2019


Time: 3 Hours

Max Marks: 50


PART – A


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


Q1. Define Micro Economics.

Ans. The term Micro is derived from the Greek word 'MICROS' which means small. It relates to the microscopic study of individual units such as individual firm, particular household, individual income, prices, wages, etc. It is that branch of Economics which deals with the study of behaviour and action of individual economic units. It is also called as ‘Individualistic Approach’ or ‘Price theory.’


Q2. What is Demand?

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.”


Q3. Define total Revenue.

Ans. Price paid by the consumer for products form revenue. In other words, we can say it is the income of the seller. The whole income received by the seller from selling various units of a commodity either at same or different prices is called Total Revenue.

TR = P x Q

Where,

TR = Total Revenue

P = Price

Q = Quantity Sold


Q4. What do you understand by marginal utility?

Ans. It is the utility derived from marginal units (additional units consumed). It refers to change in total utility obtained from the consumption of a commodity and can be expressed as: MU = ΔTU / ΔQ.


Q5. Define GDP.

Ans. It is the aggregate value of output of goods and services produced in a country without adding Net Factor Income from Abroad (NFIA).

GDP is measured at market price.

GDP = GNP – Net Factor Income from Abroad (NFIA)


Q6. What is Inflation?

Ans. Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.


Q7. Define Bank Rate.

Ans. A bank rate is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is a method by which central banks affect economic activity.


Q8. What is Mixed Economy?

Ans. A mixed economic system is a system that combines aspects both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.


Q9. Distinguish between Statics and Dynamics.

Ans. Statics analyses an economy at a specific point in time, focusing on equilibrium conditions as a "still picture," while dynamics studies how an economy changes over time, analysing the path and process of change from one equilibrium or disequilibrium state to another, like a "movie". Static economics assumes variables are constant, whereas dynamic economics incorporates the time element and variable changes, making it more realistic for studying growth and business cycles. 


Q10. Define Monopoly.

Ans. Monopoly is a firm who is the sole seller of its product, and where there are no close substitutes. An unregulated monopoly has market power and can influence prices. Examples: Microsoft and Windows, DeBeers and diamonds, your local natural gas company.


PART – B


Answer the following questions. Each question carries 4 marks. (4 x 4 = 16)


Q11. Explain the features of Industrial policy of 1991.

Ans. The Industrial Policy of 1991, often referred to as the foundation of the Liberalisation, Privatisation, and Globalisation (LPG) reforms in India, introduced radical changes.


Here are the key features of the Industrial Policy of 1991:


1. Abolition of Industrial Licensing (De-licensing)

  1. The most significant reform was the almost complete abolition of the "Licence Raj".
  2. Industrial licensing was required only for a very small list of industries (e.g., defense equipment, cigarettes, hazardous chemicals) primarily related to security, social, and environmental concerns.
  3. For all other industries, private entrepreneurs were free to set up, expand, or diversify their production without prior government approval, thus ending bureaucratic delays and encouraging competition.


2. De-reservation of the Public Sector

  1. The number of industries exclusively reserved for the public sector was drastically reduced from 17 to just 8 (and later to just two: Atomic Energy and Railway Operations).
  2. Sectors like iron and steel, heavy electricals, coal, mineral oil, and telecommunications were opened up for private sector participation.
  3. This was aimed at increasing efficiency, competitiveness, and resource mobilisation.


3. Liberalisation of Foreign Investment and Technology

  1. The policy welcomed Foreign Direct Investment (FDI) by allowing foreign equity participation up to 51% in a wide range of priority industries under the automatic route.
  2. Automatic approval was granted for technology agreements between Indian firms and foreign collaborators, ensuring easier access to modern technology and foreign capital.


4. Reduction of Restrictions on Large Businesses

  1. The Monopolies and Restrictive Trade Practices (MRTP) Act was amended to remove the threshold limits of assets.
  2. This meant that large firms no longer required prior government approval for expansion, establishment of new undertakings, mergers, or amalgamations, which facilitated the growth of large industrial houses.


These features effectively dismantled the centralised control mechanism that existed before 1991, promoting competition, private enterprise, and global integration.


Q12. Explain the law of diminishing marginal utility.

Ans. The law states that, as a consumer consumes more and more units of a specific commodity, the additional satisfaction or utility derived from each successive unit goes on decreasing, assuming all other factors remain constant (ceteris paribus).

  1. Utility refers to the satisfaction or benefit a consumer derives from consuming a good or service.
  2. Marginal Utility (MU) is the change in total utility resulting from consuming one additional unit of a commodity.

In simpler terms, the more of something you already have or consume, the less extra pleasure or benefit you get from consuming yet another unit of it.

For example, the first slice of pizza might bring high satisfaction, but the second will bring less, and the third even less, as the consumer becomes more full.


Q13. Briefly explain the features of Perfect Competition.

Ans. Perfect Competition refers to the market situation where there are large number of buyers and sellers engaged on buying and selling homogenous products at a uniform price.


Features:

Features of Perfect Competition are as follows: -


1. Large number of Buyers and Sellers –

  1. Quantity bought and sold by the buyer and the seller is so small that no single buyer or seller can influence the market price.
  2. Output of a single firm is only a small portion of the total output, and demand of a single buyer is only a small portion of the total demand.
  3. Hence, the market price has to be taken as given and unchangeable by any buyer or seller.


2. Homogenous Product –

  1. Products produced and sold by the producer are homogenous.
  2. They are standardised and identical.
  3. Products of various firms are more or like same. They are perfect substitutes to each other.


3. Free Entry and Exit –

  1. The firms in the perfect competition have the freedom to start or close their businesses.
  2. Under perfect competition, all firms earn normal profit. When new firms enter into production, extra profit earned by old firms will be shared with the new firms.
  3. If profit is less, then some firms will stop producing and consequently the profit of the remaining firms will rise.


4. Perfect Knowledge –

  1. In perfect competition, buyers and sellers are fully aware of the price that is being offered and expected, product quality and other relevant market factors.
  2. All the buyers are expected to know market price of the product. Hence, sellers can’t change the price.


5. No Transport Cost –

  1. The cost of moving goods between sellers and buyers is considered negligible or zero, ensuring a uniform price for a homogeneous product across the market.


6. Price Takers –

  1. Firms in a perfectly competitive market are price takers, meaning they must accept the market price determined by the forces of supply and demand.


7. Uniform Price –

  1. There is a single uniform price for the product in the market, determined by the overall demand and supply. 


Q14. Write the 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 any three of the following questions. Each question carries 8 marks. (3 x 8 = 24)


Q15. What is supply function. Explain law of supply in detail.

Ans. Supply Function:

It can be expressed as S(x) = f (Px).


Supply function explains as to how the quantity supplied of a commodity changes on account of changes in determinants of supply.

This function expresses the relationship between supply and price. It also gives us an idea that quantity of a commodity supplied varies directly with its price, other determinants of supply remaining constant.

Supply and price has a positive relationship. Therefore, they move in the same direction.


Supply function:

Q(x) = f [Px, P1, P2, Pn………. f1, f2, fn……. T, O]

Here,

Q(x) – quantity supplied of the commodity x

P(x) – price of the commodity x

P1, P2, Pn – price of other commodities

f1, f2, fn – cost of production

T – technology

O – objective of supplier/firm


Law of Supply:

Law of supply states that other things remaining constant, the quantity supplied varies directly with the price of the commodity. It also explains that when price of a commodity increases, the supply expands and vice-versa. The relationship between supply and price is positive. Therefore, higher the price, larger is the supply; lower the price, lesser is the quantity supplied.


Assumptions of Law of Supply:

Various assumptions of Law of Supply are as follows: -

  1. Number of firms in the market remain constant.
  2. There is no change in the level of technology.
  3. Cost of production does not change.
  4. Rate at which production takes place remains constant.
  5. Prices of related goods remain constant.
  6. Climatic conditions do not change.
  7. The seller does not expect any drastic change in the price of the commodity in near future.
  8. Preferences of the consumer remain same.
  9. There is no change in government policies.


Importance of Law of Supply:


1. Price Determination: The law of supply, along with the law of demand, is a key factor in determining market prices. It helps explain how the interaction between buyers and sellers in a market leads to price equilibrium.


2. Production and Supply Decisions: Businesses use the law of supply to guide their production decisions. When prices are high, businesses are motivated to produce and supply more to maximize profits. Conversely, when prices are low, they may reduce production to avoid losses.


3. Market Efficiency: The law of supply helps ensure that markets are relatively efficient in allocating resources. It helps to avoid surpluses (too much supply) and shortages (too little supply) by guiding producers to adjust their output based on price signals.


4. Forecasting and Planning: Businesses and policymakers can use the law of supply to forecast how changes in price or other factors (like technology or government policies) might affect production and supply.


5. Understanding Market Dynamics: The law of supply provides insights into how producers respond to changes in market conditions.


Exceptions / Limitations of law of Supply:

There are some situations under which the law of supply of goods is not applicable. It means that the supply of goods and the price of a commodity are not proportional. The exceptions of the law of supply are as mentioned below:


1. Monopoly - The situation when there is only one vendor of a service refers to monopoly. The single seller is the price maker and has control over different prices. The seller may not be willing to raise the supply even if the prices are going high, hence it is an exception to the law of supply.


2. Closure of Business - In some circumstances when a business is on the edge of closure, the seller may sell the products even at cheap prices. The retailer does this to clear the supply of stock. In this case, the law of supply does not hold and serves as an exception to the law of supply example.


3. Perishable Goods - Sometimes sellers are keen to sell perishable or fresh goods even at cheap prices. It is because, for the perishable goods, sellers cannot wait for a long time and if these types of goods remain unsold, then they will face only loss. 


4. Competition - When there is high competition in the market, the sellers may sell goods in high quantities at low rates. It refers to a situation where the law of supply does not hold. 


5. Agricultural Products - It is challenging to increase the agricultural produce at a certain level as land is a limited resource. It shows that if the prices of land increase, the supply may not get increased.


6. Out of Fashion Goods - The up-to-date goods that are in trend often have high prices. However, those goods, which are out of fashion, have cheap prices. The sellers may sell these out of fashion goods even at cheap rates. 


7. Rare Goods - The goods that are precious or artistic generally have a limited supply. The supply of these goods cannot be raised according to the rising prices or demand. Hence, if the price of the goods increases, the supply of such rare goods cannot be raised. It is also an exception to the law of supply example.


Explanation with a Supply Schedule:

A supply schedule is a tabular statement showing the different quantities of a commodity that a seller is willing to sell at different prices during a given period.


Price Per Unit (Rs.)Quantity Supplied (Units)
10100
12150
15220


As the table illustrates, when the price increases from ₹10 to ₹15, the quantity supplied increases from 100 units to 220 units, reflecting the positive relationship.


Graphical Representation: The Supply Curve

The Law of Supply is graphically represented by the Supply Curve, which slopes upwards from left to right. This upward slope signifies the direct relationship between price and quantity supplied.

  1. Y-axis: Price
  2. X-axis: Quantity Supplied


Q16. Explain the monetary policy of RBI in detail.

Ans. The Monetary Policy of the Reserve Bank of India (RBI) is the process through which the RBI, as the nation's central bank, manages the supply of money and credit in the economy to achieve specific macroeconomic objectives. It is a critical tool for maintaining economic stability and fostering sustainable growth.


Primary Objectives of Monetary Policy:

The primary objectives, as mandated by the amended RBI Act, 1934, are:


1. Price Stability: To maintain confidence in the currency and preserve the purchasing power of the rupee. The Government, in consultation with the RBI, sets an inflation target to be achieved by the Monetary Policy Committee (MPC).


2. Economic Growth: To promote sustained growth by ensuring an adequate and timely flow of credit to the productive sectors of the economy. This objective is pursued while keeping the primary objective of price stability in mind.


3. Financial Stability: To ensure the stability and integrity of the financial system, which is crucial for overall economic stability.


Instruments of Monetary Policy:

The RBI utilizes a variety of tools, broadly classified into Quantitative and Qualitative measures, to implement its policy.


A. Quantitative Instruments (General Measures)

These tools affect the overall volume of money and credit in the economy.


1. Repo Rate - The interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities.

Impact – An increase in repo rate leads to rise in bank’s borrowing costs, which further leads to higher lending rates. As a resultant, there is decrease in money supply in the economy. And vice-versa. 


2. Reverse Repo Rate - The interest rate at which the RBI borrows money from commercial banks (absorbs liquidity) against eligible collateral.

Impact – An increase in reverse repo rate encourages the bank to park more funds with the RBI. As a resultant, there is decrease in money supply in the economy. And vice-versa.


3. Cash Reserve Ratio (CRR) - The minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that it must maintain as cash reserves with the RBI.

Impact – An increase in CRR results in less cash with banks for lending. As a resultant, there is decrease in money supply in the economy. And vice-versa.


4. Statutory Liquidity Ratio (SLR) - The minimum percentage of a bank's NDTL that it must maintain in the form of liquid assets (cash, gold, unrestricted government securities).

Impact – An increase in SLR reduces bank’s lending capacity. As a resultant, there is decrease in money supply in the economy. And vice-versa.


5. Open Market Operations - The buying and selling of government securities by the RBI in the open market.

Impact – Sale of securities, sucks out money from the system. As a resultant, there is decrease in money supply in the economy. And vice-versa.


6. Bank Rate - The bank rate is the rate of interest which is charged by a central bank while lending loans to a commercial bank. 

Impact - A higher bank rate makes borrowing more expensive, causing commercial banks to raise their own rates, which decreases borrowing and contracts the money supply. And vice-versa.


B. Qualitative Instruments (Selective Measures)

These tools are used to control the direction and allocation of credit for specific sectors of the economy:


1. Margin Requirement - The difference between the loan amount and the market value of the security offered by the borrower. Raising the margin requirement reduces the amount of loan granted against a security, thereby curtailing credit for a specific purpose (e.g., speculative lending).


2. Moral Suasion - Persuasion and pressure exerted by the RBI on commercial banks to comply with general monetary policy objectives.


3. Rationing of Credit - Fixing a maximum limit or ceiling on the amount of loan and advances for certain purposes or to a particular sector.


Types of Monetary Policy:

The RBI employs one of two stances based on the economic situation:


1. Contractionary (Tight) Monetary Policy:

  1. When used: During a period of high inflation to reduce the money supply.
  2. Action: Increases the Repo Rate, CRR, SLR, and sells Government Securities.
  3. Impact: Interest rates are high. There is reduced borrowing and spending and decrease in aggregate demand. As a resultant, inflation is kept under control.


2. Expansionary Monetary Policy:

  1. When used: During a period of recession or slow growth to inject liquidity and stimulate demand.
  2. Action: Decreases the Repo Rate, CRR, SLR, and buys Government Securities.
  3. Impact: Interest rates are low. There is increased borrowing and spending and increase in aggregate demand. As a resultant, there is promotion of economic growth. 


Q17. Define Poverty. Explain its causes and employment generation schemes.

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


Types of Poverty –

Types of poverty are as follows: -


1. Absolute Poverty -

  1. It is an extreme kind of poverty, with severe deprivation of basic human needs like food, safe water, shelter, and healthcare, where individuals lack the financial means to secure a minimum standard of living for survival.
  2. People in absolute poverty tend to struggle to live and experience a lot of child deaths due to diseases like malaria, cholera, and contaminated water related diseases.
  3. This type of poverty is usually long-term in nature, passing on from generation to generation.
  4. It is usually not common in the developed world.


2. Relative Poverty –

  1. Relative poverty is the condition of having less income or fewer resources than the average person in your society, preventing you from maintaining the standard of living considered acceptable within that community.
  2. It highlights economic inequality and social exclusion rather than a lack of basic biological survival needs.
  3. They are considered poor because rest of the community have the access to superior services and amenities.


Causes:

Causes of poverty are as follows: -

  1. Income inequality / Low Level of Income
  2. Illiteracy
  3. Unemployment
  4. Ill health and disability – not able to work properly
  5. Inheritance of poverty – generation to generation
  6. Vicious circle of money – when there is low level of income, saving and investment
  7. Lack of access to education, healthcare, and economic opportunities.
  8. Conflict, climate change, and natural disasters also displace populations and destroy infrastructure, trapping communities in cycles of poverty. 
  9. Discrimination based on gender, ethnicity, or other factors creates social barriers, restricting economic and social opportunities for marginalized groups.
  10. Weak governance, corruption, and political instability can hinder the effective distribution of resources and the implementation of poverty alleviation programs.
  11. Poor roads, energy, and other basic infrastructure limit access to markets, jobs, and essential services, especially in rural and remote areas.


Special study of Rural Poverty in India:

  1. In rural areas, poverty decreased from 32.59% to 19.20% between 2015-16 and 2019-21.
  2. In 1993-94, about half of the India’s rural poor lived in the 4 most populated states – Bihar, Uttar Pradesh, Madhya Pradesh, Maharashtra.
  3. In rural Bihar, almost 50% of the population is below the poverty line.
  4. Reasons for rural poverty are corruption, unemployment, illiteracy, fluctuations in agricultural output and prices, growing population etc.
  5. Solutions can be increasing agricultural productivity, literacy and employment.


Employment Generation Schemes in India:

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 8th 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 – 1st 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.


Q18. 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.