:
Personal income is the sum of all the incomes actually received by individuals out of the
national income of a country during the year.
Personal Income = National Income - Amount not available for distribution + Transfer Payment
These are the deductions, which are made out

of national income before making any distribution.
The whole of the national income is not distributed.
For example,
The government provides certain social

security benefits to individuals such as old age pension,
Corporate income tax
unemployment allowance,
Undistributed Corporate profits
widow pensions, etc.
Social security contributions, like employee's contribution towards PF,

pension fund, etc.
9.
Such payments are knows as

"Transfer Payments"
Personal Disposal Income:

= Personal Income - Personal Taxes
= Consumption + Savings
Q: What are the various methods of estimating National Income?

MEASUREMENT OF NATIONAL INCOME.
There are three methods for measuring the national income, which are as follows:
1.
Production Method/Value Added Method
2.
Income Method
3.
Expenditure Method
1. Production Method /Value Added Method:

According to this method, national income is equal to the money value of the entire national
product or output of the country in a year. It is calculated under the following steps:
1.
2.
In this method, all the producing units are classified into 3 sectors(a)
Primary sector is sub-divided into agriculture, fisheries, animal husbandry and other
allied activities.
(b)
Secondary sector is sub-divided into manufacturing units.
(c)
Tertiary Sector is sub-divided into the services of Banking, insurance, transport and
communications. Further, each sub-sector is further divided into sub-units.
Thereafter, the value added by each unit of the sub-sector is calculated by the following
formula:
Value added by
each unit of the
sub-sector
Value of raw
materials, intermediate
goods, services, etc.
used by that unit
The value of its

gross output
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Depreciation
CPT
2.

3.
By adding the value added by all the units of the sub-sector, we get the value added by
that sub-sector, and by adding value added by all the sub-sectors, we get the value added
by a particular sector. When we add the value added by each sector, we get 'Net Domestic
Product'.
4.
If the figures are available at market price, it can be easily converted into factor cost by
deducting the value of indirect taxes and adding the value of subsidies. This gives the
Net Domestic Product at factor cost.
5.
If we add or subtract NFIA, we get the Net National Product at factor cost, which is known
as National Income.
Sale of second-hand machines is not included in national income, because they were
counted as a part of production in the year in which they were produced.
However, brokerage and commission earned by the dealers of second-hand goods are
a part of production and hence included while calculating the total value added.
Income Method:
As we know, the production of goods and services are the result of the joint efforts of all the
factors of production i.e. land, labour, capital, organisation and entrepreneur. The revenue received
by the sale of the product is distributed among them as their remuneration. Such as rent to land,
wages to labour, interest to capital and profit to entrepreneur. Thus, whatever is produced is distributed
among the factors of production. The amount so distributed is the income of these factors and is
known as the factor incomes.
In the Income Method, the aggregate of factor incomes of all the factors of production of all
the producing units form the subject matter of calculation of National Income.
National Income
Labour Income
Non- Labour
Income
Mixed
Income
Depreciation
1.
Labour income, like wages and salaries, bonus, commission, employers' contribution
to PF and compensations in kind.
2.
Capital Income (i.e. Non-labour income), like

(a)
3.
Income of self-employed.
(b)
Interest.
(c)
Profit.
(d)
Rent.
(e)
Dividend
(f)
Surplus of public enterprises
Mixed Income:
In many cases, it is difficult to separate labour income from capital income, because in
many instances, people provide both labour services and capital services. For example,
self-employed people like lawyers, engineers, traders, proprietors, etc.
In such cases, mixed income is introduced, which includes all those incomes which are
difficult to separate.
4.
NFIA need not be added separately, since the incomes received by people include net
foreign incomes as well.
But if national income is calculated not from incomes received by the people but from data regarding
incomes paid out by producers, then net income from abroad would have to be added separately because
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CPT
incomes paid by producers would total to domestic income. To arrive at national income, net income
from abroad should be added to domestic income.
Care has to be taken to see that transfer incomes are not included in national income.
For this purpose, personal income should not be confused with national income. While
personal income includes transfer payments, national income does not.
Similarly, illegal incomes, windfall gains, death duties, gift tax and sale proceeds of secondhand goods are not included in national income.
3. Expenditure Method;
This method is based on the assumption that "what is one man's expenditure is other man's
income." Hence, the national expenditure should be equal to national income. The various steps are
as under:
1.
The various sectors, i.e. the household sector, the business sector and government sector
either spend their incomes on consumer goods and services or save a part of their incomes
or they spend a part of their incomes on non-consumption goods.
So, total expenditures in an economy are grouped as under:
Expenditure on financial assets
Expenses on financial assets, which are produced and owned within the countryExcluded from national income.
Expenses on financial assets of foreign countries - is included in national expenditure.
However, only the net expenditure is included.
Net Foreign Investment
Expenditure on foreign
financial assets by residents
Expenditure on the country's

financial assets by foreigners
Expenditure on goods produced in preceding periods - Excluded from national income.
Expenditure on raw materials, intermediate goods and services - Excluded from national
income.
Government expenditure on pensions, scholarships, unemployment allowance, etc. Excluded

from national income, as these are transfer payments.
Expenditure on final goods and services produced in the current period - included in national
income
(a)
Consumption Expenditure = Private consumption of household + public consumption

of government
(b)
Expenditure on capital goods (i.e. Investment expenditure) = Private investment +

Public investment.
These two expenditures together give us 'gross domestic expenditure at market price'.
2.
If we add net foreign investment, we get gross national expenditure at market price.
3.
Again, if we add subsidies and deduct indirect taxes, we get net national expenditure
at the factor cost.
1.
Net domestic expenditure
Consumption expenditure + net domestic investment.
2.
Gross national expenditure
Consumption expenditure + net domestic investment

+ net foreign investment + replacement expenditure
3.
Net national expenditure

+
Consumption expenditure + net domestic investment

net foreign investment.
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Which method is suitable?

1.
The contributions of different sectors to the total national income are estimated by different
methods.
For exampleIn agricultural sector - production method,
in the-small scale sector - income method
in the construction sector - expenditure method.
2.
Income method may be the most suitable for developed economies, where people properly
file their income tax returns.
Q: Explain the Trend in India's National Income.

Trends in India's National Income:
Trends in NNP:
The real national income of India has increased at an annual average rate of 4.4% during last
58 years. If we consider the last 14 years we find that the rate of increase in national income has
been around 6% pa.
Plan
Lowest ->
Highest ->
Annual Average Growth Rate of

Real National Income
First Plan
3.7%
Second Plan
4.2%
Third Plan
2.8% (due to serious drought in 1965-67)
Fourth Plan
3.9%
Fifth Plan
5%
Sixth Plan
5.5%
Seventh plan
5.8%
Eighth Plan
6.8%
Ninth plan
5.4%
Tenth Plan
7.6%
Eleventh Plan (Target)
8.5%
Trends in Per Capita Income: During the last 58 years, it has increased @ 2.3% pa. This
is a modest performance.
Plan
Lowest ->
Annual Average Growth Rate of

Per Capita Income
First Plan
1.8%
Second Plan
2%
Third Plan
0%(due to serious drought in 1965-67)
Fourth Plan
1.5%
Fifth Plan
2.7%
Sixth Plan
3.2%
Seventh Plan
3.6%
Eighth Plan
4.5%
Ninth Plan
3.3%
Tenth Plan
6.1%
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4. TAX SYSTEM OF INDIA
Q: What do you mean by Direct Tax and Indirect Tax? Explain their merits and demerits.
TYPES OF TAXES
Tax is the most important source of revenue to the government. Tax is a compulsory contribution
from a person to the expenses incurred by the State in the common interest of all. The various taxes
can be divided into two categories:
(i)
Direct taxes
(ii)
Indirect taxes
Direct Taxes
Direct taxes are those whose burden cannot be shifted on others. In other words, we can say
that the burden of direct taxes is borne by the person who pays them. For example, Income-tax, Wealthtax, etc.
Merits
Demerits
1.
Progressive Nature: The nature of direct

taxes is progressive, because they are
charged according to the ability of the person
to pay.
1.
Difficulty in Assessment: This is because,

direct taxes depend on the ability to pay,
which is difficult to estimate.Only a rough
estimate can be made.
2.
Elasticity: The revenue from the direct taxes

is elastic due to its progressive nature. The
revenue will rise with a rise in income and
fall with a fall in income.
2.
3.
Civic Consciousness: The person, who pays

the direct taxes, knows how much he is
going to pay. Thus they fulfill the canon
of certainty.
Easy to Evade: As the direct taxes depend

on the ability to pay, it requires a
proper maintenance of the Books of account.
Thus, by making wrong books of account, one
can easily escape from direct taxes.
3.
Arbitrary: Another objection against direct

taxes is that they are imposed arbitrarily by
the government. No well-defined principles are
considered while fixing the rate of taxes. This
is against the spirit of social justice.
4.
Unpopular: These taxes are unpopular, because

the taxpayers are not going to be directly benefited
by them.
5.
Inconvenience: Direct taxes are inconvenient

in the sense that the taxpayer has to prepare
the income-tax returns, showing all sources
of his income to the tax authorities. Further,
the income tax provisions are so complicated
that its assessment is not easy.
4.
5.
Helpful in the Social Equality: The direct

taxes are also helpful in social equality.
This is because if the expenditure on society,
such as on health, education, etc. is financed
out of the direct taxes, they lead to diversion
of income from the rich to the poor and
from the few to the many.
Anti-inflationary: Direct taxes serve as
a good anti-inflationary tool. The excessive
purchasing power of the public can be
decreased by increasing direct taxes.
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Indirect Taxes
Indirect taxes are those whose burden can be shifted on the person who does not pay them.
Sales taxes, custom duty, excise duty, service tax, etc. are some examples of indirect taxes.
Merits
Demerits
1.
Easy to Estimate: The most important feature

of indirect taxes is that their assessment is
very easy. This is because they are assessed
at a fix rate and at the appropriate point. For
example, custom duty is imposed at borders
at the time of imports.
1.
Regressing Nature: This is because these

are not charged on the basis of the ability
to pay, but their amount is included in the
price of the commodity. Therefore every
person, whether poor or rich, has to pay
them.
2.
Difficulty in Evasion: The evasion of indirect

taxes is not easy. This is because they are
charged at a fix place as in the above example.
2.
3.
Convenient: As the amount of indirect taxes

is included in the price, the customer does not
feel hurt that he is paying a tax. Moreover, the
amount of tax on each item is often so small
as not to hurt the taxpayer. Thus, indirect taxes
fulfill the canon of convenience.
Civic un-consciousness: As the amount

of indirect taxes is included in the price
of a commodity, its buyer does not know
how much he is going to pay as indirect
tax. Thus indirect taxes fail to satisfy the
canon of certainty.
3.
Inflationary: Indirect taxes lead to price

rise and inflation. This is because any
increase in indirect taxes will increase the
market price of the commodity.
4.
Burden: Ultimately, the consumer of final

goods or services has to bear the burden.
5.
Effect on Production: Production can be

adversely affected by an increase in the
rates of indirect taxes.
4.
5.
Helpful in the Social Welfare: Government

may encourage the social welfare by discouraging
the consumption of drinks, narcotics and tobacco,
etc. by imposing higher taxes on them.
Elasticity: There is plenty of scope to raise
the rate of indirect taxes, particularly in case
of the necessities of life.
Examples:
Direct Taxes
Income Tax
It is a tax on income.
Introduced in India in 1860
but was discontinued in 1873. It was
reintroduced in 1886.
Personal
Income Tax
(by CG)
It is a tax on income
of individuals, HUF,
unregistered firms
and other
associations of
people.
The maximum
marginal rate of
income tax is 30%.
Corporate
Income Tax
(by CG)
Taxes on Wealth and Capital
Agricultural
Income Tax
(by SG)
It is a tax on incomes
of registered
companies and
corporations.
Companies have a
separate entity and
they are taxed
separately.
Estate duty
Wealth Tax
Gift tax.
First introduced in
India in 1953.
First introduced
in 1957.
First introduced
in 1958.
It is a tax on a
property passing
to the heirs on the
death of a person.
It is a tax on
wealth, like
house, car,
Jewellery, land
etc.
It was a tax on
donations, gifts
to women
dependents and
gifts to wife.
It was abolished
in 1985.
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It was abolished
in 1998.
CPT
Indirect Taxes
Custom Duties
Levied on exports and imports
Import duties are generally levied

on the basis of ad-valorem, i.e. which
means they are determined as a
percentage of the price of the
commodity. On some commodities,
specific import duties, i.e. per unit
taxes, are levied.
Excise Duties
Levied on
Production
(Not on Sale)
Service Tax
VAT
Imposed in 1994-95
It is imposed on
specified services, also
known as taxable
services (more than
100 taxable services)
Service tax Rate is 10%
The maximum rate of custom duty

is 15%.
Q: What are the main features of the Indian Tax Structure?

TAX STRUCTURE IN INDIA
Over the last four decades, the tax revenues collected both by the central and state governments
have increased many fold from Rs. 460 crore in 1951-52 to more that Rs. 12,00,000 crore in 200809. As present, the revenue from taxes is about 20% of the total national income of India. The tax
structure in India can be summarised as follows:
1.
High Burden: Tax revenues form about 20% of the total national income of India. Among
the Third World countries, India is one of the highest taxed countries. In India, the burden
of taxes is too high, this is due to(a)
Spectacular rise in the expenditure on defence and other unproductive activities.
(b)
Increase in expenditure on development planning.
(c)
Violation of the canon of economy.
2.
Narrow Population Base: The population of the country is more than 115 crore. The
working population is about 40%. But only 2.5% population is paying income-tax.
Large share of Indirect Taxes: The ratio of direct and indirect taxes was 40:60 in
2008-09. This shows that overdependence on indirect taxes is rising which is not good.
3.
4.
5.
Nature: In India, the direct taxes are progressive, while indirect taxes are regressive.
Agricultural Income: The agriculture income is wholly exempt from income tax.
6.
Complication: The Indian tax structure is very complicated. Generally the taxpayers find
it very much inconvenient to file a return.
The Boothlingam Committee and the Chelliah Committee recommended simplification and
rationalisation of tax system.
7.
Lack of Integrated Tax System: The Indian tax system in haphazard and has not been
scientifically planned. In recent years, however, attempts have been made to make the
Indian tax system an integrated one.
Inequity: Although direct taxes are quite progressive and fulfil the canon of equity, indirect
taxes violate the canon of equity.
8.
9.
Others:
(a)
High black money - 50% of the country's GDP
(b)
The Indian tax system discourages employment.
(c)
It adversely affects savings.
(d)
It distorts prices.
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CPT
Q: Write a note on 'Central Value Added Tax'.

CENTRAL VALUE ADDED TAX (CENVAT/MODVAT)
CENVAT means a tax on value addition. Value addition means the value of an output as
reduced by the value of inputs. Thus, Value Added Tax means the Tax on Output less
tax paid on Input.
Earlier CENVAT was known as MODVAT. MODVAT was introduced in 1986-87.
Basically, this was introduced to avoid the cascading effect of duty. Cascading effect means
duty on duty. Consider the following exampleWithout CENVAT
With CENVAT
Raw Material
100
Raw Material
+ Duty @ 10%
10
+ Duty @ 10%
Total
110
Total
110
Less: credit for duty
-10
Net cost of raw material
100
+ Value addition
84
+ Value addition
Cost of product B
194
Cost of product B
+ Duty 10%
19.4
+ Duty 10%
Total
213.4
Total
(Again the person who purchases,
B will get a credit of Rs. 18.40)
100
10
84
184
18.40
202.40
The above calculation shows that the same product is available to the ultimate consumer Rs.
213.40 without CENVAT Scheme and at Rs. 202.40 under the CENVAT scheme.
Merits of CENVAT;
1.
Prevents the cascading of taxes
2.
Reduces cost: This system reduces the cost of production. This is because the manufacturer
is required to pay reduced tax.
Q: Write a note on 'Value Added tax (VAT)'.

VALUE ADDED TAX (VAT)
VAT is a multistage sales tax with credit for taxes paid on business purchases.
MODVAT v. VAT: VAT covers the entire value of inputs, whereas under MODVAT credit
was given in respect of duty paid inputs only.
VAT was introduced in 1999 and implemented in April, 2005. Basically, this was introduced
to avoid the cascading effect of duty.
Meaning of Cascading effect + its example: Same as CENVAT
Merits of VAT: Same as CENVAT
Q: Explain the different canons of taxation.

CANONS OF TAXATION
According to Prof. Adam Smith, the following are the four canons of taxes:
1.
Canon of Ability/Equity: This canon is also termed as the 'canon to equity'. According
to this canon, a good tax is one whose burden is equitably distributed. It means that the
marginal dis-utility of the tax paid by the rich and the poor should be the same. In other
words, we can say that a good tax is one which is imposed according to the ability to
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CPT
pay. The person, whose income is high, should be taxed were and the person, whose
income is low, should be less taxed
2.
Canon of Economy: A good tax is that whose cost of collection is lower than the amount
collected by the tax authority.
3.
Canon of Certainty: A good tax should also satisfy the canon of certainty, i.e. the amount
of tax, which an individual is required to pay, should be certain.
4.
Canon of Convenience: A good tax is one, which is imposed 'in a way that the payment
would cause the least inconvenience to the payer.
5.
Others: Besides the above canons of taxation suggested by Adam Smith; some other
economists have also suggested certain other canons of taxation, which are as follows:
6.
(i)
Canon of Productivity: A good tax is one, which can produce a sufficient amount
of revenue in order to meet the various expenditure of the government.
(ii)
Canon of Elasticity: The tax system should be elastic, i.e. the revenue from it should
increase or decrease with an increase or decrease in the national income.
(iii)
Canon of Simplicity: So far as possible, the tax system should be simple, it should
not be complex.
Canon of Diversity: This canon requires that there should be a number of taxes of different
varieties so that the income of every class of citizen may be taxed. Every person must
be obliged to pay, directly or indirectly, something to the national income.
Questions
1.
2.
3.
4.
Economic growth means more output in (A) quantitative terms

(B) qualitative terms
(C) both (A) & (B)
(D) none of these
5.
Economic development improvement in (A) quantitative term

(B) qualitative terms
(C) per capita income
(D) none of these
6.
The primary sector consists of activities relate

to (A) agriculture
(B) services
(C) tertiary
(D) none of these
7.
Green Revolution was introduced in (A) 1964

(B) 1966
(C) 1968
(D) 1970
The most important food crop in India is
(A) wheat
(B) rice
(C) bajra
(D) jowar
Groundnut, cotton, jute are (A) food crops
(B) cereals
(C) cash crops
(D) non-food crops
8.
Agro-based industries depend on (A) manufacturing sector

(B) small sector
(C) agricultural sector
(D) export sector
Oilseeds are (A) cash crops

(B) cereals
(C) non-food crops
(D) none of these
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CPT
9.
10.
11.
12.
13.
14.
15.
16.

A near self-sufficiency was achieved by India
in(A) cereals
(B) food crops
(C) non-food crops
(D) none of these
(C) Ryotwari system

(D) none of these
17.
Uniform ceiling laws were made from (A) 1969 onwards

(B) 1970 onwards
(C) 1971 onwards
Under the green revolution, farmers used(A) HYV seeds

(B) better fertilizer & pesticides
(D) both (A) & (B)
(D) 1972 onwards

18.
Under land reforms, the definition of 'personal

civilisation' was (A) satisfactory
(B) not relevant
The agriculture sector performed poorly during

the(A) 7th plan
(B) 8th plan
(C) 9th plan
(D) 6th plan
(C) not satisfactory

(D) none of these
19.
PDS refers to (A) public distribution system

(B) private distribution system
Stress in agricultural development in the

eastern region was proposed in (A) 7th plan
(B) 8th plan
(C) 9th plan
(D) 10th plan
(C) pricing distribution system

(D) potential distribution system
20.
Effect of green revolution has not spread

to (A) food-grains
(B) commercial crops
The national agricultural policy, was announced

in (A) 2000
(B) 2001
(C) 2002
(D) 2003
(C) non-food crops

(D) none of these
21.
NABARD was set up in (A) 1981

(B) 1982
The "Integrated oilseeds programme" was

adopted in(A) 10th plan
(B) 8th plan
(C) 9th plan
(D) 7th plan
(C) 1983
(D) 1984
22.
To help the farmers, NABARD introduced

the 'Kisan credit card' in (A) 1997 - 98
Tenancy reforms means (A) regulation of rent & security of tenure

(B) giving ownership rights to presents
(C) both (A) & (B)
(D) none of these
(B) 1998 - 99
(C) 1999 - 2000
(D) 2000 - 2001
23.
Agricultural sector has (A) low marketable surplus
The headman collected the land revenue

and deposited it to the government under(A) Zamidari system
(B) Mahalwari system
(B) huge marketable surplus

(D) none of these
157

24.
25.
26.
27.
28.
29.
30.
Sick
(A)
(B)
(C)
(D)
CPT
industries are referred to RBI

government
Private sector
BIFR
31.
The 11th Plan aims at an average annual

growth rate of the Industrial sector (A) 7.3%
(B) 8.0%
(C) 10%
(D) 8.2%
The first Industrial Revolution took place in(A) 1947

(B) 1948
(C) 1949
(D) 1950
32.
The Mahalanobis model concentrated on (A) consumer goods sector

(B) capital good sector
(C) both (A) & (B)
(D) agricultural sector
The first industrial revolution laid the foundation

of (A) capitalist economy
(B) socialist economy
(C) mixed economy
(D) none of these
33.
Underutilisation of capacity was (A) not a problem of Indian industries

(B) a problem of Indian industries
(C) was a problem in some selected years
(D) none of these
Which of the following is correct?

(A) If national income rises, the per capita
income must also rise
(B) If population rises, the per capita income
must fall.
(C) If national income rises, the welfare
of the people must rise.
34.
Mixed income of the self-employed means(A) gross profits received by proprietors

(B) rent, interest and profit of an enterprise
(C) combined factor payments which are
not distinguishable
(D) Wages due to family workers
35.
Which of the following is an economic activity?

(A) Listening to music on the radio
One of the following is not the merit of direct

taxes. Find it (A) They are imposed according to the ability
of the person to pay.
(B) These taxes create civic consciousness.
(C) The revenue is income-elastic.
(D) They do not require maintenance of
accounts.
(B) Teaching one's own son at home

(C) Medical facilities rendered by a
charitable dispensary
(D) A housewife doing household duties
36.
India's major portion for tax revenue comes

from (A) direct taxes
The New Industrial Policy (NIP) was introduced

in (A) 1990
(B) 1991
(C) 1992
(D) 1993
(B) indirect taxes

(C) income taxes
(D) gift taxes
37.
An example of indirect tax is (A) A tax on profits

(B) Income tax
During the 10th plan, the industrial sector

achieved an average annual growth rate of(A) 7.3%
(B) 8.0%
(C) 8.7%
(D) 8.2%
(C) VAT
(D) Inheritance tax
38.
Which of the following is an indirect tax (A) Custom duty

(B) Excise duty
158
CPT

(C) Service Tax
39.
40.
Which of the following statement is correct?

(A) Income tax was abolished in India in
1991.
(B) Gift-tax was abolished in India in 1998.
(C) All the states have adopted the VAT
system of indirect taxation.
(D) Estate duty was abolished in 1995.
(A) Excise duty is levied on sales volume.
(B) Custom duties were drastically cut down
since 1991.
(C) VAT has been adopted by all the states
in India.
(D) Agriculture contributes the maximum
to the direct tax revenues in India.
46.
The
(A)
(B)
(C)
(D)
largest source of tax revenue is corporate tax

income tax
gift tax
excise tax
47.
MODVAT was introduced in India in the Union

budget of (A) 1985 - 86
(B) 1986 - 87
(C) 1987 - 88
(D) 1988 - 89
48.
As
(A)
(B)
(C)
(D)
MODVAT has defects, it was replaced by VAT

replaced by CENVAT
replaced by corporate taxes
none of these
41.
India's direct tax structure (A) progressive

(B) regressive
(D) none of these
49.
VAT
(A)
(B)
(C)
(D)
42.
Net value added is equal to (A) Payments accruing to factors of

production
(B) Compensation to employees
(C) Wages plus rent
(D) Value of output minus depreciation
50.
A high capital-output ratio is (A) bad for the country

(B) good for the country
(D) none of these
51.
43.
'Per
(A)
(B)
(C)
(D)
AGMARK is (A) a type of product

(B) a type of scaling
(C) a type of market
(D) a grading stamp
52.
44.
Indirect taxes (A) works through prices

(B) are inflation-potent
(C) both (A) & (B)
(D) none of these
Co-operative farming aims at

(A) solving problem of fragmentation of
holdings
(B) reaping the benefits of large scale farming
(C) both (A) & (B)
(D) none of these
45.
Agriculture income in India (A) is taxed at low rates

(B) is taxed at high rates
(C) is not taxed at all
(D) is taxed, if the farmer is rich
53.
Small-scale units exist in India, because(A) they are labour intensive and India is
a labour surplus economy
(B) they offer methods of ensuring more
equitable distribution of income and
wealth
capita national income' means population

NMP
Total capital
population
NNP
Population
None of the above
159
was one-stage sales tax

multi-stage sales tax
both (A) & (B)
none of these
CPT
(C) they facilitate the creation of a wider

entrepreneurial base
54.
60.
(A) Intermediate consumption
(B) Capital formation
(A) GDP at market price = GDP at factor

cost plus net indirect taxes
(C) Final consumption

(D) Expenditure on consumer durables.
(B) NNP at factor cost = NNP at market

price minus indirect taxes
61.
(C) GNP at market price = GDP at market

price plus net factor income from abroad
56.
(B) Decreased
(C) Increased
Purchase of ceiling fan by a household is

treated as national income as a part of (A) Capital formation
(D) First increased and then decreased

62.
(A) Under Zamindari system, the farmers

directly paid land revenue to the state.
(D) Intermediate consumption
(B) At present, income tax revenues from

the agriculture sector are negligible.
Demand for intermediate consumption arises

in (A) Consumer households
(C) Commercial banks are providing loans

to the agriculture sector at zero interest
rate.
63.
Demand for final consumption arises in (A) Household sector only

(B) Government sector only
59.
If during a year the national income at constant

prices goes up by 7%, while prices also
rise by 7% and population registers a growth
of 2%; then the real per capita income will(A) Remain constant
(B) Rise by 5%
(D) All sectors

58.
(B) Consumption over a long period of time

(C) Consumption at the time of its purchase
(B) Government enterprises only

(C) Corporate enterprises only
(D) All producing sectors of the economy
57.
The area under irrigation has___over the

years in India (A) Remained constant

55.
Imputed rental value of owner-occupied

dwellings is a part of -
(C) Fall by 5%
Transfer payments refer to payments, which

are made (A) without any exchange of goods and
services
(B) to workers on transfer from one job to
another
(C) as compensation to employees
(D) Rise by 3.5%

64.
National income differs from net national

product at market prices by the amount of(A) Current transfers from the rest of the
world
(B) Net indirect taxes
(C) National debt interest
Identify the items which are not a factor

payment(A) free uniform to defence personnel
(D) It does not differ

65.
Net National product at factor cost is (A) Equal to national income
(B) salaries to members of parliament

(C) imputed rent of an owner-occupied
building
(D) scholarships given to scheduled caste
students
(B) More than national income

(C) Less than national income
(D) Always more than the gross national
product
160
CPT
66.
67.
68.
69.
70.
71.
72.

The net value added method of measuring
national income is also known as (A) Net output method
(B) Production method
(C) Industry of origin method
(C) Increased
(D) First decreased and then increased
73.
The green revolution is also known as (A) Wheat revolution

(B) Rice revolution
(C) Maize revolution
During 1950-2007, the per capita income

increased by nearly (A) 1.5 times
(B) 2.5 times
(C) 2 times
(D) 4.5 times
(D) Forest revolution

74.
Manufacturing industries are a part of (A) primary sector

(B) secondary sector
(C) tertiary sector
The secondary sector consists of activities

of (A) banking sector
(B) manufacturing sector
(C) insurance sector
(D) none of these
75.
'Per capita income' among the following is

highest in (A) Orissa
(B) Assam .
(C) Manipur
(D) Kerala
The unsustainable levels of government deficits

in the late '80s can be attributed to (A) high levels of government expenditures
(B) insufficient revenues
(C) poor returns on government investments
76.
Which one of the following resources is the

most crucial input in India's new agriculture,
technology, responsible for the Green
Revolution?
(A) Fertilizers
(B) HYV seeds
About___per cent of the sick units in India

are small units.
(A) 10%
(B) 5%
(C) 30%
(D) 96%
(C) Agricultural machinery

(D) Irrigation
77.
'Personal disposable income' refers to (A) the income of a person after all personal
taxes are deducted.
Which one of the following measures has

been accorded the highest priority by the
government for checking the inflationary
pressure on the economy since 1990 (A) Revamping the public distribution system
(B) Correcting the fiscal imbalance by
reducing the fiscal deficit as a
percentage of GDP
(C) Increasing imports
(D) Devaluation of the rupee
(B) total income earned by a person.

(C) personal taxes paid to the government.
(D) personal and indirect taxes paid to the
government.
78.
Generally, an economy is considered under

developed, if(A) The standard of living of the people is
low and productivity is also considerably
low.
(B) Agriculture is the main occupation of
the people and productivity in agriculture
is quite low.
The share of agriculture in India's national

income has_____over the years (A) Remained constant
(B) Decreased
(C) The production techniques are backward.

161

79.
80.
81.
82.
83.
84.
85.
CPT

(A) Agriculture occupies 10% population
of India.
(B) Nearly 5% population of India is below
the poverty line.
(C) The production techniques are backward.
(C) Gross Domestic Product minus indirect

taxes and subsidies
(D) Gross National Product at factor price
plus or minus depreciation
The task of national income estimation in

India is entrusted to the (A) Indian Statistical Institute
(B) National Sample Survey Organisation
(C) Central Statistical organisation
(D) National Accounts Organisation
India has the ______ largest scientific and
technical manpower in the world (A) fifth
(B) tenth
(C) eight
(D) second
(A) The service sector contributes more
than half of the GDP of India
(B) The scope of attracting tourists is limited
as there is hardly any place of tourist
attraction in India
(C) Generally as an economy grows service
sector grows first followed agriculture
and industrial sectors
The National income of a country is also
known as (A) Gross National Product at market prices
(B) Net National Product at factor cost
(C) Gross Domestic Product at factor cost
(D) Net Domestic Product at Market prices
Mark the correct statement (A) India is a purely capitalist economy.
(B) India is a stagnant economy.
(C) India is a developing economy.
(D) India is a resources poor economy.
Net National Income at market prices is equal
to(A) Gross National Income at market prices
minus depreciation
(B) Net Domestic Product at factor price
plus or minus earnings from abroad
162
86.
Which of the statements is correct?

(A) The tertiary sector contributes the
maximum to the GDP.
(B) India is basically a socialist economy.
(C) The distribution of income and wealth
is quite equitable.
87.
____the apex bank for agricultural credit in

India is (A) RBI
(B) SIDBI
(C) NABARD
(D) ICICI
88.
The
(A)
(B)
(C)
(D)
89.

(A) Special schemes have been started to
promote export of agro-products.
(B) India has been a big importer of food
grains especially since the 1990s.
(C) The High yielding varieties programme
has resulted in improvement in
production and productivity of food grains
in India.
90.
Abolition of intermediaries and tenancy

reforms are both parts of (A) Industrial reforms in India
(B) External sector reforms in India
(C) Land reforms in India
(D) Banking reforms in India
91.
The share of tertiary or services sector in

GDP in 2007-08 was (A) more than 50%
(B) more than 52%
(C) more than 55%
(D) more than 57%
Public sector in India suffers from overstaffing

political interference
uncompetitiveness
all of the above
CPT
92.
Which of the following is not, by definition,

equal to national income?
(A) National product
(B) National expenditure
(C) National output
(D) National wealth
93.

(A) Indian tax structure relies on a very
narrow population base.
(B) Direct taxes are differential, indirect
taxes are progressive in nature.
(C) The ratio of Direct taxes to indirect taxes
which was 40:60 in 2008-09.
(D) The total tax revenue is highly insufficient
to meet the expenditure requirement
of the economy.
94.
Under the new industrial policy, 1991(A) the mandatory convertibility clause is
applicable for all term loans.
(B) the mandatory convertibility clause is
applicable for term loans of more than
10 years.
(C) the mandatory convertibility clause is
applicable for term loans of less than
10 years.
(D) the mandatory convertibility clause is
no longer applicable.
95.
The percentage of people working in the

agricultural sector came down to around
% in 2007-08 (A) 40
(B) 50
(C) 52
(D) 67
96.
Nearly____percentage of working population

is engaged in the service sector (A) 23%
(B) 45%
(C) 80%
(D) 50%
97.
Service sector accounted for nearly _____

Per cent of exports (2007-08) (A) more than 10%
(B) more than 20%
(C) more than 45%
(D) more than 80%
98.
If the NNP figure is available at market prices

we will____indirect taxes and____subsidies
to the figure to get the National Income of
the economy (A) add, subtract
(B) add, divide
(C) subtract, add
(D) subtract, divide
99.

(A) Most of the big industrial units in India
are sick.
(B) The industrial pattern on the eve of
independence was not balanced.
(C) During the planning period, the Indian
Industrial structure has shifted in favour
of basic and capital goods and
intermediate sector.
100. Agricultural sector faces the problem of (A) Slow and uneven growth
(B) Inadequate and incomplete land reforms
(C) Inadequate finance
101. We can say that Indian agriculture has
become modern since (A) There has been an increase in the use
of high-yielding varieties of seeds,
fertilizers, and pesticides, etc.
(B) There has been noticeable positive
change in the attitude of farmers towards
new techniques of production.
(C) Farmers are increasingly resoring to
intensive cultivation, multiple cropping,
scientific water management.
102. Which of the following has been specifically
established to meet the requirements of credit
of the farmers and villagers?
(A) ICICI bank
(B) Regional Rural Bank
(C) State Bank of India
(D) EXIM bank
(A) About 80% of the agricultural area has
irrigation facilities.
(B) About 60% net sown area is rain-fed
in India.
163
CPT
(C) Productivity per worker in agriculture

is much lower than that of industry.
108. All of the following can cause sickness to

an industrial unit except -
(D) Cropping pattern is quite skewed in

India.
(A) demand recession

(B) uneconomic size
(C) high productivity of labour and capital
(D) financial mismanagement
(A) The demand and supply of fuel are almost

equal.
109. The service sector in India now accounts

for (A) more than 80% of GDP
(B) Our import bill on account of oil has

been decreasing since 1990.
(C) Oil prices have been falling since 1973.
(B) more than 70% of GDP

(C) more than 57% of GDP
(D) Transmission and distribution losses

of power companies are very high.
(D) more than 9% of GDP
105. Which of the following is not an indirect tax

reform?
110. India has a mixed economy because -
(A) reducing the peak rate of custom duties
(A) agriculture and industry have both

simultaneously developed in India.
(B) rectifying anomalies like inverted duty

structure
(B) agriculture and industry have both

developed in the public sector.
(C) the tax rate on foreign companies has

also been reduced from 55% to 40%
(C) private ownership and public ownership

over means of production co-exist.
(D) introduction of value-added tax for

achieving harmonised taxation regime
(D) any of the above

111. Which of the following statement is correct?
106. Which of the following statements is not

correct?
(A) Countries which are industrially welldeveloped generally have higher per
capita income than countries which are
not.
(B) India is a capital surplus economy.
(A) GDP at market price = GNP at market

price - Net income from abroad
(B) GDP at factor cost = GDP at market
price - Net indirect taxes
(C) Agriculture sector need not depend upon

industrial sector for its growth.
(C) NDP at factor cost = NDP at market

price - Net indirect taxes
(D) NNP at factor cost = NNP at market

price - Net income from abroad
112. Mahalanobis model stressed upon the

establishment of(A) Consumer goods industries
107. Which among the following is incorrect?
(B) Export-oriented industries

(C) Agro-based industries
(D) Capital and basic goods industries
(A) India adopted planning as her way of

life because she wanted to quicken
industrialisation and economic
development with optimum utilisation
of resources and reduction of
inequalities.
113. What is the contribution of agriculture to

the National income of India?
(A) 44%.
(B) 17%.
(B) Removal of poverty and the attainment

of self reliance were two basic objectives
of the fifth plan.
(C) 34%.
(D) 50%.
(C) India has never been able to achieve

its targeted rate of growth.
114. In a_____budget revenue equals expenditure(A) balanced
(D) The Second plan was a very ambitious

plan as seeds of industrialisation were
sowed.
(B) deficit
164
CPT

121. The Small-scale sector contributes nearly
of the total exports of India -
(C) surplus
(D) long term
(A) 60%
115. Suppose India's GNP increased at an annual

average rate of 6.6% during the Tenth plan,
presuming that the growth rate of population
is 2 per cent per annum; per capita income
would increase at an annual average rate
of -
(B) 33%
(C) 45%
(D) 20%
122. The Agriculture sector faces the problem
of -
(A) 3.3%.
(A) slow and uneven growth
(B) 4.6%.
(B) inadequate and incomplete land reforms
(C) 6.6%.
(C) inadequate finance
(D) 2%.
116. About____area is rain-fed in India -
123. India's share in the world total services export

in 2005 was____% -
(A) 40% net sown area

(B) 50% net sown area
(A) 5.2
(C) 60% net sown area
(B) 2.7
(D) 70% net sown area
(C) 8.2
(D) 3.5
117. Which of the following has resulted in failure

to achieve targets of industrial production?
124. Three steel plants in Bhilai, Rourkela and

Durgapur were set up in the -
(A) Poor Planning

(B) Power, finance and labour problems
(A) First plan
(C) Technical complication
(B) Second plan
(C) Third plan

(D) Fourth plan

(A) A large number of industries face underutilisation of productions capacity.
125. The industrial sector faced the process of

retrogression and deceleration during -
(B) The incremental capital-output ratio has

been falling over the plan period.
(A) 1950-1965
(C) In terms of regions, industrial

development is quite balanced.
(C) 1980-1995
(B) 1990-2005
(D) 1965-1980
126. A sick industrial unit is one -
119. The industrial production has grown at an

annual average rate of during the Plan
period-
(A) where most of the employees are sick

(B) which is unable to perform its normal
functions and activities of production
of goods and services at a reasonable
profit on a sustained basis
(A) 10%
(B) 8%
(C) 3.5%
(C) which is unable to make profits more

than 10% of its capital employed
(D) 6.2%
(D) which borrows money from bank for

its fixed assets
120. The Small-scale sector contributes nearly

of the manufacturing exports in India (A) 60%
127. The Product method of calculating national

income is also known as -
(B) 35%
(C) 45%
(A) income method
(D) 20%
(B) value added method

165
CPT
(C) expenditure method
(C) export and import of goods
(D) distribution method
(D) total property passing to the heirs on

the death of a person.
128. NDP is GDP minus ____ -
135. For almost three decades (1950-80) the

average GDP growth rate was about___%
pa.-
(A) depreciation
(B) indirect taxes
(C) subsidies
(A) 6.6
(D) NNP
(B) 5.4
(C) 2.5
129. In 2005-06, direct taxes were around

% of GNP -
(D) 3.6
(A) 10
136. For adult education_____mission was

launched in 1998 in India -
(B) 15
(C) 12
(A) National Adult education
(D) 7
(B) National Technological

(C) National Senior Citizen
130. The Tenth Plan aimed at achieving a growth

rate of_____in the industrial sector -
(D) National Literacy
(A) 5%
137. In terms of overseas shipping tonnage, India

ranks -
(B) 8%
(C) 10%
(A) 67th
(D) 6%
(B) 23rd
(C) 100th
131. Oil and Natural Gas Corporation, Indian Oil

Corporation, Steel Authority of India, and
Bharat Heavy Electricals are all examples
of -
(D) 17th
138. GNP at market price minus____is equal
to GDP at market price -
(A) Small scale units
(A) depreciation.
(B) Private sector units
(B) direct taxes
(C) Public sector units
(C) subsidies
(D) Sick units
(D) net income from abroad
132. BPO stands for -
139. Compute national income, when the population

is three crore and the per capita income
is Rs. 2,000 -
(A) Bharat Petro Organisation

(B) Business Process Outsourcing
(C) Big Portfolio Outsourcing
(A) 6,000 cr
(D) Business Partners Organisation
(B) 2,000 cr
(C) 3,000 cr
133. Net national product at market price minus

net indirect taxes is equal to -
(D) 10,000 cr
(A) net foreign investment
140. The Indian industry faced the process of

retrogression and deceleration because of-
(B) net foreign investment plus net domestic

investment
(A) unsatisfactory performance of the

agricultural sector
(C) net national product at factor cost.
(B) slackening of real investment in public

sector
(D) replacement expenditure

134. Estate duty was levied on the (A) incomes of the individual
(C) narrow market for industrial goods,

especially in rural areas
(B) production of goods

166
CPT

(A) The industrial pattern on the eve of
independence was quite balanced.
(B) During the plan period, the structure
of Indian industry had shifted in favour
of basic and capital goods and
intermediate sector.
(C) Most of the big industrial units in India
are sick.
(B) The agricultural sector provides rawmaterials for the development of a agrobased industries of the economy.
(C) The agricultural sector provides market
for the industrial products.
148. If GNP is 15% higher than last year and
the rate of inflation is 7%, the production
in the economy grows by (A) 8%
(B) 7%
(C) 15%
(D) 2.1%
142. If real national income rises by 10% and

population increases by 2%, the per capita
income will increase by (A) 5%
(B) 8%
(C) 12%
(D) 6%
149. Sick industries are mostly (A) small units

(B) large units
(C) medium units
143. Which sector of the Indian economy

contributes the largest to national income?
(A) Primary sector
(B) Manufacturing sector
(C) Secondary sector
(D) Tertiary sector
150. Find the tax which is direct tax among the

following:
(A) Personal income tax
(B) Excise duty
(C) Sales tax
(D) Service tax
144. Economic development is (A) synonymous with economic growth

(B) narrower concept than economic growth
(C) broader concept than economic growth
151. Employment in the small industry sector

has been (A) nearly 60% of the total industrial
employment
(B) half of the number of employment offered
by modern industries
(C) about 10% of the total industrial
employment
(D) only 20% of the total industrial
employment
145. Which of the following is correct (A) GDP at market price = GDP at factor
cost plus net indirect taxes
(B) NNP at factor cost = GNP at market
price
(C) GNP at market price = NNP at market
price plus net income from abroad
152. CENVAT stands for (A) Common Entity Value Added Tax
(B) Corporate Entities Value Added Tax
(C) Central Value Added tax
146. Over the plan period the share of industrial

sector in the GDP of India has (A) increased
(B) decreased
(C) remained constant
(D) remained above 50%
153. _____is not a direct tax (A) Income tax

(B) Wealth tax
(C) Sales tax
(D) Gift tax
147. The industrial sector depends on the

agricultural sector, because (A) The agricultural sector provides food
and other products for the consumption
purposes of the industrial sector.
167
CPT
154. The per capita income of India in dollar in

the year 2005 is (A) $ 620
(B) $ 720
(C) $ 820
(D) $ 920
161. In the case of manufacturing enterprises,

a Micro unit is one, having an investment
of (A) Up to Rs. 25 Lakh
(B) between Rs. 25 lakh and Rs. 5 crore
(C) between Rs. 5 crore and Rs. 10 crore
(D) above Rs. 10 crore
155. The per capita income of India in the year

2005-06 is (A) Rs. 3,687
(B) Rs. 20,734
(C) Rs. 19,469
(D) Rs. 50,000

a Small unit is one, having an investment
of (A) Upto Rs. 25 Lakh
(D) above 10 crore
156. India's rice production is ____% of global

rice production (A) 19.8%
(B) 20.8%
(C) 21.8%
(D) 22.8%

a Medium unit is one, having an investment
of (A) Up to Rs. 25 Lakh
157. India's wheat production is____%of global

wheat production (A) 10%
(B) 11%
(C) 12%
(D) 13

a Large unit is one, having an investment
of (A) Upto Rs. 25 Lakh
158. The target growth rate of agriculture during

the XI th Plan is (A) 1%
(B) 2%
(C) 3%
(D) 4%

165. In the case of service enterprises, a Micro
unit is one, having an investment of (A) up to Rs. 10 Lakh
159. In March 2008, the number of public Sector

industrial units increased to (A) 242
(B) 300
(C) 400
(D) 539

166. In the case of service enterprises, a Small
unit is one, having an investment of (A) up to Rs. 10 Lakh
160. Select the correct name of the Act (A) Micro, Small and Medium Enterprises
Development Act, 2006
(B) Small, medium and Micro Enterprises
Development Act 2006
(C) Small, medium and Large Enterprises
(D) Small and medium enterprises

167. In the case of service enterprises, a Medium
unit is one, having investment of (A) up to Rs. 10 Lakh
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(C) Commercial banks
(D) Money lenders
168. In the case of service enterprises, a Large

unit is one, having investment of -
172. RRBs were established in (A) 1973
(A) up to Rs. 10 Lakh
(B) 1974
(C) 1975
(D) 1976
173. At present, RRB consists of -
169. The problems of the public sector are -
(A) 195 banks
(A) high losses
(B) 196 banks
(B) burden of sick units
(C) 197 banks
(C) overstaffing
(D) 198 banks
174. RRBs try to provide credit to -
170. Banking, trade, transport, etc. is included

in -
(A) rural people

(B) weaker sections of society
(A) primary sector
(C) weaker sections of rural sector
(B) secondary sector
(D) none of these
(C) tertiary sector

175. Metro Rail System is working in-
(D) none of these
(A) 1 city
171. The source from which maximum agricultural
credit is received -
(B) 2 cities
(C) 3 cities
(A) Government
(D) 4 cities
(B) Co-operatives
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CPT
Answers-sheet
1.
2.
3.
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169.
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174.
175.
B
.
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CHAPTER 10
POPULATION
GENERAL KNOWLEDGE
Population refers to the total number of people residing in a place.
Australia gives incentives to people to have large families and hence have big population of the
country.
When high population is desirable -
1.
It provides work force to produce.
2.
It provides market for the products produced.
3.
It may promote innovative ideas.
4.
It may promote division of labour.
When high population is not desirable:

1.
There may not be adequate jobs.
2.
It may result in increased consumption and reduced savings.
3.
It put pressure on means of subsistence.
4.
It put pressure on social overheads (hospitals, schools, roads, etc.)
5.
It may increase dependency.
India's Population
Highest population in world : China
Second highest population in world : India (16.7% of the world's population)
India has only about 2.4% of the world's area and less than 1.2% of the world's income
Every sixth person in the world is an Indian
Population Growth of India
: 115 crores in 2008-09 (2001 102.7 Crore)
The slow or negative growth: During 1901-21 (due to rapid and frequent occurrence of epidemics
like cholera, plague, influenza and famines)
'Year of Great Divide' for India's population: Year 1921 (because, population has again started
increasing)
Growth Rate of India's population: above 2% p.a.
Birth Rate refers to number of births per 1,000 of population. [Year 2007: 23.1 per thousand]
Lowest birth Rate: 14.7 in Kerala (2007)
Highest birth Rate: 29 in U.P. (2007)
Death Rate refers to number of death per 1,000 of population. [Year 2007: 7.4 per thousand]
Lowest death Rate: 6.3 in West Bengal (2007)
Highest death Rate: 9.2 in Orissa (2007)
Density of Population refers to the number of persons per square kilometer [Year 2001: 324
per square km.]
Highest Density states: Delhi (9294 persons living per sq. km) and thereafter Bihar (7903
persons living per sq. km.)
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CPT
Other Higher density states: West Bengal, Bihar, Kerala and U.P.
Lower density states: Andhra Pradesh, Himachal Pradesh, Gujarat, Madhya Pradesh,
Maharashtra, Karnataka, Orissa, Rajasthan, Sikkim, etc.
Sex Ratio refers to the number of females per 1,000 males. [Year 2001: 933 per thousand of
males]
The following reasons are noted for high ratio of males to females:
1.
Neglect of female child and greater care of the male child
2.
High death rate among females specially at the time of child birth.
3.
Under reporting of female births.
Life Expectancy refers to the mean expectation of life at birth. If the death rate is high or if
death occurs at an early age, life expectancy will be low. It will be high, if death rate is low.
[Year 2001:
Female: 65.3 years;
Overall Average: 63.8 years]
Literacy Ratio refers to the number of literates as a percentage of total population.

[Year 2001:
Male: 62.3 years;
Male: 75.85%;
Female: 54.16%;
Overall Average: 65.38% ]
State-wise literacy ratio

Kerala
:
90.86% (Highest)
Goa
:
82%
Maharashtra
:
77%
Himanchal Pradesh :
77%
Tamil Nadu
:
73%
Bihar
:
47% (Lowest)
Rajasthan & UP
:
60%
Age of marriage for girls: 18 years
Age of marriage for boys: 21 years
Causes of high Population growth in India
1.
High Birth rate
Lower Death Rate
Main Reasons
Main Reasons
India is an agrarian economy,

where children are considered
assets and not burdens, as they
help in agriculture operating.
2.
Slow process of urbanisation
3.
High poverty.
4.
Marriage is both a religious and social

necessity in India.
5.
Early Marriages.
6.
Religious thinking favours more

children
7.
Joint family system
8.
Lack of education among people
1.
Spread of education
2.
Expanded medical facilities
3.
Improved supply of potable

water
4.
Improvement in the
nutritional level
5.
Proper handling of situation,

like droughts, floods, etc.
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Immigration
CPT
Q: Explain the theory of Demographic Transition.

THEORY OF DEMOGRAPHIC TRANSITION
This theory was formulated by Coale and Hoover. According to this theory, there may be three
possible stages of economic development and population growth Fist Stage - Low Economic Growth:
During the first stage, both birth and death rates are high.
The birth rate is high, because of illiteracy, poverty, early marriages, the belief that 'Children
are the gift of God.', the thinking - 'The more hands, the more earning', 'Son is the insurance
of old age.' etc. etc.
Death rate is high due to lack of medical facilities, undernutrition, etc.
Since, both rates are high, so population remains more or less stable.
The average standard of living is extremely low. Most people are illiterate and mass of
the population in these countries is deprived of even the basic necessities of life
Generally, during this stage the economy is at a low level of growth.
Second Stage - Modest Economic Growth:
During this stage, death rates come down, but birth rates remain high.
Death rates come down due to improvement in education level, medical and health facilities
and due to improvement in the living standard of people.
The attitude of people towards the size of a family does not change completely, so the
birth rate remains high.
The imbalance between the high birth rate and the declining death rate leads to high population
growth. So, this is the stage of 'Population explosion'.
However, the per capita income does not improve much.
Third Stage -Economic Growth & Development:
During this stage, both birth rates and death rates come down.
Death rates are low due to better medical facilities and advanced living standards of the
people
Birth rates are low, because there is greater education-among the people, so they start
realising the benefits of 'small families'. Again it is low, because of higher income and
greater consciousness about higher standard of living.
Thus, during this stage, the population grows at a very modest rate.
This is the stage of high economic growth and development.
To conclude:
According to this theory, the population explosion is only a temporary phenomenon, since it
is confined to the stage two only. When the second stage is over, the third stage of economic development
will come. Thus, economic development is a world-wide feature.
India is passing through stage two of this theory as it has high birth rate but declining death
rate, hence it is suffering from population explosion.
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CPT
Q: Explain how the increasing population has affected the economic growth and development
in India.
EFFECT OF HIGH POPULATION GROWTH
1. Growth of 'Per Capita Income': During 1950-51 till 2007-08
National income rose by more than 12 times
Per capita income rose by 3.25 times only.
Average annual growth in national income is 4.4%
Average annual growth in per capita income is 2.3%
This poor growth rate was mainly due to the fact that population
increased at an annual rate of more than 2%.
2. Availability of food grains: During 1950-51 till
2007-08, -
Effect of High Population Growth

1. Growth of 'Per Capita Income'
2. Availability of food grains
3. Unproductive consumers
4. Unemployment problem
5. Saving, investment & capital
formation
6. Ecological balance
The total production of food grains increased from

51 million tonnes to about 231 million tonnes.
But, 'per capita domestic availability of foodgrains' increased only from 395 grams to 443
grams per day
'per capita availability of cultivable area' has come down from 0.33 hectare per capita to
0.17 hectare per capita in recent years.
3. Unproductive Consumers: With a rapid increase in population, the ratio of children and
old persons in the total population has increased. This leads to a higher burden of unproductive consumers
on the total production.
In India, around 63% of the population is in the age group 15-60.
37% of the population is under age of 15 or above 60.
4. Unemployment Problem:
People unemployed: about 10% of labour force in India.
5. Saving, Investment and Capital Formation: Consider the following example:
Population growth rate
2%
Capital output ratio
4:1
Annual investment required
8% of national income
(just to maintain the existing standard for the additional population)

For any improvement in the standard of living, the capital investment has to be more. Thus,
for a 5% rise in per capita income, the investment (or resources) needed for economic development
will be 28%. (8% for demographic investment and 20% for economic investment).
6. Ecological Balance: A rapid growing population in India has somewhat upset the ecological
balance. There is great pressure on agricultural land, leading to depletion of natural soil fertility, increase
in alkalinity and salinity of soils. A high concentration of population in the urban areas, unsupported
by adequate infrastructural facilities, is a cause of serious pollution. All these are bound to affect the
economic growth of the country.
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CPT
Q: Give an overview of India's National Population Policy 2000.

NATIONAL POPULATION POLICY, 2000
With a view to encouraging the two-child norm, the government adopted the National Population
Policy (NPP-2000). The following are the main features of the NPP 2000:
1.
Make school education up to age 14 free and compulsory.
2.
Reduce infant mortality rate to below 30 per 1000 live births.
3.
Reduce maternal mortality ratio to below 100 per 1,00,000 live births.
4.
Discourage early marriage.
5.
Achieve 80% institutional deliveries and 100% deliveries by trained persons.
6.
Achieve 100% registration of birth, death, marriage and pregnancy.
7.
Prevent and control communicable diseases.
8.
Integrate Indian Systems of Medicine (ISM) in the provision of child health services.
9.
Promote the small family norm.
10.
Bring about convergence in implementation of related social sector programmes so that

family welfare becomes a people centred programme.
Tenth Plan Targets vis-a-vis National Population Policy:

1.
a reduction in Infant Mortality Rate (IMR) to 45 per 1000 by 2007 and 28 per 1000 by
2012,
2.
reduction in Maternal Mortality rate (MMR) to two per 1000 live births by 2007 and one
per 1000 live births by 2012, and
3.
reduction in decadal growth rate of the population between 2001-2011 to 16.2%.

IMR in 2007 = 55 ;
MMR in 2001 -04 = 2.54 (very high in comparison to targets)
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CPT
Questions
1.
In 2001, the density of population was (A) 224

(B) 324
(C) 424
(D) 524
2.
The National Population Policy was introduced

in (A) 1999
(B) 2000
(C) 2001
(D) 2002
3.
According to the 2001 census, the population

is(A) 102.70 crore
(B) 105.70 crore
(C) 108.70 crore
(D) 110.70 crore
8.
Birth rate/Death rate is number of births/

deaths (A) per 100
(B) per 1,000
(C) per 10,000
(D) none of these
9.
According to the 2001 census, the average

life expectancy at birth (in-years) was (A) 61.8
(B) 63.8
(C) 65.8
(D) 67.8
10. The first Census in India was carried out in(A) 1861
(B) 1871
(C) 1881
(D) 1891
4.
At present, the percentage of population involved

in agriculture is (A) 52%
(B) 67%
(C) 70%
(D) 72%
11.
5.
What is India's rank in world population?

(A) First
(B) Second
(C) Third
(D) Fourth
6.
Population growth rate in India was negative

in (A) 1901-11
(B) 1911-21
(C) 1921-31
(D) 1931-41
12. According to the 2001 census, the population

of India was (A) 100 crore
(B) 101 crore
(C) 102 crore
(D) 103 crore
7.
The first All India population census was

conducted in the year (A) 1865
(B) 1870
(C) 1872
(D) 1882
13. The
in (A)
(B)
(C)
(D)
Nearly_____per cent of the working population

is engaged in the service sector (A) 23%
(B) 45%
(C) 80%
(D) 50%
latest Census in India was carried out

1991
1996
2001
2006
14. According to the 2001 census, the sex ratio

was
(A) 927
(B) 929
(C) 931
(D) 933
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CPT

(C) 110 crore
15. The 2001 Census shows that the urban-rural

ratio is -
(D) 115 crore
(A) 1 : 2.5
23. India accommodates nearly _____% of world's

population.
(B) 1 :2.6
(C) 1: 2.7
(A) 10
(D) 1 : 2.8
(B) 50
(C) 17
16. Over the years, the birth rate in India has

_____and death rate has_____-
(D) 45
(A) Fallen, fallen
24. Increase in population can be caused by -
(B) Risen, fallen
(A) high birth rate
(C) Risen, risen
(B) low death rate
(D) Fallen, risen
(C) immigration
17. The birth rate in India is high because of -
(A) Predominance of agriculture
25. India's present population is -
(B) Slow urbanisation
(A) more than that of China
(C) High incidence of poverty
(B) less than that of China
(C) less than that of Pakistan
18. Urbanisation -
(D) less than that of England
(A) lowers death, raises birth rate
26. Optimum population is that level of population

at which -
(B) raises both death & birth rate

(C) lowers birth & death rate
(A) output per capita is the highest
(D) none of these
(B) output per capita is the lowest

(C) output per capita is the same
19. In terms of population, India's rank is just

after -
(A) Russia
27. In the theory of demographic transition in the

last stage, -
(B) China
(C) Japan
(A) birth rate rises, death rate rises
(D) USA
(B) birth rate falls, death rate rises

(C) birth rate rises, death rate falls
20. The annual addition to the country's population

is almost equal to the total population of -
(D) birth rate falls, death rate falls
(A) Bangladesh
28. According to the 2001 census the total literacy

ratio is -
(B) Australia
(C) Japan
(A) 32.5%
(D) France
(B) 65.4%
21. India's present population is -
(C) 52.1%
(A) Between 50-60 crore
(D) 75.8%
(B) Between 60-70 crore
29. Population explosion occurs in____stage of

the theory of demographic transition -
(C) Between 70-80 crore

(D) Above 100 crore
(A) first
(B) second
22. In 2008-09, the population of India was (A) 100 crore
(C) third
(B) 105 crore
(D) fourth
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CPT
30. Indian population registered a growth of 1.25%

pa during the decade (A) 1941-51
(B) 1961-71
(C) 1971-81
(D) 1981-91
(C) Karnataka
(D) Kerala
38. The growth rate of population can be measured
by (A) division of death rate by birth rate
(B) multiplication of death rate by birth rate
(C) addition of death rate and birth rate
(D) subtraction of death rate from birth rate.
31. India's population recorded the maximum growth

rate of 2.22% per annum during the decade(A) 1941-51
(B) 1961-71
(C) 1971-81
(D) 1981-91
39. Density of population indicates the (A) Capital -land ratio

(B) Land -output ratio
(C) Land -labour ratio
(D) the number of persons per sq km
32. India accommodates_____% of the world's

population.
(A) 16.7%
(B) 11.4%
(C) 15.1%
(D) 25.8%
40. As per the 2001 census, Kerala has____

females for 1000 males (A) 933
(B) 1006
(C) 1036
(D) 1058
33. Which year is known as the year of great

divide for India's population?
(A) 1991
(B) 2001
(C) 1981
(D) 1921
41. We
(A)
(B)
(C)
(D)

(A) India's population is the second largest
in the world.
(B) India is still passing through the first
stage of demographic transition
(C) More people in a country always means
more economic trouble for the country.
will meet an Indian out of every 16 persons in the world

Six persons in the world
Eight persons in the world
Nine persons in the world
42. According to the 2004 data, there are

cases of leprosy per 1,000 population in India(A) 38.1
(B) 57.3
(C) 1.17
(D) 25.1
43. The telephone penetration rate in India is
per 100 population (A) 11.32
(B) 15.34
(C) 25.56
(D) 19.22
35. According to the latest available data, there

are malaria cases per million (A) 3.2
(B) 9.5
(C) 1.84
(D) 20.3
44. Every ____person in the world is an Indian(A) Second

(B) Third
(C) Sixth
(D) Tenth
36. The Percentage of population living in rural

areas is (A) 25%
(B) 50%
(C) 75%
(D) 90%
45. During 1950-2008, the National income

increased by (A) 8 times
(B) 12 times
37. In which state or union territory is the literacy

rate highest in the country?
(A) Delhi
(B) Chandigarh
(C) 10 times
(D) 11 times
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CPT

51. In 2007, the Birth rate in India was -
46. India is passing through _____stage of

demographic transition -
(A) 25.4 per 1000
(A) fourth
(B) 23.1 per 1000
(B) third
(C) 8.4 per 1000

(D) 7.6 per 1000
(C) first
(D) second
52. In 2007, the Death rate in India was (A) 25.4 per 1000
47. Literacy is -
(B) 23.8 per 1000

(C) 8.4 per 1000
(D) 7.4 per 1000
(A) higher for females than males

(B) higher for males than females
(C) same for females & males
(D) none of these
53. During 1950 - 2008, the per capita income

rose by (A) 3.5 times
(B) 3.25 times
48. Literacy is (A) higher among urban than rural population

(B) higher among rural than urban population
(C) 5.5 times

(D) 6.5times

(D) none of these
54. In 2007-08, the availability of food-grains was

million tonnes -
49. The theory of demographic transition was

proposed by -
(A) 205
(B) 231
(A) Dalton
(B) Robbins
(C) 211
(D) 215
(C) Coale & Hoover

(D) none of these
55. In 2007-08, per capita domestic availability

of food-grains was -
50. Most densely populated state in India is -
(C) Uttar Pradesh
(A) 100
(B) 200
(C) 300
(D) Madhya Pradesh
(D) 443
(A) West Bengal

(B) Bihar
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
D
.
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CHAPTER 11
POVERTY & UNEMPLOYMENT

POVERTY
Q: Explain the types of poverty
Types of Poverty
Absolute Poverty
Relative Poverty
It is relevant for the less-developed

countries.
It is more relevant for the developed

countries.
It is not related to income or

consumption expenditure distribution.
It is related to the distribution of income/

consumption expenditure.
In this case, some minimum standards

of living are defined. These may be
expressed in terms of income/
consumption expenditure. A person,
who falls below these standards, is
treated as poor.
The percentage of such poor in the

country's population gives a measure
of poverty.
In this case, income distribution of

the population in different groups is
estimated and a comparison of the
levels of living of the top 5 to 10%
with the bottom 5 to 10% of the
population reflects the relative standard
of poverty.
Gini co-efficients are often used for

measuring poverty in a relative sense.
In India, the concept of absolute poverty is used for measuring poverty. For this, a minimum
level of consumption standard is laid down (known as poverty line) and those who fail to reach
this minimum consumption level are regarded as poor.
Q: Define Poverty line. What steps have been taken by the government to reduce poverty
and improve the employment level in India?
POVERTY LINE
Generally speaking, the people who fail to reach a certain minimum level of consumption standard
are regarded as poor. In other words, we can say that a poor is that person, who lives below the
poverty line.
According to the Planning Commission of India
A person is below the poverty line, if his daily consumption of calories is less than 2,400
in rural areas and 2,100 in urban areas.
In rupee terms, if a person living in the rural area, is earning less than Rs. 368 a month,
he will be below the poverty line. However, for the urban areas, the minimum income level
is fixed at Rs. 559 per capita per month.
22% of the total population was still below the poverty-line in India in 2004-05.
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CPT

Economic Causes
Political Causes
Social Causes
Other Causes
1. Economic backwardness 1. Political instability 1. Caste and religions 1. Large Family Size
or stagnation
system
2. High population
2. Vote bank politics
2. lack of Education
2. Family composition
3. Over dependence on
agriculture
3. Poor levels of skills
4. Backwardness of
agriculture
4. Lack of motivation
to get out of poverty
and misery.
5. Low capital formation
Steps taken by the Government to reduce poverty and improve Employment:
In our country, poverty eradication and improving the employment opportunities have always been
central aims of economic planning. The government strategies to achieve these aims can be broadly
divided into three phases
In the first phase, the prime emphasis was on growth. The expectation was that growth
through improvement in infrastructure and heavy industries will take care of the question
of equity and self reliance.
In the second phase (beginning with the Fifth Plan), poverty alleviation came to be adopted
as an 'explicit objective' of economic planning. Several specific programmes for poverty
alleviation and employment generation directed towards selected target groups were launched.
In the third and final (present) phase, the emphasis shifted to 'growth' and 'poverty alleviation'
as two complementary actions.
The main poverty-removal and employment generation programmes are as under:(1)
National Food For Work Programme (NFFWP):
Started: In November 2004 in 150 most backward districts of the country.
Aim: To generate supplementary wage employment for rural poor, who are in need of
wage employment and desire to do manual unskilled work.
The on-going programmes of Sampoorna Grameen Rozgar Yojana (SGRY) and National
Food for Work Programme (NFFWP) would be submerged in it.
Latest Update:
The National Rural Employment Guarantee Act, 2005 was passed and the scheme was
launched in February, 2006. This Act requires every state to make a scheme for providing
not less than 100 days of guaranteed employment in a financial year to every household
in the rural areas.
Till Jan. 2007, 3.47 crore Job cards were issued. 1.50 Crores households demanded employment
and out of whom employment was provided to 1.47 crore households.
(2)
Sampoorna Grameen Rojgar Yojana (SGRY):

Started: In 2001
Employment Assurance Scheme (EAS) and Jawahar Gram Sammridhi Yojana (JGSY)
have been merged with this programme since April 2002.
Aim: To provide wage employment in rural areas + food security + creation of durable
community, social and economic assets.
181

(3)
CPT
Valmiki Ambedkar Awas Yojana (VAMBAY):

Started: In 2001
Aim: To facilitate the constructions and upgradation of dwelling units for the slum-dwellers
and to provide a healthy and enabling urban environment through community toilets.
(4)
Pradhan Mantri Gram Sadak Yojana (PMGSY):

Started: In December 2000
Aim: To provide road connectivity to 1.60 lakh unconnected villages with a population
of 500 persons or more by the end of the Tenth Plan.
Achievement: Up to March 2009, a total length of 2,14,281 km of road works had
been completed.
(5)
Indira Awas Yojana (IAY):

Aim: Construction of houses to be given to the poor free of cost.
Achievement: Up to December, 2006, about 153 lakhs houses had been constructed.
During 2007-08, around 9.4 lacs houses were constructed and during 2008-09, around
21 lacs houses were constructed under this scheme.
(6)
Swarna Jayanti Gram Swarozgar Yojana (SGSY) :

Started: In April 1999
It is the refinement of the Integrated Rural Development Programme (IRDP) and allied
programmes along with Million Wells Scheme (MWS)
Aim: To promote micro enterprises and helping the rural poor into self-help groups.
Achievement: Up to March 2009, 121 lakh swarojgaries were assisted.
(7)
The Swarna Jayanti Shahari Rozgar Yojana (SJSRY):

Started: In December 1997,
It is the merger of the earlier urban poverty alleviation programmes viz., Nehru Rozgar
Yojana (NR), Urban Basic Services Programmes (UBSP) and Prime Minister's Integrated
Urban Poverty Eradication Programme (PMIUPEP).
Aims: To provide gainful employment to the urban unemployed or underemployed poor
by encouraging the setting up of self-employment ventures or provision of wage employment.
Achievement: The number of poor assisted was
(i)
9.5 lac Poors to set up micro Enterprises
(ii)
15 lac Poors got industrial Training.

UNEMPLOYMENT
Q: What are the different types of unemployment?

TYPES OF UNEMPLOYMENT
1.
Voluntary
:
Unemployment
In every society, there are some people, who are not willing to work at the
prevailing wage rate. Similarly, there may be some people, who get a regular
source of income from their property and so, they need not work. Similarly,
there may be some persons, who never like to work and always like to depend
upon their parents/brothers/relatives etc.
All such people are voluntarily unemployed. Although voluntary employment
is a waste of national human energy, it is not a serious economic problem.
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CPT
2.
Frictional
:
Unemployment
Frictional unemployment is a temporary phenomenon. it may result when

workers are temporarily out of work while changing jobs. It may also result
when work is suspended due to strikes or lock-outs. To some extent, frictional
unemployment is also caused by imperfect mobility of labour. We may also
say that frictional unemployment is due to difficulties in getting workers and
vacancies together.
3.
Casual
:
Unemployment
In industries, workers are employed on a day-to-day basis, like building

constructions, agriculture, etc. In these cases, causal unemployment may
occur due to short-term contracts, which are terminable any time.
4.
Seasonal
:
Unemployment
There are some industries, in which production activities are seasonal in nature,
like agriculture, agro-based activities like sugar mills and rice mills, etc.
In these industries, people are employed for only a season in a year. People
engaged in such types of work or activities may remain unemployed during
the off-season. Such unemployment is usually known as seasonal unemployment.
5.
Structural
:
Unemployment
This unemployment arises due to structural changes in the economy, like

decline in demand for production in a particular industry, and the consequent
disinvestment and reduction in its manpower requirement. The typewriter Industry
is an example of this situation.
In fact, structural unemployment is a result of innovation in an industry.
6.
Technological :
Unemployment
Sometimes unemployment may arise due to technological progress,

like introduction of a new machinery, improvement in methods of production,
labour - saving devices, etc.
In such cases, workers are replaced by machines. This type of unemployment
is termed as technological unemployment.
7.
Cyclical
:
Unemployment
Normally, advanced countries are subject to trade cycle. During the contraction
phase of a trade cycle in an economy, the aggregate demand falls leading
to disinvestment, decline in production and unemployment.
In order to tackle cyclical unemployment, the purchasing power of the people
is increased by increasing total expenditure in the economy. This increases
the demand for commodities/services. Further, an easy money policy and
fiscal measures like deficit financing may help in this regard.
Since the cyclical phase is temporary, cyclical unemployment remains only
a short- term phenomenon.
8.
Chronic
:
Unemployment
When unemployment tends to be a long-term feature of a country, it is called

chronic unemployment. Underdeveloped countries suffer from chronic unemployment
due to (i)
Backwardness,
(ii)
Poverty,
(iii) Lack of resources,

(v)
Underutilisation of resources,
(v)
High population growth,
(vi) Primitive state of technology,

(vii) Low capital formation, etc. etc.
9.
Disguised
:
Unemployment
Disguised unemployment commonly refers to a situation of employment,

with surplus manpower in which some workers have zero marginal productivity
so that their removal will not affect the volume of total output. Disguised
unemployment in the strict sense implies underemployment of labour.
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CPT
For example, suppose a family farm is properly organised and four persons are
working on it. If, however, two more workers are employed on it and there is
no change in output, we may say that these two workers are disguisedly unemployed.
This kind of unemployment is a common feature of the rural sector. In short,
overcrowding in an occupation leads to disguised unemployment.
Q: What are the main causes of unemployment in India?
(1)
Growth without adequate employment opportunities
(2)
Growing population
(3)
Inappropriate technology
(4)
Inappropriate education system
Q: Explain the meaning of labour force, work force rate and unemployment rate.
Labour force (also known as economically active population)
It is population, which supplies or seeks to supply labour for production.
Labour force = employed + unemployed persons
Labour Force Participation Rate (LFPR) = Labour force per 1000 persons
=
Work-force Participation Rate (WPR)
Unemployed Rate
= Persons employed per 1,000 persons in the

labour-force.
= Persons unemployed per 1,000 persons

in the labour force.
Persons employed
Total labour force of the country
=
For examples: The data provides a breakdown of a country's population (millions):
Total population
228
Children (below the working age)
36
Unemployed people looking for a job
18
Full-time students (not looking for a job)
4
Retired people
28
Employed people
126
People confined to correctional institutions
2
Other adults not in the labour force
14
In this case,
Total Labour Force of the Country = 228 - 36 - 4 - 28 - 2 - l4 = 144
WPR
= (126/144) x 100
= 87.5%
Unemployment rate
= (18/144) x 100
= 12.5%
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CPT
Q. Explain the various modes to measure the unemployment.

MEASUREMENT OF UNEMPLOYMENT
Usual Status (UPS): This measure estimates the number of persons who may be said to be
chronically unemployed. This measure generally gives the lowest estimate of unemployment, because
only a few can afford to remain without work over a long period.
Current Weekly Status (CWS): The reference period here is one week. According to this estimate
a person is said to be employed for the week, even if he is employed only for a day during that week.
Current Daily Status (CDS): The reference period here is a day. It counts every half day's activity
status of the respondent over the week.
Rate of unemployed person-days = unemployed days during the reference weeks/total number
of labour force days.
Employment and unemployment (by UPS) by NSSO 2004-05
1983
1993-94
Labour force
277.34
343.56
377.88
428.37
Work force
269.36
334.54
367.37
415.27
Unemployed
7.98
9.02
10.51
13.10
Unemployment rate
2.88%
2.62%
2.78%
3.06%
(in million)
1999-2000 2004-05
Recent position
NSSO 2004-05:
(1)
About 42% of the population of the country was usually employed. The proportion was
44% in the rural and 37% in the urban area.
(2)
Unemployment rate among the educated was higher than among the uneducated in both
the rural and the urban areas.
Economic Survey 2007-08:

Around 52.7% of the working population was engaged in Primary Sector, 18.8% in secondary
sector and 28.5% in tertiary section in 2004-05.
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CPT
Questions
1.
2.
3.
4.
5.
6.
Poverty eradication was (A) always an objective of planners

(B) became an objective in 5th Plan
(C) became an objective in 8th Plan
(D) none of these
(C) structural unemployment

(D) casual unemployment
If work is suspended due to strikes or lockouts, it leads to (A) disguised unemployment

(B) casual unemployment
(C) frictional unemployment
(D) seasonal unemployment
Workers, if unemployed on a day to day basis,
have the chance of being (A) casual unemployed
(B) frictional unemployed
(C) disguised unemployed
(D) seasonal unemployed
8.
If unemployment is a long term feature of

a country, it is (A) structural unemployment
(B) technological unemployment
(C) chronic unemployment
(D) cyclical unemployment
9.
Disguised unemployment (A) is not open employment

(B) occurs when some workers have zero
marginal productivity
(C) only (B), but not (A)
(D) both (A) & (B)
10. Measures of employment/unemployment are

based on (A) usual status & current weekly status
(B) current daily status
(C) both (A) & (B)
(D) none of these
Agricultural activities being seasonal, offer

employment only for a certain period of time,
leading to (A) casual unemployment
(B) frictional unemployment
(C) seasonal unemployment
(D) disguised unemployment
11. The lowest estimate of unemployment is given

by (A) current daily status
(B) current weekly status
(C) usual status
Structural changes in the economy may lead

to (A) seasonal unemployment
(C) structural unemployment
(D) casual unemployment
12. The measure 'Current Weekly Status' states

that the person is employed for a week, if(A) he is employed for six days of the week.
(B) he is employed for seven days of the
week.
Due to introduction of new technology, workers

may be replaced by machines leading to (A) technological unemployment
(C) seasonal unemployment
(D) disguised unemployment
(C) he is employed for at least three days

of the week.
(D) even he is employed for only one day
of the week.
13. Most of the employment in India is -
7.
(A)
(B)
(C)
(D)
Advanced countries are subject to trade cycles

& this leads to (A) seasonal unemployment
(B) cyclical unemployment
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disguised
structural
seasonal
cyclical
CPT
14. The fraction of India's workforce being disguised

unemployed is (A) half
(B) one third
(C) one fourth
(D) one fifth
(B) he is not poor

(C) he is above the poverty line
(D) he is below the poverty line
22. Out of India's urban population (A) 22% lie below poverty line
(B) 23% lie below poverty line
15. The total employment at the beginning of the

10th Plan was (A) 70 million
(B) 60 million
(C) 80 million
(D) 65 million
(C) 24% lie below poverty line

(D) 25% lie below poverty line
23. Out of India's rural population (A) 23% lie below poverty line
(B) 25% lie below poverty line
(C) 27% lie below poverty line
16. Urban employment is mainly (A) industrial employment

(B) educated unemployment
(C) both (A) & (B)
(D) none of these
(D) 29% lie below poverty line

24. Poverty line may be defined w.r.t. (A) monthly calorie consumption
(B) daily calorie consumption
17. Rural unemployment is mainly (A) seasonal & disguised unemployment

(B) cyclical & casual
(C) both (A) & (B)
(D) none of these
(C) weekly calorie consumption

(D) yearly calorie consumption
25. The IRDP aimed to lift the target group (A) to" minimum consumption level
(B) above poverty line
18. Unemployment is lower in (A) rural than urban areas

(B) urban than rural areas
(C) same in both rural & urban areas
(D) none of these
(C) both (A) & (B)

(D) none of these
26. The Prime Minister's Rozgar Yojana tried to
provide (A) employment to all
19. Unemployment is higher for (A) females than males

(B) males than females
(C) we cannot compare it for males & females
(D) none of these
(B) self employment to all

(C) self employment to educated unemployed
(D) self employment to unemployed rural
poor
27. Unemployment rates are higher -
20. People, who are not able to attain a certain

minimum standard of consumption, are termed
as (A) Poor
(B) Rich
(C) Unhappy
(D) Happy
(A) for educated than uneducated unemployed

(B) for uneducated than educated unemployed
(D) none of these
28. Disguised unemployment is observed in (A) industrial sector
21. According to the planning Commission, if a

person earns less than Rs. 368/Rs. 559 p.m.
in rural/urban areas, then (A) he is not rich
(B) agricultural sector

(C) manufacturing sector
(D) insurance sector
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CPT
(C) population which is forced to work
(D) labour force which is unemployed
29. When due to introduction of new machinery,

some workers tend to be replaced by
machines, their unemployment is termed as-
36. Which of the following statements is incorrect(A) Workers employed in sugar mills face
seasonal unemployment.
(B) Due to introduction of new machinery,
labour saving device etc. some workers
tend to be replaced by machine is termed
as structural unemployment.
(C) Frictional unemployment is a temporary
phenomenon.
(D) Disguised unemployment refers to a
situation where the removal of some
workers will not affect the volume of total
output.
(A) Structural.
(B) Technological.
(C) Mechanical.
(D) Seasonal.
30. According to the Planning Commission, a
person is said to be below poverty line, if
he is earning less than_____per capita per
month in urban areas and less than____
per capita per month in rural areas (A) Rs. 2,000; Rs. 3,000
(B) Rs. 500; Rs. 1,000
(C) Rs. 368; Rs. 559
37. According to NSS 2004-05,_____% of

population lives below poverty line (A) 22
(B) 26
(C) 15
(D) 25
(D) Rs. 265; Rs. 225

31. From 1951 to date, the occupational structure(A) has changed slightly
(B) has changed in a drastic way
(C) has remained static
38. A situation of employment in which a person

is apparently employed but his contribution
to the production is almost nil is called _____
unemployment (A) structural
(B) chronic
(C) disguised
(D) cyclical
(D) cannot definitely be said

32. The scheme for providing food security to senior
citizens was through (A) food for work programme
(B) Indira Awas Yojuna
(C) Annapurna
(D) none of these
39. ______unemployment may result when some

workers are temporarily out of work while
changing job (A) Cyclical
(B) Voluntary
(C) Frictional
(D) Seasonal
33. Over the years, the land holding pattern in

India
(A) has improved
(B) has deteriorated
(C) has remained unchanged
(D) none of these
34. Employment Assurance Scheme and Jawahar
Gram Sammridhi Yojana have been merged
with
40. According to______ measure, a person is

said to be employed for the week, even if
he is employed only for a day during the week(A) Usual status
(B) Current weekly status
(C) Current daily status
(D) Current yearly status
(A) NFFWP
(B) SGRY
(C) SGSY
(D) IAY
41. _____measure estimates the number of persons

who may be said to be chronically unemployed(A) Usual status
35. Work force refers to that part of(A) labour force which is employed
(B) population which is unemployed
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CPT


(A) Gini co-efficients are often used for
measuring poverty in a relative sense.
42. ______measure usually gives the lowest

estimate of unemployment especially for poor
economy (A) Usual status
(B) When poverty is related to the distribution

of income or consumption expenditure,
it is absolute poverty.
(C) In India, we mainly use the concept of
relative poverty for measuring poverty.


49. Identify the incorrect statement -
43. When due to introduction of new machinery,

some workers tend to be replaced by
machines, their unemployment is termed as-
(A) The problems of poverty

unemployment are interrelated.
and
(B) The problem of poverty has been solved

in India.
(A) structural
(B) technological
(C) Growing population has also contributed

to the problem of poverty in India.
(C) mechanical
(D) seasonal
44. Work force refers to that part of -
50. If out of 100 people in the labour force, 92

are in the work force, the number of people
unemployed is -
(A) Labour force, which is employed

(B) Population, which is unemployed
(C) Population, which is forced to work
(D) Labour force, which is unemployed
(A) 8
(B) 192
(C) 100
45. According to the latest NSSO survey (2004)(A) The unemployment rates went down
between 1993-94 to 2004
(B) The unemployment rates went up between
1993-94 to 2004
(C) The unemployment rates remained the
same between 1993-94 to 2004
(D) 92
51. If four farmers can do a field job which is
being done by six farmers, this means there
is (A) Frictional unemployment
(B) Disguised unemployment
(C) Voluntary unemployment
46. When some people in a society are unwilling

to work at the prevailing wage rate and there
are people, who have income from property
or some other sources and need not work,
such people are -
(D) Seasonal unemployment

52. Structural unemployment results due to (A) a change caused by the introduction of
new machines, labour saving devices
and improvement in methods of production
(A) casually unemployed

(B) chronically unemployed
(B) a change caused by recessionary and

depressionary phases of the economy
(C) voluntarily unemployed

(D) disguisedly unemployed
47.
(C) a change caused by high population

growth, primitive state of technology, low
capital formation and vicious circle of
poverty, etc.
People who are unwilling to work at the

existing wages are (A) Voluntary unemployed
(B) Frictional unemployed
(C) Casual unemployed
(D) A change caused by a decline in demand

for production in a particular industry
consequent disinvestments and red its
manpower requirement
(D) Seasonal unemployed
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CPT
53. SJSRY stands for (A) Swaran Jayanti Shahari Rozgar Yojana
(B) Shahari Jeewan Sudhar Rashtriya Yojana
(C) Sampoorna Jeewan Shahari Rozgar
Yojana
58. The data provides a breakdown of a country's

population(millions):
Total population
228
36
Unemployed people looking for a job 18
54. EAS stands for (A) Easy Assistance Scheme

(B) Endless Assistance Scheme
(C) Employment Assurance Scheme
(D) Employment Assessment Scheme
Full-time students(not looking for a job) 4
55. Which one of the following is not a cause

of poverty in India?
(A) Abundant population
(B) Abundant natural resources
(C) Abundant inequalities in distribution of
income
(D) Abundant surplus manpower in agriculture
Other adults not in the labour force 14
Retired people
Employed people
Based on the above information, the country's

unemployment rate is (A) 7.9%
(B) 12.5%
(C) 20.2%
(D) 22.2%
59. PMGSY was launched to (A) provide house to the rural poor
(B) provide road connectivity through good
all weather roads to unconnected villages
(C) food security to the urban poor
57. The data provides a breakdown of a country's

population (millions):
Unemployed people looking for a job
60. Urbanisation results from (A) industrialisation
114
(B) development
18
(C) growth
(D) none of these
Full-time students (not looking for a job)

2
Retired people
14
Employed people
63
61. Urbanisation is (A) not a sign of development

(B) sign of development
(C) may or may not be considered as a sign
of development
People confined to correctional institutions

I
Other adults not in the labour force
126
People confined to correctional institutions2
56. The most important remedy to the problem

of poverty in India is (A) changes in the ownership pattern
(B) higher productivity
(C) re-distribution of income through fiscal,
pricing and other measures
Total population
28
(D) none of these
62. Urbanisation means -
Based on the above information, the country's

unemployment rate is (A) 7.9%
(B) 12.5%
(C) 20.2%
(D) 22.2%
(A) change of agriculture to individualists

(B) transfer of people from agricultural
occupations to non-agricultural
occupations
(C) movement of people from cities to villages
(D) none of these
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CPT
63. How many job cards were issued under the

'National Food for work Programme' till January
2007 ?
66. As per NSSO 2004-05,______% of population

of the country was employed in the Rural
area -
(A) 3.47 Lakh
(A) 37%
(B) 1.47 Lakh
(B) 40%
(C) 5.47 Lakh
(C) 42%
(D) 6.47 Lakh
(D) 44%
64. How many persons were provided with

employment under the 'National Food for work
Programme' till January 2007 ?

of the country was usually employed in the
urban areas -
(A) 3.47 Lakh
(A) 37%
(B) 1.47 Lakh
(B) 40%
(C) 5.47 Lakh
(C) 42%
(D) 6.47 Lakh
(D) 44%

of the country was usually employed (A) 37%
(B) 40%
(C) 42%
(D) 44%
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
A
.
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CPT
CHAPTER 12
INFRASTRUCTURAL CHALLENGES AND INFLATION

1. INFRASTRUCTURAL CHALLENGES
ENERGY
3% rise in industrial production in the world is accompanied by a 2% increase in energy consumption.

A similar relation is also observed in India.
Sources of Energy:
1.
Non-commercial or traditional sources of energy: Example firewood, dung cakes and

agricultural wastes etc. At present, nearly 27% of the energy consumed is obtained from
non commercial sources or traditional sources.
2.
Commercial sources energy: Example oil and gas, coal, hydro-electricity and nuclear
power etc. Major users of the commercial energy are Industry
:
38%
Household (Domestic)
:
24%
Agriculture
:
22%
Commercial establishments:
9%
3.
Primary energy resources and final energy resources: When coal is consumed for
generating electricity and electricity is consumed by industry, then coal is the primary
energy resource and electricity is the final one. Coal, petroleum products and natural gas
are both primary resources and final resources as they are consumed directly as well
as indirectly. Electricity is the only final energy resource.
Electricity;
-Progress: Our total installed capacity of generating power was around 2,300 MW in 1950-51
which rose to 1,49,390 MW in 2008-09. Thus, over a period of 58 years, there has been a more
than 75 times increase in the installed capacity. We increase 4,000-5,000 MW every year.
Who is engaged in the generation of electricity?

1.
CG
2.
3.
SG
:
Private Sector
Through,
(a) National Thermal Power Corporation (NTPC),
(b) National Hydroelectric Power Corporation. (NHPC)
(c) Nuclear Power Corporation of India Limited (NPCIL).
Through, State Electricity Boards (SEBs)
-Sources of Electricity: There are five major sources of electricity Name of Electricity
Present
Capacity
Generation of
Power
Hydro-electricity
21%
13.5%
Thermal electricity
62%
73%
Atomic energy
2.5%
2%
13.5%
11 .5%
1.
Water
2.
Coal
3.
Oil
4.
Gas
5.
Radio Active elements, like uranium,

thorium and plutonium
6.
Others
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CPT
Problems relating to energy

(1) Demand and Supply imbalances in commercial fuels: For example, the demand for coal
was 338 million tonnes in 2005-06. The Supply of coal was 316.66 million tonnes. Thus there was
a gap of 21.34 million tonnes in the supply of coal from domestic sources.
Recent Step: To improve production of power, an Electricity Act was passed in 2003 and the
Electricity Amendment Act was passed in 2005. The focus is on improved investment in the
power sector and fixing of power tariffs on the basis of competition, efficiency, economical use
of resources, commercial principles and consumers' interests.
(2) Oil prices and inflationary pressure: Since 1973, oil prices have been rising in the international
market. During 1973-2008, the Organisation of Petroleum Exporting Countries (OPEC) has increased
the prices more than four times. Therefore, rising oil prices has led to rising general prices in India.
(3) Growing oil imports: Since 1973, India's oil imports has increased substantially. In 197374, India's oil import bill was Rs. 1100 crore. It increased to Rs. 3,20,000 crore in 2007-08.
Petroleum, oil and lubricants (POL) constitute around l/3rd of our import of oil.
(4) Transmission and distribution losses: The national average of this loss is around 23%.
(5) Sick SEBs
(6) Operational inefficiency
Recent Step: The ministry of Power has launched the 'Partnership in Excellence' programme.
(7) Inadequate electrification : Till date, nearly 19% of the villages are not electrified.
Recent Step: To provide electricity in villages, the 'Rajiv Gandhi Grameen Vidhyutikaran programme'
was-started in 2005.
TRANSPORTATION
Important means of transport :
Railways, Roads, Water, Air
Railways:
Indian Railways is Asia's largest and world's second largest rail network under a single
management.
Segments of railways: freight + passenger. The freight segment accounts for about 70%
of revenues and passengers 30% of revenues.
Total route length of railways: was 63.5 thousand km in 2005-06, of which 17.9 thousand
kms were electrified. During 2008-09, it carried more than 6,900 million of passengers
and 832 million tonnes of freight traffic.
Problems of Railways:
(a)
Old technology
(b)
Smaller railway network in comparison to the requirements of the economy.
(c)
Heavy Losses. Often, essential goods like food grains, fruits and vegetables are carried
at a loss.
(d)
Overcrowding and poor passenger services.
Recent Step: Indian railways have taken the following steps recently1)
Improve resource management
4)
Faster turnaround time
2)
Rational price policy
5)
Public-Private Partnerships (PPPs)
3)
Increased wagon load
6)
Double line freight corridor
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Road:
The Indian road is one of the largest networks in the world. In 2002-03, the total road
length was to 24,83,300 km, of which 14,20,500 km is surfaced. Today, Length of the
Indian roads is 3.34 million km.
In India, roads carry nearly 61% of freight and 87% of passenger traffic.
The National Highways of India comprises about 2% of total length of road. Road length
of National Highways is 66,590 km. and carry more than 40% of the total road traffic.
The rural roads network connects around 65% all-weather roads.
Problems of Road transport:

(a)
Smaller road network in comparison to the requirements of the economy.
(b)
Interior and hilly areas are not linked with roads.
(c)
Rural roads are mud roads, which are not suitable for heavy traffic.
(d)
Poor maintenance
(e)
Heavy losses of State Road Transport Corporations
Recent Step: To provide Indian roadways, the following recent steps are taken1)
Undertaking the National Highways Development Project (NHDP). This project

aims to develop the Golden Quadrilateral (i.e. Metro cities), North-South
and East-West corridors,
2)
PPP in road developments
3)
rationalisation of taxes etc.
Water transport:
Types of Water transport:
Inland water transport
Shipping
1.
Natural modes, such as navigable rivers
1.
Coastal shipping
2.
Artificial modes, such as canals.
2.
Overseas shipping
India has a long coastline of 7,517 kms, 12 major ports and 200 minor ports and a vast hinterland.
Coastal shipping is cheapest for carrying bulk goods (like iron and steel, iron-ore, coal, timber,
etc.).
India has largest shipping fleet among developing countries and ranks 20th in the world in shipping
Tonnage.
The fleet at the end of March 2007 had 787 vessels.
The Vishakhapatnam port has been the top traffic handler in each of the last six years.
Problems faced by Indian ports:

(a)
Operational constraints such as frequent breakdown of cargo handling equipment due to
(b)
obsolescence.
(c)
Inadequate container handling facilities.
(d)
Inefficient and non-optimal deployment of port equipment.
(e)
Today, the importance of water transport has declined considerably due to expansion of
rail and road transport.
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Air transport;
Operational Aspect:
(a)
Domestic air services are provided by Indian Airlines Ltd. and by private airlines like
Sahara, Jet Airways Kingfisher, Spice Jet, etc. Private airlines account for 78.5%
traffic.
(b)
Pawan Hans Helicopters Ltd. provides helicopter support service.
(c)
International air services are provided by Air India Ltd. and by Indian Airlines Ltd.
Infrastructural Aspect:
(a)
The Airport Authority of India manages 92 airports (including five international airports
at Delhi, Mumbai, Kolkata, Chennai and Thiruvananthapuram and 28 civil enclaves
at the defence airports).
(b)
Green field airports of international standards are also being constructed at Hyderabad,
Bangalore and Goa. An international green field airport is already operational in Kochi.
Regulatory-CH/H-Developmental aspect:
(a)
Air ports are controlled by the Department of Civil Aviation, Government of India.
(b)
Non-availability of seats has been one of the major constraints faced by international
passengers.
(c)
Domestic and international traffic grew by 21.8% and 13.6% respectively, in 10th
plan. Domestic and international cargo recorded a growth of 12.6% and 12.8% respectively
during the same period. This growth is the second highest in the world next to China.
COMMUNICATION
Postal services;
India's postal system was started in 1837.
The Indian postal network is one of the largest networks in the world. Today, we have
more than 1.55 lakh post offices out of which around 1.4 lakh are in the rural areas. On
an average, one post office serves 7,174 persons and a 21.12 sq. km area.
Problems of Postal Department: Inadequate number of post offices, use of old techniques,
delays in reaching of posted material etc.
Recent Developments:
(a)
New services of postal department: Speed post, business post, express parcel post,
media post, speed post passport, 'Logistics Posts', 'Retail Post Services' etc.
(b)
To improve the speed of money order transmission, 140 VSATs (Very Small Aperture
Terminals) have been set up. They handle more than one million money orders a month.
(c)
Computerisation: Presently, more than 9,600 post offices are computerised.
(e)
Automatic mail processing centres (AMPC) have been set up at Mumbai and Chennai
for faster processing of mails. Two more AMPCs are being set up in Kolkata and Delhi.
(e)
E-post services: Under e-bill post, customers are able to pay multiple utility bills at post
office counters.
(f)
New financial products of Post offices- Savings bank and savings certificate, postal
life insurance, non-life insurance products, mutual funds, etc.
Telecommunications;
Telephone network in India is the third largest in the world.
Types of Telecommunication services: (i) the telephone service, and (ii) the telex service.
India's telephone network is one of the largest in the world.
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At the time of Independence, India had a total of only 321 telephone exchanges with about
8200 working connections. There were only 338 long-distance public call offices and 3324
telegraph offices.
In March, 2009, India had 414 million connections (basic and mobile). As on March, 2007,
5.6 lakh villages were connected using a Village Public Telephone (VPT). In the rural areas,
more than two lakh Public Call Offices (PCOs) and 113 million phones have been provided.
PSUs in the telecom sector - Bharat Sanchar Nigam Ltd. + Mahanagar Telephone Nigam
Ltd.
Who regulates telecommunication? The Telecom Regulatory Authority of India (TRAI) and
the National Internet Exchange of India (NIXI)
HEALTH
For good health, two things are essential: 1) balanced and nutritional diet; 2) medical care.
The general health standard in India is quite low. About l/4th of the population lives below
the poverty line. These people do not have nutritional diet and adequate medical care.
As a result, the overall health conditions are poor in India.
Old approach to tackle the problem of health: Providing Hospitals.
New approach (since the Sixth Plan): Focus is on providing better health and medical
care services to the poor people.
EDUCATION
India has the second largest education system in the world. 84% of the rural habitation
in India now have a primary school, located within a distance of one km.
As per our constitution, education should be free for children below 14 years of age.
The National Policy on Education (NPE) was made in 1986 and further modified in 1992.
The emphasis was on the following:
universal access and enrolment;
universal retention of children up to 14 years of age; and
a substantial improvement in the quality of education.
Type of Education:
Primary education or elementary education (up to the age of 14)
Secondary education (age group of 14 - 18 years)
Higher education or university education
Various Schemes to promote elementary education:

(a)
Sarva Shiksha Abhiyan (SSA) - To provide elementary education to all children
(b)
The National Programme for Education of Girls at Elementary Level (NPEGEL) an important component of SSA.
(c)
Education Guarantee Scheme and Alternative and Innovative Education (EGS + A1E)
- another important component of SSA
(d)
Mid-day meal scheme
(e)
Kasturba Gandhi Balika Vidyalaya (KGBV)
(f)
Prarambhik Shiksha Kosh (PSK)
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The number of secondary and higher education schools was more than 1,68,900 in 200607.
There are 7 national institutions on technology, known as IITs.
Besides the above, there are 20 National Institutes of Technology, consisting of 17 regional
engineering colleges and 3 other engineering colleges.
There are six IIMs.
2. INFLATION
Q: Define the term 'Inflation'. What are the different types of inflation?
Meaning of Inflation
The term inflation may be defined as a sustained rise in the general price level, which causes
a decline in the purchasing power of money. The main cause of rise in the general price level is too
much money in circulation.
Kinds of Inflation
Kinds of Inflation
1.
Demand Pull Inflation: It occurs, when the demand

for goods and services in the economy is more than
their supply.
1. Demand pull inflation

2. Cost pull inflation
3. Stagflation
The pressure of demand increases the prices of goods

and services.
2.
Cost Pull inflation: It is caused by an increase in the cost of factors of production. In

fact, demand-pull inflation is responsible for cost-push inflation. This is because, when
the demand-pull inflation sets in, there is an increasing demand for the factors of production,
which increase their prices. The cost-pull inflation may also take place due to increase
in the wages and due to increase in the profit margin.
3.
Stagflation: It is the combined phenomenon of 'Demand pull inflation' and 'cost pull inflation'.
In this case, there is low rate of growth, which results in economic stagnation. On the
other hand, the general price level continuously rises. Thus, Stagflation = Stagnation +
Inflation. There may be different reasons for this.
For example, In the case of developed countries, the growth rate may be low, because
their industries have already matured. But their strong labour unions may force to raise
the wage rate continuously, which will ultimately result into stagflation.
Similarly, in the case of developing countries like India, the demand increases at a fast
rate due to the high public expenditure and but the strong labour unions may force to
raise the wage rate. Thus there will be demand pull inflation as well as cost pull inflation.
Rate of inflation in India : 6.11% ( 20 Jan 2007);
3.5% (3 Feb. 2007)
Long-term inflation rate : 4.7% (2001-2006)

Q: What are the causes of Inflation?
CAUSES OF INFLATION
A rise in the general price level occurs in the following situations 1.
Increase in public expenditure: A rise in public expenditure increases the purchasing

power of the people. Therefore, if the public expenditure of government increases, but the
supply of goods does not increases proportionately, then this will promote inflation in the
country. In India, public expenditure has risen to 35% of NNP in 2007-08.
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2.
3.
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Increase in Non-Productive Expenditure: In India, about 45% of the government

expenditure is non productive, such as expenditure on defence. No doubt, the expenditure
on defence and maintenance of law and order is essential, but on the other hand, one
should not forget that this expenditure is non-productive, i.e. it does not increase the supply
of the goods, but it increases the purchasing power of the people. As a result, the general
price level rises.
General Causes for inflation
Population explosion: A fast increase in
population will also increase inflation in the country. 1. Increase in public expenditure
If the population of a country increases rapidly, 2. Increase in non-productive
but the supply of goods does not increase in
expenditure
the same proportion, then it will raise the general
3. Population explosion
price level.
For example, in our country, the supply of 4. Deficit Financing
commodities is unable to meet the requirements
of the increasing population. As a result the prices
of commodities ate continuously rising.
4.
5. Irregular agricultural growth

6. Inadequate rise in industrial
production
Deficit financing: When the government spends

more than what it expects to collect as revenue; 7. Higher taxes
it takes the help of deficit financing. Under deficit 8. Higher administered prices
financing, the government issues more currency
in the market or borrows funds from foreign governments or international agencies. It results
in more money in the market and increased in the price level.
A small dose of deficit financing is helpful to meet the public expenditure, but a large
dose and slow growth will increase inflation. In India, deficit financing has been increasing
from Plan to Plan.
5.
Irregular agricultural growth: Most of the industries of our country, such as cotton,
jute, sugarcane, tea, tobacco, etc. depend on agriculture. The failure of a crop leads to
failure of industries to supply the common goods. Therefore the failure of agriculture due
to drought etc. increases not only the price of food articles but also the general price
level.
6.
Inadequate rise in industrial production: The performance of the industrial sector, especially
between 1965 and 1985, was a bit satisfactory in our country. Over the 20 years, industrial
production increased on an average rate of 4.7% every year, which was unable to meet
even the essential requirements of the public, such as oil, food, textiles, weaving, apparel
and footwear.
7.
Higher Taxes: Another source of inflation is higher taxes, especially indirect tax like sales
tax, excise duties, etc. imposed by the government. Such taxes increase the selling
price of the commodities because producers generally shift the burden of such taxes to
consumers. Thus higher indirect taxes increase the commodity prices in the market.
8.
Higher Administered Prices: The prices of a number of important inputs, such as coal,
steel, fertilizers, diesel, petrol, etc. are administered by the government. The prices of
these inputs have been revised by the government from time to time. The revised prices
are generally fixed upward.
Q: What are the different measures to control Inflation?

MEASURES TO CHECK INFLATION
Inflation is a situation which takes place either due to a rise in the purchasing power of the
people or due to the excessive money in circulation. Therefore, it can be controlled either by controlling
the purchasing power of the people or by reducing the money in circulation.
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CPT

The various measures that are taken to control inflation can be divided as follows:
1.
Monetary measure
2.
Fiscal measures
3.
Other measures
1. Monetary Measure:
Monetary measures are those that are taken by the Central bank of the country (such as RBI
in India) to control the money supply in the economy. Such measures directly hit the inflationary boom.
Generally, the central bank takes the following steps to control the money supply under its monetary
measures Traditional / Quantitative
2.
Selective / Qualitative
1.
Bank rate
1.
Credit ceiling
2.
Open market operations
2.
Variable margin requirement
3.
CRR
3.
Variable interest rate
4.
SLR
4.
Regulation of consumer credit
5.
Moral suasion
6.
Licensing
Anti-inflationary Measure
Fiscal Measure:
Fiscal measures are a part of the budgetary operations of a 1. Monetary Measure:

government. The major anti-inflationary fiscal measures ate as follows: 1. Bank rate
1.
Public Expenditure: A cut in public expenditure can serve 2. Open market operations
as an anti-inflationary tool. The government should reduce 3. Cash reserve Ratio (CRR)
public expenditure during the period of inflation, because 4. Statutory liquidity ratio
such expenditure increases the money in circulation.
5. Variable margin requirement
Although reduction in public expenditure is not so easy,
as it is of essential nature. However, non-essential 6. Variable interest rate
7. Regulation of consumer credit
expenditure can be reduced.
2.
Taxation: The government, as an anti-inflationary measure, 8. Moral suasion
may increase the rate of existing taxes and impose new 9. Direct Action
taxes on commodities and services, so as to leave lesser 2. Fiscal Measures:
money supply with the public to purchase goods and
1. Public expenditure
services.
2. Taxation
3.
Public Borrowings: Public borrowing is also another measure
3. Public borrowings
to reduce inflation. Under this measure, the government
3.
Control over Investment
borrows money from the public. The main object of public
borrowings is to take away the excessive purchasing 4. Other Measures:
power from the public. Thus, during the period of inflation, 1. Control over output
the government should increase the public borrowings
2. Wage policy
to reduce the purchasing power of the public.
3. Price control & Rationing
3. Control Over Investment:
Control over investment is also very necessary because, due to the multiplier effect, the initial
investment leads to large increase in income and expenditure.
4.
Other Measures:
1.
Control Over Output: Increment in production is the best antidote to inflation, because
one of the reasons of inflation is inadequacy of output.
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As it is very difficult to increase output at a time of inflation, the production of essential

and sensitive goods should be increased by shifting resources from less essential and
less sensitive goods.
2.
Wage Policy: Wages must be controlled to reduce the inflationary pressure in the economy.
They are to be so fixed as not to increase the price level. For this, the wage-increase
should be linked to the increase in productivity. If this criterion is followed, higher prices
will not increase the unit cost and unit price.
3.
Price Control & Rationing: It is a direct method to check the price level. The main aim
of price control is to determine the maximum limit beyond which the price of a particular
commodity would not be allowed to rise.
Questions
1.
2.
3.
4.
5.
6.
(C) mark up inflation

Cheap money policy is followed during (A) Depression

(B) Inflation
(C) Recession
(D) Revival
7.
When too much money chases too few goods,

the resulting inflation is called (A) Deflation
(B) Demand-pull inflation
(C) Cost-push inflation
(D) Stagflation
Under inflation (A) borrowers gain

(B) lenders lose
(C) both (A) & (B)
(D) nothing can be said
8.
The
(A)
(B)
(C)
(D)
9.
Which of the following statement is incorrect?

(A) The Indian road network is one of the
largest in the world.
(B) The rural road network connects around
65% of all-weather roads.
(C) Most of the State Road Transport
Corporations are running on profits.
(D) The National highways carry more than
40% of the total road traffic
The combined phenomenon of stagnation and

inflation is called (A) Demand pull inflation
(B) cost push inflation
(C) Money inflation
(D) Stagflation
When prices are falling continuously, the
phenomenon is called (A) Inflation
(B) Stagflation
(C) Deflation
(D) Reflation
highest user of commercial energy isagriculture

transport
household
industry
10. Sahara Jet and Kingfisher are examples of(A) Private schools
(B) Private airlines
(C) Private ship
(D) Private railways
Inflation means (A) high prices

(B) prices must be continuously rising
(C) both (A) & (B)
(D) none of these
11. In terms of generation of power, _____'s

contribution is the maximum (A) hydel
(B) nuclear
(C) thermal
(D) others
Types of inflation are (A) demand pull inflation & cost push inflation
(B) income inflation
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CPT
12. Who is the regulatory authority for telecom

in India?
(C) Remained the same

(D) Doubled
(A) SEBI
20. Of the major 12 ports,_____is the top traffic

handler -
(B) TRAI
(C) MTNL
(A) Paradip
(D) BSNL
(B) Cochin
13. Inflation can be checked through -
(C) Visakhapatnam
(A) contractionery market policy
(D) Mumbai
(B) expansionary market policy
21. _______measures the operational efficiency

of a thermal plant -
(C) monetary policy is not useful

(D) none of these
(A) Power load factor

(B) Power leakage factor
14. Economic recession was experienced by India

in-
(C) Plant load factor
(A) 64 - 66
(D) Plant leakage factor
(B) 65 - 67
22. Electricity generated from radio active elements

is called -
(C) 66 - 68
(D) 67 - 69
(A) thermal electricity
15. The first devaluation in India was in -
(B) atomic energy
(A) 1991
(C) hydel electricity
(B) 1976
(D) tidal energy
(C) 1986
23. At present, nearly _______ % of the energy

consumed is obtained from noncommercial
traditional sources -
(D) 1966
16. NTPC stands for (A) National Thermal Power Corporation
(A) 45
(B) National Tidal Power Corporation
(B) 51
(C) National Theological Power Corporation
(C) 27
(D) National Talent and Potential Corporation
(D) 10
24. The National Highways now carry more than
_____% of the total road traffic -
17. Stagflation means (A) Inflation with recession
(A) 10
(B) Recession with stagnation
(B) 20
(C) Inflation galloping like a stag
(C) 30
(D) Inflation and increasing output
(D) 40
18. Over the years, the incidence of malaria (cases
in million) has -
25. In the infrastructure of an economy we include-
(A) Reduced
(A) power
(B) Increased
(B) transport
(C) Remained the same
(C) banking
(D) Doubled

26. If the demand for goods and services is more
than their supply, the resultant inflation is-
19. Over the years, the number of polio cases

has (A) Increased
(A) cost push inflation
(B) Reduced
(B) stagflation
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CPT
34. NLM stands for (A) National Leprosy Mission
(B) National Logistic Mission
(C) National Literacy Mission
(D) National Law Mission
(C) deflation
(D) demand, pull inflation
27. Our postal network is one of the _____ networks
in the world (A) Largest
(B) Smallest
35. IIM
(A)
(B)
(C)
(D)
(C) Tenth largest

(D) Tenth smallest
28. On an average, one post office in India serves(A) 100 Persons
stands for Indian Institute of marketing

Indian Institute of Manpower planning
Indian Institute of Management
International Institute of Management
36. TRAI stands for (A) Trade Regulatory Authority of India

(B) Transport Regulatory Authority of India
(C) Training Register Authority of India
(D) Telecom Regulatory Authority of India
(B) 1000 persons

(C) 7174 persons
(D) 5800 persons
29. TRAI is the regulatory authority for ____in
India (A) railways
(B) telecom
(C) banking
(D) secondary market
30. Increase in money supply will lead to (A) Cost push inflation
(B) Demand pull inflation
(C) Structural inflation
37. The
(A)
(B)
(C)
(D)
number of IITs in India is 7

20
17
6
38. The
(A)
(B)
(C)
(D)
number of IIMs in India is 7

20
17
6
31. The rate of inflation was the lowest in39. The number of National Institutes of Technology
in India is (A) 7
(B) 20
(C) 17
(D) 6
(A) fifties
(B) sixties
(C) seventies
(D) eighties
32. According to the latest data (2005), PLF is
the lowest in -
40. The number of Regional Engineering Colleges

of National Institutes of Technology in India
is (A) 7
(B) 20
(C) 17
(D) 6
(A) southern region

(B) northern region
(C) western region
(D) north-eastern region
33. Considering State Electricity Boards (SEBs)
central sector and the private sector, PLF
is the highest in -
41. India is worlds_____largest energy producer.

(A) 5th
(B) 2nd
(C) 7th
(D) 1st
(A) private sector

(B) SEBs
(C) Central sector
(D) Both SEBs and the private sector
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CPT
42. India is worlds_____largest energy consumer.
44. ______ continued to be the principal destination

of India's export in 2008-09.
(A) 5th
(B) 2nd
(A) Japan
(C) 7th
(B) USA
(D) 1st
(C) South Korea

(D) Russia
43. In the 10th plan, Total Export grew by _____%.
45. There are about_____phones per hundred

Population in India.
(A) 10
(B) 15
(A) 35.65
(C) 24
(B) 12.85
(D) 5
(C) 13.83
(D) 15.15
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
A
.
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CPT
CHAPTER 13
DEFICIT, BALANCE OF PAYMENT, EXTERNAL DEBT

Q: What do you mean by Budget Deficit and Fiscal Deficit?
Position of Budget;
If Govt. receipts = Govt. Exps., then the budget is said to be balanced.
If Govt. receipts > Govt. Exps., then the budget is said to be surplus
If Govt. receipts < Govt. Exps., then budget is said to be deficit.
Budget deficit = Total expenditure (revenue plus capital) - Total Receipts
+ Borrowings and other liabilities
Fiscal deficit
Fiscal deficit is that part of government expenditure which is financed by borrowings. Consider
the following data:
1990-97
2004-05
(Rs.) (crore)
(Rs.) (crore)
1.
Revenue receipts
54,950
3,51,200
2.
Capital receipts of which
39,010
1,63,144
(a)
Loan recoveries + other receipts
(b)
Borrowings and other liabilities
5,710
12,000
33,300
1,51,144
3.
Total receipts (1+2)
93,960
5,14,344
4.
Revenue expenditure
73,510
4,46,512
5.
Capital expenditure
31,800
67,832
6.
Total expenditure (4 + 5)
1,05,310
7.
Budgetary deficit (6 - 3)
11,350
8.
Fiscal deficit [1 + 2(a) -6 = 7 + 2(b)]
44,650
5,14,344
Nil
1,51,144
Mode of Borrowings:
Old Mode: Borrowing from RBI through ad hoc Treasury Bills
New Mode: The government now taps 91 days treasury bills from the market and shows
it as part of the capital receipts under the heading "borrowings and other liabilities".
Latest trend in India:

The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in 2000 and the
FRBM Act was passed in 2003. The Act aims at reducing gross fiscal deficit by 0.5% of the GDP
in each financial year (beginning April 1, 2000).
As a result of the efforts taken, the fiscal deficit as a proportion of GDP has started declining.
During 2007-08, it was 2.7% of GDP.
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Q: What do you mean by 'Balance of Trade' and 'Balance of Payment'? Distinguish.

BALANCE OF TRADE (MERCHANDISE BALANCE)
'Balance of Trade' is the document, which contains -
the record of imports and exports
of goods only
during a period of time, usually one year.
Characteristics:
Only import and export is included in the balance of trade. Buying and selling of goods
in the domestic market is not included in the balance of trade.
Further, import and export of only goods are considered. The import and export of
services are not included in the Balance of Trade. That is why, it is called 'Balance of
Trade'.
It shows the position of a particular period of time, which is usually a year.
When the export of goods is higher than import, then there is export surplus and its balance
is favourable. On the either hand, when import of goods is higher than export, there is
a deficit and the trade balance is unfavorable.
BALANCE OF PAYMENTS
Balance of Payment is wider in scope than balance of trade. Balance of Payment is a record
of
All the economic transactions

Between one country and the rest of the world
In a given period of time, usually one year.
All economic activities are included in the balance of Payment. Thus, it includes import and
export of goods as well as of services.
Component of Balance of Payment: The Balance of Payments position is generally classified
into two parts:
Balance of payments on Current account
It consists of
Balance of Trade
Balance of Services:
(a)
Travel (tourists, etc.), transportation

(shipping etc.), banking, insurance
(b)
Income on investment (interest,
royalties, dividends, foreign bond
earnings)
(c)
Government: Receipt from diplomatic
and military personnel from overseas
and payment to similar overseas
personnel.
Balance of unrequited transfers, like
donation, grants, etc.
Balance of payment on Capital Account

It deals with borrowings or lending of the
country.
It includes balance of
private direct investments
private portfolio investments
government loans to foreign

governments.
Thus, balance of payments is the sum of balance of current account and balance of capital
account. The balance of payments must always balance in a book-keeping sense. This is because
for any surplus (or deficit) in the overall balance of payments, there must be a corresponding debit
(or credit) entry in the net changes in external reserves. In other words, if there is a surplus it adds
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to external reserves of the country and if there is a deficit, it reduces the external reserves of the
country.
Balance of Trade Vs. Balance of Payment
Head of Diff.
Balance of Trade
Balance of Payment
1. Goods/
It records only import and
It records transactions relating to both
Services:
export of goods.
goods and services.
2. Capital
It does not record transactions
It records transactions of capital nature.
Transactions: of capital nature.
3. Relation:
Balance of trade is a part of
Balance of payments is more comprehensive.
the current account of the balance It not only includes balance of trade but
of payments.
also balance of services, balance of unrequited
transfers and balance on account of capital
transactions.
4. Favourable
Balance of trade may be
Balance of payments always remains and
and
favourable/unfavourable/in
balanced in the sense that the receipt side
Unfavourable: equilibrium.
is always made to be equal to the payments
side.
Q: Write a short note on External Debt of India.
EXTERNAL DEBT OF INDIA
Forms of External Assistance:
External Grants: It does not involve any repayment obligation
External Loans: It carries an obligation to pay interest and repay the principal.
About 90% of the external assistance received by India is in the form of loans.
Sources of External Debt:
World Bank, International Monetary Fund (IMF), International Development Association, USA,
UK, Japan, etc.
Debt with concessionabilty:
A large part of the loan has a high degree of concessionability i.e., grant element of at
least 25%.
The share of concessional debt in total debt is about 20%. In 1980-81, it was as high
as 75%.
Position of India's External Debt:
India's external debt amounted to Rs. 9,00,000 crore in March, 2008.
As a percentage of GDP, India's external debt was 19% in March, 2008.
Debt Service Ratio:
Debt-service payments was 5.4% in 2007-08.
India's debt service payment ratio is lower than the corresponding ratio of many developing
countries like Argentina, Indonesia, Mexico, Turkey, but is higher than the ratio of other
developing countries.
India ranks 6th among the top 15 debtor countries in the world according to the Global
Development Finance 2008, (World Bank).
It needs to be also recognised that the debt service ratio (ratio of principal and interest
to total exports) for India remains high by international standards.
Besides, India's exports of goods as a percentage of GDP works out to be around 14%.
This ratio shows that the potential capacity of India to service external debt is low. So,
India is vulnerable to external shocks.
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Questions
1.
Money Lenders are (A) non-institutional sources of credit

(B) institutional sources of credit
(D) none of these
2.
Fiscal tools are (A) tax rate

(B) Govt expenditure
(C) neither (A) nor (B)
(D) both (A) & (B)
3.
4.
5.
Debt service ratio for India (A) is high

(B) is low
(D) none of these
7.
Which of the following is not an objective of

fiscal policy?
(A) Economic growth
(B) Economic stability
(C) Maximisation of employment level
(D) Regulating of financial institutions
9.
The FRBM Act aims at reducing gross fiscal

deficit by_____% per annum (A) 2%
(B) 1%
(C) 0.5%
(D) 3%
11. In Fiscal deficit, we add borrowings and other

liabilities to the (A) Primary deficit
(B) Capital deficit
(C) Budget deficit
(D) Money deficit
When the government tries to meet the gap

of public expenditure and public revenue through
borrowing from the banking system, it is called(A) Deficit financing
(B) Debt financing
(C) Credit financing
_____is the difference between total receipts
and total expenditure (A) Fiscal deficit
(B) Budget deficit
(C) Revenue deficit
(D) Capital deficit
Which of the following concepts of Budget

deficit has become practically redundant in
India?
(A) Fiscal deficit
(B) Budgetary deficit
(C) Primary deficit
(D) Revenue deficit
10. About_____% of the external assistance has

been in the form of loans (A) 40
(B) 30
(C) 10
(D) 90
Expenditure on defence for Indias over the

years has (A) increased significantly
(B) decreased
(C) increased slightly
(D) remained more or less static
6.
8.
12. In India, the fiscal year starts from (A) 31st March
(B) 31st April
(C) 1st April
(D) 1st March
13. If borrowings and other liabilities are added
to the budget deficit, we get (A) Revenue deficit
(B) Capital deficit
(C) Primary deficit
(D) Fiscal deficit
14. FRBM Act stands for (A) Fiscal Revenue and Budget Management
(B) Foreign Revenue and Business
Management
(C) Fiscal Responsibility and Budget
Management
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(D) Foreign Responsibility and Budget

Management
20. Budgetary deficit can be expressed as (A) the excess of pubic expenditure over
public revenue
(B) the sum of the deficit on revenue account
and the deficit on capital account
(C) that portion of government expenditure
which is financed through the sale of
91 days Treasury Bills and drawing down
of cash balances
15. Which budget in India is passed separately?

(A) Defence
(B) Airlines
(C) Atomic energy
(D) Railways
16. Revenue deficit in India is (A) negative
(B) positive
(C) zero
21. A government budget is defined as (A) a description of the fiscal policies of the
government and the financial plans
(B) a financial plan describing estimated
receipts and proposed expenditures and
their disbursement under various heads
(C) neither of the above
(D) both (A) and (B) above
17. _____is a systematic record of all the economic

transactions between one country and the
rest of the world (A) Balance of trade
(B) Balance of transaction
(C) Budget
(D) Balance of payments
22. India ranksamong the top 10 debtor countries

in the world (Global Development Finance
2005) (A) seventh
(B) eighth
(C) ninth
(D) sixth
18. The share of concessional debt in total external

debt of India has (A) Remained the same
(B) Doubled
(C) Reduced
(D) Increased
23. As % of GDP, India's External Debt is

% (2008):(A) 10
(B) 15
(C) 12
(D) 19
19. The main objective of fiscal policy in the

developing countries is to (1)
promote economic growth
(2)
mobilise resources for economic growth
(3)
ensure economic growth and
distribution
(4)
increase employment opportunities
(A)
(B)
(C)
(D)
24. Indias Debt Service Ratio is ______.

(A) 11.5
(B) 30.5
(C) 5.4
(D) 10%
only 1 and 2 are correct

1, 2, 3 and 4 are correct
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
.
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CHAPTER 14
ECONOMICS REFORMS IN INDIA
1. ECONOMIC REFORMS SINCE 1991
-Year of Economic Crisis:

Year 1991 is known as year of economic crisis due to the
following reasons:
Major Sectors selected for

economic reforms
1. Industrial sector
1.
Low foreign exchange reserves: The available foreign

exchange reserves were just sufficient to finance imports
of three weeks.
2.
Burden of National Debt: National Debt constituted

60% of the GNP in 1991.
3.
High Inflation: The wholesale prices increased at an 4. Fiscal policy

annual average rate of 12% during the year. Three reasons
were noticed for the high inflation rate- Gulf war + hike in the administrative prices of many
essential items + excess liquidity in the economy.
2. Financial sector
3. External sector
REFORMS IN INDUSTRIAL SECTOR

1. Abolishing of Industrial licensing: Industrial Licensing was abolished for all projects, except
for 18 industries. At present, there are only six industries, which relate to health, defence and security,
remain under industrial licensing. They are (a)
Alcohol
(b)
Cigarettes
(c)
Hazardous chemicals
(d)
Electronic aerospace
(e)
Defence equipment
(f)
Industrial explosives, drugs and Pharmaceuticals (except bulk drugs industry)
2. Defence Production: In 2001, defence production was opened up to the private sector through
licensing. A minimum capital of Rs. 100 crore would be required by the companies seeking entry into
defence production. Foreign investment up to 26% was allowed.
Exemptions: If the industry is to be located in cities, where the population is not more than
one million, there would be no requirement of obtaining industrial approvals from the Central Government
except for industries subject to compulsory licensing.
3. Industries reserved for public sector: Only eight industries, with security and strategic
concerns, were reserved exclusively for the public sector. At present, there are only three industries,
which are reserved for the public sector. They are(i)
atomic energy,
(ii)
the substances specified in the schedule of CG in the Department of Atomic Energy,

and
(iii)
Rail transport.
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4. Automatic clearance for Imported Capital Goods is allowed in the following cases (a)
where foreign exchange availability is ensured through foreign equity.
(b)
If the value of imported capital goods is less than 25% of the total value of plant
and machinery up to a maximum of Rs. 2 crore.
5. Foreign Investment: The major reforms are as under:

(i)
Approval would be given for direct foreign investment up to 51% equity in high priority
industries.
(ii)
To provide access to international markets, majority foreign equity holding up to 51%

equity would be allowed for trading companies primarily engaged in export activities.
(iii)
A 'special empowered board' would be constituted to negotiate with a large number

of international firms.
Permitted FDI
51% FDI is allowed in34

high
priority
industries are specified,
wherein automatic approval
would be available for direct
foreign investment up to 51%
foreign equity.
100% FDI was allowed in
Drugs and pharmaceuticals

Hotels and tourism
Courier services
Oil refining
Mass rapid transport system
Airports
Business to business E-commerce
Internet services providers, electronic
mail and voice mail
Special economic zones industries
Certain telecom industries
Advertising film sector
Tea and for development of township
Distillation and brewing up of potable
alcohol
Manufacture of Industrial explosives
and hazardous chemicals
Laying of natural Gas/LNG lines
74% FDI is allowed-
Banking sector
49% FDI is allowed in-
Air transport services
26% FDI is allowed in-
Defence production
insurance
Print media
5. MRTP Act: The main object of this Act was to eliminate monopoly powers.
REFORMS IN FINANCIAL SECTOR - BANKING SECTOR
(1)
Bank rate has been reduced to 6%.
(2)
CRR is 5% since Jan., 2009.
(3)
SLR was reduced to 24% in recent years.
(4)
Prime lending rates are now set by banks, not by RBI. w.e.f. April 2001, PLR has
been converted into a benchmark rate for banks rather than treating it as the minimum
rate.
(5)
Interest rate on savings deposits was reduced to 3.5% in recent years.
(6)
Public sector banks can approach the public to raise resources.
(7)
To reduce non-performing assets (NPAs), banks have been advised to sound their
credit risk management system.
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(8)
A credit information bureau would be established to identify bad risks.
(9)
Recovery of Debts Due to Banks and other Financial Institutions Act, 1993 was passed
and special recovery tribunals were set up to facilitate quicker recovery of loans
arrears.
(10)
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act was passed for assisting banks in the recovery of their loans.
Financial sector reforms mainly relate to three categories as

(a) banking sector reforms; (b) capital reforms; (c) Insurance sector reforms.
In the syllabus of CPT, only banking sector reforms are covered.
REFORMS IN EXTERNAL SECTOR - EXPORTS & IMPORTS
1. New Schemes to promote exports:
a) Duty drawback scheme;
b) 100% Export Oriented Units (EOUs);
c) Cash compensatory scheme,

d) Special Economic Zones (SEZs)
Special Economic Zones (SEZs)

The SEZ policy was announced in 2000 to replace the Export Processing Zones
Till May 2009, 568 SEZs have been approved and 318 SEZs have been notified. Export
from SEZ in 2008-09 is about Rs. 1,00,000 crores and employment generated as on March,
2009 was more than 3,87,000 persons.
2.
New organisations to promote Exports:

a) The Export Promotion Councils;
b) The Federation of Indian Export Organisations;
c) The Indian Institute of Foreign Trade
d) Commodity Boards,
e) The Trade Fair Authority;
3.
Exchange rate Stabilisation: The rupee was devalued twice in July, 1991 amounting to a cumulative
devaluation of about 19%.
4.
Import Licensing;
5.
(1)
Liberalisation was given a push with the announcement of an EXlM Policy in 1992. The
policy allowed free trade of all items, except a negative list of imports and exports.
(2)
Quantitative Restrictions were removed on 714 items in the EXIM Policy of 2000-01 and
on the remaining 715 items in the EXIM Policy of 2001-02.
(3)
Imports of all kinds of consumer goods are allowed, except defence goods, environmentally
hazardous goods and some other sensitive goods.
(4)
Average applied tariff rate was reduced to 10% in 2007-08.
Export Subsidies;
(1)
Direct subsidies are not provided to exporters in India. Indirect subsidies are provided in
the form of duty concessions and tax concessions, export finance, export insurance and
guarantee and export promotion marketing assistance.
(2)
The Export Promotion Capital Goods (EPCG) scheme was introduced in 1990 to encourage
imports of capital goods.
(3)
Finally, export income has been exempted from income taxes.
Schemes abolished
(a)
The EXIM Scrip scheme was abolished with the introduction of the 'dual exchange
rate scheme'.
(b)
Cash Compensatory Scheme
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6. Foreign Exchange Reserves: The foreign exchange reserves of India consist of the following:
7.
8.
(a)
Foreign currency assets held by the RBI + gold holdings of the RBI + Special Drawing
Rights (SDRs).
(b)
Foreign exchange reserves were above US $ 314 billion in May, 2008.
FERA, 1973 was withdrawn and a new FEMA, 2000 was made applicable.
FERA remained applicable for 27 years for the Indian corporate world.
The Objectives of FEMA are "facilitating external trade and payment" and "promoting the
orderly development and maintenance of the foreign exchange market in India."
Others:
'Vishesh Krishi Upaj Yojana' has been started to promote agricultural exports.
Duty Free Export Credit (DFEC) scheme has been converted into the 'Served from India'
scheme.
REFORMS IN FISCAL POLICY
-Income Tax Reforms

(1)
The tax rate for individual reduced from 97.7% to 30%.
(2)
The tax rate for domestic companies reduced from 40% to 30%.
(3)
The tax rate on foreign companies reduced from 55% to 50% on royalty and to 40% on
other incomes.
(4)
Requirement of filing of return under the "one by six" scheme has been dispensed with.
(5)
Scheme for submission of returns through tax return preparers has been introduced.
(6)
Dematerisation of TDS certificate made effective from 1-4-2008.
-Indirect Tax Reforms: Govt. is Planning to Introduce Goods and Service Tax (GST).
2. LIBERALISATION, PRIVATISATION & DISINVESTMENT
Q: What is Liberalisation?
Liberalisation means giving relaxation to restrictions on trade. For example, removing the tariff,
subsidies and other restrictions on the flow of goods and services between countries.
Q: What do you mean by Privatisation of Public Enterprises?
PRIVATISATION
Meaning of Privatization:
In our country, the public sector is finding itself unable to generate adequate profit. They are
becoming weaker and weaker day by day. As a result, the demand for their privatisation has risen.
Privatization refers to any process that reduces the involvement of government in the public sector
enterprises. Some example of privatisation are as under:
(i)
The transfer of ownership on assets from Public (i.e. government) to the private sector.
(ii)
Entry of private sector industries into areas exclusively reserved for the public sector. Recent
example, telephone and mobile services have been open to the private sector.
(iii) Transfer of management and control of public sector undertakings into private hands. (iv)
Limiting the scope of the public sector or no more diversification of the existing public
sector undertakings.
Arguments in favour of Privatisation;
The incidence of growing inefficiency, reducing profitability and mismanagement of Indian public
sector enterprises has compelled us to think in terms of privatisation.
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It is said that privatisation will promote competitive efficiency, reduce political interference, produce
high quality products, provide better quality services, reduce wastage and optimise resources. The
following are the main merits of privatisation:
1. Reduce the
Burden
It will reduce the burden on budgetary resources, which results from

the loss making public sector units.
2. Reduce
Political
Interferences
It will relieve the public sector units from political and bureaucratic interference,
giving them more autonomy in decision-making. This will help improve
productivity, efficiency and profitability of the public sector units.
3. Improve
Efficiency
It will help improve efficiency of the public sector units. It is claimed that
competition would force the enterprises to be innovative and efficient. They
will tend to minimise cost and avoid wasteful expenditure.
4. Improve
Quality
Improved quality will result because privatised concerns will have to compete
to survive and be responsive to consumer complaints.
5. International
Competition
It will enable public sector units enter into strategic alliances with other
companies and make them more competitive in international markets.
6. Revival of
Sick Units
The sick units in the public sector have become a great liability for the
state and privatisation is a possible remedy for their revival and reconstruction.
7. Diversification :
It will help the profit making public sector units to raise additional resources
to modernise, expend and diversify their business.
Arguments against Privatisation;

1.
Privatisation will encourage monopoly power.
2.
Private enterprises may not show their interest in buying sick units. Normally, they will
invest their funds in healthy units.
3.
Private enterprises will not be interested in long gestation projects and risky projects.
4.
Private sector may not be interested in the principles of social justice and public welfare.
They may look of maximisation of their profit.
5.
Due to the WTO, the government cannot ignore foreign competition. Private sector may
not be in a position to face international competition.
6.
Privatisation may lead to concentration of economic power.
Thus, we see that privatisation has both opportunities and threats to the economy. We have
to privatise in such a manner that we make the maximum opportunities, while at the same time minimising
the threats.
Q: What do you mean by Disinvestment?
DISINVESTMENT
Meaning of Disinvestment:
In our country, the public sector is finding itself unable to generate adequate profit. They are
becoming weaker and weaker day by day. As a result, the demand for their privatisation has risen.
One of the ways of privatisation is disinvestment. It means selling of government's equity in
the public sector units. In our country, disinvestment was started in 1992 by Finance Minister Manmohan
Singh.
Progress
By the year ended 2007-08, the government could auction its small investments in the public
sector, raising Rs. 51,608 crore in the process. It was too insignificant to affect either the structure
of management or the working environment of the PSUs. In fact, it was pointed out that the government
carried out the whole exercise of disinvestment in a hasty, unplanned and hesitant way.
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Method of Disinvestment:
In our country, the government has usually the following methods for disinvestment:
(i)
Initially, equity was offered to retail investors through domestic public issues.
(ii)
By issuance of global depository receipts (GDRs) to tap the overseas market.
(iii) Cross Holding, i.e. government simply sells part of its shares in one PSU to other PSUs.
(iv)
Warehousing, i.e. government's own financial institutions buying government's equity in
select PSUs and holding them until any third buyer emerges.
(v)
Retaining Golden Share, i.e. retaining government's equity up to 26% in the PSU to
protect its interest.
(vi)
Strategic Sale Method, i.e. sell a major portion of its equity to a strategic buyer and
also give over the management control.
3. GLOBALISATION
Q: What is Globalisation? Explain. Meaning of Globalisation;

Globalisation is a process of integration of domestic economy with the world economy. It is
related to softening of economic and trade barriers across the countries so as to facilitate a free interflow of capital, technology, people, goods and services.
Eventually, globalisation would mean being able to manufacture in the most cost-effective way
anywhere in the world. It means being able to procure raw materials and labour and drawing management
resources from the cheapest source anywhere in the world.
Cases in favour of Globalisation (merits);

(1)
Globalisation of underdeveloped countries will
Improve the allocative efficiency of resources,
reduce the capital-output ratio,
increase the inflow of capital and updated technology into the country,
increase labour productivity,
help to increase export,
increase the degree of competition, and
give a boost to the average growth rate of the economy.

(2)
It will help to restructure the production and trade pattern in a capital-scarce, labour-abundant
economy in favour of labour- intensive goods and techniques.
(3)
Foreign capital will be attracted and with its entry, updated technology will also enter the
country.
(4)
With the entry of foreign competition and the removal of import tariff barriers, domestic
industry will be subject to price reducing and quality improving effects in the domestic
economy.
(5)
As a result, employment opportunities would go up.
(6)
The efficiency of banking and financial sectors will improve, as there will be competition
from the foreign capital and foreign banks.
Cases against Globalisation (Demerits):

(1)
The globalisation will result in to redistribution of economic power and political power at
the world level.
(2)
Due to globalisation, the economies of the world are moving away from one another.
(3)
Globalization is increasing the pressure on economies for structural readjustments to a

breaking point.
(4)
For future benefits, it is becoming hard for the countries to ask their public to suffer the
pains and uncertainties of structural adjustment.
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Measures Towards Globalisation;
1. Convertibility of Rupee: The most important measure of India for globalization is to make
its currency fully convertible, i.e. allow it to determine its own exchange rate in the international market
without any official intervention.
(a) Current
Account
Convertibility :
(b) Capital
Account
Convertibility:
India achieved full convertibility on current account in August 1994. Current

account convertibility means freedom to buy or sell foreign exchange for
the following transactions (i)
All payments due in connection with foreign trade, other current

business, including services and normal short-term banking and
credit facilities,
(ii)
Payment due as interest on loans
(iii)
(iv)
Payments of a moderate amount of amortisation of loans, and

Moderate remittances for family living expenses.
Certain steps towards full convertibility on capital account have also been
taken, like (i)
(ii)
(iii)
Authorised dealers have been allowed to borrow/invest abroad up

to 15% of their capital
They have been delegated powers to release exchange for opening
of offices abroad,
Banks, fulfilling certain criteria, have been permitted to import gold
for resale in India and so on.
However, full convertibility on capital account transactions will take some

years. Tarapore Committee-II is set up on fuller capital account convertibility.
A five year time framework (2007-2011) has been given for full convertibility
on capital account.
2. Import Liberalisation: On the recommendation of the World Bank, India took the following
steps for liberalisation:
(i)
Free trade of all items (except negative list imports and exports) has been allowed.
(ii)
Import duties on a wide range of capital commodities have been cut down.
For example, the peak rate of custom duty (on non-agricultural goods) has been brought
down from 150% in the '90s early to just 10% in the 2007-08 budget.
(iii) Tariff on imports of raw materials and manufactured intermediates have also been reduced.
(iv)
Moreover, as part of the Agreement on Trade Related Intellectual Property Rights (TRIPs),
the Patents (Amendment) Act, 1999 was passed in 1999 to provide for Exclusive Marketing
Rights (EMRs).
3. Opening the Economy to foreign capital: Refer to FDI earlier in this chapter.
4. Other measures: Many other measures have also been announced from time to time. For
example (i)
Foreign companies have been allowed to use their trademarks in India and carry on any
activity of a trading/commercial/industrial nature.
(ii)
Repatriation of profits by foreign companies has been allowed. Foreign companies (other
than banking companies) wanting to borrow money or accept deposits are now allowed
to do so without taking the permission of the RBI.
(iii)
Foreign companies can deal in immovable property in India,
(iv)
Restrictions on transfer of shares from one non-resident to another non-resident have been
removed etc. etc.
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Effect of Globalisation on the Indian economy:
In India, the process of globalisation started in 1991 and led to far reaching effects on the Indian
economy. The following effects of globalisation are recorded (1)
Our foreign currency reserves was only one billion dollars in June 1991. It rose substantially
to about 252 billion dollars in March, 2009.
(2)
The exchange rate for rupee has remained almost steady despite the introduction of full
convertibility of the rupee.
(3)
At the time of crisis, our external debt was rising at the rate of $ 8 billion a year. From
1996 to 2006, it grew only by about $ 3 billion per year.
(4)
The current account deficit was over 3% of GDP in 1990-91. During 2001-04, we even
had a surplus in the current account ranging between 0.7-2.3% of the GDP. In 2004-05,
05-06 06-07, 07-08, the current account deficit is (-)0.4, (-)1.1%, (-) 1% and (-) 1.5% respectively.
(5)
International confidence in India has been restored. This is indicated by the increasing
FDI.
(6)
Exporters are responding well. This would be clear from the fact that as against a fall
in the dollar value of exports by 1.5% in 1991-92, export grew in the range of 18-21%
p.a. during 1993-96.
However, during 1996-2002, the average exports' growth has been slow at about 10% p.a.
But, since 2002-03, the average export growth has been more than 20% p.a.
(7)
Exports now finance over 65% of imports, compared to only 60% in the latter half of the
'80s.
(8)
Certain benefits of globalisation have accrued to the Indian consumer in the form of a larger
variety of consumer goods, improved quality of goods and, in some cases, reduced prices
of consumer durables.
Q: What are the main organisations for facilitating Globalisation?

INTERNATIONAL MONETARY FUND (IMF)
Objectives of IMF
The International Monetary Fund (IMF) was established in 1946. The fund is an autonomous
organization affiliated to the UNO. Initially, only 31 countries were the members of the IMF, but now
more than 186 countries are its members.
The main objectives of IMF are as under (i)
The elimination of existing exchange controls;
(ii)
The establishment and maintenance of currency convertibility
with stable exchange rate;
(iii) The widest extension of multilateral trade and payments.
(iv)
The solving of balance of payments problems faced by
its member-nations.
Important organizations,
facilitating globalization
l. IMF
2. World Bank
3. WTO
Functions of the IMF

(1)
It acts as a short-term credit institution.
(2)
It provides machinery for the orderly adjustment of exchange rates.
(3)
It is a reservoir of the currencies of all the member-nations, who can borrow the currency
of other nations.
(4)
It is a sort of lending institution in foreign exchange. However, it grants loans only for
financing current transactions and not capital transactions.
(5)
It also provides machinery for altering sometimes the par value of the currency of a member
country.
(6)
It also provides machinery for international consultation.
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CPT

THE WORLD BANK
The World Bank was formed in 1945.
The World Bank is an inter-governmental institution, whose capital stock is entirely owned by
its member governments. The World Bank group consists of-
(i)
World Bank
(ii)
The International Development Association (IDA)
(iii)
The International Finance Corporation (IFC)
(iv)
The Multilateral Investment Guarantee Agency (MIGA)
(v)
The International Centre for Settlement of Investment Disputes (ICS1D).
Objectives of the World Bank
It was formed to give loan to members of countries initially for the reconstruction of war-hit economies,
and later for the development of the economies of the poorer member countries. At present, 186 countries
are its members. It provides its member countries long-term investment loan on reasonable terms.
The primary focus of World Bank is helping the poorest countries. It emphasizes the need for-
Investing in people, particularly through basic health and education.
Focusing on social development.
Strengthening the ability of the governments to deliver quality services
Protecting the environment.
Supporting and encouraging private business development.
Promoting reforms to create a stable macro-economic environment, conducive to investment

and long-term planning.
Functions of the World Bank

(1)
To help its member-countries in the reconstruction and development by facilitating the

investment of capital for productive purposes.
(2)
To encourage private foreign investment and credit by providing guarantee repayment of

the private investors.
(3)
To promote the long-term balanced growth of international trade and the maintenance of
equilibrium in the balance of payments of its member countries.
WORLD TRADE ORGANIZATION (WTO) [came into existence on 1-1-1995]
Features of WTO
(1)
The WTO is the main organ for implementing the Multilateral Trade Agreements (MTA).
(2)
The WTO is global in its membership. About 153 countries are its members.
(3)
It is the forum for negotiations among its members.
(4)
It is a full-fledged international organisation.
(5)
The decision-making under the WTO is carried out by consensus. Where a consensus
is not arrived at, the issue shall be decided by voting. Each member has one vote.
(6)
The WTO has a legal personality. Members shall give it such legal capacity, privileges
and immunities as are necessary for the exercise of its functions.
(7)
The representatives of the members and all officials of the WTO enjoy international privileges
and immunities.
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Functions/Objects of WTO
The WTO has the following five specific functions:
(1)
The WTO shall facilitate the implementation, administration and operation of the Multilateral
Trade Agreements as well as Plurilateral Trade Agreements.
(2)
The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations.
(3)
The WTO shall administer the 'Understanding on Rules and Procedures governing the Settlement
Disputes'.
(4)
The WTO shall administer the trade review mechanism.
(5)
With a view to achieving greater coherence in global economic policy making, the WTO
shall co operate with the IMF and the IBRD and its affiliated agencies.
Questions
1.
Privatisation means -
(C) the public sector's portfolio will be reviewed

with greater realism. The focus will be
on strategic high-tech and essential
infrastructure industries.
(A) private sector becoming strong

(B) public sector closing down
(C) transfer of assets from public to private
ownership
(D) the public sector's management has been

passed over to the private sector.
(D) none of these

2.
6.
Disinvestment -
(A) Functioned in a highly regulated

environment
(A) no investment
(B) less investment
3.
(C) more investment
(B) Functioned in a manner detrimental to

the generally public
(D) selling of an investment
(C) Concentrated on making huge profits
______means integrating the domestic

economy with the world economy -

7.
(A) Globalisation
(C) Liberalisation
(D) Disinvestment
(B) The system of phased manufacturing

programme will be applicable to new
projects.
The government has allowed private sector

investment in (A) power, gas, oil
(C) neither (A) nor (B)
(C) The system of phased manufacturing

programmes will be applicable to new
projects costing more than Rs. 10 crore.
(D) both (A) & (B)
(B) insurance, telecommunications
5.
Under the New Industrial Policy, 1991 (A) The system of phased manufacturing
programme approved on a case to case
basis will not be applicable to new
projects.
(B) Privatisation
4.
In the pre-reform period, the banking sector-
As a result of the New Industrial Policy, 1991-
8.
(A) the public sector has been stripped of

all its powers.
Before the financial reforms, the banking system

was characterised by all of the following, except(A) Administered interest rates structure
(B) the public sector has been given the

commanding heights of the economy.
(B) Quantitative restriction on credit flow
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(C) High revenue requirements

(D) Keeping very less lendable resources
for the priority sector
9.
14. Disinvestment programme started in India after(A) 1986-87

(B) 1988-89
The main objective of the WTO is to secure

among others (A) A general agreement among common
market countries on technical training
and mutual prices of traded goods
(B) The maintenance of intellectual property
rights and patent rights of membercountries
(C) An improvement in the USA's terms of
trade in the next decade
(D) A reduction in tariffs through negotiation,
elimination of import quotas and
globalisation of international trade
(C) 1991-92
(D) 1995-96
15. At present, there are only industries for
which licensing is compulsory (A) 18
(B) 6
(C) 10
(D) 9
16. In private banking, % FDI is allowed (A) 100
(B) 49
10. WTO was established on (A) 1-1-1991

(B) 2-3-1992
(C) 1-1-1995
(D) 2-3-1997
(C) 74
(D) 26
17. The Liberalisation process in India was initiated
by (A) Yashwant Singh
11. The pre-conditions for privatisation to be

successful requires.
(A) Liberalisation and de-regulation of the
economy
(B) Capital markets should be sufficiently
developed
(C) None of the above
(D) Both (A) & (B)
(B) Manmohan Singh

(C) Jaswant Singh
(D) Both (A) & (B)
18. EPCG stands for (A) Export Promotion Capital Goods
(B) Expert Programmer for Credit Generation
(C) Exchange Programmer for Consumer
Goods
12. Which of the following statements, regarding

privatization, is correct?
(A) Privatisation is a panacea for all economic
problems.
(B) Privatisation always leads to attaining
social and economic efficiency.
(C) Privatisation may result in lop-sided
development of industries in the country.
(D) Export Promotion Consumer Goods

19. FIEO stands for (A) Foreign Import Export Organisation
(B) Federation of Import Export Organisation
(C) Forum of Indian Export Organisation
(D) Federation of Indian Export Organisations
20. Fiscal policy means -
13. The pre-condition for privatisation to be

successful requires (A) Liberalisation and de-regulation of the
economy.
(B) Capital markets should be sufficiently
developed.
(C) None of the above
(D) Both (A) & (B)
(A) Policy relating to money and banking

in a country
(B) Policy relating to public revenue and public
expenditure
(C) Policy relating to non-banking financial
institutions
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CPT
(C) fully open the economy to trade
21. All of the following developments were noticed

during 1991 (when economic reforms were
enforced) except one. Identify it.
26. WTO stands for (A) World Trade Organization

(B) World Transport Organization
(C) World Tariff Organization
(D) Women Teachers Organization
(A) National debt was nearly 60% of GNP

of India.
(B) Inflation crossed double digit
(C) Foreign reserves were maintained at a
very high level.
27. _______refers to relaxation of previous

government restrictions (A) Privatisation
(B) Globalisation
(C) Disinvestment
(D) Liberalisation
22. All of the following statements except one

are correct about the foreign trade policy,
2004-09. Identify the incorrect statement (A) Certain thrust areas like agriculture,
handlooms, handicrafts etc have been
identified.
28. In______, we remove tariff, subsidies on the

flow of goods and services between countries(A) globalisation
(B) liberalisation
(C) privatisation
(D) disinvestments
(B) Vishesh Krishiupaj Yojana was started.

(C) 'Served from India' scheme was started.
(D) The entry of FDI in India was restricted.
23. As a result of the New Industrial Policy, 1991(A) Prior approval of central government is
required for establishing new undertakings,
and expanding the present undertaking.
29. Which of the following statements is correct

about the New Industrial Policy, 1991?
(A) It made it compulsory for the industry
to obtain licence for all projects.
(B) It abolished licensing for all projects
except 18 industries of strategic and
security importance
(C) It gave dominant position to the public
sector
(B) An industry intending to have more than

Rs. 100 crore of assets is required to
obtained the permission of the central
government.
(C) Prior approval of central government for
establishing new undertakings and
expanding the existing undertaking is
not required.
(D) Two or more companies deciding to
amalgamate are required to take the prior
approval of the central government.
30. At present, only ___ Industries are reserved

for the public sector (A) 5
(B) 7
(C) 8
(D) 3
24. Under the New Industrial policy, 1991 (A) The mandatory convertibility clause is
applicable for all term loans.
(B) The mandatory convertibility clause is
10 years.
31. The
(A)
(B)
(C)
(D)
(C) The mandatory convertibility clause is

10 years.
(D) The mandatory convertibility clause is
no longer applicable.
Foreign Trade Policy 2004-09 has identified certain thrust areas for growth
started "served from India" brand
revamped Duty Free Export-Credit
all of the above
32. The unsustainable levels of government deficits

in the late '80s can be attributed to (A) High levels of government expenditures
(B) Insufficient revenues
25. The economic reforms have failed to (A) keep fiscal deficits to the targeted levels
(B) fully implement industrial deregulation
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(C) Poor returns on government investments


with regard to the external sector in the postreform period?
33. NIXI stands for -
(A) Quantitative restrictions have been

imposed on a number of tradable items.
(A) National Internet Exchange of India

(B) National International Exchange of India
(C) National Institute of Exchange of Indian
goods
(B) Quantitative restrictions have been

removed on most of the items, except
a few goods.
(C) The tariff walls have been further raised.

(D) Foreign investment is now being
discouraged.
34. Which of the following is correct in relation

to banks in the post-reform period?
(A) Bank rate has been increased to 10%.
40. FERA stands for -
(B) CRR has been increased to 8%.

(C) CRR has been reduced in stages and
at present it is 5% since Jan., 2009.
(D) Public sector banks have been asked
to raise their funds from their private
resources only
(A) Foreign Export Revaluation Act

(B) Funds Exchange Resource Act
(C) Finance and
Association
Export
Regulation
(D) Foreign Exchange Regulation Act
35. The FRBMA 2003 emphasizes on -
41. FEMA stands for -
(A) Revenue-led fiscal consolidation

(B) Better expenditure outcomes
(C) Rationalisation of tax regime
(A) Foreign Exchange Management Act
(D) Future Exchange Management Act
(B) Funds Exchange Management Act

(C) Finance Enhancement Monetary Act
36. The economic reforms have failed to -
42. Quantitative restrictions on _____items were

removed in the EXIM Policy of 2000-01 -
(A) Keep fiscal deficits to the targeted levels

(B) Fully implement industrial deregulation
(C) Fully open the economy to trade
(A) 123
(B) 193
(C) 714
(D) 183

with regard to external sector in the pre-reform
period?
(A) The foreign trade policy was very liberal:
it allowed import of all types of goods.
(B) Import of food grains was strictly
prohibited.
(C) The balance of payments situation was
quite comfortable.
43. Integration of the domestic economy with the

world economy is called (A) disinvestment
(B) privatisation
(C) liberalisation
(D) globalisation
(A) The public sector was given a dominant
position in the newly independent India.
38. As against the target of Rs. 4000 crore

disinvestment in 2004-05, the actual
disinvestment has been -
(B) The foreign trade policy post independence

allowed free trade of all goods and services.
(A) 5000 crore

(B) 2765 crore
(C) 1567 crore
(C) Monetary policy post independence sought

to keep the CRR at a very low level.
(D) 4000 crore
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45. All of the following developments were noticed

during 1991, when economic reforms were
enforced, except one. Identify it -
51. In 2009, disinvestment programme took off

with the IPO of
(A) NTPC
(A) National debt was nearly 60% of the GNP

of India.
(B) NHPC
(C) Oil India Ltd.
(B) Inflation crossed double digits.
(D) Rural Electrification Corporation
(C) Foreign reserves were maintained at a

very high level.
52. SEZ Act came in to effect in

(A) 2002
(B) 2003
46. Which of the following statements is against

privatisation?
(C) 2006
(D) 2007
(A) Privatisation will help reducing the burden

on the exchequer.
53. FDI is prohibited in all of the following except
(B) It will help the profit making public sector

units to modernise and diversity their
business.
(A) Atomic Energy

(B) Lottery Business
(C) Gambling
(C) It will help in making public sector units

more competitive.
(D) Banking operations
54. Which is the soft lending arm of World Bank.
47. As a result of the foreign trade reforms -
(A) IDA
(A) The number of import licences has

increased.
(B) IFC
(B) Only a few types of goods and services

can now be exchanged freely.
(D) ICSID
(C) NIGA
55. Privatisation in India has takes place in all

the cases except -
(C) EPCG scheme has been abolished.

(D) The average tariff rates have been reduced.
(A) CMC
48. DFEC stands for -
(B) BALCO
(A) Direct Foreign Exchange Control
(C) VSNL
(B) Direct Finance Exchange Control
(C) Duty Free Export Credit
(D) Duty Free Exchange Credit
(A) The disinvestment programme has been

successfully carried out in India.
49. _____refers to the transfer of assets or services
or functions from public to private ownership-
(B) Privatisation up to 100% has been carried

out in all the PSUs in India.
(A) Globalisation
(C) Disinvestment
(C) Under strategic sale method of

disinvestment, the government sells a
major share to a strategic buyer.
(D) Liberalisation.
(B) Privatisation
57. Under NIP, for MRTP the threshold limit of

assets was -
50. _____refers to disposal of public sector's units

in equity in the market (A) Globalisation
(A) added
(B) Privatisation
(B) removed
(C) Disinvesment
(C) unchanged
(D) Liberalisation
(D) simplified
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65. Which committee was formed for fuller capital
account convertibility?
58. Under NIP, industrial licensing was (A) removed for all industries
(B) made strict for all industries
(A) Krishanamurthy committee
(C) abolished except for a few industries
(B) Rangarajan committee
(D) none of these
(C) Tarapore committee-II

(D) Capital account committee
59. Under NIP the public sector only had -
66. How many countries are members of WTO?
(A) 7 industry groups

(B) 6 industry groups
(A) 153
(C) 9 industry groups
(B) 184
(D) 8 industry groups
(C) 31
(D) 181
60. Under NIP, direct foreign investment up to-
67. How many countries are members of IMF?
(A) 49% equity in high priority industries

was allowed.
(A) 151
(B) 50% equity in high priority industries

was allowed.
(B) 186
(C) 51% equity in high priority industries

was allowed.
(D) 181
(C) 31
68. How many countries are members of World

Bank?
(D) 100% equity in high priority industries

was allowed.
(A) 151
61. At present, 100 per cent FDI is allowed in-
(B) 184
(A) defence
(C) 31
(B) drugs and Pharmaceuticals
(D) 186
(C) banks
69. In which year was WTO set up?
(D) insurance
(A) 1946
62. _____has been founded to act as permanent
watchdog on international trade -
(B) 1945
(C) 1995
(A) IBRD
(D) 2000
(B) ADB
70. In which year was IMF set up?
(C) WTO
(A) 1946
(D) IMF
(B) 1945
63. The SEZ scheme was introduced to replace-
(C) 1995
(A) Duty drawback scheme
(D) 2000
(B) 100% Export-oriented Scheme
71. In which year was World Bank set up?
(C) Cash Compensatory Scheme
(A) 1946
(D) Export Processing Zones
(B) 1945
64. In May, 2008, the foreign exchange reserve

of India was -
(C) 1995
(D) 2000
(A) $ 14.1 billion

(B) $ 314 billion
(C) $ 200 billion
(D) $ 1001 billion
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Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
B
.
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CHAPTER 15
MONEY, MONETARY POLICY AND BANKING SYSTEM

Q: What do you mean by money? Also explain the money stock.
-Traditional Definition:
Anything, which
(i)
serves as
(ii)
serves as
(iii) serves as
performs the following three functions, in money:

a medium of exchange
a common measure of value
a store of values
For example: clay, cowry shells, tortoise shells, cattle, rice, wool, salt, porcelain, stone, gold,
iron, brass, silver, paper and leather etc.
-Modern definition:
Anything, which is serves as store value is money.
It includes pure money (currencies, demand deposits of banks) + near money (bonds, government
securities, time deposits with banks and equity shares).
-Money is what money does. The functions of money are as under:
(i)
As a medium of exchange: The fundamental role of money in an economic system is

to serve as a medium of exchange or as a means of payment.
(ii)
As a unit of account: Money acts as a means of calculating the relative prices of goods
and services.
(iii)
As standard of deferred payments: Future dealings are settled in terms of money.
(iv)
As a store of value: Money is a convenient means of keeping any income, which is

surplus to immediate spending needs and it can be exchanged for the required goods
and services at any time. Thus it acts as a store of value.
(v)
Directs economic trends: Money directs idle resources into productive channels.
(vi)
As encouragement to division of labour: Occupational specialisation and division of

labour are encouraged by the use of money.
(vii)
transformation of savings into investments
-Money stock in India (as classified by RBI):

Old classification
Narrow Money
M1 = Currency with the public + Demand deposits of the public

M2 = M1 + Post office saving deposits.
Broad Money
M3 = M1 + Time deposits of the public with banks.

M4 = M3 + Total post office deposits.
New classification
M1 = Currency + Demand deposits + Other deposits with RBI
M2 = M1 + Time liabilities portion of saving deposits with banks + Certificates
of deposits issued by banks + Term deposits maturing within a year
(excluding FCNR deposits).
M3 = M2 + Term deposits with banks with maturity over one year + Call/term
borrowings of the banking system.
M4 = has been excluded from the scheme of monetary aggregates.
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Q: What do you mean by monetary policy? State its objectives and limitations.
Meaning of monetary policy:
Monetary policy refers to those measures, which are adopted to control the supply of money
in the market to attain certain economic objectives.
If we analyse the above definition, we find the following characteristics in Monetary Policy:
1.
Every monetary policy consists of certain measures. These measures are normally handled
by the central bank of the country.
2.
It is adopted to control the supply of money in the market
3.
It is adopted to attain certain economic objectives.
Q: Explain the various tools of monetary & monetary policy.

MONEY & MONETARY MEASURES OF RBI
The various monetary measures (also named as credit control measures) of the RBI can be
divided into two heads:
Traditional/quantitative measure,
Selective/qualitative measure.
Traditional/Quantitative Measure: These measures affect all sectors of the economy. They
control only the volume of the credit, but do not control the direction of the credit. The following are
the chief qualitative measures of the credit control:
1. Bank rate: It is the minimum rate at which the RBI is always ready to rediscount the bill
of exchange held by banks or to lend on approved securities to banks.
Whenever the RBI wants to discourage credit expansion, it increases the bank rate. An increase
in the bank rate, certainly, makes the bank-credit more costly. As a result the demand for credit will
decrease. In the same way, whenever the RBI wants to encourage credit expansion, it reduces the
bank rate.
2. Open Market Operations: Open market operations of the Money & Monetary Measures of
central bank is more effective than the measure of bank-rate. In open
RBI
market operations, the RBI purchases and sells bills of exchange
A. Quantitative measure:
and securities, viz. foreign exchange, gold, government securities,
1. Bank rate
etc.
2. Open market operations
Whenever the RBI wants to encourage credit expansion, it buys
these securities in the open market. This raises in the cash reserves 3. Variable Reserve Requirement
(i) CRR (ii) SLR
of the commercial banks, which ultimately increases the credit creation
power of the banks. In the same way, whenever the RBI wants to B. Qualitative measure:
discourage the credit expansion, it sells them.
1. Credit ceiling
3. Variable Reserve Requirement:
2. Variable margin requirement
Cash Reserve Ratio (CRR): The cash reserve ratio is 3. Variable interest rate
a very effective measure of credit control. Cash reserve 4. Regulation of consumer credit
ratio refers to that portion of the deposit of
a commercial bank which it has to keep with the RBI 5. Moral suasion
in the form of cash reserves. The credit expansion power 6. Licensing
of banks depend on the cash reserve ratio, which can 7. Direct action
be presented with the help of the following formula:
Potential Credit Expansion = Initial Excess Reserve x
So, the higher the CRR, the smaller will be the volume of credit creation and vice-versa.
For example: If the CRR is 10, then total credit expansion will be 10 times of the initial
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excess reserve. On the other hand, if the CRR is 20, then the total credit expansion will
be five times of the initial excess reserve.
Thus, the RBI can encourage credit expansion by reducing the CRR and discourage by
increasing the CRR. The RBI has been empowered to change the cash reserve ratio between
3 and 15% of the total demand and time liabilities.
The Statutory Liquidity Ratio (SLR): The Statutory Liquidity Ratio refers to that portion
of deposits of a commercial bank, which it has to keep with itself in the form of liquid
assets. The RBI has been empowered to raise the SLR to 40%. Raising of SLR will reduce
the cash reserve of banks, which can be offered for credit. This will tend to reduce credit
expansion in the market and vice-versa.
Selective/Qualitative Measures: Selective credit control is generally designed to regulate

credit for some specific purposes, i.e. these measures regulate the direction of credit. Some of the
most popular selective measures are as follows:
1. Credit Ceiling/Rationing of Credit: Credit ceiling means controlling the purpose for which
the bank credit will be used. It generally provides(a)
An overall ceiling on loans and advances for every commercial bank,
(b)
Fixing the ratio which the capital of a commercial bank should have,
(c)
Fixing ceilings for specific categories of loans and advances.
The RBI may also charge a penal interest from banks, which cross the prescribed limits of rationing.
The method curtails the freedom of banks.
2. Margin Requirement: The difference between the value of security and the amount borrowed
against this security is termed as margin. The RBI is empowered to fix different margin limits for different
uses of a loan. Thus by fixing different margin requirements for different uses, the RBI can divert credit
for more urgent uses.
3. Variable Interest Rate: The Central bank is generally empowered to fix different interest
rates for different uses, i.e. lower on more urgent uses and higher on less urgent uses. Thus, by fixing
different interest rates for different uses, the RBI can divert credit for more urgent uses.
4. Regulation of Consumer Credit: Consumer credit means credit allowed by the commercial
banks to purchase items. During an inflationary boom, consumer credit facilities are curtailed to the
minimum to reduce the purchasing power of the public. However, in the inverse case, i.e. during the
period of deflation, consumer credit facilities are increased in order to increase the purchasing power
of the public.
5. Moral Suasion: The RBI has been asking for banks' co-operation in meeting a financial situation,
which may have arisen. The reserve bank's advice is generally accepted. This method of credit control
has, therefore, been quite successful.
6. Licensing: The RBI ensures proper regional coverage through licensing. With the help of
a policy of licensing, selective regional development is made.
7. Direct Action: The RBI may take direct action against the erring commercial banks. It may
refuse to rediscount theirs papers and give excess credit or it may charge a penal interest for the
credit demanded beyond the prescribed limit.
Q: What are the main functions of a Bank?
FUNCTIONS OF A BANK
1. Accepting of Deposits: A bank receives deposits from the public. Every banker needs funds
for the purpose of lending. A large part of the fund needs of a bank is fulfilled by Deposits. Banks
have to pay interest on deposits. The most popular schemes of deposits are as under:
(i) Saving Account; (ii) Current Account; (iii) Home Saving Gullak Account; (iv) Fixed Deposits;
(v) Recurring Deposits etc.
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2. Lending of Money: The lending of money is second and important function of every bank.
Earlier, banks used to lend money mainly for industrial and commercial purposes. The examples of
commercial loans are cash credits, overdraft, or discounting of bill of exchange, etc.
But now-a-days, banks also lend money for non-commercial purposes also. The examples of
noncommercial loans are housing loans, car loans, personal loans, etc.
3. Agency Services: A bank renders various services to the consumers as agent, such as:
(i)
Collection of bills, Promissory notes and cheques on behalf of the customers
(ii)
Collection of dividends, interests premiums etc. on the behalf of customers
(iii)
Purchase and sale of shares and securities for its customers
(iv)
Acting as trustee or executor when so nominated
(v)
Marking regular payment as per the instructions of customers.

such as insurance premiums
4. Other services:
(i)
Issue of Letters of Credit, Travellers Cheques, Bank Drafts,

etc.
(ii)
Providing Locker Facility
(iii)
Supplying trade information and statistical data to its customers
(iv)
Conducting economic surveys
(v)
Preparation of feasibility studies project reports, etc.
Essentials/Principles of
"Sound Banking System"
1)
2)
3)
4)
5)
6)
7)
Stability
Liquidity
Safety
Flexibility
Dispersal
Profitability
Co-ordination
NATIONALISATION OF BANKS
Q: What were the factors responsible for the nationalisation of banks in our country?
Factors responsible for nationalisation
In our country, 14 major banks were nationalised in 1969. Later on, 6 banks were nationalised
in 1980 and 2 banks were merged in 1993. So, at present there are 19 nationalised banks in our
country.
The following factors were responsible for the nationalisation of commercial banks 1.
Private Ownership and Concentration of Economic Power: Before nationalisation, all

major banks were controlled by business houses. There was private ownership of banks.
These business houses were using the deposits of the public for their own personal benefits.
This ultimately resulted into the concentration of economic power in a few hands.
2.
Neglect of Rural Sector: Prior to nationalization, commercial banks had shown no interest
in establishing branches in the rural areas. More and more branches were opened in cities
resulting in concentration of banking facilities in the urban areas. In 1969, there were only
22% bank offices in the Rural areas. This ultimately resulted in slow rate of growth in
the rural areas.
3.
Neglect of Agricultural Sector: There was a total neglect of the agricultural sector.
Before nationalisation, banks showed their interest in industrial finance. In 1968, the agricultural
advance was only 2.2% of the total advance.
4.
Neglect of Other Priority Sectors: Other priority sectors, such as export, small-scale
industries, etc. were also completely neglected by the private commercial banks.
5.
Violation of 5-year Plans: Before nationalisation, commercial banks often violated the
norms and priorities laid down in the plans.
6.
Promotion to Speculation and Black Marketing: Private commercial banks were found
to be indulging in speculation activities. They even extended advances to black marketers
against high rates of interest.
228
CPT
Q: Describe the position of Banks after nationalisation.

1. Expansion of branches: There has been a heavy growth in the banking network after nationalisation.
Compared to just 8,262 branch offices in 1969, the number of branches has increased to 76,885 in
2008.
2. Branch opening in rural areas: Prior to nationalisation, commercial banks had shown no
interest in establishing branches in rural areas. More and more branches were opened in cities resulting
in concentration of banking facilities in the urban areas. This ultimately resulted in slow rate of growth
in the rural areas.
But after nationalisation, banks have started moving towards rural and less developed areas.
In 1969, there was only 22% bank offices in the rural areas. This percentage was 41% in June 2008.
3. Deposit Mobilisation: After nationalisation, a substantial rise was recorded in deposit mobilisation.
The aggregate deposits of commercial banks have increased from Rs. 4,665 crore in 1969 to more
than Rs.31,97,000 crore in Dec., 2008, forming almost 80% of the national income.
4. Bank lending: Again after nationalisation, a substantial rise was recorded in bank lending.
It has gone up from Rs. 3,399 crore in 1969 to more than Rs. 23,62,000 crore in June 2008.
5. Lending to priority sector: The banks have taken a special care of the priority sectors
after nationalisation. Agricultural, small-scale industries, etc. accounted for about 15% of the total
credit. But this percentage has gone up to about 44% in March 2008.
6. Promotion of new entrepreneurship: After nationalisation, banks have been financing schemes,
which promote entrepreneurship, viz, Pradhan Mantri Rojgar Yojuna (PMRY), Swarna Jayanti Rojgar
Yojuna (SJRY), etc.
Q: What are the main shortcomings of commercial banks in India.
SHORTCOMING OF COMMERCIAL BANKS
1. Insufficiency: Although commercial banks have spread to every comer of the country, their
growth in numerical terms is insufficient. This is specially so with regard to rural areas, who have
41% of the bank branches, but where more than 70% of the population of the country resides.
2. Regional Imbalances: There are regional imbalances in the coverage of bank offices. Only
a few states have well, developed banking facilities, viz. Maharashtra, West Bengal and Tamil Nadu,
etc. The states -Assam, Bihar, Arunachal Pradesh and Madhya Pradesh, etc. on an average have
less number of banks.
3. Increase in Expenditure: In our country, it seems that no attempt has been made to keep
expenditures within justifiable limits. NPA level was about 51,000 crore in 2006-07, amounting to about
25% of gross bank advance.
4. Declining Trends in Profitability: The absolute profits of the banks are rising, but the profitability
ratio in terms of 'Return on Investment' or 'Return on Equity' has been declining. Five factors have
been identified for the declining trends in profitability (i)
Persistent increase in emphasis on social goals Shortcomings of Commercial Banks
(ii)
Rising incidence of industrial sickness
(iii)
Rapid branch expansion
(iv)
Unfavourable deposit mix of banks
(v)
Growing incidence of financial disintermediation.
(vi)
High NPA.
5. Lower Efficiency: In our country, the bank employees'

efficiency level is low and there is general lack of discipline
and work culture. The salaries of bank employees are not
related to productivity. There has also been weakening of
supervision and control.
229
1.
2.
3.
4.
5.
6.
7.
8.
Insufficiency
Regional Imbalances
Increase in Expenditure
Declining Trends in
Profitability
Lower Efficiency
Lack of Expertise
Lack Regulation & Supervision
Lack of Competition
CPT
6. Lack of Expertise: Although the public sector banks have entered merchant banking and
agricultural financing, they lack expertise in these areas. There is a need for professional touch in
these areas.
7. Lack Regulation and Supervision: The supervisory system to control the working of the
commercial banks has always been lax. The degree of political interference has been very high. This
in practice had resulted in lack of the essential elements of financial discipline. The banks themselves
never attempted to set up their own control systems.
8. Lack of Competition: Despite the number of banks being large, there has been little competition
between them. The activities of the Indian Banks Association further curtailed scope for competition.
Non- price competition was also completely missing. However, the introduction of private sector banks,
like ICICI, IDBI, HDFC, etc. has created some competition.
Q: What are the main functions of the RBI? How does it help in controlling and Maintain
monetary policy of the economy? OR
the
What are the main functions of the central bank of any country?
FUNCTIONS OF RBI
RBI is the Central Bank of INDIA and it performs all the central banking functions. These are:
1. Issue of Currency: The RBI is the sole authority for the issue of currency in India other
than one rupee coins and notes and subsidiary coins. These coins are issued by the Government
of India.
2. Banker to Government: As a banker to the government, the RBI performs the following functions:
(a)
It transacts all the banking business of the Central and state governments.
(b)
It manages public debt and is responsible for issue of new loans.
(c)
The RBI also makes advances to the Central and state governments.
(d)
It also sells Treasury Bills on behalf of the Central government in order to wipe away excess
liquidity in the economy.
(e)
The RBI also acts as an adviser to the government in respect of banking matters/financial
matters/ economic issues, etc.
3. Banker's Bank: The RBI has been vested with extensive power to control and supervise
commercial banks. For example Functions of RBI
(i)
All the scheduled banks are required to maintain a certain
minimum of CRR with the RBI. This provision enables 1. Issue of Currency
the RBI to control the credit position of the country.
2. Banker of Government
(ii)
The RBI provides financial assistance to scheduled banks
3. Banker's Bank
and state cooperative banks in the form of discounting
of bills of exchange and gives loan against approved 4. Custodian of Foreign
Exchange Reserves
securities.
(iii) The RBI also conducts inspection of the commercial banks 5. Controller of Credit
and calls for returns and other necessary information 6. Promotional Functions
from banks.
7. Collection & Publication of
Data
4. Custodian of Foreign Exchange Reserves: The RBI is
required to maintain the external value of the rupee. It has to ensure 8. Central clearance, Settlement
that normal short-term fluctuations in trade do not affect the exchange
and Transfers
rate. When foreign exchange reserves are inadequate for meeting
9. Research and Development
the balance of payments problems, it borrows from the IMF.
The RBI has the authority to enter into exchange transactions
on behalf of the government. It also administers exchange control of the country and enforces the
provisions of the Foreign Exchange Management Act.
230
CPT
5. Controller of Credit: Credit control is the principal function of the RBI. It is this function
which enables it to bring about both. The most popular tools of the RBI to control credit are as under:
Traditional / Quantitative
Selective / Qualitative
1.
Bank rate
1.
Credit ceiling
2.
Open market operations
2.
Variable margin requirement
3.
CRR
3.
Variable interest rate
4.
SLR
4.
Regulation of consumer credit
5.
Moral suasion
6.
Licensing
7.
Direct action
6. Promotional Functions: The promotional functions of the RBI include promoting banking
habits among people, mobilizing savings, extending the banking system in every corner of the country,
etc.
7. Collection & Publication of Data: The RBI has also been entrusted with the task of collection
and compilation of statistical information relating to banking and other financial sectors of the economy.
8. Central clearance, settlement and transfers: The RBI has to conduct clearing house operations,
inter-bank transfer of funds and settlement of accounts. However, it may not have offices at all places.
In such cases, such functions are entrusted with the SBI.
9. Research and development: These functions are performed by the RBI, because it has
to act as adviser to the Government and as a clearing house of financial information in the country
and abroad. Without these wings, it would be well high impossible for regulating them.
Q: What is the difference between a financial institution and commercial banks?
Head of Diff.
Commercial Banks
Financial Institutions
(Development Banks)
1. Liquidity:
Commercial banks have to be very

liquid, i.e. they have to be ready to
supply cash on demand for a portion
of deposit liabilities.
Financial Institutions need not be very

liquid.
2. Period of
Lending:
Normally, commercial banks finance

for short term or medium term.
However, financial institutions have been

specifically set up to provide long-term loans.
3. Nature of
financing:
They generally provide finance for

working capital.
They generally provide finance for

development purpose.
231
CPT
Questions
1.
2.
3.
4.
5.
(A) 1969,1980
8.
Bank rate, open market operations, changes

in reserve requirement are -
(B) 1974
(A) Qualitative controls
(C) 1975
(B) Quantitative controls
(D) 1976
(C) Combinations of (A) & (B)
Commercial banks were nationalised in -
The total number of banks that were nationalised

were -
9.
(A) Qualitative controls
(B) 6
(B) Quantitative controls
(C) 19
(C) Both (A) & (B)
(D) 20
Dear money policy means -
10. Agency functions are -
(A) money available with difficulty
(A) carried out by the RBI
(B) money available at high interest rates
(B) carried out by commercial banks
(C) both (A) & (B)
(C) not carried out by commercial banks
(D) none of these
Government may control price level by -
11. Credit creation is possible only -
(A) increasing bank rate
(A) by RBI
(B) lowering bank rate
(B) by one commercial bank
(C) keeping bank rates unchanged

(D) bank rate cannot be used as a tool
(C) when several commercial banks join

hands
Open market operations are used in India-
(D) none of these
(A) to control credit expansion
6.
12. Note issue is a function carried out by -
(B) to control inflation
(A) Central Bank
(C) to help in government borrowings
(B) Commercial Bank
(D) none of these
(C) both (A) & (B)
Nationalisation of banks aimed at all of the

following except -
(D) none of these

13. The custodian of foreign exchange refers to-
(A) removal of control by a few
(A) Central Bank
(B) provision of credit to big industries only
(B) Any particular commercial bank
(C) provision of adequate credit for agriculture,

small industry and export units
(C) All commercial banks

(D) None of these
(D) encouragement of a new class of

entrepreneurs
7.
Selective credit controls are -
(A) 14
14. The Department of Supervision (DOS) was

set up by -
Variable reserve requirements are -
(A) all commercial banks
(A) SLR
(B) some commercial banks
(B) CRR
(C) RBI
(C) Both (A) & (B)
(D) both (A) & (C)
(D) None of these
232
CPT
15. Lender of last resort refers to (A) all commercial banks

(B) some commercial banks
(C) RBI
(D) both (A) & (C)
(C) CRR should be increased and bank rate

should be increased.
(D) CRR should be reduced and bank rate
should be increased.
22. Money includes (A) Currencies and demand deposits
(B) Bonds, government securities
(C) Equity shares
16. IDBI is (A) a subsidiary of RBI

(B) was independent from the beginning
(C) was a subsidiary of the RBI initially but
later became independent.
(D) None of these
23. What is Bank Rate?

(A) The rate of interest charged by public
sector banks from the general public
(B) The rate of interest on housing loans
(C) The rate of interest on educational loan
(D) The rate at which the RBI discounts the
bills of commercial banks
17. Broad money refers to (A) M1

(B) M2
(C) M3
(D) M4
24. What can RBI do if it wants to control credit

in the economy?
(A) Decrease bank rate and decrease CRR
(B) Increase bank rate and increase CRR
(C) Increase bank rate and decrease CRR
(D) Decrease bank rate and increase CRR
18. The profitability ratio of banks has declined

over the years due to (A) Lower interest on government borrowing
from banks
(B) Subsidisation of credit to priority sector
(C) High expenditure resulting from overstaffmg
and mushrooming of branches
25. Money in the traditional sense (A) serves as a medium of exchange

(B) serves as a store of value
(C) serves as both medium of exchange and
store of value
(D) serves neither as medium of exchange
nor as store of value

(A) Rural areas have 41 % of bank branches,
but more than 70% of the population
reside there.
(B) Banks are evenly spread out.
(C) Most of the banks have very less NPAs
ranging between 0 and 15%.
26. In terms of lending, priority sector constitutes

about _____% of total bank lending (A) 60
(B) 80
(C) 30
(D) 44
20. Monetary policy means (A) policy relating to non-banking financial

institutions
(B) policy relating to public revenue and public
expenditure
(C) policy relating to money and banking
in a country
(D) all of the above.
27. Commercial bank suffers from (A) Regional imbalance

(B) Increasing overdue
(C) Lower inefficiency
21. In order to control credit (A) CRR should be increased and bank rate
should be decreased.
(B) CRR should be reduced and bank rate
should be reduced.
28. Which of the following statements about banks

is incorrect?
(A) Banks encourage saving habits among
people.
233
CPT
(B) Banks mobilise savings and make them

available for production.
(C) Banks help in creating credit money.
(B) The RBI is responsible for the overall

monetary policy of India.
(C) Selective credit control measures affect
all banks in a similar manner.
(D) A high rate of interest encourages new
investment.
29. In order to encourage investment in the country,

the RBI may (A) reduce CRR
(B) increase CRR
(C) sell securities in the open market
(D) increase bank rate
36. Find the odd one out (A) State Bank of India
(B) Reserve Bank of India
(C) Bank of Baroda
(D) Bank of India
30. ______is the Banker's Bank in India. (A) SBI

(B) PNB
(C) RBI
(D) OBC
37. ICICI bank is a (A) central bank

(B) private commercial bank
(C) rural regional bank .
(D) nationalised bank
31. _____is the official minimum rate at which

the Central bank of a country is prepared
to rediscount approved bills held by banks(A) CRR
(B) SLR
(C) Bank rate
(D) Repo rate
38. In the year, the practice of RBI ____lending

to the government through ad hoc treasury
bills was given up (A) 1951
(B) 1997
(C) 1991
(D) 2001
32. At present, the bank rate is ___ % (A) 5

(B) 6
(C) 6.5
(D) 5.5
39. In order to control credit and investment, the

Central bank should (A) decrease cash reserve ratio
(B) decrease bank rate
(C) buy securities in the open market
(D) sell securities in the open market
33. The Reserve Bank of India is the country's(A) Central bank

(B) Biggest commercial bank
(C) Biggest cooperative bank
40. NABARD is the apex bank for _____ credit

in India (A) real estate
(B) small scale industries
(C) agriculture
34. During depression, it is advisable to (A) Lower bank rate and purchase securities
in the market.
(B) Increase bank rate and purchase securities
in the open market.
(C) Decrease bank rate and sell securities
in the open market.
(D) Increase bank rate and sell securities
in the open market.

41. Commercial banks suffer from (A) regional imbalances
(B) increasing overdues
(C) lower inefficiency
(D) all the above
42. M1 in the money stock in India refers to -

(A) The RBI is just like any ordinary
commercial bank in India.
(A) post office saving deposits

(B) total post office deposits
234
CPT
(C) currency plus demand deposits plus other

deposits with the RBI
49. At present, there are _______ Nationalised

Banks in India -
(D) time deposits with banks
(A) 14
(B) 6
43. Money in dynamic sense -
(C) 21
(A) Serves as an encouragement to division

of labour
(D) 19
(B) Serves as a smooth transformer of saving

into investments
50. Which of the following statements about central

bank is incorrect?
(C) Serves as both (A) and (B) of the above
(A) Central bank regulates currency in

accordance with the requirements of
business and the general public
(D) Serves neither as (A) nor (B) of the above

44. Which of the following is not a quantitative
measure of credit control?
(B) Central banks performs general banking

and agency service for the state
(A) Bank rate policy
(C) Central bank generally deals with the

public and tries to encourage saving habits
among people
(B) Open market operation

(C) Consumer credit regulation
(D) Variable reserve requirement
45. Bank rate was reduced (in stages) to____

% in April 2003 -
51. Rural bank branches constitute ____% of the

total bank branches in India -
(A) 6.5
(A) 14
(B) 7
(B) 60
(C) 6
(C) 44
(D) 7.5
(D) 82
46. ______refers to that portion of total deposits

of a commercial bank which it has to keep
with the RBI in the form of cash reserves-
52. In terms of deposit mobilisation, ___ leads

other states -
(A) CRR
(A) U.P.
(B) SLR
(B) Maharashtra
(C) Bank rate
(C) Kerala
(D) Repo rate
(D) Bihar
53. At present CRR is _____ and SLR is
for the entire net demand and time liabilities
of the scheduled commercial banks -
47. _____refers to that portion of total deposits

of a commercial bank which it has to keep
with itself in the form of liquid assets (A) CRR
(A) 10, 35
(B) SLR
(B) 7, 30
(C) Bank rate
(C) 5, 24
(D) Repo rate
(D) 10, 25
54. The government established ____ in 1982 to
finance rural projects at a lower rate of interest-
48. The RBI makes advances to the Central and

State Governments repayable within ____from
the date of advance -
(A) Regional Rural Banks
(A) 60 days
(B) 45 days
(C) 90 days
(C) National Bank for Agriculture and Rural

Development
(D) 75 days
(D) Co-operative banks
235
CPT
62. Nationalisation of banks aimed at all of the
following, except (A) Removal of control by a few
(B) Provision of credit to big industries only
(C) Provision of adequate credit for agriculture,
small industry and export units
(D) Encouragement of a new class of
entrepreneurs
55. ' The lender of the last resort' means (A) The government coming to the rescue
of poor farmers
(B) Central bank coming to the rescue of
other banks in time of financial crisis
(C) Commercial bank coming to the rescue
of small industrial units
63. In case RBI wants to increase the rate of

interest then it should (A) sell securities
(B) buy securities
(C) hold securities
56. Who is the custodian of monetary reserves

in India?
(A) SBI
(B) SIDBI
(C) NABARD
(D) RBI
64. Major commercial banks of India were

nationalised in (A) 1969
(B) 1970
(C) 1971
(D) 1972
57. Which of the following is a function of money?

(A) Medium of exchange
(B) Store of value
(C) Transfer of value
65. The effect of increase in CRR will be reduced

or nullified, if(A) Bank rate is reduced.
(B) Securities are sold in the open market.
(C) SLR is increased.
(D) People do not borrow from non-banking
institutions.
58. Which of the following is a commercial bank

in India?
(A) UTI
(B) IFCI
(C) IBRD
(D) SEBI
59. Banks are regulated by -
66. _______ controls affect indiscriminately all

sectors of the economy (A) Selective credit
(B) Quantitative
(C) Margin requirements
(A) Securities Exchange Board of India

(C) Company Law Board
(D) Registrar of Companies
60. The monetary policy is formulated by -
67. Commercial banks provide (A) loans

(B) agency services
(C) both (A) & (B)
(A) RBI
(B) SEBI
(C) CLB
(b) Finance Ministry
61. Commercial banks in India were nationalised
in 1969, because -
68. Who is the fiscal agent and adviser to

government in monetary and financial matters
in India?
(A) SBI
(B) IDBI
(C) ICICI
(D) RBI
(A) There was urban bias.

(B) Agriculture sector was neglected.
(C) There was concentration of economic
power.
236
CPT
69. Who is the custodian of the national reserves

of international currency?
(A) SBI
(B) IDBI
(C) RBI
(D) ICICI
(C) In the modern sense, money has stability,

high degree of substitutability and
feasibility of measuring statistical variation.
77. Narrow money refers to (A) M1
70. Rationing of credit takes place of when (A) demand for credit is zero
(B) demand for credit is higher than supply
(C) demand for credit is low
(B) M2
(C) M3
(D) M4
78. In July 1991, India devalued the rupee by about(A) 10-12%
71. Statutory Liquidity Ratio in India is (A) 15%

(B) 20%
(C) 24%
(D) 30%
72. The
(A)
(B)
(C)
(D)
cash reserve ratio is determined by Free play of market forces

Commercial banks
Monetary authority
None of the above
73. The
(A)
(B)
(C)
(D)
Reserve Bank of India was set up in 1949

1956
1935
1901
(B) 15-16%
(C) 18-20%
(D) 30-35%
79. Which one of the following offers the least
liquidity?
(A) Treasury Bills
(B) Immovable property
(C) Bill of exchange
(D) Bearer cheques
80. Demand deposits with banks are considered
as money because they are (A) generally acceptable as a means of
payment
(B) more liquid than cash
74. Which one of the following is not a function

of commercial banks?
(A) Advancing loans
(B) Accepting deposits
(C) Issuing notes
(D) Discounting bills of exchange
(C) held by the government

(D) managed efficiently by bank managers
81. Which of the following statements about banks
is incorrect?
(A) Banks encourage saving habits among
people.
75. Currently, the value of SDR is fixed in terms

of (A) gold
(B) dollar
(C) a basket of 16 currencies
(D) a basket of four currencies
(B) Banks mobilise savings and make them

available for production.
(C) Banks help in creating credit money.
82. Banks perform the function of -
76. Which of the following statement about money

is incorrect?
(A) There are many assets which carry the
attributes of money.
(B) Money is what money does.
(A) Receiving deposits

(B) Lending of money
(C) Agency services
237
CPT
83. The basic aim of the lead bank scheme is

that -
(D) raising or lowering of the margin

requirements
(A) Big banks should try to open offices in

each district.
89. Which one of the following is the most profitable

but least liquid asset of a commercial bank?
(B) There should be stiff competition among

the various nationalised banks.
(A) Loans and advances
(C) Individual banks should adopt particular

districts for intensive development.
(C) Bills discounted and purchased
(B) Money at call and short notice

(D) Investment in government securities
(D) All the banks should make intensive efforts

to mobilise deposits.
90. In India ______, has the authority to issue

currency -
84. The main objective of the Regional Rural Bank

is to -
(A) SBI
(B) ICICI
(A) provide credit and other facilities to small

and marginal farmers, agricultural labour
and artisans in the rural areas
(C) BOB
(D) RBI
(B) provide credit to the common people in

rural areas
91. Which of the following is not qualitative credit

control measure of the RBI ?
(C) take over the functions of the Agricultural

Refinance Corporation of India
(A) Capital rationing

(B) Moral suasion
(D) supplement scheduled commercial banks
(C) Statutory liquidity ratio
85. In order to control credit in the country, the

RBI may -
(D) Margin requirement
(A) Buy securities in the open market
92. Which of the following is not a function of

a commercial bank ?
(B) Sell securities in the open market

(C) Reduce bank rate
(A) Lending money
(D) Reduce CRR
(B) Receiving deposits

(C) Banker to the government
86. In order to discourage investment in the

economy, the RBI may -
(D) Foreign remitance
(A) Increase Bank Rate
93. Note issue is a function carried out by -
(B) Decrease bank rate
(A) Central bank
(C) Buy securities in the open market
(B) Commercial bank
(D) Decrease CRR

(D) none of these
87. A Central bank differs from a commercial bank

is that -
94. NABARD is a -
(A) It has no branches.
(A) bank
(B) It is the banker of the government.
(B) board
(C) It deals with the general public.
(C) exchange programme for consumer goods
(D) none of these
88. Open market operations by a Central bank

involve -
95. Population per Bank in India is around (A) 5,000
(A) sale and purchase of government

securities
(B) 20,000
(C) 15,000
(B) increase and decrease of discount rate
(D) 45,000
(C) changing the reserve ratio up and down
238
CPT

Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
C
.
239
CPT
CHAPTER 16
FIVE YEAR PLANS

Questions
1.
2.
3.
4.
5.
6.
7.
The
(A)
(B)
(C)
(D)
First Five year plan was from 1947-52

1948-53
1949-54
1951-56
The
(A)
(B)
(C)
(D)
Second plan was from 1954-59

1953-58
1955-60
1956-61
8.
Provision of safe drinking water was an objective

of (A) 7th Plan
(B) 8th Plan
(C) 9th Plan
(D) 10th Plan
9.
Universalisation of elementary education Was

an objective of (A) 7th Plan
(B) 8th Plan
The Second plan stressed on -
(C) 6th Plan
(A)
(B)
(C)
(D)
agriculture
industry
exports
poverty eradication
(D) 9th Plan
The
(A)
(B)
(C)
(D)
Third plan stressed on agriculture

industries
agriculture & industry
poverty eradication
10. From 1966 to 1969, India had (A) no plans

(B) annual plans
(C) 4th Plan
(D) extension of 3rd Plan
11. Growth with social justice & equaltity was
the objective of (A) 7th Plan
(B) 8th Plan
Raising the cropping intensity of our agricultural

land was an objective of(A) 7th plan
(B) 8th plan
(C) 9th plan
(D) 10th plan
(C) 9th Plan

(D) 10th Plan
12. Ensuring environmental sustainability of the
development process was an objective of (A) 7th Plan
Plan holiday refers to the years (A) 1965-68

(B) 1966-69
(C) 1967-70
(D) 1968-71
The
(A)
(B)
(C)
(D)
(B) 8th Plan

(C) 9th Plan
(D) 10th Plan
13. Achieving full employment by 2007 was an
objective of -
Eighth plan was from 1990-95

1991 -96
1992-97
1993-98
(A) 7th Plan

(B) 5th Plan
(C) 9th Plan
(D) 10th Plan
240
CPT
14. Public expenditure during the Plan period has-
18. The 10th Plan aims to reduce poverty ratio

to _______ % by 2007 -
(A) increased slightly

(B) remained unchanged
(A) 12.3
(C) increased tremendously
(B) 19.3
(D) decreased
(C) 14.3
(D) 18.3
15. The 10th Plan aims at achieving a growth

rate of ____ in the industrial sector -
19. The 2nd plan's programme of industrialisation

was based on the _______ model -
(A) 5 %
(B) 8 %
(A) The Britishers in India
(C) 10%
(B) V.V. Bhatt
(D) 6 %
(C) P.C. Mahalanobis

(D) Vera Anstey
16. Three steel plants in Bhilai, Rourkela and

Durgapur were set up in the -
20. The 10th plan aims at reducing the Maternal

Mortality Rate (MMR) to ______per live births
by 2007 -
(A) 1st Plan

(B) 2nd Plan
(A) 5
(C) 3rd Plan
(B) 2
(D) 4th Plan
(C) 1
17. The 10th plan targeted a reduction in infant
mortality rate (IMR) to ____ per 1000 by 2007-
(D) 3
(A) 28
(B) 45
(C) 16.2
(D) 74
Answers-sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
B
.
241

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CPT

Sri Sankara Coaching Centre

Automatic Mail Processing Centres

Asia Pacific Economic Co-operation

Association for South East Asian Nations (made on 8-8-1968)

Asia Europe meetings

Bharat Aluminium Company Limited

Business Process Outsourcing

Bharat Sanchar Nigam Limited

Current Daily Status

Central Value Added Tax

Cash Reserve Ratio

Central Statistical Organisation

Current Weekly Status

Duty Free Export Credit

Employment Assurance Scheme

Education Guarantee Scheme and Alternative and Innovative Education

Exclusive Marketing Rights

Export Oriented Units

Export Promotion Capital Goods

Export Processing Zones

Export Import Bank of India

Foreign Direct Investment

Foreign Exchange Management Act

Foreign Exchange Regulation Act, 1973

Federation of Indian Export organisations

Forward Rate Agreement

Fiscal Responsibility and Budget Management Act, 2003

General Agreement on Trade and Tariff (made on 1-1-1948)

Global Development Finance

Global Depositary Receipt

Sri Sankara Coaching Centre

Gross Registered Tonnage

Hotel Corporation of India Limited.

Human Development Index

High Yielding Varieties Programmes

Hindustan Zinc Limited

Indira Awas Yojana

Incremental Capital Output Ratios

The International Centre for Settlement of Investment Disputes

The International Development Association

The International Finance Corporation

Indian Institute of Management

Indian Institute of Technology

International Monetary Fund

Infant Mortality Rate

Indian Petrochemical Corporation

Integrated Rural Development Programme

Indian System of Medicine

India Tourism Development Corporation

Jessop and Company Limited

Jawahar Gram Sammridhi Yojana

Kasturba Gandhi Balika Vidyalaya

Labour-force participation rate

Lagan Jute Machinery Company Limited

Modern Food Industries Limited

The Multilateral Investment Guarantee Agency

Maternal Mortality Rate

Modified Value Added Tax

Monopolies & Restrictive Trade Practices Act

Multilateral Trade Agreements

Mahanagar Telephone Nigam Limited