Economics - I : Previous Year Questions (2024)

2024

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. Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. In other words, microeconomics tries to understand human choices, decisions and the allocation of resources.

Q2. What do you understand by 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.

Q3. What is the difference between Demand function and law of demand?

Ans.

1. Demand Function is a mathematical/algebraic statement showing the relationship between the quantity demanded of a commodity and all the factors that influence it. Whereas, Law of Demand is a statement/principle that describes the inverse relationship between the price of a commodity and its quantity demanded.

2. Demand Function has a broader scope. It includes the price of the commodity as well as other determinants like consumer income, prices of related goods, tastes, etc. Whereas, Law of Demand has a narrower scope. It focuses only on the relationship between price and quantity demanded, assuming all other factors remain constant (ceteris paribus).

Q4. Define elasticity of demand.

Ans. The term Elasticity of Demand refers to the degree of co-relation between price and demand. It is the measure of responsiveness to the change in price. 

Types of Elasticity:

The quantity demanded of a commodity may change as a result of change in its determinants like price, income of the consumer, and price of related goods.

There are three types of elasticity:

1. Price Elasticity
2. Income Elasticity
3. Cross Elasticity

Q5. What is oligopoly?

Ans. It is defined as competition among the few. Pure oligopoly includes firms selling homogenous or close substitute goods. It is a state of limited competition, in which a market is shared by a small number of producers or sellers.

Q6. Define circular flow of income.

Ans. The circular flow of income is an economic model illustrating the continuous movement of money, goods, and services between different sectors of an economy, such as households and firms, showing how income is generated, distributed, and spent. 

Households render factor services to the firms and receive factor income, which will be spent on purchase of goods and services produced by the firms. Income received from the sale of goods and services becomes equal to factor payments made to the factors of production.

Q7. What is deflation?

Ans. Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

Q8. What is difference between CRR & SLR?

Ans. The main difference between the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) lies in where the reserve is maintained and what form the reserve takes.

Q9. Define unemployment.

Ans. Unemployment is the situation where people actively looking for paid work are unable to find a job. It indicates an underutilization of the labour force and can negatively impact individual well-being through reduced income and morale, and harm the economy by decreasing spending and output. The unemployment rate is a key economic indicator measuring the percentage of the total labour force that is unemployed.

Q10. Write two 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. 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.

PART – B

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

Q11. What do you understand by shift of demand?

Ans. A shift of demand (also known as a change in demand) in economics refers to a situation where the entire demand curve moves, indicating that consumers are willing and able to purchase a different quantity of a good or service at every price level.  

Understanding the Shift:

1. Key distinction - A shift in demand is caused by a change in any non-price factor (a determinant of demand), unlike a movement along the demand curve, which is caused only by a change in the product's own price.

1. Graphical Representation:
2. Increase in Demand - The entire demand curve shifts to the right. This means that at the original price, consumers now want to buy more of the good.
3. Decrease in Demand - The entire demand curve shifts to the left. This means that at the original price, consumers now want to buy less of the good.

Determinants Causing a Shift (Non-Price Factors):

1. Consumer Income:

1. For Normal Goods (most goods), an increase in income leads to a rightward shift.
2. For Inferior Goods (e.g., generic brands), an increase in income leads to a leftward shift.

2. Tastes and Preferences: Changes in trends, advertising, or health concerns can make a good more or less desirable, causing the curve to shift right or left, respectively.

3. Prices of Related Goods:

1. Substitutes - If the price of a substitute good (e.g., Pepsi for Coke) rises, the demand for the original good (Coke) increases (rightward shift).
2. Complements - If the price of a complementary good (e.g., gasoline for cars) rises, the demand for the original good (cars) decreases (leftward shift).

4. Consumer Expectations: If consumers expect the price of a good to rise in the future, their current demand for that good will increase (rightward shift).

5. Population/Market Size: An increase in the number of buyers in the market will lead to a rightward shift in the market demand curve.

Q12. How does demand pull and cost push inflation differs?

Ans. Demand-pull inflation is a demand-side phenomenon, while cost-push inflation is a supply-side phenomenon. Key differences are as follows:

Q13. What are the functions of money?

Ans. Money is any item or medium of exchange that symbolizes perceived value. As a result, it is accepted by people for the payment of goods and services, as well as for the repayment of loans. Economies rely on money to facilitate transactions and to power financial growth.

As a medium of exchange, money is a value that buyers give to sellers when they buy goods and services. Money is accepted by sellers because they know that they can use it to buy other goods and services.

Functions of Money:

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.

3. Store of Value – Money is referred to as store of power. It is a generalised purchasing power and it can be used in present as well as future. People save and store money for all types of transactions. Barter system had difficulties in storing of value but money has helped in overcoming this problem by its rise as an efficient store of value.

4. Standard of Deferred Payments – Money acts as a standard of deferred payments. Modern economic transactions are widely based on credit transactions and money has helped in future payments and receipts.

Borrowing and lending activities have become simple even for future activities.

Q14. What is tax floor and ceilings?

Ans. Tax Ceiling/Price Ceiling –

The maximum price fixed by government beyond which producers cannot charge. Such ceilings are imposed on necessary consumer goods during emergency period like war, in order to prevent them from rising during critical period.

Tax Floor/Price Floor –

Unlike price ceiling, price floor is generally introduced to protect interest of the sellers. Generally, the price floor sets the price above the equilibrium price. It has been seen that such tool is used for agricultural goods to support farmers. In case of floor pricing, the price is fixed higher than the equilibrium price, which results in Supply of the good being higher than the demand. This situation results in surplus, where crops produced by farmers are more than demanded by buyers at that price.

For a price floor to be effective, it must be set above the equilibrium price. If it’s not above equilibrium, then the market won’t sell below equilibrium and the price floor will be irrelevant. 

PART – C

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

Q15. Explain the properties of indifference curve with the help of diagram.

Ans. Properties of Indifference Curve are as follows:

1. Indifference Curve slopes downward from left to right.

An indifference curve always slopes downward from left to right (i.e., it has a negative slope).

Explanation: This property is based on the assumption that the consumer's preferences are monotonic ("more is better") and that they are dealing with two desirable goods. If the consumer increases the consumption of one good (moves to the right on the graph), they must reduce the consumption of the other good (move down) to keep the total level of satisfaction (utility) exactly the same. If the curve were upward sloping, it would imply that a consumer is equally satisfied with a bundle containing more of both goods, which violates the assumption of monotonic preference.

2. Indifference Curve is convex to the origin; IC tends to decline.

A standard indifference curve is always convex (bowed inward) toward the origin (0,0) of the axes.

Explanation: This shape is due to the Law of Diminishing Marginal Rate of Substitution (MRS).

1. Marginal Rate of Substitution (MRSx,y): This is the rate at which a consumer is willing to give up a small amount of Good Y to get one additional unit of Good X, while remaining on the same indifference curve (i.e., maintaining the same level of utility).

1. Diminishing MRSx,y: As a consumer consumes more of Good X, the amount of Good Y they are willing to give up for yet another unit of X steadily decreases. This is because the consumer's relative valuation of Good X decreases as its stock increases (similar to the Law of Diminishing Marginal Utility).

1. Geometrically, the MRS is the absolute value of the slope of the IC. Since the MRS diminishes as we move down the curve, the curve must become flatter, resulting in the convex shape.

3. Higher Indifference Curves Represent Higher Levels of Satisfaction.

Indifference curves that lie farther away from the origin (to the upper-right) represent higher bundles of goods and, therefore, a higher level of total satisfaction (utility).

Explanation: Since an indifference curve represents a constant level of utility, a curve lying above and to the right of another must contain combinations that have either more of both goods or more of at least one good and no less of the other. Because of the assumption of monotonic preference ("more is better"), a combination with more goods must be preferred and therefore yield a higher level of satisfaction.

4. Indifference Curves Cannot Intersect.

5. Indifference Curves Do Not Touch the Axes; X Axis and Y Axis.

An indifference curve generally does not touch either the X-axis or the Y-axis.

Explanation: If an indifference curve touches the Y-axis, it means the consumer is willing to consume a combination that includes zero units of Good X. Indifference analysis typically assumes the consumer is considering a combination of two goods, and the full theory of choice usually requires both goods to be consumed.

Note: This property is sometimes relaxed for goods that are perfect substitutes (resulting in a straight-line IC) or perfect complements (resulting in an L-shaped IC), but it holds for the typical case of imperfect substitutes.

Q16. What are the characteristics 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.

Characteristics of perfect competition are as follows:

1. Large Number of Buyers and Sellers – There exists a large number of buyers and sellers in a perfectly competitive market. The number of buyers and sellers are so large that a single buyer or a single seller cannot influence the price or output through his influence.

2. Homogenous Product – The products sold in the market are homogenous, i.e., identical in its shape, size, colour, design, quality etc.

3. Freedom of Entry and Exit – There is freedom of entry and exit to the firms under perfectly competitive market. Any firm (buyer or seller) can enter the market or exit from the market as and when required.

4. Perfect Knowledge – Buyers and sellers must have a perfect knowledge about the market conditions. They should have complete information about the price at which goods are bought and sold and the places where the transactions take place etc.

5. Perfect mobility of factors of production – The factors of production are perfectly mobile in the sense that they are completely free to move from one industry to another or from one market to another or from one occupation to another.

6. Absence of Transportation Cost – It is assumed that all the sellers are equally near or far away from the markets, and as such there are uniform transport costs to all the sellers. So, ti is assumed that the transport cost is absent or constant for all sellers.  

7. Absence of Government Intervention – There is no government intervention in respect of production, transportation, and exchange of goods.

8. Uniform Price – There exists a single uniform price in the market and it is determined by the force of demand and supply.

Q17. Explain the relationship between TR, AR and MR.

Ans. The relationship between Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR) is a fundamental concept in the theory of the firm, and their interaction determines a firm's optimal level of output.

1. Total Revenue (TR) - The total amount of money a firm receives from the sale of its entire output over a given period. Formula: TR = P x Q (Price x Quantity)

1. Average Revenue (AR) - The revenue earned per unit of output sold. AR is always equal to the price (P) of the product. Formula: AR = TR/Q

1. Marginal Revenue (MR) - The additional revenue generated by selling one more unit of output. Formula: MR = ΔTR/ΔQ (Change in Total Revenue / Change in Quantity)

General Relationship between TR and MR:

The relationship between TR and MR is the most direct because MR is the slope of the TR curve at any given level of output.

1. When MR is Positive (MR > 0):

1. Each additional unit sold adds to total revenue.
2. TR increases as output increases.
3. The TR curve has a positive slope.

2. When MR is Zero (MR = 0):

1. Selling one more unit does not change total revenue.
2. TR reaches its maximum point.
3. The TR curve's slope is zero (it's flat at the peak).

3. When MR is Negative (MR < 0):

1. Selling one more unit causes total revenue to fall (because the required price cut on all units outweighs the revenue from the extra unit).
2. TR starts to decrease as output increases further.
3. The TR curve has a negative slope.

General Relationship between AR and MR:

The relationship between AR and MR is crucial for determining the shape of the demand curve faced by the firm, which varies with market structure.

1. If AR is Falling:

1. To sell an additional unit, the firm must lower the price on all units, not just the extra one.
2. Therefore, the marginal addition to revenue (MR) is less than the average revenue (AR).
3. MR < AR, and the MR curve lies below the AR curve. This occurs in imperfect competition (Monopoly, Monopolistic Competition, Oligopoly), where the demand curve (AR) is downward sloping.

2. If AR is Constant:

1. The firm can sell additional units at the same constant price.
2. The revenue from the additional unit (MR) is exactly equal to the revenue per unit (AR).
3. MR = AR, and the MR and AR curves coincide. This occurs in perfect competition, where the demand curve (AR) is perfectly elastic (horizontal).

3. Geometric Relationship (in Imperfect Competition):

1. When the AR and MR curves are linear and downward sloping, the MR curve falls twice as fast as the AR curve.
2. This means the MR curve will bisect the horizontal distance between the AR curve and the vertical axis.

Relationship across Market Structures:

A. Perfect Competition (Price is Constant)

1. Relationship: P = AR = MR
2. TR Curve: A positively sloped straight line starting from the origin, as TR increases at a constant rate (MR is constant).
3. AR/MR Curves: A single horizontal straight line parallel to the X-axis.

B. Imperfect Competition (Price Falls as Output Rises)

1. Relationship: P = AR > MR
2. AR/MR Curves: Both AR and MR curves are downward sloping. The MR curve is steeper and lies below the AR curve.
3. TR Curve: Rises initially as long as MR is positive, reaches a maximum when MR = 0, and then falls when MR becomes negative.

This comprehensive relationship is key for a firm, as it uses the MR and AR curves to analyse demand and the MR and Marginal Cost (MC) curves to determine the profit-maximizing level of output (where MR = MC).

Q18. Discuss any one of the employment generation schemes in India.

Ans. An effective employment generation scheme in India is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

MGNREGA is a landmark social security and employment guarantee scheme that aims to enhance the livelihood security of people in rural areas by guaranteeing 100 days of wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work.

Key Features:

1. Legal Right to Work: The Act gives a legal guarantee for employment. It is a demand-driven program, meaning the provision of work is triggered by the demand from the wage-seekers, not by government allocation.

1. 100 Days Guaranteed Employment: It assures a minimum of 100 days of unskilled manual work to an adult member of a rural household who registers and demands work.

1. Unemployment Allowance: If employment is not provided within 15 days of the demand, the applicant is entitled to receive an unemployment allowance from the state government.

1. Decentralized Implementation: The scheme is implemented primarily through Panchayati Raj Institutions (PRIs), with the Gram Sabha playing a key role in recommending and monitoring the works.

1. Focus on Durable Assets: The works undertaken under the scheme are primarily focused on creating durable community assets in rural areas, such as water conservation structures (ponds, check dams), rural connectivity (roads), irrigation canals, and land development. This strengthens the natural resource base.

1. Social Inclusion and Empowerment:
2. It stipulates that at least one-third of the beneficiaries should be women. In practice, female participation is often higher than 50%, significantly contributing to women's economic and social empowerment.
3. It is a self-targeting mechanism that primarily benefits the most vulnerable sections of society, including Scheduled Castes (SCs), Scheduled Tribes (STs), and other marginalized groups, as the nature of work attracts only those genuinely in need.

1. Equal Wages: It mandates equal wages for both men and women.

1. Social Audit: The Act incorporates a mandatory provision for Social Audit, ensuring transparency and accountability at the grassroots level.

Impact and Significance:

1. Poverty Reduction and Livelihood Security: It acts as a crucial social safety net, providing a fallback option, especially during lean agricultural seasons or economic distress (like the COVID-19 lockdown), which has had a positive impact on household income, consumption, and food security.

1. Reducing Distress Migration: By providing a minimum income source in their native villages, the scheme helps reduce distress migration of rural populations to urban areas in search of work.

1. Women's Empowerment: The high participation of women has enhanced their bargaining power within the household and the community, boosting their financial inclusion and decision-making roles.

1. Financial Inclusion: Wages are transferred directly into the bank or post office accounts of the beneficiaries (Direct Benefit Transfer), promoting financial inclusion.

1. Increase in Rural Wages: By setting a minimum wage and providing an alternate source of employment, MGNREGA has contributed to a modest increase in overall rural wages, benefiting even non-MGNREGA workers.

MGNREGA is thus one of the most significant rights-based, people-centred, and demand-driven employment guarantee programs in the world, with deep socio-economic and environmental implications for rural India.

Challenges in implementing MGNREGA:

While the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a successful and crucial social safety net, its implementation faces several persistent challenges that hinder its full effectiveness:

1. Inadequate and Delayed Fund Release

1. Fund Shortages: The scheme often suffers from inadequate budget allocation from the central government, leading to financial constraints for states, especially late in the financial year.
2. Delayed Wage Payments: This is perhaps the most significant challenge. Payments to workers are frequently delayed, sometimes for months, due to procedural bottlenecks, slow processing by banks/post offices, and insufficient fund release. Delays violate the core principle of timely wage payment and undermine the program's value as a reliable source of income.

2. Administrative and Implementation Issues

1. Low Quality of Assets: There are concerns regarding the quality and durability of the assets created (e.g., roads, water conservation structures). Poor planning and lack of technical supervision often result in assets that are not robust or sustainable, reducing the long-term benefit to the community.
2. Lack of Skilled Supervision: The scheme primarily involves unskilled manual work. However, the technical aspects of planning and executing works (like soil testing or engineering design) often lack proper supervision, impacting the asset quality.
3. Irregularities and Corruption: Cases of misappropriation of funds, fudging of muster rolls (attendance records), and ghost entries (payments made to non-existent workers) have been reported, necessitating stricter monitoring and enforcement.

3. Logistical and Technological Hurdles

1. Technical Glitches (Aadhaar & Bank Links): The shift to the Aadhaar-Based Payment System (ABPS), while aimed at reducing corruption, has led to exclusion issues, as technical problems like mismatched bank accounts or failed Aadhaar seeding can prevent genuine workers from receiving their wages.
2. Insufficient Awareness: In remote areas, awareness among the eligible population about their rights under the Act (like the right to demand work or claim unemployment allowance) remains low, leading to underutilization of the scheme's provisions.

4. Limited Scope and Demand-Side Issues

1. Work Availability: The guarantee is for only 100 days of employment, which may be insufficient to support a family for the entire year, especially for landless agricultural laborers.
2. Difficulty in Sustaining Demand: While it is a demand-driven scheme, the administrative machinery sometimes fails to adequately plan and roll out sufficient projects to meet the actual demand for work, particularly during peak lean seasons.

Addressing these challenges requires a concerted effort to ensure timely and adequate fund transfers, strengthen social audit mechanisms, improve the quality of assets created, and resolve the technical issues in the wage payment system.