(5/7/8 marks)

Question no. 8,9 are not answered.

ECONOMICS1. State objective of International Monetary Fund

The International Monetary Fund was established in 1944 as a result of a conference held at Bretton woods, New Hampshire in USA. The main aim of the conference was to find ways and means to promote economic growth and financial stability . An efficient international monetary system was considered as a prerequisite to promote and regulate international tread .Hence IMF came into existence in 1944 and became operational in 1947.

OBEJECTIVES :

The operations of the IFM aims at the following objectives :

1.Ensuring exchange rate stability

2.Providing assistance to member countries to overcome short term disequilibrium in balance of payments.

3.Promoting international monetary co-operation.

4.Assisting the member nations in the expansion of world trade and also ensuring balanced growth.

5.Establishing a multilateral system of payments for the smooth flow of trade.

6.Providing funds to the members to correct adverse balance of payments position of all the objectives, providing short term assistance and promoting exchange rate stability are the prime objectives of the IMF.

2. State the features of Perfect completion.

Perfect competition is an ideal market structure which ensures rational utilization of resources .Perfect competition avoids exploitation of labourers and consumers . A perfectly competitive market exhibits the following features:

1.There are large number of sellers. Each seller sells a small fraction of the output. He cannot influence the price of the commodity by changing his supply. He has to accept the prevailing price and sell as much as possible at the existing price . Hence a firm under perfect competition is said to be a price taker.

2.There are large number of buyers. Each buyer buys a small fraction of the output .Hence he cannot influence the price through his purchase.

3.All the units of commodity produced and sold by all the firms are homogeneous in nature .Hence they are perfect substitute for each other .

4.A single price prevails in the market .

5.There is free entry and exit. Any firm can join the industry and any firm can leave the industry. There are no restrictions on entry and exit.

6.There is no government intervention. Market mechanism is allowed to play its role in the determination of equilibrium price and output .

7.The transport cost is assumed to be nil. It is assumed that either all the firms are close to market or are equally far away from the market. Hence the transport cost is assumed to be nil.

8.Factors of production are said to be perfectly mobile. This ensures equal factor cost for all the firms.

9.Both the sellers and the buyers have perfect knowledge about the market. If any seller tries to sell at higher price, the consumer will shift to some other seller. Similarly no seller would like to sell at a lower price as all the sellers know about the market price.

3. State the features of Monopoly.

Monopoly is a market structure characterized by the existence of a single seller. It exhibits the following features:

1.A single seller has complete control over supply of the commodity.

2.There are no close substitute for the product.

3.There is no free entry and exit .There are many restrictions on entry and exit.

4.It is a complete negation of competition.

5.A monopoly firm has complete control over the price policy. The is a price maker under monopoly .

6.Since there is a single firm, the firm and industry are one and the same.

7.The industry faces a downward sloping demand curve. This implies that he can sell more by reducing the price . Through he is a price maker he does not have unlimited power. He cannot fix the price and the quantity to be sold .He has to fix either the price or quantity and leave the other to the market. The monopolist has to consider the elasticity of demand for his product while fixing the price.

8.There are no immediate rivals for the firms.

4. State the features of Monopolistic Competition.

Monopolistic competition is a combination of monopoly and competition. Pure monopoly and perfect competition do not exist in reality. In the real word ,markets have both elements of monopoly and competition and hence the markets are imperfect. The concept of monopolistic competition was developed by Prof. Chamberlin , a famous American economist.

The main features of monopolistic competition are as follows:

1.Large number of sellers :

There are large number of sellers sharing a small share of the market demand for a product. They produce differentiated products which are close substitutes for each other. Due to this ,the competition is very

severe under monopolistic competition .Presence of large number of seller also indicates that the size of firms will be relatively small.’

2.Product differentiation:

Though the product produced by them are identical , they are differentiated in some form or the other .In other words the products produced by the firms are not the same but similar. The price of the products cannot be very much different from each other as their products are similar. This feature also indicates the tough competition prevailing among the firms.

3.Influence over the price:

Firms under monopolistic competition have some amount of control over the price. Its products have close substitute in the market. If the price of a products have close substitute in the market. If the price of a product is reduced demand will go up and vice versa . Hence the demand for the substitutes will also vary. The firm faces a downward sloping demand curve which is the AR curve and the MR curve lies below it. The firm is not a price taker and it has to decide about the price – output combination to maximize its profit.

4.Selling cost:

This is a unique feature of monopolistic competition. Selling cost refers to the cost incurred on advertisement, Sales promotion, etc. In perfect competition and monopoly , there is no need for selling cost. Under monopolistic competition firms compete with each other through advertisement. This is known as non-price competition. Through selling cost, The preferences of the customers are influenced and firms aim at attracting more customers.

5.Large number of buyers :

This market structure like perfect competition has a large number of buyers . Buyers have ample choice in selecting the goods as close substitutes are available. Buyers also develop a preference for a particular brand .

6.Free entry and exit :

There are no barriers to entry under monopolistic competition. Exit is also equally easier. Though there is free entry and exit, it is not like perfect competition where a new firm can produce the same commodity produced by others and can compete in the market. Here the new firm has to develop a differentiated product and compete with the already existing ones.

7.Concept of group :

While developing the theory of imperfect competition , Prof. Chamberlin introduced the concept of group to replace to the concept of industry . An industry refers to a cluster of firms producing the same commodity. Here the firms are producing differentiated products which are close substitutes for each other . Hence the term industry cannot be applied here. A more relevant concept ‘group’ was introduced. It implies a collection of firms producing differentiated products which are close substitutes for each other.

8.Price and non-price competition :

Firms in the market compete both through price as well as through non-price competition . Non-price competition implies competition through advertisement, sales promotion, etc.

Thus monopolistic competition combines the features of perfect competition and monopoly. Some of the examples for monopolistic competition are

1.Different brands of tooth paste, soaps, shampoos

2.Large number of provision stores, medical stores.

3.Varity of newspaper and magazines.

4.Food plaza, Beauty parlors etc.

5. Discuss Circular flow of national Income.

Circular flow of national income explains how national income is generated in an economy and how it flows from one sector to the other. There are two models of circular flow of income namely

(1)closed economy model and (2)Open economy model

Closed economy model : (THREE SECTOR MODEL)

A closed economy is one which there are no exports and imports. The economy is self sufficient and reliant. The three sectors considered here are: (1)Households, (2)Business firm, and (3) Government. In any economy households own the factors of production to the business firms. The business firms produce goods and services and supply it to the households. This is known as the real flow. For factor services, households get payments which they use to buy goods and services from the firms. This is known as monetary flow. Both the households and firms pay taxes , transfer income subsidies etc from the government. The three sector model can be explained with the help of following diagram :

The inner circle represents the flow while the second circle indicates the monetary flow. Savings of the households flow to the financial markets and from there it flows to the business firms as investments. The outer circle shows the payment off taxes to the government by the households and business firms and in return they get wages, transfer payments subsidies etc. from the government. In this model, the leakages are savings and taxes which reduce the circular flow of income and investment and subsidies are injections which increase the circular flow . The economy will be in equilibrium when

Production = consumption

Saving = Investment and

Government’s income =0 Government’s expenditure.

6. Discuss Trade cycles features and phases

Trade cycle or business fluctuations refer to the ups and downs in business. Business is always characterized by fluctuations rather than stability. Trade cycles indicate the progress attained by a country during a given period of time. It also indicates the uncertainties involved in business and their effects on economy. Trade cycles occurs regularly in a capitalist economy. In other words they are recurring in nature. The fluctuations manifest themselves in term of changes in income, employment savings, price and investment. These fluctuations in the various economic indicators are called business cycle or trade cycles.’

Trade cycles follow a wave-like movement to indicate that prosperity will be followed by depression and depression followed by prosperity. The various phase of trade cycle are nothing but upswing and downswing. The term trade cycle is defined by many economists. According to J.M.Keynes “A trade cycle is composed of periods of goods trade , characterized by using prices, low unemployment altering with periods of bad characterized by falling prices and high unemployment”

Features/Characteristics of trade cycles:

Business cycle exhibit certain specific features. They are as follows:

1. Business cycle’s are recurrent in nature but do not occur at regular intervals.

2. It refers to rhythmic fluctuation in economic activities.3. The various economic variables like output, employment income

price etc move in the same direction. Either they rise or fall together .

4. Prosperity and depression follow each other alternatively.5. Both prosperity and depression have the seeds of their own

destruction.6. During the uptrend or downtrend, Prices , Output, employment etc

change. Along with these changes, money, supply, velocity of circulation etc also change.

7. Due to globalization, in the recent times trade cycle in one country gets transmitted to other countries, recession or depression affects them very severely.

8. Business cycle are recurrent in nature. At the same time , no two business cycle are the same. Some may be steeper than other and each one is influenced by different socio-economic factors.

Phase of trade cycle:

There are four phases of trade cycle namely : (1) Depression , (2) Recovery (3)Prosperity (4)Recession. The following diagram depicts these four phases.

In this above diagram, SS represents steady growth of the economy.

Depression is indicated by the lowest point. Then recovery starts leading to prosperity and then peak. The down trend begins afterwards resulting in recession and depression. Then the whole cycle continues.The various phase of tread cycle can be explained as follows.

(1)Depression : This phase is also known as trough. It is characterized by low investment, low production, low level of employment and low profits. Business pessimism prevails in the economy.

(2)Recovery: Positive signals to revive the economy appear during this phase. Demand starts increasing leading to an increas in investment, Production, employment etc.

(3)Boom or peak: When the trade cycle reaches its highest point, it is known as boom or peak. During this stage demand for goods and services will be more than supply. Profits tend to rise at a faster rate compared to the increase in cost of production. Capacity utilization will be very high and the level of investment will continue to rise.

(4)Recession: It refers to the downward trend. If GNP of the economy declines in two quarters in succession, it is said to be recession. A fall in demand will lead to fall in investment, employment, output profits etc. Massive unemployment occurs during recession times. When reaches its lowest point , it is termed as depression.

Thus , trade cycle is a wave like movement resulting in fluctuations in the various economic parameters like employment, income etc. Government interventions at the right time helps the economy to revive and be on the path of progress.

7. State the meaning and function of money.

Money is an important and indispensable element of modern civilization. In ordinary usage, what we use to pay for things is called money. To a layman, thus, in India, the rupee is the money, in England the pound is the money while in America the Dollar is the money. But to an economist, these represent merely different units of money. Then how do we define money? Definition of Money : It is very difficult to define money in exact sense. This is because, there are various categories of assets which possess the attributes of money. Many things such as clay. cowry shells, tortoise shells. cattle, slaves, rice, wool, salt, porcelain, stone, gold, iron, brass, silver, paper and leather etc. have been used as money. Traditionally, money has been defined on the basis of its general acceptability and its functional aspects. Thus, any thing which performed the following three functions (i) served as medium of exchange (u) served as a common measure of value and (iii) served as a store of values, was termed as money. To modern economists or empiricists, however, the crucial function of money is that it serves as a store of value. It thus includes, not only currencies and demand deposits of banks, but also includes a host of financial assets such as bonds, government securities, time deposits with banks and equity shares which serve as a store of value. Some economists categories these financial assets as near money, distinct from pure money which refers to cash and chequable deposits with commercial banks. The empiricists argue that whether a financial asset should be included in money should be decided on the basis of empirical investigation of the financial asset. To them, money is what money does. While clustering financial assets as money they have laid down certain criteria :

(i) stability of the demand function,(ii) high degree of substitutability. (iii) feasibility of measuring statistical variations in real economic

factors Influenced by the monetary policy.

Functions of money :

(i) As a medium of exchange : The fundamental role of money in an economic system is to serve as a medium of exchange or as a means of payment. In the barter system goods are exchanged for other goods. This system prevailed throughout the world in the olden times. This system suffered from many shortcomings, the prominent being that it necessitated double coincidence of wants. For exchange of goods, persons desiring to exchange goods must specifically want those goods what others offered in exchange. Money has removed this difficulty. Now a person A can sell his goods (say clothes) to another person B for money and then can use to buy goods (say Mobile phone he wants from others who have these goods.

(ii) As standard of deferred payments : Money is a unit in terms of which debts and future transactions can be settled. Thus loans are made and future contracts are settled in terms of money.

(iii) As store of value : Money being a permanent abode of purchasing power holds command over goods and services all the times-present and future. Money is a convenient means of keeping any income which is surplus to immediate spending needs and it can be exchanged for the required goods and services at any time. Thus it acts as a store of value.

in dynamic sense, money serves the following functions

(iv) Directs economic trends : Money directs idle resources into productive channels and there by affects output, employment, consumption and consequently economic welfare of the community at large.

(v) As encouragement to division of labor : In a money economy, different people tend to specialize in the different goods and through the marketing process, these goods are bought and sold for the satisfaction of multiple wants. In this way, occupational specialization and division of labor are encouraged by the use of money.

(vi) Smoothens transformation of savings into investments : In a modern economy, savings and investments are done by two different sets of people - households and firms. Households save and firms invest. Households can lend their savings to firms. The mobilization of savings can be done through the working of various financial institutions such as banks. Money so borrowed by the investors when used for buying raw materials, labor, factory plant etc. becomes investment. Saved money thus can be channelized into any productive investment.

10. Discuss ‘Hypothetical individual and market demand schedule and derive their Demand curves.

Demand curve is a graphical representation of demand schedule. It is the locus of all the points showing various quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time, assuming no change in other factors.demand curves.’

i. It shows the inverse relationship between the quantity demanded of a commodity with its price, keeping other factor constant.

ii. It can be drawn for any commodity by plotting each combination of demand schedule on a graph.

iii. Like demand schedules, demand curves can also be drawn both for individual buyers and for the entire market. So, demand curve is of two types:

(a) Individual Demand Curve

(b) Market Demand Curve

 

Individual Demand Curve:

Individual demand curve refers to a graphical representation of individual demand schedule.

the individual demand curve can be drawn as shown below.

As seen in the diagram, price (independent variable) is taken on the vertical axis (Y-axis) and quantity demanded (dependent variable) on the horizontal axis (X-axis). At each possible price, there is a quantity, which the consumer is willing to buy. By joining all the points (P to T),

we get a demand curve ‘DD’.

The demand curve ‘DD’ slopes downwards due to inverse relationship between price and quantity demanded.

Market Demand Curve:

Market demand curve refers to a graphical representation of market demand schedule. It is obtained by horizontal summation of individual demand curves.

DA and DB are the individual demand curves. Market demand curve (DM) is obtained by horizontal summation of the individual demand curves (DA and DB).

Market demand curve ‘DM‘ also slope downwards due to inverse relationship between price and quantity demanded.

Market Demand Curve is Flatter:

Market demand curve is flatter than the individual demand curves. It happens because as price changes, proportionate change in market demand is more than proportionate change in individual demand.

12. Difference between Inflation & Deflation.

13. Economies of scale.

(lntem.il and external e:onomies of scale are related industry and their scale of production. A firm retorf'rt anc \ enterprise involved in the production of a commodity while a industry refers to a group of firms producing a specific commodity. When a firm expands its scale of production il deriVes certain advantages which are termed as internal economies of scale. In other words it refers to anything which helps the firm to reduce the cost of production. Internal economies are also termed as economies of large scale production. Internal economies accrue to a firm ,

when its size expands. External economies refer to the benefits enjoyed by all the firms in the industry when their size expands. TYPES OF INTERNAL ECONOMIES:

(1) Labour Economies: It refers to the benefits which arise due to division of labour. When the firm expands its scale of operation, scope for division of labour widens. Division of labour refers to splitting the production process into several units and each unit is given to a group of workers. Thus each ' worker will specialise in the production of that part of the commodity Such a process improves the skill and dexterity of the workers and their productivity increases significantly. Division of labour saves time and improves the innovative skills of the labourers. All these benefits lead to reduction in cost of production. Adam Smith in his book Wealth oi Nations pointed out the advantages of division of labour. However according to him division of labour is possible only in large scale production. In other words, he stated that the size of the market limits division of labour. Thus when the size of production is increased, division of labour can be adopted and economies of scale can be reaped.

(2) Managerial Economies: It refers to the benefits enjoyed by the firm due to specialisation in managerial functions. When the firm expands, the various functions of the management can be divided into marketing, finance, administration, etc. and can be delegated to juniors and the manager can concentrate on the main issues. It is possible for the firm to have specialised managers for various branches. All these cannot be done in a small firm. A large firm can enjoy managerial economies when its size expands.

(3) Technical Economies: These are related to the technique of production. Various factors contribute to technical economies. Some of them are:

(a) Some factors of production like machines are indivisible. To use them fully a certain quantity of output has to be produced. When the firm produces more, such factors are utilized in a better way and this leads to reduction in cost of production.

(b) A big firm can afford to use superior technique of production. Specialized or sophisticated machines can be used which will lead to a reduction in cost of production. Such machines or techniques are generally beyond the reach of the small firm.

(c) Some machines and equipment’s, due to their sheer size confer more benefits to the firm. For e.g. huge ships, big cars can be operated more effectively and economically with the same number of people required to operate a smaller one. This increased dimension also leads to greater output at a lesser cost.

(d) Large scale production enables the firm to use power more efficiently than a small firm.

(e) Waste products are efficiently used by large firms 'C produce a number of by-products. It is often seen in the case of sugar and chemical industries. A large firm is in a position to install the necessary technology and other requirements whereas it may not be possible for a small firm.

(f) Big firms also reap benefits by having the production process on a continuous basis. This is very common in the case of printing press. It makes more sense for them to print more copies of a particular matter. This is because the composing cost remains constant and the printing charges vary only marginally.

(4)Marketing Economies: They refer to the benefits while buying inputs and selling the finished product. The bargaining power of big firms is very strong and they can negotiate in their purchases to their advantage. Generally they buy inputs on large scale and hence they get a preferential treatment. They get adequate quantity of inputs at

a lesser rate. Specialists like purchase manager are appointed to buy inputs at the most economical rates. While selling the output also it has many advantages. It can economies on a number of things like transportation cost, advertising cost. administration cost, etc. A large firm enjoys the flexibility of buying and selling more when the market conditions are favorable.

(5) Financial Economies: Finance is an essential input for any business firm. Large firms are able to get finance easily and quickly compared to small firms. This is because they have their own reputation and considerable influence on the financial institutions. Big firms are considered less risky by banks and institutions and are ever willing to provide financial help to them. They can also raise equity capital and debt capital. Big firms are not only able to get adequate capital but also at a lower rate of interest.

(6) Economies of Integration: By integrating successive processes in the production of a commodity, large firms are able to cut down cost of production. Generally iron and steel , printing presses adopt an integration process. For e.g. the case of the iron and steel industry, right from melting i iron to converting it into different shapes and sizes are done in the same premises. This leads to greater efficiency and productivity.

Apart from the above types, a large firm can easily diversify its 'duction. It can produce variety of items and different varieties a product. Through this it tries to minimize its business risk i.e. loss in one can be compensated by gain in the other product. Moreover the firm can easily expand its market throughout the country.

Thus large scale production enables a business firm to reap variety of benefits. All these benefits lead to a reduction in cost of production.

EXTERNAL ECONOMIES: External economies refer to the benefit's, enjoyed by all the firms in the industry when their scale of operation

expands. While internal economies of scale arc restricted to a particular firm, external economies accrue to all firms in the industry.

External economies are also of various types. Some of them are:

(1) Localization Economies : Localization refers to the concentration of firms in a particular region or locality, When several firms of a particular industry are. localized, several ' advantages can accrue to them. Facilities like transport, infrastructure, maintenance, etc. can be shared by all the firms. Mutual exchange of skilled labour, research facilities, lab facilities, etc. are possible when -there is localization. All these advantages help the firm to reduce cost of production.

(2) Research and Information Economies: When the industry expands, it becomes possible for it to invest on research and development significantly. Instead of each firm doing research, a joint effort reduces cost and benefits all the firms in the industry. Networking with each other enables them to avail marketing and technical information easily.

(3) Disintegration Economies: This implies that a growing industry can split up its operations and get it done through subsidiaries. The firm which does this operation will be able to get economies of scale when it operates on a large scale. The benefits are passed on to the industry in terms of reduced charges.

(4) By-products Economies: Waste materials are generally used by big industries to churn out a by-product. This helps all the firms in the industry.

When all the firms in the industry enjoy these benefits, cost of production tends to decline automatically

14. State the types of budget.

TYPES OF BUDGETS: budgets are broadly classified into two categories namely balanced budget and (2) Unbalanced budget.

1) Balanced Budget: A budget is said to be balanced when the revenue and expenditure sides are equal. The classical economists were in favour of a balanced budget. A balanced budget has its own merits and demerits.

(2) Unbalanced Budget: The budget in which income and expenditure are not equal to each other is known as unbalanced budget. It is of two types:

(a) Surplus budget: A surplus budget is one in which revenue of the government is more than its expenditure. The government will impose high taxes and will reduce its expenditure if its aim is a surplus budget. A surplus budget is advocated during inflation to reduce the prices. The high taxes will reduce the income of the people and this in turn will reduce the demand for goods and services thereby bringing down the rise in the price level.

(b) Deficit budget: When the expenditure of the government is more than its revenue, it is known as deficit budget. Deficit budget is advocated by economists like J. M. Keynes during a period of depression. The excess expenditure incurred by the government will increase the level of employment in the economy. Due to this, the demand for goods and services will 'increase, bringing about a revival in the economy. However, a deficit budget is not desirable during inflation.

Types of Deficits: Deficits in the finances of the government are classified into four types. They are budgetary deficit, revenue deficit, fiscal deficit and primary deficit.

(1)Budgetary deficit: The difference between total revenue and total expenditure of the government is termed as budgetary deficit. The revenue and expenditure in both revenue and capital accounts are taken into account here.

(2)Revenue deficit: The difference between revenue re revenue expenditure is known as revenue deficit. Revenue deficit has to be controlled effectively and should within Limits. All efforts should be taken to eliminate deficit.

(3)Fiscal deficit: It measures the difference be expenditure, both revenue and capital and certain items of revenue of the government. The items revenue are revenue receipts, recovery of loans, income mobilized through disinvestment. This d, the extent of indebtedness of the government and the resource gap.

(4)Primary deficit: It interest payments are deducted from fiscal deficit, primary deficit can be obtained. The concept of budgetary deficit has lost its importance since 1997. The government discontinued the use of ad-hoc treasury bills to monetize the budget deficit. Hence from 97-98 the concept of fiscal deficit has acquired immense significance and is considered as a key indicator at present. In the earlier decades the deficits were high and that affected the growth process. Over a period of time efforts have been taken by the government to reduce the deficits. The FRBM Act guides the government in monitoring the deficits and initiate necessary action.

16. Balance of trade v/s balance of payment

BALANCE OF TRADE AND BALANCE OF PAYMENTS:

Differences between balance of trade and balance of payments:

Balance of Trade Balance of payments1 It consist of export and import

of visible items.It consist of export and import of visible and invisible items.

2 It’s scope in narrow It has wider scope3 It can show deficit or surplus. It is always balanced.4 It gives a partial picture of the

economy.It gives a comprehensive picture of the economy.

5 It has limited practical applications.

It is widely used by governments and institutions while formulating various polices.

Balance of payment is said to be in balance when receipts are equal to payments. If receipts are more than payments, there is said to be a surplus in the balance of payments position. While a surplus in balance of payments is favourable, a continuous surplus will lead to inflation in the economy. Compared to surplus, deficit in balance of payments has far reaching effects on the economy. Huge deficits may lead to borrowings from foreign governments and international institutions leading to indebtedness. In due- course of time, the credibility of the country in the international market will become low which will affect its further borrowings. Adverse balance of payments position will lead to severe political, social and economic effects. Hence all efforts should be taken to ensure equilibrium in the balance of payments position. Both monetary and fiscal measures are used by modern governments to correct disequilibrium in the balance of payments position.

17. Difference between short run and long run production functions

Short run P. F. Long run P. F. Meaning Short run production

function alludes to the time period, in which at least one factor of production is fixed

Long run production function connotes the period of time in which all factors are variable

Scale of production No change in scale of production

change in scale of production

Law Law variable proportion

Law of return to scale

Function Q= f(a°, b°, c°, d°…n°, T)

Q= f(a, b, c, d…n, T)

Entry & exit There are barriers to entry & the firms can shut down but cannot fully exit

Firms are free to enter and exit

Factor ratio Changes Does not change