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SYJC (XII)ECONOMICS

Marks : 80 PRELIMINARY TEST PAPER - 4 Date : 12.02.2020

Q.1 [A] Fill in the blanks with appropriate alternatives given in the bracket.(1) Monopoly (2) French(3) Slicing (4) Gossen(5) Decrease

[B] State whether the following statements are TRUE or FALSE.(1) False (2) True(3) True (4) False(5) False

[C] Match the columns.

Group A Group B1. Railway 7. Public monopoly2. Production 6. Creating utility3. Theory of growth 1. Harrod and Domar4. Unemployment allowance 3. Transfer payment 5. Investment 5. Addition to stock of capital

Q.2 [A] Define the following. (3 out of 6)(1) Resources are scare and government has to allocate such resources

properly for maximum public welfare. Micro economics analysis helps the government in allocation of scare resources in the economy so as to achieve maximum social welfare. Resource allocation determines;– What goods too produce – Who will produce and in what manner– How to distribute goods– How the goods are produced are to be priced

(2) Knowledge Utility: When the utility increases due to the awareness and knowledge

acquired by the buyer about a commodity, it is called as knowledge utility

Advertisement, user manuals help the user to acquire the knowledge about the product

For e.g. Mobile phones and computers have more utility to the ones having proper knowledge to operate the same

(3) Giffen goods: Giffen good is a product that people prefer consuming more as the

price rises and vice versa, thereby violating the law of demand.1

Time : 3 Hrs.SOLUTIONS


SYJC (XII) Sir Robert Giffen, observed that in certain inferior goods (Giffen goods),

the law of demand does not hold true. According to him, when prices of such goods fall, the demand declines

due to the negative income effect and people's increasing preference for a superior commodity with the rise in their real income.

However, when the price of inferior goods increases, the demand for such goods also increases.

Hence, it can be said that there exists a direct relationship between the price of Giffen goods and its demand

(4) Cross Elasticity of Demand: It refers to a percentage change in quantity demanded of one

commodity, due to percentage change in the price of a related commodity

Such type of elasticity is found in case of Substitute goods Pepsi and coke, tajmahal tea and society tea, munch and perk,

sundaram notebook and classmate notebook etc. are examples of substitute goods. Here, if the price of one commodity increases, it would result not only in the decrease in demand of that particular commodity but would also increase the demand of the substitute commodity

When the two goods are substitutes of each other, then the cross elasticity of demand between them will be greater than zero

(5) Stock is the total quantity of goods that are available for sale at a particular point of time. It is the outcome of production. Therefore stock can be increased with an increased in production. Stock includes the current outcome and also the balance of previous output. Stock is the basis of supply. An ability of a seller to supply depends on availability of stock

(6) Price Discrimination: Price discrimination means charging different prices for the same

commodity to different buyers. It is a feature of monopoly where a monopolist resorts to price

discrimination for increasing his profits. Here, the monopolist, may charge a high price to the rich or upper

middle class and a low price to others.[B] Give reasons. (3 out of 6)

(1) Land is the most basic and primary factor of production Land includes all those natural resources which are found – on the

surface – below the surface- and above the surface Land is a natural resource and a free gift of nature By applying labour and capital the utility of land can be increased but

the area or number of plots can not be increased

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SYJC (XII) Hence, supply of land is inelastic

(2) Macro economics is a study of aggregates covering the entire economy such as total employment, national income, national output, total investment, total saving etc

It deals with macro variables and macro quantities Unlike micro economics it does not split up the economy into small

slices bur studies it in a big lump It picks up a variable and studies it as it is Thus, macro economics uses lumping method

(3) National income refers to the monetary value of goods and services produced in a country, during a given period of time, generally a year.

Second hand goods refer to the goods that have been sold once, used by a person and then resold to another person.

The value of such goods would have been considered in the national income when they were produced or sold for the first time.

Therefore, considering it for calculation of national income when it is again sold as second hand would lead to double counting of the same goods.

Also, second hand goods are not reproduced in the year. They are only resold. Therefore, second hand goods are not goods produced in a country during the year.

Therefore, income from second hand sale of goods is excluded from national income

(4) Savings refers to the difference between income and expenditure. Saving may be used in the future for unforeseen contingencies. It is that part of income which is not spent for consumption. People may save for various purposes. One of the prime motives of

saving is the motive of precaution. People save as precaution against any future contingencies or

unforeseen events like accident, major sickness or an other urgent expenditure.

(5) Anything that is used as money needs to possess certain qualities The following are the qualities of good money (Mention in brief the qualities of good money) Thus, any commodity cannot act as money. It has to possess the above

qualities.(6) The process of credit creation starts when the customers deposit their

cash in the bank. Such deposits are called primary deposits" or "cash deposits".

The banks lend money (i.e. provide loans) out of the deposits received by them. The balance amount left after keeping aside the minimum cash reserves is used for providing loans and it is known as "derivative deposit" or secondary deposit.

3


SYJC (XII) When the bank provides loan to a customer, the bank opens a deposit

account in the name of the borrower. The loan amount is credited to this deposit account.

Therefore, every loan given by a bank creates a deposit.Q.3. [A] Distinguish Between. (3 out of 6)

(1) Deficit Budget and Balanced Budget

Sr. No.

Deficit Budget Balanced Budget

i. It is type of budget, wherein the estimated government receipts are less than the anticipated government expenditure.

It is a type of budget wherein the governments estimated receipts are equal to its anticipated expenditure.

ii. Deficit Budget approach is adopted during depression period of an economy.

Balanced budget approach does not have any practical applicability in modern times.

iii. It accelerates effective demand which in turn leads to increased level of employment and investments.

It does not bring any changes in the aggregate demand of an economy.

iv. A deficit budget increases debt or reduces the reserves of the government.

A balanced budget has no effect on the debt or reserves of the government.

(2) Utility and Satisfaction

Sr. No.

Utility Satisfaction

i. Utility is the want satisfying power of a commodity.

Satisfaction is the feeling of happiness realized by the consumer.

ii. It is anticipated satisfaction. It is the actual realization.iii. It is the starting point of

consumption.It is the end result of consumption.

(3) Desire and Demand

Sr. No.

Desire Demand

i. Desire simply refers to the mere wish of a person to have a particular commodity.

Demand refers to a desire backed by the ability to pay and willingness to spend for a particular commodity.

ii. A person can desire anything at any point of time. There are no limitations for a desire.

There are several limitations affecting demand like ability to pay, willingness to spend etc.

4


SYJC (XII)iii. There is no relation of desire with

price, place and time.Demand has relation with price, place and time.

iv. Desire has a wider scope as it includes demand.

Demand has a narrow scope as it is a part of desire.

(4) Price Elasticity and Income Elasticity

Sr. No.

Price Elasticity Income Elasticity

i. Price elasticity of demand refers to the percentage change in quantity demanded of a commodity due to a percentage change in its price.

Income elasticity of demand refers to the percentage change in quantity demanded due to percentage change in income.

ii. It is measured by the ratio :Ed = Percentage change∈quantity demanded

Percentagechange∈price

It is measured as :Ey = Percentage change∈quantity demanded

Percentagechange∈income

iii. Price elasticity of demand can have five values viz. infinite, zero, unity, greater than one and less than one.

Income elasticity of demand can have three values viz. zero, greater than zero and less than zero.

(5) Individual Supply and Market Supply

Sr. No.

Individual Supply Market Supply

i. Individual Supply refers to the quantity of a commodity offered for sale by a single seller at various prices, during a given period of time.

Market Supply refers to the quantity of a commodity offered for sale by all the sellers in the market at different prices, during a given period of time.

ii. Individual supply is always less than the market supply.

Market supply is always greater than individual supply.

iii. It is a part of the market supply. It is the sum total of all individual supplies.

(6) Natural Monopoly and Legal Monopoly

Sr. No.

Natural Monopoly Legal Monopoly

i. Natural monopoly arises due to availability of natural resources such as good location, favourable climate in some regions.

Legal monopoly is said to occur when a seller enjoys monopoly position due to the legal permission provided by the government.

ii. The main objective is to maximize profits.

The main objective is to prevent competitors from producing same

5


SYJC (XII)products.

iii. For e.g. Tea from Assam, crude oil from OPEC.

For e.g. Patent on a technology developed by a company.

[B] Short notes (2 out of 4)(1) According to Kenneth Boulding, "Micro economics is the study of

particular firms, particular households, individual prices, wages incomes, individual industries and particular commodities."Scope of Micro economics: Micro Economic analysis is individualistic in nature It considers individual constituents such as consumer, firm, producer,

individual income, price etc. Its study is mainly confined to price theory and resource allocation. It does not take into account aggregates of economy or national

problems such as poverty, unemployment, inequalities of income etc. Some theories such as fiscal and monetary policies are also beyond the

limit of micro economics. We can thus conclude that, the scope of Micro economics is limited

(2) Importance or significance of the Law of Diminishing Marginal Utility. The law of Diminishing Marginal Utility states: "Other things being

constant, the additional benefit which a person derives from the increase in the stock of a thing diminishes with every increase in the stock that he already has.

The following are the importance/significance of the law of Diminishing Marginal Utility

(a)To the Government: The law of DMU is useful to government in implementing various

economic policies like public distribution system, social justice, etc. Government has to frame these economic policies from time to time

which help to improve the welfare of the people in Society(b)To the Monopolist:

The law of DMU is useful to the monopolist in setting the price of the commodities.

Since a monopolist can practice price discrimination, he can easily charge different prices to different consumers for the same commodity

For e.g. A monopolist can offer commodities at a high price to the elite class, as for this class, the marginal utility of money is low

(c)To the Finance Minister: The law directs the finance minister to frame various taxation

policies.6


SYJC (XII) It helps in reducing economic inequality t does so by charging high

tax rate to the rich class, as for this class, the MU of money is less. And charging low tax rate to the poor / middle class, as for this class, the MU of money is high.)

The law is also helpful to economic experts, modern economists and bankers

(d)To the Producer: The law helps the producer in determining the sales and fixing the

price of commodities; thereby maximizing the profits More the stock of commodities, lesser will be the marginal utility. In

this case, the producer would fix a lower price of the product Lesser the stock of commodities, more will be the marginal utility. In

this case, the producer would fix a higher price of the product(e)To understand Paradox of Value:

The paradox of value is an economic concept which intends to explain why necessary things like water, air, etc. are so economical, while commodities like diamonds, BMW cars, etc., that are not that necessary, are very expensive

With the help of the law of DMU, it is possible to explain the paradox of value' by showing the difference between value in use refers to the usefulness of a commodity) and value in exchange (refers to the rate of exchange of one commodity in relation to other commodity)For e.g. The commodity water has high value in terms of usage. However, it lacks value in exchange. Whereas, diamonds have high value in exchange but lacks value in terms of usage

In economic terms, water has very high utility, but very low marginal utility because of less scarcity than diamonds which have very high marginal utility and very low utility

(f) To the Consumer: The law of DMU highlights the fact that consumption of a

commodity must be carried out till the point where its price equals marginal utility.

Besides it also directs the consumer in planning their budget, So as to achieve maximum satisfaction from the resource Available

(3) The Variation in Demand.Meaning of Variation in Demand: Variation in demand refers to the change in demand due to the change in

price of a commodity. There are two types of variations in demand: Expansion of demand and

Contraction of demand.(a)Expansion of Demand:

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SYJC (XII) With a fall in price, when more of a commodity is bought there is

expansion or extension of demand, other things remaining constant.(b)Contraction of Demand:

With a rise in price, when less of a commodity is bought there is contraction of demand, other things remaining constant

Expansion and contraction of demand can be shown by the movement along the same demand curve. This can be explained as shown below:Extension and Contraction in Demand:

In the diagram, X-axis represents the quantity of a commodity demanded and Y-axis represents the price

DD is the demand curve. When price was OP (original price, quantity demanded was OQ (original

quantity demanded) The two cases of Variation in demand can be explained as:(a)Extension in demand:

With the fall in the price OP to OP demand extends from OQ to 00 Here, extension in demand causes a downward movement along the same demand curve.

(b)Contraction in demand: With the rise in the price OP to OP demand contracts from OQ to O0

Here, contraction in demand causes an upward movement along the same demand curve

(4) Factors Determining Elasticity of Demand Elasticity of demand refers to the responsiveness of quantity demanded to a

change in factor/s affecting demand of that particular commodity. The factors which influence the elasticity of demand are as below:

(a)Habits: Habits influence elasticity of demand. The demand, which satisfies the habits, is normally inelastic in nature For e.g. Even if the price of alcohol increases, the drunkard would not

mind paying a high price for his drink(b)Availability of substitutes:

8


SYJC (XII) The demand for commodities having larger number of substitutes such as

cold drinks, chocolates, etc. is elastic in nature Here, if the price of a commodity having many substitutes increases, the

consumers may switch to is cheaper substitutes On the other hand, the demand for commodities having less substitutes

such as salt, match box, etc. is inelastic. Here, if the price of a commodity having fewer substitutes increases, the

consumers have no option but to buy it(c)Nature of commodities:

Elasticity of demand depends on the nature of commodities. Commodities can be either luxuries or necessities Necessary goods such

as salt, water, etc. are essential, and hence the demand for these goods is inelastic

The increase/decrease in price of necessary goods will have no impact on the quantity demanded i.e. the demand would remain constant, irrespective of the change in price.

On the other hand, the demand for luxurious goods such as expensive cars, diamonds etc. is elastic.

Here, the change in price will have an impact on the demand for commodities.

(d)Durability of goods: The demand for durable commodities such as tables, fans, etc. is elastic in

nature. Here, the consumer can delay his demand, if the price of a durable

commodity increases. On the other hand, the demand for less durable goods or perishable goods

such as flowers, fruits, etc. is inelastic in nature Even if the price of less durable/perishable commodity increases, the

consumers still cannot delay its demand. This is because, the commodity may get spoilt.

(e)Income level: Elasticity of demand depends on income level When income level is high, demand is normally inelastic This is because, even if the prices of commodities increase, a consumer

with high income level wouldn't mind paying for the commodities. On the other hand, when income level is low, demand is elastic. Here, if the prices of commodities increase, a consumer with low income

level will prefer cutting down his wants(f) Complementary goods:

The demand for complementary goods such as car and petrol, ink and pen, etc. is inelastic in nature.

9


SYJC (XII) For e.g. The person possessing a car will have an inelastic demand for

petrol.(g)Alternative use of a commodity: (Composite goods)

The demand for commodities having alternative uses is elastic in nature. For e.g. Electricity can be used for a number of purposes like heating,

lighting, cooking, cooling, etc. Thus, the demand for electricity is elastic(h)Price level:

Both, high priced commodities (such as diamonds, BMW car, etc) as well as low priced commodities (such as match box, water, salt, etc.) have inelastic demand.

Here, the quantity demanded is not dependent on the price levels of commodities.

(i) Proportion of income Spent: Elasticity of demand also depends on the proportion of income spent on

different goods If the consumers spend a large amount of income on consumption of

various goods and services, then the demand is said to be inelastic in nature

On the other hand, if they opt to spend a small amount of their income for certain goods, then the demand is said to be elastic in nature

Q.4. Answer the following. (3 out of 6)(1) Concepts:

1. Gross National Product (GNP) GNP refers to the gross market value of all final goods and services

that are produced in an economy during a year It includes net income from abroad.

It is calculated as: GNP C+I+G + (X-M)(R -P)Where,C = Private Consumption ExpenditureI = Domestic Private InvestmentG = Government's Consumption and Investment Expenditure(X – M) =Net Export Value, ie. Value of Exports – Value of Imports(R – P) Receipts from Investments made abroad – Payments made abroad

2. Gross National Product at Market Price (GNP(MP) Gross National Income (GNI) GNP(MP ) /GNI means the gross market value of final goods andservices

produced annually in a country, which is estimatedaccording to the price prevailing in the market

Market price includes 'cost of production' and indirect taxes' It is calculated as: GNP C+I+G+ (X-M)+ (R- P) +IT-S

10


SYJC (XII)WhereC = Private Consumption ExpenditureI = Domestic Private InvestmentG = Government's Consumption and Investment Expenditure(X – M)= Net Export Value, i.e. Value of Exports Value of Imports(R – P) Receipts from Investments made abroad Payments made abroadMP = Production at Market Price

3. Net National Product (NNP) Net National Product is the net market value of all the final goods and

services produced, by the residents of a country, during a period of one year.

It can be calculated as: NNP= C+I+G (X-M) +(R-P) -D4. Gross National Product at Factor Cost (GNP(FC))

GNP is the sum of money value of the income, produced by and accruing to the various factors of production in one year in a country

In order to arrive at GNP at factor cost, indirect taxes should be deducted and subsidies should be added to GNP at market prices.

It is calculated as: GNPFC=GNPMP - Indirect Taxes +Subsidies5. Gross Domestic Product (GDP)

GDP is the monetary value of all the finished goods and services produced within a country's borders, during a period of one year

It is calculated as: GDP= C+I+ G+(X-M)6. Net Domestic Product (NDP)

Net Domestic Product is the net market value of all final goods and services produced, within the territorial boundaries of a country, during a period of one year.

It can be calculated as: NDP =C+ I+G (X-M)- D7. Gross Domestic Product at Market Price (GDPMP)

GDPMP is the gross market value of all final goods and services produced within the domestic territory of a country, during a period of one year

The term 'gross implies that it is inclusive of depreciation. Since it is gross domestic product, the net income from abroad is not

considered in its calculation GDPMP market price includes amount of indirect taxes paid and

excludes amount of subsidy received, i.e. net indirect taxes are included.

It is obtained by deducting net income from abroad from GNPMP Thus, it is calculated as: GDPMP:= GNPMP-Net Income fromabroad

11


SYJC (XII)i.e. GDPMP =C+I+G+(X- M)+ IT-S

8. Gross Domestic Product at Factor Cost (GDPFC)

GDPFC refers to the gross money value of the income, produced by and accruing to the various factors of production within the domestic territory of a country, during a period of one year

It includes the amount of subsidy, but excludes indirect taxes paid Thus, it is calculated asGDPFC= GDPMP-Indirect taxes+ Subsidies.

9. Net Domestic Product at Market Price (NDPMP)

NDPMP is the net market value of all final goods and services produced, within the territorial boundaries of a country, during a period of one year

Since it is net domestic product, the net income from abroad is not considered in its calculation

It is obtained by deducting depreciation from GDP at market price. Thus, it is calculated as:NDPMP = GDPMP - Depreciation

10. Net Domestic Product at Factor Cost (NDPFC)

NDPFC is the net money value of the income earned by the factors in the form of wages, profits, rent and interest; within the territorial boundaries of a country, during a period of one year

It is also known as 'Domestic Factor Income' or Domestic Income It is obtained by deducting depreciation from GDP Thus, it is calculated as: NDPFC=GDPFC−¿Depreciation

11. Net National Product at Market Price (NNPMP ¿

NNPMP is the net market value of all final goods and services produced, by the residents of a country, during a period of one year

It is obtained by deducting depreciation from GNP Thus, it is calculated as:NNPMP = GNPMP - Depreciation

12. Net National Product at Factor Cost (NNPFC¿) Net National Income (NNI) NNPFC / NNI is the sum of wages, rent, interest and profits paid to

factors for their contribution towards the production of goods and services in a year.

It is calculated as: NNPFC=GNPFC-Depreciation13. National Income at Market Price (¿MP)

12


SYJC (XII) NMP means that the value of goods and services produced in a country

are calculated according to the price prevailing in the market, at a particular time.

It includes the indirect taxes and excludes the subsidies It can be calculated as:

¿MP=¿C+I+G+ (X- M) +(R- P) + IT- S14. National Income at Factor Cost (¿FC)

¿FC is the sum of all incomes, earned by resource suppliers fortheir contribution of land, labour, capital and entrepreneurialability, which go into the year's net production

In short, it is the sum total of all income received and accrued to the factors of production.

It is calculated as: ¿FC= NNPMP -Indirect Taxes -Subsidies15. Personal Income

Personal Income is the sum of all incomes, actually received by all individuals or households from all the sources during a given year

It may be earned or unearned.16. Personal Disposable Income.

Personal disposable income refers to the actual income which can be spent on consumption by individuals and families. It refers to the actual purchasing power.

The disposable income is that part of income, which is left after the payment of direct taxes like income tax, personal property tax etc.

It is calculated as: Personal Disposable Income= Personal Income -Direct taxes.

(2) The Keynesian Psychological Law of Consumption.Consumption. Consumption is that part of income, which is spent on purchasing goods and

services. It is formulated as: C = Y - S, where, C = consumption, Y = Income and S =

Saving. Consumption leads to further production of goods and services.Keynes Psychological Law of Consumption It explains the relationship between consumption (C) and income (Y) According to this law, as aggregate income increases, the total consumption

expenditure in the economy also increases, but in a lesser proportion than the increase in income.

In other words, the proportion of income spent on consumption goes on falling with rising income

This happens because, once wants are satisfied to a certain extent, people start saving and hence the entire income is not

13


SYJC (XII) Utilized for consumption. Hence, there is bound to be a gap between income

and consumption. According to Keynes, with the increase in income, both consumption and

savings increase; but consumption increases at a diminishing rate and saving increases at an increasing rate

This law is applicable to a community as a whole; as a community is composed of individuals.

The Psychological Law of Consumption by Keynes can be expressed with the help of the schedule and graph as follows:

Aggregate Income (Y) in crores

Aggregate Consumption (C) in crores

Savings (S=Y-C) in crores

0 500 -5001000 1200 -2002000 2000 03000 2600 4004000 3300 7005000 4000 1000

Consumption and Saving Function From the above table, it can be observed that: In the initial stage, there is no

income but there is still a certain amount of consumption expenditure incurred in order to sustain life. This expenditure is called as autonomous consumption expenditure.

At this stage, people may beg, borrow or resort to dissaving (ie, drawing from past savings to meet current consumption expenditure) or live on charity.

Thus, one part of expenditure on consumption is independent of income and is constant or autonomous.

At lower levels of aggregate income, say zero and 1000 crores, consumption expenditure is more viz. 500 crores and1200 crores respectively. Hence, saving is negative (ie, dissaving of 500 crores and 200 crores, respectively) When aggregate income is 2000 crores, consumption expenditure is 2000 crores. At this level, income (Y) is equal to consumption expenditure (C) Hence, saving (S) is zero

When aggregate income further increases to 3000 crores, 4000 crores and 5000 crores; consumption expenditure is2600 crores, 3300 crores and 4000 crores respectively. The level of savings is 400 crores, 700 crores and1000 crores respectively.

Hence it is clear that consumption expenditure doesn't increase at the same rate as aggregate income. Also, it is observed that, savings increase at an increasing rate Psychological Law of Consumption by Keynes:

14


SYJC (XII)

In the diagram, X-axis represents aggregate income (Y) and Y-axis represents consumption expenditure (C)

The 45° line indicates that Y C (Aggregate Income Aggregate Consumption) and it is the baseline.

The line ABC or C= a+ bY is the actual consumption function or propensity to consume

The line AC intersects the 45 line at point B; which is the breakeven point (the point where consumption equals income)

The vertical line A represents the autonomous expenditure incurred at zero level of income. AOAB represents dissaving.

After point B, the consumption expenditure increases but at a rate that is lesser than the increase in aggregate income.

The difference between the aggregate income and aggregate expenditure is termed as savings. Savings increase with an increase in the level of aggregate income.

(3) Difficulties faced by the Barter System(a) Lack of double Coincidence of wants:

Lack of double coincidence of wants was one of the most important limitations of Barter System

Under Barter system, exchange was possible only when there was double coincidence of wants. It means that both the parties had to have surplus of what the other person needed

(b) Lack of Common measure of value: In barter exchange, there was no common measure of value or unit of

account. Hence, it was difficult to calculate the value of goods exchanged

At the same time, it was difficult to compare certain units of a commodity with any service offered.

(c) Difficulty of Storage of goods: In barter exchange, it was necessary to store goods so that they could

be exchanged for some other goods at a later date But, the storage of highly perishable goods like fish, vegetables, milk

etc. was difficult. Also, there were space constraints.(d) Problem of making Deferred payments:

15


SYJC (XII) Under barter system, there existed a problem of making deferred

payment. Deferred payment refers to the payment that has to be made at a later

date(e) Problem of Indivisibility:

Under barter system, making a fractional payment was difficult especially when the commodities to be exchanged were indivisible in nature

These difficulties of barter system led to the invention of Money(4) Secondary functions are also known as non-banking functions .

These are broadly classified into two types viz Agency functions/ Agency services and General functions/General utility services.

(a) Agency Functions / Agency Services: Commercial banks perform certain functions on behalf of their

customers The bank acts as agents while performing these functions for their

account holders. Some of these functions are as follows: (i) Dematerialization (Demat) Account:

The bank provides demat services to its customers who invests in shares. It is helpful for the customers as:i) It helps to keep a record of the shareholding of the customers

in electronic form; andii) it facilitates the customer to buy and sell shares in the

market easily. The bank issues a statement of holding to the account holder

periodically for their information and records.(ii) Payments/Periodical Payments:

Banks also make payments on behalf of their customers such as payment of insurance premium, rent, electricity bill, telephone bill, taxes etc.

A nominal commission is charged for such services. This payment is made out of the balance outstanding in the

account of the customer. This service is popularly known as ECS or Electronic Clearing

Service(iii) Purchase and Sale of Securities:

Commercial banks buy and sell securities, debentures, shares as per the instructions and authority given by their customers

The banks also send a detailed account statement on a regular basis to the clients.

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SYJC (XII) Moreover, bank provides them with various analysis and

recommendation reports to aid them in decision making.(iv) Acting as Trustee, Executor, Administrator or Attorney:

As a trustee, the bank is the custodian of the customer's fund. In case of death of a customer, the bank acts as the executor of

the customers will As an attorney, the bank signs the documents on behalf of the

customer Commission is normally charged for such services

(v) Collection of Money: Commercial banks accept standing instructions from their

customers regarding collection of money such as cheques, drafts, interest, dividend, bills, promissory notes, rents demand drafts etc. and credit them into their accounts.

Against this service, the bank charges a nominal commission from their customers.

(vi) E-banking (Electronic Banking): E-banking is a facility by which a customer can operate his bank

account through internet safely and with total confidentiality. He can transfer money from one place to another. He can also make payments of various bills like telephone bills,

electricity bills etc. E-banking helps businessmen, traders and merchants to

carryout their transactions smoothly. The customer can also obtain an up-to-date status of his

accounts and savings, via E-banking(vii) Other functions:

Commercial banks also work as an agent for any government or local authority or any other persons i.e. clearing and forwarding of goods

(b) General Functions General Utility Services:Commercial banks also perform certain General Functions .General Utility Services to the general public. These are as follows: Remittance of Funds/Transfer of Money: Commercial banks remit money from one place to another or even

from one country to another. Remittance of fund is done by telegraphic transfer, mail transfer,

demand draft etc.Underwriter/Underwriting: Commercial banks provide underwriting services.

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SYJC (XII) Here, the bank acts as a guarantor to companies in case of issue of

shares. If the shares issued by the company are not sold, the bank will take the

responsibility for the shares which are unsold The bank charges commission for underwriting the sharesReference/Status Report: Commercial banks also provide confidential reports on third party

about its financial standing, mode and frequency of payments etc.ATM Facility, Credit Cards, Debit Cards: ATM is an electronic delivery system. By using this system, customers

can withdraw money at any hour of the day without going to the bank. Credit card / Debit card is a plastic card issued by the bank to its

customers. Credit card facilitates the card holder to use it for purchase on credit or

draw cash Debit card on the other hand can be used for purchase of goods and

services wherein the amount directly gets debited from the debit card holder's account

Letters of Credit: Letter of Credit helps the traders to buy goods on credit from foreign

countries. This document is issued by the customer's bank in one country to the

supplier's bank in another country to honour the drafts or the cheques of the person whose name is written on it.

This document basically serves the purpose of giving an assurance to the supplier that he will get the payment of the goods sent by him

The bank provides the Letter of Credit after considering the credit standing of the customer.

For the said service, the bank charges a certain percentage of the LC amount as commission.

Dealings in Foreign Exchange: Customers can convert their currency with some other country's

currency at commercial banks, as these banks deal in purchase and sale of foreign currency

Banks make profit in foreign exchange transactions. While giving this service, the banks are strictly required to comply with

the RBI Exchange Control RegulationsSafe Deposit Vault: Banks provide the "safe deposit vaults" or "lockers" facility to the

customers for safekeeping of their valuables like jewels, documents etc. (Lockers are small cabinets which ore fitted in steel racks and kept in strong rooms known as vaults.)

18


SYJC (XII) The customer during the banking hours can have access to these

lockers. The lockers can be assessed with keys, pin-numbers or some other

security code/pass. For this service, banks charge half yearly or annual fee (rent)Compilation of Statistics/Publishing Information: Some commercial banks publish information related to trade,

commerce and industry. Some banks also publish bulletins or journals on research giving

information about economic and commercial matters.(5) Functions of the Central Bank

Central Bank is the apex monetary and banking authority and occupies a pivotal position in the banking structure of the country

The functions of the Central Bank can be explained as follows:(a) Banker to the Government:

In the capacity of banker to the government, the Central Bank, performs the following functions for the government:(i) As a Banker to the Government:

Custodian of Government funds: The Central Bank is a custodian of the government funds Though it maintains cash balances of the government, it does

not pay any interest on such funds.Makes and Receives Payment: The Central Bank receives and makes payment on behalf of the

government such as salaries and pension to government servants, payment of interest to people on public debt etc.

Facilitates the Transfer of Government Funds: It also transfers funds from one place to another and from one

account to another In India, the RBI has branches in Mumbai, Delhi, Kolkata,

Chennai, Kanpur etc. It has five zonal offices and 19 regional offices in most of the

state capitals. At other places, the branches of State Bank of India (SBI) act as

agents of RBIProvides Short Term Loans: It provides short term loans or advances to the government as

and when required. It is known as Ways and Means Payment This is usually done by discounting government treasury bills.

19


SYJC (XII)Helps Raising Long Term Loans: The central bank helps the government in raising long term

loans by either contributing to such loans or by underwriting it.Provides Foreign Exchange: The Central Bank also provides foreign exchange to the

government to meet its external debt obligation and to spend money in foreign countries.

(ii) As an Advisor of the Government: The Central Bank gives useful advice to the government on

important economic issues such as foreign exchange policy, monetary policy, commercial policy, planning and budgetary policy, deficit financing, devaluation of currency etc.

Since the Central Bank possesses complete information about the working of the economy, it is in a position to offer useful advice to the government on economic, financial and monetary matters.

In India, the RBI advises the government on all banking and financial matters such as preparation of financial budgets, resource mobilization, measures to control inflation, economic issues concerning planning etc

(iii) As an Agent of the Government: The Central Bank, as an agent, helps the government in

managing the public debt of the government ie by raising loans, payment of interest and repayment of loans on maturity.

It also negotiates and manages the external loans on behalf of the government.

Moreover, it acts as a representative of the government and manages relations with international financial institutions like IMF (International Monetary Fund) and the World Bank.

(b) Controller of Credit: The sole objective of the Central Bank is to maintain financial stability. Therefore, it is necessary to regulate the total supply of credit lie, it is

necessary to ensure that the credit is used in an appropriate amount and in a proper manner).

Price instability, i.e. inflation and deflation, both have harmful effects on the economic development of a country

Expansion of credit tends to create inflationary pressure. Thus, in order to prevent inflation, the Central Bank has to restrict the supply of credit in the economy.

On the other hand, contraction of credit tends to created eflationary pressure. Therefore, to prevent deflation, the Central Bank has to expand credit in the economy.

20


SYJC (XII) To sum up, the Central Bank as an executor of the government's

monetary policy, controls the volume and direction of credit(c) Acts as a Banker's Bank:

The Central Bank acts as a leader and co-ordinator of all commercial banks in the countryIn this capacity, it performs the following functions:(i) Custodian of Cash Reserves:

Every commercial bank has to maintain a certain proportion of their cash reserves with the Central Bank.

It is a compulsory legal obligation as it enables the Central Bank:1. To have control over the total amount of credit creation by

commercial banks and thus on the total quantity of money in circulation.

2. By varying the legal minimum cash reserve, which every commercial bank must keep with the Central Bank and which is not available to commercial banks as basis of credit creation, the Central Bank thereby, can manipulate the quantity of money, which is in circulation in the economy as per the policy formulated by it.

(ii) Acts as a Clearing House: Since all commercial banks keep deposit accounts with the

Central Bank, it is in a position to act as a clearing house for transfer and settlement of mutual claims for them.

The claims of commercial banks against each other are settled through simple debit and credit entries in their accounts.

It economizes the use of cash and enables convenient adjustment of dues between commercial banks.

(iii) Advices Commercial Banks: The Central Bank advices commercial banks regarding the

practices and policies followed by them.(iv) Lender of Last Resort:

Commercial banks often operate on low cash reserve system If there is a sudden demand for cash by its depositors, this may

result in shortage of funds. In such situations, commercial banks can approach the Central

Bank to obtain loans and meet the sudden demand of cash This function of Central bank of being the ultimate source of

financial assistance to commercial banks, is known as the Lender of the Last Resort.

It helps to control panic and infuses confidence among the banks as well as the public.

21


SYJC (XII) Thus, during the financial difficulties or crisis, commercial banks

can easily rely upon the Central Bank for the required assistance(d) Developmental and Promotional Functions:

The developmental and promotional functions of the Central Bank include:1) Taking steps to promote and create banking habits among the

people2) Establishing special banking training institutions to train bank

personnel to undertake banking functions in urban as well as rural areas

3) To establish specialized financial organizations with adequate funds4) For e.g. In India, RBI has many financial institutions such as National

Bank for Agricultural and Rural Development (NABARD), Export Import Bank of India (EXIM), Industrial Development Bank of India (IDBI), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Housing Bank(NHB) etc.

5) Providing credit facilities to agriculture, industry and other priority sectors through commercial and co-operative banks.

6) Maintaining price stability in the economy7) Conducting research and surveys on important aspects of the

economy with a view to provide guidelines for development.8) Gives clearance to various projects involving financial matters. It

includes clearing of joint ventures abroad and investment proposals in foreign countries.

(e) Data Collection and Publicity: The Central Bank collects and publishes information relating to the

various sectors of an economy In India, RBI publishes data and information regarding various Macro

Economic Variables Based on this information, the government formulates and implements

its economic and monetary policies.(f) Issue of Currency Notes:

Central Bank has the sole power of issuing notes or paper currency to the public

The reasons for granting monopoly rights to the Central Bank are as follows:1) It brings uniformity in the currency, thereby making it easy for the

people of the nation to identify it2) The notes carry more prestige as they are issued by a single apex

bank

22


SYJC (XII)3) Since the authority rests with a single entity, it becomes easy to

control the quantity of notes issued. Here, the over issuing of currency can be avoided

4) It helps to build confidence among the citizens of the nation5) It helps in maintaining the price stability. The central bank can do

so as it has the authority to control the credit creation by commercial banks more effectively.

6) The circulation of paper currency can be supervised and regulated by the Central Bank.

In India, the Reserve Bank of India (RBI) has the sole right of issuing currency notes of all denominations except the one rupee note.

The one rupee note and coins of all denominations are issued by the Ministry of Finance of the Government of India. However, their distribution is undertaken by the RBI

It should be noted that, while issuing notes, the Central Banks are required to follow certain principles

Earlier, it was full backing in terms of gold, however now it is the Minimum Reserve System

According to this system, a minimum reserve has to be maintained by the Central Bank before issuing currency.

The RBI maintains a minimum reserve of 200 crores, consisting of 115 crores in gold and the remaining 85crores in government securities.

(g) Foreign Exchange Regulatory: The Central Bank of the country functions as a custodian of gold and

major currencies like U.S. Dollar, Euro, Japanese Yen, Pound etc. obtained by the Government and International Trade.

This function enables the Central Bank to:1) Exchange the national currency at a fixed rate of exchange.2) Maintain the value of national currency at the determined level with

a view to attain equilibrium in the international trading transactions e. import and export of goods and services).

3) Maintain international liquidity of the country (ie, meeting any foreign obligation such as payment of interest and principal amount of foreign loans in appropriate currencies)

4) Manage exchange control operations by supplying foreign currencies to importers, businessmen and students studying abroad

5) In India, RBI has the responsibility of maintaining the exchange value of rupee.

(6) Meaning of Budget: The word 'Budget' is derived from the French word 'Bougette which means a

bag or a wallet containing financial proposals.

23


SYJC (XII) These financial proposals refer to proposals for collection of revenue and the

allocation of the revenue resources among various heads of expenditure. In simple words, budget refers to an annual statement of' collection of

revenue and 'payments on expenditure prepared by the financial authority during a fiscal year.

The key objective of budget is to regulate the financial and economic affairs of the country

Definitions of Budget: As per Prof. Johnson, "A state budget is a statement of the states estimated

income and expenditure in a commencing period usually one year" As per Prof. Dimock, "Balanced estimate of expenditure and receipts for a

given period of time" As per the Indian Constitution, "A budget has been referred to, as the

annual financial statement of the estimated receipts and expenditure of the government"

Question – SN on Indian Budget. OR Budget in India. Budget is an annual financial statement of accounts for the preceding and

current year, and the estimate of the revenue and expenditure of the coming year

Article 112 of the Constitution of India requires the Central Government to prepare "Annual Financial Statement", also known as Budget, for the country as a whole

In India, the annual budget is presented in the Parliament on the last working day of the month of February.

The Finance Minister is responsible for framing and presenting the budget to Parliament on behalf of the Union Government.

The Indian fiscal year begins from 1 April and ends on 31March The budget helps the Government of India to control the entire economy of

the nation in an effective and balanced MannerMain components of Budget. Budget is an annual financial statement of accounts for the preceding and

current year, and the estimate of the revenue and expenditure of the coming year.

As per the Indian Constitution, the budget has to distinguish expenditure on revenue account from other expenditure. Thus, the budget is distinguished into Revenue Budget and 'Capital Budget

Revenue Budget: It explains how the revenue is generated by the government and how it is

allocated among various heads of expenditure. It consists of 'Revenue Receipts and Revenue Expenditure'

Capital Budget: It deals with the capital aspect of the budget. It consists of 'Capital Receipts

and 'Capital Expenditure'24


SYJC (XII)Components of budget are explained as below: (A) Budget Receipts:

Budget Receipts refer to the budgeted estimated receipts of the government, from all sources, during a given fiscal year.

It includes 'revenue receipts' and 'capital receipts(1) Revenue Receipts:

Revenue receipts are those money receipts which neither create any liability nor lead to any reduction / depletion in government assets

They are regular and recurring in natureThe two types of revenue receipts viz. "Tax Revenue' and 'Non-Tax Revenue' are explained below(i) Tax Revenue:

Tax revenue refers to the sum total of receipts from taxes and other duties levied by the government.

It is the main source of regular receipts of the government.

It is a compulsory payment made by the public and the organization to the government without references to anything in return

The government further uses such receipts for public welfare.

Tax revenue is further classified into Direct Tax and 'indirect Tax:

(*) Direct Tax: Direct tax refers to that type of tax which is levied on the

'income of individuals and 'profits of business organizations'

Direct tax is to be borne by the tax payer. Here, the tax bearer and tax payer is one and the same Thus, it can be concluded that, direct tax is non-

transferable in nature.For e.g. Income tax, corporate tax, property tax, wealth tax, etc.(*) Indirect Tax: Indirect tax refers to that type of tax that is levied on

commodities (goods) and/or services that are manufactured by the business organizations.

These organizations transfer the burden of tax to the end customer

25


SYJC (XII) In other words, the tax payer will be the business

organization and the tax bearer will be the end customer Thus, it can be concluded that, indirect tax is transferable

in natureFor e.g. Service tax, VAT (value added tax), custom duty, excise duty, etc

(ii) Non-Tax Revenue: It includes the government receipts from all sources other

than those of tax receipts. The various sources of non-tax revenue include the

following:(*) Interest and Dividend: It is an important source of non-tax revenue. The government receives interest on the loans provided to

the state governments, union territories and private enterprises

It also receives dividends from its investment in other companies

(*) Fees, Licence Fee: Fees refer to the income generated from the charges

imposed by the government to provide various services (such as passport and visa fees, court fees, registration fees etc.) to the public.

By this way, the costs incurred for rendering the services are also met.

(*) Gifts and Grants: These refer to the monetary gifts and/or grants that the

government receives from other nations or from some international funds.

Also, individuals and/or companies sometimes voluntarily donate money to support the various initiatives of the government or during a calamity (such as flood, earthquake etc.)

(*) Fines and Penalties: These refer to that source of monetary income which

comes from the general public or organizations in the event of any violation of law and order system of the country.

For e.g. Fine for jumping a signal, wearing headphones while riding a bike etc. Penalty for not disclosing proper financial status, etc

(*) Escheats:

26


SYJC (XII) It refers to the government's claim on any unclaimed

property in the event of demise of the property owner without a legal heir or will

(2) Capital Receipts: Capital receipts refer to those monetary receipts that either

create a liability or cause a reduction in the asset of the government

Capital receipts can be broadly classified into the following three groups:

(*) Borrowings: Borrowings refer to loans availed by the government from

general public, Reserve Bank India, international organizations like World Bank, International Monetary Fund), in order to fund its exceeding expenditure requirements, in lieu of interest payment

(*) Recovery of Loans: Government provides loans to state governments, union

territories, public sector undertakings, etc. to cope with their financial requirements.

Recovery of loans takes place when the loan amount is repaid by these entities to the government.

Recovery of loans forms a capital receipt and leads to a reduction in assets of the government.

(*) Other receipts: Other receipts involve:(*) Disinvestment: Disinvestment refers to the act of selling shares of selected

Public Sector Undertakings held by the government When government sells such shares, it leads to transfer of

ownership from the public sector units to the private sector units Disinvestment forms a capital receipt and leads to a reduction in

assets of the government.(*) Small Savings: Small Savings refer to the funds raised from general public in the

form of post office deposits, national savings certificate, public provident fund, etc.

Such savings form a capital receipt and increase the liability of the government

(B) Budget Expenditure: Budget Expenditure refers to the estimated proposed expenditure of

the government for a given fiscal year. It includes the following segments:

27


SYJC (XII)(*) Plan Expenditure: It is the expenditure incurred for various plans programmes initiated by

the government. For e.g. Expenditure on irrigation, transport energy, agriculture allied

activities, general economic social services, communication, etc.(*) Non-plan Expenditure: It is the expenditure that arises out of incidents that lie outside the

scope of plans made by the government. For e.g. Expenditure on relief and rescue operations during natural

calamities(*) Developmental Expenditure: It is the expenditure that is directly associated with the socioeconomic

development of the country For e.g. Expenditure on health, education, social welfare, scientific

research etc.(*) Non-developmental Expenditure: The expenditure made by the government that doesn't create any

productive asset is known as non developmental expenditure. For e.g. Expenditure on administrative services, defence, etc.Budget expenditure can be further classified as:(1) Revenue Expenditure:

Revenue expenditure refers to that type of expenditure which neither creates any asset nor reduces the liability of the government and is recurring in nature.

It is incurred by the government for running of the various departments and providing services.

Revenue expenditure is met out of revenue receiptsIt includes expenditure on: General Services (includes defence services, collection of taxes,

judiciary and interest payments) Social and Community Services includes medical and public

health, education, labour and employment). Economic Services (includes agriculture, industries, trade,

transportation etc.) Grants (includes all grants extended to the store government

and Union territories.)(2) Capital Expenditure:

Capital expenditure refers to that type of expenditure which either creates an asset or reduces the liability of the government.

Most of the capital expenditure is developmental in nature28


SYJC (XII) Capital expenditure is met out of capital receiptsIt includes expenditure on: Expenditure on land and building, infrastructure projects such as

road construction, irrigation facility in rural areas, power generation etc

Machinery and investment Investment in stock (shares) Loans extended to state government & government companies.Loans extended to corporations and private organizations(Students shall explain the points in short as the Q is for 4 marks)

Q.5. State with reasons whether you agree or disagree with the following statements (3 out of 6)(1) No I do not agree with the statement

The scope of micro economics includes theory of product pricing and theory of factor pricing

The theory of product pricing explains how relative prices of cotton, cloth, wheat, rice, sugar, etc are determined

The theory of factor pricing explains how rewards of rent ,wages etc are determined

Micro economics helps in determining the product prices as well as factor prices

Hence it is known as price theory and not income theory(2) Yes I agree with the statement

The law of Diminishing Marginal Utility states: "Other things being constant, the additional benefit which a person derives from the increase in the stock of a thing diminishes with every increase in the stock that he already has.

The following are the importance/significance of the law of Diminishing Marginal Utility

(a) To the Government: The law of DMU is useful to government in implementing various

economic policies like public distribution system, social justice, etc. Government has to frame these economic policies from time to time

which help to improve the welfare of the people in Society(b) To the Monopolist:

The law of DMU is useful to the monopolist in setting the price of the commodities.

Since a monopolist can practice price discrimination, he can easily charge different prices to different consumers for the same commodity

For e.g. A monopolist can offer commodities at a high price to the elite class, as for this class, the marginal utility of money is low

29


SYJC (XII)(c) To the Finance Minister:

The law directs the finance minister to frame various taxation policies. It helps in reducing economic inequality t does so by charging high tax

rate to the rich class, as for this class, the MU of money is less. And charging low tax rate to the poor/middle class, as for this class, the MU of money is high.)

The law is also helpful to economic experts, modern economists and bankers

(d) To the Producer: The law helps the producer in determining the sales and fixing the

price of commodities; thereby maximizing the profits More the stock of commodities, lesser will be the marginal utility. In

this case, the producer would fix a lower price of the product Lesser the stock of commodities, more will be the marginal utility. In

this case, the producer would fix a higher price of the product(e) To understand Paradox of Value:

The paradox of value is an economic concept which intends to explain why necessary things like water, air, etc. are so economical, while commodities like diamonds, BMW cars, etc., that are not that necessary, are very expensive

With the help of the law of DMU, it is possible to explain the paradox of value' by showing the difference between value in use refers to the usefulness of a commodity) and value in exchange (refers to the rate of exchange of one commodity in relation to other commodity)For e.g. The commodity water has high value in terms of usage. However, it lacks value in exchange. Whereas, diamonds have high value in exchange but lacks value in terms of usage

In economic terms, water has very high utility, but very low marginal utility because of less scarcity than diamonds which have very high marginal utility and very low utility

(f) To the Consumer: The law of DMU highlights the fact that consumption of a commodity

must be carried out till the point where its price equals marginal utility. Besides it also directs the consumer in planning their budget, So as to achieve maximum satisfaction from the resource Available(students shall write the points in brief)

(3) Yes I agree with the statementTotal Outlay Method: Using this method, elasticity of demand is calculated by comparing the total

expenditure of the consumer at original price with the total expenditure of the consumer at the new price.

30


SYJC (XII) Dr. Alfred Marshall has explained this method by considering three cases.

The cases are explained below with the help of examples

Cases Price (Rs)

Qty demanded

Total expenditure

(PXQ)

Elasticity of demand

A 105

1020

100100

Unitary or 1

B 105

1030

100150

Elastic or >1

C 105

1015

10075

Inelastic or <1

Unitary elastic demand: In case A, it can be seen that as the price of the commodity falls from 10 to 5, the quantity demanded increases from 10 to 20 and hence the total expenditure on it remains the same, i.e. 100. Therefore, the demand is unitary elastic: Elastic demand: In case B, it can be seen that as the price of the commodity

falls from 10 to 5, the quantity demanded increases from 10 to 30 and the total expenditure on it rises from 100 to 150. Therefore, the demand is relatively elastic

Inelastic demand: In case C, it can be seen that as the price of the commodity falls from 10 to 5, the quantity demanded increases from 10 to 15 and the total expenditure on it falls from 100 to 75. Therefore, the demand is relatively inelastic.

(4) Yes I agree with the statement Perfect competition can be defined as market structure where there are large

number of sellers selling homogenous goods to large number of buyers at uniform prices without any type of government intervention

Features-Large number of buyers and sellersFree entry and exitUniform priceTransport cost is constantHomogenous products etc

Features like large number of sellers and buyes and free entry and exit are realistic

However, the other features are not possible in resl economic world as there is always some level of government intervention, some differentiation in product sold also transport cost may be different

Due to all these reasons perfect competition is imaginary concept(5) N0, I do not agree with the above statement. There are insurable as well as non-

insurable TskS

31


SYJC (XII) There are two types of business risks. Those risks which can be covered by insurance are called insurable risks. ne tosses which occur on happening of certain events are indemnified

(reimbursed) by the insurance company For e.g. Loss by fire, loss by theft, loss by floods, loss by earthquakes etc. The entrepreneur does not have to bear insurable risks. Non-insurable risks are unexpected risks in business which cannot be insured. If there is loss on account of happening of such uncertain events, then the

loss shall not be indemnified by the insurance company. For e.g.: Loss due to war, loss due to change in government policy, etc. The entrepreneur has to bear non-insurable risks. Thus, all risks are not insurable. There are insurable as well as non-insurable

risks.(6) Yes I agree with the statement

Following precautions must be considered while estimating national income by Income method: All transfer incomes or transfer payments which do not represent earnings

from productive services (such as pension, scholarship, gifts, donations, charity, unemployment allowances, lottery prize etc.) should be excluded.

All unpaid services like services of a housewife, teacher teaching her/his child etc. are to be excluded.

Any income from sale of second hand goods like cars, house, etc. should be excluded.

Receipts from the sale of financial assets such as shares and bonds should not be included as it does not add anything to real national income. The gains on trading in shares or securities is not a factor income for contribution in the process of production

Revenue received by the government through direct taxes, should be ignored, as it is only a transfer of income

Undistributed profits of companies, income from government property and profit from public enterprise, such as water supply etc. should be included.

Imputed value of production kept for self consumption and imputed rent of owner occupied houses should be included.

Q.6. Answer in detail. (2 out of 4)(1) The Law of Demand.

The law of demand was given by Dr. Alfred Marshall. The law intends to explain the consumer behaviour with reference to change

in price It also explains the inverse relationship between price and demand It describes the functional relation between demand and price.

32


SYJC (XII) It can be expressed as D= f (P) i.e. demand is a function of price.Statement of Law: Law of Demand states that "Other things being constant, the higher the price

of a commodity, smaller is the quantity demanded and lower the price of the commodity er is the quantity demanded"

The law of demand can be explained with the help of the following schedule and diagram:Demand Schedule:

Price of Apples (Per kg) (Rs)

Demand for Apples (kg)

40 130 220 310 4

In the table, it can be seen that, when the price of apple decreases, its demand increases.

Whereas, when the price of apple increases, its demand decreases Thus, it shows an inverse relationship between price and demand.

Demand Curve

In the diagram, X-axis represents the quantity demanded for apples, whereas Y-axis represents its price.

DD is the demand curve which slopes downwards from left to right The demand slope is negative as there is an inverse relationship between

price and demandExceptions to the Law of Demand? Marshall's Law of Demand: "Other things being constant, the higher the price

of a commodity, smaller is the quantity demanded and lower the price of the commodity, lorger is the quantity demanded". However, the law of demand does not hold true in all cases. In certain cases, the demand curve slopes upwards. Some of these exceptions are:

33


SYJC (XII)(a) Prestige goods:

Diamonds, sports cars, high end watches, luxurious cars are prestige goods.

Such goods have a 'snob appeal Rich people consume such goods to maintain their status and pride. Therefore, when the price of such goods increases, their demand also

increases.(b) Price illusions or Consumer's psychological bias:

Consumers have an illusion that higher the price, better the quality of the commodity. Therefore, the demand for such goods tends to increase with the increase in their price.

For e.g. Certain people tend to buy costly flats assuming that the construction quality of such flats would be much better

However, that may not be the case.(c) Giffen goods:

Giffen good is a product that people prefer consuming more as the price rises and vice versa, thereby violating the law of demand.

Sir Robert Giffen, observed that in certain inferior goods (Giffen goods), the law of demand does not hold true.

According to him, when prices of such goods fall, the demand declines due to the negative income effect and people's increasing preference for a superior commodity with the rise in their real income.

However, when the price of inferior goods increases, the demand for such goods also increases.

Hence, it can be said that there exists a direct relationship between the price of Giffen goods and its demand

In this case, the demand curve slopes upwards from left to right This behavior is also known as Giffen's paradox. Examples of Giffen goods: Low quality rice, wheat, ghee, etc.

(d) Demonstration effect: The tendency of low income groups to imitate the consumption pattern

of high income groups is called demonstration effect. For e.g. Demand for consumer durables such as latest mobiles,

refrigerators etc.(e) Ignorance:

Sometimes due to lack of knowledge of the existing market price, people tend to buy more at a higher price

(f) Speculation: When people speculate a change in price of a commodity in the future,

they may not act according to the law of demand.

34


SYJC (XII) People may tend to buy more at rising price, when they anticipate

further price rise. For e.g. Even if prices of some goods like sugar, oil, etc. are rising

before Diwali, people go on purchasing more of these products at rising prices, assuming that the prices of these goods may increase further during Diwali.

(g) Habitual goods: If a person is habituated or addicted to certain goods, his demand for

that good may not change with the change in its price. For e.g. Rise in prices of certain goods like tobacco, alcohol, cigarettes,

etc. does not have any effect on its demand(2) Price elasticity of demand refers to the percentage change in quantity demanded

of a commodity due to a percentage change in its price According to P. A. Samuelson, "Price elasticity is a concept form easuring

how much the quantity demanded responds to changing price"Types of price elasticity of demand: (a) Infinite / Perfectly Elastic Demand:

When a change in price leads to infinite change in quantity demanded, it is known as infinite elastic demand.

Perfectly elastic demand is simply theoretical.Perfectly Elastic Demand Curve:

In such a case, demand curve is a horizontal straight line parallel to X-axis as shown in the graph.

It is written symbolically as E(b) Perfectly Inelastic Demand:

When there is no change in demand, in spite of a change in price, it is called perfectly inelastic demand.

In a perfectly inelastic demand, quantity demanded remains constant regardless of change in price. In other words, the amount demanded is totally unresponsive to a change in price

For e.g. Demand for salt, water, life saving medicines, etc. Here, the change in prices will have no or negligible effect on their

quantity demand.Perfectly inelastic Demand Curve

35


SYJC (XII)

In such a case, demand curve is a vertical straight line parallel to Y-axis as shown in the graph

It is written symbolically as Ed= 0(c) Unitary Elastic Demand:

When the percentage change in demand is exactly equal to the percentage change in price, it is called as unitary elastic demand.

In a unitary elastic demand, the percentage change in both, the price and quantity demanded is the same

For e.g.: If the price falls by 75 %, quantity demanded rises by 75%Unitary Elastic Demand Curve:

In such a case, the change in price PP is equal to change in demand QQ as shown in the graph

It is written symbolically as Ed= 1.(d) Relatively elastic demand / Elastic demand:

When the percentage change in demand for a commodity is greater than the percentage change in its price, it is called as a relatively elastic demand.

In a relatively elastic demand, a proportionate change in price of a commodity causes more than proportionate change in quantity demanded.

For e.g. If the price falls by 25%, the quantity demanded of the commodity rises by 75%.Relatively Elastic Demand Curve:

36


SYJC (XII)

In such a case, the demand curve is flatter as shown in the graph It shows that the change in demand QQ1, is more than the change in

pricePP1 It is written symbolically as Ed> 1

(e) Relatively inelastic demand/Inelastic demand/Less than unitary demand: When the percentage change in demand for a commodity is less than

the percentage change in its price, it is called as a relatively inelastic demand.

In a relatively inelastic demand, a proportionate change in price of a commodity is greater than the proportionate change in quantity demanded.

For e.g. If price falls by 50% quantity demanded rises only by 25%Relatively inelastic Demand Curve:

The demand curve in such a situation is steeper as shown in the graph It shows that the change in demand QQ is less than the change in price

PP1 It is written symbolically as Ed< 1

(3) The law of supply was introduced by Dr. Alfred Marshall, in his book 'Principles of Economics'; published in 1890

The law intends to explain the producer's behaviour with reference to change in price. It explains the functional relation between quantity supplied and price

Statement of Law:

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SYJC (XII) Law of Supply states that "Other things being constant, the higher the price of

the commodity, greater is the quantity supplied and lower the price of the commodity, smaller is the quantity supplied.

The law of supply can be explained with the help of the following schedule and diagram:Supply Schedule:

Price of Oranges (Rs) per Kg

Supply of Oranges (Kg)

10 10020 20030 30040 40050 500

In the table, it can be seen that, when the price of oranges increases, its supply also increases

Whereas, when the price of oranges decreases, its supply also decreases Thus, it shows a direct relationship between price and quantity supplied.

In the diagram, X-axis represents the quantity supplied for oranges, whereas Y-axis represents its price.

SS is the supply curve which slopes upwards from left to right. The supply slope is positive as there is a direct relationship between price and

quantity supplied.Assumptions of the Law of Supply: The law of supply is conditional in nature. The law assumes that price alone changes the supply of commodities and all

the other factors affecting supply remain constant. These assumptions are as below:(a) Cost of production remains unchanged:

It is assumed that there is no change in the cost of production.

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SYJC (XII) If cost of production changes, profit of the seller changes which further

increases decreases the supply.(b) Weather Conditions Remain Unchanged:

The law assumes that the weather conditions remain the same. If there are natural calamities like earthquake, floods etc., then the

supply will decrease without decrease in price.(c) Government Policies Remain Constant:

It is assumed that government policies such as taxation policy, subsidies, industrial policies etc. remain constant.

If the government charges high rate of tax on certain commodities, then their supply will eventually decrease without a decrease in price

(d) No Change in Technique of Production: It is assumed that there is no change in the method /technique of

production Improvements in technology may increase the supply at the same

price.(e) Scale of Production Does Not Change:

The law assumes that the scale of production remains constant during the given period of time.

(f) No Change in Transport Cost: It is assumed that there is no change in the condition of transport

facilities and costs. Better transport facilities would increase the supply at the same price

(g) No Future Expectations: The law assumes that the sellers do not expect any change in the price

of the product in the near future, If the seller assumes that the prices may rise in the future, then he

would withhold the stock of goods even when the prices, at present, are high.

(h) No Changes in The Prices of Other Goods: If there is a change in the price of other goods, then the law of supply

will not operate because the producer may transfer the resources in the production of other commodities.

Hence, prices of other goods are assumed to remain constant(4) Meaning of Monopoly:

The word 'monopoly has been derived from two words mono which means 'one and poly which means 'seller

Monopoly is that form of market, where there is a single seller who has complete control over the supply of the commodity and there are no close substitutes of the commodity.

Since, there is no competition in the market, monopolist is a price maker and not a 'price taker'.

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SYJC (XII) Thus, price discrimination is possible under monopoly.Definitions of Monopoly: According to H. L. Ahuja, "Monopoly is said to exist when one firm is the sole

producer or seller of a product which has no close substitute." According to Chamberlin, "A monopoly refers to a single firm, which has

control over the supply of a product, which has no close substitute"Features of Monopoly:Following are the features of monopoly:(a) Price Maker:

The seller under monopoly, is a price maker and not a price taker'. Since, the seller has complete control over the supply of the

commodity, he can charge any price for the commodity.(b) Barriers to Entry:

The monopolist has complete hold over the market. He will not allow any other firm to sell the same or a substitute product

in the market. To restrict them to enter in the market, he will set various economical,

technological and legal barriers(c) Price Discrimination:

Price discrimination means charging different prices for the same commodity to different buyers.

It is a feature of monopoly where a monopolist resorts to price discrimination for increasing his profits.

Here, the monopolist, may charge a high price to the rich or upper middle class and a low price to others.

(d) No Distinction Between Firm and the Industry: In a monopolistic market, there is no distinction between firm and

industry, since there is only a single firm which is producing and selling the commodity.

Thus, it is rightly said that the firm and industry are same.(e) No Close Substitutes:

Under monopoly, there are no close substitutes available for the commodity sold in the market.

As the other firms do not produce the same product, monopolist does not face any competition.

(f) Single Seller: In a monopolistic market, there is a single seller or a single producer. Here, the monopolist faces no competition from any other producer or

seller.(g) Profit Maximization:

The main aim of the monopolist is to maximize profits40


SYJC (XII) Thus, his decisions regarding the price and level of output are guided

by the motive of maximizing profits. The monopolist, to earn super normal profits, may control the supply,

artificially create shortage of goods and increase the price.(h) Control Over the Market Supply:

A monopolist has complete control over the market supply. He is the sole producer/seller of the commodity. Also, entry barriers such as natural, economic, technological or legal do

not allow competitors to enter the market.

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