Economics - I : Previous Year Questions (2018)

2018

Time: 3 Hours

Max Marks: 50

PART – A

Answer the following question in one sentence each. (10 x 1 = 10)

Q1. Define Macro Economics.

Ans. Macroeconomics is a branch of economics dealing with performance, structure, behaviour, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability.

Q2. What is Demand Function?

Ans. A demand function is a mathematical representation of the relationship between the quantity of a good or service that consumers are willing and able to buy (quantity demanded) and the various factors that influence that quantity. 

These factors, known as determinants of demand, include the price of the good, consumer income, prices of related goods, consumer tastes and preferences, and expectations about future prices.

The effect of all factors of demand on the amount demanded for the commodity is called Demand Function.

Q3. Define Utility.

Ans. Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service.

Q4. What do you understand by Poverty?

Ans. It is a situation wherein a person is not able to fulfil basic requirements or necessities of life. For eg.: food, education, shelter, clothing, health, drinking water etc.

Q5. Define National Income.

Ans. It is generally defined as income of the nation. It reveals the nature of economic activities in a country. It also gives us an idea of a country’s aggregate economic activity.

According to National Income Committee of India, “a national income estimates and measures the volume of commodity and services produced during a given period.”

Q6. What is Demand Pull Inflation?

Ans. it is caused by an increase in the aggregate demand for goods and services whereas, the aggregate supply is not increasing. It is a situation where too much money is chasing too few goods.

Q7. What is Cartel?

Ans. A cartel is a group of separate companies that agree to increase profits by fixing prices and not competing with each other.

In other words, it is the collection of businesses or countries that act together as a single producer and agree to influence prices for certain goods and services by controlling production and marketing.

Q8. Mention two functions of Money.

Ans. Functions of money are as follows: -

1. Medium of Exchange – Money is serving as a medium of exchange. It facilitates all transactions and it acts as a common medium of exchange. It helps in buying and selling commodities. It is also acceptable as a means of payment for any transaction.

2. Measure of Value – The value of various goods and services can be expressed in terms of money. Hence, it is called as a measure of value. This function has helped in overcoming the problem of barter system, which lacked common measure of value. Now money is a common measure of value in exchange, also in dispersal of rewards and different factors like rent, wages etc.

Q9. Distinguish between Stock and Flow.

Ans.

Q10. What is Positive Economics?

Ans. Positive economics is an objective branch of study that allows conclusions to be made using verifiable facts. It explains the causes and consequences without passing any moral judgements on the desirability of ends.

It is concerned with ‘What Is’.

PART – B

Answer the following questions in 4-5 lines each. (4 x 4 = 16)

Q11. Explain the concept of Consumer Surplus.

Ans. The concept of consumer behaviour is very important for understanding consumer behaviour.

According to Marshall, “the excess of price which the consumer would be willing to pay rather than go without it, the thing over which he actually does pay is the economic measure of the surplus of satisfaction. It may be called consumer surplus.”

Measurement of Consumer Surplus:

CS = TU – [P*Q]

Here,

CS = Consumer Surplus

TU = Total Utility

P = Price

Q = Quantity

Consumer Surplus = Prepared to Pay – Actual Price Paid

The concept of Consumer Surplus is a relative concept because the term utility is relative, i.e., it differs from person to person as from time to time. Even it differs from commodity to commodity.

In case of necessary commodities whose prices are low, consumer surplus will be higher than the high price of luxuries.

Q12. Differentiate between Micro and Macro Economics.

Ans. Difference between Micro and Macro Economics is as follows:

1. Microeconomics studies individual economic units, whereas Macroeconomics studies a nation’s economy, as well as its various aggregates.

2. Microeconomics primarily deals with individual income, output, price of goods, etc., whereas Macroeconomics is the study of aggregates such as national output, income, as well as general price levels.

3. Microeconomics focuses on overcoming issues concerning the allocation of resources and price discrimination, whereas Macroeconomics focuses on upholding issues like employment and national household income.

4. Microeconomics accounts for factors like demand and supply of a particular commodity, whereas Macroeconomics account for the aggregated demand and supply of a nation’s economy.

5. Microeconomics offers a picture of the goods and services that are required for an efficient economy. It also shows the goods and services that might grow in demand in future. Whereas, Macroeconomics helps ensure optimum utilisation of the resources available to a country.

6. Microeconomics helps point how equilibrium can be achieved at a small scale, whereas Macroeconomics help determine the equilibrium levels of employment and income of the nation.

7. Microeconomics also focuses on issues arising due to price variation and income levels, whereas The primary component of macroeconomic problems is income.

Q13. Briefly explain the features of Monopolistic Competition.

Ans. Monopolistic competition exists when many companies offer competing products or services that are similar but not perfect substitutes. The barriers to entry in a monopolistically competitive industry are low and the decisions of any one firm don't directly affect its competitors. Competing companies differentiate themselves based on pricing and marketing decisions.

Features:

Features of Monopolistic Competition are as follows: -

1. There are many firms producing products but these are not as big as perfect competition –

1. Each firm contributes small portion of total output and have limited control over price control.

2. Independent price policy is followed by the firms –

1. Firms are producing substitute products as such each determining price, taking into consideration only cost of production and demand.

3. Product Differentiation –

1. Firms produce products which are similar but not identical.
2. Each firm tries to differentiate its product from other rival products in way or the other; with distinct marketing strategies, brand names, and different quality levels. 

4. Low barriers to entry –

1. A single firm doesn't monopolize the market in monopolistic competition. Multiple companies can enter the market and all can compete for market share.
2. If existing firms earn supernatural profit, it attracts entry of other firms in the market.
3. If existing firms incur losses, it leaves market.

5. Selling Cost is an important feature in monopolistic competition –

1. Expenses incurred in advertisements and other selling medium is known as Selling Cost.
2. Most important form of selling cost is advertisement cost, undertaken by firms to popularise brand market.

6. Both buyers and sellers and do not have perfect knowledge of market –

1. Large number of products and each being close substitute to the other, buyers are unable to choose the right product.
2. Similarly, the sellers don’t know exact preferences of the buyers and hence, are unable to get the expected demand for their product.

7. Demand Elasticity –

1. Demand is highly elastic in monopolistic competition and very responsive to price changes.
2. Consumers will change from one brand name to another for items like laundry detergent based solely on price increases.

Q14. Write properties of Indifference Curve

Ans. Following are the properties of Indifference Curve:

1. Indifference curve always slopes downwards from left to right: An indifference curve has a negative slope, i.e., it slopes downward from left to right. Reason: If a consumer decides to have one more unit of a commodity (say apples), quantity of another good (say oranges) must fall so that the total satisfaction (utility) remains same.

2. Indifference curve is always convex to the origin: Due to the law of diminishing marginal utility a consumer is always willing to sacrifice lesser units of a commodity for every additional unit of another good.

3. Higher indifference curve represents higher level of satisfaction: Higher indifference curve represents larger bundles of goods i.e., bundles which contain more of both or more of at least one. It is assumed that consumer’s preferences are monotonic i.e., he always prefers larger bundle as it gives him higher satisfaction.

4. Indifference Curve never touches X and Y Axis: An indifference curve never touches the X or Y axis because it is based on the assumption that a consumer wants a positive quantity of both goods to achieve a certain level of satisfaction. If the curve touched an axis, it would imply the consumer is consuming only one of the goods, with zero quantity of the other, which would mean a different level of utility than the one represented by the curve.

5. Two Indifference Curve never intersect each other: Two indifference curves cannot intersect because each curve represents a different, distinct level of satisfaction or utility. If they intersected, it would imply that the same combination of goods at the intersection point provides two different levels of satisfaction, which is a logical impossibility. 

PART – C

Answer the following questions in 400 words each. Attempt any three of your choice. (3 x 8 = 24)

Q15. Explain in detail basic economic problems of an economy.

Ans. Four basic problems of an economy are as follows:

1. What to Produce?

What does a society do when the resources are limited? It decides which goods/service it wants to produce. Further, it also determines the quantity required.

2. How to Produce?

The production of a good is possible by various methods. For example, you can produce cotton cloth using handlooms, power looms or automatic looms. While handlooms require more labour, automatic looms need higher power and capital investment. society must choose between the techniques to produce the commodity.

3. For whom to Produce?

It has to decide on who gets what share of the total output of goods and services produced. In other words, society decides on the distribution of the goods and services among the members of society.

4. What provision should be made for economic growth?

Can a society use all its resources for current consumption? Yes, it can. However, it is not likely to do so. The reason is simple. If a society uses all its resources for current consumption, then its production capacity would never increase. Therefore, the standard of living and the income of a member of the society will remain constant. Subsequently, in the future, the standard of living will decline. Hence, society must decide on the part of the resources that it wants to save for future progress.

Q16. Describe employment generation schemes in India.

Ans. Various employment generation schemes in India are as follows: -

1. Swarna Jayanti Gram Swarozgar Yojana (SGSY) –

1. Launched – April 1, 1999
2. Objective – to organize rural below poverty line households into self-help groups and link them with training, credit, technology and markets so that they can take up self-employment and create income-generating assets.
3. The scheme was implemented on a cost-sharing basis of 75:25 between the Centre and State Governments and had special focus on vulnerable sections such as Scheduled Castes, Scheduled Tribes, women and persons with disabilities. 
4. It was restructured and renamed the National Rural Livelihoods Mission (NRLM) and subsequently Deendayal Antyodaya Yojana - National Rural Livelihoods Mission (DAY-NRLM) in 2016.

2. Swarna Jayanti Shahari Rozgar Yojana (SJSRY) –

1. Operated from – December 1, 1997
2. The scheme provides gainful employment to the urban unemployed and underemployed poor by encouraging the setting up of self – employment ventures by the urban poor and also by providing wage employment and utilising their labour for construction of socially and economically useful public assets.
3. It has five components –
4. The Urban Self – Employment Programme;
5. The Urban Women Self – Help Programme;
6. Skill Training for Employment Promotion amongst Urban Poor;
7. Urban Wage Employment Programme; and
8. Urban Community Development Network.
9. it was restructured and renamed the National Urban Livelihood Mission (NULM) in 2014-15. The NULM is the current program that provides gainful employment to the urban poor through self-employment and wage employment opportunities. 

3. Pradhan Mantri Rozgar Yojana (PMRY) –

1. Launched on – October 2, 1993
2. It was designed to provide self – employment to more than a million educated unemployed youth by setting up of 7 lakh micro – enterprises under 8^th five - year plan.
3. PMRY was replaced with Swarna Jayanti Shahari Rozgar Yojana (SJSRY) in 1997.

4. National Rural Employment Programme (NREP) –

1. Launched in – October 1980
2. Aimed at – generating employment opportunities in rural areas by creating durable community assets.
3. NREP was a centrally sponsored scheme, with the central and state governments sharing the financial burden.
4. It focused on providing wage employment to the rural poor, thereby improving their income levels and quality of life.
5. NREP was later merged with Rural Landless Employment Guarantee Programme in 1989 to form Jawahar Rozgar Yojana.

5. Rural Landless Employment Guarantee Programme –

1. Launched on – August 15, 1983
2. Aim – at providing guarantee of employment to at least one member of the landless household for 100 days in a year.
3. Infrastructural development was undertaken with a view to create employment opportunities for rural landless households.

6. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) –

1. Launched in – 2005
2. It provides at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work.
3. Workers are entitled to the statutory minimum wage.
4. MGNREGA acts as a safety net, providing employment when other opportunities are scarce.

7. Atmanirbhar Bharat Yojana (ABRY) –

1. Launched on – 1^st October 2020
2. Aim/Objective - to incentivize employers for creation of new employment and restoration of loss of employment during Covid-19 pandemic.
3. Since inception of the scheme, as on 31.03.2024, benefits have been provided to 60.49 lakhs beneficiaries in the country.

8. Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) –

1. Launched on – 1 April 2016
2. Aim/Objective - to incentivise employers for creation of new employment.

9. National Career Service (NCS) Project –

1. Ministry of Labour and Employment, Government of India, is running the National Career Service (NCS) Portal which is a one-stop solution for providing career related services including jobs from private and government sectors, information on online & offline job fairs, job search & matching, career counselling, vocational guidance, information on skill development courses, skill/training programmes etc. through a digital platform.

10. Rural Self Employment and Training Institutes (RSETIs) –

1. Rural Self Employment and Training Institutes (RSETIs) is a Bank led Ministry of Rural Development (MoRD) funded training institution established by the Sponsor Banks in their Districts, to provide training for Skill and Entrepreneurship Development.
2.  MoRD extends financial support for the construction of RSETI building and also bears the cost of training the Rural Poor candidates. 
3. Any unemployed youth in the age group of 18-45 years having an aptitude to take up self-employment or wage employment and having some basic knowledge in the related field can undergo training at RSETI. Some of the trained candidates may also seek regular salaried jobs / wage employment.

Q17. Explain Law of Demand in detail.

Ans. Demand refers to the quantity of a goods or services that consumers are willing and able to purchase at a given price over specific period of time.

According to Benham, “the demand for anything at a given price is the amount of it, which will be bought per unit of time at that price.”

Law of Demand:

The law of demand simply expresses the relation between quantity of a commodity demanded and its price. It states the inverse relationship between the price and quantity demanded of a commodity.

According to Law of Demand, “all other things being equal, the quantity demanded of a good or service decreases as its price increases, and vice versa.”

In simpler terms, people tend to buy less of something when its price goes up and more when its price goes down. 

Law of Demand, as described by some eminent economists:

1. According to Bilas, “the law of demand states that other things being equal, the quantity demanded per unit of time will be grater, lower the price and smaller, higher the price.”
2. According to Marshall, “the amount demanded increases with a fall in price and diminishes with a rise in price.”
3. According to Professor Samuelson, “law of demand states that people will buy more at lower prices and buy less at higher prices, other things being constant.”
4. According to Ferguson, “according to law of demand, the quantity demanded varies inversely with price.”

Assumption of Law of Demand:

Some assumptions related to the Law of Demand are as follows: -

1. No change in tastes and preferences.
2. Consumer’s income, both money and real income must remain the same.
3. Prices of other commodities related to the commodity in demand should not change.
4. No change in the wealth of consumers.
5. Substitutes are not discovered.
6. There should be perfect competition in the market.

Importance of Law of Demand:

1. Price determination in perfect competition.
2. Tax imposition.
3. Planning for individual purchase of commodities.
4. Planning of industries regarding the production of output.

Exceptions / Limitations of Law of Demand:

Some exceptions of Law of Demand are as follows: -

1. Giffin Goods / Special type of inferior goods –

Sir Giffin pointed out that Law of Demand does not apply to inferior goods. This is called Giffin Paradox.

Inferior Goods refer to those goods whose demand decrease with an increase in income.

Eg.: toned milk and full cream milk; bread and meat.

2. Veblen Effect / Articles of Distinction –

There are some commodities which are purchased by the upper section of the society. If the price of such commodities is increasing, then there will be more demand for them.

Eg.: antique items, artistic goods, diamonds etc.

3. Fear of shortage –

When there is fear of shortage due to a war like situation or an emergency, people buy more of a commodity given at a higher price, due to panic situation.

4. Expectation of change in price in future / Speculative Effect –

If people expect a rise in price in future, they will rush to purchase more of the commodity at present price.

If they expect the price to fall, they will purchase less of the commodity to enjoy benefit from the fall in price later.

5. Ignorance on the part of consumers about quality –

A lower price commodity may be considered inferior and people buy lesser amount of it. But when its price is more, they consider it to be superior and purchase more.

6. Necessities of Life –

In case of the basic necessity like food items, medicines, water, clothes etc. people purchase the same quantity even at high price.

Demand Schedule:

A demand schedule is a table that shows the quantity of a good or service that consumers are willing and able to buy at different prices during a certain time period. Law of Demand is represented through Demand Schedules. They summarise the information on prices and quantity demanded.

Types of Demand Schedule –

The Demand Schedule can be of two types: -

1. Individual Demand Schedule – It refers to the price and amount demanded of a commodity by an individual.

2. Market Demand Schedule – It shows the total quantity demanded that all the consumers in the market are willing and able to buy at all possible prices and, at a given amount of time.

Sample Demand Schedule –

Demand Curve:

If we show the demand schedule graphically, we get the demand curve. The Demand Curve shows the maximum quantities per unit of time that consumers will take at various prices.

The Demand Curve slopes downward from left to right.

According to RG Lipsey, “this curve, which shows the relation between the price of a commodity and the amount of that commodity the consumers wishes to purchase, is called Demand Curve.”

Reasons for downward sloping of the Demand Curve: -

1. Diminishing Marginal Utility – as the price of the commodity falls, the consumer more of the commodity so that this marginal utility falls to equal to the reduced price. If the price rises, the opposite happens.
2. New Consumers – when the price of the commodity is reduced, then many other consumers who were not consuming the commodity earlier will start purchasing it now because it is within their reach now.
3. Income Effect – as the price of the commodity is reduced, he can get the same commodity for less amount. This may be taken to be a rise in his real income, part of the increase in his real income can be used to purchase more of the cheaper commodity. Thus, when the price falls, amount demanded rises and vice-versa.
4. Substitution Effect – when thrice of the commodity falls, it becomes cheaper as compared to other commodities which the consumer is purchasing. As a result, the consumer would like to substitute the cheaper commodity for other commodities, whose prices remains the same.
5. Different Uses of the Commodity – commodities can be put various uses. If the price of the commodity is reduced, it will be put to many other uses where it had not been used earlier and the demand will increase. If its price rises, it will be used only for more important purposes, and the demand will go down.

Demand Function:

A demand function is a mathematical representation of the relationship between the quantity of a good or service that consumers are willing and able to buy (quantity demanded) and the various factors that influence that quantity. 

These factors, known as determinants of demand, include the price of the good, consumer income, prices of related goods, consumer tastes and preferences, and expectations about future prices.

The effect of all factors of demand on the amount demanded for the commodity is called Demand Function.

Demand Function: D(x) = f (Px, Py, I, T, W)

1. D(x) = demand of the commodity x
2. Px = price of the commodity x
3. Py = price of other commodities
4. I = income
5. T = Tastes and Preferences
6. W = wealth of the consumer

When other things remain constant, demand depends on the price of the commodity.

D(x) = f (Px) [simple form].

This demand function is considered as the law of demand.

Factors affecting Demand / Causes of change in Demand:

1. Price of the Commodity – demand is decisively affected by the change in price of the commodity. There is inverse relationship between price and quantity demanded.

2. Income of the Consumer – the demand for a normal commodity goes up with rise in income, and falls down when income falls. Thus, the demand has direct relationship with the income of the consumer.

3. Price of Related Goods – in case of substitutes, for instance, tea and coffee, when coffee becomes cheaper, the consumer substitutes coffee for teas. As a result, the demand for coffee increases and that of tea decreases.

In case of complimentary goods, rise in demand for one leads to rise in demand for the other. For instance, car and petrol, when demand for car increases, the demand for petrol also increases.

4. Taste and Preferences of the Consumer – the quantity demanded also depends on consumer’s taste and preferences. It depends upon the cultural and social standard of the consumer. If the consumer develops a liking for a particular commodity, he/she will buy the product at any price. The particular lifestyle also influences the consumers to buy luxurious goods and quality products.

For eg.: in past few years, people purchase more of big size cars (SUVs). It is due to change in preference over the time.

5. Advertisements – in the era of modern civilisation, advertisements in TV, radio, newspaper etc. influences the demand for the product and even can change demand pattern of the consumers.

6. Consumer expectations – consumer expectations regarding the future changes in the price of a commodity also affects the demand.

If consumers expect their income to rise in near future, they may increase the demand for a commodity now only. If prices are expected to rise in future, the demand for the goods will increase now in the market.

Q18. Explain characteristics of Indian Economy.

Ans. Basic characteristics of Indian Economy are as follows:

1. Low per capita income: In India, the national income and per capita income is very low and it is considered as one of the basic features of underdevelopment. Thus the standard of living of Indian people remained all along very low in comparison to that of developed countries of the world.

2. Excessive dependence of agriculture: Indian economy is characterised by too much dependence on agriculture and thus it is primary producing. Out of the total working population of our country, a very high proportion of it is engaged in agriculture and allied activities, which contributed a large share in the national income of our country. In India 58 per cent of its active population is engaged in agriculture. Moreover, low agricultural productivity, lack of modernisation and lack of diversification in its output are some of the basic problems from which our agricultural sector is suffering. Thus, our agricultural sector is overburdened as the majority of our active population is depending on agriculture.

3. High rate of population growth: India is maintaining a very high growth rate of population since 1950. Thus, the pressure of population in our country is very heavy. This has resulted from a very high level of birth rates coupled with a falling level of death rates prevailing in our country. This imposes a greater economic burden on our country as to maintain such a rapidly growing population we require food, clothing, housing, schooling, health facilities etc. in significant large amount.

4. Existence of chronic unemployment and underemployment: Rapid growth of population coupled with inadequate growth of secondary and tertiary occupations are responsible for the occurrence of chronic unemployment and under-employment problem in our country. In India, unemployment is structural one, unlike in developed countries, which is of cyclical type. Unemployment in India is the result of deficiency of capital. Indian industries are not getting adequate amount of capital for its necessary expansion so as to absorb the entire surplus labour force into it.

5. Poor rate of capital formation: Capital deficiency is one of the characteristic features of the Indian economy. Both the amount of capital available per head and the present rate of capital formation in India is very low. But considering the heavy population pressure and the need for self-sustained growth, the present rate of saving is inadequate and thus the enhancement of the rate of capital formation is badly needed.

6. Inequality in the distribution of wealth: Another important characteristic of the Indian economy is the unequal distribution of wealth. Unequal distribution in income is the result of inequality in the distribution of assets in the rural areas. On the other hand, in respect of industrial front there occurs a high degree of concentration of assets in the hands of very few big business houses.

7. Low level of technology: The economy of our country is thus suffering from technological backwardness. Obsolete techniques of production are largely being applied in both the agricultural and industrial sectors of our country. Sophisticated modern technology is being applied in productive units at a very limited scale as it is very expensive. Moreover, it is difficult to adopt modern technology in Indian productive system with its untrained and unskilled labour.

8. Under-utilisation of natural resources: In respect of natural endowments India is considered as a very rich country. Various types of natural resources, viz., land, water, minerals, forest and power resources are available in sufficient quantity in the various parts of the country. But due to its various inherent problems like inaccessible region, primitive techniques, shortage of capital and small extent of the market such huge resources remained largely under-utilised.

9. Lack of infrastructure: it is one of the serious problems from which the Indian economy has been suffering till today. These infrastructural facilities include transportation and communication facilities, electricity generation and distribution, banking and credit facilities, economic organisation, health and educational institutes etc.

10. Low standard of living: The standard of living of Indian people in general is considered as very low. Nearly 25 to 40 per cent of the population in India suffers from malnutrition. The average protein content in the Indian diet is about 49 grams only per day in comparison to that of more than double the level in the developed countries of the world. Moreover, the low-calorie intake in Indian diet is another characteristic of low standard of living.