Utility is ethically neutral | Aster Classes

Q.1. (A) Fill in the blanks using appropriate alternatives given in the brackets: (5)[16] 

  1. Micro economics is a ________________________ equilibrium approach. (partial / general / total / multi-variable)
  2. Income elasticity of demand for inferior goods is ________________________. (positive / negative / zero / greater than one)
  3. Investment made by the government is ________________________ investment. (Induced / autonomous / gross / unplanned)
  4. ________________________ is a primary function of commercial blanks. (Purchasing and selling securities / Accepting deposits / Safe deposit vault / Letter of credit)
  5. When the government’s revenue exceeds government’s expenditure, it is known as ________________________ budget. (surplus / balanced / deficit / unbalanced)

(B) Match the words from the following groups ‘A’ and ‘B’ correctly: (5) 

Group AGroup B
a. Pen and ink
b. Perfectly elastic supply
c. Reward of entrepreneur
d. Income method
e. Credit control
1. Factor cost method (3)
2. Profit (2)
3. Joint demand (1)
4. Interest
5. Horizontal supply curve
6. Commercial bank
7. Vertical supply curve (4)
8. Central bank (5)

(C) State whether the following statements are True or False: (6) 

  1. Demand for luxurious goods is elastic. True
  2. Supply is indirectly related to price. False
  3. Under perfect competition products are not homogeneous. False
  4. Estimation of national income is possible with the help of money. True
  5. Commercial banks are the backbone of the modern economy. True
  6. The Central bank does not act as a lender of last resort for the commercial banks. False

Q.2. (A) Define ‘or’ explain the following concepts (Any THREE): (6)[12] 

1. Microeconomics

i. Micro economics deals with the economic behaviour of various economic units in the economy, such as particular firms, particular households, prices of individual products, wages in particular industry, etc.

ii. It studies the economic behaviour of individual firms, households, industry, product pricing and factor pricing as well as allocation of resources.
iii. Thus it studies in detail about a tree and not the forest as whole. 

(2) Define Marginal Cost.

Marginal cost is the additional cost incurred in the production of one more unit of a good or service.

It is derived from the variable cost of production, given that fixed costs do not change as output changes, hence no additional fixed cost is incurred in producing another unit of a good or service once production has already started.

(3) Natural monopoly

Solution: –

The monopoly power is acquired by a firm due to natural advantages such as good location, control over scarce resources, etc.

Normally, the monopolists would change higher price of the goods

(4) Entrepreneur 

Entrepreneur is the person who plans, organized, directs and controls the process of production.
Entrepreneur takes various activities including managerial functions and other risks such as uncertainty bearing, innovation and dynamic changes in the economy.
Entrepreneur gets profit for his entrepreneurial activities in the business. Profit is fluctuating, uncertain and sometimes even zero or negative.

(5) General equilibrium 

General equilibrium deal with the behavior of demand, supply and price in the whole economy.

macro economy deals with the behavior or large aggregates and their functional relation ship.

(6) Clearing house

All the commercial banks are mandatorily required to keep a certain percentage of their deposits, other than cash reserve ratio (CRR), with the Central Bank.

The Central Bank acts as a clearing house for the commercial banks. As a clearing house, it settles inter-bank claims and reduces the need for cash reserves by the commercial banks.

(B) Give reasons ‘or’ explain the following statements (Any THREE): (6) 

(1) Micro economics is also known as price theory. 

Microeconomics is known as ‘price theory’.

Microeconomics studies how prices of goods and services are determined in commodity market and how prices of factors of production are determined in the factor market.

Hence, microeconomics is also known as price theory

(2) Utility is ethically neutral. 

1. Utility is ethically neutral this is because the concept of utility has no ethical consideration. 

2. Ethically neutral – The concept of utility has no ethical consideration: It is morally neutral. A commodity which possesses utility may satisfy any want. It does not make any difference between good, bad, moral or immoral etc. 

3. e.g. Knife has utility for a housewife to cut vegetables and for a killer to harm somebody.

(3) Demand for necessary goods is inelastic. 

When consumers buy about the same amount of commodity whether the price drops or falls, then the demand is called inelastic demand.

For example demand for petrol for a cab driver is inelastic.

Thus the demand for a commodity depends on the nature of Commodities, Commodities may be either necessaries or, luxuries.

Normally, elasticity of demand for necessaries is inelastic and for luxurious demand tends to the elastic.

(4) Old age pension is transfer income. 

Old age pension is transfer income.

It is because transfer income refers to the income received by a person without contributing anything in the production in the period when a person get it.

Old age pension is received by person after retirement therefore old age pension is transfer income.

(5) Saving is the function of income. 

Answer:  The consumer does not spend the entire increase in his income on consumption.

Rather, a portion (generally fixed) of the increase in income is kept as savings. Thus, as the income increases, savings also increase.

This relationship between the savings and income is depicted in a functional form by the savings function.

The savings function can be expressed as:
S = f(y)

(6) As a banker to the government the central bank transfers government funds. 


Central bank is an apex bank that controls the entire banking system of a country and controls the supply of money in the economy through its various monetary policies.

The Central bank is a banker, agent and financial adviser to the government.

It manages the account of the government by transacting government funds, it buys and sells the securities of the government and maintains foreign reserves for the government.

Q.3. (A) Distinguish between the following terms (Any THREE): (6)[12] 

(1) Individual demand and Market demand. 

Individual Demand Market Demand
1.Meaning It refers to the quantity of a commodity purchased by an individual at different prices, at a given time and place.
2.Presentation Individual demand can be presented wit the help of ‘Individual demand schedule, and ‘individual demand curve’.
3.Factors affecting Factors affecting individual demand are: – price, disposable income of the individual, taste, habits, credit facilities, etc.
4.Scope It is narrow in scope as it is part of market demand.

It refers to the total quantity of a commodity purchased at different prices by all consumers together in the market at a given time and place.
Market demand can be presented with the help of ‘Market demand schedule, and ‘market demand curve’

Factors affecting market demand are: – Size and growth of population , composition of the population –age structure and sex ratio, etc

It is broader in scope as it includes all individual demand

(2) Extension in supply and Contraction in supply. 

Extension of supply Contraction of Supply
MeaningA rise in supply caused by rise in the price while other factors remaining constant is called expansion (extension) of supply.A fall in supply caused by fall in price while other factors remaining constant is called contraction of supply.
Equilibrium Point: In expansion in supply, the equilibrium point moves upwards from the left to the right on the same supply curve.
In contraction in supply, the equilibrium point moves downwards from the right to the left on the same supply curve.

(3) Slicing method and Lumping method. 

Micro economics uses slicing method for in-depth study of economic units.

It divides or slices the economy into smaller units, (such as individual households, individual firms, etc) for the purpose of in-depth study.

Macroeconomics uses lumping method for the purpose of economic study.

Under lumping method we study the general price level, and not prices of individual products.

(4) Personal income and Personal disposable income. 

Personal Income Disposable Income  
Personal income is the sum of all incomes actually received by an individual or household from all the sources during a given year.There are other personal taxes which are not considered when calculating personal income. In order to derive disposable personal income we must subtract these personal taxes from personal income.
PI = Disposable Income + Personal Income Taxes.DI = Personal Income – Personal Income Taxes.
1.      Meaning
It is directly paid by tax payers. Or it is deducted form the income of the tax payers.
2.      Examples
The direct taxes include personal income tax, corporate tax, capital gain tax, wealth tax, etc.
3.      Principles of equity
Direct taxes follow the principle of equity (social justice). Higher income people are taxed at a higher rate, and middle income people are taxed at lower rate. The lower income people are normally exempted form direct tax.
4.      Share of Taxes
In India, the share of direct taxes is on the rise. In 2008-09, the share of direct taxes was estimated at 55% of the total tax revenue of Central Government.

It is indirectly paid by tax payers. It is include in the price of goods and services.

The indirect taxes include customs duty, excise duty, VAT, service Tax, etc.

Indirect taxes lack the principle of equity. For instance, in the case of mass consumption goods, all consumers (whether rich or poor) have to pay the same rate of indirect taxes like excise duty.

In India, the share of indirect taxes is on the decline. In 2008-09, the share of indirect taxes was estimated at 45% of the total tax revenue of Central Government.

(5) Full bodied coins and Token coins. 

Basis of difference Full bodied moneyToken coins
1. DefinitionFull bodied money refers to money whose intrinsic value (value of the metal) is equal to the face value of the engraving on the currency.Token coins are those whose face value is more than its intrinsic value.
Made up of
It is made up of precious metals.It is made up of cheaper metals.
3. ExamplesGold coins, silver coins etc.Aluminium coins, nickel coins etc.

(6) Direct tax and Indirect tax.


(B) Write short notes (Any TWO): (6) 

(1) Importance of micro economics. 

following are the Importance of micro economics.

Introduction: –Micro economics is a branch of economics which is concerned with the analysis of the behaviour of an individual economic unit or variable. Micro economics plays a vital role in the study of modern economic theory. It is important in the following ways as described below:
Price Determination: It explain how prices of individual commodities are determined and how rewards of factors of productions are determined and distributed.

Business Decision Making: Micro economic theory help businessman to determine their price policy, maximum level of output and achievement of maximum productivity from factors combination.

Business and Production planning: Micro economic policy helps in preparing and planning of business policy, expansion of business and making investment decisions to achieve maximum output and peoductivity.

To understand the working of the economy:It helps us in understanding the working of a free enterprise economy. It gives us an idea about how major economic decisions are taken in a market economy.

Helpful in the efficient employment of resources:It suggests economizing, that is how efficiently the scarce available resources can be utilized in production process in an economy.

Helps in International Trade:Micro economics is used to explain gains from internal trade, external trade, foreign exchange, balance of payment, disequilibrium and in the determination of exchange rate.

Basis of welfare economics: The entire structure of micro economics has been built on the basis of price theory which is an important constituent of micro economics. It suggests the conditions of efficiency and explains how it can be achieved. It helps in improving the standard of living of population.

Helpful in understanding the consequences of taxation: Imposition of tax leads to reallocation of resources from one place to another. Micro economics explains how imposition of different types of direct and indirect taxes lead to attainment of social welfare.

Tool for evaluating economic policies:It helps the states and central government to frame economic policies like price policy, taxation policy etc. It also explains the condition of efficiency in production and consumption.

Construction and use of models:Micro economics construct and uses simple models in order to understand the actual economic phenomenon. It uses abstract models to explain the economic phenomenon.

(2) Geometric method of measuring price elasticity of demand. 

The Geometric method measures the elasticity of demand

The Geometric method measures the elasticity of demand at different points on the demand curve and is also known as the Point method of measuring the elasticity of demand.

Let us consider the figure given below, where AB is a demand curve. C is the specific point on the demand curve. It divides the demand curve into two segments, upper segment CA and lower segment CB.

Elasticity of demand at point C is the ratio between lower segment and upper segment.
ed= CB (lower segment from C) / CA (Upper segment from C)

The elasticity of demand at different points on a straight line demand curve can be derived by this method.

  1. Elasticity is zero at point B of the demand curve, where the demand curve touches the x-axis.
  2. ed= 0/BA
  3. ed= 0
  4. Elasticity is infinity at point A of the demand curve, where the demand curve touches the y-axis.
  5. ed= BA/0
  6. ed= 0
  7. Elasticity is unity at the mid-point C of the demand curve, where the lower segment is equal to the upper segment of the demand curve.
  8. ed= CB/CA
  9. ed= 1
  10. Elasticity is greater than unity at any point (L) to the left of the mid-point of the demand curve.
  11. ed= LB/LA
  12. ed> 1
  13. Elasticity is less than unity at any point (M) to the right of the mid-point of the demand curve.
  14. ed= MB/MA
  15. ed< 1

(3) Features of pure competition. 

Features of Pure Competition

Pure competition is a part and parcel of perfect competition. According to Chamberlin, “a market becomes pure when monopoly is kept away.”Pure competition has certain conditions of perfect competition.

They are 1)       Large number of sellers 2)       Large number of buyers 3)       Free entry and exist 4)       Homogeneous product 5)       Single Price

1)  Large number of sellers/sellers are price takersThere are many potential sellers selling their commodity in the market. Their number is so large that a single seller cannot influence the market price because each seller sells a small fraction of total market supply. The price of the product is determined on the basis of market demand and market supply of the commodity which is accepted by the firms, thus seller is a price taker and not a price maker.

2)      Large number of buyers:There are many buyers in the market. A single buyer cannot influence the price of the commodity because individual demand is a small fraction of total market demand.

3)      Free entry and exit: New firms can enter and exit the market without any restrictions.

4)      Homogeneous product:Firms produce and sell identical units of a given product, in purelycompetitive market, i.e., units of a commodity produced by each of them is uniform, in respect of size, shape, colour, quality, etc. Thus commodities have perfect substitute for each other.

5)      Single price: In Pure Competition all units of a commodity have uniform or a single price. It is determined by the forces of demand arid supply.

(4) Qualities of an entrepreneur. 

Meaning: -Entrepreneurs is regarded as the ‘captain of an industry’ it is the Entrepreneurs who co-ordinates or combines, organise different factors of production. He not only organises, but also control directs supervises and administers the productive activities. Thus, the work of Entrepreneurs is rather tough complex and complicated. So, it requires special ability and experience.

An efficient and successful Entrepreneur must possess the following qualities.

1.      Efficiency: –He should be highly intelligent, able and efficient so as to tackle day to day problems arising in business.

2.      Organisation: – He should be a good organiser. He should have the ability to combine al factors of production optimally i.e. in such a way that the cost of production is minimum. Thus he should be a well co-ordinator.

3.      Supervision: –He should be an efficient supervisor. He should be well equipped with supervising the working of factors inputs. He should be a good initiator of business. He should put right person in a right job.

4.      Policy Maker: – He should be a good policy maker. He should be able to make entire business policies such as policy regarding input, size of the firm, sales, advertisement payments of remuneration to the factors etc.

5.      Decision Maker: –He should be a quick decision maker. He should have the capacity to take quick decisions regarding location of industry, investment, product to be produced, price of it, cost of production, nature of production sales, etc. because delay in taking decision may result in financial losses to the firm.

6.      Self Confident: -He should be confident and should be able to develop confidence in others regarding his integrity and honesty of purpose. It will help in building up and marinating good will and reputation to his firm in the market.

7.      Innovator: -He should be a good innovator. He should introduce new techniques of production which minimise cost of production and should explore new raw material and market for his product.  

Q.4. Answer the following questions (Any THREE): [12] 

(1) Explain the ‘law of diminishing marginal utility’. 

Statement of the Law: -The law of diminishing Marginal utility states that (other thing being equal) s the number of units consumed of commodity increases, the marginal utility of that commodity diminishes. In other words, as the consumption of good increases, the marginal utility derived from successive units of a given commodities goes on diminishing.                          

Definition: -In he words of Marshal the Law states that, The additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has

The law of diminishing Marginal Utility can be explained with the help of a schedule and a diagram.

Units of consumptionTotal Utility (T.U)Marginal Utility(M.U)

 The schedule shows that with every increase in the units of Consumption, the total utility is increasing.

It reaches Maximum with the 5th& 6th unit and remains the same, but with 7th unit the total utility decreases from 30-28.           

The Marginal Utility can be derived from total utility. It is observed the Marginal Utility is falling continuously. It reaches zero and then become negative.           

The Marginal Utility is Zero when total utility is Maximum and Marginal utility is negative when total utility is falling. 

In the above diagram

X- Axis represents units of consumption and Y-Axis represents Marginal Utility. Various points from the table are plotted on graph. Join those points we can get a curve known as Marginal utility curve. The curve slopes down wards from left to right. It touches X- axis and becomes negative. It is observed from the diagram that at 6th unit of consumption the marginal utility becomes zero, when the total utility becomes maximum. It is the point of Satiety i.e. the want is completely satisfied and its intensity is nil. With the 7th unit of consumption the total utility started falling and the Marginal Utility becomes negative.

2.What is Monopolistic competition? What are its FEATURES?

Meaning: -The Concept of Monopolistic competition was introduced by E.H Chamberlin in his book “Theory of Monopolistic competition” Monopolistic competition refers to a market structure, in which a large number of firms sell a differentiated product. “The competition is keen among many firms making or producing very similar products.” Thus, Monopolistic competition refers to the competition among large number of sellers producing close but not perfect substitutes to each other. There exists competition among large number of sellers. At the same time, they have some degree of Monopoly power in the market, as they sell differentiated product.

Features of Monopolistic competition are

1.      Large number of sellers: – There are many sellers or firms in a monopolistic competition. A single seller is not large enough to influence the market. Each one may, to a certain extent, follow an independent price and output policy without disturbing others.

2.      Product Differentiation: – Product is differentiated in monopolistic competition. Products differ from each other in many ways. Product differentiation can be take place in the form of brand name and trade mark. Products may be differentiated in terms of colour, size, design, taste, etc.

3.      Close substitutes: – Even though the products are differentiated, they are very close substitutes. For example, as far as brands are concerned, there are many close substitutes for products like soaps and garments. However they are not perfect substitutes as in perfect competition.

4.      Selling cost: – firms in a monopolistic competition promote sales by incurring selling cost. Selling cost includes all types of costs incurred to promote sales. Selling cost is usually incurred in the form of advertisement, exhibitions, gifts, free samples and so.

5.      Freedom of Entry and Exit: – Another important feature of monopolistic competition is the freedom of entry and exists of firms. A firm is free to enter the market to produce which is a substitute for the existing products. There exist freedom of entry and exit of firms in the market.

6.      Price Maker: – Under Monopolistic competition the firm is a price maker. The firm has some control over the price cue to product differentiation. Thus, there are price differentials between the firms producing close substitutes.

7.  Nature of demand curve:  The demand curve for the products of each firm is downward sloping. This means that an individual firm can sell more by reducing the price.

8.      Two dimensional competitions: – Under Monopolistic competition, the competition among the sellers take place in two dimensional.          

i.      Price competition: – Under Price competition the firms compete with each other by lowering the price of the product to take advantage of higher sales.

ii.      Non Price competition: – Under Non price competition the firms compete with each other by making variation in the product or through selling cost. Through this each seller tries to capture the market.

(3) Explain the scope and subject matter of macro economics. 

Scope and subject matter of Micro Economics

         Micro Economics basically deals with         

 i)        Theory of product pricing          

ii)       Theory, of factor pricing (Microtheory of distribution) .          

iii)      Theory of economic welfare

1.       Product Pricing: -The theory of product pricing explains how the relative prices of cotton cloth, rice, car and thousands of other commodities are determined. Price of a commodity depends upon the forces of demand and supply. Therefore, analysis of demand and supply side is necessary in order to explain the process of determination of price. Study of demand side covers the analysis of consumer’s behavior and study of supply side, covers the analysis of conditions of production, cost and behaviour of firm & industry. So, theory of product pricing is subdivided into theory of demand & theory of production & cost.

2.       Factor Pricing:- Theory of factor pricing i.e. Theory of distribution explains how wages (price for the use of labour) rent (payment for the use of land), interest (Price for the use of capital), profits (the reward for the entrepreneur are determined.

3.       Theory of welfare:- Theory of welfare basically deals with efficiency in the allocaton of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people. Economic efficiency involves three efficiencies :

i)        Efficiency m production – Efficiency in production means producing maximum possible amount of goods, from the given amount of resources.

ii)       Efficiency in consumption – Efficiency in consumption means distribution of produced goods & services among the people for, consumption, in such away as to maximize total satisfaction of society.

iii)      Efficiency in the direction of production i.e. overall economic efficiency – Efficiency in the direction of production means production of those goods which are most desired by the people.
Micro economic theory shows under what conditions these efficiencies are achieved. We may conclude that Micro Economics is mainly concerned with price theory and allocation of resources. It seeks, to examine the following basic economic questions:

a)       What goods are produced with and in what quantities?          

b)       Who will produce them & how ?          

c)       To whom & how the wealth so produced shall be distributed?         

 d)       How shall resources be allocated to production & consumption in efficient manner?

(4) Explain the subjective factor influencing consumption function. 

Subjective Factors:

Subjective factors basically underlie and determine the form of the consumption function (i.e., its slope and position).

The subjective factors concerned are:

(1) behavior patterns fixed by the psychology of human nature.

(2) the institutional arrangements of the modern social order, and social practices relating to the behaviour patterns of business firms with respect to wage and dividend payments and retained earnings, and the institution controlling the distribution of income.

Human behaviour regarding consumption and savings out of increased income depends on psychological motives.

First, there are motives which “lead individuals to refrain from spending out of their incomes.”

Keynes enlists eight such motives:

1. The Motive of Precaution: The desire to build up a reserve against unforeseen contingencies.

2. The Motive of Foresight: The desire to provide for anticipated future needs, e.g., in relation to old age, family education, etc.

3. The Motive of Calculation: The desire to enjoy interest and appreciation, because a larger real consumption, at a later date, is preferred to a smaller immediate consumption.

4. The Motive of Improvement: The desire to enjoy a gradually increasing expenditure since it gratifies the common instinct to look forward to a gradually improving standard of life rather than otherwise.

5. The Motive of Independence: The desire to enjoy a sense of independence and the power to do things.

6. The Motive of Enterprise: The desire to secure a mass de man over to carry on speculation or establish business projects.

7. The Motive of Pride: The desire to possess or to bequeath a fortune.

8. The Motive of Avarice: The desire to satisfy pure miserliness, i.e., unreasonable, but insistent abstinence from expenditure as such.

To this, Keynes adds a corresponding list of motives on consumption such as enjoyment, short-sightedness, generosity, miscalculation, ostentation and extravagance.

(5) Explain the various types of loans. 

1. Demand Loan: -In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by instalment without allowing the demand character of the loan to be affected in any way. There is usually a stipulation that in the event of any instalment, remaining unpaid, the entire amount of the loan will become due. Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies, goods, etc.

2. Term Loan: – When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land / building / flat (Apartment house) are term loans.3.

3. Overdraft: – An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are honored if the balance is in credit, the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated. For example, if there is a credit balance of Rs.40,000/- in a customer’s current account and an overdraft limit of Rs. 50,000/-  is sanctioned to the party, he can draw cheques up to Rs. 90,000/-. There is no restriction, unlike in the case of loans, on drawing more than once. In fact, as many drawings and repayments are permitted as the customer would desire, provided the total amount overdrawn, i.e. the debit balance at any time does not exceed the agreed limit. This is a satisfactory arrangement from the customer’s point of view. He need not hesitate to pay into the account any moneys for fear that an amount once paid in cannot be drawn out or borrowed again, unlike in a loan account. As in the case of a demand loan account, the security in an overdraft account may be either personal or tangible. The tangible security may be in the form of shares, government paper, life insurance policies, fixed deposit receipts etc. i.e. paper securities. A cheques book is issued in an overdraft account.

4. Cash Credit: –A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required and can save interest by reducing the debit balance whenever he is in a position to do so. The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements. Cash credits are normally granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course a periodical review would be necessary.

5. Bills Purchased: –Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large. Although the term “Bills Purchased” seems to imply that the bank becomes the purchaser / owner of such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed in its favour) only as security for the advance. In addition to any rights the banker may have against the parties liable on the hills, he can also fully exercise a pledgee’s right over the goods covered by the documents.6. Bills Discounted Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity. The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called “discount”.

(6) Explain capital receipts and capital expenditure as a part of the capital budget. 

Capital budget is a financial proposal of the government which contains items that either lead to a change in the assets or liabilities of the government.

Capital budget of the government can be decomposed into the following two categories:

i. Capital receipts –

It refers to those receipts of the government which either create a liability or causes a reduction in the assets of the government.

These receipts can be classified into the following three categories:

a. Borrowings – Borrowing of funds by the government creates a liability on it. Therefore, the receipts from the borrowing activities of the government are treated as capital receipts.

b. Recovery of loans – The central government often offers loans to the state governments and union territories for various purposes. The recovery of such loans forms a part of the receipts for the government.

c. Other receipts –. These include disinvestment and small savings. Disinvestment refers to selling a part or whole of the shares of the enterprises that are owned by the government. As disinvestment results in the reduction of government assets, it is treated as capital receipts. Similarly, small savings lead to an increase in the government liabilities as they include the money of the public deposited in post offices, national savings certificates etc.

ii. Capital expenditure –

It refers to that government expenditure, which causes a reduction in the government liabilities as well as creates assets for the government.

These receipts can be classified into the following three categories

a. Expenditure on purchasing shares or bonds.
b. Expenditure on buying buildings or machinery.
c. Loans granted to the state government, union territories or the public companies.

Q.5. State with reasons whether you ‘agree’ or ‘disagree’ with the following statements (Any THREE): [12] 

(1) There are many features of utility. 

yes i agree with the above statements

Following are the Features of Utility

1.      Subjective or Psychological concept: – Utility is a psychological concept. It differs from person to person. The utility of a good cannot be same for all individuals. For example (1) Cigarette has much utility to a smoker, rather than that of a Non – smoker. (2) Walking stick has much utility to an old man, rather than that of a young man.

2.      Relative concept: – Utility of a commodity changes from time to time and place to place. For example (1) Woollen clothes has more utility in Kashmir, than in Mumbai. (2) Umbrella has more utility in rainy season, than in summer.

3.      Different from Usefulness: – Utility indicates the power of goods to satisfy human wants; irrespective whether the goods is useful or harmful. Certain goods have utility but they are not useful. For e.g.: -narcotics or drugs like cocaine may have utility for some people who use them to get rid of tension, and strees. But in general, such products are harmful, as it affects the health and wealth of a person.

4.      Different from satisfaction: – Utility is not same as that of satisfaction. Utility is not same as the satisfaction. Utility is the power of commodity which a consumer expects before consuming a commodity. But satisfaction is something which he realise after consuming it.
5.      Different from pleasure: – A commodity may have utility but need not give pleasure. For ex: Bitter medicine does not give pleasure. Yet it cures the disease.

6.      Cannot be measured cardinally: – Utility, being a subjective concept, cannot be measured numerically. But it can only be measured ordinally, i.e. in the order of preference.

7.      Utility is intangible: – Utility is intangible in nature. It has no physical existence. One cannot touch it or see it. It can be felt only by the use if the commodity.

(2) Many factors influence the demand for a commodity. 

I do agree with the statement

because the following are the determinants of demand.

Demand is influenced by the following factors.

1.Price : Price is one of the most important factors that affect demand. When price rises demand falls, and when price falls demand rises.

2.Income: Income is yet one more important factor that affects demand. Demand depends upon income of individuals in the society. Normally, Demand rises with increasing income of the society.

3.Population: An increase in population, leads to an increase in market demand for goods and services.

4.Tastes, Habits and Fashions : Some factors such as taste, habit of consumers affect demand; in the market.

5.       Prices of Substitute and Complementary Goods: Demand changes due to changes in the prices of substitute and complementary goods. For example demand for tea changes because of change in the price of coffee. Similarly, demand for motor cars changes , because of change in the price of petrol.

6.Distribution of Income : Unequal distribution of income and wealth would lead to less demand for goods and services. i.e. demand depends on the distribution of National Income and Wealth.

7.Expectation about Future Price : If consumers expect a fall in the price of a commodity in the near future, they will demand less at present price and vice versa: It shows that expectations about the future prices affect demand.

8.Advertisement: The goods which are advertised powerfully on, radio; television and newspapers,    etc.,   push   up demand. Advertisement is an important factor today that affects demand.

9.Taxation Policy: Government’s taxation policy affects demand. For example, a change in income tax will change consumer’s disposable income arid therefore demand.

(3) There are no exceptions to the law of supply. 

I do not agree with the statement

because there are many exceptions to the law of supply as follows:


1.Anticipation about future price: If the sellers anticipate a future rise in price, they may withhold the supply with a view to earn more profits in the future. Even if the price is high, sellers are not ready to release the goods in anticipation of further rise in price, expecting to make huge profits.

2. Labour Supply: -Workers normally prefer leisure after reaching certain amount of wage level. Therefore, after reaching that high level of wages, the labour supply will decline, even if they are offered more wages so,  the supply of labour becomes a backward bending curve, indicating that initially the supply of labour is directly related to wage, but after a particular limit of wag level, the supply of labour becomes inversely related to wage.

3.Need for urgent funds: A businessman may face an urgent need for funds, and as such he may sell out more goods even at lower prices. This is an exception to the law of supply

4.Change in Fashion: If some goods become out of fashion, the sellers may sell such goods at a throw away prices to clear off these goods. This is also an exception to the law of supply.

5.Perishable goods: the sellers have to dispose of the perishable goods like meat, fish, fruits, flowers etc., even if the price falls. They can not wait for longer time for the price to rise, in order to increase supply.

6.Period of recession: – During recession period the sellers are forced to sell the goods are low prices. This is because during recession, the purchasing power of the people is very low.

(4) There are many secondary functions of money. 

yes I agree with the above statement

Secondary Functions of Money are as follows:

i)       Standard of deferred payments – In the modern economy many transactions take place without instant payments. The debtors make a promise to make payments on some future date. Such future payments are possible because of money. Under Barter System taking loan was easy, but its repayment was difficult because loans were in the form of grains or cattle. Money facilitates lending and borrowings, because the borrowings are in the form of money and the repayment are also in the form of money. Due to general acceptability, stability of value compared to other goods, durability etc., money acts as a standard of deferred payments.

ii)      Store of value – Money works as a store of value. Along with satisfaction of present wants, provision for satisfaction of future wants is equally important. It requires savings from the current earnings. Money is a convenient means through which savings can be done easily:

According to Lord J.M. Keynes, “money is a link between the present and the future.” Money serves as a store of value because money has purchasing power. It can be used to purchase real assets like land, house etc. and financial assets like shares, debentures, bonds, etc 

(5) Commercial banks perform many general utility services. 

I do agree with the statement

because commercial bank performs the following general utility functions.

General Functions/General Utility Services: The commercial banks also provide following general utility services to the general public.

1) Safe Deposit Vault:Safe deposit vault facility is available to the general public to enable them to keep there valuables, such as shares, gold, silver ornaments etc. There is a separate section in the bank, where lockers are provided in various sizes at payment of a fixed rent.

2)Remittance of funds/Transfer of money:An important function performed by commercial bank is remittance of funds, banks remit money from one place to another or even from one country to another. This facility is more useful to traders. Remittance of funds is done by telegraphic transfer, mail transfer, demand draft etc.

3)Letters of credit:The commercial banks issue letters of credit to enable the traders to buy goods on credit. A letter of credit is a document or order by a banker in one place, authorizing some other banker in some other place, to honour the drafts or cheques of the person whose name appears in the document. The amount is chargeable to the issues of the letter of credit.A bank’s letter of credit helps a businessman, because of the better credit standing of a bank compared with his personal credit.

4)Reference/Status Report:The commercial bank also gives confidential reports on third party about its financial standing, mode and frequency of payments etc.

5) Underwriter/UnderwritingThe commercial bank also acts as an underwriter for issue of shares and debentures of any public and private limited company.The banks guarantee the purchase of certain proportion of shares, if not sold in the market.

6) Dealings in foreign exchange:By keeping separate foreign exchange department, bank deals in foreign exchange. Commercial bank offer services for converting one currency into another. Banks make profit in foreign exchange transactions. In India, Reserve Bank of India has a, strict control on this function.

7) ATM facility, credit card, debit card:It is an electronic delivery system. It is a convenient method of withdrawing money from bank without going to the bank through automated/ automatic teller machines. It enables people to do their banking transactions at any hour of the day.

Credit card is a plastic card issued by bank to its customers. It facilitates the card holders to use it for purchase on credit or draw cash.

(6) The Central bank does not act as bankers’ bank. 

Yes I agree with this statement


Central Bank as Bankers’ Bank -The Central Bank functions as a leader and coordinator of commercial banks in the country. In this capacity, the Central Bank performs the following functions in relation to commercial banks in the country:

a)      The Central Bank acts as a Custodian of Cash Reserves of commercial banks in the country Every commercial bank keeps certain percentage of its cash with the Central Bank of the country. At present keeping a certain percent of cash reserve as a deposit with the Central Bank, is legally made compulsory.

This enables the Central Bank.

1) To have control over the total amount of credit creation by commercial banks in the country 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 can manipulate the quantity of money, that is in circulation in the economy according to the policy it has formulated.

b)      The Central Bank acts as a “Clearing House”Since all commercial banks keep deposit accounts with the Central Bank, the Central Bank is in a position to act as clearing house for commercial banks.Take an illustration. There is not one commercial bank in the country but there are several commercial banks. Customers of Bank ‘A’ may draw cheques in favour of persons who have accounts with commercial Bank `B’ and customers with accounts in bank ‘B’ may draw cheques in favour of persons who have accounts in commercial bank ‘N. Let us suppose that in one month as a result of above transactions bank ‘A’ owes ` 50 lakhs to bank ‘B’ and bank ‘B’ owes ` 40 lakhs to bank ‘A’. Now bank ‘A’ draws a cheque in favour of bank ‘B’ for` 10 lakhs only on the central bank of the country, where all commercial banks have their accounts.

Bank ‘A’s account is debited by ` 10 lakhs and bank ‘B’s account is credited by ` 10 lakhs. Thus the clearing house system’ which becomes possible because all commercial banks keep their accounts with the central bank of the country, economizes use of cash and facilitates adjustment of dues between commercial banks by the Central Bank, with convenience to all commercial banks.

c)       The Central Bank advices commercial banks Advices them if their activities are harmful to commercial banking and provides accommodation by lending funds in case of difficulties.

d)      Lender of the last resort: The commercial banks operate on the basis of low cash reserve system. If there is a great demand for cash by the depositors, even a well managed commercial bank can run into difficulty. This is because, with low cash reserves, it will not be able to meet a sudden and large demand for cash. The Central Bank comes to their rescue at such times. It is the ultimate source of financial assistance to commercial banks. Just as people go to commercial banks when they want loans, commercial banks go to the Central Bank of the country in times of their financial difficulties. Thus, `the lender of the last resort’ function of the CentralBank helps to control panic and infuses confidence among the banks as well as the public. Hence, during the financial difficulties or crisis, commercial banks can always depend upon the Central Bank for the required assistance.

Q.6. Write explanatory answers (Any TWO): [16] 

(1) Explain the ‘law of demand’ with its assumptions.

Assumptions to the law of DEMAND

1. No change in income level of the consumer: if the law of demand is to operate, consumers’ income remain constant. If there is rise in income, people may demand more at higher prices.

2. No change in Consumer’s Taste, Preference and habit: -It is assumed that consumers’ habits, preferences, attitudes etc. remain unchanged. In other words, there is no change in consumers’ choice for the product.

3. No change in prices of substitute goods: -A change in the price of substitutes will affect the demand for the commodity. If the price of substitutes fall much more the price of the commodity, people may not demand more of that commodity even at lower prices.

4. No introduction of any substitutes: –it is also assumed that there is no introduction of any new substitutes in the market.

5. No anticipation of price change in future: -It is also assumed that people do not anticipate any further change in the price in the near future. If people expect a further rise in price, they may demand more even the existing high price. Similarly, if people expect a further fall in price, they may not buy more even at the existing low price.

6. No change in Size, sex and age composition of the population: -It is assumed that the size and composition of the population remain unchanged. After all, it is the population of a country that constitute the total market demand for a product. So any change in the size and composition of population of a country affect the total market demand for a product.

7. No change in the taxation policy of the government: – Government policies on direct and indirect taxes have great impact on demand for various goods and services. Therefore, it is assumed that there is nochange in government policy on taxation.

(2) What is ‘elasticity of demand’? Explain the type of elasticity of demand. 

“Price elasticity is a concept for measuring how much the quantity demanded responds to changing price.

Types of Price Elasticity of Demand

1.       Infinite / Perfectly Elastic Demand          When a change in price leads to infinite change in quantity demanded, it is known as, infinite elastic demand. When demand is infinite elastic, demand curve is horizontal straight line parallel to X axis. Symbolically Ed = a, Perfectly elastic demand is only a theoretical possibility.Infinite/Perfectly Elastic Demand Curve

2.       Perfectly Inelastic -Demand Irrespective of change in price, demand remains the same, if is called as perfectly inelastic demand. For example, as shown in the figure at price OP demand is OD, whereas at price OP1 (Higher) and OP2 (Lower) the demand is OD only. It means demand does not change at all. When demand is perfectly inelastic the demand curve is represented by a vertical straight line parallel to Y axis as shown in diagram. Symbolically, Ed=O.In practice such situation occurs occasionally such as demand for salt.Perfectly Inclastic Demand Curve Fig. No. 3.63.

 3. Unitary Elastic Demand: –When a change in price leads to proportionate change in quantity demanded then demand is unitary elastic. For example, if price falls by 50% the demand will rise by 50%. In figure the change in price is PP1 and change in demand is QQ1. Both the change are equal to each other. So the demand curve DD1, shows unitary elastic demand. Symbolically, Ed- 1.Unitary Elastic Demand Curve Fig. No. 3.7When the demand curve slopes steadily towards the X axis or is a rectangular hyperbola demand is unitary elastic.

4.       Relatively Elastic Demand: -When proportionate change in demand is greater than the change in price, the demand is said to be relatively elastic, for example, if price falls by 50% the demand rises by 75%. In the figure, change in demand QQ1 is greater than the change in price PP1. Hence, the demand curve DD1 shows elastic demand.Symbolically, Ed >1.Relatively Elastic Demand CurveFig. No. 3.8In this type the slope of demand curve is flatter.

5.       Relatively Inelastic Demand          When percentage change in demand is less than percentage change in price, the demand is relatively inelastic. For example, if price falls by 50%, the demand will rise by 25%, i.e., less than percentage change in price. In the above figure, the change in price is from OP to OP1 is greater than change is demand from OQ to OQ1.Relatively Inelastic Demand Curve Fig. No. 3.9          Therefore, DD is the demand curve which represents inelastic demand.          Symbolically, Ed < 1.          The slope of demand curve is steeper.

(3) What is ‘national income’? Explain the theoretical difficulties involved in estimation of national income. 

Difficulties in the measurement of National Income :

The calculation of the national income of a country is a task full of difficulties and complexities.

The following difficulties generally arise while estimating national income.
i)        Theoretical difficulties
ii)       Practical difficulties.
i)       Theoretical difficulties :     

This is also known as conceptual difficulties.

1)      Transfer payments: Individuals get pension, unemployment allowance, but whether these should be included in national income is difficult problem. On one hand, these earnings are a part of individual income and, on the other, they are government expenditure. Therefore, these transfer payments are ignored from national income.

2)      Income of foreign firms:              According to IMF view-point, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes production work. However, profits earned by foreign firms are credited to the parent concern.

3)      Unpaid services:National income is always measured in money, but there are a number of goods and services which are difficult to be assessed in terms of money.

For example, painting as ahobby. by an individual, the bringing up of children by the mother, these services are not included in national income as remuneration is not given to them. Also services of housewives and the services provided out of love, affection; mercy, sympathy and charity are not included in national income, as they are not paid for. By excluding all such services from it, the national income will work out to be less than what it actually is.

4)      Incomes from illegal activities:Income earned through illegal activities such as gambling, black marketing, theft, smuggling etc., is not included in national income. Such goods and services do have value and meet the needs of the consumers. Thus to that extent national income is underestimated.

5)      Treatment of government sector: Government provides a number of public services like defense, public administration, law and order etc. Measuring the market value of such government services is difficult; as the real value of these services is not known, therefore it has become a convention to treat all such services as final consumption. Hence, it is included in national income.

6)      Production for self consumption: Goods produced for self consumption such as food grains, vegetables and other farm products do not enter in the market. But the value of such goods should be estimated at the rate of market price that have been marketed and should be included in national income.

7)      Changing price levels: The difficulty of price changes arise in the national income estimate, when the price level in the country rises, the national income also shows an increase even though the production might have fallen and when price level falls., National Income may show a decrease even though production may have increased.

ii)      Practical difficulties / statistical:

IN practice, a number of difficulties arise in the collection of required statistics in estimating national income, some of these are.

1)      Problem of double counting: The greatest difficulty in calculating the national income is of double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. It so happens, the national income would work out to be many times the actual. For example, flour used by a bakery is an intermediate product and that by a household the final product.

2)      Existence of non-monetized sector: There is a large non-monetized sector, in-the developing economy like India. Agriculture, still being in the nature of subsistence farming in the developing countries, a major part of the output is consumed at the farm itself and a part of production is partly exchanged for other goods and services. Such production and consumption cannot be calculated in national income.

3)      Lack of occupational specialization: There is the lack of occupational specialization, which makes the calculation of national income by product method difficult. For instance, besides the crop, farmers in a developing country are engaged in supplementary occupations like dairy farming, poultry farming, cloth making etc. But income from such productive activities may not be revealed and thus is not included in the national income estimates.

4)      Inadequate and unreliable data: Adequate and correct production and cost data are not available in a developing country, such data relate to crops, fisheries, animal husbandry, forestry, the activities of petty shopkeepers, construction workers, small enterprises etc. That is why, national income of a country will not show at its actual. For estimating national income by income method, data on unearned incomes and on persons employed in the service sector are not available. Data on consumption and investment expenditures of the rural and urban population are also not available for the estimation of national income. Moreover, there is no machinery for the collection of data in such countries.

5)      Capital gains or losses: Capital gains or losses, which accrue to the property owners by increases or decreases in the market value of their capital assets or changes in demand, are not included in the gross national product, because these changes do not result from current economic activities.

6)      Depreciation: The calculation of depreciation on capital consumption is one more difficulty. Depreciation refers to wear and tear of capital assets, due to their use in the process of production. Depreciation of capital assets will depend on technical life of the asset, the intensity of its use, nature of the asset, regular and careful maintenance etc. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. In case of depreciation, one has to make many reasonable assumptions, which involve an element of subjectivity. So it is difficult to make correct deductions for depreciation.

7)      Valuation of inventories:Raw materials, intermediate goods, semi­finished and finished products in the stock of the producers are known as inventory. All inventory changes, whether negative or positive, are included in the gross national product. Any mistake in measuring the value of inventory, will distort the value of the final production of the producer. Therefore, valuation of inventories requires careful assessment.

8)      Illiteracy and Ignorance: Majority of the small producers in developing countries are illiterate and ignorant; and are not in a position to keep any account of their productive activities. So they cannot give information about the quantity or value of their output. Hence, the estimates of production and earned income are simply guesses.

(4) What is ‘aggregate supply’? Explain the factors determining of aggregate supply.

Meaning: –It is the total output of goods and services produced and supplied in the economy during a given period of time. It is an important element of macroeconomic analysis. Aggregate supply depends on the availability and use of factors of production like natural resources (N), Labour (L), Capital (K), and the state of technology (T).

Definition: – According to J.M Keynes “Aggregate supply refers to the total quantity of goods and services which can be produced with available factors of production, i.e., land, labour, capital, and organization”.                                               

Thus aggregate supply = f (N, L, K, T)

N = Natural resources             (which is considered to be constant)L = Stock of Capital  (which is considered variable)K = Supply of labour              (which is considered to be constant)T = State of Technology         (which is considered to be constant)

The main determinants of the aggregate supply are briefly explained as follows:-

1.      Natural Resources: -Natural Resources refer to all kinds of resources, which are freely available in the nature and used in the process of production. They include land, climatic conditions, rainfall, water resources, sunshine, and minerals deposits. Etc. total production of goods and services in the economy depends on the availability of natural resources as well as their utilization. Since it is difficult to change the size of the natural resources, they are considered to be constant.

2.      Supply of Labour: It refers to total labour force and human resources (HR) available and used in the production of goods and services in the economy. The supply of labour depends on the size of the population, age composition of the population, education and training of the labour force. The size of and efficiency of the labour are very essential for increasing production. It is assumed that the supply of labour can be changed in the short run.

3.      Capital: –Capital is the produced means of production. It is a man-made factor of production. The aggregate supply of goods and services produced in the country depends on the availability and use and quality of capital. Therefore, more the capital more is the supply of goods, and less capital available, less would be the supply. The stock of capital is considered to be constant in short period.

4.      State of Technology: -The state of technology implies the application of modern and advanced techniques and methods in the production process. The application of improved technology increase overall productivity. In the short term, the state of technology is assumed be constant.


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